Quintiles Transnational Corp.'s industry-wide risks and rising operating risks make the high leverage following the proposed management buyout of the company a central concern, said Michael Levesque, analyst for Moody's Investors Service. Moody's rated the $390 million credit, which backs Pharma Services Holdings' buyout of the pharmaceutical research and marketing firm for $1.7 billion, at B1. Quintiles contract research organization (CRO) business has also met slower and more volatile top line growth rates due to uneven research and development spending following patent expirations and other issues facing the large pharmaceutical companies that Quintiles serves, Moody's states. Levesque cited that Quintiles' CRO business' growth rates for accrued revenue declined from 8.6% in 2001 to 3.4% in 2002.
Significant operating risks for the Durham, N.C.-based company further include declining revenues and profitability experienced by Quintiles' product commercialization group because many companies it would serve have assumed the business in-house, Moody's says. "Critical to reversing these trends will be a successful launch of [Eli Lilly and Co.'s] Cymbalta [drug] by year-end, which will provide Quintiles an eight-year royalty stream," Levesque adds. High leverage following the transaction and a slim liquidity cushion are also factored in the rating. Quintiles' pro forma debt-to-EBITDA for 2003 is expected to be 4.2 times. Other payments and costs will also constrain Quintiles cash flow over the near term.
Quintiles' breadth, scale and market presence, along with its prospects for good operating cash flow generation weigh positively on the rating, the report states. "They have relationships with all the major companies," added Levesque. Moody's also sees the pharmaceutical industry's likelihood of igniting a push for replacement products following a wave of patent expirations in the 2005-2007 timeframe as a positive prospect for future growth.
The credit includes a $75 million revolver and a $315 million "B" loan. The acquisition transaction will also be funded with $450 million in B3-rated senior subordinated notes, about $600 million in balance sheet cash, as well as equity provided by One Equity Partners--the private equity arm of Bank One--in the form of preferred and limited common stock. A Quintiles spokeswoman did not return calls for comment.