Investors Are Losing Patience With Teva--Heard on the Street

By Charley Grant Features Dow Jones Newswires

Teva Pharmaceuticals Industries has gone one quarter too many without taking the drastic action needed to reverse its decline. It risks losing investor confidence, which is a bad thing for a heavily indebted company.

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The biggest player in the generic drug industry needs to address its weak balance sheet, bring in new top executives and produce a plan to address the industrywide and company-specific pressures it faces.

On the surface, Teva's first-quarter earnings Thursday were pretty good. Adjusted earnings of $1.06 a share topped analysts' expectations though revenue didn't. It even affirmed its full-year outlook. But that wasn't enough to keep shares from falling nearly 2% in midday trading. That's on top of the 55% fall in the share price since 2015.

Teva's chairman, Sol Barer, said on the earnings call that the board was "taking the actions we need to take today to put the company on the right footing."

There is urgency to Teva's turnaround because of the debt it built up in its overpriced acquisition of Allergan's generics business for $40 billion in cash and stock in 2015, right as sector valuations peaked.

Teva not only top-ticked the market, it made the big bet just before prices on generic drugs started to fall industrywide. The impact from that transaction is easy to see. Teva reported earnings before interest, taxes, depreciation and amortization of $1.8 billion, up 9% from a year ago. Meanwhile, net debt has increased nearly eightfold over that same period to surpass $32 billion.

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The company is trying to lower the debt by selling its women's health and oncology businesses. But it isn't clear who will buy these operations and what price they will fetch. The company should consider cutting its generous dividend, which could free up more than $1.2 billion annually. That will likely cause investors who have embraced Teva's better than 4% yield to sell, but whatever declines occur will be offset by a less risky future for the company. With Teva trading at 6 times forward earnings, investors are clearly worried.

There are reasons to be concerned. Industrywide, price declines for generic drugs appear to be getting worse. For Teva, new competition looms as soon as next month for the company's best-selling drug, its branded multiple sclerosis treatment Copaxone. Meanwhile, Teva announced the failure of a late stage clinical trial for a new multiple sclerosis drug last week.

To deal with these issues, Teva needs to step up its search to replace former CEO Erez Vigodman, who stepped down earlier this year, and finance chief Eyal Desheh, who is set to leave soon as well.

Right now, Teva is essentially saying things will get better over time. Investors may not have the patience to wait much longer.

Write to Charley Grant at charles.grant@wsj.com

(END) Dow Jones Newswires

May 11, 2017 12:51 ET (16:51 GMT)