Citi Weighs In On The 'Turmoil At Teva'

Teva Pharmaceutical Industries Ltd (ADR) (NYSE: TEVA) announced Monday after the bell that its president and CEO Erez Vigodman will step down, effective immediately. The company also said its chairman since January 2015 Yitzhak Peterburg will assume the role of president and CEO on an interim basis.

In a note reviewing the development, Citi said near-term uncertainty on the stock following its guidance cut in January would intensify now. Citi expressed concern over the timing of the announcement, it having come ahead of its earnings release scheduled for Feb. 13, 2017.

Another Guidance Cut In The Offing

Analyst Liav Abraham feels investors will now be concerned that another guidance cut may be imminent next week, either due to the inclusion of generic Copaxone 40mg competition in the company's base case guidance and/or the changing dynamics in the generics business. The analyst pointed to the fact that Monday's press release did not include reiteration of the guidance issued in January.

Covenant Breach Unlikely

Clarifying that Teva's covenants are not a concern, Citi said the company had sufficient cushion to meet its debt paydown obligations through the end of 2018, assuming a single Copaxone 40mg generic and generics revenues that are 1 percent below the bottom end of the company's guidance range for 2017. However, if the generic pricing environment worsens or the realization of new generic launches coming in slower than anticipated, the firm sees potential downside to EBITDA. That said, even in that scenario, the firm does not foresee a breach of covenants, although a one-notch downgrade of debt rating could occur.

Potential Challenges In New CEO Search:

• The perceived challenges facing the company on the generics/Copaxone/balance sheet fronts.
• The requirement in the company's Articles of Association that a CEO reside (for the majority of the year) in Israel.

However, Citi believes a new senior management with strong pharmaceuticals/operational expertise could prove to be a positive catalyst for Teva at this juncture, given the developments over the past several months. The firm also views the appointment of Barer as Teva's chairman as a positive, given his reputation in the pharma industry being validated as a founder and former CEO of Celgene Corporation (NASDAQ: CELG).

Focus Areas For Investors In The Upcoming Earnings Release

• Reassurance regarding the company's fundamentals and estimates.
• An understanding of the assumptions behind the fiscal-year 2017 guidance range and to what extent the new interim CEO is committed to these estimates.
• A clear understanding of Teva's near-term cash-flow trajectory and the company's commitment to its dividend policy.

Citi has a Buy rating on the shares of Teva and a $47 price target.

At the open, Teva was down 3.61 percent at $33.10.