Teva eases debt burden with $400M tender offer as turnaround effort escalates

Last year, troubled Teva was so overburdened with debt that credit rating agency Fitch knocked its rating down to junk status, citing “significant operational stress.” In February, the company started the long climb back to health by restructuring its disastrous $40.5 billion purchase of Allergan’s generics unit, in an agreement that brought a much-needed $700 million influx of cash.

Now, Teva is slashing its debt even further thanks to a tender offer it announced earlier this week. The company intends to pay up to $400 million of notes that were due in 2019 and 2020, it said.

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It’s the latest move in an arduous turnaround battle that some Wall Street analysts believe is finally bearing fruit. The company beat consensus earnings expectations in the second quarter by a full 13 cents, thanks largely to its debt strategy. “Importantly, Teva continues to execute well on debt reduction, having reduced net debt by ~$1B to $28.4B during Q2,” wrote Jefferies analyst David Steinberg in a note to investors, adding that the company has cut its total debt by $7 billion in the last eight quarters.

That said, Teva’s stock took a dive when it announced Q2 results in early August. The company upped its 2018 earnings expectations for the second time this year, but it didn’t increase its revenue guidance—a disappointment, acknowledged Credit Suisse analyst Vamil Divan in a note to investors.

The main challenge to Teva’s top line is Copaxone, its blockbuster multiple sclerosis drug, which has come under significant pricing pressure since Mylan pounded down the price of its generic version to $1,950 from $5,000 in July. Copaxone outperformed expectations in Q2, leading Divan to raise his full-year sales forecast for the product from $1.85 billion to $2.17 billion. But he warned that 2019 “will clearly be another down year for Teva's topline as Copaxone continues to erode.” He expects total revenues to decline again in 2020 before growth ramps up in 2021, he added.

The key question plaguing Teva now is whether its new products and late-stage pipeline will deliver the growth investors are expecting. The company recently launched Austedo to treat tardive dyskinesia (TD), hoping to mount a significant challenge to Neurocrine’s Ingrezza. Analysts initially predicted Teva wouldn’t be able to capture more than 35% of the market, because the two drugs are so similar, but the tide may be turning in the company’s favor. A June survey by Leerink Partners revealed many doctors are starting to favor Austedo, leading analysts there to predict the drug will capture at least 45% of the market and hit blockbuster status by 2023.

RELATED: With clock ticking on Teva migraine drug, analyst expresses doubt for approval

A bigger challenge may be migraine med fremanezumab, which has a PDUFA date at the FDA of Sept. 16. The approval was delayed due to FDA concerns about the Celltrion plant in South Korea that’s producing the API for the product. The FDA reinspected the plant in July, after issuing a warning letter about it earlier this year, and noted several deficiencies, including poorly trained employees. Teva initially said it was “on track” for the PDUFA date, but lingering questions have Divan predicting the product won't be approved and launched until the second half of next year.

Regardless of the timing, Teva will face significant competition once fremanezumab finally hits the market. The manufacturing delay gave Amgen and Novartis a significant head start with their rival drug, Aimovig. Eli Lilly will be launching a competing product later this year, as well.

Given the competition, Leerink analyst Ami Fadia told investors to expect minimal sales of the migraine product in 2019, “as we assume Teva will give out mostly free drug to promote uptake,” she said in a note.

Echoing what appears to be a growing consensus among analysts, Fadia further advised investors not to expect meaningful growth from Teva until 2021.