News Column

Fitch: Merck Consumer Business Sale Improves Its Core Focus

May 6, 2014



NEW YORK--(BUSINESS WIRE)-- The sale of Merck's consumer products business will increase the company's focus on its core mission of developing and marketing innovative medicines, according to Fitch Ratings. German-based Bayer AG Tuesday said it planned to buy Merck's consumer health unit for $14.2 billion.

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 $14.2 billion cash sale as incrementally negative for the company's credit profile, with the expectation that the proceeds of the sales would not be used for debt reduction, but rather to fund payments to shareholders and business development activities, including acquisitions.

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 Dec. 31, 2013, was $8.35 billion. At the end of the period, Merck had approximately $17.5 billion in cash plus short-term investments and full availability on its $4 billion revolver maturing in May 2017.

At Dec. 31, 2013, Merck had roughly $24.6 billion in debt outstanding, with $4.7 billion maturing in 2014, $2 billion in 2015, $2.3 billion in 2016 and $1 billion in 2017. Fitch expects near- to midterm maturities will be satisfied primarily through refinancing in the public debt markets.

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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Fitch Ratings

Robert Kirby, CFA

Director

Corporates

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Fitch Ratings, Inc.

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Chicago, IL

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Megan Neuburger

Senior Director

U.S. Corporates

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Email: brian.bertsch@fitchratings.com

Source: Fitch Ratings


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Source: Business Wire