Teva: Warren Buffet Is Barking Up The Wrong Tree

Teva Still Has To Refinance $5 Billion In Debt

Teva’s $32 billion debt load amid falling EBITDA is problematic. However, the company’s interest rates on that debt is paltry. Teva incurred $191 million in finance expense in Q4 – that equates to an average interest rate of just over 2%. Bond yields have been rising over the past month due to inflationary expectations. Secondly, market chatter suggests Teva needs to restructure anywhere from $12 to $19 billion in principal payments over the next three years. The company’s debt has been given a junk rating by the three major bond rating agencies.

Assuming $12 billion in new debt, for every 100 basis points increase in interest expense Teva would incur an additional $120 million in annual interest expense. If the company’s interest cost were to rise to 7%-8% it would create hundreds of millions of new interest expense as Teva’s EBITDA was in decline. Rising debt costs could rapidly change sentiment for the stock. Berkshire appears to be betting that debt holders will continue to give Teva sweetheart deals on new debt. I highly doubt it.

Management Wants To Raise Prices

New CEO Kare Schultz has won rave reviews as a turnaround specialist. In addition to layoffs his other big idea was to hike prices. Teva recently hiked prices on seven drugs ranging from 2.3% to 9.4%. Teva’s core generics business has been in disarray over the past few quarters. Q4 revenue from generics was down 16% Y/Y, while segment profit fell 31%. Large buyers have wielded their power to negotiate lower prices, and faster FDA approval of generics have also hurt prices. I expect this to continue. Secondly, generic competitor Mylan did not follow suit with price hikes. I believe Schultz is grasping at straws here. If large customers balk at price hikes or if Teva loses share to Mylan (or others) then its hike strategy could be an epic fail.

Conclusion

Teva has gone through all kinds of machinations to avoid raising equity to help pare debt. I believe rising debt costs and falling EBITDA will eventually weigh on the stock. TEVA remains a sell.