Teva Pharmaceutical Industries Ltd (TEVA): Thanks for the Cuts But Where Is the Revenue Guidance?

Mizuho's Irina Rivkind reflects on how much Teva's cost cutting compare to expectations; The missing puzzle piece - revenue guidance.

Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) shares have gained almost 15% in value since yesterday after new Danish CEO Kare Schultz’s first conference call, where the recovering Israeli pharma giant’s leadership unveiled cost cutting plans that outclassed Street-wide expectations.

Mizuho analyst Irina Rivkind Koffler notes that while the reveal may have been “highly anticipated,” the planned restructuring program that has dominated the buzzing market “still manages to positively surprise.”

For Koffler, “the punch line” boils down to the giant’s strategy to scale back $3 billion in expenses along with a reduction of a quarter of its workforce by 2019 from a projected cost base of $16.1 billion this year. The goal is for over half of this cost cutting, or past $1.5 billion, to be seen through next year. Additionally, Teva is undertaking cutting its dividend, a plan Koffler had already been anticipating, with roughly $380 million in savings primed for deployment to offset some of next year’s $700 million in restructuring frees.

More on TEVA: After Teva Pharmaceutical’s Big Jump, This Analyst Remains Unenthused

Buy side investors seemed to have been angling for cost cuts between $1.5 and $2.0 billion in 2018, and Koffler believes Teva will land “in line” these expectations. Meanwhile, “Sell side expectations were more tempered however, and total costs cuts (in COGS, SG&A and R&D) from 2017 appear to be only $865M per FactSet Consensus. In 2019, consensus expected only $1,084M in cost cuts from 2017 (using this same math) and not the much higher $3.0B number introduced by Teva. Our own estimates which had already been significantly cut in anticipation of the announcement modeled a $2.74B cost cut in 2019. We therefore think that adj. EBITDA could fall around $5.5B in 2018 and over $5.3B in 2019, therefore keeping the company’s leverage ratio below 5.0x,” writes the analyst.

“We believe mgmt. is guiding conservatively due to continued Copaxone generic uncertainty and likely introduced targets that are beatable. The only disappointment we can think of is that there was no revenue guidance, and it’s unclear if the announcement is sufficient to avoid a downgrade to high yield,” Koffler concludes, noting that even with the “positive reaction” to the restructuring plans, she is still hedging her bets on this biotech player.

As such, the analyst maintains a Neutral rating on TEVA stock with a $16 price target, which implies a close to 12% downside from current levels. (To watch Koffler’s track record, click here)

TipRanks indicates a largely cautious market unsure that Teva is worth the gamble, with only 3 out of 18 analysts in the last 3 months rating a Buy on the stock, the majority 11 maintaining a Hold, and 4 bearish on the stock’s opportunity at hand. With a downside potential of nearly 12%, the stock’s consensus target price stands at $15.29.

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