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Fitch: Fresenius Deals Offer Growth, Diversification; No Rating Impact
April 26, 2017 / 2:47 PM / in 8 months

Fitch: Fresenius Deals Offer Growth, Diversification; No Rating Impact

(The following statement was released by the rating agency) LONDON, April 26 (Fitch) Fitch Ratings says transactions by German healthcare group Fresenius SE & Co KGaA (FSE; BBB-/Stable) - including Fresenius Medical Care AG & Co. KGaA (FMC; together, Fresenius) - that enable its diversification into US generics through Akorn and biosimilars through Merck, will enhance its business risk profile. The group is well anchored in investment-grade territory, although the transactions will exhaust any financial headroom and flexibility at the current rating. We expect Akorn's enterprise value of EUR4.5 billion (around 12.5x forward-looking EBITDA) to be fully debt funded upon completion by 2018 and the upfront payment of EUR170 million plus subsequent milestone payments to Merck to be paid out of Fresenius' available liquidity, with payments starting in 2017. The transactions will use up headroom available under the current rating, as Fitch estimates consolidated funds from operations (FFO) adjusted net leverage upon completion to peak at 4.4x in 2018, within its negative rating sensitivity of 4.5x. Steady deleveraging will follow thereafter and this should then improve financial headroom for the rating. The 'BBB-' rating also remains supported by adequate financial flexibility, with consolidated FFO fixed-charge cover comfortably above 3.0x over the rating horizon, assuming a debt capital market refinancing of the acquisitions. The transactions - following on from the recent Quironsalud purchase - will widen the divergence of financial risk profiles between holding company FSE and FMC as FFO adjusted net leverage at FSE (including attributable dividends received from FMC) will peak above 5.0x. We consider this incompatible with the current rating if viewed on a de-consolidated basis due to the lack of debt cross-guarantees between FSE and FMC, and if sustained for longer than 18-24 months. Nonetheless, we assume steady and gradual deleveraging after closing, in line with previous transactions by Fresenius such as Rhoen Kliniken in 2014 and APP in 2008. This view is supported by Akorn's satisfactory profitability and cash generation, coupled with strong synergy potential, achievable in a comparatively short time, and limited execution risk. The 'BBB-' rating of the senior unsecured debt issued by FSE assumes that the acquisitions will be refinanced by debt instruments ranking pari passu with existing unsecured issues, decreasing structural subordination in the group's funding structure. In any case, deconsolidated secured net debt/EBITDA at FSE remains below 2.5x, and so does not require a differentiation of the instrument rating from the Issuer Default Rating under Fitch's methodology. We consider both deals to enhance the business risk profile of Fresenius Kabi, which will become larger and more diversified in the US through the addition of Akorn's strong position in injectables and liquid/sterile generics. This will complement Fresenius Kabi's business and add direct sales channels to retail pharmacies and physicians in addition to hospitals and clinics in the US. We therefore view the acquisition as in line with industry trends, with generic producers bulking up and deepening their product portfolio to gain scale and bargaining power against highly consolidated healthcare payers. The transactions also help diversify the group's revenue stream away from its more mature but still growing dialysis business (52% of group sales by 2019 compared with 57% in 2011). The move into biosimilars, probably strategically less obvious for Fresenius Kabi, can be viewed with a similar logic. We believe it will present Fresenius with a credible long-term strategic option to position Fresenius Kabi in this emerging growth segment. Biosimilars offer significant growth potential as an increasing number of reference biologics come off patent in the near term. However, the market is inherently riskier than small-molecule generics, due to higher development costs, including an often lengthy approval pathway, coupled with complexities around manufacturing and marketing this category of drugs. In addition, there is significant competition building up from larger and established companies, particularly in oncology and autoimmune diseases, targeted by Fresenius Kabi/Merck. We therefore view the strategy of entering the market with contractually agreed access to manufacturing and development expertise with an established pharma company, and in a capital-preserving manner, linking payments to commercial success of these treatments, as a sensible approach. Contact: Frank Orthbandt Director +44 20 3530 1037 Fitch Ratings Ltd. 30 North Colonnade London E14 5GN Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:; Rebecca O'Neill, London, Tel: +44 203 530 1697, Email: Additional information is available on 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. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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