Analysts see growth on Teva's horizon

Kare Schultz Photo: PR

CEO Kare Schultz has set sights on 2020 for a return to revenue growth, and Credit Suisse finds reasons for optimism.

Teva Pharmaceutical Industries Ltd.'s (NYSE: TEVA; TASE: TEVA) share price plunged 9.5% on Thursday following the publication of the company's second quarter results, but posted a 2.6% correction on Friday, ending the week at $22.20, reflecting a $22.6 billion market cap.

Teva upwardly revised its guidance for the year as a whole on Thursday, but the market may have expected more. Teva EVP and CFO Mike McClellan told "Globes" that Teva expected more competition for Copaxone in the second half of the year, so it was being cautious with its guidance, but had still raised it by $0.30 per share in comparison with its original guidance.

At the same time, Teva for the first time also set targets for the longer term, thereby giving investors more information about where the company expects to be in 3-5 years time. In the conference call following publication of Teva's results, CEO Kare Schultz cited three targets.

The first is a 27% non-GAAP operating profit margin, similar to the first half of 2018, although Schultz stated that due to pressure from lost Copaxone revenue and lower generics prices in the US, the profit margin for 2018 as a whole will be less than 27% and increase later. The second target is a ratio of free cash flow to non-GAAP net profit attributable to shareholders of over 80%, compared with 76% in the second quarter. The third target is a ratio of net debt to EBITDA of less than 3; the current ratio is over 5.

Teva is once again talking about growth. In the conference call, Schultz said that the company hoped to return to growth in 2020 and predicted that Teva's revenue would hit bottom in 2019 at $18 billion, compared with $18.5-19 billion in 2018. Morgan Stanley analyst David Risinger wrote that Schultz said "that the three key drivers of a return to revenue growth will be fremenezumab (migraine), Austedo (movement disorders), and Respiratory (including new launches in 2019)."

Morgan Stanley reiterated its previous recommendation - "Market perform" - and target price - $19, 14.3% lower than the current market price. Credit Suisse, on the other hand, raised its target price for Teva's share from $23 to $25, 12.8% above market, following publication of the company's financials, while retaining its "Market outperform" recommendation. Credit Suisse analyst Dr. Vamil Divan wrote that he was still optimistic about Teva's streamlining. "We think the significant downward pressure on the stock today (-9.5%) was driven largely by the disappointment in the 2018 revenues guidance," the analyst wrote (in contrast to Teva's profit and cash flow guidance, the company did not raise its revenue guidance).

"However, we continue to be bullish on TEVA as (1) The company’s restructuring program is proceeding a bit ahead of schedule; (2) Teva pointed to improved US generics pricing dynamics that suggests stabilization of what had been a significant headwind; (3) continued optimization of the generics portfolio should lead to improved profitability; (4) continued good uptake of Austedo that is trending to $200M in 2018; and (5) the potential approval of fremanezumab in September 2018 that along with Austedo should help to drive growth in the mid-long term," Divan stated.

Write-downs did not stop

Another disappointment that pushed down Teva's share price on Thursday was $668 million more in write-downs by the company. Teva spent $41 billion on acquiring Actavis and Rimsa within a few months in 2016 under the leadership of then-CEO Erez Vigodman and then-chairperson Yitzhak Peterburg.

Actavis, the generics arm of Allergan, was acquired for $33.4 billion in cash and Teva shares then worth $5.3 billion (the price later fell). Mexican company Rimsa was acquired from its founders, the Espinosa brothers, for $2.3 billion. These two acquisitions were designed to make Teva the undisputed leader in the generics market, but the scars they left have yet to heal.

The financials published late last week included more write-downs on these acquisitions. The full reports list write-downs of $120 million for the Rimsa acquisition and $511 million on the Actavis acquisition, bringing the write-downs this year to $300 million for Rimsa and $684 million for Actavis. The write-downs, which are for assets still in development and for rights to products, were made necessary by changes in their value (market size, legal environment, launch date, and discount rate for the generic product).

These write-downs are in addition to those made last year. As listed by Teva in its full reports for 2017, it recognized a $2.2 billion diminution in value for Actavis, including $838 million due to reassessment of generic products in development, $390 million for waiving certain products, $583 million for rights to products in the US and $390 million for Actavis's products in Europe and the rest of the world.

At the same time, Teva also wrote down $153 million on its investment in Rimsa in 2017 following a $900 million write-down at the end of 2016. The amount written down on these two acquisitions is therefore already $4.2 billion. Teva obtained some compensation from the sellers of these two companies following various legal proceedings, but this offset only a small proportion of the total damage. In the case of Actavis, Teva demanded $1.4 billion from Allergan for adjustments in working capital and eventually received $703 million last January following a settlement. In the case of Rimsa, Teva sued the Espinosa brothers alleging that they had committed fraud and demanding cancellation of the deal, but the New York court dismissed these allegations, although it left Teva an opening for compensation in respect of breach of contract. A recent settlement between the parties gave Teva an undisclosed sum, believed to be $300-350 million.

Are the write-offs in the second quarter the last ones, with no further negative surprises from the two acquisitions in store? Talking to "Globes," McClellan did not commit himself. "It's hard to say," he told "Globes" after Teva published its second-quarter financials. "We have made a long-term plan. We looked at the future of each of the assets we acquired and each of them has a list of many products. In the products in which we now see a lower value than the one at which we acquired them, a decline in value must be recognized, while the products that have a higher value cannot offset them. It is reasonable to assume that we'll do another assessment at the end of the year, as we always do and will continue doing from time to time. We don't, however, anticipate any more large-scale decreases in value."

Published by Globes [online], Israel business news - www.globes-online.com - on August 6, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Kare Schultz Photo: PR
Kare Schultz Photo: PR
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