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Rating Action:

Moody's affirms AstraZeneca's A3 ratings; changes outlook to negative from stable

15 Dec 2020

London, 15 December 2020 -- Moody's Investors Service (Moody's) has today affirmed AstraZeneca PLC's ('AstraZeneca') A3 senior unsecured ratings and P-2 short-term commercial paper rating. Concurrently, Moody's affirmed Zeneca Wilmington Inc.'s A3 senior unsecured rating. The outlook for both entities has been changed to negative from stable following the announcement that AstraZeneca was to acquire Alexion Pharmaceuticals for a total consideration of around $39 billion (excluding fees). The transaction, which is subject to regulatory and AstraZeneca and Alexion shareholder approvals, will be financed by new equity for around two thirds of the total consideration and one third by cash, supported by new debt issuance or business cash flows.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

"Today's outlook change to negative reflects the expected delay in AstraZeneca's deleveraging by about a year as a result of the proposed acquisition of Alexion and the risk that Moody's-adjusted gross debt/EBITDA may not sustainably reduce to below 3.0x by the end of 2022" says Frederic Duranson, a Moody's Assistant Vice President and lead analyst for AstraZeneca. "The negative outlook also emphasizes the greater appetite for large M&A deals, whereas to date we have considered this risk to be relatively modest for AstraZeneca in light of its good patent expiry and pipeline profile" Mr Duranson adds.

Today's rating action also incorporates governance considerations such as Moody's expectation that the acquisition of Alexion and the higher ensuing leverage would foster continued competition between capital allocation priorities, including deleveraging through debt reduction, the stated ambition to increase the dividend over time and investment (including M&A). Together, these create some uncertainty around the deleveraging path. The acquisition comes at a time when AstraZeneca's credit metrics remain weak for the A3 rating category, as evidenced by Moody's forecast that adjusted debt/EBITDA will be around 3.8x at the end of 2020. Therefore, there remains no room for negative deviation in the operating performance.

Having said that, over the last couple of years AstraZeneca has been executing on growth and deleveraging rapidly, in line with our expectations. In the context of the proposed transaction, Moody's believes that this trajectory will continue to be supported by Alexion's (i) revenue visibility over the medium term, (ii) high growth profile and (iii) immediate accretion it brings to AstraZeneca's earnings and cash flows through its higher profitability and cash conversion.

The affirmation of the A3 ratings reflects AstraZeneca's strong and diversified product portfolio in prescription drugs. It will be complemented by the planned acquisition of Alexion which will add the fast-growing therapeutic area of rare diseases where there is very high unmet need and relatively low competition. Moody's view also incorporates the good geographic spread and solid pipeline, which will remain one of the strongest in the industry upon the acquisition of Alexion. AstraZeneca's business profile also benefits from modest patent exposure, broadly unchanged upon the proposed Alexion acquisition despite the planned biosimilar entry for its largest product Soliris (13% of combined revenue) in 2025. These positive factors remain tempered by AstraZeneca's pure-play pharma business profile, which entails a higher business risk than some of its more diversified peers.

The A3 ratings and negative outlook also incorporate social considerations including risks related to potential US drug pricing reforms, mitigated by benefits coming from AstraZeneca's efforts to bring a scientific response to coronavirus through vaccine and medicine development. Interim phase III trial results have shown that AstraZeneca's vaccine candidate (developed by the University of Oxford) was safe, efficacious and could be stored at fridge temperature for up to six months. However, US trial results are not available yet and the shot's efficacy is markedly lower than the 95% reported by Pfizer/BioNTech and Moderna. In any case, AstraZeneca's commitment not to profit from the vaccine during the pandemic phase limits the EBITDA and cash flow upside.

LIQUIDITY

AstraZeneca's liquidity is excellent. As of 30 September 2020, the company had a cash balance of $8 billion and short-term investments of $0.4 billion. Further liquidity buffer is provided by access to $4.1 billion of undrawn long-term committed bank facilities (of which $3.4 billion matures in April 2024 and $0.7 billion in November 2021, both with extension options), exceeding the company's $4 billion of short-term debt (including lease liabilities).

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

In light of the negative outlook, upward pressure on AstraZeneca's ratings is unlikely. However, it could develop over time should the company continue its successful execution of late-stage pipeline and record strong product sales growth with operating leverage leading to Moody's-adjusted leverage sustainably below 2.5x. In addition, cash flow from operations/debt would have to exceed 35% (assuming a Moody's-adjusted cash-to-debt ratio of around 20%) and AstraZeneca would have to achieve consistent cash flow cover of dividends and positive free cash flow (FCF).

AstraZeneca's ratings could be downgraded if (1) it does not bring down its adjusted leverage to around 3.0x by the end of 2022, or (2) cash flow from operations/debt fails to improve towards 25% or (3) Moody's-adjusted free cash flow (FCF) does not turn positive in 2021 or in case of further material acquisitions involving some debt funding.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Pharmaceutical Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1062755. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

CORPORATE PROFILE

AstraZeneca PLC is a leading global biopharmaceutical company headquartered in Cambridge, UK. The company's largest therapeutic category is oncology and AstraZeneca also has Respiratory & Immunology and Cardiovascular, Renal & Metabolism (CVRM) segments. In the 12 months ended 30 September 2020, the company generated revenue of $25.9 billion (including $25.1 billion product sales) and EBITDA of $8.2 billion. Listed on the London Stock Exchange, AstraZeneca had a market capitalisation of GBP101 billion as of 14 December 2020.

Affirmations:

..Issuer: AstraZeneca PLC

....Senior Unsecured Commercial Paper, Affirmed P-2

....Senior Unsecured Medium-Term Note Program, Affirmed (P)A3

....Senior Unsecured Regular Bond/Debenture, Affirmed A3

....Senior Unsecured Shelf, Affirmed (P)A3

..Issuer: Zeneca Wilmington Inc.

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed A3

Outlook Actions:

..Issuer: AstraZeneca PLC

....Outlook, Changed To Negative From Stable

..Issuer: Zeneca Wilmington Inc.

....Outlook, Changed To Negative From Stable

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Frederic Duranson
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Richard Etheridge
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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