Teva Faces Uncertainty

Although Teva should continue to create a comfortable amount of cash flow, we think there’s an increasing probability Teva could reduce its dividend after the firm’s recent underwhelming performance and the threat of generic Copaxone combined with a new incoming CEO. A demise in cash flow from Copaxone, in particular, could spur management to preserve cash and its credit rating. Teva ended the quarter at a gross debt/EBITDA ratio of 4.87, and we think management’s previous outlook of reducing this ratio to 3.6 by the end of 2017 appears optimistic given Copaxone’s uncertain future. We currently anticipate a ratio closer to 4.5 by the end of 2017, which constricts the firm’s future capital allocation flexibility, in our view.

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