Teva: New Growth Plan Could Restore Investor Confidence

Teva Pharmaceutical Industries (NYSE:TEVA) is a nicely established pharmaceutical multinational that’s recognized for its dominant place within the international generic medication enterprise. Headquartered in Israel and integrated in 1944, TEVA has a major presence in North America and Europe and operates worldwide in over 60 markets. Regardless of having a storied previous, the corporate has since 2016 suffered a sequence of economic and industrial setbacks which have dented investor confidence. This has resulted within the inventory massively underperforming the broader market. TEVA is down 68% up to now 5 years vs the S&P 500’s 57.4% acquire.

The chart under exhibiting TEVA’s market cap over the previous 10 years tells a narrative of an organization that has fallen out of favor with traders. Understanding why is an important first step in deciding whether or not or to not put your hard-earned cash within the inventory.

The rationale TEVA fell out of favor

The sequence of occasions that triggered this bearish response by traders will be traced to TEVA’s transfer to accumulate Allergan for $40 billion in 2015. This large ticket buy resulted in TEVA’s long-term debt growing 3.8 occasions from $8.35 billion in Dec 2015 to $32.52 billion in Dec 2016. Nevertheless, in an unlucky flip of occasions, TEVA failed to realize the focused industrial and monetary outcomes post-merger on account of a lot of components, together with regulatory motion by the Federal Commerce Fee which directed that TEVA divest a few of its property in its US generics drug portfolio to protect market competitors.

On account of these challenges, TEVA’s revenues, which had been $19.65 billion in 2015, elevated marginally after the deal to $21.9 billion in 2016 and $21.8 billion in 2017. They’ve been steadily declining ever since amid a number of headwinds reminiscent of elevated competitors within the generics drug enterprise, worth reforms in key markets such because the US, a slew of lawsuits associated to the opioid disaster, narrowing enterprise margins and large money owed. In 2022, TEVA reported revenues of $14.92 billion, a web lack of $1.6 billion and had web debt of $18.8 billion.

This in abstract explains the regular decline in TEVA’s inventory worth over the previous few years. With the present inventory worth only a greenback above the all-time low of round $6.50, the vital query for traders to ask is whether or not the enterprise can reverse its fortunes and ship income development and profitability after this tough episode. The administration believes that is potential. TEVA in Might launched a brand new technique known as “Pivot to Progress” that’s geared toward redirecting the main target of the enterprise to areas with the best development potential.

Going all in on revolutionary medicines

By the strategic plan, TEVA has basically requested traders for just a few extra years to reinvent itself. The brand new “Pivot to Progress” plan locations formidable development targets for 2027 and offers a roadmap of how the corporate will get there by shifting its enterprise focus. The important thing plank of TEVA’s new development technique entails prioritizing its revolutionary medicines portfolio which has name-brand medication like Ajovy, Austedo and Copaxone. The concentrate on revolutionary medicines is geared toward countering the results that the decline within the generics phase is having on income development and margins.

Generics are getting much less worthwhile as a result of stiffer competitors within the generics market is impacting particular person firms’ volumes whereas additionally main to cost erosion for various manufacturers — principally a double whammy of decrease gross sales and decrease margins. It is a concern for TEVA as a result of generics accounted for $8.60 billion or 58% of TEVA’s whole 2022 revenues. This overreliance on generics explains why TEVA’s enterprise as a complete has been failing to develop yr after yr, whilst margins collapse due the low margin nature of the generics enterprise. Switching the enterprise’s focus and sources to revolutionary medicines as this new “Pivot to Progress” technique proposes is geared toward addressing this problem.

R&D spending is a number one indicator of the long-term path a enterprise is taking with its product combine. From the chart above, which exhibits how TEVA’s R&D capital allocation will change within the newly launched strategic cycle, it’s clear that TEVA desires revolutionary medicines to be the expansion driver of its enterprise going ahead. TEVA’s hopes on this plan are pegged on Austedo, a drugs that treats involuntary actions attributable to tardive dyskinesia or Huntington’s illness.

TEVA CEO Richard Francis informed traders in Might that Austedo ought to attain gross sales of $2.5 billion by 2027, including that TEVA would ramp up investments within the drug, together with assembling an even bigger salesforce. TEVA’s administration is principally saying Austedo will roughly double as a enterprise within the subsequent 4 years. TEVA expects income from the drug to succeed in $1.2 billion in 2023 from $971 million in 2022.

“We’re going all in on Austedo,” CEO Francis was reported as saying by Reuters. TEVA’s daring plans for Austedo are knowledgeable by the truth that the affected person inhabitants for tardive dyskinesia or Huntington’s illness is considerably undiagnosed. Francis famous that solely 15% of the 800,000 folks affected by tardive dyskinesia take remedy. Because the chart under exhibits, TEVA has been rising the variety of prescriptions at a wholesome clip lately. If it could preserve this development development – and assuming the unmet want is as nice as believed – the chances of success for this new “Pivot to Progress” technique would enhance significantly.

