When Teva Pharmaceutical (NYSE: TEVA) responded positively after its second quarter report, the rally did not last. TEVA stock briefly traded above $11 before falling. Readers are now down about 15.5% since the end of the summer. On October 10, 2022, Teva came to the attention of the European Union.
The EU concluded that Teva broke its rules. The Commission accused Teva of shielding Copaxone, linked to the treatment of multiple sclerosis, from competition. How good are the EU’s arguments against Teva?
Teva accused of breaking European Commission rules
Between October 2019 and March 2021, the Commission carried out unannounced inspections. After conducting the review, the Commission issued a preliminary opinion that Teva delayed competition to multiple sclerosis.
Teva had been struggling since 2018 to revive Copaxone’s prospects. In 2018, he failed to defend the 40mg long-acting version of the MS drug. Most recently, President and CEO Kare Schultz acknowledged Copaxone’s influence on the company over the past five years. The drug once fetched nearly $5 billion. For 2022, the company expects to generate $700 million from Copaxone sales. It cut its sales forecast for the drug by $50 million, citing competition.
In the chart below, Copaxone only accounted for $94 million in revenue. By comparison, generic products generated more than $1 billion in revenue.
Teva is counting on Ajovy and Austedo to offset Copaxone’s continued headwinds. The European Commission’s findings and the timing of the accusation are an unnecessary distraction for the company.
Commission scrutiny is a bad time for shareholders. TEVA stock has traded between $8.00 and $10.00 since 2019. Fortunately, Teva’s improving second quarter report lifted its ratings.
Teva’s valuation improved to B+. Its growth score is now A, as is its profitability. Analysts had no choice but to issue positive reviews. This improved Teva’s review score from a D to a B+.
Opioid Settlement Momentum
After settlement, Teva’s 22%+ rally on July 27, 2022 is now a distant memory. He had agreed to pay $3.7 billion in cash to settle the national opioid litigation. This sent TEVA stock above $10 for the first time since mid-2021. Still, the Nasdaq bear market has given markets a reason to take profits.
Compared to the index, the TEVA share is performing better. Teva stock is stable in 2022. Conversely, iShares Biotechnology ETF (IBB) has lost 24.7% this year. Similarly, Teva beat the iShares US Pharmaceuticals (IHE) ETF, which is down 16% year-to-date.
The Federal Reserve’s aggressive interest rate hikes are partly responsible for the current bear market. However, the Fed must cleanse the economic system of excess liquidity. After 10 years of quantitative easing, easy access to money has created inflation in the economy. Biotechnology companies that have no product on the market are the most exposed.
Pharmaceutical companies are low risk investments. The generous dividend yield of peers like Organon (OGN) and Viatris (VTRS) could limit their downside risks.
Above: As OGN and VTRS shares fall, the dividend yield rises.
Elanco (ELAN), a supplier of animal health drugs, is at levels never seen before. Investors buying the stock have a significant margin of safety. Its forward price-to-earnings ratio of 9.4 times.
Teva could grow its generics business by at least 4% per year. Investors should expect revenue of at least $4 billion. Its global biosimilars business will add modest single-digit percentage growth. In addition, its specialty business has strong long-term prospects.
The company’s opioid settlement removes a long-standing distraction. Although traders took profits after news of the settlement, Teva management could focus on Ajovy and Austedo. Already, combined sales of the two drugs are outpacing declining sales of Copaxone.
CEO Schultz outlined several long-term goals during his conference call. The three goals are stronger margins, higher cash income and reduced debt. Fortunately, Teva doesn’t need higher revenue growth to achieve these three goals.
Under Research and Development, Teva will focus on neuroscience and immunology. He said last quarter that he would maintain R&D spending as a percentage of revenue. It is unlikely that the case of the European Commission will have no impact on this important item of expenditure.
Technical chart risk
Trading volatility is Teva’s greatest risk. Business momentum often drives Teva’s share price. When the stock rallies, the stock has enough buying interest to drive the stock to new yearly highs. When the bad news piles up, Teva can’t shake off the selling momentum.
Your takeaway meals
Teva once again traded sharply below the $8.50 level. The stock could retest the yearly lows in the coming weeks. Investors ignoring stock charts should wait for Teva’s next quarterly earnings report. When it releases its results on November 3, 2022, investors will have a better understanding of the costs associated with the Commission’s charges.