Leader: $23b opioid settlement will only cost Teva $1.5-3b

Kare Schultz Photo: Shlomi Yosef

Leader Capital Markets research department manager Sabina Levy says that the global US opioid settlement is a far better scenario than the market anticipated.

Leader Capital Markets research department manager Sabina Levy says that the emerging $23 billion Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) opioid global US lawsuit settlement will only cost the company $1.5 billion - $3 billion. 

She said, "In recent months, the market included a bankruptcy risk caused by the lawsuits against the company in its pricing of Teva's share. The $23 billion that Teva will ostensibly pay under the emerging agreement is the gross list price of the drug for the consumer. Drug companies, however, customarily give many discounts to the drug purchasers amounting to 80-90% of the list price, or even more."

"We wind up with a product whose cost to Teva will probably be $1.5-3 billion, paid over a decade. This is a far better scenario than the market expected. It seems that if Teva manages the rest of its business well, it will find it easy to pay this amount from its cash flow. Furthermore, now that we have seen that the settlement includes only a single drug, there is less concern that this agreement will result in cannibalization of Teva's existing generic activity."

"Globes": In that case, should we anticipate a return by Teva's share to the prices of last May, which are almost double the current price?

Levy: "Not exactly, and the main reason is that the settlement has not been completely finalized. It will take between several weeks and several months before we know that this is indeed the final settlement.

"Meanwhile, according to the report, understandings have been reached on the framework agreement with four US states: North Carolina, Pennsylvania, Tennessee, and Texas. There is still a long way to go, however, because the lawsuit includes thousands of claims. The market believes that the parties want to reach a settlement, both because litigation is expensive and in order to allow the drug companies to continue working."

Other companies selling the Buprenorphine Naloxone opioid addiction treatment, such as Mylan and Dr. Reddy's Laboratories, could oppose the agreement, which damages them. It is doubtful, however, whether much note will be taken of such opposition.

Teva already reached an $85 million agreement on the same matter with Oklahoma a few months ago. The current case, however, referred to as "the great opioid trial," encompasses thousands of claimants in order to settle the matter once and for all.

Is it possible that after this lawsuit is settled, additional lawsuits in the same matter will emerge, and the whole dispute will emerge again?

"I'm inclined to believe that the company's lawyers will not leave it exposed to that; they will construct an agreement that will also apply to future claims."

Teva also still faces prosecution for price fixing in the US.

"The market believes that the case will be settled with a better compromise for the company than in the opioids case."

Do you envisage Teva emerging from its mountain of debt?

"Yes. If these two claims are really settled with reasonable compromises, the company should be capable of repaying its debt."

A source close to Teva said today, "All in all, the settlement is good for the company's creditors. Teva CEO Kare Schultz inherited a company with a $39 billion debt, which he already reduced to $34 billion before the outbreak of the opioids crisis, meaning that he made good progress. The fear was that this debt could again mount to enormous proportions because of the lawsuit.

"Now that the debt is clear and defined, it will probably raise again to $38 billion, assuming that this settlement really disposes of the opioids problem, and assuming that the antitrust lawsuit does not culminate in too high a settlement. With a $2.8 billion cash flow, Teva can still pay its debts, provided that the generic drugs market remains stable. The creditors have reasons to be satisfied.

"There is still a long way to go for the shareholders,however. The cash flow is being choked, and it won't be easy to pay dividends. In the long term, however, this settlement gives the shareholders hope, if there are no more skeletons hiding in the company's closet of which we don't know."

Published by Globes, Israel business news - en.globes.co.il - on October 22, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Kare Schultz Photo: Shlomi Yosef
Kare Schultz Photo: Shlomi Yosef
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