Idea of the Week: Bond Yield at 5.7%! Teva Pharmaceutical—An Absolute Leader of Generic Drugs

Teva Pharmaceutical Industries (Teva) is the world’s largest generic drug producer and an absolute leader in generic drugs. The company is currently listed on the Tel Aviv Stock Exchange and NYSE (Stock code: TEVA.IS/TEVA.US) with a market capitalisation of around USD 18.8 billion.

Aggressively Expand its Non-generic Businesses and Stable Operating Performance

Teva currently produces and sells over 500 generic prescription products. According to IQVIA data, Teva currently provides 318 million total generic prescriptions in the US, representing 8.4% of total US generic prescriptions. The generic drug supplies and sales account for around 55% of its total revenues.

Besides generic drugs, Teva still has a small businesses about specialty drugs and over-the-counter drugs. In addition to these segments, Teva engages in the sale of active pharmaceutical ingredients to third parties, provides contract manufacturing services and drug distribution business.

In recent years, Teva has aggressively expanded its non-generic businesses, significantly increasing the sales of other products and promoting other services. As shown in Table 1, Teva's generic revenue growth slowed somewhat, with only single-digit YoY growth. However, the company focused its growth strategy on its CNS (central nervous system) portfolio (AJOVY and AUSTEDO). For example, Teva launched these products in new markets such as China, Japan and Brazil in order to drive its revenue growth.

Table 1: Teva’s Segment Revenues (By Product / Business)

Truly, the CNS portfolio only accounted for less than 20% of total revenues to date. Teva is still reliant on the sales of generic products, which a mature business expected to be stable. This provides a basic level of support for its results. Along with the company's distribution business, these two segment account for up to 65% of its revenues, making it more resilient in terms of the business model.

As shown in Chart 1, for the period from April 2023 to March 2024 (the last twelve months), Teva recorded a total revenue of approximately USD 16 billion, a YoY increase of 7%. The operating margin was maintained at a level of 28%. The company's cost control was satisfactory. It did not see any significant decline in margins due to global inflation. The operating performance was quite stable.

Chart 1: Teva’s Operating Performance

It is noted that a resilient business model and a stable profit performance are favourable to the company’s credit performance. It means that the company’s business has a higher visibility, with a lower chance of having an unexpected poor performance in the credit performance going forward.

Still in Debt Reduction Phase with Leverage Level Being Under Control

As shown in Table 1, Teva’s total debt decreased 7.4% to USD 19.6 billion as of March 2024, from the end of 2022. The company is still in the debt reduction phase. The company's large increase in debt due to the acquisition of peer Allergan in 2016 was mitigated over time.

Table 1: Teva’s Credit Indicators

Teva’s leverage level is under control, with a net debt to EBIT further dropping to 3.7 times. The company’s average cost of borrowings is 4.6%. As shown in Chart 2, as the company's debt is mainly long-term debt, and the debt maturing in the next two years will only account for 17% of total debt, there is little room for the average cost of borrowings to rise further. Meanwhile, the company's interest coverage ratio is as high as 5.2 times, showing that its profitability is well sufficient to cover its interest payment.

Chart 2: Teva’s Debt Maturity Profile

Teva’s bond credit spreads are only around 150 bps. The lower credit spread indicates that the company has a stronger financing ability in the open market.

Overall Credit Risk is Manageable; Investors could consider Bonds with a yield to maturity of 5.6% or more

Currently, Teva’s issuer credit rating is BB- (S&P / Fitch), and its bonds have the same rating, belonging to non-investment grade level.

All in all, while Teva does not have a top-notch balance sheet, we believe its overall credit risk is manageable, given its stable business model, debt reduction phase and strong financing ability. Investors could consider the bonds in different tenors, with a yield to maturity of 5.6% or more (see Table 2), which have certain attractiveness.

Table 2: Teva’s USD Bonds

Related Risks

The price competition in the generic drug market is intense. Its competitors may lower prices to take market share, resulting in more pressure on the company's profit margin. Moreover, some governments around the world more or less are approving more generic drug companies to produce generic drugs, which might be similar to the company's drugs. This might lead to lower prices of generic drugs.

In addition, the company's customers are concentrated on large retail drug chains, wholesalers and medical institutions. If these institutions no longer choose the company's drugs, or if they put pressure on the company to lower the prices, the company's revenue will be adversely affected.

The company's leverage is not decent and most of its debt bears interest at a fixed rate. Under the high interest rate environment, the company might need to refinance at a higher rate. So the interest expense might rise gradually.

Conclusion

Teva is the world’s largest generic drug producer, an absolute leader of generic drugs. The company aggressively expands its non-generic businesses, which drives its revenue growth. However, Teva is still reliant on the sales of generic products. This provides a basic level of support for its results. The operating performance is quite stable.

The company's large increase in debt due to the acquisition of peer Allergan in 2016 was mitigated with the passage of time. The company is still in the debt reduction phase. Its leverage level is under control. Its profitability is well sufficient to cover its interest payment.

All in all, while Teva does not have a top-notch balance sheet, we believe its overall credit risk is manageable, given its stable business model, debt reduction phase and strong financing ability. Investors could consider the bonds in different tenors, with a yield to maturity of 5.6% or more, which have certain attractiveness.