Investing.com -- On Tuesday, Fitch Ratings upgraded the Long-Term Issuer Default Ratings of Teva Pharmaceutical Industries (NYSE: TEVA ) Limited and its subsidiary, Teva Pharmaceuticals USA, Inc., to ’BB+’ from ’BB’. The rating outlook remains stable. The agency also upgraded Teva’s senior unsecured credit facilities and debt ratings to ’BB+’ with a Recovery Rating of ’RR4’, from ’BB’/’RR4’.

The upgrade reflects Teva’s progress in reducing debt and improving financial flexibility. Fitch anticipates continued revenue growth from AUSTEDO and AJOVY, along with Teva’s biosimilar pipeline. The company’s focus on optimizing external spend, prioritizing resource allocation, and modernizing its organization is expected to result in higher operating margins.

Teva’s improved cash conversion profile should enable it to continue reducing debt and free up capital to support its transformation. Although it has made advancements, Teva’s credit profile is still influenced by challenges, including litigation, geopolitical risks, and changes in trade policy, which may slow further positive rating momentum.

Teva remains a global leader in generics, with a diversified portfolio spanning specialty, over-the-counter, and active pharmaceutical ingredient products. Its scale and global manufacturing footprint, including significant U.S. manufacturing capabilities, provide resilience and operational flexibility.

Teva’s innovative segment continues to outperform, with 1Q25 sales of Austedo up 40% year-over-year, Ajovy up 26%, and Uzedy prescriptions increasing 177%. Fitch expects these products to be the primary drivers of near-term revenue growth.

Fitch views Teva’s pipeline as a key growth lever. The company launched two biosimilars in 1Q25 and expects five additional launches in the U.S. by 2027. Complex generics and late-stage branded assets, including Olanzapine and Duvakitug, further support long-term revenue visibility.

In 1Q25, Teva repaid $1.4 billion in debt and targets net leverage of 2.0x by year-end 2027. Fitch calculates current gross and net leverage at around 4.3x and expects leverage to decline to around 4.0x by year-end 2025. Liquidity remains solid, with access to ample cash balances and an unused $1.8 billion revolving credit facility. The potential divestiture of the Teva Active Pharmaceutical Ingredients (TAPI) division could accelerate deleveraging, with estimated proceeds exceeding $1.0 billion net of taxes and transaction costs.

Teva is on track to improve its operating margin, supported by transformation programs that Fitch expects to yield as much as $700 million in net savings over 2025 to 2027. The adjusted EBITDA margin improved in 1Q25, reflecting a favorable product mix.

The U.S. generics market continues to face pricing pressure, due to customer consolidation and commoditization. Teva’s strategy to reduce exposure to low-return products and focus on complex generics is mitigating, but not eliminating, this risk. Fitch assumes a compound annual growth rate (CAGR) of revenue of around 1% over the medium term.

Fitch expects elevated litigation and restructuring expenses to persist in the medium term, constraining adjusted EBITDA margins and slowing deleveraging relative to Teva’s internal metrics. While major legal risks have been resolved, residual liabilities remain a drag on earnings quality.

Teva faces a revenue cliff from generic Revlimid in 2026 and potential headwinds from Medicare Part D negotiations under the Inflation Reduction Act, particularly impacting Austedo in 2027. These risks have been factored into Fitch’s revenue forecast for conservatism; however, pipeline progress could more than offset these challenges.

While management indicated that existing tariffs have had an immaterial impact, escalating trade tensions or new tariffs, particularly targeting pharmaceutical imports, could pose a risk to generic manufacturers. Teva’s limited sourcing from China and India and its U.S.-based manufacturing footprint provide some insulation, but the sector remains vulnerable to policy shifts.

Fitch assumes a successful sale of TAPI in fiscal 2025, with proceeds used to help reduce debt in fiscal 2026. However, delays or unfavorable terms could limit the expected deleveraging benefit. The absence of reaffirmed guidance on the transaction timeline introduces some uncertainty.

Within Fitch’s rated universe, Viatris Inc (NASDAQ: VTRS ). (BBB/Outlook Negative) is a key peer in terms of size and scope of operations in generics. Teva is rated lower, due to its leverage and litigation exposure. However, Teva has demonstrated higher growth over the last three fiscal years, made significant progress in its innovative and complex generics pipeline, and substantially reduced leverage to a level approaching Viatris’ leverage. This improved revenue outlook is a key factor in Fitch’s recent positive rating actions.

Viatris and Sandoz (SIX: SDZ ) have lower leverage and greater profitability. Compared to other healthcare and pharma peers, such as Avantor (NYSE: AVTR ), Inc. (BB+/Stable) and Jazz Pharmaceuticals (NASDAQ: JAZZ ) Public Limited Company (BB/Stable), Teva maintains somewhat higher EBITDA leverage and a larger loss contingency profile.

Teva Pharmaceutical Industries Limited’s and Teva Pharmaceuticals USA, Inc.’s ratings are rated on a consolidated basis under Fitch’s Parent and Subsidiary Linkage Rating Criteria using the weak parent/strong subsidiary approach, and open access and control factors based on the entities operating as a single enterprise with strong legal and operational ties.

Teva had a modest amount of convertible senior debentures outstanding as of March 31, 2025, after the debenture holders required Teva to redeem them in February 2021. The remaining USD23 million is treated as senior unsecured debt in Teva’s capital structure. The debentures receive no equity credit, because the principal amount is paid in cash and only the residual conversion value above the principal amount is paid in shares.

Fitch assumes revenue will increase at approximately 2.0% over the medium term, driven by growth in Austedo, Ajovy, and Uzedy, with a modest contribution assumed from new product launches. Generic medicine revenue is expected to rise at a CAGR of approximately 1% over the medium term, as generic erosion is counteracted by new generic product launches.

Adjusted EBITDA margins are expected to improve gradually over the medium term in the range of 26.0% to 26.7%. Margin expansion may be greater depending on the timing of new product launches and potential tariffs; neither are factored into Fitch’s forecast. Cash costs are expected to be in the range of USD400 million-700 million for litigation settlements and restructuring charges over the medium term.

A modest investment in working capital over the medium term is expected, which may fluctuate depending on the level of new product launches. Debt reduction remains a priority, but declining to levels in line with free cash flow (FCF) generation. Fitch treats the balance of sold receivables as a component of adjusted debt. The agency expects an effective interest rate of approximately 5.0%-5.5% over the medium term. Gross EBITDA leverage is expected to decline to around 4.0x in 2025; (cash flow from operations - capex) to total debt is expected to increase to a range of 10%-20% over the medium term.

Net proceeds from the sale of TAPI are expected to be realized in fiscal 2025, of which $1.2 billion is used to pay debt in fiscal 2026.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.