Barclays Capital has raised its recommendation for Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) from "Neutral" to "Overweight" and raised its target price from $42 to $65, a 31% premium on Friday's closing price of $49.30 on the New York Stock Exchange. The upgrade is part of a general upgrade of US "specialty pharmaceuticals from "Neutral" to "Positive".
Barclays analyst Douglas Tsao says that the upgrade is based on expectation shares will experience a rerating as Teva “unlocks” value in its core generics business, deploys capital and, perhaps most importantly in the near term, manages the decline of the Copaxone franchise through conversion to the 40mg formulation.
Barclays notes that, in the past 24 months, Teva's share price has risen 18%, underperforming a 139% gain by Mylan Inc. (Nasdaq: MYL) and a 228% gain by Actavis Inc. (NYSE: ACT). Teva's share price has risen 25% since the beginning of the year.
"In our view, there have been four key changes in investor sentiment which sets Teva up for a period of outperformance. First, we believe investors are more realistic, if not excessively pessimistic, around Teva’s underlying business, in particular the decline of the Copaxone franchise," says Tsao. "Second, numbers for the core generics business have been under pressure, but we believe the macro trends in the industry provide a tailwind for Teva to regroup and leverage its market leadership for improved financial returns. Third, newly appointed CEO Erez Vigodman brings a track record of restructuring and flexibility around value creation."
Tsao acknowledges Teva's overall recent track record of "over promise, under deliver," but notes this has not been the case with Copaxone, which has consistently come out ahead of management’s guidance. "We think FDA approval of generics is likely, although but not a certainty and a delayed entry is also possible given the complexity of the review and the FDA’s existing work backlog," he says, adding, "We believe Teva will be more aggressive with capital deployment especially targeting deals that will have an immediate impact to bolster the company’s earnings profile over the next 2-3 years."
As for Teva's new therapeutic entities (NTE) program, Tsao says, "While Teva's communications around its NTE program flopped with investors and management's $3bn expectation seems aggressive, we think it is reasonable for Teva to extract some nice opportunities."
Despite Teva's current debt, Tsao believes that it can spend an additional $5-6 billion on acquisitions, which could boost its profits by 10-20%.
Published by Globes [online], Israel business news - www.globes-online.com - on March 9, 2014
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