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The turnaround at
Teva Pharmaceutical Industries
remains on schedule.
The generic drug giant reported third-quarter sales of $4.5 billion and adjusted earnings of 68 cents a share. While both figures were down significantly from a year earlier, the earnings figure topped expectations thanks to deeper cost cuts than badysts had anticipated. Teva also increased its full-year guidance for profit and free cash flow.
That may not sound like a great quarter, and Teva’s restructuring program won’t be complete until the end of 2019, yet the stock rose sharply on Thursday.
Investors appear satisfied that new Chief Executive Kare Schultz is making enough progress in battling several familiar obstacles for Teva: too much debt, new competition for a key branded multiple-sclerosis drug and falling generic drug prices in the U.S.
Teva continues to chip away at its net borrowings, which peaked in 2016 at around $35 billion. That balance is now slightly below $30 billion. Sales of multiple-sclerosis drug Copaxone fell after new competitors came online, but new product launches like the migraine drug Ajovy are helping pick up the slack. And, while the pricing environment for generic drugs in the U.S. hasn’t shown much improvement, Mr. Schultz said in an interview that “we are past the period when prices were falling like a stone.”
The stock is still risky to own: Mr. Schultz’s cost cuts mean that earnings before interest, taxes, depreciation and amortization are likely to fall for the third year in a row in 2019. Teva believes that will be the last year of declining profitability, but the timing could slip if, say, U.S. generic prices were to begin falling sharply again.
But the deleveraging should continue, and more positive surprises are possible if all goes well. New experimental drugs, such as a non-opioid pain treatment in late stage trials, could bolster the company’s growth outlook. As debt gets paid down, the chances of a sharper stock rally go up. Shares have doubled from last fall’s multiyear low but are still down nearly 70% since their all-time high in 2015.
The company’s debt-adjusted market value is now about 10 times Ebitda, which isn’t particularly cheap. But the stock trades at a very modest 8 times forward earnings.
Teva isn’t cured yet, but is healthy enough for investors to take a chance.
Write to Charley Grant at [email protected]
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