Prospects are looking brighter for Teva Pharmaceuticals Industries Limited (NYSE:TEVA). The company won a pair of FDA approvals in September. The big news here is the FDA approving its migraine treatment. Teva’s plan to shed assets from its Medis unit is another positive development, as the heavily indebted generics drug giant takes small steps to repair its business.
On Sep. 7, the FDA approved Teva’s Cassipa, a drug for patients requiring maintenance treatment of opioid dependence. The FDA wrote:
“The FDA is committed to helping those with opioid use disorder transition to lives of sobriety. We’ve taken a number of steps to advance the development of new FDA-approved treatments for opioid dependence and encourage healthcare professionals to ensure patients are offered an adequate chance to benefit from these therapies.“
The opioid addiction crisis in the U.S. is a serious problem. Marketing and distribution from major drug firms worsened the epidemic, so Teva’s drug could help the country battle the problem. Teva’s stock, which is up by around 115% from yearly lows, could trend higher in the coming weeks and closer to a yearly high.
The stock is still undervalued, trading at a forward price-to-earnings ratio of just 8. By comparison, Allergan plc (NYSE:AGN) is now valued at 11 times forward earnings after the stock rallied from around $150 to over $190 recently. Allergan sold its Actavis Generics to Teva in 2016 for $40.5 billion. Bausch Health Companies Inc. (NYSE:BHC) is another generic drug supplier whose forward P/E ratio is comparably lower than that of Teva stock, at around 6.
Near-Term Rally for Teva Stock
In the near-term, Teva stock could rally further after the FDA said on Sept. 14 that it approved Teva’s AJOVY. The drug, which is the first and only anti-CGRP treatment, is a preventative treatment of migraines in adults. The WAC — Wholesale Acquisition Cost — for a monthly dose is $575 and $1,725 for a quarterly dose. Patients will have support services through Teva Shared Solutions and access to the drug in around two weeks’ time.
The lack of competition for AJOVY will give Teva a healthy profit margin in the coming quarters. Even after the solid 11% weekly gain in the stock, Teva is still a compelling value play. Its revenue should continue growing as sales also grow steadily at its generic unit. The migraine drug is not the only new product coming to market. Teva has dozens of other drugs under study or set for the FDA’s approval. As long as the company faces no more lawsuits, the stock’s trajectory should continue upward.
Asset Sale
Consistent with management’s promise to cut debt, Teva could sell its Medis business to lower its debt burden. The idea was first reported last year. If a buyer emerges, the unit could fetch at least $500 million.
Valuation of Teva Stock
Analysts, on average, have a $24.25 price target on Teva stock, with 9 of the 11 analysts calling it a “hold”. Tipranks reported that analyst Irina Koffler of Mizuho Securities issued a “buy” call and a $29 target price. Teva’s fair value is around $27 – $30 if Teva’s revenue does not fall over the next decade. Teva’s EBITDA must sustain 20%-30% of revenue in this 10-year DCF Revenue Exit model. I assume a discount range of between 6%-8% percent, since the company’s business is largely stable.
Takeaway
Even though Teva stock outpaced the Nasdaq Biotech Index rise of 8.8% year to date by threefold, the stock is still a stock for value investors. As business gets better, Teva will cut its debt and may hike its dividend.
The first step is releasing great products and growing cash flow.
Chris Lau does not own any of the stocks mentioned.
[Editor’s note: This article has been amended to correct a mistake in the price of Teva’s Wholesale Acquisition Cost, which was mistakenly attributed at $585.]
