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04 Dec 2003
Approximately $7 Billion of Rated Securities Affected.
New York, December 04, 2003 -- Moody's Investors Service downgraded Wyeth's senior unsecured rating
to Baa1 from A3, concluding a rating review initiated on October
22, 2003. Following this rating action, the outlook
is negative. At the same time, Moody's confirmed Wyeth's
Prime-2 commercial paper rating.
Senior unsecured notes, debentures, bank credit facility,
industrial revenue bonds, pollution control bonds to Baa1 from A3
Senior unsecured shelf rating to (P)Baa1 from (P)A3
Prime-2 commercial paper; VMIG-2 pollution control
The downgrade reflects: (1) Moody's opinion that Wyeth is
becoming increasingly likely to require additional reserves related to
diet drug litigation in excess of the new $2 billion charge recently
announced; and (2) Moody's concern that diet drug cash outflows
will result in higher debt levels for the foreseeable future, because
of fewer non-core assets available for divestiture.
The negative outlook reflects the significant amount of uncertainty associated
with the ultimate magnitude of Wyeth's diet drug-related
costs, and the inability to rule out extremely large costs.
Wyeth has stated it is unable to estimate the amount of any additional
financial exposure, that the amount of any new charge could be significant,
and that it is not possible to predict whether the ultimate liability
will have a material adverse effect on the Company's financial condition.
While Moody's cannot predict the ultimate potential losses to Wyeth related
to the diet drug litigation, the new Baa1 rating would accommodate
an additional charge -- all other factors constant -- of up
to $5 billion. Moody's believes that new liabilities
of this magnitude, combined with liabilities currently reserved
for, would result in retained cash flow to debt metrics (adjusted
to reflect cash balances) appropriate for the Baa1 rating level.
Depending on the magnitude and timing, a charge in excess of this
amount could result in further downward rating action. On the other
hand, if Wyeth demonstrates over time that diet drug costs are more
predictable and controllable, maintains good performance of core
product franchises, and advances products with promising commercial
potential through its pipeline, Moody's could revise the rating
outlook to stable.
The Baa1 rating reflects Moody's expectation that the underlying
strength of Wyeth's core pharmaceutical business will assist the
company in accessing the public debt markets in order to fund diet drug
costs as well as approximately $2.5 billion of long term
debt maturing between 2004 and 2006. Moody's believes that
Wyeth's free cash flow -- prior to considering litigation payments
-- should improve from the negative levels of 2001 and 2002 because
of growth in product sales, lower capital expenditures, and
lower pension contributions over the next several years. Although
Moody's does not expect that Wyeth will launch any major blockbuster
products in the next few years, growth in products like Effexor,
Enbrel and Protonix should more than offset declining Premarin and Prempro
sales, and allow Wyeth to achieve growth rates comparable to most
large pharmaceutical companies. Wyeth's drug portfolio appears
reasonably protected from patent expirations until 2007-2008,
when certain patents related to Prevnar and Effexor begin to expire.
Following the recent $2 billion reserve increase, Wyeth's
diet drug reserve amounted to $3.6 billion as of September
30, 2003. This reserve includes estimated minimum aggregate
costs associated with: (1) remaining initial opt-outs and
primary pulmonary hypertension (PPH) cases; (2) intermediate and
back-ended opt-outs, which appeared to total 78,000
individuals as of September 30, 2003; (3) additional payments
to the National Settlement Trust, which has received some 108,400
matrix-level claim forms; and (4) legal expenses.
Moody's believes there is considerable difficulty in estimating
the cost associated with intermediate and back-ended opt outs,
based on the extremely limited number of trials thus far, but believes
that these costs could be high. Moody's also believes there
is a very high likelihood that the National Settlement Trust will run
out of funds, given that the majority of the claimants allege conditions
that could entitle them to Level II awards, which range from $192,111
to $643,500. If the settlement trust is exhausted
individuals who would be entitled to benefits from the Trust following
audit of their claims could pursue opt out rights and litigate against
Wyeth, unless Wyeth first elects to pay the matrix benefit.
Moody's acknowledges certain factors that could help to limit Wyeth's
exposure, such as the more limited rights of intermediate and back-end
opt outs relative to the initial set of opt outs, the large number
of duplicate or incomplete claim forms filed with the settlement trust,
the 100% audit process, and the Integrity Program adopted
by the trust. Given the sheer number of claimants in the various
categories and the potential for high costs per claimant, however,
Moody's believes that there is a increasing likelihood that further
reserve increases will be necessary.
Over time, Moody's believes that Wyeth's debt levels
may rise to cover these costs. Unlike the recent past when Wyeth
divested non-core assets, including its agricultural business
for $3.8 billion and its Amgen holdings for over $4
billion, the company owns fewer non-core assets, and
could therefore be much more reliant on external financing.
Nonetheless, Moody's believes that Wyeth's liquidity currently
remains strong, based on reported cash and short term investment
balances totaling over $4 billion (although partially located off-shore
and potentially subject to repatriation taxes), committed bank credit
facilities of $2.7 billion, and relatively modest
short term borrowings and current maturities of long term debt (totaling
approximately $791 million of commercial paper and $500
million of notes due in February 2004). Moody's believes
that Wyeth's current sources of liquidity should more than cover
the next 12 months of cash needs. Longer term, the strength
of Wyeth's liquidity will depend on the amount and timing of diet
drug costs, and the refinancing of additional debt maturities including
$1 billion in 2005 and $1 billion in 2006.
With over $14.6 billion in 2002 revenues, Wyeth is
a major pharmaceutical and health care products company, engaged
in the discovery, development, manufacturing, and marketing
of pharmaceuticals, vaccines, biotechnology products,
and nonprescription medicines.
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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