It isn't news that if you're holding a stock that goes bankrupt, there's a very good chance that you'll lose all of your invested capital. What might be news for some investors is that a couple of well-known companies in the healthcare sector appear to be teetering on the edge of insolvency. In fact, investors should know more about this pair of stocks including what's causing their difficulties and what their chances of survival are.
What do the two companies have in common? Unprofitable operations, high levels of debt, and insufficient cash on hand to pay for a year's worth of expenses. What's more, neither company has free cash flows that are sufficient to provide much breathing room. Nor are their struggles newly apparent; both have been struggling for quite some time. Let's take a look at what's going on in closer detail and why they could be headed for trouble in the next year.
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Teva's collapse continues into its fourth year
Teva Pharmaceutical Industries (TEVA 1.85%) is an American-Israeli company that manufactures generic drugs, earning it trailing revenues of $16.79 billion. Teva's generic drug business is so widespread that nearly 10% of the generic drug prescriptions in the U.S. each year are filled by a Teva product. Nonetheless, the company is barely profitable, its revenue is shrinking, and it has $26.68 billion in debt, $1.6 billion of which is due in the next year.
While the company's leadership recently attributed its shrinking revenue to the detrimental economic impact of the pandemic, the company's massive debt load is nothing new, nor is its narrowing margin. Simply put, it's extremely expensive to manufacture and distribute generic drugs at scale. Since 2016, revenue has been falling, and the company's high level of debt has become a larger and larger problem. So far, Teva has managed to navigate the issue by minting billions of dollars in new stock. Still, Teva didn't make any debt payments last quarter, and its free cash flows are dwindling.
Teva's American business unit is also facing a federal criminal indictment that alleges violations of the Sherman Act, which provisions for U.S. antitrust laws against price-fixing. This could put it another few hundred million in the hole. If Teva keeps losing its remaining cash, it won't have any chance to restructure its debt and make a turnaround play, so it may be doomed to bankruptcy.
Rite Aid may buckle under its debt load
The pharmacy and consumer healthcare retailer Rite Aid (RAD -51.21%) may not have much longer if it can't make a turnaround. Despite its considerable trailing revenue of $23.2 billion and quarterly revenues that are growing year-over-year in the double digits, Rite Aid's debts are tremendous. Paying off its $6.68 billion in total debt might not seem like a difficult task for a company with so much revenue, if not for the fact that the company is unprofitable, with trailing operating cash flows of only $260.55 million.
While the pandemic has done Rite Aid no favors in terms of its retail traffic, the company has been struggling for several years. The company's overhead costs are quite high, and many of its individual retail locations incur significant losses each year. In fact, hundreds of Rite Aid locations were so unprofitable that when Walgreens Boots Alliance (WBA -1.18%) purchased nearly 2,000 stores from it in 2018, 600 of them went on to be closed over the next year and a half.
Since 2017, Rite Aid has only reported making more cash than it spent in 2018. To make up the difference between its expenditures and income, the company has issued new stock and even more debt. Rite Aid will find no relief in its cash reserves, which were only $92.73 million in the most recent quarter. This will also make it quite difficult to execute on its ambitions to refresh its brand image and pivot toward a better digital shopping experience in the next few years.
While Rite Aid's situation looks dire, it does have the potential to reverse its fortunes. If it can close enough of its unprofitable locations and restructure its debt, it may be able to leverage its growing revenue to survive. This may mean withdrawing from states where its competitive position is weak and putting off plans to expand into new areas. But, if it takes on more debt, it will be a bad sign for Rite Aid's future.
