Fitch Assigns Teva Initial IDR of 'A-'; Rates New Debt 'A-'
CHICAGO -- December 13, 2012
Fitch Ratings has assigned Teva Pharmaceutical Industries Ltd. (Teva) an
Issuer Default Rating (IDR) of 'A-'. The Rating Outlook is Stable.
In addition, Fitch rates Teva's proposed senior unsecured debt issuance 'A-'.
See the full list of ratings assigned below.
The ratings apply to approximately $13.8 billion of debt at Sept. 30, 2012,
and reflect the following key credit considerations:
Acquisitions Stretch Leverage; Financial Discipline Demonstrated
Teva has grown to be the world's largest generic drug firm and a top-20 global
pharmaceutical company through a series of acquisitions. Business development
activities accelerated over the past five years as the business increased to
one generating over $20 billion in annual sales from $8.4 billion in 2006.
During this time, the company spent nearly $20 billion on new assets. The most
recent acquisitions in 2011, notably Cephalon, Inc. (Cephalon) and Taiyo
Pharmaceutical Industry Ltd. (Taiyo), totaled $7.6 billion and pushed gross
debt leverage to 2.8x in 2011 and 2.3x for the latest 12 months (LTM) as of
the third quarter of 2012 (3Q'12).
Leverage spikes are not an uncommon occurrence for Teva given its acquisition
history. The company typically winds down debt leverage steadily following
debt-funded asset purchases as last seen following the acquisitions of Barr
Pharmaceutical in December 2008, and Merkle ratiopharm Group (ratiopharm) in
August 2010. Teva significantly decreased leverage to below 1.5x within 12
months in both situations. Currently, leverage has remained at levels more
indicative of a 'BBB+' rating category as a result of Teva's refinancing of
most of the acquisition debt given an attractive credit environment, and
seeking to push out average maturity of the debt load. The rating reflects
some comfort in Teva's commitment to near-term debt reduction gained from the
company's intention to repay up to $1 billion in debt annually. In Fitch's
estimation, the pay down of approximately $2 billion during the next two years
would yield gross debt leverage of 2.3x in 2013 and 1.8x in 2014, a level
indicative of the current rating category.
New Strategic Plan Recently Unveiled
Clearly, Teva has built its organizational structure over the past years to
facilitate balanced growth in the face of looming pressure from the patent
expiration of Copaxone as well as a general industry slowdown post patent
cliff in 2015. The mechanisms that a new management team will put into place
over the intermediate term to mitigate the impacts once the situations arise
were detailed at an investor conference on Dec. 11, 2012. At the meeting, the
company announced plans to 'reshape' its operating structure that will involve
facility consolidation and capital and expense rationalization, including a
strategic assessment of the current R&D portfolio. Management said cost
savings from the program are in the range of $1.5 billion to $2 billion over
Double-Digit Sales Growth Bolstered by Acquisitions
Teva's previous acquisition strategy sought product (both complex generic and
brand name drugs) and geographic diversification. The series of acquisitions
completed since 2006 cost $19.9 billion, and yielded an increase in revenues
to $18.3 billion in 2011 from $5.3 billion in 2005 for compound annual growth
of 23.1%. Notable acquisitions were IVAX Corporation and Barr Pharmaceuticals
(global generic drug firms), ratiopharm (an international branded generic
maker), and Cephalon (a specialty medicine developer). In the first nine
months of 2012, total revenues jumped 19.3% bolstered by the addition of
Cephalon's brand-name drugs and new revenue sources in Japan from Taiyo, both
purchased in 2011.
Patent Cliff in 2015-2016
Teva faces a key drug patent expiration period in 2015 and 2016, mainly due to
the potential loss of market exclusivity for Copaxone in September 2015. The
medicine for the treatment of multiple sclerosis (MS) generated $3.86 billion
in sales for the LTM 3Q'12, which represented 19.5% of total revenues. While
Teva contends with the negative effect of the Copaxone patent loss, Mylan
Laboratories (Mylan) may launch its generic version of Nuvigil in June 2016
per a legal settlement agreement. Together, Fitch expects the two intellectual
property losses to drag growth down by almost 5% in 2016. The generic drug
business that generates a little more than half of Teva's revenues provides a
minimal buffer to the expected sales drop, in Fitch's opinion, and the company
will need to find new branded-drug revenue drivers in the next few years.
