Teva Pharma is the way to play the re-rise of generic drugs

Key Points

• Teva is the largest generic drug maker in the world, with a possible spinoff of its ingredients unit that could boost shareholder value.
• After years of Opioid litigation, the company has finally reached settlements and is moving forward with its Pivot to Growth turnaround strategy, which is already improving results.
• TEVA shares trade at 4.32X forward earnings and have a 1.56% short interest.

Generic and specialty pharmaceutical company Teva Pharmaceutical Industries Ltd. NYSE: TEVA stock has underperformed for nearly a decade. The company has finally settled over 99% of its Opioid and price-fixing litigation in the United States. As a member of the medical sector, the focus is now back on improving growth and shareholder value.

The company has a strong pipeline of biosimilar (generic) and specialty treatments to serve the healthcare industry. The trend towards affordability and lowering drug prices is a tailwind for Teva. It's also moving towards making its ingredients business a standalone entity, which implies a spinoff is in the works. Its Q3 2023 earnings report underscores the rapid progress the company is making, and investors may want to take note before the train leaves the station.

Opioid and price-fixing litigation settlement

Recall that four major drug makers agreed to $26 billion in opioid settlements, including Johnson & Johnson NYSE: JNJ for $5 billion, Cencora Inc. NYSE: COR, formerly AmerisourceBergen for $6.1 billion, Cardinal Health Inc. NYSE: CAH for $6 billion and McKesson Co. NYSE: MCK for $7.4 billion in 2022. Additionally, pharmacies, including CVS Health Co. NYSE: CVS, Walgreens Boots Alliance Inc. NYSE: WBA and Walmart Inc. NYSE: WMT, along with Teva, reached settlements around $17.3 billion. Check out the sector heatmap on MarketBeat.

For Teva, the dark cloud of the Opioid litigation and pending settlements have finally cleared as the company commences its $4.5 billion settlement payments. As part of the settlement, it is also shipping out its generic version of Narcan, a lifesaving drug to prevent and reverse opioid overdose by blocking opioid receptors in the brain. Narcan sales will help offset some of the settlement costs over time.

Additionally, the company settled with the U.S. Department of Justice for its $200 million criminal price-fixing charges. The charges relate to incidents involving a former employee who colluded with competing drug companies to not bid on supply opportunities for a generic product for three different customers in three separate incidents between 2013 and 2015.

Implementing its Pivot to Growth strategy.

Teva appointed a new CEO, Richard Francis, at the start of 2023. Dr. Francis implemented the new "Pivot to Growth" strategy to drive the turnaround in May 2023. The strategy is built on four key pillars: investing in R&D, expanding its pipeline of first-in-class and best-in-class medicines, concentrating on high-value and complex generics and focusing on areas of significant growth and patient impact. 

Teva has implemented a strategy to expand into new and emerging markets, including China. It's committed to increasing its R&D budget by more than 20% annually. The company has grown its efforts to partner, collaborate and co-develop and commercialize new medicines to better hedge drug development costs and risks.

Teva API's New CEO

Teva appointed a new CEO, Dr. R. Ananthanarayanan, to its Teva active pharmaceutical ingredients (API) unit, which provides ingredients to over 1,000 customers, including pharmaceutical companies, drug makers and contract development and manufacturing organizations (CDMOs). The company's portfolio includes over 400 APIs produced throughout 16 state-of-the-art facilities with over 5,000 employees. Teva plans to make it an independent standalone business.  

Improving results

Teva released its Q3 2023 earnings report on November 8, 2023. The company reported non-GAAP earnings of 60 cents per share, missing consensus analyst estimates by a penny. GAAP diluted EPS was 7 cents. Gross margins improved by 50 bps YoY. Revenues grew 7% YoY to $3.9 billion, beating analyst estimates of $3.73 billion. The company generated free cash flow of $229 million.

Growth across the board

Teva's generics business grew 15% in North America, 2% in Europe and 17% YoY in International Markets. Teva's drug to treat chorea associated with Huntington's disease, Austedo, grew revenues 30% YoY to $339 million, with $1.5 billion expected in 2023. Revenues are expected to double to $2.5 billion by 2027. Ajovy, a drug for migraine headaches, experienced 22% YoY growth to $114 million and is expected to reach $400 in full-year 2023 revenues. Uzedy, a long-acting treatment for risperidone, is already capturing 55% of all NBRx in the risperidone long-acting market, which is a $4 billion market. And the company just received FDA approval for a generic version of the osteoporosis drug Forteo on November 17, 2023.

Collaboration with Sanofi

As part of its Pivot to Growth strategy, Teva announced a partnership with Sanofi NYSE: SNY on October 4, 2023, to develop and commercialize TEV'574, a treatment for inflammatory bowel disease. It's part of a drug class called anti-TL1As. The drug is in Phase 2b for ulcerative colitis and Crohn's disease. Results are expected in 2024. Sanofi has agreed to give $500 million in upfront payments and up to $1 billion in milestone payments.

They will share global development costs, net profits and losses in major markets. Sanofi will spearhead the development of TEV'574 in Phase 3. Teva will have commercialization rights in Europe, Israel and specific countries, while Sanofi will have commercialization rights in North America, Japan, Asia and the rest of the world. The potential global market size stands at $28 billion.

Raising expectations.

Teva raised its full-year 2023 revenue forecast to $15.1 billion to $15.5 billion from previous estimates of $15 billion to $15.4 billion. Non-GAAP operating income is expected to be between $4 billion to $4.4 billion. Adjusted EBITDA is expected to be between $4.5 billion and $4.9 billion. Non-GAAP diluted EPS is expected to be between $2.25 billion and $2.55 billion. Free cash flow is expected to be between $1.7 billion and $2.1 billion.

CEO Insights

CEO Francis stated, "Over the six months since our Pivot to Growth strategy was launched, we made significant progress in executing on all four pillars, as well as realizing our goal of becoming a stronger, bolder and simpler organization." He concluded, "In our generics business, we are focusing our portfolio on high-value complex products and optimizing our network. We are advancing toward Teva API becoming a stand-alone unit, and we are announcing the appointment of Dr. R. Ananthanarayanan (Ananth) as CEO of Teva API." A potential spinoff could result in a boost to its stock price.

Teva Pharmaceuticals analyst ratings and price targets are at MarketBeat. Teva Pharmaceuticals peers and competitor stocks can be found with the MarketBeat stock screener.

Weekly symmetrical triangle   

The weekly candlestick chart on TEVA illustrates a symmetrical triangle pattern. The swing low formed at $7.09 in May 2023. Shares have continued to make higher lows after reaching a peak at $10.72 in September 2023. TEVA formed a weekly market structure low (MSL) buy trigger at $9.11 after bouncing off the lower ascending trendline at $8.06. The weekly relative strength index (RSI) has been rising towards the 60-band as TEVA shares retest the daily 200-period moving average (MA) at $9.54, retesting its post-Q3 2023 earnings reaction peak. Pullback support levels are at $9.11, $8.55, $8.06 and $7.53.  

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