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Fitch Affirms Allergan's 'BBB-' Rating; Outlook Stable
December 7, 2017 / 11:31 PM / 10 days ago

Fitch Affirms Allergan's 'BBB-' Rating; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, December 07 (Fitch) Fitch Ratings has affirmed the ratings of Allergan plc (Allergan; NYSE: AGN) and subsidiaries at 'BBB-'. The Rating Outlook is Stable. Fitch has also affirmed and withdrawn the 'BBB-' IDRs of Allergan's subsidiaries, Warner Chilcott Limited and Allergan Finance LLC. These IDRs are no longer considered by Fitch to be relevant to the agency's coverage. A full list of rating actions, which apply to approximately $30.3 billion of debt outstanding at Sept. 30, 2017, follows at the end of this release. KEY RATING DRIVERS Scaled and Growing: Allergan is among the largest pharmaceutical companies in the world, with a diversified, well-positioned product portfolio and a growing (internal and externally derived) product pipeline. Fitch expects Allergan to generate low- to mid-single-digit organic sales growth, augmented by targeted acquisitions, over the ratings horizon. External R&D Strategy: Allergan is pursuing an "Open Science" R&D strategy, which should have lower development risk than that of most traditional pharma firms. However, large cash outflows related to acquisitions, in-licensing and milestone payments will likely be greater than traditional organic/adjusted R&D expenses, which lead to somewhat inflated EBITDA margins and understated leverage figures. Notably, this dynamic is likely to moderate in the longer term, as Fitch expects acquired R&D to become a smaller proportion of total R&D activities as the firm grows. Active Acquirer, Now More Targeted: Fitch expects Allergan will remain an active acquirer, using steady FCF and cash balances for targeted growth-oriented assets. Deals are expected to be generally smaller and funded with internally generated liquidity, supporting a more stable debt leverage profile than during the past five years. However, management has stated that large leveraging M&A is not out of the question. Restasis Exclusivity at Risk: Restasis (chronic dry eye) accounts for roughly 9% of total firm sales and its patent is scheduled to expire in August 2024. However, generic companies are challenging the patent and in October 2017, a U.S. district court invalidated Restasis' patent. Allergan has stated that it will appeal the decision. Generic competition could enter the market as early as 2018 depending on future legal rulings and generic manufacturers' ability to gain regulatory approval of their versions of the drug. Fitch believes Allergan would adjust its operations and cash in the event of generic competition deployment, in order to maintain its investment-grade rating should generic competition arrive early. Positive FCF: Fitch expects Allergan to generate FCF of at least $2.9 billion in 2018. Strong FCF supports management's commitment to repay all debt maturing 2018 and targeted M&A, funded with internal liquidity. Furthermore, Allergan's Irish domicile provides an efficient tax structure and allows the firm to use its cash without material repatriation penalties. U.S. federal tax reform could make this attribute less advantageous relative to other U.S. based innovative pharmaceutical firms. DERIVATION SUMMARY Allergan plc. (BBB-/Stable) is competitively positioned in terms of scale, breadth, depth, geographic reach and patent risk compared to its industry peers, Amgen Inc. (BBB/Stable), Bristol-Myers Squibb (A-/Stable) and Eli Lilly & Co. (A/Stable). Allergan's largest product, Botox, has lost patent exclusivity but continues to grow with expanded treatment indications and its difficult-to-replicate, complex chemical structure. Allergan and Amgen have much greater margins compared to Bristol-Myers and Lilly, owing to a number of their specialty products. Allergan also has significantly higher gross debt leverage than Eli Lilly and Bristol-Myers, driven by a recently more aggressive capital deployment posture, with a gross leverage sensitivity of less than or equal to 3.5x for its 'BBB-'rating. Allergan can access its international cash in a more tax-efficient manner than its peers because it is domiciled in Ireland. Allergan's rating reflects the smaller and less diversified nature of the company's operating profile relative to larger innovative pharmaceutical industry peers Pfizer and Merck. This is particularly evident regarding scale, breadth, depth, and patent