Teva Pharmaceuticals Industries Ltd. NASDAQ: TEVA. 12/2/18 Eric Abeles, Grant Kovel, Jared Robinson, Matthew Ross, Jacob Seidenberg

Transcription

1 Teva Pharmaceuticals Industries Ltd. NASDAQ: TEVA 12/2/18 Eric Abeles, Grant Kovel, Jared Robinson, Matthew Ross, Jacob Seidenberg

2 Table of Contents I. Security Overview II. Situational Overview III. Company Overview IV. Industry Overview V. Investment Merits and Risks VI. Financial Model and Projections VII. Comparable Analysis VIII.Recent Performance 1

3 Security Overview

4 Security Overview Basic Info Bloomberg ID: 88166JAA1 Rating: BB Coupon Rate: 3.65% Yield to Maturity: 5.382% Current Price: $95.86 Maturity Date: 11/10/21 Spread: Modified Duration: OAS: Z Spread: G Spread: Senior Unsecured Bloomberg 3

5 Security Overview Debt Schedule Our Bond Interest Pr i ncipa l Bloomberg 4

6 Situational Overview

7 Situational Overview Major Events 7/27/2015: Completed acquisition of Allergan generics arm, Actavis Generics for $40.5 Billion 8/3/2017: Teva reports a $6.1 Billion goodwill impairment for Quarter 2, due to declining prices in the generics market 11/1/2017: Kare Schultz becomes President and CEO of Teva 12/14/2017: Teva announces restructuring plan, intends to cut costs by $3 Billion Business is split into Generics, Specialty medicines, and API (Active Pharmaceutical Ingredients) New CEO, Kare Schultz as of November 1, 2017 Generic Segment 55% of Revenue, and 47% of profit Incurred a 6.1 Billion goodwill impairment due to pricing pressures in Q Was Downgraded in Credit to BBB after acquiring Actavis Generics Net Revenue of Billion (2017) Goodwill Impairment of Billion (2017) Net Loss Billion (2017) Total Assets of Billion (2017) Total Liabilities of Billion (2017) 10-K 10-K 6

8 Industry and Company Overview

9 Industry Overview Current State of Industry The pharmaceutical market as a whole is valued at over $1.105 Trillion and is expected to grow by 3-6% between 2018 and The overall pharmaceutical industry, encompassing a segments of the industry is highly fragmented, with the top company holding about 5.8% of the market. In the generics segment of the market, Teva holds the largest part of the market share, with around 12.3% of the market. In this industry, development and sale of new drugs is highly based on patents. Companies put Research and Development into drugs and when the gain approval, received patents for these drugs, lasting for 20 years. Over this period, the company is the exclusive seller and faces no competition. At the point when the patent expires, generic companies introduce product into the market, decreasing price and increasing competition. 8

10 Company Overview Business Overview Global pharmaceutical company that develops, manufactures, and markets both branded and generic drugs, as well as active pharmaceutical ingredients Headquartered in Petach Tikva, Israel Generics business approximately 55% of sales in 2017 Operates in North America, Europe, Latin America, Asia, and Israel Reports as United States, Europe, and International Markets (Rest of World) Major Competitors Taro Pharmaceuticals: research based pharmaceutical manufacturer Mylan N.V.: American global generic and specialty pharmaceuticals company Perrigo Company PLC: American international manufacturer of private label over-the-counter pharmaceuticals Lannett Company: develops, manufactures, markets, and distributes generic versions of brand pharmaceutical products Bloomberg, KHC 10-k 9

11 Company Overview Recent Events 10/10: Long Term Data on Copaxone 25-year safety data from long-term Copaxone study Patients who take Copaxone long-term experienced acceptable safety and tolerability profile Low rate of serious adverse events Low rate of immediate post-injection reactions 10/10: FDA Committee Recommends approval of CT-P10 (Biosimilar Rituxan) FDA s Oncologic Drugs Advisory Committee voted unanimously to recommend CT-P10 Rituxan is approved to treat Non-Hodgkin s Lymphoma, Chronic Lymphocytic Leukimia, Rheumatoid Arthritis, Wegener s Granulomatosis, Microscopic Polyangitis. Can be first Rituxan biosimilar to be approved in U.S. (three prior proposals) 9/27: Launches Generic Cialis First generic Cialis in U.S. Treatment of erectile dysfunction and symptoms of benign prostatic hyperplasia 9/14: Ajovy (Fremanezumab) Gets FDA Approval Anti-calcitonin gene-related peptide drug Preventative treatment of migraine First approved anti-cgrp treatment with monthly and quarterly dosing options ZACKS EQUITY RESEARCH 10

