Teva’s Sinking Bond Price Poses Insolvency Threat

Yields have risen sharply, complicating drug maker’s plans to recycle debt

The decline of Teva Pharmaceuticals’ share prices to a 17-year low this week caused many observers to overlook the concurrent drop in the price for the drug maker’s bonds – and the challenges it will face managing its massive debt load.

Teva’s 6.75% bond due in March 2028 is now trading at a yield of 8.3%. Its spread with equivalent U.S. Treasury bonds, a barometer of the market’s perception of their default risk, has widened to 6.36 percentage points from 3.45 in the past half year.

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Teva shares were down 2.5% to $7.99 mid-afternoon local time in in New York. They have fallen about 60% since early February.

Recycling and getting better terms for its debt – which amounted to $26.7 billion as of March – is impossible under current market conditions. Of that, $8.5 billion is coming due in 2019-20 and $4.2 billion in 2012. Cash flow generated from operations during the first quarter was just $112 million, compared with almost $1.5 billion a year earlier

The decline in cash flow is due to slumping sales of Teva’s best-selling multiple sclerosis drug Copaxone. Sales of at least one of the two drugs that were supposed to compensate for the drop – Ajovy, a treatment for migraines – haven’t been strong enough to make up the loss.

CEO Kare Schultz had expressed optimism about the start of the year concerning prices in the United States for generic drugs, which accounted for about 22% of Teva’s revenues in the 12 months through March. But it appears his forecasts were wrong, as evidenced in the announcement last week by Amneal Pharmaceuticals.

The U.S. company’s share price plunged 35% after it announced a restructuring effort in light of continued weakness in the generic-drug market. Competition in the market is intense and purchasing groups are demanding steep discounts from pharma companies, Amneal said.

Teva has said it expects cash flow from current operations to reach between $1.6 billion and $2 billion for all of 2019, but it appears that the stock market no longer believes that achievable. The company is at the risk of becoming insolvent

Schultz repeatedly rejected the idea of raising more equity capital, even when Teva’s share price was three times higher than it is today, in order to avoid diluting existing shareholders.

Teva is close to meeting its cost-cutting target of $3 billion in annual costs, which was set in 2017, but that alone won’t be enough at a time when it is facing so many other problems. It appears that the market is expecting another round of cost reductions to compensate for the inability of the company to resume growth next year as Schultz had hoped.

If all this wasn’t enough, Teva is also contending with two major lawsuits that could saddle it with penalties of between $1 billion and $4 billion, according to analysts’ estimates. In the infamous opioids affairs, federal data released on Tuesday showed drug makers and distributors flooded the U.S. with more than 75 billion pills in the years when the epidemic of painkiller addiction and deaths surged to record levels in 2006-12. Teva’s Activis unit was the second-largest maker of opioid pills, accounting for 34.5% of the total.

The data will bolster the plaintiffs’ claim that responsibility for the epidemic runs across the drug industry, in a suit ready to go to trial in Cleveland in October. In an Oklahoma case, Teva has settled for a $85 million penalty.

 A Teva Pharmaceutical Industries building is seen in Jerusalem, Israel, December 14, 2017.
REUTERS/Ammar Awad