Teva To Deliver Cost Cuts, Earnings Surprise In Coming Years, Morgan Stanley Says In Upgrade

Teva Pharmaceutical Industries Ltd ADR TEVA last week reported a 19-percent drop in Q3 revenues, stung by generic competition to its multiple sclerosis drug Copaxone, price erosion at its U.S. generic business, and certain product divestments. Non-GAAP income fell a less-than-expected to 68 cents per share.

The Analyst

Reviewing the results, Morgan Stanley analyst David Risinger upgraded Teva from Equal-Weight to Overweight and lifted the price target from $20 to $27.

The Thesis

Teva can deliver additional cost-cutting and earnings upside in the coming years, given that it's only into the first year of its three-year restructuring plan, and the 25 percent EBITDA upside in Q3, Risinger said in note.

The analyst estimates net cost cuts of $3.1 billion in 2019, relative to the 2017 base, slightly ahead of the management's target of $3 billion. Adjusted EBITDA for 2019 is likely to be an above-consensus $5.6 billion.

Risinger expects sales of new products, including Austedo and Ajovy, to deliver upside to expectations, neutralizing the Copaxone sales erosion over time.

Austedo indicated to treat movement disorder is likely to be a $1 billion product beyond 2020, and Risinger said Ajovy approved to treat migraine is estimated to generate over $1 billion in sales in the U.S. alone. He expects Ajovy to be launched in Europe in mid-2019.

Morgan Stanley expects Teva's valuation to rise, as it delivers strong performance and drives net debt/EBITDA down from 5 times to 3 times in 2020.

Price Action

Teva shares have gained about 19 percent in the year-to-date period. At time of writing, shares traded around $22.46.

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