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Fitch Affirms GlaxoSmithKline PLC at 'A+'; Revises Outlook to Negative
December 17, 2014 / 4:16 PM / 3 years ago

Fitch Affirms GlaxoSmithKline PLC at 'A+'; Revises Outlook to Negative

(The following statement was released by the rating agency) LONDON, December 17 (Fitch) Fitch Ratings has affirmed UK-based pharmaceuticals company GlaxoSmithKline PLC's (GSK) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'A+'. The Outlook has been revised to Negative from Stable. Fitch has also affirmed the senior unsecured rating of 'A+' for the debt issued under GlaxoSmithKline Capital PLC. The Negative Outlook encapsulates Fitch's expectation of increasing financial risks, as expressed by weakening forward-looking debt protection ratios, partly mitigated by the enhanced business risk profile as the group's strategy focuses increasingly on consumer health. Additional concerns stem from near-term pressures on revenues and profitability, driven by competitive pressures affecting its top selling respiratory drug, execution risk around the enlarged consumer health division, some negative pipeline newsflow in 2014, and shareholder friendly policies. The affirmation reflects the company's strong market position within the pharmaceutical industry, its wide geographical and product diversification, manageable patent expiry profile and a satisfactory R&D pipeline. KEY RATING DRIVERS Declining Rating Headroom Fitch believes that from year end 2014 onwards, GSK will continue to have limited headroom within its current rating given the double digit decline in its top selling drug Advair leading to structural pressures on profitability, the increasing competitive environment in the respiratory business, litigation risks, a continuation of shareholder friendly measures and the execution risk around the integration of the Novartis assets. Overall, we expect FFO adjusted net leverage to remain close to 2.5x over the rating horizon which is a level more in line with a 'A' rating. As a result Fitch has revised the Outlook to Negative. Strong Market, Product and Geographical Positioning In 2013 GSK was the fifth-largest pharmaceuticals company by revenue out of the Fitch rated pharma companies. It will also become one of the largest market players in the consumer health segment owning 63.5% of the second largest global consumer health business with Novartis, once the announced asset swap transactions between both companies completes (scheduled for 1H15). In addition it is the world's leading vaccine manufacturer, expected to strengthen this division integrating Novartis' vaccines business. These strong market positions help the company in negotiations with market participants and enable the company to benefit from economies of scale in terms of marketing and distribution. In addition, scale and focus are becoming increasingly important in the industry, given the full late-stage R&D pipelines, which increasingly require investment in additional clinical studies including head-to-head trials with competing treatments. Novartis Put Option We also calculate that the potential liability associated with Novartis' 36.5% put option could result in an increase of net leverage by up to approximately 1.0x, although no sooner than in four years' time, therefore we have not for the moment included it in our leverage calculations as the company has alternative options to raise these funds without impairing credit protection measures through potential divestments. Shareholder-Friendly Policies Out of the European rated pharma companies Fitch rates, GSK stands out as one of the most shareholder friendly. In the occasion of its 3Q14 results, GSK stated that is expects to maintain 2015 dividends at the same level as 2014 in addition to the distribution to shareholders of GBP4bn proceeds from the Novartis transaction. Fitch considers such a shareholder policy as aggressive given current pressures on top line, profitability and free cash flow generation. Pipeline and Low Sales at Risk Defend 'A+' Fitch regards GSK's pipeline as well balanced and commensurate with an 'A+' rating, despite the emergence of some negative newsflow with reference to its late stage developments during 2014. In addition, the group is well diversified with about 15% of 2013 year-end sales at risk from US patent expiry. The calculation includes the US patent expiry of Advair and the value compares favourably to other industry players. Fitch however notes that recent product launches have been slow in uptake and insufficient in compensating for the revenue loss in the respiratory franchise. Evolving Strategy The company's current rating is underpinned by Fitch's view that it maintains a good degree of strategic flexibility to develop its business model in an evolving industry. Some of the strategic initiatives management is currently executing or planning might affect the future business risk profile of the group. These include an increasing focus on consumer health, with structurally lower margins due to a shift away from a specialist business model compared to pure pharma and the potential of a (partial) divestment of its ViiV business. The agency would carefully assess how any of these transactions individually or in combination would affect GSK's scale and market position, the underlying quality of its cash flows (including the creation of any dividend leakage) and its debt protection ratios, particularly in case of divestment proceeds being returned to shareholders instead of being reinvested in the core business. As an example, Fitch considers a negative for GSK's credit profile the announced asset swap with Novartis, also in the light of the potential liability created by the 36.5% put granted to Novartis after three years post completion. LIQUIDITY & DEBT STRUCTURE Fitch assesses GSK's liquidity as adequate. GSK has a cash position amounting at 9M14 to GBP4.2bn, GBP6bn of US commercial paper (GBP1.5bn was in issue at 31 December 2013), GBP1.9bn of 5 year committed medium-term facilities and GBP1.5bn 364 day committed facility. Therefore, the company has more than more than sufficient liquidity to cover the short-term debt of GBP5.3bn at 9M14. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to a negative rating action include: - Inability to successfully transition its late stage pipeline, leading to a prolonged decline in pharma revenue and profitability despite accelerating restructuring efforts -Major debt-financed acquisitions or share buybacks which result in FFO adjusted net leverage above 2.5x on a continuing basis (FY13: 1.9x) -FFO fixed charge cover below 7x on a continuing basis (FY13: 8.3x) -FFO/sales below 22% (FY13: 23%) and continued negative FCF driving a weakening of debt protection ratios. Positive: Fitch views an upgrade to the 'AA' category unlikely over the rating horizon, however future developments that may, individually or collectively, lead to positive rating action include: -Credit protection measures in line with a 'AA-' rating following a change in share buyback and acquisition policies such that: -FFO adjusted net leverage remains below 1.6x and FFO net fixed charge cover above 12x on a continuing basis -FFO/sales above 25% and FCF/sales at least in mid-single digits Contact: Principal Analyst Roma Patel Analyst +44 20 3530 1465 Supervisory Analyst Frank Orthbandt Director +44 20 3530 1037 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Giulio Lombardi Senior Director +39 02 8790 87214 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, Corporate Rating Methodology, dated 28 May 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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