Teva Pharmaceutical Industries Ltd (ADR) (TEVA): Generic Drug Pricing Not Getting Worse, But Ghost of Headwinds Remain

David Steinberg is out with a cautious note on Teva, believing much of the outlook is priced into the stock.

Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) is trying hard to stage a big comeback under the new leadership of Danish CEO Kare Schultz.

Thankfully, this beleaguered biotech giant has two potential blockbuster drugs on its hands between Huntington’s asset Austedo and migraine asset fremanezumab.

However, as Jefferies analyst David Steinberg resumes coverage, he is not blind to “headwinds on multiple fronts” facing this comeback biotech kid of the Street.

Therefore, the analyst resumes coverage with a Hold rating on TEVA stock and suggests a $19 price target. Notably, these 12-month target expectations imply an 8% upside from current levels. (To watch Steinberg’s track record, click here)

“Teva’s new mgt team has moved quickly to cut costs, prioritize key pipeline projects, and create breathing room from the massive debt load – thereby improving NT cash flow. Nonetheless, generics should witness little to no growth and the 3 top brands are/will be under pressure. We think Austedo and fremanezumab will likely both be large drugs. However, trading at 10x 2020 consensus EBITDA, much of the outlook appears priced in,” explains Steinberg.

On one hand, “fundamentals remain challenging for the generics business,” the analyst notes. On the other hand, Steinberg likewise believes, “slower Copaxone generic erosion could provide NT upside.”

Steinberg writes, “The good news is that generic drug pricing doesn’t seem to be getting worse. And to their credit, mgt has begun to implement a price optimization plan to enhance profitability.” Yet, the analyst cannot help surveying the macro picture, where the domestic generics substitution rate is dialing down the pace at more than 85%. Add in rising rivalry “across the board,” and the analyst looks for the worldwide business to wane some throughout the upcoming few years.

Furthermore, with a probable slew of significant short-term launches ready to run amiss, this certainly “won’t help” matters for Tesla. Keep in mind, the analyst warns, Tesla’s monster asset Copaxone 40mg has not one, but now two generics rivals on the table.

The analyst is cautiously optimistic that “there could be some upside” nonetheless, considering Mylan has merely grabbed at roughly 13% share on back of over 20 weeks, “unless erosion” kicks up. “But the pending Proair genericization and likely pressure on Treanda in 2019 won’t help margins,” fears the analyst, contending that a heavy $32 billion in debt is “hard to ignore.”

The looming question remains: can the company’s late stage pipeline prove sufficient to generate substantial gains after the company’s restructuring initiative? Though the analyst anticipates Austedo and fremanezumab ought to seize a big piece of the massive migraine market, the grander scheme of long-term gains rate following restructuring is less than impressive- or just “pedestrian.”

By 2024, the analyst anticipates combined sales of these drugs could reach $1.4 billion. For now, Steinberg chooses to keep surveying Teva’s potential growth from the sidelines.

TipRanks highlights an apprehensive Wall Street opinion hovering around TEVA stock. Out of 18 analysts polled in the last 3 months, 5 are bullish on TEVA, 9 remain sidelined, while 4 are bearish on the stock. However, is optimism baked into these analysts’ expectations? Consider that the 12-month average price target of $19.36 reflects 10% in return potential for the beleaguered biotech giant.

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