“It’s never too late to retire early”
Teva Pharmaceutical Industries is one of the largest generic drug producers in the world. Over the past five years, Teva has faced a mountain of hurdles. Its previous management team settled bribery claims. The company was hit with several lawsuits regarding its role in the opioid crisis and generic-drug price-fixing, and it’s been challenged by a very high debt load. However, there’s light at the end of the tunnel, and turnaround-specialist CEO Kare Schultz is leading the charge.
Since taking over in late 2017, Schultz has slashed annual expenditures by about $3 billion and managed to reduce net debt from north of $34 billion to less than $24 billion. The expectation is that Teva’s net debt could dip below $15 billion by the end of 2023. Financially, it’s in much better shape than it was just a few years prior.
Teva is one of the cheapest pharma stocks out there, trading at a meager 0.7 times revenue and 4.3 times earnings. Teva is facing severe headwinds, as the U.S. Food and Drug Administration (FDA) approved a record number of generics in an attempt to drive down drug prices. Between 2014 and 2019, generic drug prices in the U.S. lost nearly 40% of their value.
In 2020, Teva’s sales declined by just 1% compared to 2019, to $16.7 billion. Against all odds, the drug-maker is still very profitable, generating about $2 billion in free cash flow and $2.57 in earnings per share (EPS) over the past year. However, it estimates that its revenue and earnings will largely remain unchanged in 2021 from 2020.
Over the past 12 months, the company reduced its debt obligations by $3.2 billion. By 2023, it expects to reduce its financial leverage, as defined by net debt divided by operating income less non-cash expenses (EBITDA), to less than three from 4.8 in 2020. A ratio of four or five usually indicates a company may default on its debt. It accumulated these liabilities after acquiring Allergan’s generic arm for $40 billion in 2016.
If Teva can get a structured settlement for its opioid woes, it would trade at just eight times earnings, assuming half of its cash flows go to legal obligations for the next decade. By then, the launch of new branded medications would have more than made up for its shortfalls. For those looking for an absolute bargain healthcare stock, Teva could still be a safe value bet.
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