Summary
- Since the acquisition of Actavis, Teva's balance sheet and cash flow were destroyed. It now has focused relentlessly on realigning its strategy and restoring the balance sheet.
- Halfway through now, it has met or exceeded most of its expectations set in early 2018.
- However, the increasingly competitive US generics markets and internal challenges mean FY2019 will see worsening financials, and FY2020 may only see marginal growth.
- Deepening impact of LOEs and the colossal debt obligations in the next five years overpower the potential upside in new products.
- Teva is reasonably priced, but even Berkshire Hathaway didn’t dip in at $15 in the January sales. Due to dissatisfactory FY2019 guidance and marginal growth beyond 2020, investors will need to be ultra-patient to reap any rewards.
Investment thesis
Since the FDA relaxed drug approvals procedures, competition in the generics market has intensified. Drugs prices across the industry erode, and big discount labels are slapped on pharmaceutical stocks. Among them, Teva (TEVA) has been one of the steepest discounts. However, there are more troubles than meet the eyes. On top of the challenging generics market, Teva also carries debts of the size of a mammoth.
Its two-year organizational realignment exceeded expectations; however, it couldn’t overshadow the fact that the impact of LOEs in 2019 will still be higher than the additional growth from AJOVY and AUSTEDO. With FY 2019 free cash flow guidance between $1.6-$2B against a $19B market cap and marginal growth beyond 2020, investors will need to be ultra-patient for this turnaround.
