The transaction is consistent with Fitch's expectation that a number of major pharmaceutical companies will continue to consider divestitures of businesses that are not core to a business model focused on biomedical innovation. This is particularly relevant to firms such as Merck who have strengthened product pipelines that are expected to support long-term growth.
The consumer business only accounts for approximately 4% of Merck's total sales, and Fitch estimates the segment's EBITDA margin is less than that of the pharmaceutical business and the total firm. Nevertheless, the incremental loss of diversification and EBITDA would be marginally negative for Merck's credit profile. We view the
While the transaction will significantly increase liquidity, the relatively modest estimated loss of EBITDA will further stress gross debt leverage of 1.65x, which is currently high for the company's current 'A+' credit rating.
Fitch looks for Merck to maintain adequate liquidity through strong FCF generation and ample access to the credit markets. FCF for the LTM ending
Fitch rates Merck 'A+' with a Negative Rating Outlook, and a downgrade of the ratings could stem from total debt leverage remaining above 1.5x in the intermediate term. The high leverage could be driven by incremental borrowing to fund acquisitions or share repurchases; although incremental liquidity provided by the cash proceeds from the sale of the consumer health business mitigates this concern in the near term. Leverage pressure could also result from operational weakness due to an inability to achieve cost-containment targets or by generating sales growth despite an improving patent risk profile and an expanding late-stage pipeline.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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Source: Fitch Ratings
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