Moody's Investors Service said it confirmed the A1 ratings on the long-term debt of Pharmacia & Upjohn Company (PNU) and upgraded the ratings on the long-term debt of Monsanto to A1 from A2. These actions complete the review process begun on December 21, 1999 when the two companies announced definitive plans to merge. The outlook for the A1 ratings is positive. Moody's short-term ratings for the commercial paper programs of PNU were previously confirmed at Prime-1; the rating on the CP program of Monsanto Company is confirmed at Prime-1 today.
The combined company will be called Pharmacia Corporation (PC) and will be headquartered in Peapack, New Jersey. The merger has been approved by both boards and the regulatory authorities (FTC) in the US, but is subject to approval by shareholders and EU regulatory review.
The agricultural business will retain the Monsanto name and will be headquartered in St. Louis Missouri. Initially, the credit profile of the Monsanto Ag business benefits from being part of a larger stronger drug company. However, Moody's recognizes the possibility that, over time, the ownership stake held by Pharmacia might be reduced. Under this scenario, Moody's will increasingly look at Monsanto as a freestanding credit; Monsanto's risk profile on a freestanding basis is currently strong and is expected to improve further as debt is reduced.
Ratings upgraded today:
Monsanto Company and Monsanto Defined Contribution ESOT - notes, debentures, MTN program, and industrial revenue bonds; senior unsecured; to A1 from A2
Searle (GD) & Co.
Industrial revenue bonds; senior unsecured; to A1 from A2
Ratings confirmed today or previously confirmed:
Pharmacia & Upjohn Company (PNU) -
Notes, medium-term notes, and industrial revenue bonds; senior unsecured; confirmed at A1
The Upjohn Company Employee Stock Ownership Trust -- guaranteed amortizing notes; confirmed at A1
Pharmacia & Upjohn, Inc. - senior unsecured shelf; confirmed at (P)A1
Monsanto Company - Prime-1 commercial paper
Pharmacia & Upjohn, Inc. -- Prime-1 for commercial paper.
Pharmacia & Upjohn Treasury Services AB -- Prime-1 for guaranteed commercial paper.
Pharmacia Biotech Inc. -- Prime-1 for guaranteed industrial revenue bonds.
Monsanto Company --Prime- 1 for industrial revenue bonds
Today's rating actions anticipate that all of the currently rated long-term debt will be situated at PC and none at Monsanto, except the existing Monsanto CP program. The rating on this CP program is being confirmed today at Prime-1.
The A1 ratings of PC reflect the combined pharmaceutical businesses strong debt protection measures, growing top tier positions in a number of therapeutic areas, low patent expiry exposure, good double-digit growth potential, better R&D critical mass and a relatively full new product pipeline. The merger is also expected to provide cost avoidance and cost cutting opportunities; the companies have identified $600 million in cost savings achievable over three years.
Factors limiting the ratings include the high debt level initially, moderate operating margins when compared to other top tier drug companies, and the near term challenges associated with managing the merger process and assimilating two large institutions with individual cultures. We believe that the PNU management team has successfully combined the former Pharmacia and Upjohn entities.
PC's favorable operating outlook in pharma reflects good growth potential from recently introduced products -- like Celebrex for arthritis, Xalatan for glaucoma, Detrol for urinary incontinence, and an array of oncology drugs -- and from new products with high expectations -- including Zyvox anti-infective, valdecoxib for arthritis and pain, and parexcoxib analgesic. Near term launches of new products are expected to provide differentiated products targeted at important disease segments.
The company's current operating margin is a very healthy 19% on a pro forma basis. But the margin is low when compared to other top-tier well-positioned drug credits. The margin is expected to improve over the next few years as the company achieves better economies through top line growth and synergy benefits.
In addition, the initial net debt level of about $6.5 billion is expected to be managed down in the near term with proceeds from divestitures and cash flow generation.
The outlook for the A1 rating is positive; debt reduction and lower leverage, rising margins, and adherence to conservative financial policies would lend support to an argument for a higher rating category over time.
Meanwhile, the Prime-1 ratings on Monsanto's CP program benefit from leading market positions in agricultural chemicals and strong and stable cash flows generated by the Roundup herbicide franchise. While the risks may be high today in the controversial biotech business, the base businesses at Monsanto, the most important of which is the Roundup franchise, are strong and generate robust and stable cash flows. Even if we assume minimal contribution from biotech products, the ratio profile and liquidity analysis are still strong. Monsanto's freestanding credit profile is expected to improve as debt is reduced with proceeds from the planned initial public offering for up to 20% of the company, contemplated post-merger.
Despite the heightened level of risk in the ag chem sector, due primarily to opposition from activists and environmentalists and serious questions about consumer acceptance, Moody's believes that the ultimate survival of ag biotech foods product is not in question. Indeed, Moody's believes this industry has a promising future. However, the pace of acceptance and growth in products will be impeded until more products with obvious consumer benefits (with so-called output traits) are developed and can be demonstrated as safe as part of a required approval process and better regulatory framework.
Headquartered in Peapack, New Jersey, The combined company will be called Pharmacia Corporation (PC) and will be headquartered in Peapack, New Jersey. PC will be a roughly $17 billion global pharmaceutical company with other health-related products for humans and animals.
Headquartered in St. Louis Missouri, the new Monsanto will be a roughly $5.2 Billion company with its business focus in agricultural chemicals.
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