When pharmaceutical companies lose patent cases on the blockbuster drugs, it usually means that they are at risk of losing billions of dollars in drug sales. When Teva Pharmaceutical Industries Ltd. (NYSE: TEVA) lost several patents on its key Copaxone drug, it was not that surprising to see its shares sell off handily.
What may come as a surprise to some investors is that sometimes bad news is almost good news. The reality is that some of this was at least partially expected by the analysts, and this means one of the risks acting as an overhang is now coming to an end.
24/7 Wall St. was surprised to see that two analysts came on strongly in favor of Teva Pharma on Tuesday, January 31. The news is too hard to spin as good news, but Merrill Lynch and Credit Suisse both see high value here for long-term investors who are willing to look past the near-term noise.
Bank of America Merrill Lynch’s Sumant Kulkarni and Steve Chen actually raised their prior Neutral rating to Buy on Tuesday. Their price objective is $42. There are a few takeaways to consider here. One is that the risk versus reward is actually now more favorable, but they admit that investors are going to need some patience. The plus side is that the patent loss actually removes some of the uncertainty around Teva, and that the drug pipeline should help investors.
Merrill Lynch’s view is that the lower court loss means that if 3TW generics are approved, which has not happened yet, and if they are launched in 2017, then investors could see the actual effect of competition as opposed to simply worrying about how bad the effect might be. The team is building in $5.1 billion in operating cash flow in 2017 (assuming 3TW generics) and 3.7 times net debt/EBITDA exiting 2017.
The long and short of the Merrill Lynch view is that the team thinks Teva can continue to service its debt and dividends in this scenario. They continue to favor Teva’s generic pipeline and the branded drug pipeline being underappreciated. The Merrill Lynch investment rationale said:
With a loss at lower court on Copaxone that removes an overhang, and reset investor expectations on the generic side following Teva’s last outlook issuance in Jan-17, we believe the risk reward on the shares is appealing now. While the generic pharma environment remains somewhat challenged, we believe Teva with its industry leading pipeline is well-positioned. On the brand side, we continue to view Teva’s pipeline as underappreciated.
Credit Suisse reiterated its Outperform rating and it has a $41 price target. Teva’s loss of Copaxone 40mg/mL patents is another step toward likely generic competition. Credit Suisse’s Vamil Divan already conservatively assumes 2017 generic competition in the base case for Teva, so the firm is not changing estimates.
Divan noted that there are still several steps still to go. The report said:
We spoke to Teva and expect them to appeal tonight’s decision, while also requesting a preliminary injunction preventing the launch of any generic version until the legal process around all of the outstanding patents has been completed. In addition to the four patents included in this decision, Teva has also filed suit against the potential competitors on a 5th and 6th patent, with court cases expected in the 2018 timeframe. The IPR appeals process is also ongoing, with a decision expected in late 2017/early 2018. Finally, beyond the legal decisions, the competitors all still need to obtain FDA approval prior to being able to launch.
In an effort to show both sides of the coin (after all, we wouldn’t want you thinking we believe all analyst reports just because they get issued), here are some other calls:
- Barclays has an Equal Weight rating and cut its target to $38 from $46.
- Goldman Sachs maintained a Neutral rating and cut its target to $35 from $40.
- Leerink has an Outperform rating but lowered its target to $39 from $40.
Again, this is not considered good news. Still, two firms are making positive calls to buy shares when those shares are close to a 52-week low rather than when there is good news taking the shares to new highs. Teva shares were last seen down 4.6% at $32.95 on Tuesday morning after an hour of trading. The volume of over 13 million shares was almost more than an average day’s worth of volume.
Teva shares hit a daily low of $32.19 on Tuesday, barely keeping the prior 52-week range of $32.11 to $62.31 alive. The prior consensus analyst target price was $44.70.