On Friday, Moody's Investor Service reiterated its A3 rating for Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA), but lowered the outlook from "Stable" to "Negative", following the company's $1.6 billion patent infringement settlement with Pfizer Inc. (NYSE: PFE; LSE: PFZ) and Takeda Pharmaceuticals Co. Ltd. (TSE: 4502) the day before.
Moody's believes, "The company will need to draw on its bank revolving credit facility to fund some or all of the $1.6 billion payment to Pfizer. The settlement comes at a time that Teva is also facing pressure on earnings due to competitive product launches (i.e., a generic version of Provigil) and global pricing pressure. Further, competition to Teva's blockbuster Copaxone franchise (approximately 20% of sales) appears to be intensifying based on the very successful early launch of Biogen Idec's oral multiple sclerosis drug, Tecfidera. At the same time, Teva's outlined strategy to return $1-2 billion per year to shareholders (through a combination of dividends and share repurchases) while pursuing around $2 billion per year of acquisitions and other business development, if completed, would leave little free cash left to repay debt."
Moody's adds that it is reaffirming the A3 rating for Teva's debt, which "reflects its position as the world's largest generic drug company, the diversity provided by its branded business, its strong operating track record, and solid operating cash flow. Moody's believes that, despite its challenges, Teva will benefit from new product launches, a focus on innovative products, increased penetration of generic drugs in international markets and cost reductions. If successful, Teva could reduce its cost structure by $1.5 to $2 billion annually within the next five years."
Fitch says that the Pfizer settlement could pressure Teva's A- rating. Fitch adds that, even though the payout was previously incorporated into Fitch's forecast and is reflected in the current rating and "Stable" outlook, the manner in which Teva funds this cash outflow could affect its credit rating.
"Our concern centers on the possibility that the incurrence of additional long-term debt to fund the settlement payout could extend the de-levering time horizon to nearly coincide with the expected loss of patent exclusivity of the company's top-selling drug (Copaxone) in September 2015. Sales of Copaxone accounted for nearly 20% of overall sales in fiscal 2012. New therapies Tysabri and Tecfidera could also present increasing though indirect competition to Copaxone in advance of the patent's expiration," says Fitch.
"My entire focus is to clear the deck," said Teva president and CEO Dr. Jeremy Levin in his first comment on the issue at a Goldman Sachs conference on Thursday. He added that Protonix was something that happened in the past and was no longer interesting, and that Teva did not want to be in litigation with Pfizer.
Published by Globes [online], Israel business news - www.globes-online.com - on June 16, 2013
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