Pfizer (PFE) IDR Cut to A+ by Fitch; Outlook Stable
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Fitch Ratings-Chicago-23 September 2011: Fitch Ratings has downgraded Pfizer Inc.'s (Pfizer) ratings as follows:
--Long-term Issuer Default Rating (IDR) to 'A+' from 'AA-;
--Senior unsecured debt rating to 'A+' from 'AA-;
--Bank loan rating to 'A+' from 'AA-;
--Short-term IDR to 'F1' from 'F1+';
--Commercial paper rating to 'F1' from 'F1+'.
The ratings apply to approximately $41.7 billion of debt. The Rating Outlook is revised to Stable from Negative.
De-Leveraging Below Expectations:
Pfizer has shown some financial discipline by reducing the debt load that nearly tripled with the $68 billion acquisition of Wyeth in October 2009. More than
$7.6 billion of long-term debt has been paid down in 2010 and 2011, paralleling the debt maturity schedule, and outstanding commercial paper has been reduced to $600 million (from $3.9 billion in 2009) resulting in total debt leverage and adjusted debt leverage of 1.45 times (x) and 1.54x, respectively, for the latest
12 month (LTM) period ending July 3, 2011. Further debt reduction is facilitated by a long-term debt maturity schedule with $3 billion to $4.5 billion of aggregate maturities per year in 2011-2016. However, leverage is still not commensurate with an 'AA-' category rating almost two years after the acquisition, as had been originally anticipated by Fitch. Fitch now believes that leverage will be consistent with the new rating category as Pfizer contends with revenue and margin pressures that Fitch anticipates over the ratings horizon.
Patent Cliff Accelerating:
Generic drug competition to Pfizer's maturing medicine basket will accelerate later this year, when the U.S. patent expires for the world's best-selling pharmaceutical Lipitor in November. The cholesterol-lowering treatment alone generated $2.6 billion in sales, which represented 15% of total company revenues in the second quarter of 2011. The current wave of drug patent expiration effectively began in July 2010 when Effexor-XR lost U.S. patent protection and includes the patent lapses of Xalatan and Aromasin in the first half of 2011.
Looking out three years, around a dozen pharmaceuticals that collectively represented one-third of overall sales, including Viagra, Enbrel and Lipitor, could potentially lose U.S. market exclusivity. Fitch expects revenues to moderate to around $62 billion in 2012 and hover above $61 billion thereafter incorporating a level of commercialization of the late-stage R&D program. The compound annual growth rate (CAGR) in 2011 to 2015 drops by 1% as calculated by Fitch, contributing to the negative rating action.
Significant Liquidity Available:
Fitch recognizes the flexibility afforded by Pfizer's superior cash flow generation that is expected by Fitch to continue despite the top-line pressures.
Pfizer saw the return of double-digit free cash flow margin for the LTM period at the end of the second quarter, when free cash flow margin was 23.5%. Margin rose from 5.7% in 2010 during which time cash flow was negatively affected by a one-time tax impact of $11 billion resulting from actions taken to complete the Wyeth acquisition. Fitch expects operating cash flow to moderate during Pfizer's period of key drug patent exclusivity lapses, yet remain above $18 billion annually. Additional liquidity is derived from $3.1 billion in cash, $22.4 billion of short-term investments, as well as $10.2 billion of long-term investments on July 3, 2011. Pfizer also had $8.2 billion in unused lines of credit at the end of the second quarter, of which a total of $7.0 billion were available to backstop a $12 billion commercial paper program.
Shareholder-Friendly Activities Increase:
Fitch sees the company taking a measured approach to debt reduction over the ratings horizon given a renewed posture toward shareholder friendly activities.
The company has demonstrated a penchant for share repurchases with the announcement at the new CEO's inaugural earnings conference call in February to buy back $5 billion in shares during 2011. Moreover, proceeds of the recent Capsugel divestiture are expected to be used for additional repurchase activity potentially bringing the 2011 total to $5 billion to $7 billion, of which $4.3 billion in shares have been bought by August 1. Moreover, the company remains committed to increasing the dividend (halved due to the Wyeth purchase) to an industry average payout ratio about 40% by the end of 2013. The dividend was increased this year by approximately 11% to $0.80 per share per year.
Margin Supported by Cost Initiatives:
Fitch positively views cost savings initiatives derived from organizational restructuring and integration synergies undertaken since 2005 that have served to support margins in the midst of the patent cliff. Despite these efforts, EBITDA and EBITDA margin have declined since the end of 2010 and were $28.8 billion and 42.8%, respectively, for the LTM period at the end of the second quarter. Fitch is most concerned with Pfizer's ability to further moderate costs during the height of its patent cliff in 2012, mainly to mitigate the anticipated dramatic fall in Lipitor sales from generic drug competition.
