Cheap Teva Stock Should Reward Patient Investors

Summary:

• Teva is poised to benefit from rising demand for generic drugs due to a favorable macro and political environment.
• The company’s valuation is attractive despite its high debt load, which it is likely to manage effectively.
• Teva’s generic drug revenue surged 16% in Q2, and the unit’s continued growth is expected to significantly boost the firm’s overall revenue.
• Governments and consumers are increasingly opting for cost-effective generic drugs. The latter trend is likely to help boost demand for Teva’s generic products.

Israel-based Teva Pharmaceutical Industries Limited (NYSE:TEVA), which develops both generic and branded drugs, looks poised to benefit from multiple, significant, positive catalysts over the medium term and long term. One of these drivers is the increasing demand for generic drugs due to a favorable macro and political environment for these products. Moreover, the demand for Teva’s own generic and branded drugs is rising a great deal, and chances are high that the latter trends will continue going forward.

Further, the valuation of Teva stock is very attractive. And while the firm does have a high debt load, the company is likely to be able to overcome that challenge without too much trouble.

A Favorable Macro/Political Environment for Generic Drugs

In the second quarter, $2.48 billion of Teva’s total revenue of $4.2 billion was generated from selling generic drugs. In May 2023, the company announced plans to stop producing some older generic drugs and reduce the number of new generic pharmaceuticals that it makes. Still, the firm can benefit from increased demand for the generic medicine that it continues to market. For example, the demand for its generic Adderall pill is so strong that the company has had trouble meeting it. In the next section, I will provide detailed information about some highly promising generic offerings that Teva has recently begun or will soon start to sell.

Although 90% of prescriptions filled in the U.S. are for generic drugs, Teva can still benefit from significantly increased demand for some of its generic products in the country. In Q2, it generated $1.02 billion in sales from selling generic drugs in America.

Moreover, according to one forecast, the global market for generic drugs will increase at a meaningful compound annual growth rate of 5.7% between 2023 and 2030. In my opinion, a highly favorable macro environment will enable the sector’s growth rate to meet and possibly surpass that forecast.

Specifically, after the U.S., the EU, and many other parts of the world experienced high inflation for the last few years, a large percentage of both companies and consumers in much of the developed world are likely looking to reduce their costs. Indeed, in December 2023, a headline on the financial news website, PYMNTS, stated that “Consumers Pull Back on Spending; Companies Cut Costs”

One way for companies to reduce their costs is by selecting health insurance plans for their workers that utilize generic drugs to the greatest extent possible. Similarly, consumers can cut their expenditures by purchasing fewer, expensive branded drugs and more generic pharmaceuticals.

By buying more generic drugs for the citizens whom they insure, governments can save significant amounts of money. And with both the American and Chinese governments facing major debt problems, the world’s largest and second-largest economies are likely to meaningfully increase the amount of generic drugs available to their citizens.

Indeed, both the Trump and Biden administrations have supported the concept of Washington following the latter course of action. For example, in 2021, President Joe Biden signed into law two bills aimed at increasing the supply of and demand for generic drugs. In 2020, the Trump administration allowed Medicare Part D plans “to substitute certain generic drugs… onto plan formularies more quickly during the year, so beneficiaries immediately have access to the generic” version of drugs.

Quantitatively, the revenue of Teva’s generic business jumped by 9.15% or $208 million in Q2 to $2.48 billion in Q2 versus the same period a year earlier. If the unit’s growth climbs to 12% in Q2 of 2025, its generic sales will increase by nearly $300 million. That’s a much larger increase than $208 million and would represent a 7% increase over the firm’s sales last quarter.

The Demand for Teva’s Generic and Branded Drugs Should Remain Strong

In addition to the catalysts that I discussed in the previous section, Teva’s generic business should get a big lift going forward from its launch last quarter of a biosimilar (the term for a generic version of a biological treatment) of one of the most lucrative medical treatments in history, Humira, which helps arthritis sufferers.

