Louise Chen Bucks Odds on Valeant Pharmaceuticals Intl Inc (VRX) to Beat the Street Long-Term, Hedges Bet on Teva Pharmaceutical Industries Ltd (ADR) (TEVA)

A glimpse into why Louise Chen believes Valeant is the better biotech play than Teva down the line.

How are biotech giants like Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) faring in surviving a rough-and-tumble balance sheet recession?

Cantor analyst Louise Chen is divided on these two pharma players caught in attempted turnarounds, encouraged by strong steps to push off mandatory debt payments while “easing” covenants, but more impressed with Valeant’s potential to make it out of the tussle down the line than Teva. However, for both companies, the analyst sees reduced near-term overhang for shares, which helps pave the way for both Valeant as well as Teva to try to rebound to to steady earnings growth once again.

Let’s dive in to see why Valeant has the analyst’s confidence, but Teva’s near-term is too murky for him to take the risk (To watch Chen’s track record, click here):

Valeant Hasn’t Won the War Just Yet, But the Giant Is on Its Way

Valeant has been trying to make a comeback and Chen encouragingly spots a light at the end of the tunnel. As far as Chen is concerned, long-term, this troubled biotech giant will be worth the wager, noting that even though it remains “too early to declare victory,” “slowly,” but surely, Valeant is finally “getting there.” Just how long will it take this giant to rally?

From the analyst’s eyes, the company is right “on track to meet its three-year plan,” thanks to a third quarter that demonstrated positive strides forward in achieving business goals. Chen notes that just a month prior, the biotech player submitted an NDA for its plaque psoriasis candidate IDP-118, which could prove to be competitive in the market when it comes to a longer duration of usage. Meanwhile, with regards to the Current Good Manufacturing Practice inspection at the biotech giant’s Tampa facility, Valeant secured Voluntary Action Indicated (VAI) status in August. In other words, Chen anticipates Valeant’s prospective blockbuster drug Vyzulta in glaucoma could garner a green light as soon as the end of 2017.

The analyst reiterates an Overweight rating on VRX stock with a $23 price target, which implies a just under 61% increase from where the shares last closed.

“This year, the company is focused on stabilization, which we think Valeant has already achieved. 73% of Valeant’s business is growing at 8% (constant currency). Year two is about paying down debt. We believe that Valeant can lower its debt to 4x-5x EBITDA over the next several years. The company is already ahead of its debt pay-down objectives. Finally, Year three is about new, organic product launches. We think Valeant has already started this with Siliq, Relistor, Luminess and Vyzulta,” highlights Chen.

Of course, the analyst is not blind to Valeant’s high debt to EBITDA ratio and troubling lack of visibility into earnings heading into next year. Additionally, the analyst understands Valeant’s dermatology segment is presently shackling the giant, consistently underperforming expectations.

“All this said,” Chen notes, “we think patience will be rewarded with this stock and we are confident that the company can meet or beat its guidance and Street expectations over the longer term. Furthermore, Valeant has no significant debt maturities and no mandatory amortization requirements until 2020, which affords the company good financial flexibility going forward.”

If the biotech player can improve its dermatology business, the analyst anticipates upside could be beneficial here, and notes that “for the stock to work,” Wall Street is going to be keeping its attention to see if advantageous trends that hit the first half of this year can keep the momentum rolling through the third quarter.

When it comes to the troubled biotech giant’s turnaround, the Street is going to take more convincing than Chen, as TipRanks analytics exhibit VRX as a Hold. Out of 14 analysts polled by TipRanks in the last 3 months, 3 are bullish on Valeant stock, 8 remain sidelined, and 3 are bearish on the stock. With a return potential of 31%, the stock’s consensus target price stands at $18.83.Analyst consensus for VRX

Is FactSet Consensus Too Bullish on Teva? Cantor Says Yes

Teva’s CFO has Chen nervous when it comes to a third quarter preview of this shaken Israeli biotech giant, as the management team indicates third quarter could look a lot like the second quarter- a quarter that saw no strategic new launches at play, a flat Specialty business, and generics sales that keep crumbling under the competition. Even with new CEO Kare Schultz from Lundbeck sent in to try to save the day for Teva, the analyst is not swayed enough to budge from the sidelines on this biotech player.

As such, the analyst maintains a Neutral rating on TEVA stock with a price target of $17, which represents a close to 4% downside from current levels.

Consider that in the first quarter of 2017, Teva posted EPS of $1.06, where G&A expenses were “artificially low, and Teva still received some royalties that it no longer gets,” explains Chen. Meanwhile, in the second quarter print, Teva reported EPS of $1.02, and with the Specialty segment and generics sales not performing too well, the analyst would not be surprised if FactSet consensus expectations for EPS of $1.08 for the third quarter prove to be “high.”

To put it bluntly, Chen asserts: “Unless 3Q17 FactSet consensus EPS of $1.08 for Teva comes down before the company reports, we think Teva could miss expectations.”

However, on a positive note, three key moves from Teva could better its earnings visibility, from Schultz filling the shoes as the new CEO (who has no official start date released) to “an easing of its debt covenants” to “the successful divestiture of its Women’s Health business.”  Moving forward, the analyst writes, “The next order of business on the management front is to look for a new and permanent CFO […] The Oncology/Pain businesses are next to be divested.”

Overall, “If Teva misses 3Q17 FactSet consensus estimates, then the Street may be concerned that Teva may not be able to make its 2017 financial guidance. We would note, though, that Teva has three solid launches in December including: Viagra (180-day exclusivity), Reyataz (180-day exclusivity) and Viread (exclusivity until January 25th). We think one way for Teva to stop the earnings decline from generic drug price erosion is to cut costs. Mr. Schultz could be helpful here given his background in cost cutting. Mr. Schultz is not expected to be on the 3Q17 call,” underscores Chen, who for now does not see enough signs of a comeback from Teva.

Wall Street backs Chen’s caution here, as TipRanks analytics reveal TEVA as a Hold. Based on 17 analysts polled by TipRanks in the last 3 months, 2 rate a Buy on Teva stock, 12 maintain a Hold, while 3 issue a Sell on the stock. The 12-month average price target stands at $21.00, marking a 19% upside from where the stock is currently trading.Analyst consensus for TEVA

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