A bond yield to maturity of 6%, or a $21 share price? This is the question posed by Leader Capital Markets regarding Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA). The question remains open, but analyst Sabina Levy believes that the current pricing for Teva's bonds reflects most of the threats facing the company in the near future.
"Questionable acquisitions, instability in the management backbone, and substantial worsening of the business environment in the US generics industry had a significant negative impact on the company's results and increased its leverage," Levy wrote.
According to Levy, most analysts are less optimistic about the company's share, and are recommending either "Market perform" or "Underweight" for Teva, with an average target price of $19 (the company's current share price is $21, and Leader Capital Market's recommendation is "Market perform" with a $17 target price). Levy adds, "Given the decline in its financial situation, the rating companies downgraded Teva's debt rating to the junk bond level, and the bonds' yield to maturity has risen in recent months."
Aggressive measures
Levy continues, "There is no doubt that the company faces many challenges, and we believe that it will take time before Teva's revenue takes an upturn. At the same time, the aggressive measures the company is taking to strengthen its balance sheet and reduce its leverage are bolstering our confidence about the company's ability to service its debt."
Levy mentions that the acquisition of Actavis in 2016 caused a steep rise in Teva's leverage, and its debt soared from $11 billion to $32.5 billion, as of the end of 2017. Teva intends to reduce its debt by $3.5 billion this year, and to lower its ratio of net debt to EBITDA from 4.8 at the end of 2017 to less than 4 by 2020. As of now, 89% of Teva's debt consists of bonds, most of which are long-term and 60% of which are dollar-denominated. Levy believes that it is very likely that Teva will recycle some of its existing debt in order to ensure a more comfortable debt repayment schedule.
"Teva's dollar-denominated bonds that are redeemable in 2026 (the series totals $3.5 billion) had especially high trading turnovers in recent months, amounting to a cumulative $9 billion from the beginning of October until now. The yield to maturity on these bonds is estimated at 5.8%, compared with a 4.3% yield to maturity on bonds redeemable in 2026," Levy writes.
The bonds of Teva and Mylan NV were traded at similar yields until July 2017, but the market's disappointment with Teva's results were reflected in a higher yields on its bonds, which are currently higher than for most companies in the sector. "We assume that the current pricing of Teva's bonds reflects most of the threats facing the company in the near future. We also believe that there is a strong probability that the company will meet its targets and timetables for the restructuring plan," Levy writes.
Levy writes that most of the analysts are not optimistic, given the major decline in the company's results, its questionable deals, and the deterioration in the generics market. In addition to the fall in sales of Copaxone, Teva's gross profit margins have eroded, and its net profit has dropped. "The launching of generic versions of 40-milligram Copaxone is likely to put additional pressure on Teva's results in the coming years," she notes. "We also anticipate a further decline in the company's results, given the continued downward pressure on generic drug prices in the US."
Levy says that there is great uncertainty about Teva's future growth potential. She writes, "As part of its cost cutting and restructuring plan, Teva is now making aggressive cuts in its R&D and personnel, including marketing and sales personnel. Teva's pipeline of innovative products is rather thin. The company is now in an inferior position with respect to generic versions of biological drugs."
Published by Globes [online], Israel Business News - www.globes-online.com - on February 21, 2018
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