Fitch Maintains Teva Pharmaceuticals' Ratings on Negative Watch

April 20, 2016 03:35 PM Eastern Daylight Time

CHICAGO--(BUSINESS WIRE)--Fitch Ratings maintains the long-term ratings, including the Long-term Issuer Default Rating (IDR) of Teva Pharmaceutical Industries Limited (NYSE: TEVA) and its subsidiaries on Rating Watch Negative.

A complete list of rating actions, which apply to approximately $10 billion of debt outstanding at Dec. 31, 2015, follows at the end of this release.

The maintenance of the Negative Watch follows Fitch's guidelines for Rating Watch status review, following the placement of the companies' ratings on Negative Watch on April 21, 2015. Fitch first placed Teva's 'BBB+' ratings on Rating Watch Negative following the firm's unsolicited (now cancelled) bid to acquire Mylan N.V. (NYSE: MYL; 'BBB-'/Stable Outlook). Teva subsequently agreed to acquire the generic pharmaceuticals unit of Allergan plc (NYSE: AGN; 'BBB-'/Stable Outlook; Actavis Gx) for approximately $40.5 billion.

Fitch will resolve the Negative Rating Watch when there is a high degree of certainty that the Actavis Gx deal will be completed as currently contemplated. At that time, Fitch expects to downgrade Teva's long-term ratings, likely by one-notch to 'BBB', pending more information on the firm's post-deal outlook and capital deployment strategy.

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 and superior flexibility with which to expand into 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 accelerated 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:

--Flat revenue growth at Teva standalone, with approximately one half-year contribution from Actavis Gx, net of divestitures;

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

--Repayment of all debt due 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;

--Capital deployment in excess of debt repayment required to maintain covenant compliance weighted toward active business development, with a modestly growing common dividend.

RATING SENSITIVITIES

Consummation of the Actavis Gx transaction with funding as currently proposed is not consistent with Teva's current 'BBB+' rating. Fitch expects pro forma leverage above 4.0x at deal close, trending toward 3x in 2018, versus 1.5x at Dec. 31, 2015.

Run-rate gross debt/EBITDA around 3.2x gives support for a downgrade limited to one-notch to 'BBB'. Teva's unmatched scale as the world's largest and most diversified global manufacturer of generic pharmaceuticals, with solid 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-'. A two-notch downgrade to 'BBB-' is not the most likely outcome in resolution of the current Negative Rating Watch but could materialize if Fitch expects the firm to pursue an aggressive capital deployment strategy in 2016 - 2017, or if potential generic competition Copaxone begins to pose a threat greater than currently anticipated in Fitch's ratings case assumptions. 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, run-rate gross debt/EBITDA trending toward 2.5x, with improved cash generation and positive pipeline momentum that offsets potential Copaxone losses, could support a return to 'BBB+' ratings.

LIQUIDITY

Teva has historically maintained a strong liquidity profile, with more than $1 billion of cash on hand ($6.95 billion at Dec. 31, 2015) and a generally undrawn $3 billion unsecured revolver (increasing to $4.5 billion upon close of the Actavis Gx deal).

Current debt maturities are manageable, and Fitch expects that issuance of new bonds will result in a well-laddered and well-diversified maturity profile. FCF exceeding $4 billion annually should be sufficient to address most maturities over the forecast period.

FULL LIST OF RATING ACTIONS

Fitch has maintained the following ratings on Negative Watch:

Teva Pharmaceutical Industries Limited

--Long-term IDR 'BBB+'.

Teva Pharmaceuticals USA, Inc.

--Senior unsecured bank facility 'BBB+'.

Teva Pharmaceutical Finance Company LLC