A full list of rating actions follows at the end of this release.
The rating actions follow the close of MCK's agreements with
KEY RATING DRIVERS
-- MCK's acquisition of
-- Fitch expects MCK's post-deal capital structure to include a materially increased amount of long-term debt. Pro forma debt-to-EBITDA could exceed 2.5x, but MCK's strong cash generating ability should allow for de-leveraging to around 2x by fiscal year-end 2016. Liquidity is expected to remain strong.
-- U.S. drug distributors maintain exceptionally stable operating profiles and consistent and strong cash generation, owing to steady pharmaceutical demand and generally oligopolistic markets. Margins and cash flows continue to benefit from the mostly durable effects of the unprecedented generic wave, which is set to ramp up again in calendar 2014.
-- Fitch sees the European drug channel as somewhat less stable and efficient, and generally higher risk, than the U.S. market due to increased competitive/regulatory pressures. MCK's acquisition of
-- MCK holds top U.S. market positions in specialty drug distribution, medical-surgical distribution, and healthcare IT, as well as drug distribution in
Maintenance of a 'BBB+' IDR will require MCK to direct sufficient cash flows toward debt repayment such that debt-to-EBITDA of 2x or below is achieved over the next 24-30 months. Long-term funding plans have not been made available, but Fitch expects MCK's significant cash generating ability, enhanced by the addition of
Ratings flexibility will be limited during the de-leveraging timeframe. Significant M&A activity or the resumption of large-scale share repurchases in the next 2-3 years could contribute to downward ratings pressure, to the extent that such actions restrict MCK's ability to repay debt maturities as they come due. The addition of more long-term debt than currently expected could also pressure the 'BBB+' ratings.
A positive rating action is not anticipated in the near-to-intermediate term.
The Negative Outlook represents the large amount of de-leveraging necessary to support the 'BBB+' ratings, plus uncertainty related to the longer-term post-deal capital structure. Furthermore, some event risk remains surrounding future acquisition-related transactions and processes. Significant setbacks in any of these areas requiring the use of material amounts cash or external financing could contribute to negative ratings pressure.
CELESIO DEAL IS STRATEGICALLY SOUND; LIMITED NEAR-TERM FINANCIAL BENEFITS
Fitch views the acquisition of
The combination of MCK and
STABLE OPERATIONS IN THE U.S. AND
MCK and its peers in the drug distribution industry continue to exhibit exceptionally stable operations and financial performance. Despite still weak macroeconomic conditions and moderately decreased utilization of healthcare in the U.S., core business growth at MCK has remained largely in-step with or ahead of broader market growth. Organic long-range growth in the low-single digits is driven by consistent demand for pharmaceuticals and is realized relatively uniformly, given the largely oligopolistic market.
Fitch expects the U.S. drug distribution industry to maintain good operating stability. The industry's very slim margins make it an unlikely target for extra taxes and fees (like those recently imposed on the pharma and medical device sectors in the U.S.). Distributors excel in adding value to the drug channel through the supply chain management and other services they offer to both upstream and downstream customers.
A FEW MORE YEARS OF THE UNPRECEDENTED GENERIC WAVE
MCK and its peers - both in the U.S. and in
Further margin growth is expected to benefit from the introduction of biosimilars to the U.S. drug channel, as well as from new branded biologic drugs, as the pace of traditional branded-to-generic conversions slows post-2015. Fitch believes biosimilars could represent an even more compelling margin expansion opportunity for drug distributors than traditional generics in the intermediate-to-longer term.
SOLID PRESENCE IN SPECIALTY, MED-SURG, AND HIT
Traditional drug distribution in the U.S. is a consolidated industry characterized by steady growth in the low-single digits. Traditional drug distribution accounts for roughly 80% of MCK's overall revenues. The remaining 20% comes from the company's leading market positions in the distribution of specialty pharmaceuticals and of med-surg supplies, and in healthcare information technology (HIT). MCK is one of only a handful of companies with a significant share of these relatively fragmented markets.
As a result, Fitch believes MCK is uniquely positioned to benefit from growth opportunities related to its ancillary businesses as those markets grow and consolidate over time. To that end, Fitch expects MCK to continue consummating small, tuck-in acquisitions in especially the med-surg and HIT spaces.
ROBUST CASH FLOWS AND SOLID LIQUIDITY
MCK's stable margins, efficient operations, and good asset management contribute to stable and strong cash generation measures. Funds from operations (FFO) and FCF for the latest 12 months (LTM) period ended
Debt maturities are estimated as follows:
Fitch has downgraded the following ratings of MCK:
-- Long-term IDR to 'BBB+' from 'A-';
-- Unsecured bank facility to 'BBB+' from 'A-';
-- Unsecured senior notes to 'BBB+' from 'A-'.
Fitch has affirmed the following ratings of MCK:
-- Short-term IDR at 'F2';
-- Commercial paper at 'F2'.
The Rating Outlook is Negative.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (
--'U.S. Healthcare Stats Quarterly - Third-Quarter 2013' (
--'Trekking the Path to Biosimilars - The Destination' (
--'Vital Signs - Currents in the Drug Channel' (Podcast) (
--'Navigating the Drug Channel - Drug Distributors: A Deeper Dive' (
U.S. Healthcare Stats Quarterly — Third-Quarter 2013
Navigating the Drug Channel -- Drug Distributors: A Deeper Dive
Trekking the Path to Biosimilars -- The Destination
Source: Fitch Ratings
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