Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) CEO Kare Schultz is saying, "I'm coming to Teva with the single-minded and declared intention of getting it back on track, carving off its fat, and taking it a long way." In any event, that is the impression of IBI Investments pharma and medical analyst Steven Tepper after meeting with Schultz in recent days.
Tepper writes, "Schultz's plans will serve the interests of both the holders of short and medium-term debt and the shareholders in the long term." At the same time, he emphasizes that reducing the debt will also indirectly benefit the shareholders in the short term. Following the meeting with Schultz, IBI Investments raised its target price for Teva by $4 to $25, 17% above the market price, while retaining its "Market outperform" recommendation for the share.
"Over the years, Teva has made many acquisitions and utilized the clear synergies from them, but has retained an inefficient organizational structure with a great deal of fat," Tepper says. "The most prominent example of this is the number and utilization rates of the production facilities. According to the CEO, Teva has 80 plants, most of which are significantly under-producing. The company can therefore make do with 15-20 plants without any substantial effect on its production."
"The previous idea has disintegrated"
According to Tepper, Teva is shifting from a strategy of growth in market share to growth in profitability. He believes that the streamlining plan, which will cut the company's cost base by $3 billion within two years, is likely to "stabilize the situation, while reducing revenue that does not contribute to profits." For example, in generics, the company is likely to forego revenue in generics in the short term in exchange for improving profit margins. "The previous idea that if Teva is bigger, it will be able to cope better with the large buyers has disintegrated before our eyes, because a purchase is per individual product, not a basket of products , and there is therefore no advantage in size and the volume of the basket of products," Tepper explains.
Tepper believes that the generics market in the US will probably calm down, with moderation of the downtrend in prices and an accelerated pace of approval for complicated generics. "Following the stabilization phase, Teva's generics business will be focused on products with a medium and high level of complexity, and less on simple products," Tepper states.
In the original drugs sphere, Teva's growth engines in the medium term are the drugs for treatment of migraine headaches (fremanezumab), with sales in 2019, assuming that the product is approved, and for treatment of movement disorders (austedo), with sales in 2018. With respect to Copaxone, Teva's flagship product that is already encountering competition from generic versions, Tepper writes, "In our opinion, Copaxone will continue to be a significant drug in the coming years, although revenue from it will be more moderate. We believe that within 2-3 years, the growth rate in the two new original drugs is likely to exceed the rate of erosion in revenue from Copaxone." He adds that the aggregate sales potential from the products is $4 billion at peak.
Tepper also writes that Schultz is focused on producing the maximum amount of cash in the next four years in order to reduce the company's heavy debt. "The CEO reiterated that he did not intend to hold a share offering, which is likely to largely limit his financial flexibility. On the other hand, since the CEO also decided that he would also not make any acquisitions or other substantial deal in the foreseeable future, he probably sees no need for financial flexibility," he believes. "In our view, in the long term, reducing the debt is the best way of creating financial flexibility in order to facilitate future growth starting five years from now."
Teva's current market cap is $21.7 billion, following a 91% rise in the share prices since Schultz became CEO, but a 36% drop over the past year.
Published by Globes [online], Israel Business News - www.globes-online.com - on January 29, 2018
© Copyright of Globes Publisher Itonut (1983) Ltd. 2018