Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) is up 1.5% today on the TASE after rising 2.18% on Wall Street yesterday to $9.37, giving a market cap of $10.2 billion. This despite the return of drug prices to the headlines in the US where President Donald Trump is promoting a measure aimed at reducing drug prices. On his Twitter account, he tweeted that if the two political parties cooperate in cutting prescription drug prices, "We would get big results very fast!"
Before this week, Teva's share price had recovered somewhat in recent weeks since hitting its lowest point in two decades as a result of the legal risks to which Teva is exposed.
Some, however, believe that too much weight is being given to these risks, and that Teva's share now constitutes an opportunity. IBI Investment House pharma analyst Steven Tepper thinks that the legal risks threatening Teva are being overpriced in its current share price, and that following the steep falls in recent months, the current share price is now very comfortable for an investment. According to Tepper, Teva CEO Kare Schultz "is running for long distances and leaving past skeletons to the lawyers."
The recent steep decline in Teva's share price came in response to two legal proceedings involving the company: prosecution for price fixing in the generic drug market in the US and marketing of addictive opioid pain relievers. Tepper mentions that Teva's share price has fallen 40% in the past two months, wiping $7 billion off its market cap, which is now at $10.2 billion, following a slight recovery from the low point reached by the share three weeks ago. While the company has lost $7 billion in market cap, Tepper estimates the expected damage from the two legal proceedings at $3.5 billion, "substantially lower than the damage reflected by the market. The investors' main concern is the company's high leverage."
Tepper says that the legal proceeding for price fixing is likely to continue for many years. From an analysis of the company's revenue in the generic drug field during the period mentioned in the lawsuit, he concludes that the surplus revenue of Teva and Actavis amounted to a maximum of $1 billion, and with the addition of interest and fines could reach $3 billion. As for the legal proceedings concerning opioids, he says that the damage to Teva will not exceed $1.5 billion.
"Under Schultz's leadership, Teva is switching from a strategy of growth in market share to growth profit margins," Tepper writes. "The restructuring plan is progressing faster than expected, and there is a good chance that by the end of the year, the company will outperform its $3 billion target for savings in costs. The company also stated that it would unveil a plan in early 2020 for continuing the improvement in its profit margin, while further reducing the number of its plants, in order to increase its operating profit margin by 0.5-1% a year and reach a target operating profit margin of 27% in 3-5 years. We believe that making the company leaner and more efficient, while focusing on products with high profit margins, will put the company back on the path of moderate growth in the medium and long term."
Tepper cites the recent stabilizing of generic drug activity, accompanied by a slowing of the decline in generic drug prices in the US and faster rates of approval for complicated generic drugs. A number of important drug launches are slated for the second half of 2019.
"The main growth engines in the short and medium term rely on the two original drugs: biological drug Ajovy for treatment of migraine headaches and Austedo for treatment of movement disorders. Sales of Austedo are expected to total $360 million this year, while sales of Ajovy are expected in the $150-240 million range, depending on the volume of prescriptions receiving insurance coverage," Tepper adds. He comments that two biosimilar launches are scheduled in late 2019-early 2020 with peak sales potential of $500 million.
At the same time, Tepper predicts that Copaxone will continue to be a significant drug in the coming years, although revenue will me much more modest - $900 million-$1 billion in 2020, he estimates. "We believe that within 2-3 years, the growth rate for Ajovy and Austedo will compensate for the rate of decline in Copaxone. In our opinion, the combination of these two products has a peak sales potential of $4 billion a year."
Tepper also comments on Teva's debt ($26.7 billion net at the end of the first quarter). He says that the debt is spread fairly comfortably and at low cost - a 2.8% annual interest rate of an average duration of six years. He predicts that Teva's annual cash flow will make it possible to repay the debt according to the payments on the principal, while using an existing line of credit to reschedule the debt in the short term.
For 2021, Teva announced that it was considering rescheduling a small proportion of its debt. "In our estimation, if the company raises $1.5 billion in debt for five years, it will have to pay 7.5% interest under the current market conditions, amounting to $90 million in additional net financing expenses. In 2020-2024, Teva's average annual debt repayment will reach $3 billion, corresponding to the average projected cash flow," Tepper writes. "Although the debt is a heavy burden and will continue to be heavy in the coming years, we believe that the company can manage it and reduce it gradually in the coming years."
IBI recommends "Market outperform" for the share, with a target price of $15, 62% higher than the current market price, for a long-term investment. "In our opinion, despite the legal risks, the cash flow following the streamlining plan and the focus on the most profitable products in the generic drug sector, combined with the company's total commitment to reducing its leverage, significantly ease concerns about the debt, and indirectly contribute to the shareholders in the long term," Tepper concludes.
Published by Globes, Israel business news - en.globes.co.il - on July 10, 2019
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