Teva Pharma (TEVA) Ratings Affirmed by S&P; Business Risk Profile Revised to 'Strong'

• Israel-based generic drug company Teva Pharmaceutical Industries Ltd.'s branded specialty pharmaceutical business faces challenges in light of looming patent expirations on several high-margin products.
• We affirmed our ratings on the company, including the 'A-' corporate credit rating. The outlook remains stable.
• At the same time, we are revising our business risk profile assessment on Teva to "satisfactory" from "strong". In our assessment, the company's financial risk profile remains "modest".
• We also removed our negative one-notch financial policy modifier. While we believe the company will become more active on the acquisition front, we project that strong free cash flow generation would enable the company to quickly delever.
• We applied a positive one-notch comparable rating analysis modifier to reflect Teva's blend of a leading generic drug franchise with a solid higher-margin branded specialty pharmaceutical business.
• Our stable rating outlook is based on Teva's solid specialty and generic franchises and substantial operating cash flow.

Standard & Poor's Ratings Services affirmed all of its ratings on Teva Pharmaceutical Industries Ltd. (NYSE: TEVA), including its 'A-' corporate credit rating. The outlook remains stable.

"We revised our business risk profile assessment on Teva to 'satisfactory' from 'strong,' based on the increased challenges Teva's branded specialty business faces given the looming patent expiration and expected generic competition to the company's lead product, the multiple sclerosis treatment Copaxone," said Standard & Poor's credit analyst Arthur Wong. Specialty and generic drug maker Teva's well-established position as the largest company in the competitive generic drug industry and its solid relatively high-margin branded specialty pharmaceutical portfolio are key factors in our assessment of business risk. Sales are roughly split evenly between the two businesses, though the much higher-margin specialty business accounts for an estimated 65% of total company EBITDA (Standard & Poor's estimate, pro forma for partial loss of Copaxone sales due to generic competition in late 2015).

Our stable rating outlook on Teva Pharmaceutical Industries Ltd. reflects our view that both its specialty and generic franchises remain solid despite patent expirations on high-margin products in its specialty branded business, and its operating cash flow remains substantial. While we incorporate the possibility of increased debt-financed acquisition activity, we project leverage should remain under 2x longer term.

We could lower the rating if, in the face of lackluster operating performance, the company uses leverage to either purchase significant pharmaceutical assets or improve share valuations through share repurchases. We already incorporate an expectation that the company will use incremental leverage to fund acquisitions or shareholder returns. As a result, the downgrade scenario would involve a total spend in excess of $7.5 billion that could result in leverage remaining above 2x for a sustained period. We could also lower the rating should we elect to no longer utilize the favorable comparable rating modifier should there be significant erosion in its specialty or generic franchises.

We believe that prospects for an upgrade over the next year are limited, given the emerging threats to Copaxone's leading position in the market for MS treatments and the likelihood of increased acquisition activity in the near term.

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