After several years of plunging prices, there are signs that the pharma market is stabilizing, according to IBI investment house analyst Steven Tepper. He believes that the change in the US Congressional balance of power will maintain the status quo and ease the uncertainty that has pervaded the pharma industry for the past three years. Tepper writes, "We are close to a new equilibrium point in the market with lower prices, but with post-streamlining profit margins that will still enable the large companies to resume moderate growth in the coming years."
IBI regards the health industry as a long-term investment opportunity as a result of growth in demand, an aging population in the developed countries, continued expansion in the insured population, and increased consumption of drugs in the emerging countries.
Tepper also commented specifically on two of the most prominent companies in the sector listed on the Tel Aviv Stock Exchange (TASE): Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) and Perrigo Company (NYSE:PRGO; TASE:PRGO). About Teva, he writes, "Teva's new captain, Kare Schultz turned the company around 180 degrees in 2018. The weather is still stormy, but the icebergs have been left behind." Tepper believes that 2019 will be calmer for Teva, after Schultz led a "comprehensive and painful reorganization with a $2 billion cut in expenses, without substantially affecting regular activity and restoring investors' belief in the company."
Tepper predicts stabilization in Teva's generics business in the US in 2019, with a boost from important generic launches and a focus on more profitable products (EpiPen, Restasis, and others) and on biosimilars. In original drugs, he foresees a continued gradual fading of Copaxone, with the new products (Ajovy for migraines and Austedo for movement disorders) offsetting the fall in revenue from Copaxone only in 2020-2021. Tepper emphasizes that Ajovy and Austedo are two important growth engines for Teva in the medium and long term, together with biosimilar versions of oncological drugs Rituxan and Herceptin. He adds that over 80% of holders of commercial health insurance policies in the US have coverage for Ajovy, but that reimbursement is usually inferior, with a higher deductible.
According to Tepper, Teva's share is trading at a relatively low 6.5 multiple on profit for 2019, despite the latent potential of Ajovy and Austedo. He recommends "Market outperform" for the share with a $25 target price, 35% higher than the market price. "The share is at fairly comfortable levels for entering," he writes, commenting that the total commitment to reducing leverage eases concern about Teva's debt.
Perrigo leveling off, but no growth in prospect
As for Perrigo, Tepper writes that the ship is steadying, but no growth is on the horizon. "The company began showing signs of stability in 2018, even though it had to lower its guidance a number of times by a cumulative 13%," he states. Murray Kessler was recently appointed Perrigo's third CEO in two and a half years. "Kessler is focusing the company on its core business of consumer products, while omitting the word 'healthcare' and replacing it with the words 'self-care.' Just what is this? The CEO should provide more details in the coming months." Tepper writes that Kessler's first task will be to completely separate prescription generic drug activity as preparation for selling it or launching it as a separate company.
He recommends "Market perform" for Perrigo's share with a target price of $61, 7% above the market price, which he says reflects a profit multiple of 13 for 2019 - a substantial premium on the conventional generics competitors. "The profit multiple reflects the company's quality and its differentiation in the consumer health products market, but also the absence of clear growth engines for the coming years and the existing risks in the generics business," Tepper explains.
Published by Globes, Israel business news - en.globes.co.il - on December 17, 2018
© Copyright of Globes Publisher Itonut (1983) Ltd. 2018