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Mylan N.V. 'BBB-' Issuer Credit Rating Affirmed On Proposed Merger With Upjohn Co.; Outlook Developing
The rating reflects the expectation that the combined company will have better profitability and product diversity than stand-alone Mylan N.V. and greater geographic diversity, while maintaining its leading position in the global generics market. We believe these strengths are partially offset by intensified competition in global generics, greater difficulty in developing complex generic products, and global pressure to generally lower pharmaceutical prices. The addition of Upjohn's brands improve the durability of the company's revenues given the brands' strong competitive position in emerging markets, based on perceived higher quality and efficacy, which enhances Upjohn's ability to command premium prices.
We also believe the combined company will have low product concentration and good geographic diversity. We estimate the combined company's top product will account for roughly 15% of branded revenue but about 7% of total revenue. We think the top three products will represent about 35% of branded revenues and 20% of total revenue. This compares favorably to many branded pharmaceutical companies, including Allergan PLC, Merck & Co. Inc., and Abbvie Inc. Because of its strong international presence, we believe the company also will have stronger geographic diversity than many other pharmaceutical companies, with the top region representing about 30% of revenue. In our view, the benefit of the diversity is slightly diluted by the exposure to slightly more volatile markets than many peer pharmaceutical companies.
The combined company will be the clear global leader in generic and branded generic drugs, with scale that now exceeds that of Teva Pharmaceutical Industries Ltd. The combined company's strengths are partially offset by intensified competition in global generics and risks to its complex generics strategy. Global generic markets, especially in the U.S., are now more competitive, with greater penetration from manufacturers from low cost locations, more aggressive negotiation from customers, and regulatory agencies that are heightening competition with faster approvals. In addition, we believe branded generics are particularly vulnerable to margin compression from a global movement to lower pharmaceutical prices. Nevertheless, we believe that doctors and patients often perceive branded generics to have better efficacy and safety in certain markets, so we think a global move from branded generics to less expensive generic drugs will be gradual.
Our developing outlook reflects our view that the combined company could deleverage beyond our current forecast of adjusted debt to EBITDA of around 3x two years after transaction close. This is in part because our revenue forecast over the next two years is fairly conservative given several quarters of underperformance in the generics business and recent steep pricing declines in the Chinese market, which could continue or have a greater impact on Upjohn's volumes than we expect. If the new company delivers on or exceeds its operating plan, it may deleverage more rapidly than we are projecting. The developing outlook also reflects the possibility that the transaction is not completed and that Mylan's operating results and credit metrics will be weak for the 'BBB-' rating, in which case we could consider a negative outlook or a lower rating.
We will likely revise the outlook to positive if the transaction is completed as proposed and operating results are generally in line with our expectations.
We could consider revising the outlook to negative or a lower rating if the transaction is not completed and Mylan's credit metrics remain weak for the rating.
We expect liquidity to be strong for the combined company. Ahead of transaction close, we assess Mylan's liquidity as strong because we believe sources of cash will exceed uses by more than 3x over the next 12 months. We also believe that net sources of liquidity will be positive even if forecast EBITDA declines by 30%. We think Mylan can absorb a high-impact, low probability event (such as concurrent regulatory suspensions in major facilities) without needing to refinance due to its solid cash flow generation and availability under its revolving credit facility. Mylan has, in our view, well-established and solid relationships with its banking partners and generally high standing in the credit markets given its large revolving credit facilities, access to the commercial paper market, and ability to issue unsecured notes relatively quickly. We believe Mylan's financial risk management policies anticipate potential setbacks such that sources of cash will continue to exceed uses by 1.5x for the next three years.
Principle liquidity sources:
- 29-Jul-2019 12:12 EDT
- Table of Contents
- Generic pharmaceutical manufacturer Mylan N.V. has said it intends to merge with Upjohn Co., Pfizer Inc.'s established branded pharmaceutical segment, to create a new global pharmaceutical company.
- The transaction is immediately deleveraging given the significant equity component of the combination, placing leverage comfortably in the 3x-4x range, when it previously was at the high end of the range.
- We expect to rate the new combined company 'BBB-' with a positive outlook.
- We are affirming the 'BBB-' issuer credit rating on Mylan N.V. and revising the outlook to developing.
- The developing outlook reflects our expectation to revise the outlook to positive if the transaction is successful, but we could revise the outlook to negative or consider a lower rating if it is unsuccessful.
