Julius Baer sees 16.6% downside in Teva

Teva Photo: Reuters

"They may need to raise equity to pay-down the debt and reduce the leverage," said analyst Terence McManus.

Swiss investment bank Julius Baer believes that volatility in Teva Pharmaceutical Industries Ltd.'s (NYSE: TEVA; TASE: TEVA) share will persist in the near future, with the share price possibly rising or falling by 10% following announcements by the company. Julius Baer research department analyst Terence McManus, who covers the Teva share, gives a $12.25 target price, 16.6% below the current price, with a "Neutral" recommendation for the share.

Teva's share price has risen 8% on Wall Street in the past two days, following the organizational change announced by new CEO Kare Schultz, and is now 31.6% higher than the low point reached less than a month ago (but 52.4% lower than it was in early August). Teva is being forced to take far-reaching steps, including cutting its workforce, due to its $34.7 billion debt, most of which was incurred in the acquisitions of Actavis in 2016.

McManus answered the question of what measure Teva should take first in order to reduce its debt by writing, "We think it is more important to reduce the leverage, than simply the total debt. Selling assets that generate EBITDA won’t decrease the net debt-to-EBITDA ratio or leverage… We believe it is a very difficult situation, a challenge for the new CEO. Given the previously described dynamic, they may need to raise equity to pay-down the debt and reduce the leverage."

Towards a detailed quantitative plan

McManus believes that Teva is above all a generics company, but will probably also remain active in the specialty drugs sphere. Commenting on the consolidation of these two activities, which were formerly separate divisions in Teva, he wrote, "The press release mentions extracting efficiencies and says that some of the global business units will be redundant. So, this is a reorganisation which will enable cost savings and create a leaner business. This would be expected, given the company’s current debt situation and the past history of the new CEO (who led an economizing program at Lundbeck, where he was CEO, S. H.-V.) They are setting the ground work for a more detailed quantitative restructuring plan announcement in mid-December. The new business heads will be tasked with extracting cost savings."

Teva announced an organizational change on Monday, including the consolidation of its generics and special drugs divisions into a single commercial organization that will operate in three geographic regions: North America, Europe, and growing markets. Most of the investment banks covering Teva (including Julius Baer), are waiting to hear further details and precise numbers about the expected layoffs from the company, which is planning to provide these figures in December. RBC commented this week on the personnel changes in Teva's management, including the resignations of Michael Hayden and Rob Koremans, which it described as something of a cleaning out of the previous management, and said were not a surprise. RBC's economists believe that the appointment of Michael McClellan as permanent CFO, after having been temporary in the job, was removing existing uncertainty.

Published by Globes [online], Israel Business News - www.globes-online.com - on November 29, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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Teva Photo: Reuters
Teva Photo: Reuters
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