Generics drug giant Teva has been reeling since Mylan won approval to offer a generic version of blockbuster multiple sclerosis drug Copaxone. The drug represents 18% of Teva’s total revenue and 45% – 50% of its EBITDA. Generic Copaxone is expected to negatively impact Q4 2017 results and fully kick in by Q1 2018. Newly hired CEO Kare Schultz revealed he would lay off 14,000 employees (25% of the workforce) in an effort to wring $3 billion in costs out of the business. He will also suspend the dividend and make deep cuts to R&D.

Teva still has $35 billion in debt that needs to be repaid. Its debt already exceeds 5x run-rate EBITDA. Fitch recently downgraded the company to junk status. Once generic Copaxone kicks in I expect the company’s credit metrics to deteriorate further. An even more pressing matter is that $5 billion of the company’s debt load is due next year, and $19 billion over the next three years. The Shock Exchange is on record that generic Copaxone could trigger Teva’s insolvency:

I also estimate that generic Copaxone could cut Teva’s EBITDA by about 34%, making it difficult to cover its $34 billion in net debt. Said another, generic Copaxone could cause Teva to become insolvent. Below I attempted to value Teva including the impact of generic Copaxone.

Not only will Teva’s debt exceed its enterprise value but the company could be hard-pressed to make principal payments as they come due. About $5 billion of its debt is due next year and $19 billion over the next three years. The company has $680 million in cash and generates about $2.3 billion in free cash flow annually. That will decline once generic Copaxone arrives.


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