Johnson & Johnson -- Moody's affirms J&J's Aaa rating; negative outlook

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Rating Action: Moody's affirms J&J's Aaa rating; negative outlook

Global Credit Research - 19 Aug 2020

New York, August 19, 2020 -- Moody's Investors Service ("Moody's") affirmed the Aaa long-term ratings of Johnson & Johnson ("J&J"), as well as the Prime-1 short-term rating. The outlook remains unchanged at negative. The rating affirmation follows the announcement that J&J will acquire Momenta Pharmaceuticals, Inc. ("Momenta") for approximately $6.5 billion.

"Despite an increase in debt/EBITDA to fund the Momenta acquisition, J&J's Aaa rating reflects its excellent business profile and a financial profile that supports deleveraging," stated Michael Levesque, Moody's Senior Vice President.

"However, higher financial leverage reduces J&J's flexibility to absorb potential talc and opioid-related litigation outflows -- the key risk factors in the negative outlook," continued Levesque.

Ratings of Johnson & Johnson affirmed:

Senior unsecured rating, affirmed Aaa

Senior unsecured MTN program, affirmed (P)Aaa

Issuer rating, affirmed Aaa

Commercial paper, affirmed Prime-1

Outlook actions: Outlook remains negative RATINGS RATIONALE

Johnson & Johnson's Aaa rating reflects the company's large scale and market presence, its strong product and geographic diversity, and its high margins. J&J's well-performing pharmaceutical business will generate mid-to-high single digit growth, allowing the company to sustain overall revenue growth in the low-to-mid single digits over the next several years. Diversity from the pharmaceutical and consumer products units also helps buffer J&J from the adverse impact of the coronavirus pandemic on the medial device unit. Based on J&J's long-held conservative financial policies, Moody's anticipates deleveraging after the pending acquisition of Momenta Pharmaceuticals. A combination of earnings growth and debt repayment will result in debt/EBITDA declining to 1.5x within two years of the acquisition. Offsetting these strengths, J&J faces rising social risks including unresolved litigation involving opioids and talc, potentially constraining free cash flow over a multi-year period. At the same time, global pricing pressure will continue, driven by efforts to curb healthcare spending.

Social and governance considerations are material to J&J's rating. Moody's regards the coronavirus pandemic as a social risk under Moody's ESG framework, given the substantial implications for public health and safety. J&J's medical device unit faces ongoing pressure from deferrals of elective medical procedures during a period of social distancing. At the same time, J&J faces social opportunities because of its ongoing development of COVID-19 vaccines. Beyond the coronavirus outbreak, the primary social risk facing J&J is unresolved legal exposure to opioids and talc, discussed above, which fall under the category of responsible production. In addition, J&J faces rises social risks stemming from demographics and societal trends. While these trends are favorable from a healthcare utilization standpoint, they are also driving healthcare payers to implement measures curbing healthcare spending. In particular, numerous regulatory and legislative proposals in the US market are aimed at drug pricing. J&J's diversity outside of pharmaceuticals will help buffer it from these risks relative to pure-play pharmaceutical companies.

The outlook is negative, reflecting the potential that J&J's legal exposures, including opioid-related lawsuits, will reduce the company's otherwise excellent financial flexibility. The negative outlook also reflects reduced capacity at the current rating level for additional acquisitions beyond Momenta while litigation remains unresolved.

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

Factors that could lead to a downgrade include increasing potential for material litigation-related cash outflows, additional debt-financed acquisitions or share repurchases, divestitures of major business units, or changes in financial policies such that debt/EBITDA is sustained above 1.5x.

New Brunswick, New Jersey-based Johnson & Johnson ("J&J") is one of the world's largest healthcare companies, with annual revenues in excess of $80 billion.

The principal methodology used in these ratings was Pharmaceutical Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1062755. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Michael Levesque, CFA Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Jessica Gladstone, CFA Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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