Shares of Teva Pharmaceutical Industries (NYSE: TEVA), an Israeli-based developer of branded and generic drugs, gained more than 8% during September, totaling $1.3 billion in market cap, according to data from S&P Global Market Intelligence. A key hiring and the announcement of important divestments caused the company's share price to finally perk up.
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Teva ran into a brick wall in 2017, and everything came to a head in August during its second-quarter earnings release. The company ended up slashing its dividend by 75%, cutting its sales and profit guidance, and warning that generic-drug pricing would remain weak for some time. It also recently settled a bribery scandal concerning three countries, saw its CEO and CFO leave, is coping with the expected entrance of generic competition to its lead branded drug that accounts for $4 billion in annual sales, and is dealing with how to chip away at $35.1 billion in total debt.
Now that you have the background straight, we can get into why Teva rallied in September. First, the company announced it found its next CEO. Hiring Kare Schultz, the CEO of H Lundbeck A/S, and a former executive at Novo Nordisk, is being viewed as a big positive. Schultz has a storied history of successfully leading restructuring efforts, and he brings an untarnished reputation to the helm.
The second catalyst involves multiple divestments announced last month regarding its women's health operations. Just a day after introducing a new CEO, Teva announced the sale of ParaGard, a contraceptives device manufacturer, for $1.1 billion, or just over 6.5 times what the division generated in sales over the previous 12-month period. A week after the sale of ParaGard to Cooper Companies, Teva also announced that its remaining women's health assets were being sold for $1.38 billion in two separate transactions. The nearly $2.5 billion generated from these divestments was more than the $2 billion the company was hoping to get, and it'll be used to chip away at its debt.
Though Wall Street is mostly bearish on Teva over the near term and intermediate term, this writer has been an active acquirer of its shares. I see no less than six catalysts that could push Teva higher.
In particular, I believe naysayers are underestimating how quickly Teva could chip away at its debt. The divestment of its women's health businesses, and the likely sale of its European oncology and pain division before the end of the year, will provide a quick way to reduce debt. However, the company is saving $1 billion annually by slashing its dividend by 75%, and it still has the capacity to generate between $2 billion and $4 billion in annual free cash flow. A $7 billion to $10 billion pay down by the end of 2018 is very feasible.
Time is also on Teva's side. We're seeing a growing trend toward generic drug usage, which favors Teva since it's the world's largest generic drug producer. Even if the generic-drug pricing environment remains challenging, Teva should do just fine from a volume perspective. As icing on the cake, the elderly population is expected to rise dramatically in the decades to come. Since the elderly are more likely to need prescription medicines than younger folks, it means Teva's patient pool is constantly growing.
Doors are opening for Teva, which leads me to believe its stock price will be significantly higher years down the road.
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