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Can Teva (TEVA) Return to Growth in This Year or Next?

Zacks Equity Research

Teva Pharmaceutical Industries Limited TEVA faces several challenges in the form of generic erosion of its once blockbuster multiple sclerosis drug, Copaxone, new competition for other branded products like Bendeka/Treanda, pricing erosion in the U.S. generics business, currency headwinds and a massive debt load.

Teva is also involved in an opioid litigation and faces DOJ investigations on allocations of price fixing, which are overhangs on its stock. Teva faces several lawsuits, which claim that it is one of the several companies whose opioid-based drugs are responsible for fueling nationwide opioid epidemic.

Nonetheless, in 2019, Teva completed its two-year restructuring plan announced in December 2017, reducing its cost base by more than $3 billion and net debt by more than $9 billion.

Under the plan, Teva reduced its workforce by more than 13,000 employees, closed down or divested 23 manufacturing sites and 40 offices and laboratories. It achieved this by reducing its cost base, simplifying organization and improving business performance, profitability, cash flow generation and productivity. The plan also included optimization of the global generics portfolio, especially in the United States, through price adjustments and/or product discontinuation.

Teva share price has risen 22.7% this year so far against the industry’s decrease of 5.8%.

 

 

Teva will continue to consolidate manufacturing sites in 2020 while optimizing each and every manufacturing site for better efficiency. Teva targets to achieve adjusted operating margin of 28% by the end of 2023 through initiatives like further improving procurement cost and increasing supply chain integration.

Meanwhile, its newest drugs Austedo and Ajovy could emerge as significant drivers of long-term sales growth. While Austedo has done well since launch, Ajovy’s sales growth has been slow. Ajovy’s weekly total prescription count in the United States has remained flat for many quarters. Management attributed the lower market share to preference of patients for auto injectors while Ajovy is available as a subcutaneous injection. Importantly, Teva’s auto injector device for Ajovy is now approved in the United States and EU and was launched in the United States in late April, which could re-ignite growth in 2020.

Meanwhile, Teva saw stabilization of the generic pricing environment in the United States as well as Europe in 2019. In 2020, it expects both North America and Europe generics to be relatively stable compared to 2019, benefiting from generic launches, which will offset the impact of generic erosion. Teva expects to launch generic versions of Merck’s MRK NuvaRing, Gilead’s GILD Truvada and Allergan’s (now a part of AbbVie) Restasis in 2020 while generic version of Lilly’s LLY Forteo could be launched in late 2020 or pushed to 2021.

With encouraging progress on restructuring activities, stabilization in U.S. and European generics business and improvement in financials, we believe the company may return to growth in 2020 or 2021.

However, there is significant uncertainty regarding the impact of the coronavirus pandemic on sales and profits of all companies. Teva’s sales in the first quarter benefited from greater demand in several markets for generic and OTC products and respiratory products amid the coronavirus-related lockdown. However, Teva expects the most significant negative impact from COVID-19 in the second quarter, which may offset the first-quarter outperformance. It expects the stockpiling benefit seen in the first quarter to reverse in the future quarters. Also, there is a risk that reduced physical interaction between its sales force and physicians could lead to a slower uptake of new products.

Currently, Teva has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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