Fitch Affirms Eli Lilly & Co.'s IDR At 'AA'; Outlook Stable

Main Category: Pharma Industry / Biotech Industry
Article Date: 02 Oct 2008 - 10:00 PDT

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Fitch Ratings has affirmed Eli Lilly and Co.'s (Eli Lilly) ratings as follows:

--Issuer Default Rating (IDR) 'AA';
--Bank loan 'AA';
--Senior unsecured debt 'AA';
--Short-term IDR 'F1+'.

The Rating Outlook is Stable. The ratings apply to approximately $4.61 billion of outstanding debt.

The rating action reflects improving free cash flow generation since a low point reached in 2005, benefiting from a relatively solid intellectual property position and reduced litigation exposure. Accordingly, free cash flow dramatically increased to $3.43 billion for the latest 12-months (LTM) ending June 30, 2008 from ($1.04 billion) at the end of 2005. Fitch estimates free cash flow generation will improve annually until the company starts to experience a period of potential patent losses of key drug products after the end of the decade.

Fitch's main concern is Eli Lilly's ability to counter a patent cliff in 2010-2013, which includes the potential loss of market exclusivity for Zyprexa in April 2011 (not including pediatric exclusivity). Almost 59% of total revenues for the LTM period at the end of the second quarter comprise the patent cliff. Fitch anticipates significant pressure on the company's credit profile starting in 2011 and lasting through 2014.

Maintenance of current leverage during this period will depend on the company's proactive attempts to reduce operating costs, sustained market demand for the human drug portfolio, and successful commercialization of late-stage R&D projects, notably prasugrel. At the end of the second quarter, leverage as measured by total debt to LTM EBITDA was 0.7 times (x). Refinancing risk is not a concern as Eli Lilly has only $500 million of debt coming due in the midst of the patent cliff.

Fitch is less concerned with reliance of revenue growth on sales of the company's top-selling drug product, Zyprexa. Eli Lilly has mitigated revenue concentration over the years to less than 25% from greater than one-third, as a refreshed drug product portfolio gained sales momentum. The acquisition to gain worldwide rights to Cialis in January 2007 accelerated the positive trend. Fitch believes that the treatment for schizophrenia will represent less than 20% of total revenues ahead of its patent expiration in the U.S.

Eli Lilly had expanded its late-stage drug R&D pipeline over the past year through internal drug project advancement and business development. Still relatively thin in comparison to its peers, the company's R&D program includes a potential blockbuster drug, prasugrel, which may be granted marketing clearance in the U.S. in the very near term. Successful commercialization of the promising therapeutic and advancement of promising therapeutics into late-stage studies in the near term are needed to address the coming patent cliff. The R&D program is still well-funded, despite cost containment initiatives over the past few years, as shown by an investment representing greater than 18% of total revenues.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, http://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.

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