Summary
- Teva has struggled ever since its mistimed an ill-conceived acquisition of Actavis Generics.
- The generic drug market is finally bottoming out and Teva is poised to benefit as this market recovers in a new business cycle.
- Management has been focused on creating a more efficient company by cutting its manufacturing locations and headcount.
- Teva is in a strong liquidity position and debt is no longer a huge concern.
How much shareholder value can a failed acquisition destroy? Look no further than Teva Pharmaceutical Industries (TEVA). Once the symbol of Israeli success, an ill-conceived buying spree coupled with a collapse in the global generic drug market has left the company in a financial crisis. Today, the company is down nearly 80% from its 2016 highs. However, the worst may be over for this beleaguered pharma giant. The company has been making the hard but necessary changes to simplify the company and new management is in place to lead it towards a different future. This article will detail the past struggles of Teva and explain why the company is undervalued and positioned to return to prominence in the future.
Teva’s Well-Documented Struggles
Teva’s fall began with its massive $40.5 billion purchase of Actavis Genericsfrom Allergan (AGN) in 2015. The deal was initially well received by investors. After the acquisition was announced, the company’s stock skyrocketed by an incredible 16% to a record high market cap of $61 billion. Management boasted at the time that this purchase would help the company “win in global healthcare” and set lofty financial targets that in hindsight we can see were way off. For example, Teva expected the combined company by 2018 to deliver $11.6 billion in EBITDA and $8.5 billion in free cash flow. In reality, last year the company recorded just $5.3 billion in EBITDA and $3.7 billion in free cash flow, both less than half the projected amounts.
Overpaying for Actavis put a tremendous financial burden on Teva and saddled it with $35 billion in debt. The acquisition also proved to be done with the worst possible timing. In 2016 with the election of Donald Trump, the FDA started speeding up the approval of generic drugs which flooded the market with a record number of new products. This, combined with the rise of group-purchasing organizations (GPOs), has put severe downward pressure on generic drug prices. In 2018, Evercore ISI found that generic price deflation was around 11%. When Teva acquired Actavis, it was at a time when the generic market was at the height of its business cycle. Past management gambled that those strong pricing conditions would continue - they were clearly wrong.
