Investors who are looking for a beaten-down pharma stock should consider Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA), which has seen its value plummet nearly 40% over the past year, including 14% year-to-date. TEVA stock closed Friday at $31.14, hovering near ten-year lows. The shares have fallen 3.3% and 23.6% in the respective three months and six months, trailing the VanEck Vectors Pharmaceutical ETF (NASDAQ:PPH) during both spans.
But with some patience, Teva Pharmaceutical, which pays a 4.31% annual yield — twice that of the S&P 500 index — can deliver 25% returns, reaching $40 per share in the next 12 to 18 months.
Healthy Returns Expected From TEVA Stock
Teva Pharmaceutical, an Israeli-based branded and generic drug developer, has fallen amid the controversies of some peers such as Valeant Pharmaceuticals Intl Inc (NYSE:VRX). Like Valeant, TEVA, which once traded north of $72 per share, had grown via strategic acquisitions, including buying the generic drug developer Actavis from Allergan plc Ordinary Shares (NYSE:AGN), making it the world’s largest generic drugmaker. And as with Valiant, Teva Pharmaceutical can no longer rely on generic drug pricing power that once drove the industry.
As such, the company’s debt balance of $36 billion, as of the most recent quarter, has scared off investors. This compares to just $2 billion in cash on the balance sheet. But the company is now looking to sell off assets to grow cash. According to Bloomberg, TEVA is willing to unload its cancer products division, which delivered 2016 revenue of $1.14 billion. Led by Treanda/Bendeka, which delivers annual revenue of almost $700 million, the cancer business is highly coveted.
Analysts estimate the cancer business could fetch anywhere between $4 billion to $6 billion. Even if Teva Pharmaceutical were to receive $5 billion on the sale, this would allow the company to cut a sizable chunk of debt, while infusing cash into the business that can be used to fund growth and research and development. While there is no guarantee that the company will find a suitor, it can still rely on Copaxone — its top selling drug used to treat multiple sclerosis.
Copaxone raked in 2016 revenue of $4.2 billion, which represents almost 20% of total company revenue of $21.9 billion. For 2017, Teva Pharmaceutical projects revenue will grow 11% to a range of $23.8 billion and $24.5 billion, while earnings will come in between $4.90 and $5.30 per share of TEVA stock. This compares to Wall Street earnings estimates of $4.81 per share.
Bottom Line for TEVA Stock
All told, there is still considerably less risk in the company’s stock, which is priced at less than 7-times fiscal 2018 estimates of $4.78 per share. Assuming the company does find a partner for its cancer business, combined with sustained growth in Copaxone, TEVA stock can deliver 25% returns in the next 12 to 18 months on its way towards $40 per share.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
