Teva Pharmaceutical Industries Ltd (TEVA) Equity Research 812 Research Report - TEVA.pdf · Teva was founded in 1901 as a small drug wholesale company in Jerusalem and then converted

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Headquartered in Israel, Teva Pharmaceutical is one of the world’s largest manufacturer of generic drugs, with approximately 60 manufacturing and R&D facilities. The company was founded in 1901 and has a portfolio of more than 3,500 drugs. roughly 1 out of 9 generic prescriptions in the U.S. is filled with a Teva product. The company also develops brand-name drugs in the central nervous system, oncology and respiratory system categories.

Teva was founded in 1901 as a small drug wholesale company in Jerusalem and then converted into a local drug manufacturer during World War II. As demand grew, the company merged the market in 1960 to create the largest pharmaceutical manufacturer. Teva expanded internationally to Europe and the United States, and then passed the Hatch-Waxman Act in 1984, which expanded to generic drugs. In the next 30 years, Teva completed approximately 30 acquisitions, further consolidating its position as the world’s largest composite material manufacturer, with approximately 90 manufacturing and research and development facilities worldwide.

Stock Information（data as of August 20, 2020）

Ticker Symbol TEVA Market NYSE Sector Healthcare Stock Price $10.14 52 wk High $13.76 52 wk Low $6.25 Shares Outstanding 1.1B Public Market Float 1.09B Avg.Daily Volume 10,042,237 Market Capitalization 13.311B Beta (5Y Monthly): 1.58 Trailing P/E Ratio (1Y): 1.16k

Revenue (Fiscal Year End: August) Unit: $Million

Q4 Q3 Q2 Q1 2020 3.87 4.357 2019 3.992 4.264 4.337 4.295 2018 4.559 4.529 4.701 5.065

Stock Performance

Source: yahoo finance

Company Profile

Teva Pharmaceutical Industries Ltd (TEVA) Equity Research

TimeLine

August 17, 2020 Hanzhang Gao

[email protected] 812-650-2867

mailto:[email protected]

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As one of the largest global generic manufacturers in an industry undergoing dramatic changes, Teva is likely one of the most controversial publicly traded Healthcare companies. With the rapid generic market decline due to pricing pressures, the entry of generic competition for its specialty drug Copaxone (treatment for multiple sclerosis), a high debt load, and a confluence of legal matters, management has had to make several difficult choices. The new management team aggressively reduced operating expenses by $3 billion in fiscal 2019 and continues to strive toward a leverage ratio of 3 times over the long term. This strategy clearly outlines the closing of nearly 30 facilities globally and the elimination of over 10,000 employees. With the elimination of these roles, Teva has reduced management layers to increase accountability and transparency into P&L performance. In addition to this restructuring, management actively rationalized the overall portfolio to eliminate unprofitable stock-keeping units. Teva currently has 17 API production facilities, producing approximately 350 APIs in various therapeutic areas. The API intellectual property portfolio includes hundreds of granted patents and pending applications worldwide. APIs used in pharmaceutical products are subject to regulatory oversight by national health authorities. API sales to third parties in the second quarter of 2020 were $211 million, an increase of 4% in both U.S. dollar and local currency terms, compared to the second quarter of 2019. API sales to third parties in the second quarter of 2020 take 5.7% of total revenue. API sales to third parties in 2019 increased by 1% to $754 million, in both U.S. dollar and local currency terms. API sales to third parties in 2019 take 4.5% of total revenue. The Company has entered into alliances and other arrangements with third parties to acquire rights to products it does not have, to access markets it does not operate in, and to otherwise share development costs or business risks. The Company’s most significant agreements of this nature are summarized below. Alvotech Partnership

In August 2020, Teva entered into an exclusive partnership agreement with biopharmaceutical company Alvotech for commercialization in the U.S. of five biosimilar product candidates. Eli Lilly

In December 2018, Teva entered into an agreement with Eli Lilly, resolving the European Patent Office opposition they had filed against Teva’s AJOVY® patents. The settlement agreement with Lilly also resolved Lilly’s action to revoke the patent protecting AJOVY in the United Kingdom. AUSTEDO®

On September 19, 2017, Teva entered into a partnership agreement with Nuvelution Pharma, Inc. (“Nuvelution”) for the development of AUSTEDO for the treatment of Tourette

5 Basel Street Petah Tikva 4951033

Israel

Business Strategy and Outlook Bull reasons

As the largest pharmaceutical manufacturer with vertically integrated operations, Teva has the operating scale to continually replenish its generic pipeline to minimize the threat of low-cost producers in emerging markets.

Teva is a leading generic firm with the financial resources and manufacturing capabilities to reproduce complex drugs, such as biosimilars and respiratory inhalers.

Teva currently has 17 API production facilities, producing approximately 350 APIs in various therapeutic areas.

