Analyst Derek Archila Sizes Up Risks to Teva Pharmaceutical Industries Ltd (ADR) Shares

As Wall Street scrambles away from Teva after a sharp guidance miss for 2018, Oppenheimer's Derek Archila shares his two (cautious) cents.


Oppenheimer analyst Derek Archila called it: the Street was just too optimistic on Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) ahead of its fourth quarter print.

Revenue and earnings certainly underwhelmed for the quarter, but the biggest point of contention is the 2018 EBITDA guide- a massive blow considering Street-wide expectations. In reaction, the Israeli pharma giant’s shares crashed almost 11% off recovery course yesterday and continue to fall today.

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Archila muses that Teva “shares still look pricey, but is the worst over?” Wary approaching the quarterly print, the analyst was not so floored to see the beleaguered company’s lackluster performance for the quarter. Considering 2017 was quite a rocky stretch for the company, it is no surprise that most are choosing to play it cautious these days- even with cost-cutting endeavors in full play.

Therefore, the analyst reiterates a Perform rating on TEVA stock without listing a price target. (To watch Archila’s track record, click here)

Archila explains, “As we noted in our EPS preview, we suspected consensus 2018 sales/EPS/EBITDA estimates were too high and were cautious into the print. For a highly levered company facing meaningful headwinds to both its branded and US generic segments along with execution risk around a multi-year restructuring plan, we don’t think the shares are particularly cheap. TEVA trades at ~11x our revised 2018E EBITDA of ~$4.9B, well ahead of its best comparable, MYL at ~8.5x. Further, we think a potential delay in approval for what is hailed as one of the company’s few growth drivers (fremanezumab) along with categorical pricing pressures in generics, present risk. We prefer to remain on the sidelines until we see more material progress on TEVA’s restructuring initiatives.”

Another sore point for Teva investors- the giant’s best-selling asset Copaxone is poised for a sharp dip in revenue. Based on the guide, the company’s total revenue will fall off around $3.6 billion between 2017 and 2018- with close to half of the downturn stemming from anticipated generics rivalry chasing Copaxone. The TEVA team calls for worldwide Copaxone sales circling $1.8 billion, underperforming the Street’s around $1.9 billion estimate- this angles for a second domestic generics 40mg candidate to hit the market as early as the second quarter of this year. With new competition rising, Archila fears this will apply even more “pressure” on Teva’s gross margins and EPS already under hot water- for the rest of the year.

Domestic generics revenues are guided to reach approximately $4 billion this year, around half a billion shy of the Street’s expectations. Archila points out a looming headwind for Teva: further rivalry gunning for the company’s g-Concerta, a product asset that brought in about $400 to $500 million last year. Meanwhile, Archila wonders about the what-if factor: could Teva’s migraine asset candidate Fremanezumab face a delay in gaining a green light? Right now, this hovers as an “unclear” “headline risk” for Teva stock, as far as Archila is concerned.

For 2018, Teva set an EBITDA guide between roughly $4.7 and $5.0 billion- far below the Street’s approximately $5.3 billion forecast. Yet, looking at a volatile last year to year and a half period for Teva, Archila believes odds are new Danish CEO Kare Schultz is opting to navigate “conservative” waters here as far as the outlook. “We think TEVA’s ability to balance massive cost cuts without impairing future growth drivers (i.e. Austedo, Fremanezumab) remains on the minds of investors,” notes the analyst.

Bottom line, “we don’t see the balance sheet improving drastically any time soon,” Archila surmises on what currently looks like an expensive stock- and a company with more road to travel to recovery.

TipRanks indicates analysts on Wall Street tend to side with Archila’s apprehensive perspective on Teva stock. Out of 20 analysts polled in the last 3 months, 4 are bullish on the Israeli pharma giant, but 11 remain sidelined, with 5 bears sounding the alarm. Yet, it appears some optimism is baked into these analysts’ expectations. The 12-month average price target of $19.58 boasts potential upside of 5% from where the stock is currently trading.