Investment bank Morgan Stanley has given Israel’s Teva Pharmaceuticals a positive rating for the first time in two years. Morgan Stanley analyst David Risinger says investors should buy shares of Teva Pharmaceutical Industries as the pharmaceutical giant’s turnaround picks up steam.
Risinger upgraded shares of Teva from “equal weight” to “overweight” and increased his price target from $20 to $27.
Risinger wrote, “We expect continued improvement in Teva’s financials and investor perception. Recall that Teva is just a year into its 3-year restructuring plan, and 25% EBITDA upside in 3Q gave us greater confidence that Teva can deliver additional cost cutting and earnings surprise in coming years.”
According to the analyst, there are three factors that led to his upbeat position on Teva. First, he expects higher profits than what analysts are expecting due to substantial cost cuts. Risinger also believes new products that have launched “should deliver sales above expectations and replace Copaxone over time.”
The analyst has also estimated that in 2023, Ajovy (the company’s new migraine drug) and Austedo (its treatment of tardive dyskinesia in adults) could generate sales equal to Copaxone sales in 2018 of about $2.3 billion. Teva launched Ajovy just this past September, making it second to market in the new class of medicines known as CGRP inhibitors
The third factor according to Risinger is that the company’s valuation will rise as strong performance drives its net debt/EBITDA ratio down from the current 5.0 to an expected 3.8 by 2020.
“Deleveraging outlook and free cash flow generation is promising,” Risinger wrote in his note. “If we assume normalized FCF/quarter for Teva $625 million, Teva has the capacity to generate annualized FCF of $2.5 billion/year before the company returns to growth. Based on our year-end 2018 net debt projection of approximately $27 billion, if Teva continues to pay down $2.5 billion/year, by 2020 Teva could reduce net debt to $22 billion,” he added.
Teva recently reported third quarter results revealing sales at $4.5 billion with adjusted earnings of 68 cents a share. Both were lower than the year ago quarter’s figures but beat what analysts had expected.
Teva also forecast annual increase in non-GAAP earnings per share (EPS) to a range of $2.80 to $2.95. Previously the company had guided for $2.55 to $2.80.
CEO Kare Schultz who has been with the company for just a year, said on the earnings call, “Today, on the date, it’s one year ago since I joined Teva. It has been a exciting and challenging year, and I’m very happy about the results that we have achieved. I would like today to thank all our shareholders for the trust and the confidence they put in me and in the company. And I hope that the results I’ll be sharing with you shows you that we take your trust very seriously, and we will do our utmost to live up to your expectations.”