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15 Jun 2005
MOODY'S CONFIRMS Aaa RATINGS OF PFIZER INC.; AFFIRMS PRIME-1 SHORT TERM RATING; NEGATIVE RATING OUTLOOK
Approximately $6.5 Billion of Long Term Debt Affected by Rating Confirmation.
New York, June 15, 2005 -- Moody's Investors Service confirmed the Aaa long term debt ratings
of Pfizer Inc. ("Pfizer"), concluding a rating
review for possible downgrade initiated on April 7, 2005.
At the same time, Moody's affirmed Pfizer's Prime-1
short term rating, which was not under review for downgrade.
Following this rating action, the outlook on Pfizer's Aaa
long term rating is negative.
The confirmation of Pfizer's Aaa rating reflects Moody's belief
that Pfizer will continue to meet the guidelines outlined in Moody's
Global Pharmaceutical Rating Methodology at the Aaa level. That
belief is supported by Moody's expectation that: (1) Pfizer will
reduce its gross debt levels over the next several years as it applies
cash repatriated under the American Jobs Creation Act (AJCA) to repay
debt; (2) Pfizer has the ability and willingness to maintain financial
flexibility consistent with the Aaa rating; and (3) Pfizer's
strong pipeline will remain consistent with the Aaa rating category.
Moody's placed Pfizer's Aaa rating under review for possible
downgrade on April 7, 2005 when Pfizer announced that Bextra would
be removed from the market and that Celebrex would carry a stricter warning
level, potentially resulting in lower usage of the product.
Moody's was concerned that lost cash flow from these events would
put additional strain on financial ratios that were already low for the
Aaa rating category, and at a time when Pfizer faced higher operating
risks because of exposure to upcoming blockbuster patent expirations.
As part of its rating review, Moody's performed a detailed
review of Pfizer's existing products and late stage pipeline products,
and prepared projections considering growth opportunities for each product,
potential approvals of new drugs, and upcoming patent expirations
between 2005 and 2007 on a number of products including Norvasc,
Zoloft and Zithromax.
Based on Moody's projections, it appears very likely that
Pfizer has the ability to meet the following key credit metrics:
(1) operating cash flow to adjusted debt of 75%; (2) free
cash flow to adjusted debt of 40%; and (3) adjusted cash and
investments to adjusted debt of 75%. These ratios are the
guidelines for the Aaa rating level specified in Moody's Global
Pharmaceutical Rating Methodology. As of year-end 2004,
Pfizer's ratios were approximately 62%, 33%,
and 79%, respectively, according to Moody's calculations.
Moody's does expect lower cash flow in 2005, stemming from
limited Bextra sales, lower Celebrex sales, and the ongoing
effect of generic competition on Neurontin, Accupril and Diflucan.
Moody's projections also consider a dampening effect on gross margins,
since mature products facing patent expirations are often very high-margin
products. However, we anticipate a large reduction in Pfizer's
debt levels, facilitated by repatriation opportunities under the
AJCA, resulting in substantial improvement in these ratios.
Moody's has also considered Pfizer's "Adapting to Scale" Initiative,
which aims to remove $4 billion of expenses from Pfizer's
cost structure by 2008.
The confirmation of Pfizer's Aaa rating also reflects Moody's
belief that adhering to the specified metrics is largely in management's
control through its financial policies, which include the AJCA repatriation
strategy, share repurchases, and funding of acquisitions.
Moody's estimates that in recent years Pfizer has performed share
repurchases of approximately $5 billion annually (excluding proceeds
from asset sales). Depending on the next several years of financial
performance, this level may need to decline in order to support
the metrics consistent with the Aaa rating.
A further consideration in confirming Pfizer's rating is its strong
late-stage pipeline consisting of more than a dozen new chemical
entities in Phase III or beyond. Several key products, Exubera
and Oporia, are undergoing regulatory review. Lyrica,
a potential blockbuster, was approved by the FDA earlier this year,
and the launch is pending labeling discussions with the FDA.
Moody's evaluates pharmaceutical pipelines by estimating peak sales
and comparing this figure to the existing revenue base. Moody's
estimates that peak sales from Pfizer's late stage pipeline exceed
30% of Pfizer's current revenues, in line with the
"Aaa" rating category as outlined in the Rating Methodology.
The robustness of Pfizer's late-stage pipeline is a key differentiating
factor compared to most other rated pharmaceutical companies, and
helps to offset concerns regarding Pfizer's high exposure to upcoming
Although the rating is being confirmed at Aaa, Moody's is
maintaining a negative outlook on Pfizer's ratings. While
we believe it is likely that Pfizer will maintain a level of financial
flexibility consistent with the indicated ratios, several risk factors
could create deviations from our current expectations. In particular,
the forecast is very sensitive to the following: (1) projected sales
levels of several new products -- especially Caduet and Lyrica --
for which ultimate market acceptance is unclear (Caduet, in particular,
has had a very slow launch); (2) earlier than expected generic entrants
or faster than expected sales erosion upon generic competition; and
(3) any disappointments related to late-stage pipeline products.
Furthermore, in the currently heightened environment focused on
drug safety issues, Moody's believes that additional safety
concerns are hard to rule out. Viagra, for instance,
has recently been linked to rare cases of blindness. Finally,
Moody's notes that Pfizer's financial policies have been oriented
to shareholders in the past, and a return to larger share repurchases
or other shareholder value initiatives might ensue if Pfizer's share
price does not reverse its downward trend. Moreover, as Pfizer
faces a slow earnings outlook in 2005 and accelerating patent expirations
in 2006 and 2007, the likelihood of cash financed acquisitions may
These concerns create some degree of risk that Pfizer may not reach the
guidelines outlined above, and Moody's believes a negative
outlook is currently warranted. Over time, if Moody's
becomes more confident that the specified ratios will be readily attained
and remain sustainable, then the outlook is likely to stabilize.
Conversely, if it becomes more clear that the specified ratios will
not be attained, then the ratings are very likely to be downgraded.
Examples of situations where this could occur include, but are not
limited to: (1) weak performance of in-line products such
as Lipitor; (2) a disappointing Lyrica launch; (3) any number
of unpredictable events such as another safety-related product
withdrawal or a major pipeline disappointment; or (4) an unwillingness
to maintain financial policies that preserve the aforementioned ratios
within the ranges outlined for the Aaa rating category.
The affirmation of Pfizer's short term rating reflects the company's
strong liquidity profile. Pfizer still generates strong cash flow,
and its balance sheet contained approximately $22 billion of cash
and short term investments as of March 31, 2005, compared
to $13.4 billion of short term debt and $6.4
billion of reported long term debt.
Pfizer Inc. -- Aaa senior notes, Eurobonds, medium
term notes, industrial revenue bonds, revolving credit facility
and issuer rating; (P)Aaa shelf registration rating
Warner-Lambert -- Aaa senior note rating
Pharmacia Corporation -- Aaa notes, medium term notes and industrial
Pfizer Inc. -- Prime-1 short term debt rating
Headquartered in New York, Pfizer Inc. is a global pharmaceutical
company, with $52.5 billion of 2004 revenues.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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