Teva Pharmaceuticals (NYSE:TEVA) started attracting buyers in the last few months for good reason. The generics drug supplier is working with the government to resolve differences, and the company is showing signs of stabilization. This is a welcome development because heavy debt is weighing TEVA stock down. Looking ahead, higher product pricing to match strong product demand will increase profitability and cash flow.
On Nov. 25, Bloomberg reported that it held talks with the U.S. Department of Justice to resolve a criminal probe. If it settles with the government on the alleged price-fixing for generic drugs, it will quantify the one-time cost and remove uncertainty. Unknown future costs previously weighed on Teva stock. But hope that the talks are going well raised its share price from a $6.07 low to a recent trading price over $10.
Teva Pharmaceuticals could avoid prosecution and future charges by admitting to certain allegations and cooperating with the investigation. The big unknown is how much it will cost Teva to settle. The company is short on cash flow growth and will need to pay out any settlement over several years. Its first priority is lowering operating expenses and reducing its debt.
In the third quarter, Teva lost 29 cents a share as non-GAAP EBITDA was $1.2 billion. Free cash flow was $550 million. The company launched 39 generic products through the first three quarters, as generic revenue was $914 million. Revenue from Austedo — used in the treatment of Huntington’s disease — grew at a healthy pace to $105 million. Last month, it launched Truxima, a rituximab biosimilar.
Teva Pharmaceuticals lowered its base costs and will be on track to reach its $3 billion reduction target. At a $13.3 billion expense level, Teva still needs to keep generic drug sales steady. Those sales ensure continued cash flow generation that the company may use to pay down debt each quarter.
Copaxone Business Stabilizing
Teva reported stable development for Copaxone — a medication used to treat multiple sclerosis — in both North America and Europe in the third quarter. And although it continues to see a “slow erosion” in total prescriptions count, management is confident it will maintain Copaxone sales. Generic competition for Copaxone contributed to the 6% decline in quarterly revenues, but gross margin held steady at 49.3%. Restructuring efforts will lead to sustained profitability for Copaxone in 2020. And if sales stabilize or grow in the U.S. next, due to a lack of new competitors entering the market, profits will keep improving.
In the $10 range and with a forward price-to-earnings ratio of 4.2, Teva stock is a good value stock play. Plus, in Europe, positive dynamics for sales of the 40-milligram dosing option will favor Teva. For example, the European patent system will give Copaxone sales a positive lift. Looking ahead, sales of Austedo and Ajovy — a medication used to prevent migraines — will grow, giving investors another reason to consider owning Teva stock at these levels.
The accrual of opioid litigation led to a diluted per-share loss of 29 cents for Teva in Q3. Fortunately, a preliminary settlement with a group of state attorney generals removes a key uncertainty hurting shares. Supplying a Suboxone generic for the next 10 years to those suffering from opioid addition earns Teva some goodwill.
The Bottom Line on TEVA Stock
Teva Pharmaceuticals will continue to work on paying down its debt. Interest rates are still low and could fall further, lowering the cost to finance debt obligations. Ultimately, stronger sales of Austedo and other new products will also benefit the company. And ongoing spending on research and development will also yield innovative biologics in the future. Right now, those potential prospects are not getting priced in Teva stock. That is yet another reason to take a second look at the company before shares continue heading higher.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.