Health & Fitness
Health and Fitness
Health and Fitness
Tue, August 10, 2010
Mon, August 9, 2010
Fitch Upgrades Watson Pharmaceuticals' IDR to 'BBB'; Outlook Stable
CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has upgraded Watson Pharmaceuticals, Inc.'s (Watson) (NYSE: WPI) ratings as follows:
--Issuer Default Rating (IDR) to 'BBB' from 'BBB-';
--Senior unsecured convertible debentures to 'BBB' from 'BBB-';
--Senior unsecured credit facility to 'BBB' from 'BBB-'.
The Rating Outlook is Stable. The ratings apply to approximately $1.24 billion of debt outstanding as of June 30, 2010.
The rating reflects Watson's proven history of rapid debt reduction following leveraging acquisitions which was recently evident after the purchase of Arrow Group (Arrow). Total debt leverage has dropped to 1.74 times (x) for the latest 12-month period (LTM) ending June 30, 2010 from 2.35x at the end of 2009 as the company paid down approximately $220 million since the close of the acquisition in November 2009. Fitch expects slight improvement in leverage to 1.7x (gross debt leverage) and 1.9x (adjusted debt leverage) by the end of this year due mainly to the current level of debt reduction and annualizing of Arrow.
Watson's underlying operations have been solid and backstopped by the generic drug business that has benefited from 'favorable' U.S. pricing and limited competition to new key generic pharmaceuticals, specifically Micro-K and Toprol-XL. Further supporting continued growth are incremental revenues from Arrow and potentially new generic drug introductions in the intermediate term, most notably, Lipitor, Xoponex, and Concerta.
Fitch recognizes the immediate challenge of replacing brand name drug revenues from Ferrlecit after the lapse of a distribution agreement at the end of 2009. However, the brand drug sales lost from Ferrlecit may be entirely replaced by revenues over the next two years from new brand name products launched over the past 18 months - Trelstar 6-month, Rapaflo, and Gelnique. Fitch anticipates double digit growth through the intermediate term.
Generic manufacturers are consistently tasked to control gross margin given the ebbs and flows within the industry, notably sustained focus on health care cost control and efforts to offer a full drug portfolio to the marketplace. Despite these factors, Watson has successfully expanded margin over the past few years due to cost reduction efforts focused on streamlining the manufacturing footprint and off-shoring operations to lower cost locations, including the finished dosage plants in India with present capacity to produce 3 billion units (and plans to double the output in two to three years). As such, EBITDA and EBITDAR margins grew to 22.5% and 23.1%, respectively, for the LTM period at the end of the second quarter, from 20.4% and 20.9% in 2006. Fitch conservatively expects some margin compression as the company's product portfolio is increasingly favored toward lower margin generic drugs, yet projected margins are still more indicative of the new rating.
Free cash flow generation has been strong for the current rating category and was $355.8 million for the LTM period ending June 30, 2010, representing an 11.2% margin. Free cash flow will continue to benefit from moderating capital intensity as the company consolidates manufacturing facilities as well as the absence of shareholder-friendly activities. Fitch believes that free cash flow margin will remain relatively consistent with current levels through the intermediate term.
Additional liquidity is provided by cash and marketable securities of approximately $236 million on June 30, 2010, and remaining availability of $450 million on the $500 million unsecured revolving credit facility expiring in November 2011. Term loan debt of $150 million against the $650 million facility also comes due in November 2011. Beyond the unsecured credit facility due next year, Watson's next significant debt maturities are $200 million of mandatorily convertible (payable in cash) preferred stock in 2012, and $450 million of senior notes due August 2014.
Fitch expects that the major focus for capital deployment is tuck-in acquisitions over the intermediate-term; however, a larger leveraging acquisition over the next two years would not be unexpected given a pattern of leveraging transactions every few years as indicated by the Arrow purchase in 2009 that followed the Andrx acquisition in 2006.
These rating actions reflect the application of Fitch's current criteria which is available on Fitch's web site at [ www.fitchratings.com ] and specifically includes: 'Rating Pharmaceutical Companies - Sector Credit Factors' dated July 19, 2010, 'Corporate Rating Methodology', dated Nov. 24, 2009, and 'Liquidity Considerations for Corporate Issuers' dated June 12, 2007.
Additional information is available at '[ www.fitchratings.com ]'.
Related Research:
Rating Pharmaceutical Companies - Sector Credit Factors
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=531669 ]
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489018 ]
Liquidity Considerations for Corporate Issuers
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666 ]
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