Fitch Ratings has affirmed Bristol-Myers Squibb Co.'s (Bristol- Myers,
Bristol) Issuer Default Rating (IDR) at 'A-' and has revised the Rating
Outlook to Stable from Negative. The ratings apply to approximately
$7.27 billion of debt outstanding at Sept. 30, 2014. A full list of the
company's ratings follows at the end of this press release.
KEY RATING DRIVERS
--Fitch expects Bristol-Myers to operate with leverage below 2.0 times
(x) following the divestiture of its diabetes business. Leverage at
Sept. 30, 2014 was 1.76x compared to 1.96x at Dec. 31, 2013 - just prior
to the divestiture.
--Fitch anticipates that continued market uptake of Bristol's medicines
with longer patent protection and the successful commercialization of
key research projects will help offset the effects of the patent
expirations of Baraclude and Abilify during 2015.
--Bristol has made progress in advancing a number of late-stage pipeline
candidates that treat various cancers and hepatitis C, which will help
longer-term growth.
--Baraclude and Abilify patent expirations will be a headwind to sales
and cash flows in 2015. Nevertheless, Fitch does see meaningful
operational improvement in 2016 as new and established patent-protected
drugs continue to gain traction and patent expiries are more manageable.
--The sale of the company's diabetes business has reduced EBITDA and
left Bristol less diversified. However, Fitch believes the company will
benefit from its narrower strategic focus from gains in operational
efficiency and research productivity in the intermediate to long term.
--Fitch believes Bristol will use a cash deployment strategy that
generally preserves cash through 2015 by moderating its share
repurchases.
Leverage Expected to Remain Below 2.0x
Fitch expects that Bristol will operate with gross debt leverage (total
debt/EBITDA) below 2.0x during the forecast horizon. In fact, leverage
has remained at or below 1.8x since the diabetes divestiture in early
February 2014, as the company paid down approximately $755 million in
debt during the first quarter of 2014 and has maintained profitability
during the past nine months. The revision of the Rating Outlook to
Stable from Negative is, in part, driven by the company's demonstrated
willingness and ability to conservatively deploy cash in order to
maintain its 'A-' credit profile.
Patent Protected Products Growing
Bristol has a number of growth drivers for the intermediate term that
will help to mitigate the roughly 20% of sales at risk to patent
expiries through the end of 2016. The company's longer-dated patented
products continue to generate solid growth. Sprycel (chronic myeloid
leukemia), Yervoy (metastatic melanoma) and Orencia (rheumatoid
arthiritis) are generating strong double-digit growth as favorable
clinical outcomes drive increased utilization. Eliquis (blood clots)
revenues have increased eight-fold over the prior year due to positive
clinical data and improved formulary positioning. Erbitux (head/neck and
colorectal cancer) continues to grow at mid single-digit rates.
Pipeline Progress
Bristol-Myers has made meaningful progress with its late-stage pipeline
during the past year. Elotuzumab/BMS-901608 (cancer) was granted
breakthrough therapy designation by the FDA for triple combination with
lenalidomide and dexamethasone for the treatment of multiple myeloma in
May 2014. Daklinza/daclatasvir (hepatitis C) was approved in Europe in
August 2014 and submitted to the FDA in April 2014, although the FDA has
issued a Complete Response Letter to the company. Phase III studies were
initiated with Beclabuvir/BMS-791325 (hepatitis C) in March 2014.
Opdivo/nivolumab (cancer) has had numerous developments during the past
year. It was submitted to U.S. and European regulatory authorities for
approval in September 2014 and approved in Japan in July 2014. The drug
has also generated positive clinical data for the treatment of melanoma
and lung cancer. Bristol has announced it will collaborate with
Novartis, Kyowa Hakko Kirin, and Five Prime by combining their drugs
with nivolumab for the treatment of various cancers.
Moderate Impact from Patent Losses in 2015 - 2016
A second wave of drug patent expirations occurs in 2015 - 2016 when
Baraclude and Abilify lose market exclusivity in the U.S. The maturing
medicines account for roughly 20% of total revenues. The patent
expiration of Baraclude in the U.S. is immaterial, although the expected
loss of exclusivity in international markets in October 2016 poses a
moderate challenge, as its international sales account for roughly 8% of
total firm sales.
Expected strong performance of Yervoy and Eliquis and continued growth
of core blockbuster medicines, notably Sprycel, Reyataz, and Orencia,
should provide support during the 2015 - 2016 patent expiry period. As
such, the negative effect on sales growth and operating margin should be
more moderate than what Bristol experienced during 2012 when Plavix lost
most of its sales because of generic competition after its U.S. patent
expired.
Sharpened Strategic Focus
In its effort to narrow its strategic focus, Bristol-Myers sold its
diabetes business to AstraZeneca in the February 2014. Fitch believes,
over the long term, the benefits of an increased strategic focus -
improved operational efficiencies and research productivity - will
offset the negative effect of divestiture-related decrease in product
portfolio diversification.
Bristol received $2.7 billion cash at closing and will receive $800
million in potential approval milestones and sales performance
milestones of potentially $600 million payable in 2020. The company will
also receive specified royalties on the diabetes' business net worldwide
sales through 2025.
Soft Near-Term FCF
Fitch forecasts relatively soft annual free cash flow (FCF; cash from
operations less dividends and capital expenditures) generation of
roughly $500 million to $700 million during 2014 -2015, mainly the
result of top-line pressure from patent expiries and the loss of
contribution from the diabetes franchise. Steady improvements should
follow in 2016 and beyond as new products, recently-launched and
to-be-launched, gain traction. FCF in the latest 12 month (LTM) period
ended Sept. 30, 2014 was $1.07 billion, compared to $166 million in
prior year's LTM period.
Cash Preservation through Patent Cliff
Fitch believes that Bristol will deploy cash in a relatively
conservative manner throughout 2015. While Fitch expects that Bristol
will continue to support its dividend, the company will likely lean
towards cash preservation over significant share repurchases. During the
LTM period ended Sept. 30, 2014, share repurchases declined
significantly and issuances actually exceeded purchases with net
proceeds of $310 million compared to net repurchases of $376 million in
the prior year period.
RATING SENSITIVITIES
Positive: While Fitch does not anticipate a positive rating action in
the near term, future developments that may, individually or
collectively, lead to such an action include:
Given the anticipated operational pressure from expiring drug patents
through 2016, Fitch would consider a positive rating action if it
believes gross debt leverage will be maintained below 1.7x and FCF will
remain positive through the forecast period. Drivers of operational
improvement that would support a positive revision include strong demand
for new therapeutics, as well as successful commercialization of
promising oral Hepatitis C treatments and the potential first-in-class
oncology drug, Opdivo/nivolumumab.
Negative: Future developments that may, individually or collectively,
lead to a negative rating action include:
Ratings pressure would result if the company is not successful in
mitigating the negative effects in 2015 - 2016 of the Abilify, Sustiva,
and Baraclude patent expirations. A negative Rating Outlook or a
one-notch downgrade could follow a sustained increase in total debt
leverage to greater than 2.0x together with significant FCF contraction
resulting from margin compression and incremental borrowings.
Fitch affirms Bristol-Myers Squibb's ratings as follows:
--IDR at 'A-';
--Senior unsecured debt at 'A-';
--Bank loan at 'A-';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
The Rating Outlook has been revised to Stable from Negative, and the
ratings apply to approximately $7.27 billion of debt at Sept. 30, 2014.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 2014);
--'Pharmaceuticals: Ratings Navigator Companion' (November 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Pharmaceuticals: Ratings Navigator Companion
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=804048
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=948635
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