High Debt, Potential Litigation Costs Face New Teva CFO

By Nina Trentmann

Teva Pharmaceuticals Industries Ltd. appointed a new finance chief who will be charged with managing the Israeli drug manufacturer's high debt as it braces for potential costs associated with opioid litigation in the U.S.

The Jerusalem-based company named Eli Kalif as executive vice president and chief financial officer, effective Dec. 22. Mr. Kalif succeeds Michael McClellan, the company's CFO since 2017, who is stepping down for personal reasons, Teva said.

Mr. Kalif joins Teva from Flex Ltd., a U.S.-based technology manufacturer that operates in 30 countries. Mr. Kalif had served as Flex's senior vice president of finance since 2013. Before that, he was Flex's vice president of finance for the company's Americas, Europe and South America business.

The appointment comes as Teva works to turn around its business following a series of loss-making quarters. The company on Thursday reported a net loss that widened to $314 million in the third quarter, up from a loss of $237 million in the prior-year period.

Its profitability -- measured by gross margin under generally accepted accounting principles -- fell to 42.9% in the past quarter, down from 43.7% in the third quarter of 2018, which is off the target of 50% or more that generic drug manufacturers usually aim for, according to Soo Romanoff, a Morningstar Inc. analyst.

Teva has been cutting costs as it faces pricing pressure in North America, which, together with Western Europe, generates about 49% of its sales, according to the company's 2018 annual report. Its two-year restructuring effort is intended to bring down total costs by $3 billion by the end of the year. The company had an estimated cost base of $16.1 billion in 2017.

"They are trying to put the company in a position to pay down some debt, but also to create a favorable debt-maturity schedule by extending the maturities," said David Amsellem, a managing director at investment bank Piper Jaffray Cos.

Teva had nearly $27 billion in debt in the third quarter, compared with $28.7 billion in the second quarter, according to the company, which repaid about $1.5 billion during the quarter.

Teva's ratio between net debt to earnings before interest, depreciation, amortization and interest was 5.7 times in the third quarter, according to data provider S&P Capital IQ. Mylan NV, its closest competitor, had a ratio of 3.7 times.

Teva is aiming for a ratio of less than three times within the next five years. About $2.5 billion of the company's debt is coming due in 2020, followed by $4.2 billion maturing in 2021, according to S&P Capital IQ.

"Managing the capital structure is incredibly important in the context of Teva's opioid litigation and potential liabilities," Mr. Amsellem said.

The company on Oct. 21 announced a settlement agreement with two counties in Ohio, which will see Teva donate opioid treatment drugs valued at $25 million, and a cash payment of $20 million. The company also struck an agreement in principle with a group of attorneys and defendants for a global settlement framework, under which Teva would donate treatment medication worth $23 billion over the next 10 years alongside $250 million in cash.

The company booked $468 million in legal costs in the third quarter, the majority in relation to its opioid cases.

Mr. Kalif will have to enhance the company's financial flexibility to manage costs arising from settlements as well as potential costs stemming from a U.S. Justice Department investigation into alleged price fixing, analysts said.

"The communication around these complex cases to employees and the investor base is going to be key," said Matthew Todd, an associate director at S&P Global Ratings.

Write to Nina Trentmann at Nina.Trentmann@wsj.com

(END) Dow Jones Newswires

November 07, 2019 16:22 ET (21:22 GMT)

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