June 9, 2017 / 2:53 PM / 4 months ago

Fitch Affirms Mylan's Ratings at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, June 09 (Fitch) Fitch Ratings has affirmed Mylan's ratings at 'BBB-' and assigned an 'F3' short-term rating to the company's new commercial paper program. The Rating Outlook is Stable. The ratings apply to $15.3 billion of debt at March 31, 2017. See the full list of rating actions at the end of this release. KEY RATING DRIVERS Elevated Leverage to Decline: Mylan is in the process of deleveraging from its partly debt-financed acquisition of Meda in August 2016. This company's diverse product portfolio, which benefits from relatively reliable demand and generally defensible margins, should drive consistently positive free cash flow (FCF). Fitch expects Mylan will pay down sufficient debt to reduce gross leverage (total gross debt/EBITDA) to below 3.5x by year-end 2017, despite some litigation and pricing headwinds. Longer term, Mylan will likely maintain its acquisitive posture, focusing on targets that improve the breadth and depth of its existing portfolio or adjacent opportunities. Diversified, Scaled Operations: Mylan is a well-diversified top-three global generic drug firm. Scale and diversification are important for generic drug firms to maintain stable and durable margins, particularly given the consolidation of industry customers. Mylan's operating profile also benefits from the company's focus on relatively difficult-to-manufacture, chemically complex generic or near-generic drugs. Aggressive Capital Deployment: In recent years, Mylan has taken a more aggressive acquisitive posture. Most recently, the company acquired Meda for about $10 billion including assumed debt, driving pro forma gross leverage above 4.0x. However, Fitch expects the company's near-term M&A activity will be limited to targeted transactions, and will be financed in accordance with the goal of maintaining its investment-grade ratings. In addition, any such deals will likely fit into Mylan's areas of core competence, limiting integration risk. EpiPen Pressure: Mylan introduced its own generic version of the company's branded EpiPen product in late 2016. The branded and generic products will provide incrementally lower EBITDA contributions going forward. Furthermore, uncertainties related to ongoing legal and government investigations and the recently announced Medicaid settlement add potential event risk to the credit profile. Constructive Industry Outlook: Fitch's outlook for global generic pharma, especially the largest players, is favorable for volume growth, partly offset by pricing pressure. Growth opportunities exist because of increasing generic penetration in many European markets, aging populations in developed markets, and improving access to healthcare in emerging markets. DERIVATION SUMMARY Mylan N.V.'s rating of 'BBB-' reflects the company's favorable position relative to smaller industry peers on the basis of scale, geographic end-markets and the level of differentiation of its products. Mylan continues to increase its focus on difficult-to-manufacture, chemically complex drugs, which generally command relatively more defensible prices and margins. The company has been a consistent generator of positive FCF. Partly offsetting the strong operating profile are the continued prospects of pricing pressure on less differentiated products and the company's acquisitive posture. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Relatively flat top-line organic performance in 2017 with recent acquisition-related revenue more than offsetting pricing headwinds and generic competition to EpiPen to generate strong double-digit reported revenue growth. --Higher EBITDA margins in 2017 driven by improved operational efficiency and acquisition-related synergies, partly offset by lower EpiPen sales and margins. --Operating cash flows of approximately $2.7 billion in 2017, with capex of $470 million, resulting in FCF of $2.2 billion, excluding litigation payments. --Targeted M&A within the context of de-leveraging to below 3.5x by year-end 2017. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --An upgrade to 'BBB' is unlikely over the ratings horizon, given the firm's demonstrated willingness to add meaningful leverage to the balance sheet for M&A, and ongoing EpiPen uncertainties. --Top-line growth and/or margin expansion exceeds Fitch's base case, particularly from successful launches of key products such as generic Advair, depending on capital deployment in the meantime. --The company commits to operating with debt leverage near 2.5x. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --Management abandons its commitment to operating within the context of investment-grade ratings, demonstrated by a willingness to sustain gross debt/EBITDA near 3.5x. --The company fails to launch meaningful new products or experiences greater competitive/pricing pressures than currently contemplated, including additional large cash outlays. LIQUIDITY Sufficient Liquidity, Well-staggered Maturities: Mylan presently has sufficient liquidity, including a $2 billion revolving credit facility, undrawn as of March 31, 2017. LTM FCF is greater than scheduled debt maturities in 2017 and 2018, and Fitch expects liquidity to remain strong throughout the forecast period. FULL LIST OF RATING ACTIONS Mylan N.V. --Long-Term Issuer Default Rating affirmed at 'BBB-'; --Senior unsecured notes affirmed at 'BBB-'; The Rating Outlook is Stable. Mylan N.V. Fitch has assigned the following ratings. --Short-Term IDR 'F3'; --Commercial Paper 'F3'. Mylan, Inc. --Senior unsecured bank facility affirmed at 'BBB-'; --Senior unsecured notes affirmed at 'BBB-'. Mylan, Inc. Fitch has assigned the following rating: --Long-Term Issuer Default Rating 'BBB-'. The Rating Outlook is Stable. Contact: Primary Analyst Bob Kirby, CFA Director +1-312-368-3147 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Megan Neuburger Managing Director +1-212-908-0501 Committee Chairperson Bill Densmore Senior Director +1-312-368-3125 Summary of Financial Statement Adjustments --Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. 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