NEW YORK (TheStreet) -- Bond ratings firm Moody's isn't sold on the idea that the four largest generic drug manufacturers Teva Pharmaceuticals (TEVA) - Get Report, Mylan (MYL) - Get Report, Actavis (ACT) - Get Report and Sandoz can continue to consolidate after years of merger activity in the sector. Moody's also would likely rate a takeover of any of the generics "big four" by serial acquirer Valeant Pharmaceuticals (VRX) as junk.

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"Mergers between any of the top four generic players would face significant challenges. The high level of fragmentation in the generic pharmaceutical industry and consolidation among its large customers argue for M&A among generic pharmaceutical players. But consolidation between the top four players --Teva Pharmaceutical, Mylan, Actavis plc, and Sandoz (owned by Novartis AG) -- is unlikely given antitrust challenges that would likely require significant divestitures," Moody's lead analyst Jessica Gladstone wrote in a Wednesday note.

The firm does see the prospect that Valeant Pharmaceuticals would go after one of the big four in the generics space, however, it said such a deal would likely be rated below investment grade.

"A hypothetical merger between Valeant and one of the top four generic players could be rated below investment grade. Given Valeant Pharmaceuticals' M&A appetite, we cannot completely rule out that it would buy a generic player," Moody's said.

A merger of a generic drug maker would be outside of Valeant's normal interest in specialty drug makers, Moody's noted. However, the company has recently indicated to the media and in investor presentations that it is bracing for a next big acquisition after buying Medicis and Bausch + Lomb in recent years.

Combining Valeant's existing businesses with a large generic drug manufacturer would give the company size, scale and diversification, however, it would also indicate continued aggressive financial policies that would preclude an investment grade rating, Moody's said.

After making a handful of acquisitions, Valeant Pharmaceuticals promised to pay down its debt and deleverage. Instead, the company has continued to make acquisitions, dramatically increasing its debt stock.

Valeant's long-term debt stood at over $17 billion as of year-end 2013, up nearly three-fold from 2011 year-end levels and nearly five-fold from 2010 levels.

Still, Valeant's acquisitive ways have paid off for shareholders, including ValueAct Capital, which currently holds seats on the company's board of directors.

Valeant shares have risen over 1000% over the past five years, excluding dividends, as the company has divested poorly performing assets and used cheap financing markets to grow by acquisition.

Valeant was trading less than 1% lower in Wednesday trading at $130.66.

-- Written by Antoine Gara in New York

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