When investors hear that a company is initiated in coverage with a Neutral rating, they generally interpret this to mean Hold. Some might even say that it means Sell. Things are different in the Credit Suisse ratings system because it uses a relative peer-reference base rather than a market performance-based expectation. It turns out that a new Neutral rating on Teva Pharmaceutical Industries Ltd. (NYSE: TEVA) from Credit Suisse actually comes with significant upside.

One thing investors need to consider is that as bull markets continue, analysts issuing Buy or Outperform ratings for large cap stocks generally come with implied upside of 8% to 15%. Teva was given an implied upside north of 13% here, if you include its 2.5% dividend yield.

Credit Suisse’s price target of $60 compares to a prior close of $54.20, but the weakness in the stock market on Wednesday and the unenthusiastic Neutral rating by the sound of it had Teva’s shares down another 1.1% to $53.60. From that level, the implied upside is almost 15%.

So, what is it that Credit Suisse sees happening with Teva for close to 15% upside but only a Neutral rating? Vamil Divan and Anamaria Sudarov made the Neutral recommendation on Wednesday.

Their report suggests that Teva has opportunities as a longer-term story, but they also see a number of questions and uncertainties in the near term. The team sees the Allergan generics deal to close in June but they worry whether Teva can generate value from the deal given the price it paid. Another concern is about how the recent negative trends in generic drug pricing may impact Teva.

Furthermore, regarding Teva’s specialty pharma business, questions remain about the longevity of Copaxone. Credit Suisse pointed out that numerous legal decisions are due in the next 12 to 18 months that will determine the franchise’s outlook. The report said:

The Street does now seem to be factoring in a near-worst case scenario for Copaxone, but we also look for more evidence on TEVA’s ability to successfully expand beyond Copaxone and become a more diversified specialty pharma company, with our greatest excitement centered around TEV-48125 (anti-CGRP for migraines).

Several positives were mentioned:

• Promising specialty pharma pipeline with several assets holding blockbuster potential, helping to drive top-line growth and lessen Teva’s reliance on Copaxone
• Continued generics leadership to be further boosted by acquisition of Allergan’s generics business
• Underappreciated margin expansion opportunity driven by integration of Allergan’s generics business and emergence of broader specialty pharma business

The key investment risks were listed as follows:

• Allergan’s generics deal fails to close or results in lower synergies or accretion than expected
• Earlier-than-expected loss of patent protection for lead product Copaxone (assumed generic entry in 2018)
• Setbacks in the development of specialty pharma pipeline assets, most notably TEV-48125 and SD-809

Catalysts for Teva include the earnings report due on May 9 and the Copaxone IPR hearing on May 12. Its SD-809 Huntington’s Disease target has a PDUFA in late May, and the coming closure of Allergan’s generics acquisition is expected in June.

Credit Suisse’s team has based its $60 target price with a 75% relative valuation and 25% from a discounted cash flow model. It is also based on an 11.0 times the Credit Suisse 2017 EPS estimate of $5.97 (and then discounted back to 2016) for a net level of $5.48 per share. The firm’s cash flows are modeled through 2025 with a 9% weighted average cost of capital and a 1% terminal growth.

So, how does this all stand up to the rest of the pack? Trading at $53.60, Teva has a consensus analyst price target of $74.60 and a 52-week range of $52.62 to $72.31.

Be advised that Teva Pharmaceutical is one of the 10 stocks to own for the next decade from 24/7 Wall St.

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