Summary
- Teva remains the largest manufacturer of generic drugs in the world, and recent fat cutting efforts have increased its scale efficiency.
- Collapsing margins should be near the cycle end and in fact have likely already begun to expand as evidenced by unexpectedly weak margins just reported by customer Walgreens Boots Alliance.
- Political pressure to lower drug prices mostly applies to patented drugs, while Teva's revenues are now mostly in generics priced competitively. Meanwhile, Teva's upcoming pipeline of generic products is deep and broad.
- Gloom during the past 18 months over Teva's past missteps and the loss of patent protection for blockbuster Copaxone is now history, and it's clear that the new management has progressed on their intelligent restructuring plan.
- Currently trading at an astonishing 6.3 and 5.8 times 2019 and 2020 earnings estimates, respectively, if CEO Schultz's prediction of 2019 as the "trough year" proves true, the shares should trade at roughly double where they are now.
I loaded up on shares of drug giant Teva Pharmaceutical (NYSE:TEVA) over a year ago, and while the share price performance has disappointed, the business results have not. Debt was reduced to plan, headcount has been slashed, plants closed, a reorganization effected, and the drug portfolio thoroughly scrubbed to discontinue unprofitable drugs while emphasizing more profitable ones in which TEVA possesses a cost edge. Two promising patented drugs were launched to rapid sales growth along with a slew of generics. Hundreds more new drugs are in the pipeline with 92 tentatively approved in the US alone. I consider the shares currently trading at $15.xx to reflect irrationally pessimistic expectations, so I have been increasing my already overweight long position.
For those who are new to the story, here is a brief synopsis of why the shares tanked in 2017 from the $30s and higher:
