The board at Teva Pharmaceutical Industries TEVA 19.35% has scored a clear victory. The investor celebration shouldn’t last much longer, however.
The struggling generic drugs giant announced Monday that Kare Schultz will take over as president and chief executive officer. That marks the end of a CEO search that began in February. Shares closed 19% higher in New York on Monday.
Teva did about as well as could be expected in its search, and the sharp rally is a logical response. Mr. Schultz brings a strong résumé, having recently served at H. Lundbeck and Novo Nordisk during his nearly 30 years of industry experience. He also brings skills that will be needed to address the challenges he faces at Teva, including experience with generic drugs as well as corporate restructuring.
It is tempting to predict a significant rebound for Teva shares. A new CEO with cost-cutting experience and fresh eyes can quickly make a big impact. Optimists will note that Teva shares traded more than three times higher than Monday’s price as recently as 2015.
But that was before Teva’s balance-sheet busting acquisition of Allergan ’s generics business last year. For Teva to return to health, it needs to cut its $35 billion debt load. The cutting part is relatively easy—reduce costs and sell assets. The trick is to do that in a way that doesn’t slash profits. Teva announced the sale of its intrauterine contraceptive business to a unit of Cooper Co s. for $1.1 billion on Monday afternoon.
But that was before Teva’s balance-sheet busting acquisition of Allergan’s generics business last year. For Teva to return to health, it needs to cut its $35 billion debt load. The cutting part is relatively easy—reduce costs and sell assets. The trick is to do that in a way that doesn’t slash profits.
The task will be harder for Mr. Schultz because generic drug prices are falling. That dynamic has hit Teva hard. Operating cash flow was down 23% in the second quarter from a year earlier, despite a 13% bump in revenues. Other companies are struggling with similar issues, but it means lower prices for Teva’s assets.
Meanwhile, Teva’s stock isn’t as cheap as it seems, despite this year’s 49% decline in the share price. Teva shares trades at just four times forward earnings. Include the debt, however, and the company is valued at 8.5 times enterprise value to forward earnings before interest, taxes, depreciation and amortization. That’s right in line with the 10-year average.
Monday’s news was a good start in the rebuilding project. Investors should want to see much more before betting that the rebound will last.
Write to Charley Grant at [email protected]
Appeared in the September 12, 2017, print edition as 'For Teva, Hard Part Starts Now.'