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Fitch Places Teva Pharmaceutical's Ratings on Watch Negative on Proposed Mylan Acquisition
[April 22, 2015]

Fitch Places Teva Pharmaceutical's Ratings on Watch Negative on Proposed Mylan Acquisition


Fitch Ratings has placed the ratings of Teva Pharmaceutical Industries Limited (NYSE: TEVA) and its subsidiaries, including the 'BBB+' long-term Issuer Default Rating, on Rating Watch Negative.

A full list of rating actions, which apply to approximately $10.9 billion of debt pro forma for completed bond issuance and tender transactions in first-quarter 2015, follows at the end of this release.

The rating actions follow Teva's unsolicited proposal to acquire Mylan N.V. (Mylan; NASDAQ: MYL) for $82/share, or approximately $40 billion. Proposed 50% cash and 50% stock funding will require significant new borrowings, possibly pushing pro forma gross debt/EBITDA toward 4x, likely outside the current 'BBB+' ratings. Fitch estimates the offer price represents a transaction multiple of roughly 14 times forecasted Mylan 2015 EBITDA.

Notably, the offer is contingent on Mylan not engaging in other M&A, including its $29 billion bid for Perrigo plc (Perrigo; NASDAQ: PRGO). Perrigo's board of directors rejected Mylan's initial offer.

If successful, the merger would boost Teva's position as the largest generic drugmaker in the world. Total estimated combined 2015 sales are $29 billion, though potential required divestitures could pull this figure down somewhat. Available synergies are likely greater than Teva's initial $2 billion estimate and would provide further margin enhancement opportunities on top of Teva's currently underway restructuring programs.

KEY RATING DRIVERS

--Teva management's increasingly aggressive tone toward capital deployment during 2014 is manifest in its $40 billion bid for Mylan. Teva's medium-term growth outlook would improve with the addition of Mylan, but significant holes remain given the expectation of generic competition to both firms' top-selling products, Copaxone and EpiPen, in the near future. Consequently, Fitch would expect Teva to remain an active acquirer even after consummating an acquisition as large as Mylan, which could hinder Teva's debt repayment post-deal.

--Copaxone, Teva's top-selling product (approximately 20% of sales, 50% of operating profit before G&A expenses), is set to face generic competition in 2015. Fitch estimates that $800 million to $1 billion of Copaxone's $3.1 billion of 2014 U.S. sales are at risk of loss to generic competitors. Potential losses are mitigated by Teva's successful conversion of roughly two-thirds of U.S. patients to a new formulation with less frequent dosing.

--Cash flow generation was stronger than Fitch expected in 2014, partially due to a significant working capital reduction, allowing for debt repayment leading to gross debt/EBITDA of 1.7x at Dec. 31, 2014. Borrowings required to fund a potential Mylan deal, however, could push this figure up toward 4x, outside the range appropriate for Teva's current 'BBB+' ratings.

--Teva is the world's largest generic drug manufacturer and a top-20 global pharmaceutical company. Such scale, combined with good product and geographic diversification (except Copaxone), provides the firm with strong positions in most relevant pharmaceutical markets and superior flexibility with which to expand into emerging markets. Fitch notes that the addition of Mylan would boost Teva's presence in important growth markets India and Asia-Pacific, and in injectable manufacturing capabilities.

--Fitch's outlook for the generic drug industry is favorable, with aging populations and increasing acceptance of generic drug products in developed markets and improving access to healthcare in developed markets. Top-line growth may appear somewhat stagnant compared to the unprecedented but now-subsiding generic wave of 2011-2014. Business mix decisions may also reduce top-line growth but support profitability in 2015-2016.

RATING SENSITIVITIES

Teva has good flexibility at its current ratings, sufficient for the firm to engage in targeted M&A while also funding its outlined shareholder payouts for 2015. Consummation of the Mylan deal as proposed, however, is not supportive of the 'BBB+' ratings.

Teva's 'BBB+' ratings consider gross unadjusted debt/EBITDA of 2.0x-2.5x over the ratings horizon, with continued execution of the firm's restructuring program and expected associated improvements in profit margins. Temporary increases in debt leverage to fund M&A will be appropriate at the 'BBB+' level, so long as the firm is committed to de-leveraging back to below 2.5x within 12-18 months.

