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Credit Rating Downgrade: Bristol-Myers Squibb

Written by on April 1, 2013

After performing a review of the top-tier drug makers, we are downgrading our credit rating on Bristol-Myers Squibb to AA- from AA+, reflecting its relatively large obligations, including operating leases and unfunded pension obligations. Overall, though, we still like the firm’s wide moat, large size, high cash flows, and strong financial position.

Although we see limited growth opportunities in the next few years due to recent and expected patent expirations, such as the patent losses on Plavix, Avapro, Abilify, and anti-infective drugs, other drugs and pipeline candidates should pick up the slack, keeping Bristol on solid financial footing. We think Bristol should be able to easily meet scheduled interest and principal payments during the foreseeable future.

Also of note, the majority of the company’s new drugs are classified as biologics, which should reduce cash flow volatility in the long term, as we expect less generic competition for biologic drugs following the loss of patent protection than we currently see for chemical compounds.

On top of its positive business characteristics, Bristol-Myers operates with light debt leverage. At the end of 2012, the firm held $2.8 billion in cash compared with $7.4 billion in debt, or net debt/EBITDA around 1 times trailing 12-month EBITDA. The firm also has an unfunded pension obligation around $1.7 billion and relatively large lease obligations compared to its peers, which affect its credit profile.

Overall though, Bristol’s leverage remains manageable, especially with the $3.8 billion in free cash flow expected on average annually during the next five years. Therefore, we wouldn’t be surprised to see the firm remain active on the acquisition front or return more cash to shareholders going forward.

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