Will streamlining save Teva?

Shiri Habib-Valdhorn

Financial measures may also be required to ensure Teva's survival.

Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) owes the huge sum of $34.7 billion. Most of this debt was incurred when Teva raised money for the acquisition of Actavis Generics in the summer of 2016 for almost $40 billion. Although the interest rate on the debt is low, it is still a burden for Teva, which has been having trouble reducing it in recent quarters. Furthermore, Teva's cash flow is on a downtrend, given the continued weakness in the US generics market and the beginning of competition from a generic version of Copaxone, Teva's flagship drug for the treatment of multiple sclerosis. All of these factors have increased concern in recent months that Teva will be unable to service its debt. Teva has been forced to sell assets that are not part of its core business in order to raise money for debt repayment.

As of the end of the third quarter, the vast majority of the debt ($32 billion) is long-term. Teva has also managed to slightly relieve the pressure by reaching an agreement with its creditor banks in September, in which its existing loan agreements were revised and the leverage ratios required of it were reduced. Teva owes nearly $11 billion to a the banks. Under the revised agreement, Teva is required to comply with an EBITDA ratio of 5 at the end of the 2017, compared with 4.25 before the revision.

All the same, Teva will eventually have to repay the debt, and the question arises whether the plan presented today will enable it to do so. In 2008, shortly after Teva acquired US company Barr for $7.46 billion, then Teva CFO Eyal Desheh (who resigned this year) said in an interview, "We won't be in a situation of being unable to repay debt. We read about such cases in the newspapers, and this will never happen at Teva, even under the most extreme scenario." Even now, when this extreme scenario seem closer than ever before, it still appears that Teva will be able to service its existing debt by taking harsh measures: a program of cutbacks, selling assets, refinancing its existing debt, and perhaps also raising money. The market believed that Teva would try to save $1-2 billion on its annual expenses. A few days ago, Citi analyst Liav Avraham said that the cuts would be greater than $1 billion, and would be close to $2 billion when the cutbacks were fully implemented. This assumed that Teva would lay off 5,000-10,000 employees worldwide, which Avraham believes will save the company $1 billion a year. The actual figure announced today is 14,000 employees.

Beyond the expected cutbacks and the assets that have been sold, opinion is divided on Teva's plans for raising capital. At the current market price, an offering of shares will significantly dilute the company's existing shareholders, but if Teva does decide to raise several billion dollars, it could help the company repay its debt and meet the required leverage ratios. Avraham believes that Teva will not hold such a financing round, and that it will be able to maintain its investment-grade rating by rating agencies S&P and Moody's. A few weeks ago, the Fitch rating agency downgraded Teva's debt rating to junk level (BB with a negative outlook). Fitch wrote at the time that Teva was facing "significant operational stress at a time when it needs to reduce debt" taken to finance the acquisition of Actavis in August 2016.

At this stage, S&P and Moody's still give Teva an investment-grade rating, but with a negative outlook - in other words, a downgrade is possible. If Teva's rating is downgraded, it will have to pay more on its existing debt, because its financial covenants with the banks include a clause concerning the ratings by these agencies. The fact that the two rating agencies are still giving Teva an investment-grade rating indicates that they believe in Teva's ability to repay its debt, whether by making cuts or through refinancing.

Credit Suisse addressed the question of Teva's debt yesterday, writing that Teva might be able to reduce the pressure in the short term by restructuring its debt. Teva needs to repay $6 billion to its bondholders in 2018 and a total of $11.9 billion by 2020. Credit Suisse says that refinancing this debt, meaning raising new debt with a more remote payment date, probably at a higher interest rate, will release the company's cash flow for other uses. Credit Suisse also thinks that Teva is likely to make a capital offering. In the context of the company's cutback program, the main question is to what extent Teva can make cuts without damaging its ability to grow in the future. For example, cutting expenses for R&D on original drugs will help Teva in the short term, but is liable to harm its growth engines in the long term. Similarly, closing down plans that are not money-losers (and this is the claim about the plant in Kiryat Shmona, for example) may help Teva focus on its core activities, but is also liable to reduce its EBITDA in the longer term.

Published by Globes [online], Israel Business News - www.globes-online.com - on December 14, 2017

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

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