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A decade ago, generic drugmakers ruled. Unlike their big pharma cousins, they were better known for operational and financial acumen than cutting edge science. Their daring M&A and pursuit of low-tax domiciles turned them into swashbuckling Wall Street heroes. The leader of the pack was Teva Pharmaceuticals, whose market capitalisation reached $60bn in 2015.
Teva now sits in the crosshairs of law enforcement. On Monday, it entered into a deferred prosecution agreement with the US Department of Justice over a criminal price-fixing scandal. Earlier this year, it settled civil charges for more than $4bn over the marketing of opioids. Sales are falling. Revenue of $15bn last year was down a third from 2017. The company’s market cap has shrivelled to less than $10bn.
Trouble can be traced back to 2016, when Teva acquired generics rival Actavis from Allergan for $40bn. The highly leveraged deal became a flashpoint for its problems. Teva’s debt-to-ebitda ratio soared to more than five times, just as sales and profits were about to moderate. Since then, the company has been forced into diverting cash flow into debt reduction. It is attempting to reduce its leverage ratio to around two times in the next couple of years.
Teva’s new chief executive, Richard Francis, insists that the Israeli company has turned the corner and can move from retrenchment to growth. Teva previously targeted generic drug creation for 80 per cent of products coming to the end of patent exclusivity. Francis wants to reduce that ratio to 60 per cent. The company can then allocate more towards developing its own exclusive drugs as well as so-called biosimilar treatments.
The new-look Teva is supposed to grow annual revenue in the mid-single digits and have an operating margin above 30 per cent with only modest debt. A decade ago, those targets would be unthinkably uninspiring. Francis’s job is to show that the new figures are both ambitious and attainable.
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