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Fitch Affirms Ache's IDRs at 'BBB'; Outlook Stable

January 28, 2014

Fitch Ratings has affirmed Ache Laboratorios Farmaceuticos S.A.'s ratings (Ache) as follows: --Foreign and local currency Issuer Default Rating (IDR) at 'BBB'; --National scale rating at 'AAA(bra)'. RATING DRIVERS Ache's 'BBB' rating is supported by the company's strong business position in the Brazilian market and its leadership position in the prescription drug segment. The ratings also incorporate the company's conservative financial strategy of unleveraged capital structure and its strong liquidity position. The solid fundamentals of the pharmaceutical industry in Brazil and its favorable long- term outlook are also factored into the ratings. The need for constant drug innovation and the regulatory burden of the sector are seen as manageable risks. Solid Business Profile in a Competitive Environment Ache has a solid and recognized brand in the Brazilian pharmaceutical industry. Its diversified product portfolio, leadership in the prescription drugs segment, and presence in the fast-growing over-the-counter (OTC) generics and dermo-cosmetics segments support its sound business profile. Ache is the fourth- largest laboratory in Brazil in terms of gross revenue and the second in net revenues. It also has one of the largest sales forces in the domestic market, which gives it competitive advantages compared with peers. Ache's margins are strong and stable, despite the challenge of operating in an environment of strong competition from multinational pharmaceutical companies. Similar to other emerging-market pharmaceutical companies, Ache has a narrower research and development (R&D) product pipeline than its multinational competitors and has a weaker portfolio of patented products. Positively, the company's exposure to licensing agreements is low, with only about 15 percent of revenues derived from these products. The company has been constantly increasing its efforts to innovate and renovate its product portfolio by investing about 3.5 percent of its revenues in R&D. New drugs launches should result in 25 percent revenue expansion from 2014-16. Limited Impact from Potential New Branded-Generics Regulations ANVISA, the local industry regulator, is about to set new rules for the branded-generics drugs, which corresponds to 55 percent of Ache's total revenues. The most relevant measure relates to a new price cap limiting branded generics prices to 65 percent of the reference medication price. Fitch expects limited impact in Ache's operating cash flow generation as its branded-generics drugs are already sold at an average discount of 45 percent to the reference drug, according to Fitch's estimates. Nevertheless, Ache's price flexibility should be challenged under this scenario and also due to an expected overall downward pressure in drugs prices as a result of a greater variety of bioequivalent drugs available for costumers. Unleveraged Capital Structure and Robust Liquidity Ache has historically maintained low leverage ratios, and its credit measures continue to be quite strong. Fitch's projections for 2014 indicate a net debt/EBITDA ratio below 0.5x. In the past five years, the company's average leverage, as measured by the funds from operations (FFO) adjusted leverage ratio, was 0.6x, while its net debt/EBITDA ratio was negative or below 0.5x. During the last 12 months (LTM) ended Sept. 30, 2013 , Ache's cash balances plus cash flow from operations (CFFO) would cover its total debt by more than 3x. As of Sept. 30, 2013 , the company had BRL412 million of cash and marketable securities and total adjusted debt of BRL227 million . Conservative Approach Leads to Profitability Gains Ache has been efficient in balancing the expansion of generics with an innovative portfolio of branded products while achieving benefits from economies of scale. Going forward, Fitch believes that Ache's operational expertise in the Brazilian industry and its strong distribution base should partially mitigate the threat of increasing competition. Its generic portfolio is not expected to account for more than 10 percent-15 percent of its revenues, according to Fitch's projections. For the last 12 months (LTM) ended Sept. 30, 2013 , the company's net revenue and EBITDA reached BRL1.8 billion and BRL630 million , respectively. These figures compare favorably with net revenues of BRL1.2 billion and an EBITDA of BRL394 million in 2009. The EBITDA margin was 35 percent, compared with an average of 33.3 percent in the past two years. FFO and CFFO remained quite robust, totaling BRL488 million and BRL378 million during the LTM, respectively. Consistent FCF Generation Ache has a solid track record of positive free cash flow (FCF) generation after dividends and capex. Between 2009 and 2013, Ache generated an average FCF of BRL116 million . Dividend distributions averaged BRL215 million in the period. In the past three years, the company has increased its dividend payout in order to support the additional business opportunities of its controlling shareholders, paying out a total of BRL1.3 billion between 2009 and 2013. This aggressive dividend policy has been mainly underpinned by the company's strong CFFO and its unleveraged capital structure. Fitch expects that in a more challenging scenario, the company would pursue a more conservative dividend policy in order to increase its financial flexibility and sustain its strong capital structure. During the LTM Sept. 2013 , Ache generated negative FCF of BRL137 million , due mainly to dividends distribution of BRL472 million . Rating Sensitivities A downgrade would be driven by a large debt-financed acquisition that moves the company's capital structure away from the acceptable ranges for its rating category. A significant deterioration in the reputation of its brand and cash generation, or a substantial decline in the company's market share in the Brazilian pharmaceutical industry would also lead to a downgrade. Fitch considers a further upgrade unlikely in the medium term. Applicable Criteria and Related Research : --'Corporate Rating Methodology' ( Aug. 5 , 2013); --'National Ratings - Methodology Update' ( Oct. 31 , 2013). Applicable Criteria and Related Research : Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage Additional information is available at 'fitchratings.com ' ((Comments on this story may be sent to newsdesk@closeupmedia.com ))


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