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Rating Action:

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

02 Apr 2019

Paris, April 02, 2019 -- Moody's Investors Service (Moody's) has today affirmed AstraZeneca PLC's (AstraZeneca) A3 senior unsecured rating, its (P)A3 senior unsecured medium-term note program rating, its (P)A3 senior unsecured shelf rating and the short-term rating commercial paper at P-2. Concurrently, Moody's affirmed Zeneca Wilmington Inc.'s A3 senior unsecured rating. The outlook for both entities has been changed to stable from negative.

"Our outlook change follows the announcement that AstraZeneca has funded the asset collaboration of Daiichi Sankyo's trastuzumab deruxtecan (DS-8201) by issuing $3.5 billion of equity, which is in excess of anticipated outflows related to the transaction over the next two years. In addition to the equity issuance, out of which $1 billion of the proceeds will be used to reimburse debt, the stabilization of the outlook also factors in our expectations that strong organic growth will lead to a reduction of leverage towards 3.5x debt/EBITDA by 2020," says Knut Slatten, a Vice President -- Senior Analyst at Moody's.

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 Stable From Negative

..Issuer: Zeneca Wilmington Inc.

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

The change in outlook follows the announcement that AstraZeneca has issued $3.5 billion worth of common equity to fund payments due to Daiichi Sankyo for collaboration on its late stage asset, trastuzumab deruxtecan, an HER2-targeting antibody-drug conjugate for the treatment of breast cancer. The equity issuance is well in excess of anticipated cash outflows related to the transaction in the near term and part of the funding will be applied to reimburse AstraZeneca's upcoming $1 billion bond maturity in September 2019. Any remaining funding will be used to partially cover negative free cash flows that Moody's expects in 2019.

AstraZeneca returned to growth in product sales in 2018 and has guided towards growth in the high single digits for 2019. Over the next three years, Moody's expects the company to be among the fastest growing pharmaceutical companies in our rated universe. In view of the company's still high leverage -- defined as Moody's adjusted debt/ EBITDA -- of slightly over 5x in 2018, the stabilization of the outlook also incorporates our expectations that AstraZeneca's forecasted strong revenue growth will also translate into favorable operating leverage allowing for its leverage to move towards 3.5x by 2020 and continue on a trajectory to below 3.0x over time.

In tandem with diminishing headwinds from patent expiries, the quality of AstraZeneca's pipeline remains high. Trastuzumab deruxtecan will be a good addition to the company's oncology portfolio, which, notably, will strengthen its breast cancer franchise. Whereas the drug has received breakthrough therapy designation by the US Food and Drug Administration for the treatment of high-expressing HER2 positive patients with metastatic breast cancer, Moody's believes the larger revenue potential lies in patients that have HER2 low expressing tumors where the unmet need is higher. Data readouts in this setting will, however, not be available for quite some time yet. In addition to breast cancer, trastuzumab deruxtecan is undergoing clinical studies in a number of other settings including, lung, colorectal and gastric cancer. Moody's would not expect trastuzumab deruxtecan to have a meaningful contribution to AstraZeneca's EBITDA and cash flow before 2022.

-- AFFIRMATION OF A3-RATING

AstraZeneca PLC's A3 rating continues to reflect the company's (1) strong and diversified product portfolio in prescription drugs, (2) good geographical spread, (3) solid pipeline, which is one of the strongest in the industry. These positive rating drivers are tempered by (1) the company's credit metrics, which are still weak for the rating category but will improve over time driven by a favourable operating leverage starting in 2019; (2) a pure play pharma business profile which entails a higher level of business risk compared to some of its more diversified peers; and (3) the company's high dividend payouts, which will again exceed its internally generated cash flow in 2019.

--STABLE OUTLOOK

The stable outlook continues to reflect Moody's expectations that AstraZeneca will strongly delever over the next two to three years such that its Moody's adjusted (gross) debt to EBITDA ratio trends towards 3.5x by 2020 and moves below 3.0x over time. The rating remains weakly positioned in the A3 category and there is no room for negative deviation in operating performance.

LIQUIDITY

AstraZeneca's liquidity profile is good. As at 31 December 2018, the company had cash balances of $4.8 billion and short-term investments (excluding equity) of $849 million. Further liquidity cushion is provided by access to $4.1 billion of undrawn long-term committed bank facilities, exceeding the company's $1.7 billion of short-term debt.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the rating could develop over time should AstraZeneca continue to successfully execute on its late-stage pipeline and recently launched products perform well so that its leverage moves sustainably below 2.5x with a Cash Flow from Operations (CFO)/debt ratio exceeding 35% (assuming a Moody's-adjusted cash-to-debt ratio of around 20%).

Negative rating pressure could emerge should AstraZeneca not be successful in bringing down its leverage towards 3.5x by 2020 or if its CFO/debt ratio fails to improve towards 25%. Negative rating pressure could also develop should free cash flow remain negative or if AstraZeneca were to make larger debt-funded acquisitions.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Pharmaceutical Industry published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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.

Knut Slatten
Vice President - Senior Analyst
Corporate Finance Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Yasmina Serghini, CFA
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

No Related Data.
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