Teva still mired deep in a battle for survival

Eli Tsipori

With a huge long-term debt, Teva's biggest problem is the lack of revenue growth engines to replace Copaxone.

It took Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) CEO Kåre Schultz sixteen months to finally hold his first press conference in Israel. Sixteen months in which he has done everything required of him: aggressive cuts in expenditure in order to save Teva from bankruptcy. The amount of expenditure, he found when he took office together with the company's debt, weak cash flow, and falling revenue meant that Teva could not have survived for long, even though most of the debt was long term. Sixteen months is a relatively short amount of time in order to conduct corporate recovery of a company on Teva's scale and along the way there has been substantial evidence of the drugmaker's dire state, as was also seen in Schultz's press conference yesterday.

When will Teva get back on track? Nobody knows, not even Kåre Schultz himself and it does not entirely depend on him. Teva has not yet stabilized itself and it is too early to talk about getting back on track. The recovery process for a company of Teva's huge size, and certainly in the pharmaceuticals market in which it operates, is not a matter of magic. There are no transformations by pulling a rabbit out of the hat, especially after so many mistakes over so many years, which exacted a heavy price from Teva and shook its financial stability. Recovery does not happen in a quarter and not even in two or three years. It is a Sisyphean task of many years and in any even depends on Teva's competitive environment. Schultz has told investors that there won't be an improvement before 2020 and that is more evidence that Teva is bogged down deep in a struggle for survival.

Schultz has mentioned the notion of 'bankruptcy' as justification for the aggressive streamlining process. He is right but it is by no means certain that the danger has passed. Teva has received some breathing space but its financial situation remains very challenging.

Schultz cannot make any commitments that Teva won't be sold

Teva's fundamental problem was and remains its large debt of nearly $30 billion, most of it long-term. On the other hand, the company has shrinking cash coffers of about $1.8 billion and very weak cash flow from ongoing operations and perhaps it will be even negative, on the bottom line, for the last quarter of 2019.

Teva has seen dramatic erosion in revenue from its golden egg and flagship branded drug Copaxone for the treatment of multiple sclerosis. There is weakness in the generic drug market in general and in the US in particular due to pressure on prices despite stabilization in recent months. Teva's biggest problem, in my opinion, is the absence of any growth engines and highly profitable products that will offset the erosion in Copaxone's sales, in the near future. That is the reason that since the beginning of Schultz's term of office, Teva has been waging a struggle for survival built around aggressive cost cutting, which has meant firing a quarter of the workforce, and selling assets. There was no alternative. Teva might be able to exert control over expenditure but controlling revenue does not seem to be on the horizon.

Schultz insists that Teva is not for sale. But that is not a statement that a CEO can guarantee for its does not depend entirely on him. Teva's market cap is currently around $20 billion, making it a comfortable target for a takeover, if one of the big pharma companies so desires. There may currently be no bidders that can quickly change. Schultz is also committed to his shareholders and cannot necessarily reject bids out of hand - if any were to be put on the table - at a generous premium on the market value.

Such an exit might be welcomed by shareholders after the low-point that the share reached in 2017, and it also might be a good exit for Schultz himself. Schultz received a dream contract at Teva and perhaps the largest ever offered to an executive of an Israeli company - a $20 million signing on fee, a generous salary and bonus package, options at the bargain basement price of $11 per share (today the shares are worth $18 each) and long-term remuneration depending on the share's performance. With $30 million already in his pocket after 16 months in the job, tens of millions of dollars are likely to be forthcoming in the future. Selling Teva would undoubtedly speed up one of the most fantastic terms of office any executive in Israel has ever seen. It would also bring down the curtain on a nightmare that was once the flagship of Israeli industry.

Published by Globes, Israel business news - - on February 20, 2019

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

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018