Fitch Ratings has affirmed
Fitch has also affirmed the 'BB+'/'RR1' debt ratings on Jazz and its subsidiaries' secured credit facilities and secured notes and the 'BB-'/'RR4' debt ratings on
The Positive Outlook is supported by the expectation of steady revenue growth from Jazz's neuroscience and oncology franchises and growing CFO and FCF emerging from an increasingly diversified portfolio of products. These strengths are primarily offset by the expectation of material corporate development activity to reach Jazz's Vision 2025 revenue targets, increased competition for its key products, and its current, albeit declining, product concentration. Further positive momentum in the rating will depend heavily on several key factors including the possibility for meaningful incremental revenue and EBITDA resulting from an acquisition along with the amount of acquisition-related debt. Following any material acquisition, Fitch would evaluate Jazz's ability and willingness to return leverage to levels consistent with Fitch's rating sensitivities within 24 months.
Key Rating Drivers
Revenue Growth and Diversification: Jazz's revenue growth is reflective of its solid track record of new product launches (five key launches in 2020 and 2021) and acquisition of
Effective Deleveraging: Following the combination with
Growth Through Acquisition: Fitch anticipates that Jazz will continue to pursue a steady level of investments in companies or assets to build out its portfolio of products but will remain largely focused on areas of significant unmet needs and targeted therapeutic conditions. The acquisitions of
Derivation Summary
Jazz's 'BB-' IDR and Positive Outlook reflect its leadership position in the sale and development of products to address sleep and movement disorders and its growing business in oncology, including hematologic malignancies and solid tumors. In addition, the rating reflects Jazz's significant cash flow generation and its expanding pipeline of therapeutics.
The combination with
Jazz's credit profile compares favorably to other biopharmaceutical companies with comparable revenues. It has greater revenue diversification and significantly less litigation claims and expenses compared to
Parent-Subsidiary Relationship: The IDRs are rated on a consolidated basis as discussed in Fitch's Parent-Subsidiary Linkage Criteria using the weak parent/strong subsidiary approach, open access and control factors based on the intercompany guarantees of secured debt and the entities operating as a single enterprise with strong legal and operational ties.
Hybrid Instruments: Fitch has treated the two exchangeable notes as 100% debt in its ratio calculations. According to Fitch's Corporate Hybrid and Rating Criteria, optional convertibles (whether the option is with the issuer, instrument holder or both) will be treated as debt in all cases, unless the instrument has other features as described in the criteria report and which are conducive to equity credit. This is not the case for the two exchangeable notes because they have stated maturities and require interest payments with no deferral features.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Organic revenue growth rate of approximately 5% over the 2023-2026 forecast and total growth of 8% inclusive of assumed acquisitions; organic growth driven primarily from increased sales of Epidiolex, Xywav and Zepzelca;
Adjusted gross margins of approximately 85% and adjusted EBITDA margins of approximately 40%-43% over the forecast, which include charges for IPR&D investment of
Effective tax rate of approximately 17%;
Effective interest expense increases with the rise in SOFR and ranges between 5%-8% over the forecast period;
Working capital changes are assumed to range from 1% -4% of revenue over the forecast;
Capex is assumed to be approximately 1.5% of revenues over the forecast;
A large acquisition is factored into the forecast in 2024 that helps Jazz reach its Vision 2025 revenue target; gross EBITDA leverage peaks at approximately 5.4x, but returns to below 4.0x within 24 months thereafter with payment of debt;
Common dividends or share repurchases are not assumed.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Stability of the revenue streams from the existing products comprising the oxybate and oncology segments;
Total EBITDA leverage sustained below 4.0x and CFO - CapEx / total debt with equity credit greater than 10%.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Loss of Oxybate revenues without offsetting growth in other products;
A large debt-funded transaction or significant investments in IPR&D that causes total EBITDA leverage to be sustained above 4.5x and CFO - CapEx / total debt with equity credit less than 5%.
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 '
Liquidity and Debt Structure
Good, Steady Source of Liquidity: Jazz is expected to possess good liquidity to support its operating activities, capital expenditures, product acquisitions and in-licensing activities and debt service. Jazz's primary sources of liquidity are expected to be CFO and a
Manageable Long-Term Debt: Jazz has a modest level of required principal payments compared to forecast FCF. As a result, Fitch believes Jazz will have significant flexibility to continue to pay down its term loan B rapidly; in addition, Jazz's target leverage ratio was 3.5x on a net basis for 2022, which Fitch believes will be exceeded comfortably in 2023, absent any material new IPR&D investments or leveraged acquisitions.
Issuer Profile
Summary of Financial Adjustments
Fitch made adjustments to add back stock-based compensation, transaction and integration related expenses, and acquisition accounting inventory fair value step-up, and operating lease interest expense (treated as an operating cost) to earnings before interest, depreciation, amortization and taxes.
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
Jazz has an ESG Relevance Score of '4' for Exposure to Social Impacts due to pressure to contain healthcare spending; a highly sensitive political environment; and social pressure to contain costs or restrict pricing. This has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, 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.
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