S&P Global Ratings revised the outlook for Johnson & Johnson's ratings to negative and affirmed the company's AAA issuer credit rating after the healthcare giant upped its legal reserve by $1.5 billion.

The outlook on the company's ratings was changed to negative after the pharmaceutical giant's leverage reached a 15-year high, according to the Oct. 28 rating action.

Ratings said the leverage for the third quarter increased as J&J added $1.5 billion to a legal reserve for opioid and talc litigation. Also contributing is the completion of the $6.5 billion cash deal for Momenta Pharmaceuticals Inc.

The aggressive defense by J&J of all talc litigation and the pharmaceutical company's excellent track record in those cases so far has limited its liability. But now, the company is setting aside $500 million primarily for talc settlements, indicating an increased likelihood that these cases may end up costing the company billions of dollars, the rating agency noted.

J&J's leverage is weak for the current rating, and the way the company is prioritizing M&A and share repurchases over deleveraging shows comfort with leverage going up to the mid-1x area, Ratings added. The rating agency said leverage in that range is more consistent with an AA+ rating instead of AAA.

The ratings action noted a similar trend among most U.S.-based pharmaceutical companies that have been increasing leverage tolerances over the past few years to execute debt-financed M&A.

The COVID-19 pandemic had a modest impact on the company's operating performance, and Ratings expects revenue growth in the third quarter will continue.

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.