Investing.com -- Johnson & Johnson (NYSE:JNJ)'s 'AAA' credit rating, as determined by S&P Global Ratings, is now under review due to the company's recent acquisition of Intra-Cellular Therapies (NASDAQ:ITCI) Inc. The acquisition is expected to raise Johnson & Johnson's S&P Global Ratings-adjusted leverage to 1.4x, which surpasses the 1.0x downside trigger for the current rating.
S&P Global Ratings has placed Johnson & Johnson's 'AAA' ratings on CreditWatch Negative, indicating potential downgrades. This decision reflects the expectation that the company's leverage may occasionally exceed 1.0x, a level that is inconsistent with the current 'AAA' rating.
Despite this, projections suggest that Johnson & Johnson will lower its leverage to 1.1x by the end of 2025 and below 1.0x by the end of 2026. These predictions are based on the assumption that the company will continue to expand its business and carry out smaller acquisitions over the next two years.
Johnson & Johnson has a history of successful integration of acquisitions and maintaining conservative financial policies. The company has carried out numerous substantial mergers and acquisitions to enhance the competitive positions of its Innovative Medicine and MedTech franchises. Notably, Johnson & Johnson acquired medical device manufacturer Shockwave Medical (NASDAQ:SWAV) Inc. for $13.1 billion in the first half of 2024. This followed its acquisitions of Abiomed (NASDAQ:ABMD) for $16.6 billion in 2022 and cardiovascular medical device maker Laminar Inc. for $400 million in late 2023.
The acquisition of Intra-Cellular aligns with Johnson & Johnson's strategy of completing moderate-size acquisitions to strengthen its portfolio and pipeline. This move enhances the company's neuroscience franchise, adding CAPLYTA to its portfolio, along with several other early-stage development prospects. Intra-Cellular has also submitted an application for CAPLYTA to treat major depressive disorder, which could significantly expand its potential market.
S&P Global Ratings has previously stated that it could lower the rating on Johnson & Johnson if its leverage remains above 1x for more than a year. The decision to resolve the CreditWatch listing will be made after reviewing the company's full-year 2024 performance, 2025 guidance, additional details regarding the transaction, and further clarity on the company's financial policy regarding future mergers and acquisitions. The ongoing talcum powder litigation settlement's impact on Johnson & Johnson’s net S&P Global Ratings-adjusted leverage will also be assessed.
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