Teva Pharmaceutical Industries Ltd.'s (NYSE: TEVA; TASE: TEVA) new CEO Kåre Schultz has a mountain to climb. He took office on Wednesday and by Thursday afternoon, following publication of disastrous third quarter results, it had become clear that the mountain peaks were much higher than previously thought, while the abyss beckoned.
Teva's share price hit almost $70 in August 2015, giving a market cap of $70 billion, when the $40 billion acquisition of Allergan's generics division Actavis was announced. It was worth less than half at $32 in August when the second quarter results were announced and guidance was cut. The share price halved again. The third quarter results provided more of the same and the share price lost another 20% to just $11.23, giving a market cap of $11.4 billion.
Schultz did not say much at the post-results conference call. “I recognize the significant debt burden that Teva is currently under, and it will be an absolute priority for me that we stabilize the company’s operating profit and cash flow in order to improve our financial profile.” He declined questions and it must be hoped that he is a man of action rather than words.
There are some positive signs for Schultz in terms of debt reduction as the Israeli company has renegotiated finance repayment terms and divests itself of non-core assets worth about 10% of the debt. Teva has announced over the past few days that it has completed the $1.1 billion sale of its Paragard Intrauterine Device (IUD) to CooperSurgical and the $675 million sale of emergency contraception brands to Foundation Consumer Healthcare. Teva is also selling its remaining women's health assets to CVC Partners for another $525 million and it is reportedly in advanced talks to sell oncology assets to Cerberus for $1 billion.
There has also been streamlining with 7,000 jobs cut worldwide and 15 plants shut down. Ambitious plans to build a new headquarter in Ra'anana were abandoned and the land was sold. More cuts would seem to be inevitable if the debt is to be serviced.
On the other hand, Teva's falling revenue and profitability will only make it more difficult to repay the debt. The Copaxone revenue stream of about $1 billion per quarter is about to dry up now that Mylan has put a generic alternative of the multiple sclerosis treatment on the market earlier than expected. The new drug touted as a blockbuster replacement - Fremanezumab for treating migraine - won't be on the market for at least a year.
Branded drugs aside, it is the generics market that has really done for Teva, which is the world's largest manufacturer of generics copycat drugs. The huge acquisition of Actavis, which many felt was over-priced anyway, could not have come at a worse time, just as greater political, legal and regulatory scrutiny in the US was bringing down the price of generic drugs.
There is also the question of bad management as argued by Israeli activist shareholder Benny Landa. He charges Teva's board of directors with lacking the required pharmaceutical specialist knowledge. The $2.3 billion acquisition of Mexican generics company Rimsa Pharmaceuticals in 2015 seems to back up this point. Teva did not get what it paid for. But while the company took Rimsa's owners to court for alleged fraud, the US court ruled that it was just poorly conducted due diligence.
Another result of the Actavis acquisition is that Allergan was left holding 10% of Teva as part of the purchase deal. The shares were locked down for 12 months following completion of the acquisition in August 2016. In its third quarter financial report earlier this week, Allergan said that it was set to begin selling this stake. This does not bode well for Teva's share price with so many shares being offloaded.
Schultz, the Danish former Lundbeck CEO must now set about earning his $20 million signing-on fee and annual salary of $2 million plus bonuses and stock options. This is by far the 56 year-old's biggest challenge in a distinguished pharmaceutical business career. He does not have to reconquer the summit. Stopping the fall and clawing his way back up just a bit of the mountainside would probably suffice.
Published by Globes [online], Israel business news - www.globes-online.com - on November 3, 2017
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