EUR 850.00 For Business Accounts Only

Morningstar | Teva Pharmaceutical: Burgeoning Growth Amid Generic Drug Wreckage; $15 FVE

We assign Teva Pharmaceutical a no-moat and stable trend rating while lowering our fair value estimate to $15 per share from $16. Teva has some differentiation, including the necessary infrastructure to aggressively replenish its generic and specialty pipeline and manufacture increasingly complex drugs. The company is determined to right size the business and improve P&L accountability to improve its position and deleverage the balance sheet.

As the largest global generic manufacturer in an industry undergoing dramatic changes, Teva is likely one of the most controversial publicly traded healthcare companies. With the rapid generic market decline due to pricing pressures, the entry of generic competition for its largest specialty drug Copaxone (treatment for multiple sclerosis), a high debt load, and a confluence of legal matters, management has had to make several difficult choices. The new management team has clearly defined a strategy to reduce operating expenses by $3 billion by fiscal 2019 and move toward a leverage ratio of 3 times net debt to EBITDA over the longer term. This strategy includes the closing of nearly 30 facilities globally and elimination of over 10,000 employees. With the elimination of management layers, Teva will have increased accountability and transparency into P&L performance. In addition to this restructuring, management actively rationalized the overall portfolio to eliminate unprofitable SKUs.

We expect Teva to continue to aggressively be the first to file for generic drug approvals to replenish the pipeline with a narrower focus on drugs with a more complex manufacturing and approval process. In addition to generic drugs, the company also develops branded pharmaceuticals in a few key categories. Ajovy (preventive treatment for migraines) and Austedo (treatment for chorea associated with Huntington’s disease and tardive dyskinesia) appear to be tracking well and should start to offset the patent expiration of the Copaxone.