Bloomberg News

Buybacks May Pressure Drugmaker Credit Ratings, Moody’s Says

March 14, 2012

The ratings of European drugmakers may come under pressure after the resumption of share buybacks following a period of “intense” consolidation in 2009 and 2010, Moody’s Investors Service said.

Stock repurchases by Novartis AG (NOVN) and Sanofi probably will be smaller and more opportunistic than those announced by AstraZeneca Plc and GlaxoSmithKline Plc (GSK), Moody’s said. The levels of those buybacks may be lower if the companies make acquisitions, Moody’s said.

Pharmaceutical companies are returning cash to investors after spending on deals such as Novartis’s $50 billion Alcon purchase and Sanofi’s $20.1 billion Genzyme acquisition. Buybacks reward stockholders by increasing earnings per share at a time when best-selling medicines such as AstraZeneca’s Nexium ulcer pill and Glaxo’s Valtrex antiviral face generic competition that are crimping sales, Moody’s analysts said.

“If companies make share buybacks in excess of their free cash flow generation, and their cash flows are not growing, their credit metrics will weaken as a result, since they will either need to raise debt or use cash on their balance sheets to fund these transactions,” Moody’s said.

Large buybacks are unlikely because most companies want to maintain ratings that provide easy access to the debt markets, the analysts said.

Prime-1 Rating

“Because a Prime-1 rating hinges on an issuer’s ability to maintain a long-term rating of at least A2 or higher, we would not expect companies to undertake substantial share repurchases that could potentially jeopardize this,” Moody’s analysts wrote in the report.

London-based AstraZeneca (AZN), which Moody’s rates as A1 stable, plans to buy back $4.5 billion in stock this year. That amount exceeds the $2.5 billion Moody’s expects for post-dividend free cash flow generation in 2012.

“Negative pressure on AstraZeneca’s rating or outlook could build if sizeable buybacks combined with earnings erosion lead its financial profile to weaken,” said Marie Fischer- Sabatie, a Paris-based senior credit officer in Moody’s Corporate Finance Group, said in the statement.

Glaxo, based in London, said in February that it will buy 1 billion pounds ($1.6 billion) to 2 billion pounds of its stock this year after repurchasing 2.2 billion shares in 2011, its first buyback since 2008.

Free Cash Flow

The company’s free cash flow probably will cover that cost, though Glaxo is also facing legal expenses, Moody’s said. Glaxo agreed last year to pay $3 billion to resolve U.S. criminal and civil investigations into whether it marketed drugs for unapproved uses and other matters. Moody’s rates the company A1 stable.

“Share buybacks combined with other large cash outflows could potentially lead GSK’s financial profile to weaken, resulting in rating pressure,” Fischer-Sabatie said. “However, GSK has provided a monetary range for its repurchases, enabling it to retain a degree of flexibility if conditions change.”

Sanofi (SAN) Chief Executive Officer Chris Viehbacher has said the Paris-based company plans to stick to “opportunistic” buybacks, and that he doesn’t favor sizeable repurchase plans right now.

“In general, our preference is to have an aggressive dividend policy,” Viehbacher said during a Jan. 10 presentation in San Francisco. Moody’s rates Sanofi A2 stable.

Novartis has about $7 billion remaining of a $10 billion buyback plan first announced in 2008, Chief Financial Officer Jon Symonds said in January.

“We are definitely not saying there are no buybacks; we’re just not announcing a structured program that has a defined limit to it,” Symonds told analysts and investors on a conference call at the time.

The Basel, Switzerland-based drugmaker has an Aa2 negative rating, Moody’s said.

To contact the reporters on this story: Trista Kelley in London at tkelley2@bloomberg.net; Kristen Hallam in London at khallam@bloomberg.net

To contact the editor responsible for this story: Phil Serafino at pserafino@bloomberg.net


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