Fitch Rates Forest Labs Bonds BBB-, Affirms Actavis at BBB-; Outlook Stable

The rating actions follow the close of Actavis’ acquisition of Forest Labs for approximately $28 billion and apply to $8.7 billion of debt at March 31, 2014, plus $3 billion of Forest Labs bonds, $3.7 billion of Actavis bonds issued in May 2014, and a newly drawn $2 billion unsecured term loan.

A full list of rating actions follows at the end of this release.


— Actavis has improved its competitive positioning through its successively larger acquisitions of the Actavis Group (legacy Actavis), Warner Chilcott plc (Warner Chilcott), and Forest Labs over the past three years. Fitch views each deal as strategically compelling and responsibly financed at the ‘BBB-‘ ratings. Integration risk is material but mitigated by Actavis’ history of successful business integrations and synergy capture.

— Fitch expects Actavis to remain an active acquirer over the next several years, directing most cash flows not used for debt repayment toward strategic mergers and acquisitions (M&A). Absent significant debt-funded M&A, Fitch’s expectation for improving credit metrics and strengthening cash flows could support an upward rating trajectory over the intermediate term.

— The combined company will generate meaningful cash flows, including Fitch-estimated $2 billion of free cash flow (FCF) in 2014, allowing for the accelerated repayment of outstanding term loans. Fitch expects debt-to-EBITDA to moderate to 3x or below during fiscal 2015, consistent with Actavis’ ‘BBB-‘ ratings.

— Actavis’ specialty business is poised for solid organic growth, owing to a growing product portfolio, a number of promising products in R&D, and the potential for significant sales synergies over the next two to four years. Fitch further expects Actavis to bolster its product portfolio and R&D pipeline through business development activities, similar to Forest Lab’s acquisition of Furiex Pharmaceuticals, Inc. (Furiex).

— The long-term outlook for the global generic industry is favorable, despite the largest markets being mostly penetrated. Growth will be driven by aging demographics in developed markets and generally improving access to healthcare in emerging markets. Payers worldwide will remain focused on limiting the growth in healthcare spending, thereby potentially driving increasing utilization of generic pharmaceuticals.

— Fitch believes the ranking of all unsecured debt in the capital structure is substantially similar, including the Forest Labs bonds and the new bonds issued by Actavis Funding SCS, through a series of upstream and downstream guarantees among parent, intermediary, issuing, and operating subsidiaries. Key strategic and operational ties also contribute to Fitch’s equivalent ratings for all outstanding unsecured debt.


Ratings flexibility will be limited for the remainder of 2014 and possibly into 2015. But Fitch expects that cash flows will be used for debt repayment as necessary to meet the firm’s 3x gross unadjusted leverage target by year-end 2015. Maintenance of the current ‘BBB-‘ ratings will generally require gross unadjusted debt-to-EBITDAR of around 3x, allowing for temporary increases followed by timely de-leveraging. Solid base business growth with evidence of successful integration of Forest Labs will support the ‘BBB-‘ ratings.

Fitch expects Actavis to remain acquisitive; so an upgrade is unlikely in the intermediate term. Absent large-scale M&A, however, Fitch’s forecasts indicate that Actavis’ credit metrics could support ‘BBB’ ratings over the ratings horizon. Furthermore, successful integration and synergy capture of at least the outlined $1 billion could provide the firm with incremental ratings flexibility with respect to financial credit metrics in the intermediate term.

A negative rating action is not anticipated, given Actavis’ historical commitment to maintaining investment grade ratings. This commitment has been demonstrated by the use of equity in recent M&A deals and rapid debt repayment following leveraging M&A. However, a further large and leveraging transaction in the near term, or deteriorating operations or severely negative pricing trends, leading to gross unadjusted debt leverage expected to be sustained above 3x could drive a downgrade.


Actavis’ successively larger acquisitions of the legacy Actavis, Warner Chilcott, and Forest Labs have greatly improved the firm’s competitive positioning in both the generics and specialty pharmaceutical markets. Recent deals have also contributed to increased diversification, better margins, and an improved growth profile. However, the rapid pace of M&A activity over this timeframe adds risk to the firm’s credit profile due to elevated debt levels and necessary business integration and cost reduction activities. Actavis closed its acquisition of Warner Chilcott only nine months ago, and Forest Labs just closed its acquisition of Aptalis in February 2014.

The firm’s history of successful business combinations and synergy capture alleviates these concerns somewhat. Fitch expects Actavis will achieve or outperform its current $1 billion synergy target and, with cost savings related to Forest Lab’s restructuring program and acquisition-related synergies, will generate strong cash flows in 2014-2015. Fitch forecasts FCF of about $2 billion in 2014 and nearly $4 billion in 2015 but notes that these figures could prove conservative depending on the success of recent drug launches and the pace of synergy capture. Gross unadjusted debt-to-EBITDA is expected to be maintained around 3x or below. Growing EBITDA will drive the majority of expected de-leveraging; but Fitch anticipates that Actavis will direct most cash flows not used for M&A toward debt repayment over the next two to three years.


Actavis will likely remain acquisitive, targeting small- to mid-sized deals until integration and de-leveraging associated with the Forest Labs deal is substantially complete. Given Fitch’s expectations for cash flows, debt repayment, and integration activities, the company could be in a position to again consummate another sizeable acquisition by second-half 2015. M&A targets are likely to be of complementary branded products or portfolios or of operations in markets to which Actavis currently has limited exposure.


