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Morningstar | Teva's 1Q: Not Out of the Woods Yet - Cash Flow Remains Focus

Teva Pharmaceutical reported quarterly results that generally met our lowered expectations. While cost savings initiatives and debt reduction remain on track, overall quarterly results contained numerous gives and takes, including softness in net volumes (driven by around 50% declines in North American sales of multiple sclerosis drug Copaxone and respiratory drug ProAir), foreign exchange headwinds that were partially offset by encouraging initial signs of growth of recent product launches (migraine drug Ajovy and Huntington's disease drug Austedo) and stabilization of U.S. generic business (last five consecutive quarters). Management maintained full-year EPS guidance and expects tailwinds in the second half from working capital benefits and elimination of the $300 million annual incentive payment. We maintain our no-moat rating and fair value estimate of $16.

Management continues to right-size the business (current spend base target of $13.3 billion) and expects to achieve the two-year cost reduction target of $3 billion. Net debt was reduced by $0.5 billion resulting in a level of $26.7 billion or 64% leverage ratio (5.5 times trailing EBITDA). For the fiscal first quarter, revenue declined 15% year over year to $4.3 billion, while normalized EPS declined 36% year over year to $0.60. Normalized operating margin declined to 24%, from 28% last year.

We believe that the company is taking the painful but necessary steps to right-size the business on the cost side and we are encouraged by the fact that revenue did not deteriorate beyond lowered guidance from February. We still would not lean into this name as there are too many moving parts.