Shares of Teva Pharmaceutical Industries (NYSE: TEVA), the world’s leading generic drug developer and a producer of brand-name medicines, crashed by 48% in 2017, according to data from S&P Global Market Intelligence. The catalysts behind Teva’s collapse primarily relate to weakness in its core businesses, as well as its ballooned debt load.
The wheels really came off the wagon for Teva in early August when it announced that its full-year profit expectations would fall well short of estimates and that it would be cutting its dividend by 75%, to $0.085 per share, a quarter. Prior to this announcement, Teva had been among the highest-yielding healthcare stocks. The impetus behind this latter move was the company’s roughly $35 billion debt pile, which was a result of overpaying to acquire Actavis, Allergan’s generic drug division. Cutting its dividend was designed to save about $1 billion annually.
In addition to announcing this substantial dividend cut, Teva’s management also noted that it would be divesting noncore assets in order to help reduce its debt. This was viewed by some investors as a sign of the seriousness of Teva’s debt situation and the long road that lies ahead.
Making matters even worse, generic drug pricing power cratered in 2017. The timing for generic drug prices to sink couldn’t have been worse for Teva as it coincided almost perfectly with closing its deal to acquire Actavis. It’ll likely be a few more quarters before generic drug prices stabilize.
Teva also lost its battle to keep generic versions of its leading brand-name drug, Copaxone, off pharmacy shelves. Generic versions of its blockbuster multiple sclerosis drug were recently introduced as a substantial discount to Copaxone’s list price, which is likely to eat into the company’s sales and profitability in 2018.
And, as icing on the cake, in December, it announced that it would completely do away with its dividend in order to conserve cash.
That’s Teva’s year in a nutshell.
As someone who has bought into the prospects of a Teva turnaround in the second half of the year, I can attest firsthand that this will be a long road ahead. Generic pricing has shown few signs of stabilizing, and 2018 will see notable contraction in top-selling Copaxone. Nonetheless, there were bright spots.
For example, the company hired Kare Schultz as its new CEO after a long search. Schultz brings a track record of success in turning around troubled companies, and he’s done well with Teva thus far by trimming the fat, so to speak. In December, the company announced a plan to pare 14,000 jobs by the end of 2019, along with the aforementioned cessation of its dividend. The steep job cuts, which account for more than a quarter of its workforce, as well as the sale of research and development facilities and office buildings, should reduce its costs by $3 billion a year by 2019. Added to what should be at least $2 billion in operating cash flow, Teva has a real shot at reducing its debt by $6 billion to $9 billion in total, in my opinion, over the next two years.
Teva is also playing a numbers game that it should win. The use of generics is only increasing, as is the age of the global population. As demand for generics rises, pricing power will likely return to the company’s court.
Teva is exceptionally cheap as well. It’s valued at less than seven times its forward profit projections because Wall Street is worried about the implementation of its debt-reduction plan. However, if Schultz sticks to the game plan and additional noncore assets are sold, Teva could prove to be quite the bargain for patient investors.
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Jan 11, 2018