--Long-term Issuer Default Rating (IDR) to 'A+' from 'AA-;
--Senior unsecured debt rating to 'A+' from 'AA-;
--Bank loan rating to 'A+' from 'AA-;
--Short-term IDR to 'F1' from 'F1+';
--Commercial paper rating to 'F1' from 'F1+'.
The ratings apply to approximately $41.7 billion of debt. The Rating Outlook is revised to Stable from Negative.
De-Leveraging Below Expectations:
Pfizer has shown some financial discipline by reducing the debt load that nearly tripled with the $68 billion acquisition of Wyeth in October 2009. More than
$7.6 billion of long-term debt has been paid down in 2010 and 2011, paralleling the debt maturity schedule, and outstanding commercial paper has been reduced to $600 million (from $3.9 billion in 2009) resulting in total debt leverage and adjusted debt leverage of 1.45 times (x) and 1.54x, respectively, for the latest
12 month (LTM) period ending July 3, 2011. Further debt reduction is facilitated by a long-term debt maturity schedule with $3 billion to $4.5 billion of aggregate maturities per year in 2011-2016. However, leverage is still not commensurate with an 'AA-' category rating almost two years after the acquisition, as had been originally anticipated by Fitch. Fitch now believes that leverage will be consistent with the new rating category as Pfizer contends with revenue and margin pressures that Fitch anticipates over the ratings horizon.
Patent Cliff Accelerating:
Generic drug competition to Pfizer's maturing medicine basket will accelerate later this year, when the U.S. patent expires for the world's best-selling pharmaceutical Lipitor in November. The cholesterol-lowering treatment alone generated $2.6 billion in sales, which represented 15% of total company revenues in the second quarter of 2011. The current wave of drug patent expiration effectively began in July 2010 when Effexor-XR lost U.S. patent protection and includes the patent lapses of Xalatan and Aromasin in the first half of 2011.
Looking out three years, around a dozen pharmaceuticals that collectively represented one-third of overall sales, including Viagra, Enbrel and Lipitor, could potentially lose U.S. market exclusivity. Fitch expects revenues to moderate to around $62 billion in 2012 and hover above $61 billion thereafter incorporating a level of commercialization of the late-stage R&D program. The compound annual growth rate (CAGR) in 2011 to 2015 drops by 1% as calculated by Fitch, contributing to the negative rating action.
Significant Liquidity Available:
Fitch recognizes the flexibility afforded by Pfizer's superior cash flow generation that is expected by Fitch to continue despite the top-line pressures.
Pfizer saw the return of double-digit free cash flow margin for the LTM period at the end of the second quarter, when free cash flow margin was 23.5%. Margin rose from 5.7% in 2010 during which time cash flow was negatively affected by a one-time tax impact of $11 billion resulting from actions taken to complete the Wyeth acquisition. Fitch expects operating cash flow to moderate during Pfizer's period of key drug patent exclusivity lapses, yet remain above $18 billion annually. Additional liquidity is derived from $3.1 billion in cash, $22.4 billion of short-term investments, as well as $10.2 billion of long-term investments on July 3, 2011. Pfizer also had $8.2 billion in unused lines of credit at the end of the second quarter, of which a total of $7.0 billion were available to backstop a $12 billion commercial paper program.
Shareholder-Friendly Activities Increase:
Fitch sees the company taking a measured approach to debt reduction over the ratings horizon given a renewed posture toward shareholder friendly activities.
The company has demonstrated a penchant for share repurchases with the announcement at the new CEO's inaugural earnings conference call in February to buy back $5 billion in shares during 2011. Moreover, proceeds of the recent Capsugel divestiture are expected to be used for additional repurchase activity potentially bringing the 2011 total to $5 billion to $7 billion, of which $4.3 billion in shares have been bought by August 1. Moreover, the company remains committed to increasing the dividend (halved due to the Wyeth purchase) to an industry average payout ratio about 40% by the end of 2013. The dividend was increased this year by approximately 11% to $0.80 per share per year.
Margin Supported by Cost Initiatives:
Fitch positively views cost savings initiatives derived from organizational restructuring and integration synergies undertaken since 2005 that have served to support margins in the midst of the patent cliff. Despite these efforts, EBITDA and EBITDA margin have declined since the end of 2010 and were $28.8 billion and 42.8%, respectively, for the LTM period at the end of the second quarter. Fitch is most concerned with Pfizer's ability to further moderate costs during the height of its patent cliff in 2012, mainly to mitigate the anticipated dramatic fall in Lipitor sales from generic drug competition.
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