September 13, 2012 / 8:37 PM / 5 years ago

TEXT-Fitch affirms Pfizer ratings

Sept 13 - Fitch Ratings has affirmed Pfizer Inc.'s (Pfizer) 
ratings as follows: 

--Issuer Default Rating (IDR) at 'A+'
--Senior unsecured debt at 'A+';
--Bank loan at 'A+';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.

The Rating Outlook is Stable. The ratings apply to approximately $38.6 billion 
in outstanding debt. 

Acquisition Debt Winds Down

Pfizer has reduced outstanding debt by over $10 billion since the $68 billion 
acquisition of Wyeth in October 2009. Pacing the long-term debt maturity 
schedule, total debt leverage and adjusted debt leverage have fallen to 1.31 
times (x) and 1.39x, respectively, for the latest 12 month (LTM) period ending 1
July 2012. 

Fitch believes that total debt leverage will remain steady through 2013 
concomitant with operational pressures from expiring drug patents offset by a 
further decrease in the debt level from payment of maturing securities. 
Potential upside to the rating would result from accelerated debt repayment 
utilizing strong cash flow or proceeds from asset divestitures, resulting gross 
debt-to-EBITDA below 1.3x.

Patent Cliff Easing

Pfizer is in the midst of a period of significant patent losses that includes 
the U.S. patent expiration of the world's once best-selling pharmaceutical 
Lipitor in November 2011. In the first half of 2012 alone, Lipitor sales have 
eroded by nearly $2.4 billion due to generic drug inroads. Looking out three 
years, the company's patent cliff is appreciably less daunting given only 14.5% 
of the company's drug portfolio is at-risk of losing market exclusivity, 
including the potential loss of market exclusivity for two of its 
five-bestselling medicines - Celebrex and Enbrel - in 2014. Excluding 
discontinued operations, Fitch expects revenues to moderate to around $60 
billion in 2012 and hover at $54 billion thereafter, excluding the Zoetis Inc. 
(Zoetis) animal health business, with a compound annual revenue growth rate 
(CAGR) in 2013 to 2016 at 0.3%. Beyond 2014, the next significant U.S. drug 
patent expiration is Lyrica in December 2018.

Strong Cash Flow Sustained 

Fitch believes that Pfizer will continue to generate superior cash flow despite 
the top-line pressures from key drug patent exclusivity lapses and expects that 
operating cash flow will remain above $18 billion through the intermediate term.
Pfizer generated free cash flow (operating cash flow less dividends and capital 
spending) of $8.5 billion generated in the LTM period ending July 1, 2012, 
representing a strong margin of 13.3%. Fitch sees free cash flow margins above 
17% over the next few years despite an increasing dividend. 

A cash balance and short-term investments totaling $24.3 billion and long-term 
investments of $10.5 billion at the end of the second quarter provide further 
liquidity. The company also had lines of credit totaling $9.1 billion at the end
of the second quarter, of which $8.3 billion were unused. Unused lines of credit
of $7 billion that expire in 2016 backstop the company's $12 billion commercial 
paper program. Pfizer has outstanding commercial paper of $2.7 billion at the 
end of the second quarter. 

Margins Supported by Cost Cutting

Fitch recognizes Pfizer's success in extracting costs via organizational 
restructuring and integration synergies undertaken since 2005, which have 
benefited margins despite revenue and earnings pressures from the maturing drug 
portfolio. Accordingly, EBITDA and EBITDAR margins have increased to 45.9% and 
46.5%, respectively, for the LTM period ending 1 July 2012 from 44.6% and 45.2% 
in 2011, and 43.8% and 44.4% in 2010. 

Fitch is most concerned with Pfizer's ability to further moderate costs during 
the second half of 2012, mainly to mitigate the anticipated dramatic fall in 
Lipitor sales from generic drug competition. Fitch expects moderate compression 
in margins in 2013 from the current level due to annualizing the Lipitor patent 
loss, but more meaningful tightening in 2014 from the patent expiries of 
Celebrex and Enbrel.              

R&D Spending Drop Parallels Expectations

Pfizer realigned the R&D organization starting in early 2011 to focus on the 
primary therapeutic areas: immunology and inflammation, oncology, cardiovascular
and metabolic diseases, neuroscience and pain, and vaccines. In conjunction, the
company set a target to reduce overall spending to $6.5 billion to $7 billion in
2012 (on an adjusted basis), a level below that at Pfizer alone prior to the 
Wyeth purchase. Over the LTM period at the end of the second quarter, Pfizer 
spent $7.8 billion on R&D, which represented 12.2% of total revenues. In the 
first half of 2012, research investment fell to $3.4 billion or 11.3% of company

Despite the cost cutting, Pfizer has launched three new oncology therapies - 
Xalkori, Inlyta, and Bosulif - over the past year or so. The recent approval of 
specialty medicines is a testament to increased research focus on oncology; 
however, Pfizer still has two highly promising primary care drugs nearing 
authorization in the U.S. - Eliquis for stroke prevention, and tofacitinib for 
the oral treatment of rheumatoid arthritis. 

Shareholder-Friendly Actions Absorbed

Pfizer's cash flow generation supports its renewed aggressive 
shareholder-friendly activities after a respite following the Wyeth acquisition.
The company first directs capital to share repurchases and uses the return on 
investment from the buybacks as a measuring stick for bolt-on acquisition 
activity. In the first half of 2012, Pfizer bought back $3 billion in common 
equity with the expectation to purchase $5 billion for the full year after 
purchasing $9 billion of shares during 2011. Additionally, dividends rose at 
least 10% annually over the past two years to a goal of an average payout ratio 
of 40% by 2013. Aggressive shareholder-friendly actions can be absorbed by the 
predicted strong cash flow, in Fitch's opinion.      

Guidelines for Further Rating Actions

Positive rating action would be warranted if Pfizer 

significantly reduces gross leverage via debt reduction in excess of the 
long-term debt maturity schedule or sustained strong operational performance 
through the current patent cliff. Gross debt leverage maintained in the range of
1.0x to 1.3x would lead to positive rating action. Proceeds from the sale of the
nutrition business and potential spinout of Zoetis directed toward debt 
reduction would positively affect the rating. 

Downward rating action would result from pressure on the operations such that 
debt reduction efforts are compromised. Operational weakness could stem from 
lower-than-anticipated results from cost containment initiatives or 
poorer-than-expected sales performance in light of the maturing drug product 
portfolio. A transaction in the midst of the patent cliff that places pressure 
on gross leverage would negatively affect the rating.

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