12 Company Overview Decline in Revenue in All Segments North America sales were reported at $2.27 billion in their most recent quarter This figure is down 26% from the prior year Pricing erosion in U.S. generic markets Rate of erosion has slowed significantly in third quarter from second quarter Due to product launces and optimization of generics product portfolio (14% share of generics market) Austedo, Teva s newest launched product, has seen great increase in sales from second to third quarter Expects to launch new generic version of EpiPen (FDA approval in August Low Copaxone sales ($463 million, down 43% from the prior year due to generic competition) Managed to maintain market share in U.S. (sales still better than management expectations) United States revenues declined 27% to $2.1 billion Increase in distribution revenues ($333 million, 13% increase), generated by Anda (acquired in 2016) Europe sales were reported at $1.21 billion in their most recent quarter This figure is down 12% from the prior year Loss of revenues from the closure of a distribution business in Hungary Divesture of women s health business Lower Copaxone revenues ($124 million, down 16% from prior year) Due to price reductions caused by entry of generics International Markets sales were reported at $726 million This figure is down 18% from the prior year (12% in constant currency terms) Lower sales in Japan and Russia Deconsolidation of subsidiaries in Venezuela Loss of revenues from sale of Women s Health ZACKS EQUITY RESEARCH 11

13 Company Overview Revenue Mix Other Revenues 10% Specialty Medicines 35% Generic Medicines 55% Bloomberg, KHC 10-K 12

14 Company Overview Margins Margins drastically decreased since 2016 Market decline in generic drug prices Most believe that these prices have already bottomed out 13

15 Company Overview Suppliers Supplier Revenue COGS Antares Pharma 38.00% 0.18% Corium International 22.00% 0.06% PetIQ Inc 15.00% 0.35% Customers Company Revenue COGS McKesson Corp 16.00% 1.84% AmerisourceBergen 15.00% 2.23% Bloomberg 14

16 Investment Merits and Risks

17 Investment Merits and Risks Investment Merits Merit 1 Strong Emphasis on Cutting Costs Merit 2 Innovative Products (Generic EpiPen and Ajovy) Merit 3 Company Focused on Repaying its Large Debt Load Investment Risk and Merit Summary Investment Risks Risk 1 Copaxone pricing erosion Mitigant: Majority market share Risk 2 Generic pricing pressure Mitigant: Pricing is bottoming out 16

18 Investment Merits and Risks Strong Emphasis on Cutting Costs Teva Pharmaceuticals has worked over the past several years, and is continuing to successfully cut costs. It s projected that by 2019, Teva will be able to cut annual costs by about $3 Billion. Morgan Stanley now projects that they will slightly exceed those projections, eventually being able to cut $3.1 Billion in annual costs. The company intends to cut costs specifically through decreasing their workforce by around 25%, or 14,000 employees, with many of these cuts being made in The company also intends to sell of parts of their business not directly related to the sale of pharmaceuticals, as well as closing down or selling of some Research and Development elements, for both generic and specialty drugs. These cuts would increase their Free Cash Flow by 11%, increasing their ability to repay creditors. Since late 2016, this has already allowed the company to decrease their debt by around 25%. Source: Bloomberg 17

19 Investment Merits and Risks Innovative Products Creating new products allows Teva to compete in many different markets, leading to more stable revenue. More products can help take advantage of Teva s customer loyalty because they are the world s biggest producer of generic drugs. In September, Teva s new drug Ajovy was approved by the FDA. Ajovy is the first migraine treatment with monthly and quarterly dosing. According to Stephen Silberstein of the Jefferson Headache Center, migraines affects more than 36 million people in the United States. The U.S. Wholesale Acquisition Cost (WAC) of AJOVY is $575 per monthly dose and $1,725 per quarterly dose. Commercially insured patients may pay as little as $0 on prescriptions for AJOVY until the offer expires. In addition, the FDA recently granted Teva Pharmaceutical to make the first generic version of Mylan's EpiPen. Teva s generic EpiPen is set to be released in the next few months. The EpiPen will lead to increased revenue and give Teva a competitive advantage over Mylan. Source: Bloomberg 18

20 Investment Merits and Risks Company Focused on Repaying its Large Debt Load In December 2017, Teva announced a restructuring plan that included its focus on deleveraging its capital structure. Teva s goal is to get a 4x net debt/ebitda by In order to do so, Teva will have to continue paying down its debt with strong liquidity; Teva will not raise more equity. Teva plans to achieve this liquidity by cost reduction. They expected that more than half of $3 billion in cost reductions to be executed while protecting top line growth. This has already been achieved as Teva has achieved over $1.8 billion in cuts through 2018 alone. Part of these cost reductions include cutting a quarter of its work force (14,000 jobs), and closing or selling a large number of manufacturing plants. Since their announcement in December 2017, Teva has already cut its headcount by more than 9,000 employees. These cuts will allow Teva to reduce their cost base and simplify their operations, increasing profitability and cash flow generation. They also intend to optimize their global generics portfolio through price adjustments and product discontinuation. Teva has shut down several manufacturing plants globally. They have also discontinued multiple research and development programs. Teva has continued to divest in non-core assets (such as Women s Health portfolio) and will neither buy late-stage pipeline candidates nor acquire any company. Teva also has suspended dividend payments and annual bonus. ZACKS EQUITY RESEARCH, TEVA 19

