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Moody's reviewing Merck debt rating over borrowing

Linda a. Johnson, AP Business Writer

Moody's Investors Service said Wednesday that it's reviewing its ratings for drugmaker Merck & Co.'s and may downgrade them.

Moody's cited Merck's plan, announced Wednesday, to buy back about $7.5 billion worth of its shares over the next 12 months. Those repurchases are part of a new $15 billion share repurchase program approved by Merck's board.

The ratings service took exception to Merck's plan to fund the buybacks partly with an unspecified amount of new debt.

"Debt-financed share repurchases are outside our expectations for Merck's previously conservative financial policies and could result in a one-notch rating downgrade," Michael Levesque, Moody's senior vice president, said in a statement.

Moody's said the review was also prompted by "pressures facing Merck's business, including a worse-than-expected impact from generic competition and moderating growth in the Januvia franchise."

Januvia and related combination pills treat Type 2 diabetes. Their sales had been growing rapidly, along with the worsening worldwide epidemic of obesity-related diabetes.

But in announcing its first-quarter results on Wednesday, Merck said sales of Januvia fell by 4 percent, to $884 million. Sales last year were around $1 billion or more in each quarter, hitting $1.13 billion in the last three months of 2012.

Januvia is now Merck's top-selling drug, after allergy and asthma pill Singulair got U.S. generic competition last August, which cut its sales by 75 percent.

Moody's said it's reviewing its ratings for several categories of Merck's senior unsecured notes, bonds and other debt currently rated from A1 to Aa3, all investment grade.

"A key challenge for Merck will be to mitigate the ongoing earnings gap produced by the U.S. patent expiration of Singulair and several other products with growth in newer products," Moody's noted.

Meanwhile, it affirmed Merck's Prime-1 commercial paper rating.

The ratings cover about $20 billion in debt, Moody's said.

Merck, based in Whitehouse Station, N.J., had revenue of $47.3 billion last year, making it the world's No. 3 drugmaker by revenue.

In afternoon trading, shares slipped $1.19, or 2.5 percent, to $45.81.