21.07.2016, 23:07

Fitch Downgrades Teva Pharmaceuticals; Rates New Bonds 'BBB'

OREANDA-NEWS. Fitch Ratings has downgraded the ratings of Teva Pharmaceutical Industries Ltd. (NYSE: TEVA) and its subsidiaries, including the Long-Term Issuer Default Rating (IDR), to 'BBB' from 'BBB+' and removed them from Rating Watch Negative. The Rating Outlook is Stable.

Fitch has also assigned 'BBB' ratings to the $15 billion bond issuance by Teva subsidiaries, the proceeds of which are expected to fund the pending acquisition of the generic pharmaceuticals business (Actavis Gx) of Allergan plc (NYSE: AGN; 'BBB-'/Stable).

A full list of ratings, which apply to approximately $10 billion of debt outstanding at March 31, 2016, follows at the end of this release.

KEY RATING DRIVERS

Global Scale, Well-Diversified: With its acquisition of Actavis Gx, Teva solidifies its position as the world's largest generic pharmaceutical company and a leading global manufacturer of pharmaceuticals by volume. Such scale, combined with good product and geographic diversification (ex-Copaxone), provides the firm with strong positions in most relevant pharmaceutical markets vis-a-vis consolidated pharmaceutical product purchasers and growth opportunities in emerging markets.

Elevated Leverage, Continuing M&A: Elevated debt leverage may linger somewhat following the Actavis Gx acquisition, as Teva has articulated that it intends to pursue M&A transactions in the medium term. But compliance with its credit agreement covenants will require moderation of net debt/EBITDA to below 3.5x within roughly two years of the deal close.

Copaxone Risk Remains, but Mitigated: Teva has successfully maintained Copaxone's market share despite the launch of a generic alternative to the 20mg version in June 2015. However, U. S. sales remain at risk pending the outcome of a challenge to the patents protecting Copaxone 40mg.

Improving Fundamentals, Patent Losses: Teva's restructuring program is on track and driving margin and cash flow improvements. The firm's renewed commitment to its generics business and narrowed focus on CNS/pain and respiratory should also contribute to improving operations. Improvements may be somewhat offset, though, by the loss of market exclusivity for a number of key branded products over the ratings horizon.

Favorable Industry Dynamics: Fitch expects aging populations in developed markets and increasing access to healthcare in emerging markets will support solid base business growth for Teva and its generic pharma peers. Increasing generic penetration in key markets like Japan and certain European nations will provide a key growth platform for the foreseeable future.

KEY ASSUMPTIONS

Fitch makes the following key assumptions in its rating case forecast for Teva:

--Relatively flat revenue growth at Teva standalone, before divestitures, with approximately five months' contribution from Actavis Gx;

--Further operating efficiency gains and the addition of Actavis Gx supports margin improvement post-2016, offset by integration costs and declining branded revenues in 2016-2018;

--Repayment of all debt maturing in 2016 - 2017 and repayment of new term loans according to contractual amortization/maturities, leading to gross debt/EBITDA trending to below 3.5x during 2018;

--FCF of $4 billion to $5 billion, depending on working capital (excludes divestiture proceeds);

--Capital deployment in excess of required debt repayment weighted toward active business development, particularly in specialty and biosimilars, with a modestly growing common dividend.

RATING SENSITIVITIES

Teva's 'BBB' ratings consider run-rate gross debt/EBITDA around 3.2x. Teva's unmatched scale as the world's largest and most diversified global manufacturer of generic pharmaceuticals, with solid and growing cash generation, allows the firm to carry incrementally higher debt leverage. Fitch usually views 3x as an appropriate debt/EBITDA for 'BBB'-rated U. S. healthcare firms with similar margin and cash flow profiles.

Expectation for gross debt/EBITDA sustained at or above 3.5x could lead to a downgrade to 'BBB-'. The expectation of an aggressive capital deployment strategy in 2016 - 2017 or meaningful generic competition to Copaxone that poses a threat greater than currently anticipated in Fitch's ratings case assumptions could drive downward rating actions. Notably, Teva's credit agreements contain a maximum net debt leverage covenant of 3.5x.

Fitch does not expect positive ratings momentum over the forecast period, as the firm is expected to prioritize the use of discretionary cash flows for business development, rather than additional debt repayment. However, gross debt/EBITDA sustained around 2.5x or below, with improved cash generation and positive pipeline momentum that offsets potential Copaxone losses, could support a return to 'BBB+'.

FULL LIST OF RATING ACTIONS

Fitch has downgraded the following ratings:

Teva Pharmaceutical Industries Limited

--Long-Term IDR to 'BBB' from 'BBB+'.

Teva Pharmaceuticals USA, Inc.

--Senior unsecured bank facilities to 'BBB' from 'BBB+'.

Teva Pharmaceutical Finance Company LLC