Teva Shares Rally on Opioid Settlement, but Analysts Have Doubts

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The logo for Teva appears above a trading post on the floor of the New York Stock Exchange, October 21, 2019.
The logo for Teva appears above a trading post on the floor of the New York Stock Exchange, October 21, 2019. Credit: Richard Drew,AP

Shares of Teva Pharmaceuticals rallied Tuesday on the Tel Aviv Stock Exchange after the Israeli drug maker said it had reached a tentative settlement with major U.S. plaintiffs over its role in the opioid epidemic.

But analysts expressed doubts about the agreement with the attorneys general of four American states, which has yet to be released, and whether the four could gain the concurrence of some 2,600 municipalities joining in the suit.

“We’re in the early to middle innings of a lengthy process, and I just don’t see this as bringing us much closer to a global settlement,” Piper Jaffray analyst David Amsellem told Bloomberg News. “The government wants to extract a pound of flesh. States and municipalities want money in their coffers as soon as possible to help deal with the epidemic.”

Nevertheless, Teva shares soared 11.2% to close at 27.97 shekels ($7.92) on Tuesday. Yields on Teva bonds also dropped sharply on the news, indicating that investors were increasingly confident that the risk on insolvency at the indebted company was lower.

In New York on Monday Teva shares rose a more modest 8.7%, but on Tuesday they had begun trending down and were trading down 0.4% at $8.12 early afternoon local time.

Teva said Monday that it had offered to pay $250 million in cash and donate $23 billion worth of the generic opioid addiction treatment Suboxone to opioid addicts, both over a 10-year period. Such a settlement would require Teva to make billions of dollars in write-downs on top of the $646 million it took in the second quarter.

The news came on the heels of a smaller settlement with two Ohio counties to pay $20 million in cash and donate $25 million worth of Suboxone over three years.

The agreement enabled Teva, together with the distributors AmerisourceBergen, Cardinal Health and McKesson, to avoid the immediate threat of a trial that was to begin on Monday in Cleveland. The trial with the two countries acting as plaintiffs was intended as a test run for a bigger case that Teva is now seeking to resolve with a much bigger cash-and-drugs offer.

Teva is one a group of drug makers and distributors that face what could be the priciest civil trial ever in the U.S. over their role in fueling a nationwide opioid crisis. Some 400,000 U.S. overdose deaths between 1997 and 2017 were linked to opioids, according to government data.

The companies have denied wrongdoing, arguing that their products carried government-approved labeling that warned of the addictive risks of opioids. Distributors had argued that their role was to make sure medicines prescribed by licensed doctors were available for patients.

The companies have sought to avoid going to trial, reportedly out of concern over the negative publicity. That is especially the case for Teva, which has little experience in dealing with high-profile lawsuits and attendant media coverage.

Ronny Gal, an analyst for the equity research house Bernstein, praised the deal for putting most of its value on donated drugs, a move that reduced the risk of the company filing bankruptcy or having to increase its debt. He termed the deal a “clear win.”

Teva said the value of the Suboxone contribution would be based on its wholesale price. Gal estimated that since the manufacturing cost of Subxone was just 11% of the wholesale price, the actual cost to Teva would amount to just $2.5 billion spread out over 10 years.

Seeking non-cash settlements

Led by CEO Kare Schultz, Teva has been seeking settlements weighed toward free medicines as it struggles with debt that stood at $26.7 billion at the end of June. The company ran up most of that from its acquisition of Allergan’s generic unit Actavis in 2016. Meanwhile it has had to cope with lower prices for generic drugs in the U.S. and the loss of market share for its best-selling Copaxone multiple sclerosis treatment to generic rivals.

Analysts said the Teva announcement still left open the question about how much free cash flow, i.e., money available to repay debt, the company would have if the agreement goes into force. They also were asking how the agreement would handle the issue of changing prices for generic drugs.

Teva said the supply of Suboxone it was offering met most of the market’s needs for opioid addiction treatments. However, there are a host of other makers, among them Mylan and Dr. Ready, that might go to court over lost sales, analysts warned

Moody’s termed the proposal “credit negative” because of the adverse effect it will have on Teva’s earnings and ability to reduce debt.

“This is primarily because of the costs Teva would incur in supplying buprenorphine naloxone tablets – a treatment for opioid dependence – for a period of 10 years. That said, the cash component involved in the proposed framework is relatively modest, at $250 million over 10 years,” it added, saying it would make no change in Teva’s Ba2 rating or Negative outlook.

Meanwhile, RBC Capital Markets analyst Randall Stanicky also called it a “win-win” for Teva, but he urged investor caution until the other plaintiffs sign on. “That does not appear to be there at this point (at least for now),” he wrote.

While many attorneys general are backing the offers, lawyers for local governments have rejected it out of fear they won’t get enough money to cope with the continued fallout of the opioid epidemic. Gal said they may still sign on but demand more compensation from Teva, in the area of $3 billion to $4 billion, particularly more cash.

That, he said, would still be a win for Teva. However, taking into account the opioid settlements plus penalties that could reach $1 billion, Teva’s enterprise value – its market cap plus net debt – could reach $389 billion while its free cash flow would amount to $2 billion to $2.5 billion annually.

Gal said he was sticking to his $9 price target for Teva for now.

In expressing doubts about the Teva deal, Piper Jaffray’s Amsellem pointed to the problems Purdue Pharma – the bankrupt maker of the opioid OxyContin – has encountered in reaching a settlement worth between $10 billion and $12 billion with U.S. states. He retained his $6 price target for Teva.

The proposal has been accepted by 24 states but is opposed by 24 other states and the District of Columbia. Arizona has said it may withdraw support, which would mean a majority of states oppose the tentative pact.

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