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Moody's places Astellas' ratings under review for downgrade on $3B Audentes deal

Moody's placed Astellas Pharma Inc.'s A1 issuer ratings under review for downgrade after the company announced it would acquire San Francisco-based Audentes Therapeutics Inc. in a deal valued at $3 billion.

The acquisition of the gene therapies developer is expected to be completed in the first calendar quarter of 2020 following which Audentes will operate as an independent unit of Astellas.

The rating agency said it is the first time in recent years that Tokyo-based Astellas is using debt to finance one of its largest acquisitions instead of cash on hand or internal cash flows. The transaction values Audentes at eight times book equity.

Moody's said the acquisition shows the urgent need for Astellas to replenish its long term product pipeline after many patents expire this year and signal acquisition event risk.

The rating agency noted that the acquisition provides Astellas with genetic regulation as a new growth area. However, even with Audentes' drug AT132, which received the U.S. Food and Drug Administration's regenerative medicine advanced therapy designation to treat a type of inherited muscle disorder called X-linked myotubular myopathy, Moody's sees Audentes as unprofitable for some years during the ongoing development and approval of the drug.

Moody's added that Astellas' debt to EBITDA ratio will increase by 0.3x to over 1.2x on a pro forma basis due to the introduction of debt on Astellas' reported balance sheet and the lack of earnings from Audentes.

The rating agency said its review will consider Astellas' growth strategy to fill its product pipeline and longer-term financial policy. However, an upgrade of the company's ratings is unlikely.

Moody's said it could stabilize the ratings outlook if the company shows it has the ability to offset the reduction in revenue due to expired patents while keeping its debt to EBITDA ratio below 1x, among other things.

Furthermore, it warned that ratings could be downgraded if Astellas' financial policy appears to entail more mergers and acquisitions and shareholder returns as that would weaken its cash position and keep debt to EBITDA ratio above 1x.