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Moody's expects Teva's opioid settlement to impact earnings, deleveraging

Moody's said that Teva Pharmaceutical Industries Ltd.'s proposed global settlement for the opioid litigation is credit negative but does not impact the company's Ba2 Corporate Family Rating and negative outlook.

Teva has proposed to donate about $23 billion worth of addiction drugs, as well as $250 million over 10 years to settle a number of cases that allege the company helped fuel the opioid epidemic.

Moody's said the settlement will impact the company's earnings as well as deleveraging efforts.

The $23 billion is the wholesale acquisition cost of the drugs, but does not represent the cost of production. Moody's said in an Oct. 22 comment that the production costs for the donated drugs will flow through the company's earnings, with every $100 million of costs increasing Teva's debt/EBITDA by 0.15x, which was 6.6x as of June 30.

Moody's added that the higher operating costs and outgoing cash flow will delay Teva's deleveraging. The rating agency expects that the company's leverage will steadily decline and drop below 5x by the end of 2021.

According to Moody's, the Israeli pharmaceutical company will need at least partial refinancing to meet its debt obligations that amount to $4.1 billion in 2021. The finalization of the settlement will facilitate the refinancing of debt maturities as it will reduce pressure on Teva's share price and bond spreads.

The agency added that the uncertainty regarding the parties' acceptance of the settlement offer still poses a risk, and Teva's liability for the opioid lawsuits could be even more credit negative. However, the agency said the finalization of a settlement does reduce an overhang associated with unknown costs from the opioid matter.