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Teva Pharmaceutical Stock: Prepare For Takeoff (NYSE:TEVA)

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Teva Pharmaceutical Stock: Prepare For Takeoff (NYSE:TEVA)

Teva Pharmaceutical Stock: Prepare For Takeoff (NYSE:TEVA)

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Teva Pharmaceutical (NYSE:TEVA) is one of the largest generic companies in the world, producing generic, patent medicines and biosimilars to save and improve the lives of millions of people around the world.

Under the leadership of Kåre Schultz, the company earned $4,100 million in Q4 2021, up 5.5% from Q1 2020. The company’s gross margin reached 50% in Q4 2021, an increase of 3.8% compared to Q3 2021. It is also higher than many other large generic companies, which indicates a higher efficiency in business management than other companies from this sector. Over recent quarters, progress can be seen in improving the company’s cash flow, even despite senior bond payments and increased competition from generics. Teva’s cash flow was $716 million in Q4 2021, up 52% ​​from a year earlier and down 10% from Q3 2021. Sales of the company’s key drug, AUSTEDO, continue to grow due to its preferred safety and efficacy profile over competitors. Thus, sales of this drug amounted to $282 million in the 4th quarter of 2021, an increase of 40.3% compared to the 3rd quarter of 2021 and by 52.4% compared to the 4th quarter of 2020.

Also, under the leadership of Kåre Schultz, net debt is declining QoQ to $21.4 billion in Q4 2021, down 12% from a year earlier and down 3.2% from Q3 2021 of the year. In the second half of 2021, the company partially refinanced $5 billion of debt, which will allow the company to pursue a more flexible financial policy and significantly reduce the risk of default on other bonds. In the coming years, Teva’s management expects to receive approvals for several biosimilars and patent drugs, which will contribute to a significant increase in net income and the possible start of dividend payments by 2025, which will lead to increased optimism of large investment funds.

Continued debt reduction year on year, growth in gross margins, and increased sales of key drug products make Teva Pharmaceutical an excellent candidate for long-term investors.

Company’s Financial Position

Teva is successfully managing loan repayments, increasing the number of partnerships with pharmaceutical companies, increasing the number of approved medicines, which contributes to the growth of the company’s revenue, even though the difficult situation with the COVID-19 pandemic, which began in 2020 and is still affecting the pharmaceutical industry. Under Kåre Schultz’s leadership and effective business management, the company earned $4,100 million in Q4 2021, up 5.5% from Q1 2020.

Teva revenue by region

Source: Author’s elaboration, based on quarterly securities reports

Increased sales of patent medicines, namely AUSTEDO and AJOVY, contributed to Teva’s 2021 gross margin growth. The company’s gross margin reached 50% in Q4 2021, up 3.8% on Q3 2021 and up 4% year-on-year.

Teva gross margin trend

Source: Author’s elaboration, based on Seeking Alpha

Currently, Teva’s gross margin is higher than that of many other large generic pharmaceutical companies, which indicates a higher efficiency in the production of generic drugs and biosimilars than other companies in this sector.

Teva gross margin

Source: Author’s elaboration, based on Seeking Alpha

Over recent quarters, progress can be seen in improving the company’s cash flow, even despite senior bond payments and increased competition from generic drug companies. Teva’s cash flow was $716 million in Q4 2021, up 52% from a year earlier and down 10% from Q3 2021.

Teva free cash flow trend

Source: Author’s elaboration, based on quarterly securities reports

In my estimation, the upward trend in cash flow will continue in the coming years, gradually accelerating with sales of risperidone LAI for schizophrenia, the Humira biosimilar, and senior bond redemptions between 2023-2025 totaling more than $5 billion. Let’s take a closer look at the progress in drug commercialization that has been made since my last Teva article.

Teva Pharmaceutical Medicines

Teva has an extensive portfolio in neuroscience, gastroenterology, oncology with many generic and patented products that continue to improve the quality of life for millions of people around the world.

