S&P Global Ratings said its outlook for Teva Pharmaceutical Industries Ltd. and Endo International PLC is negative as the two companies face opioid litigation — and potentially costly settlements — in the U.S.
"In light of the recent developments relating to opioid litigation, we now believe there is a plausible risk of settlements or judgments against certain drug manufacturer companies, relating to opioids, materially exceeding a billion dollars," Ratings wrote in a Sept. 23 report. "In addition, we believe ongoing uncertainty around the exposure will likely limit access to capital markets for companies perceived to have elevated risk."
S&P Global Ratings cited recent developments in multiple opioid lawsuits, such as the judgment against Johnson & Johnson in Oklahoma, recent settlements, the bankruptcy of Purdue Pharma LP and Teva setting aside $646 million in legal reserves.
However, the rating agency affirmed Teva's BB long-term issuer credit rating and the BB senior unsecured issue-level rating as well as Endo's B issuer credit rating, B+ senior secured debt rating and CCC+ senior unsecured debt rating.
Ratings sees Teva's opioid settlements combined with its price-fixing litigation posing a risk of slowing down the company's current pace of reducing debt. The Israeli company is also dependent on its newer products Ajovi and Austedo for revenue growth, the rating agency noted.
Ratings expects free cash flow of about $1.8 billion in 2019 and $2 billion in 2020 and the average adjusted funds from operations to debt of about 12% to 13%. The agency expects Teva to use cash flow from operations to repay debt with no expectations of any significant acquisitions or cash distributions to shareholders over the next two years.
"We believe Teva has little room for underperformance in 2019, and we could lower the rating if free cash flow falls materially below $1.8 billion in 2019 and about $2 billion in 2020 and adjusted FFO to debt is below our 12% to 13% expectation," the rating agency wrote.
S&P Global Ratings revised its outlook for Dublin-based Endo to negative from stable. This reflects possible opioid settlements that exceed the company's capacity to pay and maintain its current ratings. The agency estimates Endo's capacity to pay at about $1.5 billion to $2 billion.
The company recently had an $11 million settlement with two counties in Ohio regarding the opioid litigation.
Endo is also involved in price-fixing litigation and future legal liabilities could impact the company's cash flow and hamper its ability to invest in new products that offset the declining revenues from the mature ones.
The rating agency also noted pricing pressure on Endo's generics business and potential competition to the company's cardiology treatment Vasostrict, which represents 15% of its sales.
Endo's shares were down by about 6.32% to $3.26 as of 4 p.m. ET.
Ratings expects annual revenue of about $2.85 billion in 2019 and 2020, and adjusted EBITDA of about $1.25 billion in 2019 and $1.28 billion in 2020. The agency expects free cash flow of $160 million to $200 million in 2019, potentially reaching $300 million in 2020.
"We could consider lowering the rating multiple notches if we expect negligible cash flow, which would likely be caused by unexpected operating weakness or ongoing payments related to a legal settlement," the rating agency wrote.
On Sept. 11, S&P Global Ratings downgraded its long-term issuer rating for another opioid manufacturer, Mallinckrodt PLC, to CCC from B+.
"We do not assume a similar degree of legal risk for drug distributors that are listed defendants, because there is no similar pattern of settlements and judgments," Ratings wrote Sept. 23. "Moreover, those companies generally have capacity to satisfy a settlement materially exceeding a billion dollars, within the current rating."
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.
