Big developments are coming out of Teva Pharmaceuticals (NYSE:TEVA) this week. Some could either be the generic giant’s saving grace while others could sink the company.
This week, Teva made three critical announcements. First, it will be raising $5 billion more in debt to pay off some of the $34 billion debt it already holds. Second, it will be settling with Allergan plc (NYSE:AGN) for $703 million in an ongoing dispute over working capital related to Teva’s acquisitions of its generic business. (The proceeds will be used to pay off debt.) Third, Teva just announced that the European Medicines Agency (EMA) has accepted its Marketing Authorization Application of Fremanezumab, its expected-blockbuster specialty migraine drug.
Let’s deal with these from last to first. Fremanezumab is expected to sell about $2 billion annually globally, which should help plug some of the expected shortfall from the impending dropoff in Copaxone sales. Copaxone is Teva’s specialty multiple sclerosis drug and No.1 revenue generator. At $4.2 billion in revenue in 2016, it makes close to 20% of Teva’s total top line. Generic competition is expected to take a big bite out of those revenues so fremanezumab is coming into the market just in time. Depending on how far and how fast Copaxone revenues decline and how fast Fremanezumab revenues take their place, Teva could even end up with higher total revenues by the time Copaxone bottoms out and Fremanezumab sales reach their maximum.
As for the $703 million settlement with Allergan, it is less than Teva wanted but it will help Teva get over the $5.1 billion in debt it must repay by the end of this year. Certainly, Teva understands that it needs as much cash is it can reasonably get help it over that $5 billion hump.
And this brings us to the third development, which could either make or break Teva’s entire restructuring plan and determine whether it will be, in the end, acquired or whether it will survive one of the darkest periods in its corporate history. Knowing that it needs to repay $5 billion in principle by the end of 2018, it has decided to raise that sum in new debt securities and roll it over. The thing is, there are no specifics yet as to the rates Teva will pay and this is key.
If Teva can roll over $5 billion at a reasonable and fixed interest rate, then the rollover could succeed. I have already pointed out in previous coverage of Teva that $28 billion of its total debt load is fixed rate and this is very good. If, however, the generics giant is forced to raise it at floating rates, it will be subjecting itself to what looks like an environment of sustained rising interest rates for the foreseeable future. We are already seeing rates spike globally across the board, and murmurings of a bond bear market are getting much louder, especially as U.S. government borrowing is projected to explode past $1 trillion a year by fiscal 2019, according to the Wall Street Journal, up from only $519 billion last year.
It’s not the fact that a severely indebted company is raising more debt that’s the problem. It may be reasonable provided it saves money in the long run. The issue shareholders should keep a very close eye on is how sustainable is the new debt that will be raised. If it’s at a floating rate, it might be time to capitulate on Teva. We will find out soon enough when the new debt is issued.
(Disclosure: Long TEVA)
