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Fitch Rates Bristol-Myers Squibb's Notes Offering 'A-'; Outlook Stable
February 22, 2017 / 9:45 PM / 9 months ago

Fitch Rates Bristol-Myers Squibb's Notes Offering 'A-'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, February 22 (Fitch) Fitch Ratings has assigned an 'A-' rating to Bristol-Myers Squibb Company's (Bristol, BMY) senior unsecured notes offering. Proceeds will be used to partially fund an accelerated share repurchase program (ASR). The Rating Outlook is Stable. KEY RATING DRIVERS --The company maintains decent headroom under the 2.0x gross leverage level Fitch considers appropriate for the 'A-' rating after incorporating the effect of a recently announced $2 billion ASR. Fitch calculates pro forma gross leverage of 1.6x. --Increasing involvement by activist shareholders raises the likelihood that the company will pursue transactions that have a negative effect on the balance sheet and credit profile, like the ASR. Bristol's still decent fundamental operating outlook and demonstrated commitment to operating with leverage below 2.0x mitigate this risk. --Fitch anticipates that continued market uptake of promising medicines with longer patent protection and the successful commercialization of key research projects will help offset the declining sales of existing drugs with expired patents. --While Bristol's new lung cancer drug Opdivo will likely grow at lower rates than Fitch previously forecasted, the product will likely still present good long-term prospects as the company focuses on clinical studies to expand its use over currently approved indications. --Fitch anticipates that Bristol will successfully advance a number of early- to mid-stage pipeline candidates into late-stage development and regulatory submission. --A moderating patent cliff, moderately improving margins and capital expenditures declining to more normalized levels support positive and improving FCF (FCF; cash from operations less dividends and capital expenditures) over the rating horizon 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. Leverage has remained at or below 1.8x since the company's diabetes divestiture in early February 2014. The Stable Outlook continues to be supported by a demonstrated willingness and ability to conservatively deploy cash in order to maintain a 'A-' credit profile. However, Bristol's recently announced ASR program and shareholder activists' involvement are indicative of increased event risk related to leveraging transactions. Patent Protected Products Growing: Bristol has a number of growth drivers for the intermediate term that will help to mitigate the roughly 19% of sales at risk to patent expiries through the end of 2019. The company's longer-dated patented products continue to generate solid growth. Sprycel (chronic myeloid leukemia), Eliquis (blood clots), Yervoy (cancer) and Opdivo (cancer) should support long-term growth as favorable clinical outcomes and/or demographics drive increased utilization. While Fitch expects near- and longer-term growth for Opdivo, the drug is facing competitive headwinds, which have moderated our growth targets. Near-Term Challenges for Opdivo: Opdivo has experienced some clinical setbacks from a competitive perspective when compared to Keytruda (Merck & Co., Inc.) as a first-line treatment (as a sole agent or as combination therapy) of lung cancer. Fitch believes Bristol will continue to advance Opdivo's clinical utility through performing clinical trials as a standalone therapy and part of combination therapy. The company's numerous clinical trials currently underway in various types of cancers support this assumption. Partly offsetting these setbacks, is the legal settlement that Merck reached with Bristol regarding Keytruda's alleged infringement of Opdivo's patents. Under the agreement, Merck will initially pay $625 million to Bristol and its partner Ono Pharmaceutical Company, Ltd. (Ono). Merck will also pay royalties on global sales of Keytruda of 6.5% from Jan. 1, 2017 through Dec. 31, 2023, and 2.5% from Jan. 1, 2024 through Dec. 31, 2026. Additionally, the three companies have granted certain rights to each other under their respective patent portfolios pertaining to PD-1. Mid/Early-Stage Pipeline: The vast majority of Bristol's late-stage clinical developments have come from a large number of studies with Opdivo. However, the company has a significant number of new molecular entities (NME) in mid- to early-stage development. These programs involve new therapies to treat cardiovascular disease, various types of cancer, neurological disorders, fibrotic diseases and genetically defined illnesses. Current therapeutic options for a number of these targeted diseases are suboptimal, which provide BMY an opportunity to gain expedited pathways of regulatory approval if these therapies demonstrate early efficacy and good safety profiles. Patent Cliff Moderates: The wave of drug patent expirations during 2015 - 2016, is now behind Bristol. The company's next significant patent expiry occurs when Orencia (rheumatoid arthritis/12 of total revenues), a biologic, loses patent protection in the U.S. in 2019, Europe in 2017, and Japan in 2018. As a biologic therapy, Fitch expects that when biosimilar competitors arrive, Orencia will experience more gradual market share losses than a small molecule drug facing generic competition. Expected strong performance of Opdivo, Sprycel, Empliciti and Eliquis should provide support during 2017 to 2021. Improving FCF: Bristol should generate steady improvements in FCF during 2017 and beyond, as new products recently launched gain traction and margins gradually improve owing to cost control and favorable shifts in sales mix of newer, higher margin products. Fitch forecasts $500 million to $600 million in FCF during 2017. Estimated FCF in the latest-12-month (LTM) period ended Dec. 31, 2016 was ($912) million, compared to ($1.47) billion in the prior year's LTM period. A temporary increase in capital expenditures (manufacturing expansion) and working capital uses drove the negative FCF. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Bristol include: --Low single-digit revenue growth in 2017 to 2019 with new products offsetting the decline in mature products and slowing growth rate for Opdivo; --EBITDA margin to increase to 27% to 28% as mix improves with newer product growth and ongoing efforts to rein in costs yield savings; --Annual FCF (cash flow from operations minus capital expenditures minus dividends) of roughly $500 to $600 million during 2017; --Leverage to remain below 2.0x. 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: 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 newer, patent-protected therapeutics. Negative: Future developments that may individually or collectively, lead to a negative rating action include: Ratings pressure would result if the company faces significant and durable operational stress possibly from an increased competitive landscape regarding its relatively new therapies, or pursues a leveraging transaction. A Negative Rating Outlook or a one-notch downgrade could result if Fitch expects leverage to be maintained above 2.0x. LIQUIDITY Bristol has adequate sources of liquidity. At Dec. 31, 2016, the company had full capacity under $3 billion in five-year revolving credit facilities comprising $1.5 billion expiring in October 2020 and $1.5 billion expiring in July 2021. The revolvers contain no financial covenants. Also on Dec. 31, 2016, the company had cash and short-term investments of $6.3 billion and long-dated securities of $2.7 billion. Roughly $1.1 billion of cash, cash equivalents and marketable securities resides domestically. Upcoming significant debt maturities are the $750 million notes in 2017. Fitch expects maturities will be refinanced with debt issuances or commercial paper borrowings. FULL LIST OF RATING ACTIONS Fitch currently rates Bristol-Myers Squibb Co. as follows: --Long-Term IDR 'A-'; Outlook Stable; --Senior unsecured debt 'A-'; --Bank loan 'A-'; --Short-Term IDR 'F2'; --Commercial paper 'F2'. Contact: Primary Analyst Bob Kirby, CFA Director +1-312-368-3147 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Megan Neuburger, CFA Managing Director +1-212-908-0501 Committee Chairperson Barbara Chapman Senior Director +1-646-582-4886 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Date of Relevant Committee: Feb. 15, 2017 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Historical and projected EBITDA is adjusted to add back non-cash stock based compensation. 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