S&P keeps Teva’s BBB rating, cuts management score

Standard & Poor’s, the credit rating agency, affirmed the BBB corporate credit rating with a negative outlook for Israel’s Teva Pharmaceutical Industries Ltd., but lowered its management and governance score to “fair” from “satisfactory.”

The BBB rating is the lowest investment grade allocated by the credit agency. Ratings below that are non-investment grades, making it more difficult for companies to raise funds at attractive interest rates.

The Israeli based generics drug maker “continues to face a number of challenges,” including to its blockbuster Copaxone drug for the treatment of multiple sclerosis; continued pressure in the pricing of generic drugs; and “risks to execution of its strategy as the company navigates changes to its management team,” S&P said in a research update on the firm dated March 10.

Teva’s CEO Erez Vigodman stepped down last month after the Israeli company, which has been a source of national pride and a fixture of local investment plans, was dogged by a series of missteps, including a $40 billion acquisition of drug company Actavis Generics, the generics arm of rival Allergan, and an inability to fend off competition for Copaxone. In addition, Teva said in December that the chief executive for its global generics medicines group, Sigurdur Olafsson, would be replaced at the end of the first quarter of this year by Dipankar Bhattacharjee.

“The revision of Teva’s management and governance score to fair from satisfactory is based on our view that the company’s strategic execution is more challenged given the loss of two key executives in the past three months,” the report said. “The management changes have occurred at the same time the company is striving to integrate the Allergan generics acquisition, achieve 2017 guidance, and manage through legal and regulatory hurdles. The company’s ongoing strategic review also adds a degree of uncertainty to its plans for its generics and specialty businesses.”

“We continue to monitor whether the appointment of a new CEO and the concurrent business review bring any change in strategic direction or financial policy,” the report said. S&P expects Teva to “efficiently integrate” with Actavis and achieve synergies, allowing the company to deleverage its debt, it said. But the negative outlook also reflects S&P’s view that “there are significant risks to achieving this target, and the company has very limited capacity for debt-financed acquisitions at this time.”

In an upside scenario, assuming Teva manages an efficient integration with the generic drug operations of Actavis, which will lead to synergies, and sells assets as planned, and should there be no further erosion in the prices of generic drugs, then “we believe Teva will steadily deleverage,” the report said.

S&P warned it could lower its BBB rating if it believes the company will not readily reduce leverage over the next two years.