|[December 11, 2013]
Fitch Downgrades Teva to 'BBB+'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has downgraded the ratings of Teva Pharmaceutical
Industries Limited (Teva) to 'BBB+' from 'A-'. The Rating Outlook is
A full list of rating actions follows at the end of this release.
The downgrade is driven by Fitch's view that free cash flow (FCF) will
be insufficient in 2013-2014 to repay maturing debt, resulting in a
further extended de-leveraging timeframe following the 2011 Cephalon
acquisition to beyond 2014. Fitch's forecast for depressed FCF, despite
the expectation for cost savings, stems from the confluence of
previously-announced significant cash outflows for litigation, tax
settlements, and accelerated restructuring activities and of branded and
likely near-term generic competition to Copaxone. Furthermore, Fitch
identifies material execution risk with respect to the firm's
accelerated 'Re-Shape' program and R&D productivity, given the
significance of the program's success to the firm's longer-term credit
profile. This risk is heightened, in Fitch's view, by the firm's current
lack of a permanent CEO.
KEY RATING DRIVERS
-- Teva is the largest generic drugmaker and one of the largest
pharmaceutical firms in the world. As such, the company benefits from
considerable scale, global presence, and good diversification (except
-- FCF is expected to be significantly pressured in 2013-2014 by more
than $3.5 billion in non-recurring cash outflows for litigation and tax
settlements and accelerated restructuring activities. Fitch forecasts
FCF of approximately $450 million to $800 million in 2014, compared to
$2.6 billion for fiscal 2012 and $1.9 billion for the latest 12 month
(LTM) period ended Sept. 30, 2013.
-- Reduced FCF will be insufficient to repay maturing debt as previously
expected, especially if the firm consummates what Fitch deems as likely
M&A in order to shore up a relatively weak medium-term growth profile.
Fitch expects gross unadjusted debt-to-EBITDA to be maintained between
2.0x and 2.5x over the ratings horizon.
-- Fitch's outlook for the global generic pharmaceutical industry is
generally favorable. Aging populations and price-conscious payers in
developed markets and generally improving access to healthcare in
emerging markets should support demand growth. Pricing could be
pressured, particularly by payers in Western Europe and consolidating
purchasers globally, over the near-to-medium term.
-- Fitch sees Teva's stated strategic objectives as appropriate and
realistic, and capable of driving growth beginning in the 2016-2018
timeframe. However, material execution risk with respect to Teva's
accelerated 'Re-Shape' program and R&D focus is exacerbated by the
firm's current lack of a permanent CEO.
Maintenance of a 'BBB+' credit profile will generally require a
sustained commitment to and successful execution of the firm's outlined
strategic objectives over the ratings horizon. Significant cost savings,
particularly in the generics business, and key investments in growth
areas will be important to the company's longer-term growth and
Teva has ample flexibility at the 'BBB+' ratings to consummate targeted
M&A transactions that contribute to the firm's medium-to-longer term
growth profile. This view holds in the scenario that Copaxone faces
generic competition in May 2014. Fitch notes that the timing of a
generic launch, the number of generic entrants, and the pace of generic
conversion is at this time relatively uncertain.
A negative rating action could be caused by more severe Copaxone share
losses leading to materially lower margins and weaker cash generation
than currently expected by Fitch. A material departure from or failure
to execute on the firm's outlined strategic objectives could also weigh
on the ratings. Furthermore, a transformative M&A transaction or
additional unexpected cash outflows (e.g. sizeable shareholder-friendly
payments, additional litigation or tax settlements) requiring debt
funding such that gross unadjusted debt-to-EBITDA would be sustained
above 2.5x would likely cause a downgrade to 'BBB'.
A positive rating action is not expected over the ratings horizon given
the number of known headwinds and remaining uncertainties currently
facing the firm.
PRESSURED CASH FLOWS HINDER DEBT REPAYMENT
Significant cash outflows related to litigation and tax settlements and
accelerated restructuring activities yield Fitch-forecasted FCF of
approximately $450 million to $800 million in 2014, depending on the
timing of a generic Copaxone launch. More than $3.5 billion of cash
payouts in 2013-2014 for litigation ($1.6 billion - $2.1 billion), tax
settlements (approx. $718 million), and restructuring (approx. $800
million) are the primary drivers of these lower FCF figures.
Fitch had previously expected Teva to use cash flows to repay
approximately $1 billion of debt in each of 2012-2014, leading to gross
unadjusted debt-to-EBITDA below 2.0 by year-end 2014. But FCF is likely
to be insufficient to repay the majority of the $1.1 billion notes that
matured in November 2013 and $750 million due in March 2014. Refinancing
these issuances will cause gross unadjusted debt leverage to be
sustained between 2.0x and 2.5x through 2014 - more than three years
following the close of the Cephalon deal in October 2011.
INCREASING COPAXONE COMPETITION
Relatively new therapies for the treatment of multiple sclerosis (M.S.),
notably newer oral therapies, are expected to continue to eat into
Copaxone's market share in 2014 at a pace slightly ahead of Fitch's
initial expectations. However, the potential for AB-rated generic
competition from as many as four firms n May 2014 poses a greater risk
to the longevity of Teva's largest drug franchise. Fitch sees
management's public comments pertaining to an expected 10% market share
loss to oral therapies and a potential 25% share loss to generics in
2014 as reasonable.