If its bid for Mylan is successful, Teva's public comments suggest it would plan to de-lever to 3x gross debt-to-EBITDA within 24 months of close. Fitch thinks tis target is achievable, assuming transaction details as proposed, probably supporting an expectation for a one-notch downgrade to 'BBB'.



A two-notch downgrade is unlikely, but could result from a material change in transaction details or other developments causing Fitch to doubt that the aforementioned de-leveraging target would be achievable.

Negative ratings pressure could also result from a failure to execute on the firm's ongoing cost restructuring efforts and/or more aggressive shareholder-friendly payouts requiring debt funding. Notably, a downgrade is not expected to be caused by the launch of generic competition to Copaxone 20mg in the U.S.


Though debt leverage has moderated in 2014 and could continue to decline in 2015 absent the potential Mylan transaction, Fitch does not expect positive ratings momentum in the near term. Declining sales, management's more aggressive stance toward capital deployment, and Fitch's belief that M&A could be material in the aggregate during 2015-2016 support this view.

KEY ASSUMPTIONS

The following reflect Fitch's forecast for Teva only, not pro forma or in any way affected by the proposed acquisition of Mylan.

--Total revenues of approximately $19 billion, including $9.3 billion from generics (including API) and $3.5 billion from the Copaxone franchise.

--Modest EBITDA growth despite top-line declines, owing to successful cost reductions and generally favorable drug pricing in the U.S.

--Relatively steady gross debt/EBITDA of 1.7x-2.0x, absent debt-funded M&A.

--Solid free cash flow (FCF) of $3 billion to $3.5 billion in 2015.

Fitch has placed Teva's ratings on Rating Watch Negative as follows:

Teva Pharmaceutical Industries Limited

--IDR at 'BBB+'.

Teva Pharmaceuticals USA, Inc.

--Senior unsecured bank facility at 'BBB+'.

Teva Pharmaceutical Finance Company LLC

--Senior unsecured notes at 'BBB+'.

Teva Pharmaceutical Finance II, LLC

--Senior unsecured notes at 'BBB+'.

Teva Pharmaceutical Finance IV, LLC

--Senior unsecured notes at 'BBB+'.

Teva Pharmaceutical Finance Company, B.V.

--Senior unsecured notes at 'BBB+'.

Teva Pharmaceutical Finance II, B.V.

--Senior unsecured notes at 'BBB+'.

Teva Pharmaceutical Finance IV, B.V.

--Senior unsecured notes at 'BBB+'.

Teva Pharmaceutical Finance V, B.V.

--Senior unsecured notes at 'BBB+'.

Teva Pharmaceutical Finance Netherlands II B.V.

--Senior unsecured notes at 'BBB+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Fitch Rates Teva's Euro Bond Offering 'BBB+' (March 24, 2015) ';

--'Fitch Affirms Teva's Ratings at 'BBB+'; Outlook Stable' (Dec. 17, 2014);

--'Teva Pharmaceutical Industries Limited - Ratings Navigator' (Dec. 17, 2014);

--'Global Pharmaceutical R&D Pipeline - Approvals Accelerating' (Feb. 3, 2015);

--'2015 Outlook: Global Pharmaceuticals Strategic Industry Evolution to Continue; M&A Reduces Rating Headroom' (Dec. 11, 2014);

--'Pharmaceuticals: Ratings Navigator Companion' (Nov. 26, 2014);

--'Trekking the Path to Biosimilars - Forging Ahead' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Teva Pharmaceutical Industries Limited - Ratings Navigator

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=825328

Global Pharmaceutical R&D Pipeline (Approvals Accelerating)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=859488

2015 Outlook: Global Pharmaceuticals (Strategic Industry Evolution to Continue; M&A Reduces Rating Headroom)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=834168

Pharmaceuticals: Ratings Navigator Companion

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=804048

Trekking the Path to Biosimilars -- Forging Ahead

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714715

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983449

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