Fitch Ratings has affirmed Pfizer, Inc.'s, Wyeth LLC's and Pharmacia Corp.'s (collectively, Pfizer) ratings, including their 'A' Issuer Default Ratings (IDRs).
Fitch has also affirmed Pfizer, Inc.'s Short-Term IDR at 'F1' and revised Pfizer's Rating Outlook to Stable from Positive. The outlook revision reflects Pfizer's announcement that it intends to acquire Seagen Inc. (Seagen) for roughly $43 billion in cash, which will be partly funded with $31 billion of long-term debt issuance. Fitch believes the transaction could stress EBITDA leverage (total debt/EBITDA) in the intermediate term.
Key Rating Drivers
Acquisition to Increase Leverage: Fitch views Pfizer's proposed $43 billion cash acquisition of Seagen as strategically constructive. Seagen will increase Pfizer's presence in the growing area of oncology, particularly with Seagen's antibody drug conjugate technological platform. Pfizer should be able leverage its commercial and R&D infrastructure with Seagen's marketed therapies and pipeline products. The transaction is expected to be funded with $31 billion in long-term debt and balance sheet cash with an anticipated closing in late 2023 or early 2024.
Fitch believes EBITDA leverage could be stressed in the intermediate term and approach but not exceed the negative Rating Sensitivity. Should Fitch come to expect leverage will exceed 2.2x through the Rating Horizon without the prospects for timely deleveraging, whether through additional debt-funded transactions or weaker operating fundamentals, there could be negative momentum in the Ratings and/or Outlook.
COVID-19 Tailwinds to Moderate: The coronavirus pandemic has been a boon to Pfizer's revenues and enabling the issuer to build meaningful liquidity. Its Comirnaty vaccine has become the leading COVID-19 vaccine, and its Paxlovid drug has been widely used to treat active COVID-19 infections. While Fitch expects revenue from both products to decline over time as the pandemic wanes, the company continues to modify the vaccine to address new variants of the virus. The mRNA technology used to develop the vaccine is also being used to create other vaccines and therapies unrelated to the coronavirus.
Manageable Patent Expiries: The company's intermediate-term patent cliff is manageable, with less than 15% of revenues at risk during the next three years. In addition, Pfizer's Eliquis (for blood clots), which accounts for roughly 7.3% of revenues, is expected to face generic competition in November 2026. While Eliquis also accounts for 13.4% of Pfizer's revenues excluding Comirnaty sales, higher growth rates in newer therapies over the next four years are likely to mitigate this concentration.
Advancing Pipeline: During the past two years, Pfizer received regulatory approvals for Comirnaty (its COVID-19 vaccine), TicoVac (a tick-borne encephalitis vaccine) and Paxlovid (its COVID-19 treatment), and the company currently has several candidates in Phase III development to treat hemophilia, cancer, immunological disorders, bacterial infections and cardiovascular disease. Pfizer is also conducting clinical trials that could expand the market for certain of its currently-approved products. Fitch sees further growth opportunities in Pfizer's collaborations on certain external pipeline projects and via potential acquisitions.
Solid FCF Generator: Despite a significant cash dividend burden and volatile FCF margin, FCF has remained consistently positive and relatively stable revenues, strong EBITDA margins and modest capex requirements have supported performance. Fitch expects continued strong positive FCF generation, supported by moderately improving margins and believes Pfizer is likely to allocate FCF primarily to acquisitions and share repurchases. Fitch also expects Pfizer's Board to increase its dividend annually.
Pressure from Payers: The defensibility of pricing power is always a top-of-mind issue affecting the sales outlook for pharmaceutical firms, including Pfizer. In its current form, the 'Inflation Reduction Act' (IRA) threatens the profitability of companies that manufacture and market some of the top-selling, older drugs in the Medicare Part D program. While Pfizer has two products that may be targeted by the IRA, the precise products that may become subject to price negotiation thereunder remain unknown. Fitch will continue monitoring developments related to the IRA to better assess this risk.
While the political environment in the U.S. has recently cast a spotlight on risks related to Medicare drug price negotiation, drug companies have engaged in negotiations on drug pricing and accessibility with health insurers and pharmacy benefit managers for many years. Fitch's ratings case forecasts for Pfizer and its peers generally assume better price defensibility for newer, truly innovative products and that revenues from more commoditized products are likely over time to face escalating headwinds.
Derivation Summary
Pfizer's 'A'/Stable rating reflects the company's operating profile, which is well-positioned relative to its peer Amgen (BBB+/Negative Rating Watch) in terms of scale, breadth, depth, geographic reach and patent risk. Relatively manageable intermediate-term patent risk, an advancing pipeline and a broad product portfolio further support its prospects for operational and financial stability. Fitch considers gross leverage (total debt/EBITDA) at or below 2.2x to be consistent with Pfizer's 'A' rating.
Parent-Subsidiary Linkage
Fitch applies a Weak Parent/Strong Subsidiary approach to the Parent-Subsidiary Linkage criteria. Both Wyeth LLC and Pharmacia Corp. subsidiaries have open Ring-fencing and Access & Control, which leads to both being consolidated at the same IDR as that assigned to their parent, Pfizer, Inc.
Key Assumptions
Revenue to decline over the ratings horizon with declines in COVID-related revenue as the pandemic wanes;
Operating EBITDA margins to improve over the ratings horizon to around 40%, reflecting declining revenue from Comirnaty at margins Fitch believes are below the company's average;
FCF to remain positive over the forecast period, trending to 6%-7% of revenues. Fitch believes that Pfizer is likely to prioritize dividends and share repurchases over debt repayment in the use of its FCF;
Total debt/Operating EBITDA to increase over the ratings horizon towards 2.2x about 24 months after the Seagen acquisition.
RATING SENSITIVITIES
Fitch does not contemplate an upgrade in the intermediate term. However, factors that could, individually or collectively, lead to positive rating action/upgrade:
Gross debt leverage (total debt/EBITDA) expected to be sustained at or below 1.7x;
Strong operational performance sustained over the forecast period, including stable-to-positive trends in revenues, margins and FCF.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Gross debt leverage (total debt/EBITDA) expected to be sustained at or above 2.2x, potentially driven by marketplace pressures, adverse regulatory actions, unfavorable clinical developments or continued aggressive capital allocation policy;
Pursuit of additional significant transactions (including debt-funded acquisitions and/or share repurchases) that place pressure on gross debt leverage without the expectation of deleveraging in a timely manner.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Adequate Liquidity and Manageable Maturities: Liquidity included $416 million in cash and cash equivalents and $7.0 billion of availability under an undrawn revolver. Pfizer also has $22.3 billion in short-term investments, the majority of which Fitch considers to be readily available for liquidity purposes. Fitch expects Pfizer's liquidity to remain strong over the rating horizon, bolstered by considerable FCF generation. In addition, Pfizer's debt maturities are manageable, with $2.9 billion due in 2023, $2.3 billion due in 2024 and $750 million due in 2025.
Issuer Profile
Pfizer is one of the world's largest pharmaceutical companies. The company develops, manufactures and markets therapeutics that compete in the vast majority of treatment categories and major geographic markets. Its top five selling products accounted for roughly 75% of 2021 revenues.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Pfizer Inc. has an ESG Relevance Score of '4' for Exposure to Social Impacts due to due to societal and regulatory pressures to constrain growth in healthcare spending in the U.S. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors. Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
PFIZER, INC. 
