Several years ago, Teva Pharmaceuticals Industries (TASE: TEVA; NYSE: TEVA) set three long-term financial goals for itself: an operating profit margin of 28%; a cash:profit ratio of over 80%; and a debt:EBITDA ratio of less than three.
According to its plans, Teva is meant to reach these goals by the end of 2023, and at the annual JP Morgan Healthcare Conference, Teva CEO Kare Schultz was asked where Teva aspired to be after that.
Schultz promised that Teva would set new financial goals, and, from a strategic point of view, would continue to focus on improving profitability, and also on revenue growth (which has been weak in recent years). “We are not a type of business where we are going for phenomenal double-digit growth. But we want to go for single-digit growth and we want to do it organically, globally…. So, you will be looking at modest growth on revenue, continued improvement on margin, strong cash generation,” Schultz said.
Once the current goals are achieved, Schultz said, “Then we can start thinking about allocating some capital, some cash towards the shareholders, and we can also start thinking about if they’re really good business opportunities to do, maybe smaller bolt-on acquisitions and so on. But the key driver, in my personal view, is to continue to take debt down.”
Teva stopped paying dividends at the end of 2017, when Schultz’s huge streamlining plan was launched. Teva’s current market cap in Tel Aviv and New York is $10 billion, down 34% since Schultz became CEO of the company in November 2017, and 86% below its 2015 peak.
Apart from the possibility of going back to distributing dividends and making acquisitions after the current financial goals are achieved, what else did Schultz have to say?
New York opioids trial: “Serious grounds for appeal”
Schultz opened his presentation at the conference by talking about the legal proceedings over the opioids affair in the US, which have weighed on Teva for several years. Teva is one of a long list of respondents to lawsuits in the US concerning the marketing of addictive opioid-based painkillers. The company recently suffered a legal setback in a proceeding in New York, against which it is appealing.
Schultz described the litigation as “a burning topic that I would say everybody is very interested in,” and mentioned that Teva was a party to the proceedings together with other drug makers. He also mentioned settlements that Teva had reached in some US states, and the outline general settlement that was agreed more than two years ago but has been finally signed. “We are still in discussions… trying to reach a suitable compromise on a nationwide settlement that could really be in the best interest of all stakeholders,” Schultz said.
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He also hinted that there were those who would try to object to the fact that a small part of the settlement was in cash ($250 million), and that it mostly consisted of Teva products, to a value of $23 billion at wholesale prices, because the cash component is what determines the fees of the consultants involved. Nevertheless, Schultz added that he did not believe that any of the parties would derive benefit from prolonged legal proceedings, and that it was in everyone’s interests to reach a settlement.
On the jury trial in New York, Schultz said, “A lot of interesting things that happened in that trial. I’ll just mention that we have filed for mistrial, and that’s basically because of the closing remarks, the state produced data on opioid volumes that they claim several of the Teva companies has been selling, and these volumes were completely misstated and they had not been willing to reveal what they were going to present…
“So there we are, you could say, moving for a mistrial that will be heard by the judge in February, assuming that works, there will be a new trial. Otherwise, there’ll be a verdict, we’ll appeal there. And then we hope that based on that appeal, the second part of the trial so to speak will be stayed until that appeal has been heard.”
Schultz added in response to a question that “we have many, many very serious grounds for appeal,” and sketched a timetable for the process that could stretch to two years or more, so that it seems that these proceedings will occupy Teva for a long time to come.
Optimization: 100 sites shut
On optimization of Teva’s business, Schultz mentioned that Teva had shut down or sold 100 sites so far, almost equally divided between production, R&D, and administrative sites. A further ten production sites are expected to be closed in the coming years.
“And those of you who remember the targets we set in early 2018, will see that we still have the same target for the end of 2023, a 28% operating margin, and we are well on the way to hit that. So that’s a simple way of explaining that we’re doing everything we can to improve the business by consolidating and optimizing the business,” Schultz said. At its lowest, operating profitability hit 24.5% in 2019, but in the third quarter of 2021 it was 26.8%, on a non-GAAP basis.
Debt: Reduced to $22 billion
On Teva’s debt, which was $34 billion in 2017 and had been reduced to $21.7 billion by the third quarter of 2021, Schultz said that Teva would continue to reduce it. Referring to its recent recycling of $5 billion debt, Schultz said, “We refinanced $5 billion, so basically we issued $5 billion in sustainability-linked bonds. What that means is that you have a bond and of course, you pay a normal interest rate on it, but then you also commit yourselves to certain targets. If you don’t meet these targets, you pay a penalty.
“Now we have committed ourselves to three targets; one for the emission of greenhouse gases and two for access to medicine in low and middle income countries. And this is the first time that a generic medicines company issues these type of bonds. But it’s also the first time in the pharmaceutical industry that we have both social and environmental targets… So we’re very proud about that.”
Schultz added that, as Teva’s debt fell, so did the interest rate it was required to pay, because its risk premium became lower. Repeating promises made in previous years, Schultz said that the company would continue to reduce its debt and was not planning to make an equity offering.
Teva is not expected to present growth in its 2021 financials. Revenue is forecast to reach $16-16.4 billion, meaning a fourth successive year of decline. Schultz mentioned Teva’s growth engines, among them its innovative drugs Austedo and Ajovy, and biosimilars. On Ajoby, a migraine treatment, Schultz said that the company continued to aspire to a market share of one third in Europe and the US in the coming years, and concerning biosimilars (generic drugs based on biological drugs) he said that Teva was well placed for growth.
Schultz also mentioned an additional original product, temporarily named TV-46000, for treating schizophrenia, which awaits marketing approval in the US, expected in the first half of this year. “There’s a huge need for better long-acting treatments of schizophrenia,” Schultz said.
Published by Globes, Israel business news – en.globes.co.il – on January 13, 2022.
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