Teva - Operations and Opioid
All,
Please refer to our unchanged analysis here.
Operationally there are limited concerns, but any change in approach from AGs/prosecutors could be detrimental to Teva. Teva can’t afford to pay any fine in cash given its current leverage of 4.9x and will require any settlement to be based on the same premise as the one reached with the four Attorney Generals, an upfront small fine ($250m) and supply of free drugs (reportedly worth $23bn).
Our base case is there will not be any attempt to extract a large cash settlement as this could potentially push Teva into bankruptcy protection and may reduce any settlements to the Cities and Counties. There is potential for the upfront fine and level of “free” drugs to be increased but we would still expect it to be modest from current expectations.
Teva continues to deliver on its targets of increasing operating margin, increase cash conversion and deleveraging their balance sheet from cash flow. However, the Company could not comment on potential settlement on the outstanding Opioid cases. Early this month, a major trial started in California with three counties (Santa Clara, Los Angele and Orange and the City of Oakland seeking $50bn in damages from J&J, Abbvie’s Allergan business, Teva and Endo.
In February, Teva CEO stated they were close to a global settlement but there is a difference between being close and getting something signed. The consistent line has been that all parties needed the pressure of live cases to force all sides to agree on a deal. There was no comment on the call today despite several questions with the Company CEO stating that because they are in active litigation, they can’t comment.
Given where Teva currently trades we are not taking an active long position, and given the low probability of a massive increase in cash fine, are unwilling to short either. We continue to monitor.
Happy to discuss.
Tomás
_______________________________
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
M:+44 7786 705 806
www.sarria.co.uk