TEVA Pharmaceutical Industries Limited

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 2/5

Teva Pharmaceutical Industries is a global pharmaceutical company specializing in generics and some specialty medicines, with a large global presence and a complex history of acquisitions and divestitures.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Teva is a global pharmaceutical company engaged in the development, manufacture, and sale of generic and specialty pharmaceutical products. The company operates in two segments: North America and International Markets with specific focus on complex generics, biosimilars, and specialty medicines. The company was founded in 1901 and has been a leader in the generic pharmaceutical industry with a huge global presence.

  • Geographic Presence:
    • North America: Primarily the United States and Canada.
    • Europe: Includes European Union countries, the United Kingdom, and other European nations.
    • International Markets: All other territories except the above two segments such as Asia, Latin America, and emerging markets.
  • Product Portfolio:
    • Generics: The largest part of their business. Include solid oral dosage products, injectables, and inhalers.
  • Specialty Medicines: Focus on innovative medicines, including those for central nervous system disorders, respiratory conditions, and oncology. * Biosimilars: Replicas of biologic drugs, offering more affordable alternatives, with the company showing growing interest in developing new products in that area.

The company is emphasizing growth in biosimilars and complex generics in its strategy.

  • Recent Strategy Shifts Teva has recently focused on cost-cutting measures. The company is pursuing the strategy of divesting some of their businesses. They are also focusing on developing innovative branded products. In general, Teva is pivoting from a high debt, high risk conglomerate company into a business with sustainable cash flows and new growth opportunities.

Moat Analysis:

Teva’s moat is assessed to be a weak moat at 2 out of 5, primarily due to the following factors:

  • Generic Competition: Teva primarily operates in generics, where companies compete primarily on cost, not on product differentiation. This means low profit margins for everyone and no differentiation which can establish a long-term competitive advantage. With more competition in the generics industry, Teva can’t rely on that segment for durable profits.
  • Price Erosion in Generics: Generic medicines often face price erosions over time as more competitors enter the market. Although volumes may remain high, falling prices diminish the ability of companies to generate long-term profits.
  • Regulatory and Patent Challenges: Teva faces regulatory hurdles and patent challenges constantly. These issues can significantly impact the revenue stream and profitability from patented products.
  • Limited Brand Power: Though some of Teva’s specialty drugs are recognized brands, they do not create the brand loyalty needed to generate a strong economic moat compared to other pharmaceutical giants.
  • High Debt Levels: High levels of debt have made it difficult for Teva to develop and invest in R&D. This creates an unstable structure that is vulnerable during times of turbulence and may negatively impact Teva ability to take advantage of new opportunities. The company has been reducing its debt which gives a favorable light on their situation going forward.
  • Competitive Landscape: The generics market is fiercely competitive and a barrier to entry in the business, which makes it hard to create a durable competitive advantage. Competition is intensifying from both branded and generic companies.
  • Dependency on Acquisitions: Teva has relied greatly on acquisitions, which often result in high debt, and may have created a company that is too diversified to understand and manage well. The lack of organic growth and the reliance on acquisitions is a sign of weak economic moat.

Risks Affecting the Moat:

  • Generic Competition: The increased competition can easily erode pricing power. The more competition in the market, the lower the potential profit margins for Teva.
  • Patent Expiration & Challenges: Patent loss or patent challenges on key products can erode profit margins quickly. Teva relies on a lot of revenue derived from patented drugs, this is a great risk to the company.
  • Regulatory Changes: Changes in regulatory requirements could affect approval timelines and pricing dynamics, significantly affecting the profitability of Teva.
  • Debt Burden: High debt burdens can limit flexibility and can cause financial stress during downturns. Teva has made some progress in debt reductions and is focusing on bringing down their debt-to-EBITDA ratio to below 3. However, the debt remains an important problem that can greatly impact Teva’s ability to create value for shareholders.
  • Product Litigation: A variety of class action and other litigation, particularly around opioid-related products, can create liability and negatively affect the long term stability. This litigation has already started to take a toll on the revenue as well as the company’s expenses.

Business Resilience:

  • Global Diversification: Teva’s geographic diversity helps lessen the impact of economic troubles in a particular region. The operations span across the globe giving resilience to the business.
  • Established Presence in Generics: They are a leader in the generic drug segment. This ensures a degree of stability and predictable revenue. Even if a drug faces competition in terms of patents, it will still keep on generating revenue as it can now be offered at lower prices.
  • Focus on Specialty and Biosimilars: They are slowly pivoting their business into more differentiated products, this is a good sign for better profit margins and less dependence on commoditized products.

Financial Overview:

Teva’s financials have been very volatile and complex due to many acquisitions and divestitures and it is critical to analyze them with context and understand the important details.

  • Revenues: A large pharmaceutical company, most of their revenue is tied to the sale of generic products. They are trying to diversify into other segments.
  • Profitability: The pharmaceutical industry generally has a high profitability due to the patent protection offered on branded drugs. However, the generic drug business where Teva operates for a large part of its operations has inherently low profit margins. While the company had a gross profit margin of around 50%, operating margins remain in low single digits which is a cause of concern for the overall value of Teva.
  • Return on Invested Capital (ROIC): This is a great measure to estimate the value creation ability of the company. Higher the ROIC, the more value the company is generating for the invested capital. In recent times, the ROIC of the company has been underperforming, which suggests there are problems with their strategy. They need to improve that aspect before the company can be considered a value pick.

  • Debt: The company had a very high debt, which makes it extremely vulnerable to downturns. They have been continuously working on reducing the debt, which is a great sign. But it remains one of the key drawbacks of investing into Teva right now.

  • Recent Earnings Call Notes

    • Teva management stressed the importance of its “innovative medicines” pipeline, especially in neuroscience and immunology. The pipeline is expected to drive long-term growth.
    • Teva is focusing on increasing efficiency, which would be achieved through continued cost cutting measures and improvements in gross profit.
    • They are going to reduce the debt to under 3x EBITDA.
      • The company’s management indicated that the company is targeting a mid to high single digit growth for their revenues and operating income over the next couple of years.
    • Teva is actively seeking options for their portfolio, and that they have no issue in exiting businesses that do not fit their core strengths.

Understandability Rating: 4 / 5

Teva’s business model is somewhat complex, but it is still relatively easy to understand. The various types of products they have are easy to comprehend. However, they do have several different financial instruments on their balance sheet that can be difficult for a layman to fully understand. Their business segments can also be a little complicated at times due to the number of products that they cater to. The operations are quite straightforward, but they might be difficult to follow because of the huge amount of products they are working on. Therefore, the understandability rating is given 4 out of 5.

Balance Sheet Health Rating: 2 / 5 Teva’s balance sheet is very complex and has several concerning items, therefore, getting a bad rating of 2 out of 5.

  • High Debt: Teva has a large debt pile which they are slowly trying to bring down. A high debt burden limits their flexibility to invest in other potential opportunities or research. Although it has improved recently, it is still a cause of concern for the business.
  • Goodwill and Intangible Assets: A substantial portion of the balance sheet consists of goodwill and acquired intangibles, due to prior acquisitions. These might not reflect the actual current market value.
  • Reorganisation Liabilities: There are also substantial liabilities in relation to restructuring and acquisitions, which can negatively affect financial flexibility.
  • Tax Liability: The company has substantial deferred tax liabilities.

Despite these issues, Teva is making great progress in controlling costs and reducing its debt. There are some positive signs but the business is not yet out of the woods and remains vulnerable to financial distress.