Fitch expects the newly combined branded product portfolio of Actavis and Forest Labs, including that of recently acquired Aptalis and (pending) Furiex, will complement one another and drive solid growth over the near-to-intermediate term. Notably, outlined synergy targets do not include potential sales synergies. The combined firm has strong positions in women’s health, especially oral contraceptives, central nervous system (Namenda), and gastroenterology. Budding therapies for the treatment of irritable bowel syndrome and certain respiratory pipeline assets could represent strong revenue and profit contributors over the intermediate-to-longer term.


Fitch sees Actavis’ generics business benefiting from a moderately favorable operating environment for the global generic drug industry over the next several years. Generally aging populations, gradually improving generic penetration rates in many developed European countries, the opportunity for continued expansion into developing markets, and the prospects of a burgeoning biosimilars market in the 2016 timeframe and beyond drive this view.

The slowing pace of branded-to-generic conversions post-2015, pricing pressures from growing drug purchasers, and generally constrained healthcare reimbursement globally are the most notable headwinds. Fitch expects that Actavis and others of the largest generic drugmakers should be able to offset pricing pressures, especially from consolidating drug purchasers, with increased volumes.


Actavis sales are heavily concentrated in North America (Fitch estimates approximately 80%). Since growth in the largest pharmaceutical markets, including the U.S., will be in the low-single digits going forward, exposure to faster growing markets will be important to Actavis’ credit profile going forward. These markets generally include Southeast Asia, Eastern Europe, and South America. While the firm’s general underrepresentation in non-U.S. markets is a credit negative, it also provides a significant area of growth potential over the ratings horizon. Fitch expects international expansion to be a source of M&A over the intermediate term.


Fitch views the credit risk associated with the $3 billion of Forest Labs bonds as substantially similar to the rest of the unsecured debt in the capital structure. The equivalent ‘BBB-‘ ratings reflect the operational and strategic ties that are expected to materialize as the Forest Labs business is integrated with Actavis. These bonds benefit from a downstream guarantee from the parent, Actavis plc, which also guarantees all other debt except the recently issued bonds at Actavis Funding SCS. Notably, Fitch is not aware of any upstream guarantees provided by Forest Laboratories, Inc.


Liquidity is adequate, comprising $337 million of cash on hand and $741 million of revolver availability at March 31, 2014. Fitch expects Actavis to maintain solid access to both the bond and loan markets as necessary.

Debt maturities are manageable for the firm, especially in light of strong projected cash flows. Though Fitch anticipates that Actavis will repay debt in an accelerated manner during 2014-2015, contractual maturities are estimated as follows: $1.53 billion for the remainder of 2014 (including the $1.25 billion 7.75% Warner Chilcott bond), $441 million in 2015, $1.37 billion in 2016, $2.86 billion in 2017, $735 million in 2018, and $10.42 billion thereafter.

Fitch has assigned the following ratings:

Forest Laboratories, Inc.

–IDR ‘BBB-‘;

–Senior unsecured notes ‘BBB-‘.

Fitch has affirmed the following ratings:

Actavis plc

–IDR at ‘BBB-‘.

Warner Chilcott Limited

–IDR at ‘BBB-‘.

Actavis Capital S.a r.l.

–IDR at ‘BBB-‘;

–Senior unsecured bank facility at ‘BBB-‘.

Actavis Funding SCS

–IDR at ‘BBB-‘;

–Senior unsecured notes at ‘BBB-‘.

Actavis, Inc.

–IDR at ‘BBB-‘;

–Senior unsecured notes at ‘BBB-‘.

Actavis WC 2 S.a r.l.

–IDR at ‘BBB-‘;

–Senior unsecured bank facility at ‘BBB-‘.

Warner Chilcott Corporation

–IDR at ‘BBB-‘.

Warner Chilcott Company, LLC

–IDR at ‘BBB-‘;

–Senior unsecured notes at ‘BBB-‘.

Warner Chilcott Finance LLC

–IDR at ‘BBB-‘.

The Rating Outlook for each IDR is Stable.

Applicable Criteria and Related Research:

–‘Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage’ (May 28, 2014);

–‘Fitch Rates New Actavis Bonds ‘BBB-‘; Outlook Stable’ (June 10, 2014);

–‘Fitch Affirms Actavis at ‘BBB-‘ on Forest Labs Acquisition; Outlook Stable’ (Feb. 18, 2014);

–‘Fitch Assigns Initial ‘BBB-‘ Ratings to Actavis plc & Subsidiaries; Outlook Stable’ (Oct. 1, 2013);

–‘Fitch Affirms Actavis’ at ‘BBB-‘; Outlook Stable (Sept. 25, 2013);

–‘Fitch: Warner Chilcott Deal In Line with Actavis’ ‘BBB-‘ Ratings’ (May 20, 2013);

–‘Global Pharmaceutical R&D Pipeline – Evolving Trends in Diabetes and Cancer Treatments’ (May 13, 2014);

–‘U.S. Healthcare Stats Quarterly: Fourth-Quarter 2013’ (April 25, 2014);

–‘Trekking the Path to Biosimilars – Forging Ahead’ (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage

Global Pharmaceutical R&D Pipeline – Evolving Trends in Diabetes and Cancer Treatments

U.S. Healthcare Stats Quarterly — Fourth-Quarter 2013

Trekking the Path to Biosimilars — Forging Ahead

Additional Disclosure

Solicitation Status