Cheap Teva Stock Should Reward Patient Investors (NYSE:TEVA)

based in Israel Teva Pharmaceutical Industries Limited (NYSE: TEVA)which develops both generic and branded drugs, looks poised to benefit from multiple, significant and positive medium- to long-term catalysts. One of these factors is the increasing demand for generic drugs due to to a favorable macro and political environment for these products. Moreover, the demand for Teva’s generic and branded medicines is growing very much and there is a good chance that the latest trends will continue.

In addition, Teva’s stock valuation is very attractive. And while the firm has a heavy debt load, it is likely that the company will be able to overcome this 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 the sale of generic drugs. In May 2023, company announced plans to shut down producing older generic drugs and reducing the number of new generic pharmaceuticals it produces. However, the firm may benefit from increased demand for the generic drug it continues to market. For example, demand for its generic Adderall pill is so strong that the company he had problems meeting him. In the next section, I will provide detailed information on some very promising generic offerings that Teva has recently started or will soon start selling.

Although 90% of prescriptions filled in the US are for generic drugs, Teva may 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 generic sales in the Americas.

Moreover, according to a forecast, the global generics market will grow at a significant compound annual growth rate of 5.7% between 2023 and 2030. In my view, a very favorable macro environment will allow the growth rate of sector to meet and possibly exceed that forecast.

Specifically, after the US, EU and many other parts of the world have experienced high inflation over the past few years, a large percentage of businesses and consumers across much of the developed world are likely looking to cut costs. Indeed, in December 2023, a headline from financial news site PYMNTS stated that “Consumers pull back spending; companies cut costs”

One way that companies can reduce their costs is by selecting health insurance plans for their workers that use generic drugs to the greatest extent possible. Similarly, consumers can reduce their spending by buying fewer expensive brand-name drugs and more generic pharmaceuticals.

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

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

On a quantitative basis, Teva’s generics business revenue increased 9.15% or $208 million in Q2 to $2.48 billion in Q2 compared to the same period last year. If unit growth climbs to 12% in Q2 2025, its generic sales will increase by nearly $300 million. That’s a much larger increase than the $208 million and would represent a 7 percent increase over the company’s sales last quarter.

Demand for Teva’s generic and brand-name drugs should remain strong

In addition to the catalysts we discussed in the previous section, Teva’s generics business should get a big boost from last quarter’s launch of a biosimilar (the term for a generic version of a biological treatment) of one of the most profitable medical drugs. treatments from history, Humira, which helps arthritis sufferers.

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

Indeed, a large insurer, The Cigna Group (CI), has already agreed to buy Simlandi. Another big payer, UnitedHealth Group Incorporated (UNH) Express Scripts, revealed that it will stop buying Humira in January 2025. So while Francis noted that Teva was a “late starter” in the arena when it comes to biosimilars for Humira, it has a good opportunity to generate a high revenues from Simlandi in the medium term.

In addition, 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 an agreement with Johnson & Johnson (JNJ), the owner of Stelara, which allows them to launch the biosimilar, called Selarsdi, until February 21, 2025.

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

Given Teva’s success with previous generics and the progress it’s made with Simlandi and Selarsdi, I expect these offerings to significantly boost its top-line and bottom-line results over the medium term.

On the branded drug front, sales of Teva’s Austedo drug for the tardive dyskinesia and involuntary movements associated with Huntington’s disease rose 32% from last year to $407 million. Experts believe TD affects about 500,000 people in the US alone, while Huntington’s reportedly affects 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 vendors offering the drug and launched an advertising campaign for the treatment. Also importantly, in May the company introduced an extended-release version of the drug that requires a single dose, regardless of how much drug is contained in each pill.

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

Teva expects Ajovy, a migraine treatment, to generate $500 million in sales this year, up from $435 million in 2023. In the last quarter, the company’s Ajovy revenue rose 10.5 % compared to last year, at 116 million dollars. Francis reports that the treatment is growing significantly in Europe and other markets outside the US. In America, “price pressures are acting on the drug,” he noted.

Finally, sales of Teva’s veteran MS drug Copaxone rose 44% from last year to $81 million in Q2 in the US, possibly indicating that the treatment is undergoing a revival in the country.

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

Risks and assessment

At the end of the second quarter, Teva had current debt of $2.1 billion and long-term debt of $16.55 billion, with just $2.26 billion in cash. Therefore, its debt could cause major problems for the firm down the road. Still, the drugmaker has nearly enough cash to cover its current portion of debt, and in the 12 months that ended in June, its operations generated $1.17 billion in cash. In addition, falling interest rates should make debt more manageable going forward.

Ajovy’s U.S. sales fell 20 percent annually in Q2 to $42 million, and the drug, which is injected, faces increased competition from oral treatments. On the other hand, Ajovy has a first-mover advantage, and Francis reported that some patients who switched from injectables to an oral treatment switched back to an injectable. However, Ajovy’s sales could be below expectations due to increased competition.

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

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