Teva's Opioid Options Come Into More Focus Ahead Of Third Quarter Financials
Executive Summary
Investors may have more clarity on Teva's long-term outlook if the generic drug maker reaches a settlement in a big opioid case before it goes to trial in Ohio next week.
Teva Pharmaceutical Industries Ltd. appears to be ironing out a settlement agreement with plaintiffs in a major opioid liability case that is set to go to trial on 21 October in Ohio. A deal would give investors more clarity on the long-term financial outlook for the troubled generic drug maker as it heads into its third quarter financial report on 7 November.
The uncertainty around ongoing opioid liability litigation has been a significant overhang for the company as it tries to navigate its way to a financial recovery. The company has made progress on some fronts, cutting costs and even stabilizing the challenging North American generic drug business in the second quarter. But that hasn't stopped investors from fearing the worst – bankruptcy – given the low cash flow and amount of debt Teva has on the books.
Teva is the lone pharmaceutical company that has yet to settle with plaintiffs in the multi-district litigation (MDL) opioid case in Ohio. Johnson & Johnson reached a settlement deal on 1 October, agreeing to pay $10m to the two Ohio county plaintiffs, reimburse $5m in legal fees and expenses and contribute $5.4m to non-profits connected with opioid programs. (Also see "J&J Settlement Leaves Teva As Sole Opioid Maker In Bellwether Trial" - Pink Sheet, 2 Oct, 2019.) J&J's settlement followed deals by other drug manufacturers including Endo International PLC,
Allergan PLC and Mallinckrodt PLC. Those agreements got the companies out of the bellwether trial but left them as defendants in the more than 2,000 other cases in the MDL and state courts.
This week, several companies, including Teva, reportedly made offers to resolve all of these cases. According to a report in Bloomberg on 15 October, Teva has proposed giving away $15bn in generic drugs over 10 years to resolve all of its cases.
In an opioid liability case in Oklahoma in May, Teva settled for $85m two days before the trial was set to begin. (Also see "Teva Stresses Stability In Settling Oklahoma Opioids Case" - Generics Bulletin, 28 May, 2019.)
While Teva's offer is yet to be accepted, a resolution would be welcomed by investors, even as other litigation risks around generic drug price fixing allegations persist. The company's stock is trading up around 7% on the New York Stock Exchange since the settlement report surfaced, opening 17 October at $7.17. Nonetheless, that is still 66% lower than where the stock was trading a year ago.
Bernstein analyst Ronny Gal outlined the financial impact of such a settlement, if it were to be finalized, in a 16 October research note. "We would argue that any settlement that does not include bankruptcy and spreads the cost out over time would be a positive for Teva," he said. "The structuring of the agreement as drug volume provides multiple added benefits that reduce the economic impact of the settlements."
Gal based his financial assumptions on the agreement being tied to the price of the drugs as determined by wholesaler acquisition cost and including largely broad-based primary care drugs like statins, antibiotics and hypertension drugs. With a gross margin of about 20% for those kinds of products, he forecast that the impacted gross profit would be about $800m and impacted net income would be $640m. The impact on free cash flow (FCF) would be about $550m a year, he predicted.
"Measured against current FCF of $2bn-$2.5bn, this is a sensible outcome," Gal said, though he emphasized that the reports are only for the settlement that Teva is offering, which may not be accepted, and an eventual settlement could end up looking very different.
But even if such a deal were to be agreed upon, Gal said the impact would continue to be a drag on Teva's share price.
"With most drug companies trading at 10-year FCF, Teva shares are not the most attractive," he said.
The other defendants in the Ohio trial are drug distributors AmerisourceBergen Corp.., Cardinal Health Inc., Henry Schein Inc.,
McKesson Corp.. and the pharmacy Walgreen Co..
In September, the biggest marketer of branded opioids, Purdue Pharma, filed for bankruptcy, paving the way for what the company hopes will be a broad settlement agreement. (Also see "Purdue Pharma: From Blockbuster Success To Bankrupt Villain " - Scrip, 16 Sep, 2019.)