The ratings apply to approximately
KEY RATING DRIVERS
Fitch believes Lilly will maintain a credit profile supportive of its 'A' rating despite facing significant operational headwinds during 2014. Fitch's rating actions are based on the following:
--Lilly faces significant patent risk with three of its top drugs, which account for roughly 30% of total firm sales and are scheduled to lose patent protection during the next two years.
--Fitch expects LLY will return to top-line growth during 2015-2016 with the annualizing of patent expiries and continued strength in established and new products such as Amyvid, Alimta, Cialis, Effient, Erbitux and Tradjenta/Jandueto.
--Fitch believes Lilly's late-stage pipeline, particularly strong in treatments for diabetes and cancer, offers the company numerous opportunities to sustain longer-term growth.
--Fitch anticipates margin compression in 2014 due to Cymbalta's patent expiry. However Lilly's cost cutting measures should result in a leaner cost structure, paving the way for margin expansion in 2015-2016 as sales rebound.
--Fitch forecasts that Lilly will generate approximately
--Relatively aggressive share repurchases from now through 2017 are incorporated in Fitch's forecast. However, cash dividend increases are expected to be modest and acquisitions targeted.
--With leverage (total debt/EBITDA) of 0.74x for the latest 12-month (LTM) period ended
--Fitch assumes the company will maintain adequate liquidity during the upcoming patent cliff, supported by FCF generation, balance sheet cash, and availability on its revolving credit facility.
SIGNIFICANT PATENT CLIFF
Lilly faces significant patent expiries through 2014. Its largest selling drug, Cymbalta, lost U.S. patent protection in
REBOUND WITH PATENT-PROTECTED PRODUCTS
Fitch expects Lilly will return to top-line growth during 2015-2016, achieving annual sales in excess of
Lilly has improved its growth prospects for the intermediate- to longer-term, as it has been making significant progress in building its late-stage pipeline. The company currently has four drug candidates in registration to treat diabetes and gastric cancer (and possibly lung cancer). In phase III development, Lilly has a growing number of therapeutics, including three to treat cancer and two to treat diabetes. In addition, its phase III pipeline contains drugs to treat lupus, psoriasis, high cholesterol, depression, and rheumatoid arthritis. The company has partnered with Boehringer Ingelheim in its efforts to develop diabetes medications.
EFFORTS TO SUPPORT MARGINS
Fitch expects Lilly to remain focused on controlling costs in order to support margins while balancing its need to invest in growth. The company faces a number of operational headwinds, including the anticipated near-term patent expiries. As such, Lilly has cumulatively taken approximately
POSITIVE BUT SUBDUED FCF
Fitch forecasts positive but lower FCF of approximately
RELATIVELY AGGRESSIVE CASH DEPLOYMENT
Fitch incorporates roughly
LEVERAGE TO INCREASE IN 2014
Fitch looks for Lilly to operate with debt leverage of 1.1x-1.3x in 2014 during the height of the patent expiries. This is a sharp increase from current leverage of 0.74x. Fitch recognizes that there is some uncertainty surrounding its forecasted leverage range for 2014, since the forecast will be influenced by the level of profitability the company will generate during the period, as well as the discipline Lilly exercises regarding balance sheet debt. Fitch assumes Lilly will refinance the
Fitch assumes Lilly will maintain adequate liquidity, supported by FCF generation, balance sheet cash and availability on its revolving credit facility. At
Future developments that may, individually or collectively, lead to a revision of the Rating Outlook to Positive include:
--Revenues continue to expand for recently launched patent protected products, including Amyvid, Alimta, Cialis, Effient, Erbitux and Tradjenta/Jandueto;
--The company employs adequate cost controls to generate sufficient profitability while limiting increases in debt to maintain leverage sustainably below 1.3x;
--Cash is deployed conservatively, with the majority of the planned
Future developments that may, individually or collectively, lead to a Negative Rating Outlook and/or a one-notch downgrade to 'A-'/'F2' include:
--Operational stress from, but not limited to, patent expiries drives leverage durably above 1.7x;
--FCF deteriorates without the expectation of a timely trend reversal.
Fitch currently rates Eli Lilly as follows:
--Long-term IDR at 'A';
--Senior unsecured debt rating at 'A';
--Bank loan rating at 'A';
--Short-term IDR at 'F1';
--Commercial paper rating at'F1'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology'
--'Rating Pharmaceutical Companies - Sector Credit Factors',
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Pharmaceutical Companies
Source: Fitch Ratings
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