TEXT-S&P rates Teva Pharmaceutical's notes 'A-'
Overview -- Standard & Poor's Ratings Services assigned its 'A-' ratings to Israel-based generic drug giant Teva Pharmaceutical Industries Ltd.'s (A-/Stable/--) proposed issue of senior unsecured notes through subsidiaries Teva Pharmaceutical Finance Company B.V. (notes due 2022) and Teva Pharmaceutical Finance IV, LLC (2020). These issues will be unconditionally guaranteed by parent Teva. Proceeds will be used to refinance near-term maturities and general corporate purposes. -- The refinancing does not affect credit protection measures and lengthens maturities, prompting a revision in our liquidity assessment to "strong". -- We affirmed our 'A-' corporate credit rating on the company. -- Our stable rating outlook reflects Teva's renewed focus on margin enhancement and commitment to a financial policy consistent with a 'modest' financial risk profile. Rating Action On Dec. 13, 2012, Standard & Poor's Ratings Services affirmed its 'A-' corporate credit rating on Israel-based Teva Pharmaceuticals Industries Inc., and assigned its 'A-' ratings to the proposed issue of senior unsecured notes through subsidiaries Teva Pharmaceutical Finance Company B.V. (notes due 2022) and Teva Pharmaceutical Finance IV, LLC (2020). These issues will be unconditionally guaranteed by parent Teva. We also affirmed the preliminary 'A-' senior and 'BBB+' subordinated ratings on Teva's shelf registration securities. Rationale The ratings on Israel-based Teva Pharmaceutical Industries Inc. reflect Standard & Poor's Ratings Services' view that Teva's leading position in the fast-growing global market for generic drugs supports a "strong" business risk profile. Our "modest" financial risk profile incorporates the expectation that Teva will continue to use its considerable cash flow to maintain credit measures consistent with a modest financial risk profile. Teva is the world's largest generic pharmaceutical company, and has a significant presence in branded drugs. However, we now expect Teva's revenues will reach a plateau in 2012 and 2013, based upon a slackening of sales. Organic growth in the company's generic drug business is becoming more sluggish on the large sales base; the year-to-year increase in generic drug revenues in the latest quarter was only 0.2%. In the branded segment, Teva's Copaxone treatment for multiple sclerosis (MS) faces new competition that dims its prospects, and comparisons early in 2013 will be handicapped by the loss of patent protection for Provigil last April. Margins may benefit from efforts over the next five years to gain up to $2 billion in operating economies, and we expect gross margins of around 60% that compare favorably to those of other generic companies due to Teva's proprietary drug portfolio. We do not expect any significant near-term debt-financed acquisitions. Key factors we consider in our view of Teva's strong business risk profile include a diverse generic portfolio complemented by sizable proprietary drug offerings, an industry-leading product pipeline, and, on the negative side, potential competition to its high-margin proprietary multiple sclerosis (MS) drug Copaxone. The company's relatively profitable proprietary pharmaceutical franchises also benefit, but to a much lesser extent, from its offering of oncology, respiratory and women's health products. The company's active pharmaceutical ingredient (API) business provides significant vertical integration to its pharmaceutical production. We believe Teva will focus on building the profitability of its current portfolio rather than emphasizing rapid growth. As highlighted by the 2011 $6.8 billion all-cash acquisition of Cephalon Inc., Teva has used sizable acquisitions to more than double revenues over the past five years. Teva continues to be very profitable, with adjusted EBITDA margins of 30%, but expects that by focusing on improving purchasing, inventory management, and other efficiencies, it can gain up to $2 billion in savings within five years. While there will be costs in achieving this goal, we expect a net benefit within a few years. Despite the frequent use of debt financing for acquisitions, Teva uses its sizable discretionary cash flows to rapidly repay debt and support a modest financial risk profile. With the acquisition of Cephalon, leverage rose to 2.7x from 1.6x as of Dec. 31, 2011; nine months later, it has fallen to 2.1x on a mixture of EBITDA growth and more than $700 million in debt repayment. Discretionarycash flow (after capital spending and dividends) of some $2.5 billion provides the capacity to further repay debt. Even with our estimate of flat growth and margins, we expect Teva to reduce leverage to about 2x by year-end 2013. Liquidity The most recent refinancing of near term maturities has prompted a revision of our liquidity assessment to "strong" from "adequate". We expect sources of cash to exceed mandatory uses of cash over the next two to three years. Relevant aspects of Teva's liquidity are: -- We expect liquidity sources to exceed uses by at least 1.5x over the next two years. -- Even if EBITDA declines by 30%, we expect liquidity sources to continue exceeding uses. -- Teva has well-established, solid relationships with banks, and a generally high standing in the credit markets. -- With ample cash balance and solid relationships with banks, we believe Teva can absorb, without refinancing, any high-impact, low-probability events. -- Sources of liquidity as of Sept. 30, 2012, included cash and short-term investments of $1.4 billion. Additional sources of funding include a syndicated revolving credit agreement of $2.5 billion. -- Capital spending needs are small relative to operating cash flow as are dividends. -- The new debt issuance will repay existing debt and eliminate most maturities through 2014. Outlook Our rating outlook on Teva is stable. Its moderating revenue growth and renewed focus on margin enhancement are consistent with our strong business risk assessment, and Teva's commitment to a modest financial risk profile is an important support for the rating. Significant operational setbacks and debt-financed acquisitions, share repurchases or dividends that sustain leverage over 2.5x for more than one year could lead to a downgrade. A rating upgrade is unlikely given the prevalence of threats to Copaxone. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed Teva Pharmaceutical Industries Ltd. Corporate Credit Rating A-/Stable/-- Unsecured debt A- New Rating Teva Pharmaceutical Finance Co B.V. Senior unsecured notes due Dec. 2022 A- Teva Pharmaceutical Finance IV, LLC Senior Unsecured notes due March 2020 A- Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.