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Novartis’ Offer for Advanced Accelerator Applications Is Credit Negative
On Monday, Novartis AG (Aa3 negative) announced that it had launched a $3.9 billion tender offer for Advanced Accelerator Applications (AAA, unrated). Such a deal would be credit negative for Novartis because the company would fund the acquisition with debt, which would further weaken its credit metrics over the next 12-18 months, and the acquisition amount would likely exceed the company’s 2018 free cash flow. Novartis’ tender offer follows a year during which the company faced headwinds from generic competition after the loss of exclusivity of its oncology drug, Gleevec. We expect the company to return to growth in 2018, and although we expect Novartis to generate free cash flow of around $3 billion in 2018, this will not be enough to fully finance the AAA acquisition. As a result, we expect Novartis’ net debt to increase to $22 billion at the end of 2018 from $21 billion as of September 2017. By the end of 2018, we estimate that the company’s ratio of cash flow from operations (CFO) to debt will be in the mid-30% range versus 39.6% as of the end of 2016, with a leverage ratio (defined as Moody’sadjusted gross debt/EBITDA) of around 2.6x versus 2.2x over the same period. For the Aa3 ratings category, we expect Novartis’ CFO/debt to be above 50% with a debt/EBITDA ratio of below 2x. A debt-funded acquisition of AAA will keep Novartis’ credit metrics weak for Aa3 rating category until 2019-20. Although AAA recorded 2016 revenue of €104 million, we believe the company is unlikely to materially add to Novartis’ EBITDA and cash flow over the next two years. Instead, AAA would be a platform acquisition that has the potential to strengthen Novartis’ market presence in the field of treating radiosensitive tumors. Novartis has at its disposal various non-core assets that it could sell, the proceeds of which could help reduce debt. This is a factor that we continue to consider in our credit assessment of Novartis. However, the company in its third-quarter earnings report published on 24 October said that its strategic review of its Alcon unit might involve the creation of a standalone company via an eventual capital markets exit that would maximize shareholder value. A spinoff of Alcon would be credit negative for Novartis unless accompanied by debt reduction because Novartis’ business would be less diverse. AAA is a French biotech company focused on a new technology platform called targeted radionuclides. The company’s lead drug candidate, Lutathera, was approved in Europe in September 2017 for the treatment of certain types of tumors. The company awaits approval for Lutathera by the US Food and Drug Administration by January
