Israeli company Teva Pharmaceuticals (NYSE:TEVA) has been a leader in the healthcare industry for more than 40 years with offerings ranging from generics to specialty drugs like neurodegenerative and oncological medicines to groundbreaking biosimilars. Teva is the single largest producer of generic medicines across the globe, with a company footprint that extends to over 60 countries.
But Teva's days as the pharmaceutical golden child could be waning.
Teva stock has experienced a massive decline over the past few years, and ongoing debt issues continue to weigh the company down. Not only that, but Teva has faced an onslaught of legal actions ranging from opioid scandals to a recent whistleblower lawsuit -- and at the time of this article, the litigation debacle rages on.
One of the reasons Teva has continued to interest investors despite its recent challenges is the low price of its stock. In this case, though, the risks of purchasing Teva stock may far outweigh the rewards.
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Teva is deeply in debt
To say that Teva is swimming in debt would be an understatement. In 2016, Teva purchased Actavis Generics, a branch of the pharmaceutical firm Allergan. This hallmark buy cemented Teva as one of the leading pharmaceutical companies in the world since Allergan Generics ranked number three in the drug market by sales at the time of the acquisition.
The Israeli drug company paid approximately $40 billion to acquire Actavis Generics and projected that the transaction would increase its net assets by roughly $1.4 billion in the coming years. By 2019, the company forecasted revenues would be around $27 billion.
In reality, the Actavis acquisition put Teva in such a mire of debt that they have yet to recover from it. Teva's 2019 Q3 report confirmed its financial quagmire, with a debt total of just under $27 billion as of September. The company's free cash flow in Q3 was $551 million compared to its total revenue between July and September of $4.3 billion.
2019 was not a great year for the drugmaker as a whole with a reported 6% revenue tumble in Q3 alone. This was largely because of increased rivalry in the generics sector and diminished sales in its Russian, North American, and Japanese markets.
To avoid bankruptcy, Teva began issuing layoffs at the end of 2017 in a series of restructuring efforts. The company also made waves in its leadership, most notably with its appointment of veteran financial expert Eli Kalif as its new Chief Financial Officer and Executive Vice President in November 2019.
At the time of the appointment, Chief Executive Officer and President Kare Schultz expressed his hopes that the new CFO would help to increase the company's solvency while cutting its debt ratio, stating, "With deep functional expertise and technical knowledge in all aspects of corporate finance, financial planning, and accounting, I believe Eli has the required leadership capabilities to strategically manage our debt, enabling the company to move forward from the restructuring phase to optimizing Teva for success and future sustainable growth."
Is this all too little too late? Only time will tell, but it's highly unlikely that Teva will make a massive turnaround in 2020. Teva will release its report for Q4 at the end of February, which will enable investors to gain a complete picture of 2019's financials in review.
The company's legal moat is deteriorating
Another factor that has contributed to Teva's debt amount is its legal troubles. Teva has been slapped with a succession of legal scandals, revolving primarily around allegations that the company fixed generic drug costs and tried to hide its role in fueling the opioid epidemic. The alleged price-fixing scheme is particularly noteworthy, as Teva has been accused of attempting to drive its share value by crediting its revenue to internal growth.
At the beginning of January, Teva acquiesced to a $54 million payout to settle a whistleblower action. The lawsuit claimed that the company had bribed doctors to peddle prescriptions for two of its drugs.
While settlements appear to be imminent for many of the legal actions Teva currently faces, the payouts alone are costing the company billions. In 2019, Teva reserved about $1.2 billion to pay case settlements.
Teva shares have plunged by more than 70% in just a few years
As if Teva's debt and legal troubles weren't enough, shares have plunged by a staggering amount in a matter of years. In 2015, before the Actavis Generics acquisition, Teva stock was considered a good buy at about $70 per share. Fast forward to today, when the shares are sitting at a 52-week high of $20.21 and a 52-week low of $6.07, with an average cost of $6.50 per share reported at the beginning of Q4, the future looks far from promising. In its Q3 report, Teva reported EPS at $0.58, which showed a 14.7% year-over-year slump.
Given the extreme volatility of Teva's shares, its serious debt problem, and ongoing legal woes which are only increasing the financial hole the company finds itself in, now is not the time to be investing in Teva stock.
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