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Teva Remains on Watch Negative on Allergan Generics Acquisition
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According to Fitch Ratings, the ratings of Teva Pharmaceutical Industries Limited (TEVA) and its subsidiaries, including the ‘BBB+’ long-term Issuer Default Rating, remain on Rating Watch Negative, following its announcement that it will acquire the global generics business of Allergan plc (Allergan; NYSE: AGN) for $40.5 billion.

The purchase price consists of $33.75 billion in cash and $6.75 billion in Teva stock. The stock issuance is estimated to represent less than a 10% ownership stake. The firms expect the deal to close in first-quarter 2016, pending regulatory and other approvals.

A full list of ratings, which apply to approximately $11 billion of debt as of March 31, 2015, follows at the end of this release.

Teva’s ratings were originally placed on Rating Watch Negative in April 2015 following its unsolicited proposal to acquire Mylan N.V. for approximately $40 billion using 50% debt and 50% stock.

Teva’s ‘BBB+’ ratings consider gross unadjusted debt/EBITDA of 2.0x-2.5x, with continued execution of the firm’s restructuring program and expected associated improvements in profit margins. Consummation of the Allergan transaction with deal funding as proposed, however, is not consistent with the current ‘BBB+’ ratings.

Fitch estimates that pro forma gross debt/EBITDA will exceed 4x immediately post-deal, assuming roughly $27 billion of new debt and $7 billion of new equity to fund the $33.75 billion cash component of the deal. In the context of the previously proposed Mylan deal, Teva management had suggested that it would plan to de-lever to 3x gross debt/EBITDA within 24 months of close. Assuming a similar de-leveraging plan for the Allergan deal, Fitch would expect a one-notch downgrade of Teva’s ratings to ‘BBB’.

However, Fitch is unsure if the newly combined firm’s cash generation will be sufficient to facilitate debt repayment of such a magnitude. Depending on the post-deal capital structure and associated de-leveraging plan, a two-notch downgrade to ‘BBB-‘ could result.

Notably, additional cost savings from the firm’s ongoing efficiency programs, combined with outlined deal synergies of $1.5 billion over three years, could support de-leveraging prospects going forward. Furthermore, Teva’s superior scale and global diversification may also provide ratings support amid an evolving industry landscape. Fitch maintains a generally favorable long-term outlook for the global generic drug market.

The acquisition will solidify Teva’s position as the world’s largest generic drug manufacturer and a top-10 global pharmaceutical company. The addition of Allergan’s generics business is more complementary to Teva than its previously attempted purchase of Mylan N.V., as it will require fewer regulatory-driven divestitures and will boost Teva’s manufacturing capabilities, particularly related to transdermal patches and semi-solid and liquid dosage forms.

On balance, the deal improves Teva’s medium-term growth outlook; notwithstanding the hole that remains associated with the expectation of generic competition to Teva’s top-selling product, Copaxone, 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.



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