Moody's downgraded Takeda Pharmaceutical Co. Ltd.'s issuer and senior unsecured ratings to Baa2 from A2 following a review, citing its $62 billion acquisition of Shire plc.
The rating agency also changed the Japanese drugmaker's ratings outlook to stable. Moody's previously downgraded Takeda's credit rating by one notch to A2 following the Shire deal.
Moody's analyst Yukiko Asanuma said the Shire deal will cause Takeda's debt to grow six-fold. Takeda's gross debt to EBITDA ratio will also rise to over 5x, which is well above the 2x to 3x range typical of drugmakers rated A to Baa, the rating agency said.
The Baa2 rating is also indicative of the improvement in the Japanese drugmaker's business profile, Moody's said, citing Ireland-based Shire's rare disease businesses and its presence in the U.S. market. The rating agency added that the acquisition will contribute to higher profitability and potential free cash flow.
The agency noted that Takeda's plan to divest non-core assets — for proceeds of up to $10 billion — could be susceptible to execution risk. Moody's said rising pricing pressure in the U.S. and competitive threats could also be potential roadblocks to the drugmaker from achieving its leverage target of a net debt/EBITDA of 2x or less.
Moody's said the stable outlook is based on the agency's expectation that Takeda will reduce its elevated leverage as measured by gross debt/EBITDA to below 4x two years following the deal. The expectation is supported by the drugmaker's solid free cash flow from key products and by Takeda achieving cost synergies.
Meanwhile, the agency said it could upgrade the company's ratings once Takeda, Japan's largest drugmaker by revenue, establishes a track record as a much larger company and if it sustains a gross debt/EBITDA of below 3.5x as a result of cost synergies and divestment of non-core assets to reduce debt.
Moody's could also downgrade Takeda's ratings if it does not successfully integrate Shire's operations and fails to reduce debt through divestitures resulting in gross debt/EBITDA remaining above 4.5x in the fiscal year ending March 2021. Large debt-funded acquisitions or shareholder returns could also trigger a downgrade, Moody's said.