Five Considerations After Teva Pharmaceuticals’ Q3 Report

Summary

TEVA stock is down irrationally after its quarterly earnings report.

Shares traded at a 2021 forward P/E in the 3 times range.

Outlook reaffirmed.

This idea was discussed in more depth with members of my private investing community, DIY Value Investing. Learn More »

JHVEPhoto/iStock Editorial via Getty Images Just when it looked like Teva Pharmaceutical ( TEVA ) would return to $10 and then break out, hopes dimmed after the third-quarter report. Sales of two of its key products , Ajovy and Austedo, failed to offset the negative impact of lower Copaxone and generic drug sales .

Teva’s disappointing results could foreshadow slower sales for Viatris ( VTRS ), which reports on Nov. 8. Still, despite a weak stock ahead of the report, Viatris posted strong results in its two past quarters. With TEVA stock trading recently at $8.74, patient value investors should review Q3 results and its outlook ahead.

There are five considerations after Teva posted quarterly results. 1/ Teva Q3 Results

Teva posted GAAP EPS of 26 cents a share. Revenue fell by 2.5% Y/Y to $3.9 billion . For 2021, it reaffirmed net revenue at between billion $16.0 to $16.4 billion, exceeding consensus estimates. EPS for the year is between $2.50 and $2.70. This values Teva stock is trading as low as 3.3 times forward earnings. At that level, the stock’s 13.7% weekly drop looks overdone. Chart courtesy of finviz

On the chart, Teva had bearish momentum throughout the year. Buyers tried to push the stock above $11.50 but failed. When the drug-manufacturing sector sold off, Teva fell to the $8.50 support zone. After the earnings report, the stock is back to those lows. Readers who rely on charts may consider that Teva will bottom at around $8.50.

The company posted decent results. Expectations for the year are unchanged. Free cash flow will be in the range of $2.0 billion to $2.3 billion. This will give it the flexibility to pay down more debt. In a few years, Teva could have a debt/equity level that compares to that of Viatris. That allows Viatris to pay a healthy dividend.

At the end of Q3, Teva reduced its net debt to $21.7 billion. CEO Kare Schultz said the company aims to take its net debt-to-EBITDA to below three times by the end of 2023. Since 2017, net debt fell from $34 billion: In Q3/2020, Teva had a net debt/EBITDA of 4.92 times and a leverage of 71%. In Q3/2021, that fell to 4.51 times and 67%, respectively. The drop is modest but steady. To get to a sub-three times net debt/EBITDA, TEVA needs an operating income margin of 28% and cash-to-earnings at above 28%.

Teva’s leverage is not the reason for the stock’s underperformance. Markets failed to react positively to the sales results. 2/ Strong Austedo Sales

Teva posted a 19% increase in Austedo sales, to $201 million. Revenues rebounded since the Q1/2021 decline: Source: Teva Q3/2021 Earnings Call Presentation, slide 5

Teva reaffirmed its Austedo revenue of $850 million. It expects sales to accelerate in the current fourth quarter. CEO Schultz said the Austedo plan depends on psychiatrists’ return to offer to diagnose patients in person. The forecast also depends on the positive impact of the direct-to-consumer campaigns. Teva started them in May. Teva’s Head of North America Commercial, Sven Dethlefs, said ” what we’ve seen in our new patient starts going out of Q3 and now going into Q4 is a significant separation from the baseline trends.”

Besides scripts rising since Q2/2021, the Austedo launch in China and Japan should lead to a slow and steady increase in revenue. 3/ Strong Ajovy Sales

Teva’s Ajovy sales in Q3 totaled $108 million, with North America contributing most of that figure. On the conference call , the company said its initial ambition of 25% market share in the U.S. and Europe is too low. It now believes it can reach one-third of the market.

Similar to Austedo, Ajovy’s launch in China and Japan will lift sales steadily over the next few quarters. 4/ Strong Pipeline

On Slide 7, Teva showed its deep pipeline is mostly in the pre-clinical to Phase 2 stage. Source: Teva Q3/2021 Earnings Call PresentationTeva’s biosimilar in the research and development and product pipeline should interest investors the most. It, together with MedinCell, announced positive results for the injectable Risperidone for patients with Schizophrenia in January 2021 . The licensing collaboration for MODAG, with the lead compound anle138b, to treat a neurodegenerative disease, shows promise. The drug is a promising […]

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