TEVA and the 27 Billion Dollar Elephant in the Room

TEVA Offices

On Wednesday, February 12th, TEVA surprised many investors by revealing that the company had outperformed analyst expectations in the fourth quarter of 2019. On the news, shares surged 9.1% to $13.40.

To those who have recently invested in this bargain stock: break out the champagne! Your investment is starting to pay off!

For those, however, who have been investing in TEVA for a longer time period, the recent surge is bittersweet.

Imagine it’s 2016, and TEVA stock is sitting at $66 dollars a share. The company just announced it will be acquiring Activis, the 3rd largest generic manufacturer in 12 global markets. TEVA is pursuing aggressive expansion, slashing prices to gain even more market share in the generics market. CEO Erez Vigodman is thrilled: TEVA’s blockbuster drug Copaxone will soon lose its exclusivity and become available as a generic, but his acquisition will ensure TEVA is able to continue to profit and grow.

Fast forward to 2017. Generic competition is at a fever pitch. Prices are driven down drastically, profits shrink, and suddenly the $30 billion dollar debt burden created by the acquisition the prior year is looking like a pretty big mistake. Vigodman steps down.
Within a year TEVA stock loses 80% of its value.

Today, Kare Schultz, the new CEO, is slowly paying down the debt. The company appears to be able to stay solvent. Sure, Kare had to lay off 14,000 workers to achieve this, but sacrifices must sometimes be made to fix the mistakes of others. With the stock finally rising again and profits managing to gain despite the Copaxone’s exclusivity loss, it seems that TEVA is perhaps due for a comeback. If you forget about all that pending litigation of course.

Remember the crazy competition that drove down generic prices? Its beginning to look like competition may not have been the only driver behind low pricing. From 2013-2015, multiple large generics manufacturers are accused of colluding to fix the prices of numerous generics, artificially inflating the costs and pocketing the rewards themselves. 44 States have filed lawsuits against TEVA in this matter, meaning the cost to the drug maker could be substantial.

To make matters worse, hundreds of thousands of people have died in an opiate epidemic that has ravished the USA and lawmakers are out for blood.

“When the first day of trial starts, we look forward to sharing the facts — and the facts will show that opioid makers and distributors conspired to create and benefit from the worst public health crisis in decades,” lawyers representing the States declared as the first federal trial over the opioid epidemic prepared to begin.

Ultimately, local governments would reject a $48 billion dollar settlement offer from TEVA and other drug makers accused of not doing enough to curb the spread of the addiction epidemic. The liability to these companies, including TEVA, is now essentially unknown.

Considering TEVA’s net revenue for 2018 was already only $17.45 billion relative to its $25 billion in debt, the company is not out of hot water. If the various cases against it go poorly, investors could be in for a world of hurt.