S&P Downgrades AbbVie (ABBV) to 'A-' Amid Move to Acquire Stemcentrx; Outlook Stable

April 28, 2016 3:36 PM EDT

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Standard & Poor's Ratings Services lowered its long-term corporate credit rating on AbbVie Inc. (NYSE: ABBV) to 'A-' from 'A'. The outlook is stable.

At the same time, we lowered the rating on AbbVie's senior unsecured notes to 'A-' from 'A'. The company's short-term rating remained unchanged at 'A-1'.

"The downgrade reflects our view that AbbVie's financial policy has proven to be more aggressive than we previously projected, as evidenced by the debt-financed acquisition of Stemcentrx, only a year after the $21-billion debt-funded acquisition of Pharmacyclics, and a larger-than-anticipated share repurchase program in 2015," said Standard & Poor's credit analyst Tulip Lim. Now we project the company's 2016 adjusted leverage ratio will be around 3.0x, improving to 2.6x in 2017. That is in contrast to our previous projections of 2016 leverage ratio at 2.3x improving to 1.7x in 2017.

We think Stemcentrx acquisition will be a good complement to AbbVie's oncology platform and will provide immediate support to the company's late-stage pipeline. At the same time, we don't think the benefits from the acquisition are sufficient enough at this moment to offset the deterioration in credit protection measures, given that we don't expect any revenue or EBITDA contribution from this acquisition until 2018-2019.

Our rating on AbbVie continues to reflect its well-established position in the branded pharmaceuticals market; a highly profitable, market-leading product; and a promising pipeline over the next few years. AbbVie acquired oncology drug Imbruvica with the recent acquisition of Pharmacyclics. The Stemcentrx transaction will expand AbbVie's late-stage oncology pipeline to include Rova-T, a product that is currently under development for small cell lung cancer as the lead indication and has potential for additional indications across multiple tumor types. Stemcentrx also has four early-stage pipeline candidates which will further strengthen AbbVie's oncology platform. Still, since we do not expect Rova-T to add product or revenue diversity over the next two years, we are not considering an improvement to our assessment of AbbVie's business risk profile as strong.

The stable rating outlook reflects our expectation that 9%-12% revenue growth in 2016-2017, increased EBITDA margins, and strong cash flow generation will result in AbbVie's leverage improving to the mid-2.0x area in 2017 and sustained in that range going forward.

Currently, AbbVie does not have much capacity for another significant debt-financed acquisition, but we expect the company to build some additional debt capacity in 2017-2018. We could consider a downgrade if the company completed another nonaccretive debt-funded acquisition exceeding $3 billion in 2016 or exceeding $10 billion in 2017. We could also lower the rating if sales of Imbruvica meaningfully fail to meet our expectations or significant challenges to Humira's market position develop, particularly from the launch of a biosimilar. If either of these developments result in flat revenues and an EBITDA margin contraction of over 400 basis points leading to leverage increasing and sustained above 3.0x, with limited prospects for improvement, it could prompt a rating downgrade.

We could increase the rating if the company improved its leverage ratio below 2.0x and sustained it at that level. Given the current pace of acquisition activity that we consider to be aggressive and our expectation of leverage around 3.0x at the end of 2016, we view an upgrade as unlikely over the next 12 to 18 months.



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