Teva : On the road to investment grade

Teva successfully delivered the 1st phase of its ‘Pivot To Growth’ strategy with a return to revenue growth in 2023 and 2024 (+3% and +9% on constant FX respectively, excluding a $ 500m payment from Sanofi in Q4 2023). The company will now enter the 2nd phase of its strategy (‘accelerate growth’) with a sustained momentum for its AUSTEDO/AJOVY and a good a pipeline of biosimilar and innovative drugs (Olanzapine LAI in 2026, DARI in 2027). These developments should more than compensate for pricing headwinds in the US, we believe. Operating margins should be constrained by R&D and marketing investments in 2025, but then improve thanks to an increasingly favourable revenue mix combined with steady cost efficiencies. We expect that the de-leveraging trajectory towards the 2x target by 2027 (vs. 3x in 2024) will continue in 2025, despite muted EBITDA growth. It should be supported by solid adjusted FCF generation of $ 1.9bn this year as well as potential one-off inflows from the sale of the Teva Takeda JV ($ 0.3bn), the launch of Phase III for divakitug (up to $ 0.5bn) and the potential sale of TAPI ($ 1.5-2.0bn as per our estimates). We believe that Teva could even reach its 2x reported leverage target as soon as 2026 should all three events materialize. Adjusted for off-balance sheet securitization and provisions for legal settlements, the leverage remains high at 4.4x in 2024 but we forecast that it should drop towards 3x in the mid-term. We affirm our Buy recommendation given the expected improvement of credit metrics and potential rating upgrades that could lead to reaching an IG status in the mid-term. We are waiting for further clarity from the US administration on potential sector specific duties, if any, and potential retaliation measures from other countries to better assess specific impacts on Teva.