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Here's Why Teva Pharmaceutical Soared Today

By Maxx Chatsko - Updated Oct 21, 2019 at 3:36PM

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The company announced an unexpectedly favorable settlement in a lawsuit related to the opioid epidemic.

What happened

Shares of Teva Pharmaceutical (TEVA -0.27%) rose over 19% today after the company announced it had made a last-minute settlement with two counties in Ohio related to the opioid epidemic. The company and three drug distributors will pay a combined $260 million settlement to avoid arguing the case in a federal trial, which would have been the first stemming from the health crisis. 

Teva Pharmaceutical will only pay $20 million in cash and donate another $25 million in Suboxone (naloxone), the primary drug used to treat opioid addiction, to the counties over a three-year period. That's far below the worst-case scenario and suggests fears that the company would end up paying billions of dollars in total cash settlements could be a severe overestimate.

As of 3:05 p.m. EDT, the pharmaceutical stock had settled to a 7.7% gain.

An ascending bar chart with the last and tallest bar represented by a red arrow on a springboard.

Image source: Getty Images.

So what

It's still a little too soon to conclude that Teva Pharmaceutical has de-risked its financial exposure to the opioid crisis. UBS analyst Navin Jacob previously estimated that the business could pay as much as $2.2 billion to settle opioid-related claims. While the now-settled Ohio suit was expected to represent a significant chunk of that estimated total, over 2,000 counties, cities, and states are seeking damages from the health crisis. 

But Teva Pharmaceutical said it has an agreement in principle with attorneys general from North Carolina, Pennsylvania, Tennessee, and Texas as part of a global settlement in which the company would donate up to $23 billion in Suboxone (based on wholesale acquisition cost) and make cash payments totaling $250 million over a decade. Including other companies involved in the nationwide crisis, the global settlement could exceed $50 billion in total value, primarily comprising donated drugs (and calculated at wholesale prices).

Now what

Investors are pleased that the legal situation is moving toward a potential resolution. If Teva Pharmaceutical can avoid paying billions in cash settlements, then it would provide more operating flexibility for the struggling business. That said, donating what amounts to a nationwide supply of Suboxone under the proposed global settlement would significantly weigh on operations -- and significantly curtail growth plans of other suppliers of generic naloxone. 

Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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