CHICAGO - (Business Wire) Fitch Ratings has assigned a 'BBB-' rating to Watson Pharmaceuticals, Inc.'s (Watson) (NYSE: WPI) proposed offering of up to $850 million in new five- and 10-year senior unsecured notes. In addition, Fitch has affirmed Watson's ratings as follows: --Issuer Default Rating (IDR) at 'BBB-';
--Senior unsecured convertible debentures at 'BBB-';
--Senior unsecured credit facility at 'BBB-'.
The Rating Outlook is Stable. The ratings apply to approximately $876 million of debt outstanding as of June 30, 2009.
Fitch expects the proceeds of the offering to be used in part to fund the recently announced acquisition of Arrow Group (Arrow) and to refinance the company's existing $575 million in convertible contingent senior debentures due 2023 (CODES) that have an in-the-money put option on March 15, 2010. The acquisition is expected to be funded with $1.05 billion in cash, 16.9 million shares of Watson's common stock (worth approximately $581 million as of Aug. 10, 2009), and $200 million in zero-coupon preferred stock, redeemable after three years.
The ratings reflect the expectation that Watson's debt and leverage levels will increase after the acquisition; however, Fitch notes that there is flexibility within Watson's current rating category for moderately leveraging transactions. At closing, which should occur in the second half of 2009, Fitch projects pro forma leverage (debt/EBITDA) to remain below 2.5 times (x), which is consistent with an investment grade rating, but an increase from the 1.53x leverage reported for the last 12-months (LTM) period ended June 30, 2009. Fitch notes that post-close, Watson will have limited financial flexibility within the rating category and that further leveraging transactions could result in negative ratings actions.
Fitch believes the acquisition will provide Watson with a platform from which to expand its global marketing presence both in markets where Arrow already has significant activities - such as Canada, France and Britain - and in other markets where Arrow has registered but is not actively marketing products. In addition to geographic expansion, Watson should benefit from Arrow's pipeline, which includes the rights to launch the authorized generic version of Lipitor in November 2011 (which will have a profit-sharing agreement with Arrow's shareholders) and exclusive rights to the generic version of Xopenex in August 2012, as well as numerous pending Abbreviated New Drug Applications (ANDA). Finally, the transaction enhances Watson's biopharmaceutical development capabilities as Watson will gain a minority interest - with the possibility of expansion - in Eden Biodesign, which provides development services for early-stage biotech companies.
Fitch believes that Watson should also benefit from several recent and upcoming new product opportunities within its existing business, including generic Toprol XL, the recently launched Gelnique and Rapaflo, and several pending patent challenges with exclusivity such as Mucinex D. However, Fitch believes that some of this growth will be offset by the potential loss after 2009 of Ferrlecit, which represented 12% of Watson's gross profit in 2008.
Liquidity is provided by cash on hand ($638 million at June 30, 2009), availability on the $500 million unsecured revolving credit facility expiring in 2011 ($450 million at June 30, 2009), and free cash flow ($351 million for the LTM ended June 30, 2009). Watson's free cash flow margin of 13% is significantly stronger than typical margins for the rating category. Going forward, Fitch expects free cash flow to remain relatively consistent with current levels although there could be some pressure in 2009.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings
Lauren Coste, 312-606-2320
Michael Zbinovec, 312-368-3164 (Chicago)
Media Relations:
Cindy Stoller, 212-908-0526 (New York)
cindy.stoller@fitchratings.com