The R&D program has been refocused on two therapeutic classes - central
nervous system (including pain) and respiratory. As such, potential therapies
in non-core areas have been recently cancelled including late-stage projects
in stem cell therapies, a potential lung cancer medicine, and a new anti-TNF
for sciatica treatment. However, Teva has added two new molecular entities -
XEN042 and pridopidine - since September, bringing total Phase III programs to
15 (including line extensions). The new focus, beyond CNS (including pain) and
respiratory, includes the development of new therapeutic entities (NTEs) or
existing pharmaceuticals in new formulations or delivery formats. Teva plans
to start development of 10-15 NTEs in 2013 with an expectation of first
launching in 2016. Fitch expects that commercialization of the current branded
pipeline will only partially offset Teva's patent cliff.
Strong Cash Flow
Cash generation is consistent and robust, driven by an extensive product
portfolio and good geographic diversification. LTM free cash flow (FCF) for
the period ended Sept. 30, 2012 was approximately $2.5 billion, rising from
nearly $2.3 billion generated in 2011. FCF has remained above $2 billion
annually since 2008. Fitch expects Teva to maintain FCF above $2.8 billion per
year (excluding a potential material legal settlement pertaining to an
'at-risk' launch of Protonix in December 2007) and FCF margins in excess of
14% over the ratings horizon. Cash balances of $1.4 billion and full
availability under its $2.5 billion revolver due January 2014 on Sept. 30,
2012 further support an exceptional liquidity profile.
Capital Deployment Evenly Split
Teva publicly outlined uses for estimated cash flows between $4.5 billion to
$5.5 billion annually through 2016 with approximately $2 billion to be
dedicated to business development and $1 billion to $2 billion to shareholder
returns. The new strategic plan looks to repay up to $1 billion in debt
annually as well.
Teva's Board of Directors authorized a $1 billion share buyback program in
December 2010, and throughout 2011, a total of $899 million in shares were
repurchased. Along with the announcement of a new $3 billion program in
December 2011, the company stated an expectation to exhaust the authorization
over three years. Fitch expects equity repurchases to resume in the near term
after a temporary suspension in the third quarter in line with the expectation
for shareholder returns detailed at the recent analyst conference. Teva's
Board also makes dividend decisions, and Fitch anticipates future increases
more modest in comparison to the 25% jump in 2011.
Cost Initiatives Implemented as Revenue Growth Slows
Teva has held EBITDA margins above 28% since 2009, which is commendable given
the volatility in revenues and earnings inherent in the generic drug industry
and continuous disruptions from acquisitions. EBITDA and EBITDAR margins were
relatively steady at 29.4% and 30.0%, respectively, for the LTM Q3'12,
compared to 28.2% and 28.9%, respectively, in 2011.
Fitch sees revenue growth easing from the torrid pace over the past years due
to brand name competition to Copaxone, a slowing patent cliff, and moderating
asset purchasing. As such, profitability may stagnate if not for cost cutting.
The company had already planned for $500 million of integration synergies from
the Cephalon acquisition before seeking incremental cost savings of $1.5
billion to $2 billion over five years under the new strategic initiative.
Fitch builds in cost savings of $2 billion in 2014-2016 that would serve to
What Could Trigger A Rating Action
An upgrade will not be considered until the company significantly reduces
higher leverage that remains after the purchase of Cephalon in October 2011. A
positive rating action would be favorably influenced by gross debt leverage to
the low end of Teva's debt leverage range (i.e. 1.5x to 2.0x EBITDA). The
reduction could come from debt repayment following the long-term maturity
schedule as well as shoring up margins from expense saving resulting from
operational reorganization ahead of the coming Copaxone patent expiration in
2015 and general generic industry slowdown in 2016.
Negative rating pressure would result from total debt leverage persisting
above 2.0x at the end of 2014. Failure to achieve this leverage level could
arise from failure to pay down 2013 debt maturities, leveraging transactions,
and/or inability to extract operating expenses ahead of the looming patent
loss of Copaxone and generic drug industry pressures.
Fitch has assigned the following ratings:
--Long Term IDR of 'A-';
--Senior unsecured debt of 'A-';
--Bank loan of 'A-'.
Additional information is available at www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' Aug. 8, 2012;
--'Rating Pharmaceutical Companies - Sector Credit Factors', Aug. 9, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Pharmaceutical Companies
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