AUSTEDO

AUSTEDO is a drug approved for the treatment of tardive dyskinesia and also for the treatment of chorea associated with Huntington’s disease in adults. Currently, only two drugs for the treatment of tardive dyskinesia in adults, deutetrabenazine (AUSTEDO) and valbenazine (Ingrezza), are approved by the FDA, which sets the stage for continued growth in AUSTEDO’s share in this huge market, which exceeds 550 thousand people in the United States.

With aging, population growth, and the use of antipsychotics, the number of patients suffering from tardive dyskinesia is increasing, creating a huge need for effective and safe treatment of this disease. Thus, according to my model, the following trends in the prevalence of this disease in the United States are expected,

Total number of patients with Tardive Dyskinesia

Source: Author’s elaboration, based on UN DESA

In addition, the only two drugs approved by the FDA for the treatment of chorea associated with Huntington’s disease are tetrabenazine (Xenazine) and deutetrabenazine (AUSTEDO). Despite the similar efficacy between the two drugs, the safety profile of AUSTEDO is significantly better, namely

Teva - tetrabenazine (Xenazine) and deutetrabenazine (AUSTEDO).

Source: Created by author

Thus, in my estimation, this will contribute to the continued introduction of this drug into medical practice in the market, which is more than 30 thousand people with Huntington’s disease in the United States. The absence of a large number of competitors, the preferred safety profile, and the efficiency of AUSTEDO is reflected in the growth in sales. Sales were $282 million in Q4 2021, up 40.3% QoQ and 52.4% Q4 2020.

Teva - Austedo Sales

Source: Author’s elaboration, based on quarterly financial reports

Teva Pharmaceutical Debt Situation

Teva has 2 priorities that have been set to improve the financial position of the company. One of these challenges is to reduce the high debt burden, which has become the main reason for pumping out most of the free cash flow and, as a result, limits the company’s ability to invest in promising therapeutic areas. Thanks to conservative and efficient financial management in recent years, net debt has been reduced by 37.2% from its peak in 2016. In addition, there was a decrease in the Net Debt/EBITDA ratio to 4.9 in 2021 from 5.7 at the end of 2018, even despite the growth in the number of partnership agreements for the commercialization and development of biosimilars and next-generation drugs.

Teva debt analysis

Source: Author’s elaboration, based on Seeking Alpha

Also, under the leadership of Kåre Schultz, net debt continues to decline as it stood at $21.4 billion in Q4 2021, down 12% from a year earlier.

Teva net debt

Source: Author’s elaboration, based on Seeking Alpha

In the second half of 2021, the company partially refinanced the debt as I expected, and wrote about it in my first article on Seeking Alpha “Teva: Maximum Optimism”. And at the moment, the general situation with debt repayments by years is as follows, namely:

Teva debt maturity profile

Source: Author’s elaboration, based on quarterly financial reports

As you can see, the main problem is the following senior notes maturing in 2025-2027 totaling more than $6 billion, namely:

Teva long-term debt

Source: Author’s elaboration, based on 10-Q report

At the moment, the company does not have financial reserves that would allow them to be fully repaid. The main reason for this is the lower free cash flow of $2.1 billion per year relative to the annual repayment amount in the period 2025-2027. As a result, Teva’s management will have to turn to the major holders of these bonds to refinance a significant portion of these obligations. This assumption was confirmed by the CEO of the company at the quarterly report, namely

And you can also see here that we will need to do one last refinancing before we get to 2025, 2026 and 2027, probably of around $3 billion to $4 billion.

In my estimation, Teva will have no difficulty refinancing senior bonds totaling $3.5 billion maturing in 2026. Due to the fact that these bonds are low volatile and trade well below par value, namely $90.66 per bond.

