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Fitch Affirms Novartis AG at 'AA'; Outlook Stable
November 20, 2014 / 1:57 PM / 3 years ago

Fitch Affirms Novartis AG at 'AA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, November 20 (Fitch) Fitch Ratings has affirmed Switzerland-based pharmaceutical company Novartis AG's (Novartis) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'AA' and its Short-term IDR at 'F1+'. The Outlook is Stable. Fitch has also assigned a senior unsecured rating of 'AA' to debt issued by Novartis Finance S.A. The rating reflects Novartis' strong competitive position as a leading player in the global pharmaceutical industry, underpinned by its satisfactory product and geographical diversification. Fitch considers the business risk as well spread between the company's innovation-driven pharma activity, generic treatments through its Sandoz division and its leading eye-care business Alcon. The ratings are further supported by a 33% stake in competitor Roche's bearer shares, which provides financial flexibility and future strategic options. Novartis is in the process of positioning its core businesses in line with the recent strategic review, which will lead to a divestment of the animal and consumer health operations and investment in its oncology franchise with a focus on strengthening its R&D platform. Fitch considers the execution of these complex corporate transactions a long-term positive for the group's business risk profile and underlying profitability but expects them to contribute to a near-term moderate increase of financial leverage. However, Fitch projects debt coverage to remain comfortably within the 'AA' rating level, as reflected in the Stable Outlook. KEY RATING DRIVERS Strong and Diverse Market Positioning Novartis AG's ratings are supported by its solid competitive position as a leading player in the global pharmaceuticals and consumer healthcare industry. Wide geographical and product diversification helps the company to mitigate the effect of the government's cost-containment measures and patent-expiry risk in individual countries. Manageable Patent Expiries A wide product range shields the company from the impact of the patent expiry of a single product. In 2013 an estimated 6.9% of sales were at risk from patent expiry in the US over the next three years, which is low compared with an average of 10% for European peers. This does not include Diovan monotherapy, however, as we do not expect a generic version of the drug to be a material risk for Novartis given the low percentage of sales at risk for the 'AA' rating. Strong Late-stage Pipeline Novartis has strong R&D in cardiovascular, multiple sclerosis, and oncology as seen in its full R&D pipeline and its recent successful product launches. In addition, its oncology franchise will also benefit from a recently announced asset swap with GSK. There has been accelerating positive news flow on LCZ696, Novartis' cardivascular drug treatment with blockbuster drug potential. Improving Profitability Novartis' profitability has been structurally lower than that of pure research-driven pharmaceutical companies, reflecting its diversification into lower-margin consumer health and generics. However, cash flow generation remains very strong with FCF margin above 7%. Fitch projects that the announced portfolio optimisation and expected launches of new products out of its late-stage R&D pipeline should lift the group's EBITDA margin, currently 27%, by an estimated 250bps, while we expect benefits generated by the group's continuous cost optimisation to be largely reinvested in the business. Fitch also forecasts the profit margin profile to remain reflective of the diversified business model relative to pure research-driven pharma peers. Capital Allocation Aligned with Ratings Novartis' debt coverage ratios continue to remain in line with an 'AA' rating level. The recent announced GSK/Novartis and Eli Lilly deals will decrease Novartis' headroom within the ratings as it will result in USD7.6bn cash outflow in 1H15 when the transactions are expected to complete. As a result, Fitch projects a maximum 0.5x increase in FFO adjusted net leverage, still below our 1.5x guideline to maintain the 'AA' rating. Fitch also expects the company to complete their USD5bn share buy-back programme in 2015, which has USD2.4bn outstanding. LIQUIDITY & DEBT STRUCTURE Novartis liquidity is strong with cash and marketable securities at USD8.8bn at end-2013 (as defined by Fitch including current accounts, time deposits, short-term investments and 70% of debt securities) comfortably covering 2014 debt maturities of USD6.6bn, of which around USD1bn related to drawings under its CP programmes at end-2013. In addition the group has undrawn committed bank facilities of USD4.5bn. Novartis has demonstrated strong access to capital markets, refinancing EUR1.2bn of debt in the bond markets in November 2014 RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to a positive rating action include: -FFO-adjusted net leverage no greater than 0.5x on a sustained basis (2013: 0.8x) -FFO net fixed charge cover of 20x or above on a sustained basis (2013: 17x) -Further progress towards implementing the current strategic re-positioning with focus on the three key pillars, innovation-based pharma, Alcon and Sandoz. In line with Fitch's guidelines issued for the global pharma sector, the agency sees the potential for a rating upgrade capped at one notch. Negative: Future developments that may, individually or collectively, lead to a negative rating action include: -Major debt-financed acquisitions or share buybacks resulting in FFO-adjusted net leverage greater than 1.5x and/or FCF margin continuously below 6% on a sustained basis -FFO net fixed charge cover below 13x on a sustained basis Contact: Principal Analyst Roma Patel Analyst +44 20 3530 1465 Supervisory Analyst Frank Orthbandt Director +44 20 3530 1037 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, Corporate Rating Methodology, dated 28 May 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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