Fitch Rates Eli Lilly's Euro Notes Offering 'A'; Outlook Stable

<span id="midArticle_start"/>(The following statement was released by the rating agency)CHICAGO, May 26 (Fitch) Fitch Ratings has assigned an 'A' ratingto Eli Lilly's Euro notes offering. Fitch expects the company to use the netproceeds of the issuance for general corporate purposes, including the possiblepay down of existing debt. The Rating Outlook is Stable.KEY RATING DRIVERS--Lilly is nearing the end of its significant patent risk periodthat essentially began in 2014 with two of its top drugs, whichaccounted for roughly 26% of total firm sales, losing patent protection and nowaccounting for only 7% of firm sales. --Fitch expects Lilly will return to top-line organic growthduring 2015-2016 with the annualizing of patent expiries and continued strengthin established and new products such as Alimta, Cialis, Effient, Erbitux and Tradjenta/Jandueto.--Fitch believes Lilly's late-stage pipeline, particularlystrong in treatments for diabetes and cancer, offers the company numerousopportunities to sustain longer-term growth. --Lilly's leaner cost structure, growth of patent-protectedproducts and new product launches should pave the way for margin expansion in2015-2016 as sales rebound.--Fitch views the acquisition of Novartis' Animal Health (NAH)business as strategically sound, offering Lilly a broader product portfolio,greater geographic reach, top-line growth opportunities and potentialcost savings.--Fitch forecasts that Lilly will generate approximately $400million to $600 million of free cash flow (FCF; cash flow from operations minuscapital expenditures and dividend payments) in 2015.--Relatively aggressive share repurchases from now through 2017are incorporated in Fitch's forecast. However, cash dividend increases areexpected to be modest and acquisitions targeted.--Fitch expects Lilly to operate with leverage (totaldebt/EBITDA) of 1.5x-1.7x during 2015.--Fitch assumes the company will maintain adequate liquidityduring the forecast horizon, supported by FCF generation, balance sheet cash, andavailability on its revolving credit facility.PATENT RISK EASINGLilly is close to exiting its significant patent expiry periodthat essentially began in 2014. Its largest selling drug, Cymbalta, lost U.S.patent protection in December 2013 and European patent protection in August 2014.Cymbalta accounted for roughly 24% of total company sales during 2013 andaccounted for only 7% in 2015. Evista lost U.S. market exclusivity in March2014 and accounted for approximately 4% of total firm revenues, declining to 2% offirm revenues in 2014. To date, no biosimilar competition to Humalog has enteredthe market, despite its May 2013 patent expiry. REBOUND WITH PATENT-PROTECTED PRODUCTSFitch expects Lilly will return to top-line organic growthduring 2015-2016, achieving annual sales of roughly $19 billion to $21 billionincluding meaningful foreign exchange headwinds. Currently marketed drugsincluding Alimta (cancer), Cialis (erectile dysfunction), Effient (cardiacthrombosis), Erbitux (cancer) and Tradjenta/Jandueto (diabetes), in aggregate, havedecent intermediate-term growth potential. These drugs, combined,generate roughly $6.3 billion in annual revenues for Lilly and address large andgrowing treatment markets.IMPROVING PIPELINELilly has improved its growth prospects for theintermediate-to-longer term, as it has been making significant progress in building itslate-stage pipeline. The company has a number of late-stage drug candidates and recentlylaunched Cyramza (cancer) and Trulicity (diabetes). Late stage candidates includepotential treatments for cancer, diabetes, lupus, psoriasis, highcholesterol, depression, and rheumatoid arthritis. The company has partnered withBoehringer Ingelheim in its efforts to develop diabetes medications. ANIMAL HEALTH ACQUISITION GOOD FITLilly completed its $5.4 billion NAH acquisition in January2015, which it funded with roughly $3.4 billion of international cash and $2billion in debt. The acquisition moves Lilly near to the top of the animal healthmarket in terms of product categories and geographic presence. In addition,Novartis' animal health product pipeline is reportedly strong and will likelyincrease Lilly's long-term growth potential.The newfound scale with its animal health business should alsooffer efficiency opportunities. Lilly has stated that it expects to achieve morethan $200 million in annual cost synergies within three years after theacquisition. While acquisition-related top-line synergies are more difficult toquantify and realize, Fitch believes there will be prospects for enhancedorganic growth stemming from a broader product portfolio.COST CONTROL BODES WELL FOR LONGER-TERM MARGIN EXPANSIONLilly has been effective in reducing costs during 2014, as itreduced spending in SG&A by 7% and R&D by 15% compared to 2013. Much of thedecrease was driven by reducing resources needed to support Cymbalta and Evista, aswell