When Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) reports quarterly earnings results on Aug. 3 before market open, good sales numbers may not do enough to give TEVA stock a boost.
Investors will demand more details on Teva Pharmaceutical’s strategy in absorbing Actavis. After paying $40.5 billion, the generic drug giant must devise a solid strategy that gives its investors more confidence.
TEVA stock has strong fundamentals, a robust pipeline and has the flexibility to adjust for the upheaval in healthcare policies imposed by governments around the world. Should circumstances change, the drug manufacturer may adjust its dividend rate, shed assets and cut down operating expenses further. In the near-term, investors will look at the following things below.
TEVA Stock: Watch for Cash Flow Growth
Teva Pharmaceutical will need to show growth in operating cash flow in the quarter. Chances are good that revenue from generic medicine unit will show improvements. Quarterly expenses probably dropped, due to the streamlining of weak business units, job cuts and lower marketing spending. The Actavis acquisition strengthens Teva’s competitive positioning as one of the few discount drug companies. By cutting costs and operating more efficiently, the company may sell generic brands at lower operating costs.
Specialty medicine will take more time than generics to add meaningfully to TEVA’s quarter. But in the medium- to long-term, Specialty drugs have the potential to accelerate free cash flow but it will take the company a few quarters. Teva Pharmaceutical needs time, money and resources in building the sales momentum for specialty drug products.
TEVA has hundreds of drug products that are awaiting approval. Once regulators give the new products the green light, the company’s profits will inevitably grow.
Teva may not announce a big cut in its high debt levels in the quarter. This should raise no alarm bells for shareholders. The debt is manageable, so long as Teva’s cash flow more than covers the dividend and interest payments owed on the debt.
On July 14, rumors circulated that AstraZeneca plc (ADR)’s (NYSE:AZN) CEO Pascal Soriot would join Teva as CEO. Bloomberg then reported that Soriot would not in fact run Teva. The lack of leadership is a headwind for the TEVA stock price but the current board and management have the know-how to keep running the business effectively.
Teva’s main constraint without a CEO is its inability to make strategic decisions. Still, the need for asset divestitures is not urgent because the debt is manageable. The sector does not face changes in the political landscape such that Teva will have to adjust its business model.
Endo International plc – Ordinary Shares (NASDAQ:ENDP) is struggling in the markets. Endo’s forward P/E of 3.22X should interest value investors in the stock. Similarly, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has a forward P/E of 4.41 times. These low numbers only give investors part of the story.
Both companies face a deceleration in revenue. But if Endo’s specialty drug sales offset the loss in revenue for Opana ER, after the Food and Drug Administration ordered Endo to pull the drug from the market, the stock could rebound. Valeant depends on strong initial sales for its SILIQ. Which is just getting launched to market.
Bottom Line on Teva Pharmaceutical
Teva stock may show some high volatility in the days following its earnings report. The deep value, strong dividend yield of 4.4% and potential for a rebound will attract investors looking for a stock trading at a discount. Teva Pharmaceutical fits that description.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.