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TMCNet:  Fitch Affirms Allergan's IDR at 'A+'; Stable Outlook

[March 05, 2014]

Fitch Affirms Allergan's IDR at 'A+'; Stable Outlook

CHICAGO --(Business Wire)--

Fitch Ratings has affirmed Allergan Inc.'s (Allergan) Issuer Default Rating (IDR) at 'A+'. A complete list of ratings affirmed is provided at the end of this release.

The Rating Outlook is Stable. The ratings apply to approximately $2.1 billion of outstanding debt.

KEY RATING DRIVERS

Margin Expansion Maintained: EBITDA margins have expanded year-over-year since 2009 and reached a record level in 2013 bolstered by gross margin improvement. Fitch sees margins sustained at the current level as marketing expenses rise commensurate with revenue growth to support the regulatory approvals achieved over the past few years.

Intellectual Property Position Steadied: Allergan recently alleviated significant concern regarding approaching patent expirations of key pharmaceuticals, Restasis and Lumigan 0.01%. The eye care treatments collectively generated almost one-quarter of total sales in 2013.

Low Debt Leverage: Debt leverage (total debt to EBITDA) has been maintained below 1.0 times (x) since 2011 and was at 1.0x in 2013 despite incremental debt used for funding acquisition activity. Debt leverage is expected to remain below 1.0x due to sustained operational performance.

Strong FCF Sustained: Fitch expects solid free cash flow (FCF; operating cash flow less capital spending and dividends) generation through the ratings horizon with margins at least 20% supported by solid operational performance. FCF and FCF margins jumped in 2012 and 2013 to $1.6 billion or 23.8% of revenues, and $1.7 billion or 23.1% of sales, respectively.

Small Scale: The ratings are constrainted by Allergan's small scale relative to pharmaceutical industry peers. In addition, while the company has scale within its product lines, it lags in diversity of product categories.

EBITDA margins have expanded year-over-year since 2009 and reached a record of 34.8% as the company utilized its operating leverage most evident in manufacturing. Gross margin has expanded to 87.5% in 2013 from 85.5% in 2010 mainly from a favorable product mix shift, lower standard costs, and positive geographic mix. EBITDA margin rose last year despite increased research expenses for a deeper pipeline as well as higher marketing investment to promote a wealth of new indications and products launched since 2010. While Allergan can flex marketing costs to further drive operating leverage, Fitch sees margins sustained at the current level given rising marketing expenses to support the many regulatory approvals achieved since 2010.

Fitch sees unabated high single digit revenue increases in 2014-2016 in light of lessened patent expiration risk. The company alleviated significant concern regarding approaching patent expirations of key pharmaceuticals - Restasis and Lumigan 0.01% - in early 2014. Allergan recently obtained three new U.S. patents pertaining to the drug formulation and method of use of its top-selling eye care treatment Restasis (representing 14.9% of total sales in 2013) that effectively extends the product life from May 2014 until August 2024. In addition, a District Court found in January 2014 that five patents pertaining to Lumigan 0.01% are valid until June 2027 and infringed by challenges from four generic drug makers. Allergan generated high single digit growth for the fourth consecutive year with sales rising 8.5% in 2013 showing the resilience of its diversified portfolio to pressures stemming from a difficult macroeconomic environment in Europe.

Fitch believes the company will continue to devote significant resources to its R&D program, supplemented by business development activities including in-licensing new treatent projects. Allergan commits significant investment of 16% to 17% of total sales to internal research to source new revenue growth drivers. Since 2010, the research program has been highly productive having achieved more than 25 regulatory approvals across the world of novel eye-care treatments, line extensions, and new medical devices. Most recently, the FDA approved the facial aesthetic Juvederm Voluma XC to correct age-related cheek volume loss, and cleared Botox Cosmetic for the treatment of crow's feet.

Fitch sees Allergan maintaining solid liquidity driven by steady FCF of greater than $1.4 billion annually in 2014 to 2016 including stable dividends and rising capital spending. FCF margin was 23.1% in 2013, the second consecutive year above 23% in conjunction with EBITDA margin jumping to over 34% during this time. Additional liquidity is provided by full availability under an $800 million credit facility maturing in October 2016, serving to back up an $800 million commercial paper program, and cash and short-term investments of $3.65 billion at the end of 2013.

Allergan will likely remain disciplined when returning value to equity shareholders, historically accomplished by a small dividend and share repurchases to offset stock option dilution, as the company prioritizes capital for supporting growth strategies. The annual amount purchased under the company's 'evergreen' share repurchase program has modulated around 6 million shares (ranging from 4.5 million to 10 million) over the past five years with the vast majority funded from cash flow generation. Fitch expects stable annual dividends of $.20 per share and around 6 million in equity bought under the company's share repurchase program. Allergan paid $59.4 million in dividends and repurchased a net of $471.4 million in common equity during 2013.

RATING SENSITIVITIES

Credit metrics, including leverage and interest coverage, are strong relative to the 'A+' rating. However, upward momentum in the ratings is limited by the company's lack of size and product category diversity in comparision to pharmaceutical peers. Positive rating action would be supported by total debt leverage continuing at 1.0x or below, coupled with sustainable growth in operations driving revenues and EBITDAR of at least $10 billion and $2.5 billion, respectively. In addition, the company would need to demonstrate strong commitment to a capital deployment policy consistent with maintenance of currently low leverage levels. This is particularly important given the trend toward consolidation in the specialty pharmaceuticals segment.

Fitch does not currently expect negative rating action given Allergan's promising organic revenue and earnings growth outlooks backstopped by a solid intellectual property position. In addition, Fitch sees the company generating consistent margins given its ability to flex its operating cost base in the event of demand pressures stemming from secular headwinds. Negative pressure would arise from a leveraging transaction, most likely an acquisition rather than shareholder-friendly actions, such that gross debt leverage rises and stays around 1.5x through the intermediate term. However, the company's focus on tuck-in asset purchases and modest shareholder returns make the situation unlikely.

Fitch has affirmed the following ratings:

--Issuer Default Rating (IDR) at 'A+';

--Senior unsecured debt at 'A+';

--Bank loan at 'A+';

--Short-term IDR at 'F1';

--Commercial paper at 'F1'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Pharmaceutical Companies - Sector Credit Factors' dated Aug. 9, 2012;

--'Corporate Rating Methodology' dated Aug. 5, 2013.

Applicable Criteria and Related Research:

Rating Pharmaceutical Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684459

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822610

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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