This is part #15 about Teva, the huge Israeli generics producer.
Teva (Teva Pharmaceutical Industries Ltd. or the company) is the largest manufacturer of generic drugs in the world. Its portfolio of more than 3,000 products is among the largest of any pharmaceutical company. Nearly 200 million people in 60 countries benefit from one of its medicines every day (company).
Teva’s stock (TEVA US) traded above $60 five years ago and is currently at $11. For the last 18 months it trades in a range between $6.50 and $13.50 with quick moves on news.
This is another part of my series of Quickies on new companies.
Teva’s Product Focus includes generics, specialty therapeutics,
Generic medicines is huge at Teva. In the US one out of nine prescriptions is filled by a Teva product. In the UK and Canada it is one out of six. In addition, many prescription medications made by other companies include active pharmaceutical ingredients (API) produced by Teva (generics). I wrote about generics and general industry issues in December, in my part #1 Krka analysis.
Specialty therapeutic areas in which Teva is acitve include respisatory; migraine, headache and pain; neurodegenerative conditions and movement disorders; and oncology (specialty).
Research and development is important at Teva. The company spends almost 6% of revenue on R&D. (research)
A deal gone wrong …
Teva spent big money for Allergan’s generics business. Afterwards, pricing in the sector trended downward through a combination of pricing scrutiny and competition. (fiercepharma). Allergan plc received $33 bn in cash (from debt) and approximately 100m Teva shares (businesswire). Teva was saddled with a huge debt load: $ 33.6 bn as of Q1 2017. Over the last three years, Teva continued to pay down debt resulting in a net debt reduction by more than $10 bn to $23.8 bn while guiding for FCF of c. $2 bn for the full year (Q3 2020).
Kare Schultz came on board turning Teva around. Not an easy task after it amassed a huge debt pile after from paying too much at the wrong time. In North America, it’s most important segment, Teva is involved in litigation defense in the US and it’s involved in various other legal disputes, adding risk to its turnaround.
- revenue is not only contrated in the US key market, but also product-wise
Teva looks cheap if we look at its equity market capitalization of $ 12bn and FCF of $ 2bn. Comparing PpS to adj. EpS paints the same picture (Non-GAAP adjustments below). But Teva’s EV of almost $ 40bn is dramatically higher, taking into account the huge debt pile. Net debt will be reduced for a considerable time. If the turnaround is succesful and key risks are resolved Teva’s equity valuation could profit enormously, due to its high debt lever(age). So far, Schultz seems to be the right person for the turnaround …
Teva, by 2023 wants to achieve a target of net debt / Ebitda of 3x max by year end 2023 (Q3 2020 presentation). This could be possible with reported Q3 Ebitda of $ 1.2 bn (x4 x3 = 14.5), an operating margin expansion (+2%p) and further using FCF for reducing net debt. Any considerable payments due to legal issues acting as a set back.
I hope you enjoyed this post on Teva.
- I might sell my position to realize my losses, for tax reasons (and might re-enter afterwards)
- compared to Krka (look here) I do not prefer Teva
- due to its huge debt load + legal issues
- I sold my small position on January 11th, 2021 for € 9.03 per share
- shortly after it rose further, @ €9.70 at Jan 13th 😦
- compared to Krka (look here) I do not prefer Teva
(I still want to look into the generics industry in much more detail …)
Non-GAAP information: Net non-GAAP adjustments in the third quarter of 2020 were $4,986 million. Non-GAAP net income and non-GAAP EPS for the third quarter of 2020 were adjusted to exclude the following items:
- A goodwill impairment charge of $4,628 million related to our North America reporting unit in the third quarter of 2020;
- $565 million impairment of long-lived assets comprised mainly of impairments of identifiable intangible assets totaling $509 million ($360 million of IPR&D assets and $149 million of identifiable product rights);
- Amortization of purchased intangible assets of $251 million, of which $221 million is included in cost of sales and the remaining $31 million in S&M expenses;
- Contingent consideration income of $179 million, mainly related to a decrease in future royalties;
- Gain from equity investment of $134 million, reflecting the difference between the book value of our investment in American Well Corporation and its fair value as of the date it completed its initial public offering in September 2020;
- Finance income of $124 million, mainly related to the American Well equity holding;
- Purchase of in-process R&D of $21 million;
- Legal settlements and loss contingencies of $21 million;
- Equity compensation expenses of $30 million;
- Other items of $24 million; and
- Income tax of $117 million.
Differentiating between biologics and drugs is important – since prescriptions of complex “biologics” (rather than easily re-created “drugs”) have to be filled as such. Prescriptions for a medicine labeled “drug” can be filled with a “generic version” under automatic substitution laws, but these laws don’t apply to “biologics”.