risk. Gross leverage durably below 2.2x is supportive of Merck's 'A' rating, while Pfizer 'A+' rating gross debt to EBITDA sensitivity of 1.4x-1.7x is supportive of Pfizer's 'A+' rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: -Organic sales growth in the low- to mid-single digits (assuming mid-to-late 2018 generic Restasis competition) during the next three years and possibly greater than that, if Restasis' patent is ultimately validated. - SG&A prioritized toward growing profitable segments while pared from areas expect to generate soft and growing R&D costs, resulting in relatively steady EBITDA margins around 50% with some softness tied to timing of generic competition for Restasis. -Normalized annual FCF (cash flow from operations minus capital expenditures minus dividends) of $2.6 billion-$3.6 billion during the four-year forecast period. -All debt maturities repaid (not refinanced) in 2018, leading to gross debt/EBITDA of roughly 3.4x at YE2018. RATING SENSITIVITIES Allergan's 'BBB-' ratings consider run-rate gross debt/EBITDA in the range of 3x-3.5x. Possible temporary increases are consistent with the 'BBB-' rating, if expected to be followed by a period of deleveraging. Annual post-dividend, post-milestone FCF of at least $1 billion-$2 billion should provide ample ongoing liquidity for continuing bolt-on acquisitions of established businesses and in-process R&D assets. Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Positive ratings momentum is slowed to the degree internal liquidity is directed toward share repurchases and committed dividend payouts. -A capital deployment strategy that provides a period of time without large, leveraging M&A that allows gross debt/EBITDA to trend to 3x or below on a reported basis will be required before an upgrade to 'BBB' is considered. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -A downgrade could be considered if the firm were to pursue a significantly large debt-funded acquisition that would cause gross debt/EBITDA to be sustained above 3.5x for a period of greater than 18-24 months. -Given the well-diversified nature of Allergan's product portfolio, a downgrade scenario involving operational difficulties is unlikely. Allergan's 'BBB-' ratings consider run-rate gross debt/EBITDA in the range of 3x-3.5x. -Possible temporary increases are consistent with the 'BBB-' rating, if expected to be followed by a period of deleveraging. LIQUIDITY Adequate Liquidity: Liquidity is sufficient with full availability on its $1.5 revolving credit facility, approximately $5.4 billion in cash and marketable securities at Sept. 30, 2017. Fitch expects Allergan to pay down debt maturing in 2018 with cash flow. Estimated debt maturities include: $3 billion in 2018; $1.25 billion in 2019; $4.65 billion in 2020; and $20.7 billion thereafter. Unlike many of its U.S. pharma peers, Allergan is able to use substantially all of its cash flows free from the relatively high U.S. taxes associated with repatriation of earnings generated outside the U.S. This advantage relative to U.S. domiciled peers could fade depending on reform of the U.S. tax code. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings. Allergan plc --Issuer-Default Rating (IDR) 'BBB-'. Allergan Funding SCS (fka Actavis Funding SCS) --Senior unsecured notes 'BBB-'. Allergan Finance LLC (fka Actavis, Inc.) --Senior unsecured notes 'BBB-'. Forest Laboratories, LLC --IDR 'BBB-'; --Senior unsecured notes 'BBB-'. Allergan, Inc. --IDR 'BBB-'; --Senior unsecured notes 'BBB-'. The Rating Outlook for all of the IDRs is Stable. Fitch has also affirmed and withdrawn the following ratings. Warner Chilcott Limited --IDR 'BBB-'. Allergan Finance LLC (fka Actavis, Inc.) --IDR 'BBB-'. Contact: Primary Analyst Bob Kirby, CFA Director Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 +1-312-368-3147 Secondary Analyst Megan Neuburger, CFA Managing Director +1-212-908-0501 Committee Chairperson Steven Marks Managing Director +1 212-908-9161 Summary of Financial Statement Adjustments - Fitch has removed stock-based compensation and other non-cash and non-recurring expenses from Fitch's EBITDA calculation. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com; Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Hybrids Treatment and Notching Criteria (pub. 27 Apr 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy 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 WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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