Fitch Ratings has affirmed Merck & Co.'s (Merck) ratings, and revised the Rating Outlook to Negative from Stable.
The ratings affirmed are:
- Long-term Issuer Default Rating (IDR) at 'AA-';
- Senior unsecured debt rating at 'AA-';
- Bank loan rating at 'AA-';
- Short-term IDR at 'F1+'.
The ratings apply to approximately $6.93 billion of outstanding debt. The Rating Outlook is Negative.
Merck is in the middle of a period of intellectual property losses during which four of its top-selling drugs will potentially face generic competition. Two major drug products, Zocor and Fosamax, have already lost market exclusivity over the past two years. The period of patent expiry extends until 2012, when the company faces the potential patent loss of its highest revenue generator, Singulair. Additionally, Merck's research and development (R&D) program, which had been highly successful in prior years, has experienced recent delays in key projects, including Tredaptive in the U.S.
Fitch's Outlook revision reflects an estimate of flat- to slightly declining revenues over the long term, as potential commercialization of the R&D pipeline will not fully offset declines due to the maturing drug product portfolio, with the worst effect on revenues in 2010, and lessened impacts in 2012 and 2013. Given the challenges to the company's intellectual property position, Merck's credit profile is dependent on operating cost efficiencies gained from ongoing restructuring activities as well as improving equity income from its joint ventures, most notably the Merck/Schering Plough joint venture.
Fitch recognizes that Merck has undertaken significant restructuring activities over the past few years, including major programs announced in 2005 and 2008, to control operating costs during the current wave of drug patent expirations. Cost cutting efforts have led to a moderation of manufacturing costs as well as a reduction of marketing expenses, yielding EBITDA margins for 2007 and the latest 12-month period ending Sept. 30, 2008, above that experienced prior to the patent loss of the company's then top-selling product, Zocor, in June 2006. However, Fitch expects continued pressure through the intermediate term on equity income received from the company's cholesterol joint venture with Schering-Plough Corp. due to significant sales declines of Vytorin and Zetia.