The trouble with value investing is that a pick that looks like a value stock could end up becoming a value trap.
For example, Teva Pharmaceutical (NASDAQ: TEVA) is potentially a good turnaround play. TEVA hired a veteran CEO, Kare Schultz. It is cutting its debt and rolling out new products.
The Good News About TEVA Stock
Since the fourth quarter, Teva has been addressing the ongoing shortage of EpiPen treatments. It is manufacturing more of the product and increasing its capacity to build more of it. EpiPen Jr., which has a dosage of 0.15 milligrams, compared to EpiPen’s 0.3 milligrams, is scheduled to be released in the second quarter.
On Feb. 4, Teva ‘s Ajovy migraine treatment was approved by the EU’s pharmaceutical regulatory agency, the European Medicines Agency (EMA). Delivered via pre-filled syringes, each dose of Ajovy consists of 225 mg of an antibody that treats adults suffering from at least four migraines a month. It is a potential blockbuster.
Migraine sufferers have few treatment options available, so getting Ajovy approved by the EMA would be a welcome development for the owners of Teva Pharmaceutical stock. Once the treatment is approved, TEVA needs to work on getting each country in the EU to agree to reimburse patients for it. Sales of Ajovy in the EU are expected to ramp up slowly over the next one or two years.
Paying Down Debt
TEVA expects to pay down $1.7 billion of its debt in July, using its operating cash flow and cash on hand. By avoiding both refinancing and re-negotiating its revolving credit facility, Teva could potentially lower the cost of maintaining its debt. The company is seeking to lower its net debt-to-EBITDA level to four by the end of next year.
Copaxone Is a Headwind for TEVA Stock
Falling sales of the company’s MS drug Copaxone, which lost its exclusivity, are a headwind to Teva’s gross margins. Larger-than-expected gross margin declines, in turn, could weigh on TEVA stock.
Opportunities Could Boost Teva Pharmaceutical Stock
As mentioned earlier, gaining approval of Ajovy from the EU is a key component of Teva’s turnaround plan. Getting health insurers and other payers to decide on the drug’s accessibility and reimbursement details will have an impact on its success in the marketplace. In Q4, about 60% of U.S. commercial insurers covered the treatment.
Generic Forteo, an injection treatment for osteoporosis, will start generating revenue for TEVA in the second half of this year. Its contribution will likely be slow at first. The product is not easy to make, and competitors will enter the market next year. Despite these challenges, TEVA is confident that the product will do well.
Entering the Biosimilars Market
Through its partnership with the hugely successful biotech firm, Regeneron Pharmaceuticals (NASDAQ: REGN), TEVA is building a pipeline of biosimilars and innovative biologics. Fasinumab, which interacts with the nerve-growth-factor protein and is supposed to treat osteoarthritis pain, met all of its endpoints in a recent trial, although data indicated that the treatment could increase the occurrence of rapidly progressing osteoarthritis.
If Fasinumab, gets approved, it could be an option for doctors seeking a non-addictive pain therapy. At a time when opioid addiction has ruined so many lives, such a treatment option could help many patients.
The Valuation of TEVA Stock
The 13 analysts covering TEVA stock have an average price target of $19.76 on Teva Pharmaceutical stock (per Tipranks), versus the stock’s level of $16.30 on Friday afternoon.
Simply Wall ST estimates that the intrinsic value of TEVA stock, based on future cash flows, is $40. Those who buy Teva Pharmaceutical stock at its current level will be rewarded if TEVA stock rebound back to $40 in the next few years.
The Bottom Line on TEVA
Value investors cannot blindly follow Berkshire’s investments, but they can evaluate Teva’s potential on their own. At this point, the company’s debt levels are frighteningly high. The prices and sales volumes of the company’s new products may be weak in the short-term, potentially hurting its short-term results and weighing on TEVA stock.
Still, Teva’s CEO is highly qualified to lead the company’s turnaround. Based on last quarter’s numbers, TEVA appears to be heading in the right direction under his leadership.
As of this writing, the author did not hold a position in any of the aforementioned securities.