September 17, 2012 / 3:57 PM / 5 years ago

TEXT-S&P raises Roche Holding to 'AA'

     -- Switzerland-based pharmaceuticals and diagnostics group Roche Holding 
AG continues to display strong operating performance.
     -- We believe the group's financial policy has become more conservative 
because it has no large M&A ambitions.
     -- We are raising our long-term corporate credit rating on Roche to 'AA' 
from 'AA-' and are affirming the 'A-1+' short-term rating.
     -- The stable outlook reflects our view that the group's future 
performance will enable speedy deleveraging, aided by a supportive financial 
Rating Action
On Sept. 17, 2012, Standard & Poor's Ratings Services raised its long-term 
corporate credit rating on Switzerland-based pharmaceuticals and diagnostics 
group Roche Holding AG (Roche) to 'AA' from 'AA-'. At the same time, the 
'A-1+' short-term rating was affirmed. The outlook is stable.

The upgrade reflects that Roche has transitioned into the credit metrics 
compatible with higher ratings. The group has achieved continuous strong free 
cash flow generation, based on a portfolio of mature and growing products, 
basically not threatened by near-time patent expiries. Furthermore, the 
group's business profile is reinforced in our view by its continuing strong 
global lead in the oncology segment and by its promising late-stage pipeline 
also consisting of potentially meaningful non-oncology compounds. It also 
reflects our perception of management's more conservative financial policy 
following the Genentech minorities' buyout for $47 billion in 2009.

Total financial debt was Swiss franc (CHF) 26.5 billion ($27.8 billion) on 
June 30, 2012.

With its portfolio of leading oncology drugs and seven blockbuster drugs in 
total, thereof three drugs generating more than CHF5 billion in annual 
revenues, Roche's excellent business risk position becomes evident. 
Consequently, EBITDA margins in the pharmaceutical division rose to 48% in 
2012, from 47% a year ago, and to almost 43% on a group level--including the 
weaker-margin diagnostics division--from about 42% in 2011. 

These are excellent results in a peer group context, which should not be 
significantly threatened in the near future, thanks to Roche's superior patent 
expiry profile relative to its peers. Our comparatively robust revenue growth 
assumption of about 4% for the group's pharmaceuticals division is mainly 
based on this. In addition, we believe Roche will likely be able to generate 
positive sales growth in the wider future, also as a result of innovative 
drugs launched in the past, such as Lucentis (against macular degeneration) or 
with respect to its well-filled pipeline. 

We view management's financial policy now as having become more conservative 
than in earlier years, such as in 2009, which culminated in the large-scale 
Genentech transaction. Meanwhile, Roche's credit metrics have recovered and we 
understand it is unlikely that large mergers and acquisitions will be 
undertaken within our two-year ratings horizon. 

Coupled with a relatively modest dividend allocation and no share buybacks, 
Roche's discretionary cash flow is stronger than that of most of its peers, 
which generally make use of both shareholder remuneration instruments. Thus, 
based on the group's ample free cash generation of more than CHF10 billion 
annually, we believe Roche can deleverage relatively speedily over the next 
couple of years.

The short-term rating is 'A-1+'. We view Roche's liquidity as "strong" under 
our criteria and calculate that liquidity sources should exceed liquidity 
needs by a factor of 1.8x over the next 12 months. On June 30, 2012, the group 
had more than CHF7 billion in available cash and marketable securities, 
stripping out about CHF2 billion to account for restricted cash elements, 
thereby comfortably exceeding short-term maturities of only CHF5.4 billion at 
the same date. In addition, the group had undrawn committed credit lines 
exceeding EUR3 billion at the end of June 2012. Furthermore, the group's strong 
liquidity profile is also supported by Roche's having achieved free operating 
cash flow before acquisitions and dividends of almost CHF10 billion in the 
last 12 months to June 30, 2012, which is about the same level as in 2010, and 
compares well against peers.

The stable outlook reflects Roche's well entrenched market positions, both in 
pharmaceuticals and diagnostics. It also reflects our expectation that the 
group will predominantly use its enhanced free cash flow-generating 
capabilities for debt reduction in 2012 and beyond. We therefore expect 
management to abstain from large debt-funded acquisitions. 

We consider a sustainable pension-adjusted funds from operations-to-net-debt 
ratio of 60% and rising further to be consistent with the current ratings. 
Moreover, the ratings provide some flexibility for potential midsize 

We would consider a positive rating action if Roche were to achieve a nearly 
net cash position and demonstrate a sustainable commitment to a financial 
policy commensurate with a higher rating. 

Conversely, a large debt-funded acquisition could trigger a downgrade.

Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit 
Portal, unless otherwise stated.
     -- Key Credit Factors: Business And Financial Risks In The Global 
Pharmaceutical Industry, Jan. 22, 2009 
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List
Upgraded; Ratings Affirmed
                                        To                 From
Roche Holding AG
 Corporate Credit Rating                AA/Stable/A-1+     AA-/Stable/A-1+
Genentech Inc.
 Corporate Credit Rating                AA/Stable/NR       AA-/Stable/NR
 Senior Unsecured                       AA                 AA-
                                        To                 From
Roche Finance Europe B.V.
 Senior Unsecured(2)                    AA                 AA-

Roche Holdings Inc.
 Senior Unsecured(2)                    AA                 AA-

Roche Kapitalmarkt AG
 Senior Unsecured                       AA                 AA-
   1 issue(1)
   3 issues(2)
(1)Guaranteed by Roche Holding AG
(2)Guaranteed by Roche Holding Ltd.

 Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left 

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