Analysts cut Teva targets but remain optimistic

Erez Vigodman  photo: Tamar Matsafi

On the falling share price: "The US market does not tolerate having its trust abused."

Teva Pharmaceutical Industries Ltd.'s (NYSE: TEVA; TASE: TEVA) share price was down 8.36% on Wall Street yesterday, following the publication of the company's third quarter results, putting the share 43% lower than at the beginning of the year and 48% below its mid-2015 peak. The company's market cap has now fallen to $34.7 billion, lower than the price Teva paid for the acquisition of Actavis, Allergen's generic division, in a deal signed a year ago and completed two months ago. Teva's current share price is $37.60, a three-year low and 15% below its price when Erez Vigodman was appointed company CEO in early 2014.

The third quarter results themselves exceeded the analysts' profit forecasts, but failed to meet the revenue forecasts. The company also downwardly revised its revenue guidance for 2016 as a whole from $22-22.5 billion to $21.6-21.9 billion. Leader Capital Markets analyst Sabina Levy says that the market regarded the guidance ranges provided by Teva in July as optimistic, so when the report and the revised guidance came, the market was not very surprised. According to Levy, however, Wall Street investors are aggressive, and trust is very important to them. It therefore appears that they responded sharply to Teva's downward revision of its guidance such a short time after its publication. The main slide in the results was in the generics sector. Only two months ago, Teva conducted an impressive seminar presenting its generics plans, without emphasizing the problems.

Analysts downwardly revise price forecasts

Levy adds that Teva's reports also hint at a downward revision for 2017, although Teva did not say so officially. Teva's current revenue guidance is $25.2-26.2 billion for 2017, $25.8-26.9 billion for 2018, and $26.7-27.8 billion for 2019.

Levy also says that Teva's current focus in the innovative sector is products for movement disorders acquired from Auspex Pharmaceuticals and products from Labrys Biologics for treatment of migraine headaches. The company expects billions of dollars in revenue from each of these drugs over their lifespan, and these billions are not included in the models used by most analysts, or at least not completely. The clinical risk for Auspex's product is relatively low. There is still a clinical risk for Labrys's product, as well as a marketing risk, because it is still unknown to what extent the product will be distinguishable from other products currently in development, and whether it will be the market leader.

Up until yesterday, most of the analysts kept a "Buy" or "Market perform" recommendation for Teva, with a target price around $65, even when the share price began to drop to a 20-30% discount on their recommendation. Now, following Teva's reports, most of the analysts have revised their target downward in order to adjust their forecasts to what is actually happening in the market. IBI analyst Steven Tepper also notes that the report raises questions about what will happen in 2017, although he says that there are still optimistic scenarios. He adds that Copaxone was a pleasant surprise, because he had expected a steeper decline. He comments that in the company conference call, Vigodman repeated his assessment that a generic version of 40mg Copaxone in the coming years was unlikely, while most analysts believe that the generic product will be introduced in early 2017.

While some of the analysts are criticizing the acquisition of Actavis when generics is a bear market, Tepper says that the great importance of the acquisition is palpable. He points out that Teva now has a major advantage, an opportunity to cut operating costs, and a broad backlog of high-quality products that will enable it to grow in a market with sliding prices. Credit Suisse says that it expects less money to flow to Teva until the company provides a better look ahead to 2017 and beyond. The bank adds that it will take time for investors to become more positive about Teva, saying that it is critical for Teva to provide realistic guidance for 2017 and explain clearly how it will achieve them. Some analysts, on the other hand, still regard the current Teva share price as mistaken. Gugenheim Investments points out that Teva outperformed the profit forecast, adding that its performance capabilities are being underpriced. The bank says it believes that the share will rise as a result of synergy in the generic sector, developments in its ethical products pipeline, and small acquisitions. At the same time, the market is still troubled at the quality of Teva's deals, the US government investigation, and the company's lack of organic growth. Wells Fargo analysts David Maris, Katie Brennan, and Patrick Trucchio say that the main reason why Teva beat the profit forecasts is tax benefits and one-time revenue, while its operating revenue declined. They say they still like the Teva share, and that its price is attractive, its pipeline of products underappreciated, and its competitive advantages not given enough weight.

In the Teva conference call, Global Generic Medicines Group president and CEO Sigurdur Olafsson said that the main reason for the weakness of generics in the US, beyond the across-the-board drop in prices in the US generic sector, was the delay in launching of important generic products originally scheduled in the current quarter. These have not disappeared; they have only been postponed until later. The bad news, however, is that the postponement is significant.

Vigodman said in the conference call that the company was not currently planning to buy back its shares, despite their relatively low price. He said that Teva would devote all of its disposable cash flow to decreasing its debt, and had no plans for major acquisitions. Vigodman admitted that the Rimsa deal had been a failure, but said it did not detract from the success of other deals, such as Auspex, for example.

Published by Globes [online], Israel business news - - on November 16, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

Erez Vigodman  photo: Tamar Matsafi
Erez Vigodman photo: Tamar Matsafi
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