Louise Chen Raises Red Flags on Teva Pharmaceutical Industries Ltd (ADR) (TEVA); Here’s Why

Louise Chen is dialing down the price target on TEVA after a rocky third quarter performance.

Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) shares were crashing almost 20% yesterday once investors caught word of “something amiss:” a third quarter flub and a full year chop in earnings guidance.

Cantor analyst Louise Chen is continuing to be cautious here, noting that market dynamics are “challenging” the company between pricing dips and fast FDA green lights for a slew of generic clones of rival off-patent drugs. Moreover, Chen points to sinking gross profit and profitability of the company’s generics and specialty medicines segments as the culprit for the weak gross profit margin performance. Acquiring Allergan’s Anda, the fourth leading domestic distributor of generics medicine, a whopper of a takeover bought for $500 million, likewise carries a low margin, writes the analyst.

In reaction to the print, the analyst maintains a Neutral rating on TEVA stock while cutting the price target from $17 to $10, which represents a close to 11% downside from current levels. (To watch Chen’s track record, click here)

For the third quarter, the troubled Israeli pharma giant’s U.S. generics revenues were hit with a 9% year-over-year wind-down to $1.2 billion, with Chen underscoring rocky waters with customer consolidation transitioning to bigger purchasing groups. Teva ended up shortchanging FactSet consensus by $0.07 with its quarterly results of $1.00, which also hit $0.02 under the analyst’s own estimate. For the full year, Teva wound down its EPS guide from $4.30 to $4.50 with a $4.40 midpoint to $3.77 to $3.87 with a $3.82 midpoint. For context, FactSet consensus had set its 2017 EPS expectations at $4.24. Whereas the TEVA team anticipated a $5 billion debt paydown, the company adjusted expectations to a $3 billion to $4 billion debt paydown moving forward.

What happened to specialty medicines revenues this quarter? The analyst finds the yearly growth waned due to the company’s CNS products producing softer sales. Regarding Teva leadership, Chen highlights: “The new CEO Kare spoke on the call today, but was not part of the Q&A. He said that he wants to reposition TEVA operationally and financially, and that it is a priority for him to stabilize TEVA’s operating profit and cash flows, and that reducing the debt burden is important as well.”

Overall, Chen’s comprehensive look at Teva following its quarterly performance has the analyst dialing down 2017 EPS expectations and wondering if this company is capable of the comeback it needs to achieve amid cutthroat generics pressure: “The decrease in our PT was driven by downward earnings revisions in 2017+. We like Teva, but we think the company has some meaningful headwinds which need to be addressed before the stock can trade higher. 1) Whether Teva will break the company into brand and generics, 2) Whether Teva can continue to pay down its debt, maintain its investment grade rating, And, 3) How the company will grow through generic drug pricing pressure. We would be more positive on Teva shares if generic drug pricing improves and/or the brand drug launches and pipeline advancements exceed expectations.”

The Cantor analyst’s sidelined stance aligns with the majority who take in this giant’s prospects with eyes wide open, as TipRanks analytics exhibit TEVA as a Hold. Based on 21 analysts polled by TipRanks in the last 3 months, 3 rate a Buy on Teva stock, 15 maintain a Hold, while 3 issue a Sell on the stock. The 12-month average price target stands at $20.11, marking a 79% upside from where the stock is currently trading.

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