Summary
- Opioid-related lawsuits is a significant threat for Teva, but it can be overcome.
- Teva's debt load is what investors should focus on.
- Teva is fundamentally cheap and has a path to turnaround.
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Investment Thesis
Teva's (TEVA) share price continues to fall. Investors are fearful of getting involved with the company, with significant and uncertain lawsuits and huge debt load.
No matter how cheap the company becomes, investors are passionately shying away.
Share Price Continues To Rapidly Sell Off
If, at any point, during the past twelve months, investors were vaguely uninterested and apathetic towards Teva, today, the message could not be clearer: it's one of panic.
To be fair, the market was not wrong on Teva. Teva has had a myriad of issues hitting its recent performance. From losing its blockbuster drug, Copaxone, sooner than expected, to price-fixing scandals.
On price-fixing allegations, most investors believe this to be a minor trouble in the grand scheme of this.
What is ultimately forcing shareholders pain and causing them to sell their shares at a huge discount is the uncertainty revolving around the scale of the fines from its opioid crisis.
The trouble is that nobody knows just how big this fine could be. Furthermore, the issue is not only affecting Teva. It is affecting the whole sector. Right away, given the complexity of these lawsuits, it is likely to be a drawn-out affair.
The highest figure investors are likely to have seen appears to be the $4 billion from UBS analyst Navin Jacob who extrapolated the $85 million settlement from Oklahoma to all 50 states.
So, the issue I wish to press on readers is that, while nobody has any certainty over just how much the total settlement will amount to, we do know that the figure is likely to have an upper limit of approximately $4 billion.
Next, these opioid lawsuits are the worst of the recent bad news. Sell-side analysts following the share price lower have been putting out ever-lower share price targets, but with no new justification, apart from rehashing old news. There are no other meaningful skeletons in Teva's closest. No new news.
The Most Pressing Issue: Teva's Crippling Debt
The opioid crisis, in of itself, would present Teva with enough troubles. Further hampering Teva's operations is its never-ending debt load.
This, in my mind, presents a more challenging set of conditions for Teva. Nevertheless, this issue too, despite being challenging, I believe that with careful execution, Teva can overcome. As a reminder, Teva has net debt $25 billion, and it's leveraged by 5.72x.
Once more, Teva's debt is what I believe investors should be focused on. This is the fundamental key to Teva's investment success or failure.
Source: Slide 35
Highlighted inside the red boxes are Teva's 2021 and 2023 notes. CFO Mike McClellan (who is stepping down for family reasons) declares that Teva is looking at ways to refinance those stacks.
