The debt-financed acquisition of Cubist Pharmaceuticals by Merck for $9.5 billion is the latest in a string of large, debt-financed acquisitions that are stressing the credit profiles of US healthcare companies, according to Fitch Ratings.
Encouraged by accommodative credit market conditions, more companies in the US healthcare sector have recently been willing to sacrifice credit ratings to finance acquisitions. While higher debt levels are a credit concern, the impact on ratings has been defrayed by the strong business rational supporting these transactions.
The Cubist deal is no exception as we believe the acquisition constructive. Cubist’s fairly differentiated medicines will add to Merck’s portfolio of treatments in the acute hospital care segment of the market. At the outset, Cubist’s products will enhance the company’s ability to address gram-positive, gram-negative, and clostridium difficile infections. In addition, Cubist’s Entereg helps to improve recovery times in patients who undergo bowel surgery. In the intermediate term, Cubist’s late-stage pipeline also complements Merck’s acute-care drug development efforts.
On balance, Fitch expects the acquisition will strengthen Merck’s growth opportunities, particularly in non-US/European markets. The transaction should also provide for cost synergies over the longer term. While integration risk is present, Fitch’s main concern relates to the Merck’s capital structure in the intermediate term.
Merck’s ratings remain on Negative Outlook following the announcement of the transaction. The financing of the acquisition will lead to higher leverage, but the ultimate influence on the company’s ratings will depend upon management of the capital structure, particularly regarding any potential redemptions of existing debt, over the next 6-12-month period.