TEVA ($TEVA) — FY21 Update

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Price: $7.80 Market Cap: $8.6bn Valuation: 6x EBITDA / 4.4x FCF Category: General

FY21 Review

Revenue fell 8% in Q4. Earnings were up 13% from $0.68 to $0.77 per share.

TEVA continues the massive deleveraging journey following a large ill-timed acquisition several years ago — net debt down to $20.9bn in FY21 (from $23.7bn FY20)
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Looking at a breakdown of revenue by product line:
  • Generics (global) are 57% of sales and NA is 24% of sales alone
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  • There is one specialy drug off-patent with declining sales (Copaxone) and 2 new specialty drugs in growth mode (Austedo and Ajovy).
    • Copaxone was $1.3bn FY20 sales and fell 25% to $1bn in FY21 (as expected) — headwinds should get smaller as it becomes smaller portion of total sales
    • Ajovy/Austedo — grew 36% to $1.1bn in FY21
  • NA generics were a problem in FY21 — sales down 6% and this makes up ~24% of total revenue
2022 guidance
  • 25% growth in Ajovy/Austedo specialty drugs (9% of FY22 sales) + 15% decline in Copaxone (5.4% of FY22 sales)
  • Flattish EPS — $2.40-2.60 vs. $2.58 in FY21
  • Flat-to-down FCF and EBITDA
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Thoughts & Valuation

Teva is making good progress on their multi-year plan of getting net debt down to 3x EBITDA, operating margins to 28%, and FCF conversion to 80% of net earnings.

Multiples continue to compress for generics peers. Teva is well below multi-year averages (even after getting leverage down a significant amount)

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After reading a few sell-side reports, the bear case around Teva centers on the potential opiod liabilities and continued pressure on the generics business.

Management sets a significantly more confident tone around cash flow visibility over the next few years and they’ve been holding margins despite the revenue declines.

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CEO Kare Schultz talked about capital returns to shareholders coming into the picture after they hit the leverage target. With a 20-25% FCF yield, that could be substantial. On top of that, Teva trades at about the lowest valuation level in its history despite good progress on the balance sheet.

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Using the historic average 7x EBITDA multiple on $4.85bn 2022 EBITDA and an ending net debt balance of $19.1bn = $14.8bn equity value or $13.30 per share price target.