There remain considerable uncertainties with respect to both the
occurrence and impact of a potential generic launch, i.e. the success of
converting patients to and maintaining pricing of Teva's
yet-to-be-approved three-times-weekly version of Copaxone; and the FDA's
approval, the successful launch, and the pace of market acceptance of
generic versions of Copaxone. Fitch thinks it is possible that the
outcome of these uncertainties could drive Copaxone share losses,
particularly to generics, and pricing pressures greater than those
outlined publicly by the firm in 2014-2015.
It is also possible that the launch of a generic Copaxone could be
delayed beyond the May 2014 expiration of market exclusivity. But Fitch
believes that even in this scenario it is unlikely that Teva will be
able to adequately reduce debt before facing severe profit losses at
some point soon thereafter.
APPROPRIATE STRATEGY WITH HIGHTENED EXECUTION RISK
Fitch thinks the strategic objectives outlined by Teva first in December
2012, and accelerated in October 2013, are appropriate and capable of
driving longer-term growth. Targeted cost savings are, in Fitch's view,
realistic and achievable and will offset some of the effects of Copaxone
losses. However, Fitch expects that a sizeable portion of cost savings -
the bulk of which will be realized in Teva's generics business - will be
reinvested over the life of the program and will not, therefore,
sufficiently bolster profitability in 2014-2016.
Successful execution of the outlined R&D strategy could drive
significant growth in the outer years of the rating horizon, in Fitch's
view; but not in time to offset expected Copaxone losses in 2014-2016.
Biosimilars and complex generics are key areas of growth which Teva in
uniquely positioned to achieve. The company's JV with Proctor & Gamble
should also provide an area of near-to-medium term growth, albeit
relatively smaller compared to the firm as a whole.
Material execution risk around achieving these objectives is heightened
by the current lack of a permanent CEO. The eventual hiring of a new
permanent CEO opens the possibility for an altered strategic plan,
though Fitch thinks this is unlikely.
LIQUIDITY STRETCHED BUT AMPLE FOR 'BBB+'
Teva maintains a $3 billion unsecured revolver due 2017 and had $1.15
billion of cash on hand at Sept. 30, 2013. Fitch expects Teva to carry a
balance on its revolver at year-end 2013 due to the repayment of the
$1.1 billion of notes that matured in November 2013.
The firm's maturity schedule is well-laddered, though likely requiring
some refinancing in 2014 to maintain adequate cash on hand. Debt
maturities are estimated as follows: approx. $0.8 billion in 2014; $1.2
billion in 2015, $1.5 billion in 2016, $650 million in 2017, and $8.5
Fitch has taken the following ratings actions:
-- Downgraded the Issuer Default Rating (IDR) of Teva Pharmaceutical
Industries Limited to 'BBB+' from 'A-';
-- Downgraded the senior unsecured notes ratings to 'BBB+' from 'A-';
-- Downgraded the senior unsecured bank facility rating to 'BBB+' from
-- Assigned a 'BBB+' IDR to Teva Pharmaceuticals USA, Inc.;
-- Assigned a 'BBB+' IDR to Teva Capital Services Switzerland GmbH;
-- Assigned a 'BBB+' IDR to Teva Finance Services B.V.;
-- Assigned a 'BBB+' IDR to Teva Finance Services II B.V.;
-- Assigned a 'BBB+' IDR to Teva Pharmaceutical Finance, LLC;
-- Assigned a 'BBB+' IDR to Teva Pharmaceutical Finance II, LLC;
-- Assigned a 'BBB+' IDR to Teva Pharmaceutical Finance IV, LLC;
-- Assigned a 'BBB+' IDR to Teva Pharmaceutical Finance, B.V.;
-- Assigned a 'BBB+' IDR to Teva Pharmaceutical Finance II, B.V.;
-- Assigned a 'BBB+' IDR to Teva Pharmaceutical Finance III, B.V.;
-- Assigned a 'BBB+' IDR to Teva Pharmaceutical Finance IV, B.V.;
-- Assigned a 'BBB+' IDR to Teva Pharmaceutical Finance V, B.V.
The issuers being assigned IDRs are co-borrowers or issuers of
already-rated debt instruments.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage' (Aug. 5, 2013);
--'2014 Outlook: Global Branded Pharmaceuticals' (Dec. 10, 2013);
--'2014 Outlook: U.S. Healthcare' (Nov. 25, 2013);
--'Trekking the Path to Biosimilars - The Destination' (Oct. 4, 2013);
--'Global Pharmaceutical R&D Pipeline' (Sep. 23, 2013);
--'Fitch: At-Risk Settlement Could Pressure Teva's Ratings' (June 13,
--'Global Pharmaceuticals Sector and Company Overview' (Jan. 29, 2013);
--'Rating Pharmaceutical Companies' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
2014 Outlook: Global Branded Pharmaceuticals (Manageable Risk Profile)
2014 Outlook: U.S. Healthcare -- Secular Challenges Require a Compelling
Trekking the Path to Biosimilars -- The Destination
Global Pharmaceutical R&D Pipeline (Novel Drug Approvals Ease)
Rating Pharmaceutical Companies
Global Pharmaceuticals Sector and Companies Overview
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