As Share Price Collapses, Vultures Circle Teva With Cash Infusion Offers

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FILE PHOTO: An employee of Teva Pharmaceutical Industries wears a shirt bearing the company's logo at its Jerusalem oral solid dosage plant (OSD) December 21, 2011. REUTERS/Ronen Zvulun/File Photo GLOBAL BUSINESS WEEK AHEAD - SEARCH GLOBAL BUSINESS 8 MAY FOR ALL IMAGES
FILE PHOTO: An employee of Teva Pharmaceutical Industries wears a shirt bearing the company's logo at its Jerusalem oral solid dosage plant (OSD) December 21, 2011. REUTERS/Ronen Zvulun/File Photo GLOCredit: Ronen Zvulun/REUTERS

>> UPDATE: Teva Names Lundbeck's Kåre Schultz as CEO

The thrashing Teva Pharmaceuticals’ stock has suffered since reporting its second-quarter earnings has attracted the attention of investment funds interested in making a cash infusion in return for a major stake.

Teva shares lost more than a third of their value in New York Thursday and Friday, marking a 70% drop from their peak in July 2015 and slashing its market cap to the same level it was 17 years ago. On the Tel Aviv Stock Exchange on Sunday, the stock tumbled 22.1% to close at 71.28 shekels ($19.64).

Teva is vulnerable to what would in effect be a takeover, with buyers offering to inject $5 billion or so into the company in exchange for a stake of 15% to 20%.

Not only does Teva’s depressed market valuation make it cheap for any potential buyer, a lot of Teva stock will be coming on the market soon. Part of what is now seen as a disastrous $40.5 billion acquisition Actavis Generics last year was paid for by Teva in some 100 million of its shares, or 9.9% of its equity.

Until last week, Allergan was barred from selling them, but Chief Financial Officer Maria Teresa Hilado said last week that it was now preparing to offload them and one of Teva’s suitors may snap them up.

Teva is also vulnerable because of the giant, $35 billion in debt it took on when it bought Actavis. Teva was already struggling to pay it and its CFO Mike McClellan warned last week in a conference call with analysts the company might not meet the terms on its debt unless it accelerates assets sales to raise cash.

The extent of Teva’s debt woes became clear over the weekend. The credit agency Moody’s lowered Teva’s rating from Baa2 to Baa3, just one notch above junk and assigned it a Negative outlook.

Ratings also downgraded Teva to BBB-minus from BBB with a Negative outlook, noting that the company is “facing significant operational stress at a time when it needs to reduce debt and leverage” from its acquisition of Allergan.

If Teva bonds were downgraded to junk status, it would not be able to recycle its debt, pressuring the drug maker further still. However, a cash injection from an outsider of $4 billion to $5 billion plus $5 billion raised from assets sales could save Teva from that critical downgrade.

Meanwhile, the price of Teva bonds due in 2026 plunged 12% while the price of insuring them jumped 74%. The spread between the equivalent U.S. treasuries widened to 1.9 percentage points from 1.4.

As determined as Teva’s board of directors might be to keep the company Israeli and independent, the company’s grim financial picture may leave them with little choice. Moreover, many of them – including interim CEO Yitzhak Peterburg – backed the Actavis deal that is the source of the problem in the first place.

The company’s $6 billion second-quarter loss, the result of a giant write-down on its U.S. generics assets, was due to falling prices for the drugs. The company cuts its dividend and announced by job cuts.

Teva ascribed the trouble to the growing buying power of the biggest retailers – four companies control 85% of all generic wholesale buying – as well as to a U.S. Food and Drug Administration decision, announced in late June that it plans to promote drug competition, including expedited review for generic drug applications.

Teva downgraded its outlook for the rest of the year, and analysts who follow the stock say the drug makers’ troubles are not going away anytime soon.

Among the Teva bears, Credit Suisse analyst Vamil Divan downgraded the Israeli pharmaceutical company to Neutral from Outperform and cut his price target for the stock to $25 from $39 (they closed at $20.60 in New York Friday). He said there are no signs of stabilization for U.S. generic drug price erosion and increased competition doesn’t look to be slowing down any time soon.

Oppenheimer analyst Derek Archila downgraded the stock to Perform from Outperform and slashed his target price for the stock to $28 from $42.

“We do not view Teva as a growth story in the near-to-medium term and continued focus on cost cutting/divestments are required to ensure it meets its debt obligations,” wrote Archila in a note Thursday.

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