International ratings agency S&P has kept the long-term credit rating of Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) unchanged at BB with a negative outlook. S&P has also raised its view of Teva's capacity for liabilities from a legal settlement (including opioid and price-fixing litigation) to $2 billion (from $1 billion) at the current rating, given its higher expectation for EBITDA following better-than-expected performance year to date.
The S&P analysts wrote, "Our affirmation reflects Teva's capacity to absorb significant litigation liabilities (around $2 billion, including $646 million already reserved on the balance sheet) at the current rating while still deleveraging toward adjusted debt to EBITDA of below 5x and maintaining funds from operations (FFO) to debt above 12%-13%. Our negative outlook reflects the risk that liabilities from ongoing litigation could exceed $2 billion and also that the business could underperform over the next year given the extent of recent cost cutting and restructuring. Although we would view global resolutions to opioid and price-fixing litigation as one-time events, we believe the cash flow impact could constrict Teva's ability to invest in future growth to offset future declines in maturing products."
S&P said that, "the negative outlook reflects risk to Teva's deleveraging trajectory, given the number of moving pieces associated with maturing products, the uncertain success of new product launches, and the overhang from U.S. opioid and price-fixing litigation. We predict adjusted funds from operations (FFO) to debt will be 12%-13% in 2019 and 2020 and free cash flow will be about $1.8 billion in 2019 and about $2 billion in 2020."
In its downside scenario S&P said, "We believe Teva has little room for underperformance in 2019, and we could lower the rating if free cash flow falls materially below $1.8 billion in 2019 and about $2 billion in 2020 and adjusted FFO to debt is below our 12%-13% expectation. In this scenario, the US generic segment would likely decline more than expected from worse pricing dynamics and fewer new launches. We could also lower the rating if we become confident that liabilities associated with opioid or price-fixing litigation will exceed $2 billion. We could consider a multi-notch downgrade if we believe litigation liabilities will exceed $4 billion-$5 billion."
On the other hand, in its upside scenario S&P said, "We could revise the outlook to stable if Teva meets or exceeds the upper end of its guidance, generating cash flows of about $2 billion and demonstrating commercial success of Ajovi and Austedo. In this scenario, we would expect to have more certainty in the range of outcomes in the opioid and price-fixing litigation evidenced by a wide-reaching settlement or other type of resolution resulting in an expected liability below $2 billion. We also view a stabilization of Teva's US generics segment (including successful new launches to offset price declines) and slower revenue declines in other mature products as essential to providing a clearer path to sustained growth and further debt repayment in 2020 and 2021."
Teva, led by president and CEO Kare Schultz, saw its share price fall 3.49% on Wall Street yesterday to $7.19, giving a market cap of $8.21 billion.
Published by Globes, Israel business news - en.globes.co.il - on September 24, 2019
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