It’s been a rough few years for Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) stock. TEVA stock has declined by half from mid-2015 levels, nearing a three-plus-year low in the process. The loss of patents for Teva Pharma’s MS drug Copaxone has been a key driver to the downside. Regulatory risk — raised after a settlement with the U.S. Department of Justice in December — continues to pressure Teva stock.
But Teva Pharma’s stock has — at least — stabilized lately, and it’s getting tough to argue that the risks aren’t more than priced in.
That seems too cheap, given that there are still several reasons to buy TEVA.
TEVA Stock Is Just Too Cheap
The 2017 guidance of $4.90 to $5.30 — even backing out an estimated $0.75 to $0.95 impact from the loss of Copaxone protection — prices TEVA stock at about 8x earnings-per-share at the moment.
A low-single-digit multiple alone doesn’t necessarily make a stock a buy. Nor is it out of line in the generics space. Peer Mylan N.V. (NASDAQ:MYL) trades at a little over 7x 2018 EPS, for instance. But that low multiple does provide a margin of safety.
And it’s not as if Teva Pharma earnings are falling off a cliff. Analysts expect a modest increase in 2018 EPS. The loss of Copaxone seems priced in; the rest of Teva’s portfolio remains reasonably strong. That bodes well for TEVA stock.
Regulatory Risk Shall Pass for Teva Pharma
One of the ironies of the current pressure on generic manufacturers is that generics were supposed to be the savior of U.S. healthcare. Lower-priced generics were supposed to cut health care costs more broadly. It was branded manufacturers like Pfizer Inc. (NYSE:PFE) and Merck & Co., Inc. (NYSE:MRK) that were likely to face pricing and regulatory pressure.
And it seems highly likely that at some point, that narrative will return, if not in full. Pharmaceuticals are important overall, particularly given the increasing average of the population in the developed world. Generics are moreso. Teva’s emphasis on ‘biosimilars’ likely will pay off eventually, as another avenue to reduce overall costs. Teva, Mylan and other manufacturers may be punching bags now. But their importance will be remembered eventually.
TEVA Stock Has Drugs Beyond Copaxone
While Copaxone is a key drug for Teva, it’s not as if it represents the majority of the company’s earnings. Teva’s situation is not analogous to that of Gilead Sciences, Inc., (NASDAQ:GILD) with its enormous reliance on HCV drugs. Just in the last month, Teva has launched a generic version of Allergan plc Ordinary Shares’ (NYSE:AGN) Minastrin and received a priority review for a potential “orphan drug” for tardive dyskinesia.
There’s a real sense that investors are throwing out the baby with the bathwater when it comes to TEVA stock. Yes, there are challenges; yes, there are risks. But generic drugs will have a place in healthcare for decades to come. So will Teva Pharma. And as the new administration finds its footings, and as the company works through some of those challenges, TEVA stock seems likely to rise.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
