Fitch Ratings has assigned foreign and local currency IDRs of ‘BBB-‘ to CFR Pharmaceuticals S.A. (CFR). In conjunction with these rating actions, Fitch has assigned an expected rating of ‘BBB-‘ to CFR International SpA’s proposed up to USD300 million senior unsecured notes. The proceeds from the issuance will be used to fund the purchase of Laboratorio Franco Colombiano (Lafrancol) in Colombia and for general corporate purposes. A list of the national scale ratings of CFR follows at the end of this press release.
The Rating Outlook for CFR is Stable.
CFR International SpA (CFR International) is a wholly owned subsidiary of CFR and is domiciled in Chile. The senior unsecured notes are expected to be fully and unconditionally guaranteed by CFR and its main operating subsidiaries Laboratorios Recalcine S.A., Farmindustria S.A., Laboratorio Synthesis S.A. and Sundelight Corp. Within 60 days of the closing of the acquisition of Lafrancol, Lafrancol and Lafrancol Internacional S.A.S. will also be required to provide guarantees of the notes. On a pro-forma basis, these guarantors represent about 85% of CFR’s consolidated EBITDA. The expected ratings of CFR International’s notes have been directly linked to that of its parent company, CFR, through Fitch’s parent and subsidiary methodology.
CFR’s investment grade ratings reflect its sound capital structure and its strong business position in the Chilean and Peruvian prescription drug markets. They also take into consideration the improved diversification of the company’s business due to its acquisition of Lafrancol in Colombia and the benefits of being the market leader in that market. Further factored into the company’s ratings are the solid fundamentals of the pharmaceutical industry in emerging markets due to rising incomes and increased access to healthcare.
The ratings of CFR are constrained by ongoing challenges related to integrating recently acquired businesses, as well as maintaining its market leading positions in an environment of strong competition. CFR’s ratings also consider the financial and operational risks of the company’s businesses in Argentina and Venezuela, which represent 18% and 10% of consolidated sales as of Sep. 30, 2012, respectively.
Solid Business Profile in a Competitive Environment
CFR has a diversified product portfolio, where branded specialty products represent near 78% of sales and generic drugs account for about 20%. The company’s products include several in the fields of neurology, psychiatry and cardiology. CFR also sells complex injectables, products for transplants, dialysis and oncology, health and wellness.
The company is the market leader in branded specialty products in Chile and Peru with market shares estimated at 8.5% and 8.7%. In Argentina, CFR is the leader in complex injectable products. In addition to having operations in Chile, Colombia, Argentina and Peru, the company has a commercial presence in approximately 15 other markets – primarily emerging markets.
CFR has a large sales force, composed by nearly 1,600 medical representatives. The company’s R&D expenses totaled 1.7% of sales during 2011, considered modest when compared to large global pharmaceutical companies, but high compared to Latin American companies. CFR has a solid product registration pipeline of 950 products, of which the majority relates to prescription products. Positively, CFR’s exposure to licensing agreements is low.
CFR announced the acquisition of Lafrancol in Colombia for USD562 million during July 2012. Lafrancol is leader in the Colombian branded specialty market, with annual sales of approximately USD200 million. The transaction has been approved by Colombian regulatory entities and the closing of this transaction is expected to occur before the end of 2012.
Through this acquisition, CFR should strengthen its competitive position in Colombia (rated ‘BBB-‘ by Fitch) and achieve cost synergies with its existing operations in that country. CFR intends to finance the acquisition with proceeds from the international note issuance, USD142 million of notes placed in the Chilean market and through its cash holdings. This acquisition is in line with the investment plan announced by the company. Given the magnitude of the investment, a key challenge will be to integrate the operations quickly and obtain synergies.
Leverage to Peak during 2012
CFR had USD52 million of debt and USD256 million of cash as of Sep. 30, 2012. The company’s large cash position is the result of an equity offering completed during 2011 with the intent to expand inorganically. CFR generated USD96 million of EBITDA during the last twelve months (LTM) period ended Sep. 30, 2012, resulting in a total debt/EBITDA ratio of 0.5 times (x).
For 2012, Fitch projects the company’s EBITDA will be around USD105 million. The debt associated with the acquisition of Lafrancol should increase the company’s total debt to about USD 500 million and lower its cash position to around USD150 million, resulting in a net debt/EBITDA ratio of 3.5x and a total debt/EBITDA ratio of 5.0x.
The consolidation of Lafrancol for a full year during 2013 should increase the company’s EBITDA to approximately USD150 million and cash flow from operations should be around USD50 million. With capex running in the range of USD20 million to USD25 million, free cash flow for debt reduction will be limited and net leverage should be in the range of 2.5x to 3.0x.
Acquisitions and Integration Risks Remain High
Integration risk and event risk are above average for the company, as it seeks to expand internationally. The Lafrancol transaction is the largest transaction executed by the company. CFR’s largest transaction prior to this one occurred during 2010 when it acquired the Argentine laboratories Northia and Fada for USD75 million.
During 2011, CFR restructured its joint ventures with Grupo Farmaceutico Chemo, increasing its controlling participation in Sinensix in Vietnam and Atlas in Argentina. The company also acquired a 50.79% controlling participation in Laboratio Uman, in Canada, for USD26.5 million and strengthened its position in Vietnam through the acquisition of a non-controlling participation in Domesco, the second largest player in the local pharmaceutical industry for USD14.4 million.
Key Rating Drivers
A rating upgrade is not likely in the near term given the magnitude of the recent acquisition and the integration risk. On the other hand, ratings could be negatively affected if credit metrics deteriorate further than projected. A material acquisition that is leveraging beyond the 2.5x to 3.0x net leverage ratio projected for 2013 could also result in a negative rating action.
Fitch rates CFR Pharmaceuticals S.A. as follows:
–Long term national scale rating ‘A(cl)’
— Local Bonds N-730 and N-731’A(cl)’
–Equity rating ‘Primera Clase Nivel 3’
Applicable Criteria and Related Research:
–‘Corporate Rating Methodology’ (Aug. 8, 2012);
–‘National Rating Criteria’ (Jan. 19, 2011);
–‘Parent and Subsidiary Rating Linkage’ (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
National Ratings Criteria
Parent and Subsidiary Rating Linkage