Business Wire - Fitch Places Schering-Plough’s Ratings on Rating Watch Negative
CHICAGO — Fitch Ratings has placed Schering-Plough Corp.’s (Schering-Plough) (NYSE:SGP) ratings on Rating Watch Negative. The action applies to approximately $11.98 billion of outstanding debt.
The Rating Watch reflects Fitch’s concern that Schering-Plough will be unable to reduce leverage, total debt-to-EBITDA, to below 2.0 times (x) by the end of 2009 given potential sales erosion of the cholesterol-lowering medicines, Vytorin and Zetia. Leverage rose to 3.2 times (x) at the end of 2007 from 1.2x at the end of 2006, in conjunction with the acquisition of Organon Biosciences N.V. (Organon Biosciences) for approximately $16.1 billion in November 2007. Fitch will monitor debt reduction over the near-term in light of the company’s operational challenges.
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Sales declines experienced since the release of clinical data from the ENHANCE study in January moderated late in the first quarter of 2008, but may trend downward depending on the application by cardiologists and primary care physicians of a recommendation by a panel of physicians at the recent American College of Cardiology (ACC) meeting. The ACC panel suggested that Vytorin and Zetia should be used only after patients fail to achieve cholesterol reduction goals with other statins and ‘proven’ medicines, including lower-cost generics. The Rating Watch Negative will likely be in place over the next few quarters as more clear evidence of the extent of sales erosion becomes available.
The company’s credit profile is highly sensitive to changes in equity income from affiliates, mainly derived from the Merck and Co, Inc. (Merck)/Schering-Plough joint venture, responsible for the marketing of Vytorin and Zetia. Demand pressures for the drug products directly negatively affect equity income derived from the Merck/Schering-Plough joint venture. Potential significant declines of equity income would compress EBITDA margin, reversing the solid operational performance achieved by the company over the past few years. EBITDA margin increased annually to 23.7% for 2007 from a low of 7.1% in 2004.
Schering-Plough is also in the midst of integrating Organon Biosciences. Fitch recognizes that in the first year of operating the new businesses, additional integration costs may weigh on the company’s credit profile and that synergies may not outweigh integration costs in the intermediate-term. Additionally, litigation and government investigations surrounding the release of the ENHANCE study data add a layer of risk to the credit profile.
Schering-Plough maintains solid liquidity provided by a new $2 billion revolving credit facility and sustained free cash flow generation. Free cash flow was $1.51 billion for the full year of 2007 and $1.29 billion in 2006. Additionally, the company had cash and equivalents and short term investments of $2.31 billion at the end of 2007.
Fitch has placed the following ratings on Rating Watch Negative:
— Issuer Default Rating (IDR) ‘BBB’;
— Senior unsecured debt rating ‘BBB’;
— Bank loan rating ‘BBB’;
— Convertible preferred stock rating ‘BBB-’
— Short-term IDR ‘F2′.
— Short-term debt rating ‘F2′.
Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.
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