Assume The Worst About Teva
The tete-a-tete with Senator McCaskill looks even more damning for Teva given that competitors have seemingly been more responsive to her requests. When I worked in M&A my former boss once told me, “When doing due diligence, if a company refuses to answer a simple question then assume the worst.” I believe investors should now assume the worst about Teva.
Assume Teva Failed To Report Suspicious Orders
One of the more devastating aspects of the opioid crisis is that many of the drug overdoses involved legal drugs that were not prescribed to the user. There are examples of millions of opioid pills being shipped to towns in Florida or West Virginia with populations smaller than 10,000. To the extent Teva’s actions and omissions formed a link in the supply chain that resulted in millions of opioids being sold on the street then it should be held accountable. The worst case scenario is that Teva could open itself up to potential fines if lawmakers find it failed to report suspicious orders.
Assume Teva Spiked Approval Of Opioids For Inappropriate Off-Label Use
One way to increase drug sales is to worker harder, work longer or hire more sales people in order to take market share from competitors. Another way is to convince doctors to prescribe a drug for additional indications. Until Teva proves otherwise, investors should assume the company pushed to have its opioids prescribed for inappropriate off-label use. Certain companies like Mallinckrodt (MNK) have been fined for not reporting suspicious orders. However, the financial impact of promoting off-label use of opioids is less clear. Insys could become a case study. Ultimately, it could hurt Teva’s reputation or cause negative sentiment for the stock.
Unwelcome Scrutiny For Teva
Scrutiny from lawmakers comes at a difficult time for Teva. Its $40 billion acquisition of Allergan’s generics business has left the company saddled with over $30 billion in debt at junk levels. Its loss of exclusivity for multiple sclerosis drug Copaxone has also caused a serious decline in Teva’s EBITDA. It will likely get worsen in Q1 2018 as generic Copaxone begins to fully kick in. The company’s debt has also been downgraded to junk levels by all three major rating agencies. Nonetheless, its credit metrics continue to deteriorate; its debt/run-rate EBITDA was 5.0x in Q2 2017, 5.3x in Q3 2017 and 5.4x in the most recent quarter. I believe more downgrades could be imminent.
Meanwhile, Teva is in the market to raise billions in new debt in order to push back near term principal payments. I think the company needs to raise equity but management could rather engage in layoffs and more borrowings. Fielding questions from investors about the potential financial impact of the opioid investigation is the last thing Teva needs. It could hurt its ability to raise capital or cause lenders to demand higher interest rates. Lastly, any uncertainties over its role in the opioid epidemic could create an overhang for the stock.
Conclusion
Until the company proves otherwise, investors should assume Teva is hiding something; assume it will have to incur tens of millions in fines once its secret is divulged to Senator McCaskill. TEVA is a sell.
