Why Teva’s Grand Turnaround Could Just Be Getting Started

It seems to have been a long time since there were all that many positive statements about Teva Pharmaceutical Industries Ltd. (NYSE: TEVA). But a look through the slew of research updates in 2020 reveals that Teva has seen almost entirely upgraded target prices from the analyst community. Now it has been given higher upside by one of the top independent research firms.

Argus reiterated its Buy rating and raised its target price to $15 from $10. While this is a delayed report, compared to other firms, after the release of Teva’s fourth-quarter results, Argus is considered independent research in that it does not pursue investment banking activities and does not have any of the inherent potential conflicts of interest. In short, Argus can rate companies however it wants without worrying about how it will be treated by a company in the future.

Investors always should keep in mind that no single research report should ever be the sole basis for investing. Many views remain cautious, or outright negative, when it comes to Teva. Despite bettering its balance sheet, this dirt-cheap price-to-earnings P/E ratio screen comes with a leveraged balance sheet at a time when drug pricing and other risks are still pressing.

The Argus report addresses the numerous challenges that the company has faced in recent years, as well as the devastation that has been brought down on its shareholders. While the exposure and inherent risks around the opioid crisis are still pressing, Argus believes that Teva has made progress concerning its other challenges by noting that the generic drug industry has stabilized and that the company’s own reliance on Copaxone has decreased at the same time it has lowered its operating costs.

Argus admits that Teva may have to pay out additional settlements or fines related to its lawsuits, but the firm believes these events are already baked into Teva’s stock price. The firm’s new $15 target price implies a discounted multiple of 5.9 times the firm’s 2020 estimate and points out that it is well below the peer average of 8.9 times earnings.

The report said:

The company has faced numerous challenges over the past several years, including the loss of exclusivity on key drugs, price erosion in the generics space, a high cost basis, bribery/price-fixing litigation, and litigation regarding its role in the opioid epidemic, which have led to steep discounts in the stock price. While legal issues remain, the company has made progress in resolving its other challenges. Copaxone, traditionally a key driver of performance, now accounts for just 8.7% of total revenue due in part to contributions from new products. In addition, the generic drug industry, which had faced significant price erosion, has stabilized, with the company’s U.S. generic sales showing 3% growth in 4Q19 after experiencing several quarters of steep losses. Teva’s restructuring efforts have also cut annual costs by $3 billion, securing cash flow for the company to reduce its debt. While Teva still faces litigation threats and a substantial debt burden, we believe that the market remains too fearful of the stock, presenting a strong buying opportunity for more risk-tolerant investors. As we expect the company to achieve further growth in 2020, we believe that TEVA merits a higher valuation.

Despite a decline in full-year earnings, Teva has seen several positive pipeline updates over the past several months, and Argus feels that the company is handily scaling back on research and development expenses (by more than $3 billion from 2017) to keep its restructuring resources available. The firm also pointed out that Teva has seen positive news around difficult-to-treat migraines and the first biosimilar to Rituxan in the United States for the treatment of non-Hodgkin’s lymphoma and chronic lymphocytic leukemia. The report further said:

Management noted that the reduction in expenses will allow for a higher cash flow, necessary in the company’s efforts to reduce its debt. It also stressed that the restructuring activities did not impact the company’s operational capacity. Having completed the restructuring program, the company will now focus on continuing to improve its manufacturing costs in order to raise its gross margin to 28% in 2023, as well as securing top-line revenue growth.

While a potential move of more than 20% upside to the price target sounds attractive, Argus did address its cash position against debt. Teva had cash (and equivalents) of $1.98 billion and total debt of $27.34 billion at the end of 2019, with that cash being up from $1.78 billion and the debt down from $28.01 billion at the end of 2018.

Argus has not been alone when it comes to research analysts raising target prices. These are the most recent target price hikes seen elsewhere since the start of 2020:

  • Morgan Stanley to $13 from $8 (Underweight)
  • SunTrust from $9 to $13 (Hold)
  • Merrill Lynch to $11 from $8 (Underweight)
  • Oppenheimer to $16 from $12 (Outperform)
  • CFRA from $11 to $13 (Hold)
  • Wells Fargo to $10 from $8 (Equal Weight)

With the Dow and S&P selling off in a broad down day, Teva shares were last seen down three cents at $12.19 midday Tuesday. Its 52-week trading range is $6.07 to $18.08, and the Refinitiv consensus target price was $11.89.

Coming into the new week, Teva shares were trading up about 24% so far in 2020. That is down about 30% from a year ago and down sharply from 2015.

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