Ties Can Bind Generics

Moody's Levesque says he isn't opposed to Barr, Watson or Mylan making certain acquisitions, even if the deals cost them a ratings downgrade by one or two notches. "I don't think it would impair their access to markets," he says. "It would raise their cost of borrowing."

However, current ratings show they lack the financial flexibility to make a major purchase. Each is rated Ba1, the highest noninvestment grade. Teva is two notches above investment grade at Baa2; but Teva "has more to lose" by making a deal that would imperil its investment-grade rating, Levesque adds.

S&P is a bit kinder in its rating assessments of Mylan, Watson and Barr. They have BBB-minus ratings, the last rung on the investment-grade ladder. Teva has a BBB rating. Each has a stable outlook except for Watson, whose outlook is negative. Higher ratings are reserved for drugmakers with more proprietary products.

S&P's Wong says Mylan, Watson and Barr would be better served by integrating recent acquisitions and, if necessary, making smaller deals. If they bid for the Merck unit, the extra debt would "sink [these] ratings," and their "shareholders wouldn't be happy" with a deal that dilutes equity, he says.