21 Investment Merits and Risks Generic Pricing Pressure As a primarily generic drug manufacturer, Teva revenue is subject to the pricing of generic drugs. One of the major drugs produced by Teva, Copaxone, has had their market share drop by almost 40% during quarter 2, due to Mylan cutting their price by 61%. This resulted in a $6.1 Billion goodwill impairment charge in Q2 of Additionally, revenue generated by generics decreased by nearly 33% in North America over recent years. This has caused the stocks for generic drug manufacturers to decrease by an average of 6% to date. The FDA has intentionally began to increase approval of generics as a way to increase competition and drive down pricing. The new FDA commissioner, Dr. Scott Gottlieb has made this a major part of his policy platform. Mitigant: Bottoming out It appears that the market for generic drugs has begun to reach a bottom, and should begin to rise at least slightly. The CEO of Teva, Kare Schultz, has said on a call with Analysts that "Based on what we are seeing in the second quarter, we believe that there's an improved pricing dynamic on U.S. generics." Bloomberg 20

22 Investment Merits and Risks Copaxone Pricing Erosion Copaxone is is prescription medicine used for the treatment of people with relapsing forms of multiple sclerosis (MS). The FDA recently allowed Teva s competitors to make a generic version of this drug. Mylan set its list price just $800 per month below Teva s $5,800. With Mylan and Novartis generics in the mix, sales for the first half of this year for the 20mg and 40mg versions together amounted to $940 million in North America, down more than $700 million from last year's $1.65 billion. Teva is only projecting to sell $1.8 billion in sales this year from Copaxone, while last year Teva had sales of $3.8 billion. Mitigant: Drugs newly released on the market, like Austedo, are slowly helping Teva make up for the loss of revenue from the Generic Copaxone being produced. Austedo posted $44 million in sales this current year. Ajovy will be available in the next few weeks and is projected to account for $228 million in sales for the next couple of years. In addition, Teva saw a significant spend base reduction of over $1 billion between the first half of this year and last. Source: WSJ 21

23 Financial Model and Projections

24 Financial Model and Projections Income Statement 23

25 Financial Model and Projections Free Cash Flow Bridge 24

26 Financial Model and Projections Breakeven Analysis 25

27 Financial Model and Projections Graphs Revenue FCF Revenue in Millions 23, , , , , 000 FCF in Millions , Years Years EBITDA Cash EBITDA in Millions Years Cash in Millions Years 26

28 Comparable Analysis

29 Comparable Analysis Comparable Securities TEVA MYL AGN CELG Operating Income: Operating Margin: A Net Debt/EBITDA: EBITDA-CapEx/Interest Expense: EV/EBITDA (Equity Cushion): Maturity Date: 11/10/21 6/15/21 12/15/21 8/15/21 Coupon Rate: 3.65% 3.15% 5% 2.25% Bond Rating (S&P): BB BBB- BBB BBB+ Modified Duration: OAS: YTW/YTM: 5.19% 4.02% 3.97% 3.64% Spread: Bloomberg 28

30 Comparable Analysis Financial Metrics Operating Margin 30. 0% 25. 0% 20. 0% 15. 0% 10. 0% 5. 0% 0. 0% FY 2014 FY 2015 FY 2016 FY 2017 Last 12 M 10-K 29

31 Recent Performance

32 Recent Performance Stock Performance Bond Performance Bloomberg 31

33 Disclaimer: These materials has been prepared by the Goizueta Investment Management Group. This document is for information and illustrative purposes only and does not purport to show actual results. It is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action. Opinions expressed herein are current opinions as of the date appearing in this material only and are subject to change without notice. Reasonable people may disagree about the opinions expressed herein. In the event any of the assumptions used herein do not prove to be true, results are likely to vary substantially. All investments entail risks. There is no guarantee that investment strategies will achieve the desired results under all market conditions and each investor should evaluate its ability to invest for a long term especially during periods of a market downturn. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those discussed, if any. No part of this document may be reproduced in any manner, in whole or in part, without the prior written permission of the Goizueta Investment Management Group, other than to your employees. This information is provided with the understanding that with respect to the material provided herein, that you will make your own independent decision with respect to any course of action in connection herewith and as to whether such course of action is appropriate or proper based on your own judgment, and that you are capable of understanding and assessing the merits of a course of action. The Goizueta Investment Management Group does not purport to and does not, in any fashion, provide broker/dealer, consulting or any related services. You may not rely on the statements contained herein. The Goizueta Investment Management Group shall not have any liability for any damages of any kind whatsoever relating to this material. You should consult your advisors with respect to these areas. By accepting this material, you acknowledge, understand and accept the foregoing Goizueta Investment Management Group. All Rights Reserved.