Teva stock price

Source: FINRA Bond Center

It should be noted that senior bonds have a constant coupon and, as a result, the Fed rate hike in 2022 will have a minimal impact on the company’s financial position. As a result, this enables Teva’s management to accurately predict financial costs and manage debt, which also favors large investors and provides prerequisites for revising the company’s credit rating towards improvement. According to my assessment, the situation with debt repayments by years after the refinancing that I propose will look like this, namely

Teva debt maturity profile

Source: Created by author

As a result, this will lead to a decrease in the Net Debt/EBITDA ratio to 2.7 in 2026 from 5.7 at the end of 2018 and net debt by more than 1.5 times from current values.

Teva debt analysis

Source: Author’s elaboration, based on Seeking Alpha, created by author

If the company successfully manages the bond payments and numerous biosimilars and other patent drugs receive regulatory approvals, then I expect the company to start paying dividends by 2025-2026. This assumption was confirmed by the CEO of the company at the quarterly report, namely

And then, of course, you can all calculate that there will be a nice time when we don’t need to allocate all our excess liquidity and cash to bondholders, but we can, at some point in time in the coming years, start allocating cash to the shareholders, which will, of course, be a big pressure (00:19:41) to reach that point.

Let’s move directly to the second priority that was set to improve the company’s financial position, namely resolving the problem around the opioid crisis.

Progress in Overcoming the Opioid Crisis

As mentioned in my previous article “Teva: Maximum Optimism”, Teva Pharmaceutical is one of the main defendants in numerous lawsuits over the opioid crisis. Despite the current situation, the company’s management continues to pursue a competent financial policy, which will reduce the impact of negative consequences in the event of certain court decisions on Teva’s financial position. One of the components of this policy is that the company’s management decides to increase Teva’s reserves for legal settlements and cover unforeseen losses. The company has allocated about $2.7 billion for this purpose in 2021, which is 66.8% more than in 2020.

Teva provision for legal settlements and loss contingencies

Source: Author’s elaboration, based on 10-Q report

With the latest news that Teva’s CEO estimates the company will pay $2.7 billion to $3.6 billion over 15 years to settle lawsuits. Thus, the company’s current reserves cover 75-100% of possible judgment payments, which, in my estimation, will allow us to cope with the opioid crisis without much difficulty. In addition, I would like to note the progress made in settling some of these lawsuits since 2019. Insurance and legal companies that Teva cooperates with effectively do their job, which is reflected in the out-of-court settlement of claims and also in the conditions for them.

Conditions for settling opioid crisis claims

Source: Created by author

Thus, we can conclude that despite all the difficulties associated with the legal and financial issues of the settlement, Teva management is pursuing a financially competent policy that is aimed at reducing the negative effects of the opioid crisis. I estimate that most of the 3,500 lawsuits will be settled during 2022-2023, and according to the terms of the deals, a significant proportion of them will be payments as medicines for the treatment of opioid use disorders.

Conclusion

Under the leadership of Kåre Schultz, the company earned $4,100 million in Q4 2021, up 5.5% from Q1 2020. The company’s gross margin reached 50% in Q4 2021, an increase of 3.8% compared to Q3 2021. It is also higher than many other large generic companies, which indicates a higher efficiency in business management than other companies from this sector. Over recent quarters, progress can be seen in improving the company’s cash flow, even despite senior bond payments and increased competition from generics. Sales of the company’s key drug, AUSTEDO, continue to grow due to its preferred safety and efficacy profile over competitors. Thus, sales of this drug amounted to $282 million in the 4th quarter of 2021, an increase of 40.3% compared to the 3rd quarter of 2021.

Thanks to the efficient and conservative management of the company’s business, net debt has been declining quarter by quarter. In the second half of 2021, the company partially refinanced $5 billion of debt, which will allow the company to pursue a more flexible financial policy and significantly reduce the risk of default on other bonds. In the coming years, Teva’s management expects to receive approvals for several biosimilars and patent drugs, which will contribute to a significant increase in net income and the possible start of dividend payments by 2025, which will lead to increased optimism of large investment funds.

Taking into account the risks described in the article, in my opinion, the company’s shares will correct in the short term. I plan to buy shares of the company in the range of $6.85-$7.35 per share. And I set a price target for Teva at $25 per share.