The rating reflects the expectation that the combined company will have better profitability and product diversity than stand-alone Mylan N.V. and greater geographic diversity, while maintaining its leading position in the global generics market. We believe these strengths are partially offset by intensified competition in global generics, greater difficulty in developing complex generic products, and global pressure to generally lower pharmaceutical prices. The addition of Upjohn's brands improve the durability of the company's revenues given the brands' strong competitive position in emerging markets, based on perceived higher quality and efficacy, which enhances Upjohn's ability to command premium prices.
We also believe the combined company will have low product concentration and good geographic diversity. We estimate the combined company's top product will account for roughly 15% of branded revenue but about 7% of total revenue. We think the top three products will represent about 35% of branded revenues and 20% of total revenue. This compares favorably to many branded pharmaceutical companies, including Allergan PLC, Merck & Co. Inc., and Abbvie Inc. Because of its strong international presence, we believe the company also will have stronger geographic diversity than many other pharmaceutical companies, with the top region representing about 30% of revenue. In our view, the benefit of the diversity is slightly diluted by the exposure to slightly more volatile markets than many peer pharmaceutical companies.
The combined company will be the clear global leader in generic and branded generic drugs, with scale that now exceeds that of Teva Pharmaceutical Industries Ltd. The combined company's strengths are partially offset by intensified competition in global generics and risks to its complex generics strategy. Global generic markets, especially in the U.S., are now more competitive, with greater penetration from manufacturers from low cost locations, more aggressive negotiation from customers, and regulatory agencies that are heightening competition with faster approvals. In addition, we believe branded generics are particularly vulnerable to margin compression from a global movement to lower pharmaceutical prices. Nevertheless, we believe that doctors and patients often perceive branded generics to have better efficacy and safety in certain markets, so we think a global move from branded generics to less expensive generic drugs will be gradual.
Our developing outlook reflects our view that the combined company could deleverage beyond our current forecast of adjusted debt to EBITDA of around 3x two years after transaction close. This is in part because our revenue forecast over the next two years is fairly conservative given several quarters of underperformance in the generics business and recent steep pricing declines in the Chinese market, which could continue or have a greater impact on Upjohn's volumes than we expect. If the new company delivers on or exceeds its operating plan, it may deleverage more rapidly than we are projecting. The developing outlook also reflects the possibility that the transaction is not completed and that Mylan's operating results and credit metrics will be weak for the 'BBB-' rating, in which case we could consider a negative outlook or a lower rating.
We will likely revise the outlook to positive if the transaction is completed as proposed and operating results are generally in line with our expectations.
We could consider revising the outlook to negative or a lower rating if the transaction is not completed and Mylan's credit metrics remain weak for the rating.
- The combined company will raise $12 billion of additional unsecured debt.
- Mylan's current unsecured debt will remain, and the new debt will be structured to be pari passu to existing debt.
- The new company will pay Pfizer a $12 billion cash dividend.
- $1 billion of cash synergies to be realized by 2023.
- Significant costs to achieve combination and synergies in 2020, tapering to 2023.
- About $400 million of asset acquisitions annually to sustain essentially flat revenues.
- Annual dividend payout ratio of about 25% of net income (over $1 billion annually).
- Repayment debt maturities through 2022.
- Essentially flat revenue as volume growth in established products and new generics launches offset pricing declines in mature products.
- EBITDA margins higher than Mylan as a stand-alone company, expanding through 2023 as cost synergies are realized and costs to achieve taper.
- We assume a Jan. 1, 2020, close for simplicity, although mid-year 2020 close is likely.
We expect liquidity to be strong for the combined company. Ahead of transaction close, we assess Mylan's liquidity as strong because we believe sources of cash will exceed uses by more than 3x over the next 12 months. We also believe that net sources of liquidity will be positive even if forecast EBITDA declines by 30%. We think Mylan can absorb a high-impact, low probability event (such as concurrent regulatory suspensions in major facilities) without needing to refinance due to its solid cash flow generation and availability under its revolving credit facility. Mylan has, in our view, well-established and solid relationships with its banking partners and generally high standing in the credit markets given its large revolving credit facilities, access to the commercial paper market, and ability to issue unsecured notes relatively quickly. We believe Mylan's financial risk management policies anticipate potential setbacks such that sources of cash will continue to exceed uses by 1.5x for the next three years.
Principle liquidity sources:
- Expected cash funds from operations (FFO) of about $2.5 billion over the next 12 months;
- Cash and marketable investments of about $446 million as of Dec. 31, 2018; and
- Essentially full revolver availability of $2 billion.
- Debt maturities of about $650 million over the next 12 months;
- Working capital outflows of $400 million-$500 million annually; and
- Capital expenditures of about $300 million annually.
