Teva Analyst Says Shares Are Pricing In Too Much Risk

Teva Pharmaceutical Industries Ltd TEVA, which is beset by fundamental and legal woes, is entering a recovery phase, according to UBS Securities.

The Teva Analyst

Analyst Kevin Caliendo upgraded Teva from Neutral to Buy and lowered the price target from $14 to $12. 

The Teva Thesis

Teva shares have underperformed the broader market, which is overly discounting earnings, business disruption and credit risks, Caliendo said in a Monday upgrade note. (See his track record here.)

The analyst said he sees minimal near-term credit risk for Teva, even in the most stressed environment. The company closed refinancing for near-term expiries in the fourth quarter of 2019 at investment-grade terms, he said. 

While noting that the company has access to over $3 billion in liquidity if needed, Caliendo said he believes its free cash flow will cover outstanding balances.

"Also, our research suggests TEVA's supply chain exposure is manageable, with the biggest risk being if production of key pharmaceutical ingredients in China is halted for closer to ~1+ years vs the ~2 months experienced," the analyst said.

UBS checks suggest production is back online in China and is ramping back toward normal utilization already, he said. 

Taking a conservative stance, UBS lowered its peak estimate for migraine drug Ajovy by about 35%, citing disruption in marketing. The firm also sees risk to the current strong growth in the movement disorder drug Austedo.

UBS made a few estimate changes that left near-term EBITDA unchanged but lowered outyear estimates due to potentially longer growth path for new launches.

"We believe the market is currently pricing in significantly more risk than our estimates would suggest, creating a 3-1 risk-reward skew in the stock here," Caliendo said. 

TEVA Price Action

Teva shares were trading 7.56% higher at $9.04 at the time of publication Monday. 

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