A year after sinking to a 20-year low, Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) is once again the most valuable company on the Tel Aviv Stock Exchange (TASE). In the early days of the Covid-19 crisis in March, Teva once again slumped to close to last year's low but it has since rebounded strongly due to better than expected first quarter results and other trends related to the Covid-19 pandemic itself.
Summer 2019 was a tough time for Teva's investors, as what was once proudly called 'the share of the nation' tumbled in price and lost its title as the most valuable company on the TASE. Israel's two largest banks - Bank Hapoalim (TASE: POLI) and Bank Leumi (TASE: LUMI) - as well as International Flavors and Fragrances Inc. (NYSE: IFF; TASE: IFF) (which has been traded on the TASE since acquiring Frutarom) and NICE Systems Ltd. (Nasdaq: NICE; TASE: NICE) all overtook Teva in terms of market cap. For a brief period so did Azrieli Group Ltd. (TASE: AZRG). In August 2019, Teva's share price plunged to just above $6, wiping 90% of its price at its peak in 2015. Weighing on Teva with its very heavy debt burden, were concerns about major lawsuits in the US against Teva for opioid addiction and price fixing of generic drugs.
But today, even though none of these problems has disappeared, Teva's share price has more than doubled to $12.64 and its market cap is $13.9 billion, and it is once again the most valuable company on the TASE.
Successful Q1 as customers stockpile
The first quarter of 2020 was better than expected for Teva, which benefitted from the Covid-19 pandemic. Revenue rose because customers were stockpiling products (a trend likely to moderate in the second quarter). There was also a fall in operational expenses with no flights and executive travel. Overall Teva's share outperformed the NYSE's pharmaceutical index.
In the first quarter of 2020, revenue was $4.4 billion, up 5% from the corresponding quarter of 2019. GAAP net profit was $69 million ($0.06 per share) in the first quarter of 2020, compared with GAAP net loss of $105 million in the first quarter of 2019. Non-GAAP net profit in the first quarter of 2020 was $835 million ($0.76 per share) (above the analysts' consensus of $0.59 per share), compared with $654 million ($0.60 per share) in the first quarter of 2019.
In part Teva has been able to reclaim the title of the most valuable company on the TASE because its rivals for the crown have fared so badly. Israel's bank shares are down 28%-29% in 2020, Azrieli has lost 36% and IFF a relatively modest 3%. Only tech company NICE Systems with products that enhance remote working has prospered during the crisis with its market cap rising to an all time record of more than $12.1 billion.
Teva not involved in race for vaccination but gaining from it
Teva is not one of the players in the race to develop the first vaccination for Covid-19 but it produces pharmaceuticals that can be part of the supportive treatment for patients. In recent years, the company has specialized in developing neurological and respiratory treatments but not in the field of vaccinations and infectious diseases.
The most widely used treatments to alleviate coronavirus symptoms in hospitals today are Paracetamol and Ibuprofen for easing pain and lowering fever, as well as antibiotics for preventing secondary infections, drugs for enhancing bronchial health and breathings by letting in more air, drug thinners in cases with blood clots and treatments for kidney disease if the virus develops in that direction. Teva is a major generic drug player in most of these areas.
Teva is also one of the manufacturers Dexamethasone, a steroid that have proven effective in treating patients in advanced stages of Covid-19 one the main problem is the over-reaction of the immune system.
At the outbreak of the pandemic, Teva donated six million doses of Hydroxychloroquine to the US, which some reports had suggested might help treat Covid-19. This donation could help Teva in terms of its image regarding the legal proceedings against it, although ultimately a scientific consensus was formed that the drug has a risk profile and there is not enough proof that it contributes to treating the virus, which would justify larger trials.
Schultz's plans: Strealining is not enough, a return to growth is needed
Since the end of 2017, Teva has been led by CEO and president Kare Scultz, who came to 'sort out' the company and ensure its future when there was a genuine concern that it would be unable to service its debts. Most of the debt was taken in 2015 when Teva had acquired Actavis, the generic division of Allergan for $40 billion - Teva's largest-ever acquisition. Most of the payment for the acquisition was in cash because Teva had been eager not to dilute its shareholders equity but even though the debt had been raised on very attractive terms, it was still very high. Many had questioned the price that Teva had paid for Actavis as being too high even before the deal was completed but it has since become clear that the Israeli pharmaceutical company did indeed overpay, especially when taking into account the contribution of the purchased company to Teva's financial results.
At the end of 2017, Teva's debt was $34.7 billion, when Schultz unveiled a massive streamlining plan to cut $3 billion in annual expenditure. As part of the plan, Teva shed 13,000 employees worldwide and the number of employees in Israel has shrunk by 36.7% within two years to 3,961 at the end of 2019. This plan was successfully completed at the end of 2019 and Teva is now instituting additional efficiency measures by optimizing manufacturing.
In the long term, streamlining won't be sufficient for Teva and the company is also striving to restore growth. In recent years, the Israeli pharmaceuticals company has seen the patent expire of multiple sclerosis treatment Copaxone, which has been its cash cow over the past two decades, with worldwide sales of $4 billion annually at its peak.
Teva is hoping to replace some of these eroded blockbuster revenues with two new branded drugs - Ajovy for the treatment of migraines and Austedo for the treatment of chorea associated with Huntington’s disease and tardive dyskinesia. In the first quarter of 2020 Austedo sales grew 64% to $122 million and Ajovy sales grew 44% to $29 million (still far from expectations) while sales of Copaxone fell 5% to $198 million and sales of the QVAR steroid inhaler fell 29% to $45 million.
Teva also reiterated its guidance for 2020, at a time when other companies froze their guidance due to uncertainty. The second quarter, which ends next week is expected to be slightly weaker. Meanwhile Teva's debt has fallen to $26.1 billion and the company sees no problems in debt repayments over the next two years, although some debt recycling will be required to meet repayments in 2023.
Other recent good news is that Kare Schultz has extended his contract by 12 months to remain as Teva CEO until at least 2023 - contributing to greater certainty in an era of uncertainty.
Published by Globes, Israel business news - en.globes.co.il - on June 25, 2020
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