On Wednesday, May 10, we looked at four of the most pressing questions shareholders (including yours truly) had heading into Teva Pharmaceutical Industries' (NYSE:TEVA) first-quarter earnings report. By the following morning, we had answers to quite a few of those questions.
Teva's Q1 report answers a few key questions
As a quick synopsis for the quarter, Teva wound up reporting $5.63 billion in revenue, up from $4.81 billion in the year-ago quarter. Much of the increase can be attributed to its acquisition of generic drug company Actavis from Allergan last year.
At the same time, adjusted net income fell to $1.08 billion, or $1.06 per share, from $1.17 billion, or $1.20 per share, in the year-ago quarter. Comparatively, Wall Street had been looking for $60 million more in sales, but the company wound up reporting a $0.03 per share larger profit than expected. In other words, another mixed report for Teva.
One question Teva firmly answered is that its cost synergies from the Actavis transaction are on track. In fact, the company wound up increasing its forecast for cost synergies by $200 million to $1.5 billion by the end of 2017. That's great news for a company that's seen its interest expenses and legal costs soar in recent quarters.
Shareholders also received clear guidance that the company is looking to part ways with either its Women's Health operations and/or its European oncology and pain segments in order to reduce its debt load. As of the end of the first quarter, its debt still stood at approximately $34.6 billion; however, the company did reduce its total debt by $1.2 billion during the quarter.
How much could Teva generate by selling its non-core assets?
The affirmation that Teva is looking to make a deal is a smart move for a company that's recently been weighed down by debt concerns and rising litigation and settlement costs. The only question at this point is, how much could Teva reasonably fetch for either of its non-core assets? While no one has the precise answer or knows if Teva can even reach such a deal for any of its assets, we can probably take an educated guess at the price tag for each segment.
In early April, Bloomberg initially reported that Teva was actively seeking a buyer for its Women's Health division for about $2 billion, according to sources that wished to remain anonymous. Last year, the company's Women's Health segment generated $560 million in sales, and revenue rose by a crisp 13% in the first quarter to $124 million from $110 million in the first quarter of 2016. If Teva can deliver high single-digit to low double-digit sales growth, there's no reason the women's health segment won't top $600 million in sales in 2017.
Generally speaking, acquisitions in the drug space have been occurring anywhere from three times sales to up to six times sales, based on the growth prospects of a drug or segment. Women's Health has consistently delivered high single-digit or low double-digit growth. So, with a modest premium to the three times sales expectations, Teva is probably looking to generate $2 billion to $2.2 billion in sales from this segment, which wouldn't be too bad considering that it paid $288 million for the division back in 2010.
Oncology and pain
The other asset on the chopping block is the company's European oncology and pain segment, which Bloomberg pegged as having generated $320 million in sales last year. This segment is considerably tougher to come up with a fair price range for considering the push-pull dynamics at work.
On one hand, brand-name oncology and pain therapeutics can generate high margins, so Teva is going to be reluctant to just hand these sales and profits over for a low-ball bid. On the other hand, oncology sales have struggled because of weaker results from Treanda/Bendeka. Increasing competition in the cancer drug space has been mostly to blame for its sluggish performance. Worldwide sales for Treanda/Bendeka grew 1% in the first quarter of 2017, but they fell 11% last year to $661 million. Between sluggish worldwide sales and Europe's considerably tougher drug-pricing practices compared to the U.S., the premium for Teva's EU oncology and pain business might be lower than some would expect.
My guess? Teva is probably looking to get in the neighborhood of $900 million to $950 million for this division.
Altogether, Teva could generate close to $3 billion from divesting these two non-core assets. Considering that it's still capable of producing around $5 billion in operating cash flow annually (when it's not dealing with litigation and major buyouts), Teva could safely whittle away as much as $6 billion to $7 billion of its $34.6 billion in debt over the next year if it sells these aforementioned assets and funnels a majority of its operating cash flow toward debt repayment.
Will it move forward with the sale of these assets and receive a fair price? That's what remains to be seen. In the meantime, I remain steadfast in my belief that long-term investors will be rewarded by sticking with Teva.