Teva woes deepen as Fitch cuts credit rating to junk

Credit rating agency Fitch Ratings cut the credit rating for Israel’s Teva Pharmaceutical Industries Ltd. to junk on Monday, citing operational stress, as the drugmaker faces repayments of massive debt after the acquisition of a generics firm last year.

The rating cut comes as Teva’s new CEO Kåre Schultz, 56, took the reins of the firm Nov. 1. He is tasked with setting up strategy, divesting assets, cutting debt and restoring investor confidence at the firm, which has seen its New York-traded shares dive some 68 percent in the past 12 months as the company struggled to find strategic direction.

Junk bonds are defined as those that have a higher default risk, compared to investment grade bonds. A junk bond rating makes it harder and more expensive for companies to raise funds to repay debt.

“The Negative Outlook reflects the uncertainty around whether the company’s challenges will deepen and the nature and timing of the company’s response to such challenges such as whether Teva would seek equity financing to reduce its debt burden,” Fitch said in its rating downgrade, which applies to some $34.7 billion of debt as of Sept. 30.

Fitch downgraded its rating to BB from BBB-, bringing the rating to below investment grade. The other two ratings agencies, Standard & Poor’s and Moody’s Investors Service, have ranked Teva at the lowest investment grade of their ratings.

Teva declined to comment.

Fitch said Teva must reduce its debt load to pay off its pricey acquisition of Actavis Generics, a unit of Allergan Plc it acquired for $40 billion last year. Teva has started selling off assets to do so, and Fitch forecast the proceeds from the sales of Teva’s entire global Women’s Health business will be approximately $2.3 billion.

Fitch also warned of a continued deterioration of the firm’s generics business environment, with the firm facing pricing pressures particularly in its US generics business, which comprises 23% of total revenues for the nine months ending Sept. 30, 2017. The pricing pressures will continue to “meaningfully weigh on revenue and margins in the near term”, Fitch said. Teva’s ability to counter this erosion is limited, as competition has increased, due to faster FDA approvals of competitor products, Fitch said.

“Over the medium to long term, Fitch believes that Teva may benefit from its focus on innovative pharmaceuticals and difficult to manufacture, chemically complex drugs, which generally command relatively more defensible prices and margins.”

Last week Teva cut its sales and profit forecasts for 2017, amid  greater competition in its generics business and for its flagship branded drug for multiple sclerosis, Copaxone.

“The rating cut comes as no surprise, the writing was on the wall,” said Yaniv Pagot, an economist and head of strategy for the Ayalon Group, an Israeli institutional investor. “After the dramatic slide of the share price there was an indication that the market is doubting Teva’s ability to repay its debt. Investors are concerned there will have to be a share sale, which will dilute their holdings, or in the worst case scenario a so-called haircut on debt repayments Teva needs to make to holders.”