Rebounding Teva is ‘too cheap to ignore,' upbeat analysts say

What kind of difference can one year make? Just ask some Teva analysts, who these days seem upbeat that the Israeli drugmaker's cost-cutting measures are paying off.

UBS analyst Navin Jacob, for one, has upgraded once-struggling Teva to "buy," calling the Israeli pharma giant "too cheap to ignore," in a recent note to investors. 

And Wells Fargo analyst David Maris seems to share at least part of Jacob's optimism. "Overall, we continue to think the narrative is improving (things are on the mend)," he wrote in his own recent note to clients. While he's maintaining Teva's rating, wanting to see further improvements before counting the chickens, his team's current estimates for Teva's fourth-quarter earnings are higher than Wall Street's. 

It's a good reflection on Kåre Schultz, the new CEO Teva installed behind the wheel just over a year ago to steer the hard-hit business back to growth. His huge cost-cutting plan—which Jacob estimates will sink Teva's headcount to just 39,000 by the end of this year, down from 53,000 at the end of 2017—has provoked some controversy but has always been welcomed by analysts.

As Jacob sees it, the Street is overestimating Teva’s debt risk. And the cost-cutting plan? The $3.6 billion it could save this year will only help stabilize Teva’s bottom line and won’t negatively affect product sales, he figures.

In retrospect, Teva clearly picked the wrong time to acquire Allergan's generics unit Actavis, with the entire U.S. generics market facing pricing pressure. But as Schultz told investors at this year’s J.P. Morgan Healthcare Conference, Teva is out of that "classical negative death spiral of pricing," and "the whole pricing dynamic in the U.S. changed." Teva itself is also shifting away from making products that don’t contribute to its profitability, according to Schultz.

Jacob estimates that Teva’s generics price erosion in the U.S. will be 8% in 2019. However, price alone doesn't account for sales. Citing Iqvia data, Maris said Teva's U.S. generics sales continued to decline at "high rates" of above 20% on a year-over-year basis from October to December. "These 20%+ declines, while less severe than early 2018, are still concerning," he said.

Then what's driving the analysts' bullish outlook for Teva? New products are.

Sales from new drugs like Austedo and CGRP migraine therapy Ajovy, as well as from biosimilars to Herceptin and Rituxan, will help offset erosion to multiple sclerosis blockbuster Copaxone and asthma treatment ProAir, Jacob said, as quoted by Israel’s financial newspaper Globes.

"Ajovy looks to be off to a strong start in terms of prescription volumes as it has an approximate 24% new prescription (NRx) share" versus Amgen and Novartis' Aimovig, at 55% share, and Eli Lilly's Emgality, which boasts 21% share, Maris agreed, citing Iqvia data as of the week ended Jan. 18.

Still, Ajovy will have some hurdles to overcome in the U.S. in 2019. It has so far only won preferred coverage on CVS Caremark's formulary, while CGRP first-mover Aimovig has snagged prime placement on the lists of UnitedHealthcare’s OptumRx and Express Scripts, and third-to-market Emgality has picked up top placement on all three. Before OptumRx's decision recently came out, Maris' team had been projecting 2019 Ajovy sales of $106 million, versus consensus of $81 million.

In another "slight negative," Maris noted, Teva seems to have launched an authorized generic for its ProAir inhaler on Jan. 17, ahead of what investors had expected, in response to GlaxoSmithKline launching an authorized generic to rival drug Ventolin on Jan. 15. 

Still, Jacob believes Teva is undervalued. "In 2020, when leverage will be close to 3 and net profit per share growth will stabilize, Teva should be trading at an historical multiple of 10, which reflects a premium of 50%," the UBS analyst said, according to Globes. Maris noted that Teva is trading at 2019 EV/EBITDA multiple of 9.2, higher than Mylan's 7.5 and Jazz Pharma's 7.4.

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