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Rating Action:

Moody's changes outlook on GSK's A2 rating to stable from negative; affirms ratings

27 Jul 2017

London, 27 July 2017 -- Moody's Investors Service has today changed to stable from negative the outlook on the A2 ratings of British pharmaceutical company GlaxoSmithKline plc (GSK) . At the same time, Moody's has affirmed all the ratings of the company and its guaranteed subsidiaries.

"Our decision to stabilize the outlook on GSK's A2 rating reflects the company's continued deleveraging and operating performance improvements," says Knut Slatten, a Vice President -- Senior Analyst at Moody's. "Moreover, the stabilization of the outlook also reflects GSK's commitment to strengthen its credit profile and protect its short-term (P)Prime-1 rating", adds Mr Slatten.

The full list of ratings is provided at the end of this press release.

RATINGS RATIONALE

Today's stabilization of the outlook on GSK's A2 ratings reflects Moody's expectations that GSK will again return to positive free cash flow in 2017 as the company's operating performance continues to improve. For the first six months of 2017, GSK delivered sales growth of 4% at constant exchange rates and its adjusted core operating margin increased by 140 basis points to 27.6% from the same period in 2016, resulting in a leverage -- defined as Moody's-adjusted debt/EBITDA -- of approximately 3.9x. As such, GSK continues on a path of deleveraging after having reached a high point of 5.7x at the end of 2015.

An approval and launch of a generic substitutable Advair Diskus in the US continues to represent a downside risk to GSK's operating performance over the next 12-18 months. While Moody's believes such a launch -- if it were to occur -- will have a negative impact on GSK's profitability due to Advair's higher than average profit margins, solid growth in GSK's remaining respiratory franchise would cushion its impact. For example, during the first half of 2017, GSK's respiratory franchise was up by 4% in constant currencies in spite of Advair sales declining by 13% over the same period.

Moody's also notes that the Vaccines division delivered a good first half with revenue growth of 10% at constant exchange rates . Whereas the operating environment was more challenging for Consumer Healthcare, growing at 1% at constant exchange rates over the same period. Moody's expects both of these segments to continue to improve GSK's profitability and support a further step up in positive free cash flow generation over the next 12-18 months.

-- AFFIRMATION OF A2 ISSUER RATING

GSK's A2 rating continues to be supported by (1) its large scale and diversified profile, with operations in numerous therapeutic categories as well as in vaccines and consumer healthcare; (2) limited exposure to patent expiries (aside from Advair), resulting in a relatively high visibility on future cash flow generation when compared to peers; (3) a healthy pipeline spread across various therapeutic areas; and (4) its public commitment to strengthen its credit profile and protect its short-term Prime-1 rating with, notably, dividend payments only projected to increase when dividend cover reaches 1.25x-1.50x.

However, the rating also reflects (1) a degree of concentration on Seretide/Advair, which represented around 12% of group sales in 2016 and which may still face substitutable generic competition in the US over the next 12 months; (2) somewhat weak financial ratios that were, on average, in the Baa/Ba categories over recent quarters according to Moody's Pharmaceutical Industry rating methodology.

LIQUIDITY

GSK's liquidity profile is good. As of end-June 2017, the company had cash-balances of GBP4 billion. A further liquidity cushion is provided by access to a GBP1.9 billion syndicated bank facility maturing in 2021. GSK also has access to US$2.5 billion in 364-day committed facilities. Supported by Moody's expectations of free cash flows (after dividends) slightly exceeding GBP500 million over the next 12 months to June 2018, this should be more than enough to cover the company's GBP6.6 billion of short-term financial liabilities. Moody's notes, however, that Novartis AG (Aa3 negative) has a put option related to its 36.5% stake in its common consumer health joint venture with GSK. The put option -- which had a value of GBP8.3 billion as of 30 June 2017 -- can be triggered from March 2018 and could require GSK to come up with sufficient financing within a three month window.

WHAT COULD CHANGE THE RATING UP/DOWN

Further upward pressure is not anticipated in the short term. Over time, GSK could achieve a higher rating if Cash flow from operations (CFO)/debt were to move to above 40% (above 30% including the put options) and cash/debt to above 30% (above 25% including the put options) on a sustainable basis.

Negative pressure on the rating could arise if GSK were not able to maintain CFO/debt above 30% (above 20% including put options) and cash/debt above 20% (above 15% including put options) on a sustainable basis.

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.

LIST OF ASSIGNED RATINGS

Affirmations:

..Issuer: GlaxoSmithKline plc

.... LT Issuer Rating, Affirmed A2

.... Senior Unsecured MTN Program, Affirmed (P)A2

.... Senior Unsecured Shelf, Affirmed (P)A2

.... Other Short Term, Affirmed (P)P-1

..Issuer: GlaxoSmithKline Capital Inc.

.... BACKED Senior Unsecured Regular Bond/Debenture, Affirmed A2

.... BACKED Senior Unsecured Shelf, Affirmed (P)A2

..Issuer: GlaxoSmithKline Capital Plc

.... BACKED Senior Unsecured Regular Bond/Debenture, Affirmed A2

.... BACKED Senior Unsecured MTN Program, Affirmed (P)A2

.... BACKED Senior Unsecured Shelf, Affirmed (P)A2

.... BACKED Other Short Term, Affirmed (P)P-1

..Issuer: GlaxoSmithKline Finance Plc

.... BACKED Commercial Paper, Affirmed P-1

..Issuer: GlaxoSmithKline LLC

.... BACKED Commercial Paper, Affirmed P-1

Outlook Actions:

..Issuer: GlaxoSmithKline plc

....Outlook, Changed To Stable From Negative

..Issuer: GlaxoSmithKline Capital Inc.

....Outlook, Changed To Stable From Negative

..Issuer: GlaxoSmithKline Capital Plc

....Outlook, Changed To Stable From Negative

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
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.
© 2019 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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