Teva - illusive deal appears on horizon

All,

Please find our unchanged analysis here.

As the market becomes increasingly comfortable with the size and shape of Teva’s forthcoming opioid settlements, analysts are beginning to return their attention to the underlying business and the performance of various drug programs. As for ourselves, that means we are turning our attention to other names and, unless we hear from you otherwise, will be terminating our coverage of Teva.

Litigation update:

- The current proposed deal between the AGs and Johnson & Johnson and three distributors (Cardinal Health, AmerisourceBergen, and McKesson) was outlined on July 21st. The deal is broadly in line with the Cleveland deal reached in principle two years ago, albeit payments appear to stretch over a longer time period. Unlike the previous deal in Cleveland, which had agreement in principle, Teva are not part of the current proposed settlement. This is likely due to the limited cash settlement offered by Teva (instead offering product over a 10yr period), while AGs are incentivised to agree cash settlement as soon as possible with J&J and the other distributors.

- The Company exudes confidence that the cash component is likely to remain small, as it is not in anyone’s interest to push for a higher cash component (potentially pushing Teva to seek bankruptcy protection where all participants would lose out). Teva acknowledged on the call that they are hopeful of a settlement within the next year along with similar terms as the previous deal (albeit potentially stretched over a 15-20yr period instead of 10yr previously proposed).

Operations (Do they matter):

- Teva has continued to deleverage over the last couple of years, with leverage dropping from 5.5x in Q1 2019 to current levels of 4.7x, as the Company continues to generate healthy FCF. The business continues to see growth in new patented drugs and although management slightly reduced top line guidance from earlier in the year, they have maintained FCF, EBITDA and Operating Guidance.

Termination of Coverage:

- We exited our position in August 2020 but have maintained our model on the name as there always remained the risk that the proposed (Cleveland) deal wouldn't form the basis of any settlement. Except for longer payment terms however, the current potential deal seems broadly in line. We have come close to a settlement before, but all commentary from all participants point to a resolution before year end.

- Unless you would like us to continue covering it - please say so if you do, we are therefore discontinuing active coverage of Teva.

Happy to discuss.

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009

M:+44 7786 705 806
www.sarria.co.uk