It is two years since Morgan Stanley rated Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) positively, but the investment bank has now reverted to doing so. In a note to investors today, analyst David Risinger upgrades his recommendation for the Israeli pharmaceutical company from "Equal-weight" to "Overweight", and raises his price target for the stock from $20 to $27, 19.5% above the price in New York.
"We expect continued improvement in Teva's financials and investor perception," Risinger writes, adding that he expects "strong ramp" for Teva's original drugs Austedo (for movement disorder) and Ajovy (for migraine).
Risinger explains his new positive recommendation by three factors. The first is his expectation of higher profits than the analysts' consensus, thanks to substantial cost cutting at the company. The second is the new products that have been launched, which, he says, "should deliver sales above expectations and replace Copaxone over time." He estimates that, in 2023, Ajovy and Austedo could generate sales equal to Copaxone sales in 2018 of about $2.3 billion. The third factor is that the company's valuation will rise as strong performance drives its net debt/EBITDA ratio down from the current 5.0 to an expected 3.8 by 2020.
"Deleveraging outlook and free cash flow generation is promising," Risinger writes, noting that in the third quarter of 2018, Teva delivered $700 million in free cash flow (FCF), up from the second quarter's $550 million. "If we assume normalized FCF/quarter for Teva $625 million, Teva has the capacity to generate annualized FCF of $2.5 billion/year before the company returns to growth. Based on our year-end 2018 net debt projection of approximately $27 billion, if Teva continues to pay down $2.5 billion/year, by 2020 Teva could reduce net debt to $22 billion," he calculates.
Published by Globes, Israel business news - en.globes.co.il - on November 5, 2018
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