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syndrome in pediatric patients in the United States. There are no further plans in this indication following clinical trial results received in February 2020, which failed to meet their primary endpoints. Teva is a globalization company in which most of the Holders are from North America and Europe instead of Israel. For the major holders, 0.060% of shares held by all insider, 54.67% of shares held by the institution, and 55.00% of float held by the institution. In total, there are 631 institutions are holding shares right now. The most shares held institution is an American financial services company - Capital Research Global Investors, which is one of the world's oldest and largest investment management organizations. The interesting thing is that Berkshire Hathaway, Inc., led by Warren Buffett also holds 3.92% shares in Teva.


Although Teva is an Israel company, the major markets for Teva is North America and Europe. And now the new strategic of Teva focus in the Japanese market. Generic Product is

Business model

Bear reasons

Teva’s higher-margin branded segment has shrunk following asset sales and generic versions of key products, especially Copaxone.

Increasing litigation pressure could hurt the company’s ability to pay down its large debt burden.

Teva faces considerable competition from low cost producers in emerging markets, especially India. Aggressive entry pricing could weaken Teva’s dominant market position.

Ownership Strategy

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the major product for Teva right now, As the leading generic pharmaceutical company in the world, Teva is pleased to offer the portfolio of FDA-approved generic products on the market. Approximately 550 Teva medicines are currently available, covering all major therapeutic categories. The following table disaggregates Teva’s revenues by major revenue streams.

Major revenue six months ended June 30, 2020 (U.S. $ in Millions) North America Europe International Others Total Sale of goods 3,283 2,370 939 388 6.981 Licensing Arrangements 42 15 4 2 63

Source: 10-Q - Quarterly report of Teva, filing date 2020-08-05

And here is a chart of Teva’s segment profits for the six months ended June 30, 2020.


The table of the income statement is below and we can clearly find that both of the total revenue and the gross profit is decreasing year by year. The main reason for the further decline is that its multiple sclerosis drug Copaxone is facing a patent cliff, its market share has been strongly attacked by other generic drugs, and the company's new drug failed to quickly open the market to make up for the loss.


53%35%

12%

Teva’s segment profits

North America Profit

Europe Profit

International Markets Profit

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The following tables present revenues by major products and activities for the three and six months ended June 30, 2020 and 2019:

Major Product six months ended June 30, 2020 (U.S. $ in Millions) North America 2020 2019 Generic Products $ 1,875 $ 1,913 Branded pharmaceuticals $ 2,011 $ 1,919 Active Pharmaceutical Ingredients $ 242 $ 286 Total $ 4,192 $ 4,128


Major Product six months ended June 30, 2020 (U.S. $ in Millions)

Europe 2020 2019 Generic Products $ 1,769 $ 1,763 Branded pharmaceuticals $ 388 $ 403 Active Pharmaceutical Ingredients $ 246 $ 282 Total $ 2,402 $ 2,448


Major Product six months ended June 30, 2020 (U.S. $ in Millions) International Markets 2020 2019 Generic Products $ 875 $ 930 Branded pharmaceuticals $ 23 $ 27 Active Pharmaceutical Ingredients $ 154 $ 147 Total $ 1,053 $ 1,103


By the database from the tables above, we can clearly know the present revenues by major products including all three segment areas for the six months ended June 30, 2020. Teva has three major products which are Generic products, Branded pharmaceuticals and Active Pharmaceutical Ingredients (which is another on the table above).


60%

32%

8%

Present Revenues by Major Products

Generic products

Branded pharmaceuticals

Active PharmaceuticalIngredients

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We used the Monte Carlo Method to analyze the price of stock prices one year later. In the first table, we simulating the best-case scenario over the past 5 years. And the second table, we simulating the best-case scenario over the past 6 months. The ordinate is the possible price of the stock price in one year, and then we take the average value to get the average price of the stock price. We calculate the best average share price in a year will be $6.99 and the worst average share price in a year will be $5.68.

Table 1: Teva Last 5 Years Best Scenario

Source: Teva’s last 5 years closing price data and analyze by Monte Carlo Method

Table 2: Teva Last 6 Months Best Scenario

Source: Teva’s last 6 Months closing price data and analyze by Monte Carlo Method

Monte Carlo Method Analysis

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The stock price of Teva is $10.14 right now. By using the Monte Carlo Method, we can simulate the stock price is in a year will be between $5.68 to $6.99, in which is much low than today’s closing price. The reason may cause the one year after stock price much lower than today is because in these years huge debt burden and the competition of emerging is the main problem for Teva, and cause the stock price all the way down.

