Fitch Downgrades Pfizer, Inc.'s Ratings to 'AA+'; Outlook Negative
CHICAGO -- Fitch Ratings has downgraded the following ratings of Pfizer Inc.'s (Pfizer) to 'AA+' from 'AAA':
--Issuer Default Rating (IDR);
--Senior unsecured debt;
--Bank loan ratings.
Simultaneously, Fitch has affirmed the 'F1+' short-term IDR and CP rating. The ratings apply to approximately $8.7 billion of debt. The Rating Outlook is revised to Negative from Stable.
Pfizer's rating reflects the company's maturing pharmaceutical product portfolio and an R&D program containing limited promising late-stage drug candidates. The company is in the midst of a wave of drug patent expirations that will negatively affect revenues and cash flow in 2008, and is trying to proactively mitigate the effect of the next period of potential market exclusivity losses in 2011-2012 that includes the company's top-selling prescription drug, Lipitor. Lipitor alone represents approximately 26% of total revenues. Recovery of revenues from patent expiries is driven by two high- growth drug franchises, Lyrica and Chantix.
Pfizer devotes the highest investment in the pharmaceutical industry to its R&D program, having spent $7.3 billion for the latest 12-month (LTM) period ending Sept. 30, 2007. However, the company's current late-stage program is thin compared to its peers, and is not expected to fully replace potential losses from looming patent expiries in 2011-2012. Promising mid-stage projects must emerge in the very near term, and the late-stage pipeline must be expanded (internally or licensed) as well in the near term to mitigate the heightened product portfolio risk after the end of the decade.
Fitch recognizes that leverage has stayed at a historically low level at approximately 0.5 times (x) through the LTM period ending Sept. 30, 2007, since Pfizer significantly reduced outstanding commercial paper borrowings in 2005. Additionally, the company is favored by a light debt maturity schedule during the next period of expected patent losses. However, the current leverage level may be challenged by aggressive business development activity, as the company faces a multitude of operational challenges.
The company maintains exceptional liquidity, provided by a cash balance and short-term investments totaling $22.3 billion at the end of the third quarter of 2007, a $12 billion commercial paper program, and $3.6 billion of lines of credit (with $3.4 billion presently available). Free cash flow dropped to $4.4 billion for the LTM period ending Sept. 30, 2007 from $8.6 billion in 2006 and was negatively affected by increased taxes to $2.2 billion related to the sale of the consumer products business as well as the earnings impact of generic competition to Zoloft and Norvasc. Fitch expects relatively stable free cash flow generation albeit at a lower-than-historical rate through the long term as flat to declining revenues are offset by major cost initiatives. The company is expected to complete a $10 billion share repurachse program in 2007 and return significant dividends to shareholders.