Profitable return to development might ship outsized positive factors

Traders will seemingly flip bullish if TEVA succeeds in restoring income development by way of a excessive margin product reminiscent of Austedo. the place the valuation multiples are right this moment, traders who purchase at present costs might take pleasure in outsized positive factors if this situation performs out. TEVA’s EV/EBITDA is 6.22 vs the sector median of 13.19 whereas its P/S is 0.56 vs the sector median of 4.47. (I’ve used EV/EBITDA and P/S as an alternative of P/E since TEVA has just lately posted destructive GAAP earnings). Each on an EV/EBITDA and P/S foundation, the inventory is the most cost effective it is ever been. Such a low a number of that’s out of tune with the broader market is normally a bearish signal. It exhibits there are not any traders prepared to purchase the inventory at greater costs. It additionally exhibits that the enterprise faces distinctive challenges not affecting friends.

TEVA is principally valued like a failing firm, which means any signal that’s not the truth is a failing enterprise however a thriving one might result in outsized positive factors as traders rush in to make the most of the steep undervaluation. No one has a crystal ball to know whether or not or not Austedo will stay as much as the expectations set by TEVA’s administration. Nevertheless, if it does, the return for traders who purchase the inventory right this moment will probably be nicely definitely worth the threat.

The prospects for Austedo’s potential success are supported by a number of components. To start with, Austedo has already garnered important gross sales momentum as earlier indicated with the instance of the expansion in prescriptions. The corporate can be matching its ambition with financing and sources as proven by TEVA’s ongoing shift in R&D spending to revolutionary medicines. Importantly, TEVA has the expertise of efficiently advertising a name-brand drug known as Copaxone. The remedy, which was launched in 1997 to deal with a number of sclerosis, has been usually profitable, raking in billions of {dollars} by way of the years. Whereas Copaxone gross sales have lately slowed down after its patents expired a number of years in the past and generics entered the market, the drug’s success whereas TEVA loved exclusivity exhibits that the corporate has the experience and expertise to efficiently market a reputation model drug.

TEVA additionally has an vital tailwind within the type of the settlement of a number of lawsuits regarding the opioid disaster. The corporate has made substantial progress in direction of the US nationwide opioid settlement settlement with 49/50 states having reached a deal on the time of writing. That is excellent news for traders because the monetary uncertainty relating to those lawsuits is now within the rear view mirror. The administration additionally has extra time and sources to concentrate on the core enterprise.

Total, the success of Austedo might assist revive investor curiosity in TEVA. It’s going to additionally set the stage for future success of different medication. The corporate has a various portfolio and promising pipeline of revolutionary medicines and biosimilars that would assist drive future development if profitable. Its Investor Day presentation goes into extra element about these medicines, however the chart under briefly captures the ambitions for the approaching years to launch new merchandise.

Take heed of the dangers

Regardless of the bullish prospects of a restoration supported by investments in revolutionary medicines reminiscent of Austedo, traders considering TEVA must take heed of the dangers. To start with, TEVA shouldn’t be transferring out of generics and into revolutionary medicines. The technique is solely a matter of rebalancing its portfolio and product combine to place greater margin revolutionary medicines extra prominently. The generics enterprise continues to be vital, with the corporate sustaining that it seeks to “maintain the generics powerhouse” in its Investor Day presentation.

Because of this the results of the slowdown within the generics enterprise might nonetheless undermine future plans for development. If the generics enterprise continues shrinking at a quick tempo, it might offset no matter development is achieved by way of Austedo and the broader revolutionary medication portfolio. A quicker than anticipated slowdown within the generics enterprise might additionally gradual money era, making debt reimbursement a lot tougher. TEVA has been paying down debt aggressively however nonetheless owes collectors as a lot as $18.5 billion. This debt load is proving burdensome amid slowing gross sales and compressing margins. Tellingly, “S&P International Scores just lately revised the ranking outlook for TEVA to steady from optimistic. S&P famous that over the previous couple of quarters, the corporate’s income constraints and margin pressures have raised leverage from 5.9x for 2022 to about ~6.5x as of March 31. The credit score rankings company stated that the corporate’s EBITDA has been weak during the last two quarters, which provides uncertainty to its efficiency.”

Conclusion

After years of turmoil, TEVA is steadying the ship and appears to have a clearer technique of methods to reverse its fortunes by specializing in greater margin revolutionary medicines. Given the steep undervaluation as measured by EV/EBITDA and P/S and the 20% decline YTD within the inventory worth, TEVA is beginning to look enticing based mostly on the potential for a return to development.

The dangers are, nonetheless, actual and I would not be shocked if the inventory continued sliding within the subsequent few quarters as traders keep unconvinced in regards to the prospects of restoration. I used to be bearish on the inventory in Q1 however should admit that the brand new plan has restored some confidence. Now I’m impartial and would swap to bullish if Austedo met 2023 gross sales forecasts and confirmed prospects of continued development in 2024. Continued debt discount, margin enlargement and enchancment in money era are additionally vital metrics to observe in the event you’re considering of shopping for this inventory.