AstraZeneca PLC -- Moody's changes outlook on AstraZeneca's A1 rating to negative

Paris, July 04, 2012 -- Moody's Investors Service has today changed the outlook on the A1 long-term senior unsecured ratings of AstraZeneca PLC and its guaranteed subsidiaries to negative from stable. This follows the announcement that AstraZeneca and Bristol-Myers Squibb Company ("BMS", rated A2 stable) will extend their alliance on diabetes products through the acquisition of Amylin Pharmaceuticals ("Amylin", not rated) for a total consideration of USD7 billion (including debt assumed and contingent payments), resulting in a cash outflow for AstraZeneca of USD3.4 billion.

RATINGS RATIONALE

"The change in outlook to negative reflects a weakening in AstraZeneca's positioning within its rating category due to the combination of, firstly, pressure on the company's revenues and profits related to major patent expiries; secondly, the pursuit of relatively large share buybacks; and thirdly, the impact of recently announced transactions -- in particular, the transaction on Amylin -- on the group's financial profile," says Marie Fischer-Sabatié, a Moody's Vice President -- Senior Credit Officer and lead analyst for AstraZeneca.

Moody's notes that AstraZeneca has been facing strategic challenges, with developing pressure on its revenues and profits due to large patent expiries. This has recently led to management changes and a more active acquisition strategy, reflected by the recent purchase of Ardea for USD1.2 billion, and the announced Amylin transaction, which will result in a cash outflow of USD3.4 billion for the group. In Moody's view, AstraZeneca will need to pursue an active acquisition strategy to offset the effects of patent expiries and return to revenue and cash flow growth, which may further erode its financial profile.

Moody's views the Amylin transaction as having a strong strategic rationale. Amylin brings complementary products to the existing collaboration in diabetes between AstraZeneca and BMS: Amylin's main assets are the GLP-1 drugs Byetta and Bydureon, while AstraZeneca and BMS have developed a DPP-4, Onglyza, and an SGLT-2, Forxiga. Bydureon was launched recently and has strong growth prospects, being the first once-weekly GLP-1 to reach the market. In addition, Moody's notes that, by sharing the cost of the transaction with BMS, AstraZeneca also limits the effect on its financial profile.

However, the rating agency recognises that the combination of large share buybacks and announced acquisitions, which have so far this year totalled approximately USD4.6 billion, will weigh on the group's financial profile at a time when its cash flow is declining due to patent expiries. Indeed, Moody's expects that AstraZeneca will not meet the target metrics for the A1 rating for the next 18-24 months, namely a cash flow from operations (CFO)/debt ratio of 65%-70% and a cash/debt ratio above 35%.

AstraZeneca's A1 rating continues to reflect (1) a strong, albeit mature, diversified product portfolio, with EBITA margins above the industry average; and (2) strong liquidity, underpinned by large cash balances. These positive rating drivers are counterbalanced by (1) a very high exposure to patent expiries, with several key products coming off patent over the short to medium term; (2) a business profile that is less balanced than that of other players in the industry and which exhibits a degree of product concentration; and (3) a modest pipeline, insufficient to offset loss of revenue from generics competition, although Moody's notes that AstraZeneca's recent acquisitions will improve somewhat its assessment of the group's pipeline.

AstraZeneca's liquidity profile is currently very healthy. As of 30 April 2012, AstraZeneca had cash balances amounting to approximately USD6.3 billion and access to USD3.0 billion of five-year committed bank facilities maturing in April 2017, exceeding the group's USD2 billion of short-term debt. In addition, Moody's expects AstraZeneca's free cash flow generation to remain healthy within the next 12 months, although it will decline materially compared with 2011 due to large patent expiries. AstraZeneca will finance the USD3.4 billion cash outflow related to Amylin through a mix of cash and credit programmes, while still maintaining strong liquidity.

WHAT COULD CHANGE THE RATING UP/DOWN

Downward pressure on the rating could be exerted if (1) AstraZeneca fails to meet Moody's expectations for an A1 rating, such as CFO/debt in the 65%-70% range and cash/debt above 35%; (2) the group undertakes sizeable acquisitions or share buybacks ; (3) generics on the group's largest-selling drugs are launched before patent expiries; (4) significant cash outflow results from litigation.

Conversely, upward pressure on the rating could result from (1) a significantly improved balance between pipeline quality and patent exposures; (2) an improved earnings outlook; and (3) the maintenance of strong credit metrics, positioned at least in the high Aa rating category. However, Moody's considers upward rating pressure to be unlikely in the short term given the negative outlook on the ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Pharmaceutical Industry published in October 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in London, United Kingdom, AstraZeneca is a global pharmaceutical company. The company reported approximately USD33.6 billion of revenues in 2011.

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