S&P Downgrades Teva, Pushing Credit Rating Further Into Junk Territory

Israeli drug manufacturer’s many legal entanglements may cost it even more than previously forecast – and twice what the company itself has set aside, rating agency says

Yoram Gabison
Yoram Gabison
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Teva Pharmaceuticals CEO Kare Schultz, Tel Aviv, February 19, 2020.
Teva Pharmaceuticals CEO Kare Schultz, Tel Aviv, February 19, 2020.Credit: Moti Milrod
Yoram Gabison
Yoram Gabison

Credit rating agency Standard & Poors downgraded Teva Pharmaceutical Industries’ credit rating down one notch on Friday to BB-, which is three levels under investment grade and well into junk or speculative territory.

The rating agency cited litigation risks facing the embattled Israeli generic drug manufacturer, and the possibility that it will be paying considerable settlements to resolve several legal cases. These include lawsuits alleging Teva’s marketing policies fed into the U.S. opioid epidemic, which has killed 400,000 people between 1999 and 2017, and federal charges of conspiring with competitors to raise prices within the U.S. generic drug market; and another federal suit alleging Teva illicitly subsidized the company’s flagship proprietary multiple sclerosis drug Copaxone in order to increase payouts from Medicare.

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S&P gave the bond a stable outlook.

The rating agency stated that these affairs would damage Teva’s reputation and put it at a disadvantage compared to its competitors.

It is now estimating that Teva will be paying some $3 billion to settle its legal troubles, up from its previous estimate of $2.5 billion – and nearly double the $1.6 billion that Teva has set aside for legal commitments as of June.

This may make it even harder for the company to pay off other financial obligations, such as to its bondholders, the agency noted.

Teva’s share price did not respond to the credit rating cut, closing up 0.66% on Wall Street on Friday. Investors beat the rating agency to the punch, however, and the company’s share is already down 28% since the beginning of August. The share is dual-listed on Wall Street and in Tel Aviv.

But the company’s bonds responded with price drops, which for bonds translates into higher returns. The price of Teva’s bond series with a maturity date of October 2026 fell 1.5%, pushing yields up to 4.962%, which is 4.58 percentage points higher than government bonds with a similar maturity date.

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