Teva Chief Says Generic Prices Are Improving

Teva Pharmaceutical (TEVA) reversed course into the black on Friday after an analyst backed up the company’s chief executive who contends U.S. pricing dynamics are improving for generic drugs.

On the stock market today, Teva stock jumped 2.6% to close at 22.17. That followed a 9.5% dive on Thursday after Teva’s mixed quarterly report. Sales of generic drugs toppled 29% year over year. Net revenue lagged, while adjusted profit topped.

But Credit Suisse analyst Vamil Divan boosted his price target on Teva stock to 25 from 23, and kept his outperform rating. A Morgan Stanley analyst also raised the bank’s price target on shares to 20 from 19, and kept an equal weight rating.

“We think the significant pressure on the stock (Thursday) was driven largely by the disappointment in the 2018 revenues guidance,” Divan said in a report. “Investor expectations had been preparing for an increase but it in fact remains unchanged. However, we continue to be bullish on Teva.”

Generic Drugs Strained

Teva reiterated its 2018 sales guidance for $18.5 billion to $19 billion, vs. consensus views for $18.98 billion. But the generic drugs firm raised its adjusted profit view to $2.55-$2.80 per share. Still, that missed the consensus for $2.69 at the midpoint.

Generic drugs have been particularly strained amid a Food and Drug Administration push to approve more. The hope is that competition will bring down prices. Generic drugmaker stocks have also been under pressure and are down about 6% year to date.

CEO Kare Schultz is bullish on U.S. pricing trends for generic drugs. On the earnings conference call with analysts Thursday he said, “Based on what we are seeing in the second quarter, we believe that there’s an improved pricing dynamic on U.S. generics.”

This “suggests stabilization of what had been a significant headwind,” Credit Suisse’s Divan said.

Further, Schultz noted Teva’s restructuring efforts are a bit ahead of schedule. Late last year, Teva said it would aim to reduce its costs by $3 billion by the end of 2019. Part of that goal included price adjustments and/or product discontinuation among generic drugs, most specifically in the U.S.

Copaxone Holding Up

Divan also sees Teva’s multiple sclerosis drug Copaxone as holding “up better than expected so far” amid generic competition from Novartis (NVS) and Mylan (MYL). He raised his 2018 view for Copaxone sales to $2.17 billion from his prior estimate for $1.85 billion.

But he also cut his estimate for Teva’s global sales of generic drugs to $9.38 billion, down from his prior view for $10.13 billion.

“Next year will clearly be another down year for Teva’s top line as Copaxone continues to erode,” he said. “Management expects to grow the top line again in 2020; altogether our model now suggests a slight additional decline in 2020 before growth resumes in 2021.”

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