Fitch Affirms Johnson & Johnson’s ‘AAA’ Rating; Outlook Stable
By Business Wire News
By Business Wire News
Fitch Ratings has affirmed Johnson & Johnson’s (JNJ) ratings at ‘AAA’. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
–The affirmation reflects Fitch’s expectation that JNJ will continue to generate strong, long-term operational and financial performance, despite some near-term headwinds.
–Biosimilar competition for Remicade in Europe, significant competition for Olysio in the U.S., adverse foreign exchange movement, and the expected divestiture of Cordis will weigh on revenues during 2015, but the longer-term trend remains positive.
–The company’s agreement to sell its Cordis cardiovascular business for $1.9 billion makes strategic sense and preserves its broad-based business model.
–Fitch forecasts free cash flow (FCF) generation of $5.1 billion – $5.3 billion in 2015, driven relatively stable margins.
–Fitch expects that JNJ will remain committed to deploying cash for acquisitions, joint ventures and internal investment opportunities that it believes will support long-term profitable growth.
–Fitch anticipates that JNJ will operate with leverage consistent with its ‘AAA’ rating and solid liquidity supported by significant cash balances and ample access to credit markets.
NEAR-TERM REVENUE HEADWINDS
JNJ’s faces a number of challenges to top-line growth during 2015. The strengthening of the U.S. dollar against most other currencies will likely present a significant headwind to reported sales during 2015.
Olysio will face tough year-over-year comparisons relative to 2014, now that Gilead has a strong competing product in the market. Olysio posted $1.9 billion in U.S. sales for 2014. REMICADE, the company’s largest selling product, generated $6.9 billion in sales globally in 2014. The patents for REMICADE in certain countries in Europe expire in February 2015. Loss of exclusivity will likely result in a reduction in sales as biosimilar versions are introduced to the market.
In addition, the expected divestiture of the Cordis business will likely have a negative impact of at least $350 million on sales for 2015. Longer-term Fitch expects that JNJ will generate mid-single digit organic growth, driven by the company’s existing portfolio and new product introductions.
BROAD PORTFOLIO MITIGATES RISK
JNJ operates with three business segments and a large diversified product portfolio, reducing its operational and financial reliance any on individual product. The company develops and manufactures consumer healthcare related products, medical devices and pharmaceutical/biologic therapies.
JNJ’s largest selling product, Remicade, accounts for roughly 9.2% of sales. It is also a biologic, which typically faces patent slopes as opposed to patent cliffs like traditional, small-molecule drugs. The next three largest products, in total, account for less than 10% of company sales. Its diverse business model also enables JNJ to pursue of a broad array of treatment advancements that offer growth opportunities.
CORDIS DIVESTITURE MAKES STRATEGIC SENSE
JNJ will sell its Cordis business to Cardinal Health for $1.94 billion cash. The segment develops and manufactures interventional vascular technology devices and generated roughly $780 million of revenues in 2014. Fitch believes the margins and long-term growth opportunities for this business are lower than that of the total firm.
The sale will only modestly reduce the diversification of the company’s product portfolio, given that the diagnostics business accounts for roughly only 1.1% of total firm sales. JNJ will retain its Biosense Webster business, which is part of the cardiovascular segment and focuses on the development of faster growing electrophysiological devices.
FCF FOR GROWTH AND SHAREHOLDER RETURNS
Fitch anticipates that JNJ will produce strong annual FCF during the forecast period of $5.1 billion – $5.6 billion. An improving sales mix and continued focus on costs should drive stable to modestly increasing margins, despite near-term, foreign exchange rate challenges.
JNJ will likely remain acquisitive, focusing on targets or products that offer innovation and growth in the health care sector. The company is expected to finance its transactions within the context of its ‘AAA’ credit profile. Shareholder-focused activities, such as dividend increases and share repurchases are also expected to continue, which Fitch believes will largely be financed with FCF.
JNJ has significant liquidity and access to the credit markets. Moderate growth and relatively stable margins enabled the company to generate $7.0 billion of FCF [cash flow from operations ($18.9 billion minus capital expenditures ($3.8 billion) and dividends ($7.8 billion)] during the LTM period, ended Dec. 29, 2014. On Dec. 29, 2014, JNJ had approximately $33.1 billion in cash plus short-term marketable securities and access to $10 billion in short-term borrowings.
JNJ had approximately $18.8 billion in debt, including $3.7 billion in short-term debt. JNJ has roughly $3.6 billion of long-term debt maturing in 2015, $2.1 billion in 2016, $1.7 billion in 2017 and $1.5 billion in 2018. Fitch expects that the company will refinance the vast majority of its upcoming maturities.
During the LTM ended at Dec. 29, 2014, debt increased by $541 million during the LTM period, as the company took advantage of a continuing favorable long-term interest rate environment. Resulting TD/EBITDA remained essentially flat at 0.73x vs. 0.77x, primarily because of the growth in EBITDA.
Fitch’s key assumptions for Johnson & Johnson’s ‘AAA’/Stable Outlook rating case include:
–Near mid-single-digit revenue decline in 2015 followed by low- to mid-single-digit revenue growth in the following three years.
–Incremental margin improvement driven by favorable product mix and an ongoing focus on costs during the intermediate term.
–FCF of $5.1 billion to $5.6 billion during the four-year forecast period.
–Leverage to range between 0.7x and 0.9x with modestly increasing levels of debt.
–Meaningful acquisitions and/or share repurchases, depending on the availability and valuation of strategically appropriate targets.
While Fitch does not anticipate a downgrade during its four-year forecast horizon, a negative rating action could occur if some combination of deteriorating operational performance and leveraging transactions stress the company’s credit profile. Fitch believes the company’s broadly diversified health-care related franchises make it more likely that a negative rating action would be prompted by a leveraging transaction, as opposed to operational stress.
Three of the key rating metrics for JNJ’s ‘AAA’ rating that Fitch believes investors should consider are the following:
–Total debt/FCF of 3.0x gives no flexibility;
–Total debt/EBITDA of 1.0x gives no flexibility;
–Net debt of $4 billion – $5 billion gives no flexibility.
On Dec. 29, 2014, latest 12 month (LTM) selected credit metrics were as follows.
–Total debt/FCF was nearly 2.7x;
–Total debt/EBITDA was 0.73x;
–JNJ had a net cash position of $14.7 billion.
Fitch has affirmed JNJ’s ratings as follows:
–Issuer Default Rating (IDR) at ‘AAA’;
–Senior unsecured debt at ‘AAA’;
–Subordinated debt at ‘AAA’;
–Short-term IDR at ‘F1+’;
–Commercial paper at ‘F1+’.
The Rating Outlook is Stable.
The ratings apply to approximately $18.8 billion of debt.
Additional information is available at ‘www.fitchratings.com‘.
Applicable Criteria and Related Research:
–‘Corporate Rating Methodology’ (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage
Bob Kirby, +1-312-368-3147
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Gregory Dickerson, +1-212-908-0220
John Culver, +1-312-368-3216
Alyssa Castelli, New York, +1-212-908-0540
Elizabeth Fogerty, New York, +1-212-908-0526