Paris, November 05, 2021 -- Moody's Investors Service (Moody's) had today affirmed the
Aa3 long-term ratings and P-1 short-term ratings
of Swiss pharmaceutical company Roche Holding AG (Roche) and its guaranteed
subsidiaries, following the announcement by Roche that it would
repurchase the 53.3 million Roche shares held by Novartis AG (Novartis)
for a consideration of about CHF19 billion. The outlook on all
ratings is positive.
A full list of affected ratings is provided at the end of the press release.
RATINGS RATIONALE
The affirmation of the Aa3 rating reflects Roche's very strong financial
profile, with Roche having built financial flexibility within its
rating category over a period of many years. Although Roche will
fund the transaction with debt and this will initially weaken its financial
profile, Moody's expects credit metrics to remain commensurate
with the Aa3 category. Leverage (Moody's-adjusted
debt/EBITDA) will increase to about 1.6x at year-end 2021
pro forma the transaction from 0.9x at year-end 2020,
and then reduce again over 2022-23 to a level of about 1.2x-1.3x,
according to Moody's forecasts. The affirmation assumes no
change to Roche's conservative financial strategy and policies despite
this material debt-funded transaction. Moody's expects
that the company will apply some of its free cash flow generation to debt
reduction over the next few years and that the company's M&A
policy will not change and continue to be limited to bolt-on acquisitions.
Moody's regards financial strategy and risk management as a governance
consideration under its ESG framework.
On 4 November 2021, Roche announced that it would repurchase the
53.3 million Roche shares that had been held by Novartis for a
purchase price of CHF356.9341 per share, representing a total
consideration of CHF19 billion. The repurchased shares will be
cancelled, which will reduce future dividend payments by Roche (by
about CHF480 million based on 2020 dividend paid) and support continued
strong cash flow generation.
Roche's Aa3 rating continues to reflect Roche's very strong
business profile, which has strengthened further over the last couple
of years given the high growth of its recently launched products,
reduced patent cliff and its strong pipeline, which will offset
the revenue decline for MabThera/Rituxan, Herceptin and Avastin.
Roche continues to have a degree of business diversification because of
its presence in diagnostics. This further strengthening in the
business profile is also a key driver in the decision to maintain the
positive outlook and mitigates the current deterioration in credit metrics
and delay in reaching levels more commensurate with a Aa2 rating.
The Aa3 rating also factors in the growing competition from biosimilars,
which has curbed earnings growth; the pharmaceutical division's high
concentration in oncology, which Moody's expects to decrease
over time; a degree of acquisition risk; and exposure to regulatory
risk in the US, similar to most large pharmaceutical companies.
RATIONALE FOR THE OUTLOOK
The positive outlook factors in Moody's expectations that Roche
will continue to grow through its patent cliff, underpinned by continued
strong sales growth from recently launched drugs and from its diagnostics
division, and that, while there has been a deterioration in
credit metrics following the share repurchase, its financial profile
will strengthen again in the next couple of years. The positive
outlook does not factor in any large debt-financed acquisitions.
LIQUIDITY
Roche's liquidity is excellent, supported by cash and marketable
securities totaling CHF8.0 billion as of 30 June 2021, solid
free cash flow generation of about CHF6 billion-CHF7 billion annually,
and access to USD7.5 billion committed credit lines that are also
used as backstop facilities to Roche's US commercial paper program.
Moody's expects Roche to conservatively fund the CHF19 billion repurchase
of shares from Novartis and maintain its excellent liquidity profile.
ESG CONSIDERATIONS
Roche faces high industry-wide social risks related to policy risk,
litigation exposure and high manufacturing compliance standards.
While some of Roche's largest-selling drugs have high exposure
to government payors in the US, this exposure has reduced because
of biosimilar competition. The company's good geographical spread
and business diversification, with a presence in diagnostics,
help mitigate these social risks. Roche has moderate exposure to
environmental considerations, and it has strong corporate governance
practices, a successful track record and generally conservative
financial policies. The transaction will not materially affect
our assessment of Roche's corporate governance.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could consider upgrading the rating to Aa2 if the company
continues to line up a steady flow of new molecules to the market,
as evidenced over the past couple of years, reducing product concentration
and allowing for improved visibility into revenue growth beyond the current
patent cliff. Quantitatively, a positive rating action could
be considered if Moody's-adjusted debt/EBITDA strengthens
to around 1.25x and cash flow from operations/debt above 65%
on a sustained basis.
Negative rating pressure could develop should pricing pressure in oncology
be more pronounced, for instance because of a change in US regulation,
or if Roche were to adopt less conservative financial policies,
including transformative debt-financed acquisitions. Quantitatively,
the Aa3 rating could come under pressure should the company's cash flow
from operations/debt decline below 55% or debt/EBITDA remain above
1.75x on a sustained basis.
LIST OF AFFECTED RATINGS
Affirmations:
..Issuer: Roche Finance Europe BV
....BACKED Senior Unsecured Medium-Term
Note Program, Affirmed (P)Aa3
....BACKED Other Short Term, Affirmed
(P)P-1
....BACKED Senior Unsecured Regular Bond/Debenture,
Affirmed Aa3
..Issuer: Roche Holding AG
....ST Issuer Rating, Affirmed P-1
....LT Issuer Rating, Affirmed Aa3
..Issuer: Roche Holdings Inc.
....BACKED Commercial Paper, Affirmed
P-1
....BACKED Senior Unsecured Medium-Term
Note Program, Affirmed (P)Aa3
....BACKED Other Short Term, Affirmed
(P)P-1
....Senior Unsecured Regular Bond/Debenture,
Affirmed Aa3
....BACKED Senior Unsecured Regular Bond/Debenture,
Affirmed Aa3
..Issuer: Roche Kapitalmarkt AG
....BACKED Senior Unsecured Regular Bond/Debenture,
Affirmed Aa3
Outlook Actions:
..Issuer: Roche Finance Europe BV
....Outlook, Remains Positive
..Issuer: Roche Holding AG
....Outlook, Remains Positive
..Issuer: Roche Holdings Inc.
....Outlook, Remains Positive
..Issuer: Roche Kapitalmarkt AG
....Outlook, Remains Positive
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.
COMPANY PROFILE
Roche is a global healthcare company, with its pharmaceutical operations
focused on the production of innovative medicines, and a world leader
in diagnostics, with a strong product range. The company
reported sales of CHF58 billion in 2020.
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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
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.
Marie Fischer-Sabatie
Senior Vice President
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Jeanine Arnold
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
