January 13, 2017 / 4:07 PM / a year ago

Fitch Affirms Ache's IDR at 'BB+'; Outlook Negative

(The following statement was released by the rating agency) CHICAGO, January 13 (Fitch) Fitch Ratings has affirmed Ache Laboratorios Farmaceuticos S.A.'s (Ache) ratings as follows: --Foreign Currency (FC) Issuer Default Rating (IDR) at 'BB+'; Outlook Negative; --Local currency (LC) IDR at 'BBB'; Outlook Stable; --National Scale rating at 'AAA(bra)'; Outlook Stable. Ache's FC IDR is constrained by Brazil's 'BB+' Country Ceiling, and its Negative Outlook follows Fitch's Negative Outlook for Brazil's sovereign rating (FC IDR 'BB'). Ache's operations are predominantly in Brazil, with less than 3% of revenues coming from exports. The company does not have cross-border issuances. RATING DRIVERS Ache's ratings are supported by its strong business position in the Brazilian pharmaceutical market and its leadership position in the prescription drug segment. The ratings also incorporate Ache's conservative financial strategy underpinned by an unleveraged capital structure and adequate liquidity profile. The need for constant drug innovation, the fierce competition and the regulatory burden of the sector are seen as manageable risks. Fitch expects Ache to remain relatively unscathed by the recession in Brazil, reflecting the resilience of its business fundamentals. The company's strategy to diversify its portfolio of products and therapeutic drug classes should continue to demand extra oversight on SG&A and put negative pressure its operating margins to the 29%-31% range, which is below the historical 32%-35% of the last four years. Solid Business Profile Despite Competition Ache has a solid and recognized brand in the Brazilian pharmaceutical industry. Its diversified product portfolio, leadership in the prescription drugs segment, and presence in the fast-growing over-the-counter (OTC), generics and dermo-cosmetics segments support its sound business profile. Ache is the third-largest laboratory in Brazil in terms of gross revenue and the second in net revenues. It also has one of the largest salesforces in the domestic market, which provides a key competitive advantage compared with peers. Ache's margins are robust despite the challenging competition from large and well-capitalized multinational pharmaceutical companies over the last years. Fitch believes that Ache's operational expertise in Brazil in combination with its strong distribution system mitigate the threat of increasing competition. Similar to other emerging-markets pharmaceutical companies, Ache has a narrower research and development (R&D) product pipeline than its multinational competitors and has a weaker portfolio of patented products. Positively, the company's exposure to licensing agreements is low, representing less than 6% of revenues from these products. Ache has consistently been increasing its efforts to innovate and renovate its product portfolio by investing about 3.0% of its revenues in R&D. In the last 12 months (LTM) ended September 2016, products launched rose to 25% of revenues from 16% in 2012. Fitch expects Ache's new drug launches should result in an average 25% revenue expansion from 2017-2019. Lower Profitability but Sound CFFO Ache has historically presented sound operational performance. During 2016, the combination of BRL devaluation and increasing efforts to diversify its product portfolio pressured profitability and EBITDA margins. Around 34% of Ache's cost of goods sold (COGS) is linked to the U.S. dollar. Fitch forecasts the company's EBTIDA margin will move to around 29%-31%, a decline from the 32%-35% over the last four years. For LTM Sept. 30, 2016, Ache's net revenue and EBITDA reached BRL2.5 billion and BRL721 million, respectively, with EBITDA margins at 28.5%. These figures compare with net revenues of BRL2.3 billion and EBITDA of BRL705 million in 2015, with EBITDA of 30.2%. Funds from operations (FFO) and cash flow from operations (CFFO) remained quite robust, at BRL535 million and BRL413 million, respectively, during the LTM. Free Cash Flow Remains Pressured by Strong Dividends Ache has a track record of maintaining an aggressive shareholder-friendly policy, which has led to negative free cash flows (FCF) since 2012. Between 2012 and 2016, Ache generated an average negative FCF of BRL55 million. Dividend distributions averaged BRL377 million in the period. This aggressive dividend policy has been underpinned by the company's strong CFFO and its unleveraged capital structure. Fitch expects that in a more challenging scenario, the company would pursue a more conservative dividend policy in order to increase its financial flexibility and sustain its strong capital structure. During the LTM ended September 2016, Ache generated negative FCF of BRL46 million, after BRL148 million capex and BRL311 million of dividend pay-outs. Unleveraged Capital Structure Ache has historically maintained low leverage ratios, and its credit measures continue to be quite strong. Fitch's projections indicate a net debt/EBITDA ratio below 0.5x in the next three years. In the past five years, the company's average leverage, as measured by the FFO adjusted leverage ratio, was 0.4x, while its net debt/EBITDA ratio was negative at 0.2x. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Revenue growth in the mid-single digits from 2017 to 2019; --Innovation to continue to represent around 25% of revenues (R&D expenses of around 3% of revenue); --EBITDA margin in the range of 29%-31% due to increasing SG&A related to diversification of the portfolio; --Annual average capex of BRL180 million for the next three years, which includes the start of construction of the new plant in Permanbuco; --Maintenance of the high dividend pay-outs at around 75% of net income; --Disbursement of BRL150 million in small acquisitions/partnerships in the next three years. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to positive rating action: For the Foreign Currency IDR, positive rating actions are limited by Brazil's country ceiling of 'BB+', while for the Local Currency IDR of 'BBB', an upgrade is unlikely in the medium term. Future developments that may, individually or collectively, lead to negative rating action: Ache's credit ratios are very strong at the current rating level, but unexpected events that move the company's net leverage beyond 2.5x could result in negative rating action for the Local Currency IDR. A further negative rating action on Brazil's sovereign ratings and country ceiling could also result in negative rating action for the company's foreign currency IDR. LIQUIDITY Ache's has historically held a robust liquidity position. As of Sept. 30, 2016, Ache's cash balances plus LTM CFFO covered its total debt by 3.2x. As of the same date, the company reported BRL156 million of cash and marketable securities and total adjusted debt of BRL175 million, of which BRL37 million was short-term. About 78% of Ache's debt is with the Brazilian Development Bank (BNDES). Contact: Primary Analyst Debora Jalles Director +1-312-606-2338 Fitch Ratings, Inc. 70 West Madison St. Chicago, IL 60602 Secondary Analyst Renato Donatti Associate Director +55-11-4504-2215 Committee Chairperson Mauro Storino Senior Director +55 21 4503-2625 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Date of Relevant Rating Committee: Jan. 12, 2017. Additional information is available at www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1017525 Solicitation Status here 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. 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