CEO Kare Schultz, who joined Teva on Nov. 1, 2017, said he will combine the Israeli company’s generic and specialty drugs business, as well as the research and development groups for those units. From 2015 to October 31, 2017, Mr. Schultz served as the President and Chief Executive Officer of H. Lundbeck A/S, which is a Danish international pharmaceutical company engaged in the research and

development, production, marketing, and sale of drugs for the treatment of disorders in the central nervous system (CNS), including depression, schizophrenia, Alzheimer's disease and Parkinson's disease. Mr. Schultz is a seasoned veteran in the pharmaceutical industry and recognized for restructuring and cost-cutting. The restructuring plan included the closure of 20-25 manufacturing facilities within the first two years. As of 2019, roughly 20 manufacturing facilities were closed and in excess of 10,000 positions were eliminated. Management continues to seek incremental efficiency, and additional sites may be tacked on to this list. The significant reduction in operating expenses targeting the current demand will allow the management team to operate in a more efficient manner.

Richard Daniell stayed in teva for 14 years and became Executive Vice President, European Commercial in November 2017. From December 2016 to November 2017, he served as President and CEO, Teva Europe Generics, leading all activities of Teva's Generic and OTC business in Europe. And now,he focuses on leading all

activities of Teva's Specialty, Generic and OTC business for Europe.

The main risk for Teva is the huge debt burden and increasing litigation pressure. Also, the huge competition of emerging markets could be another risk for Teva need to solve. Teva has an extreme uncertainty rating because of its relatively high financial leverage and litigation risk. Teva operates in an evolving healthcare market with significant regulatory and competitive pressures. The company will need to continue to aggressively replenish its pipeline of complex generic and specialty drugs to pay down debt. The continued focus on complex generics and specialty drugs are critical to remain the leading generic drug manufacturer and fend off the second-largest manufacturer, Mylan, along with less sophisticated emerging international competitors. Outside of cash involved in a potential

Risk & Uncertainty

Management team

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legal settlement, operating cash flows should be sufficient in paying down debt. To exacerbate the situation, Teva has also been in the crosshairs of federal and state prosecutors for marketing opioid products and allegedly conspiring with competitors for drug price fixing. These factors have weighed heavily on shares, which have declined substantially since their peak around $70 in August 2015.

The huge debt burden and the competition of emerging could be the main problem for Teva. The good thing is, the restructuring plan for the new CEO, Mr. Schultz, is going well. It may offset losses from maturing generic Copaxone and some debt burden. In general, Teva is a long-established healthcare company in Israel, mainly focusing on generic products, branded drugs, and active pharmaceutical ingredients. Currently, Teva’s main business areas are North America and Europe, and Teva’s management team also comes from Europe. This means that although Teva is from Israel, it is a globalization company, which is one of his strengths. Teva’s second advantage is that its scale of operations can continuously complement its general pipelines to minimize the threat of low-cost producers in emerging markets, and the cost-saving plan may help them increase revenue. When the performance was poor, Buffett led Berkshire to invest in Teva. Considering the potential growth of the generic and prescription drug market as the world's population ages in the next few decades, he believes that the stock of this pharmaceutical company is too cheap. Similarly, active pharmaceutical ingredients may be another advantage of Teva. Teva currently has 17 API production facilities and can produce approximately 350 APIs in various therapeutic fields. Although API revenue only accounted for 8% of total revenue for the six months ended June 30, 2020, it can increase due to the growing world demand for APIs and Teva has good conditions for manufacturing APIs. The huge debt burden and increasing litigation pressure may be the most important problem they need to solve for Teva. The U.S. Department of Justice said on Thursday that the Florida-based specialty pharmacy will pay $3.5 million to resolve allegations that it has become a channel for Teva Pharmaceutical Industries Ltd subsidiaries to pay rebates to Medicare patients. The second disadvantage is that they face huge competition from low-cost producers in emerging markets.

Conclusion

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DISCLOSURES

This report is only for informational purposes and does not purport to make any forecasts or predictions and nothing in this report should be construed as doing so. It is merely intended to help investors better understand the company in a research report format. Dragon Gate Investment Partners prepared the information in this report. Dragon Gate Investment Partners has no obligation to inform you when information in this report changes. This report is for information purposes only. Under no circumstances is it to be used or considered as a solicitation to buy or sell any securities. While the information contained herein has been obtained from sources we believe to be reliable, Dragon Gate Investment Partners does not represent that it is accurate or complete, and accordingly, should not be relied upon as such. Risk factors and actual results may differ significantly from the information contained herein. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Dragon Gate Investment Partners. This report is prepared for Institutional Consideration Only. Estimates of future performance are based on assumptions that may not be realized. Past performance is not necessarily a guide to future performance. Copyright © Dragon Gate Investment Partners 2020

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Teva Pharmaceutical Industries Ltd (TEVA) Equity Research 812 Research Report - TEVA.pdf · Teva was founded in 1901 as a small drug wholesale company in Jerusalem and then converted