as prioritizing research and development projects. In addition tocosts, the growth in newer, higher-margin products supports the case for marginimprovement beginning in 2015.POSITIVE AND GROWING FCFFitch forecasts higher FCF of approximately $400 million to $600million during 2015, as Lilly returns to a period of organic growth andimproved margins. Expected cash flow from operations of roughly $4 billion shouldbe sufficient to fund approximately $2.2 billion in cash dividends and $1.3billion in capital expenditures. Fitch believes FCF will continue to grow from 2014levels over the long run, as revenues and margins recover.RELATIVELY AGGRESSIVE CASH DEPLOYMENTFitch incorporates roughly $4 billion in share repurchases fromnow through 2017-2018, funded with FCF and cash on hand. However, Fitchmodels only incremental dividend increases and targeted acquisitions duringthe same forecast period, which will not likely stress Lilly's balancesheet.NAH ACQUISITION DRIVEN LEVERAGE Fitch looks for Lilly to operate with debt leverage of 1.5x-1.7xduring 2015. The forecasted increase in leverage over early 2014 stems fromthe increased debt that the company incurred to fund the acquisition of NAH inearly 2015. Fitch does not expect the company to reduce debt levels duringthe forecast period.KEY ASSUMPTIONSFitch's key assumptions for Lilly's 'A'/Stable Outlook include:--Moderate organic revenue growth, which is mostly offset by thenegative effect of foreign exchange movements during 2015;--Improving margins driven by favorable mix, including newproduct introductions and the achievement meaningful cost reduction;--Annual FCF (cash flow from operations minus capitalexpenditures minus dividends) of $400 million to $600 million during 2015;--Leverage to remain below 1.7x during 2015;--No major business development initiatives that wouldmeaningfully increase leverage during 2015.RATING SENSITIVITIESWhile Fitch does not expect a positive rating action in the nearterm, future developments that may, individually or collectively, lead to arevision of the Rating Outlook to Positive in the intermediate term include:--Revenues continue to expand for patent protected products,including Alimta, Cialis, Cyramza, Effient, Erbitux, Tradjenta/Jandueto andTrulicity;--The company employs adequate cost controls and integrationsynergies to generate sufficient profitability while limiting increases indebt to maintain leverage sustainably below 1.3x;--Cash is deployed conservatively with the vast majority of theremaining $3.7 billion share repurchase authorization funded with cash flow asopposed to debt issuance. Future developments that may, individually or collectively, leadto a Negative Rating Outlook and/or a one-notch downgrade to 'A-'/'F2'include:--Operational stress from, but not limited to, patent expiriesdrives leverage durably above 1.7x;--Inability to extract efficiencies from current operations aswell as from the NAH acquisition;--FCF deteriorates without the expectation of a timely trendreversal.LIQUIDITYFitch assumes Lilly will maintain adequate liquidity, supportedby FCF generation, balance sheet cash and availability on its revolvingcredit facility. At March 31, 2015, the company had approximately $4.1billion of cash and short-term investments, $3.2 billion of unused committedbank credit facilities, and roughly $4.6 billion in noncurrent investments.Lilly generated approximately $461 million in FCF during the LTM period. At March 31, 2015, Lilly had approximately $7.6 billion in debtoutstanding. Fitch believes the company's long-term debt maturities aremanageable with roughly $823 million maturing in 2015, $200 million in 2016, $1billion in 2017, $800 million in 2018, and $600 million in 2019. Fitch's forecastassumes that Lilly will refinance these maturities with new debt issuances.FULL LIST OF RATINGSFitch currently rates Eli Lilly & Co. as follows:--Long-term IDR 'A'; --Senior unsecured debt rating 'A';--Bank loan rating 'A';--Short-term IDR 'F1';--Commercial paper rating 'F1'. Contact: Primary AnalystBob KirbyDirector+1-312-368-3147 Fitch Ratings, Inc.70 West Madison StreetChicago, IL 60602Secondary AnalystGreg DickersonDirector+1-212-908-0220 Committee ChairpersonMegan NeuburgerManaging Director+1-212-908-0501Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 9080540, Email: alyssa.castelli@fitchratings.com; Elizabeth Fogerty, New York,Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com.Additional information is available on 'www.fitchratings.com'.Additional Disclosures Solicitation Status here<a href="http://ift.tt/1F8wk51 =2&detail=31">Endorsement Policy ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS ANDDISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THISLINK: here. IN ADDITION,RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLEON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS,CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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