Now That Teva Has Stabilized, Teva Stock Looks Undervalued

Debt looks to be less of a problem for Teva stock

Israeli pharmaceutical company Teva (NYSE:TEVA) reported better-than-expected fourth-quarter results on Feb. 12. The results show that its business has stabilized, as I predicted in my previous column. Meanwhile,  Teva stock continues to have multiple, positive catalysts and its debt is manageable.

Now That Teva Has Stabilized, Teva Stock Looks Undervalued
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Given all of these points and its low valuation, Teva’s shares are undervalued and worth buying at their current levels.

Teva’s Q4 EPS and revenue both came in above analysts’ average estimates. Importantly, its Q4 revenue rose 1% year-over-year. Its EBITDA jumped 10% YOY and its earnings per share, excluding certain items, surged 17% to 62 cents.

By greatly reducing its annual expenses (the company just completed a multiyear restructuring effort that cut its annual expenses by about $3 billion) and taking steps to boost its revenue, Teva has returned to profitability after multiple years of steep losses.

Teva expects its 2020 revenue to come in at $16.6 billion to $17 billion, and it provided 2020 EPS guidance, excluding certain items,  of $2.30 to $2.55. The company’s 2019 revenue was $16.9 billion and its EPS, excluding certain items, was $2.40, so the company expects its top and bottom lines to remain mostly unchanged in 2020.

However,CEO Kare Schultz, in a statement, did indicate that the guidance was conservative.

“Looking ahead, we will further transform our manufacturing network, improve our profitability, and generate cash, which will further reduce our debt,” he said.

Growth Outlook

Teva has two proprietary drugs, Austedo and Ajovy, whose sales are growing rapidly. Austedo, along with only one competing treatment, was approved in recent years as the first-ever treatments for tardive dyskinesia in the U.S. But only 9,000 tardive dyskinesia sufferers out of an estimated 500,000 affected patients are taking the drug daily, Schultz reported.

After the drug’s sales jumped 98% to $136 million in 2019, Teva estimates that they can surge to $650 million in 2020. Meanwhile, the company recently received approval from the U.S. and Europe to deliver its migraine treatment, Ajovy, through an autoinjector. Moreover, it’s in the middle of launching the drug in Europe and expects to launch it in multiple other markets in 2020. 

The company thinks the drug’s market share will rebound to 25% in the U.S., up from 20% last year, and it expects Ajovy’s sales to jump to about $250 million this year from $96 million in 2019. Teva expects the growth of Austedo and Ajovy to more than compensate for the decline in sales of its MS drug, Copaxone, which has been hurt by competition from generic drugs.

Further, Teva is conducting Phase III trials on the efficacy of Ajovy as a treatment for post-traumatic headache and fibromyalgia. Results from those trials are due out in 2021. And, as I pointed out in my previous column Teva launched Truxima, “the first biosimilar of Rituxan, a non-Hodgkin lymphoma treatment.”

Truxima will cost 10% less than Rituxan. Moreover, Schultz was relatively upbeat about the outlook of the company’s biosimilar business, saying that Teva’s market share of the biosimilars it launches in the U.S. can reach 10%.

During this month’s earnings conference call, Schultz noted that Fasinumab, a new biologic the company is developing with Regeneron (NASDAQ:REGN) as a treatment for osteoarthritis pain, is currently in Phase III trials. He said data from the trials could be unveiled this year.

Finally, Teva is looking to launch its Digihaler devices for asthma sufferers later this year. The device has “built-in sensors that connect to a companion mobile application to provide information on inhaler use to people with asthma.”

Importantly, Schultz told Barron’s that the supply and demand dynamics of the company’s huge North American generics business now “looks very stable.” The business had been weakening in recent years.

Debt, Valuation and Teva Stock

On the earnings conference call, the CEO said that the company could handle its debt maturing in the next three years with its cash on hand and the cash flows it expects to generate. Teva will probably refinance some of the $4.3 billion of debt due in 2023.

The company’s debt to EBITDA ratio fell to 5.32 at the end of 2019 from 5.72 in Q2 of 2019, and Schultz said he expects the ratio to continue falling going forward. As I pointed out in my last column, although the company’s liability from the opioid tragedy could meaningfully increase its debt, Teva could, in a worst-case scenario, use asset sales to effectively cope with that situation.

The forward price-earnings ratio of Teva stock is only 5, and its trailing price/sales ratio is 0.8. With Teva’s financial situation in control and given the company’s multiple growth drivers, those valuation metrics are quite low. As a result, the shares look attractive for long-term, value investors.

As of this writing, Larry Ramer did not own shares of any of the aforementioned companies. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.


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