TEXT-Fitch affirms Phoenix Pharmahandel at 'BB'

(The following statement was released by the rating agency)

Oct 5 - Fitch Ratings has affirmed Germany-based pharmaceuticals wholesaler Phoenix Pharmahandel GmbH & Co. KG's ('Phoenix') Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BB'. The Outlook is Stable.

Despite some pressure on the European wholesale markets, Phoenix is performing according to Fitch's expectations for the current rating level. An improvement in debt protection measures over the next few years is expected, helped by solid cash flow generation and the absence of larger acquisitions and meaningful dividends.

The ratings are supported by Phoenix's market leading positions in the European pharmaceuticals wholesale markets, Phoenix's wide geographical coverage - which leaves it relatively resilient to changes in healthcare systems in single countries, its integrated business model which enhances Phoenix's profitability, and its solid and relatively predictable cash flow generation, with low capex requirements. Negative ratings factors include Phoenix's low EBITDA margin when compared to other industries, some sales pressure as a result of cost containment policies from European governments, as seen in the first half 2012. Negative rating factors also include some competitive pressure from pharmacy acquisitions if European pharmacy markets continue liberalizing. Fitch expects debt protection measures to improve by FYE2013/14 with the lease and ABS/factoring adjusted net debt/EBITDAR ratio to be below 4x and EBITDAR net fixed charge cover to approach 3.5x. The company has a financial policy to reduce net debt further to reach a net debt/EBITDA ratio of 3x at FYE2013/14. No large acquisitions or meaningful dividends are planned by the company over the next three years.

Phoenix is the market leader in the European pharmaceuticals wholesale markets with 11 number one market positions and eight number two or three market positions in the 23 countries it operates in. Such strong market positioning helps Phoenix to benefit from economies of scale, while its pan-European coverage helps it to be a partner of choice for big pharmaceutical companies, which to some extent tend to reduce their number of wholesalers and prefer those with operations in many European countries.

The group's cash flow generation is helped by the regulated markets it operates in. 70% to 80% of the group's wholesale turnover is generated with prescription drugs, the prices of which are regulated, thus ensuring relatively predictable sales and EBITDA development. Demand for medicines is also non-discretionary. After capex, EBITDAR conversion into FCF has been high in FY11/12 at 38% and is expected by Fitch to remain above 25% going forward.

With an EBITDAR margin of 3.0% in FY11, enhanced by is presence in retail pharmacies, Phoenix has, like many of its industry peers, low profitability compared to other industries. The low level of profitability is however also linked to the relatively low risk in its operating model and is connected to the profit margin's relative stability and predictability.

Phoenix's cash flow generation is solid. Over the past four years the company has consistently shown its ability to generate funds from operations (FFO) of about EUR300m annually, or a FFO margin of 1.4% to 1.8% of sales. FFO/sales is expected to increase over time.

Phoenix's intention is to continue to acquire pharmacies in the current market to profit from higher margins in the retail segment. Size helps the company to leverage costs but also helps it to be a partner of choice for big pharma. As Phoenix's competitors are also acquiring pharmacies there might be the risk that Phoenix loses customers once pharmacy liberalization in a country starts and Phoenix's wholesale competitors acquire pharmacies in a larger scale. Further liberalization of the pharmacy markets in Germany and other key European markets is however not likely. The assigned ratings factor-in the company's intention to pursue profitable and financially sound add-on acquisitions (mainly pharmacies) within a pre-defined annual budget of EUR20m-EUR30m. Government's cost containment is expected to have a negative impact on sales and profitability over time. The effect is expected by Fitch to be somewhat mitigated by shifts in product mixes towards own label products and efficiency enhancement programs.


Positive: Future developments that may, individually or collectively, lead to positive rating action include: Further deleveraging resulting in net (lease, factoring and ABS-) adjusted debt / EBITDAR to be below 3x and operating EBITDAR/net fixed charge cover above 3.5x on a permanent basis. This translates into FFO adjusted net leverage below 3.3x and FFO fixed charge coverage above 2.8x on a continued basis.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include: Major debt-financed acquisitions or operational setbacks, which result in net (lease, factoring and ABS-) adjusted debt/EBITDAR above 4x and operating EBITDAR/net fixed charge cover below 3x on a permanent basis. This translates into FFO adjusted net leverage above 4.5x and FFO fixed charge coverage below 2.2x. A negative rating action might also be considered if FCF/EBITDAR was below 25% on a continued basis.

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The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012 are available at

. Applicable Criteria and Related Research: Corporate Rating Methodology (New York Ratings Team)

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