Dive Brief:
- As Teva's financial problems have continued to mount, one Wall Street investment research firm slashed its stock price target Wednesday by more than one-third, flagging concerns with the Israeli giant's financial health.
- Ronny Gal, an analyst for Bernstein, cut his target on Teva from $17 to $11 after forecasting plateauing cash flow levels for the future. Shares closed Wednesday down 2% at roughly $8, reflecting a stock decline of nearly 50% since the beginning of 2019 and an 88% fall from its 2015 peak.
- Investor concerns in Teva have recently peaked with an emerging financial threat from opioid and price fixing lawsuits, added on top of a tumbling market capitalization, significant debt levels and flatlining cash flow. "The litigation risk is material, but it is really the much lower cash flow generation for the next few years that concerns us," Gal wrote.
Dive Insight:
Teva is facing a multitude of problems that have caused its stock to collapse since 2015, going from trading at about $70 to $8 per share.
Taking over in 2017, CEO Kåre Schultz and chairman Sol Barer rolled out a restructuring plan in December 2017 in response to these financial concerns. Through a variety of cost-cutting measures including layoffs and plant closures, the company aims to reduce its total cost base by $3 billion by the end of 2019.
Even with that plan, the company still faces nearly $24 billion in long-term debt, which is poised to test its financial wherewithal in the next few years. The company did not respond to requests for comments on that plan's progress.
Teva's decision in 2015 to buy Allergan's generic business for $40.5 billion ballooned the Israeli company's debt levels from roughly $10 billion to $35 billion at the time.
Now, Gal honed in on cash flow as a critical problem. After Teva disclosed a lower-than-expected cash flow for the first three months of 2019, Gal crunched the numbers for future expectations. He forecasted 2019 cash flows at $1.9 billion, more than $1 billion less than cash generation from last year.
And the analyst then expects that figure to flatline around $2.3 billion per year through 2023. A key reason for the plateau comes from Teva's newer drugs being unable to cover for declining sales from brands now facing competition.
The blockbuster multiple sclerosis drug Copaxone (glatiramer acetate injection), for instance, has seen sales crater from generic competition. Net sales for the drug have fallen from $4.2 billion in 2016 to $3.8 billion in 2017 to $2.4 billion last year.
Legal troubles compound the cash flow worries. Teva is facing a variety of lawsuits that could create more financial liabilities. About 1,500 complaints have been filed against the company for its role in marketing and selling opioids, and most of those have been lumped into a critical multi-district litigation set for a jury trial to begin in October.
Key creditors have taken note of the legal liability, particularly after the pharma paid $85 million to settle a lawsuit from the state of Oklahoma related to opioids.
"The potential exposure to cash outflows is probably the primary concern, because they have some litigation exposures both to opioids and price fixing," Morris Borenstein, a senior analyst at Moody's, said in an interview. "Those are wildcards that are very uncertain at this point."
Earlier this month, Fitch Ratings downgraded Teva to BB- from BB. A BB rating indicates low expectations of default but that negative events are more likely to hurt their ability to pay out their commitments.
Fitch also maintained a negative rating outlook on the company, putting them at potential risk of further demotion. The subsequent rating of B translates to a material risk of default with a limited margin of safety, according to Fitch.
One credit-monitoring metric that takes into account all these financial and stock metrics has also reflected a stark deterioration in Teva's financial health in 2019.
CreditRiskMonitor analyzes financial risks facing public companies through its primary metric called a FRISK score, which measures the likelihood of bankruptcy on a 1-10 scale.
With 10 being the strongest financial position, Teva's rating has fallen from a 7 at the beginning of 2019 to a 3 this month. The current rating translates to roughly a 3% probability of bankruptcy happening in the next 12 months.
"This company is being battered, and its ability to save itself is contracting," said Jerry Flum, CEO of the credit monitoring firm, flagging a rising leverage ratio between its liabilities and collapsing market capitalization.
"There is a right to be damn concerned," Flum added.