Encouragingly, Teva CEO Richard Francis, speaking on the company’s Q2 earnings call, reported that the company was “getting good and growing” results when it comes to persuading insurers to cover the firm’s biosimilar of Humira, which is called Simlandi.

Indeed, a large insurer, The Cigna Group (CI), has already agreed to buy Simlandi. Another large payor, UnitedHealth Group Incorporated’s (UNH) Express Scripts, has disclosed that it will stop buying Humira in January 2025. So although Francis noted that Teva had gotten a “late start” to the arena when it comes to biosimilars for Humira, it has a good opportunity to generate a great deal of revenue from Simlandi in the medium term.

Moreover, Teva has developed a biosimilar for Stelara, a treatment for many conditions, including “plaque psoriasis, psoriatic arthritis, Crohn’s disease, and ulcerative colitis. ” Teva and its partner, Alvotech, reached a deal with Johnson & Johnson (JNJ), Stelara’s owner, that allows them to launch the biosimilar, called Selarsdi, by February 21, 2025.

Stelara generated about $10.9 billion in sales last year, so Teva should be able to obtain significant revenue from its biosimilar. What’s more, Francis reported last month that Teva was already starting to hold talks with payors about providing its biosimilar of Stelara to them. The FDA approved the biosimilar in April.

Given Teva’s success with past generic drugs and the progress that it has made with Simlandi and Selarsdi, I expect these offerings to significantly increase its top and bottom lines in the medium term.

On the branded drug front, the sales of Teva’s Austedo drug for tardive dyskinesia and involuntary movements associated with Huntington’s disease, jumped 32% year-over-year last quarter to $407 million. Experts believe that TD affects about 500,000 people in the U.S. alone, while Huntington’s reportedly impacts 8.2-9 people per 10,000 in the country.

Austedo should continue to grow at a brisk pace because, according to Teva, many patients with the disease are still untreated, while Teva has increased the number of salespeople pitching the drug and has launched an ad campaign for the treatment. Also, importantly, in May, the company introduced an extended-release version of the drug that only requires one dose, no matter how much medicine is contained in each pill.

As a result, the drug now “provides the most once-daily dosing options” of any treatment in its class.

Teva expects Ajovy, a treatment for migraines, to generate $500 million in sales this year, up from $435 million in 2023. Last quarter, the company’s revenue from Ajovy rose 10.5% YOY to $116 million. Francis reports that the treatment is growing significantly in Europe and other markets outside of the U.S. In America, “pricing pressures are weighing on the drug,” he noted.

Finally, the sales of Teva’s veteran drug for MS, Copaxone, increased 44% YOY to $81 million in Q2 in the U.S., possibly indicating that the treatment is undergoing a renaissance in the country.

If the sales of Austedo and Ajovy advance 30% and 10%, respectively, in Q2 of 2025, they will generate a combined $133.7 million of growth for the firm in the quarter. That would represent a 3% increase over the firm’s total sales last quarter.

Risks and Valuation

As of the end of Q2, Teva did have a current debt of $2.1 billion and a long-term debt of $16.55 billion, with only $2.26 billion of cash. Therefore, its debt could cause major problems for the firm down the road. Nevertheless, the drugmaker does have nearly enough cash to cover the current portion of its debt, and in the 12 months that ended in June, its operations generated $1.17 billion of cash. Moreover, declining interest rates should make its debt more manageable going forward.

Ajovy’s sales in the U.S. declined by 20% YOY in Q2 to $42 million, and the drug, which is injected, is facing increased competition from oral treatments. On the other hand, Ajovy does have a first-mover advantage and Francis reported that some patients who switched from injectables to an oral treatment did return to an injectable. Still, Ajovy’s sales could come in below expectations due to the stepped-up competition.

Finally, Teva’s upcoming, highly promising generic offerings may face tough competition, undermining its growth in 2025 and 2026.

Teva’s adjusted forward price-to-earnings ratio of 6.7 is far below the sector median of 20 times, making its valuation extremely attractive. That’s especially the case because analysts, on average, expect its EPS to surge 13% in 2025. Looking at the big picture, I believe Teva is a buy.

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