Why TEVA soared 28% ($TEVA)
The comeback story of Teva keeps unfolding.
Teva Pharmaceuticals has made remarkable strides in transforming its business, showcasing resilience and an ability to exceed expectations. As we step into 2025, I am optimistic about Teva’s trajectory, with more room to run over the next 12-18 month the company´s share price could near $30, reflecting the company’s strong fundamentals and strategic progress.
What happened?
Teva is emerging as a leader in the promising anti-TL1A drug class, with shares surging following the release of best-in-class results for its experimental drug, duvakitug. This drug is being developed for ulcerative colitis (UC) and Crohn’s disease (CD), two chronic inflammatory conditions of the gastrointestinal (GI) tract, with potential to expand into other inflammatory diseases.
The anti-TL1A space has seen significant momentum, driven by major deals highlighting the value of this drug class. Last year, Merck acquired Prometheus for $10.8 billion, and Roche purchased Televant—a joint venture between Pfizer and Roivant—for $7.1 billion. In a strategic collaboration, Sanofi partnered with Teva, contributing $500 million upfront and up to $1 billion in milestone payments to co-develop duvakitug.
Teva’s Phase 2b RELIEVE UCCD study was pivotal in solidifying duvakitug’s potential. The trial achieved its primary endpoints, demonstrating significant clinical improvements for patients with UC and CD. Importantly, these benefits were consistent across patient subgroups, and the treatment was well-tolerated with no safety concerns identified. As a human monoclonal antibody, duvakitug’s innovative mechanism could make it a cornerstone therapy for inflammatory bowel disease and beyond. The goal of the Phase 2 has been widely discussed by analyst, and it must be very satisfactory for Eric Hughes (Chief Medical Officer, Teva) to prove the analysts wrong and see the medicine strategy unfold.
Key Drivers of Growth
1. Clinical Success and Innovation
Teva’s groundbreaking success with Duvakitug now positions the company as a leader in the TL1a inhibitor space. Following exceptional Phase 2 data (released December 17th), the market reacted strongly positive due to:
Superior Efficacy: A clear dose-response relationship in Phase 2 trials sets the stage for high-dose candidates in Phase 3.
Safety Profile: Comparable side effects to the placebo arm make this a compelling option for patients.
Next Steps: Teva’s focus on market-ready formulations, such as auto-injectors, underscores its commitment to accessibility and innovation.
2. Financial Strength and Deleveraging
Teva’s efforts to streamline operations and deleverage its balance sheet are paying off. The company projects a net debt reduction from $12.6 billion in 2024 to an anticipated surplus by 2028. The full reduction of debt would add around $14 to the share price. This financial discipline enhances credibility and shareholder value, thus positioning Teva as an increasingly attractive investment.
3. Underappreciated Upside Potential
Despite strong stock performance, Teva remains under-owned among institutional investors. There is additional opportunity for re-rating:
The anticipated API sale could unlock value beyond market expectations (However, analysts are dividing here, but management talk positively about the divesture timeline and outcome).
Teva benefits from a favorable macro environment, with limited regulatory risks impacting its core business.
Financial highlights
Teva’s valuation remains compelling:
P/E Ratio: Trading at 8x P/E (based on 2025 estimate for EPS), Teva is undervalued relative to peers, based on projected 10% annual EPS growth.
ROIC Expansion: We could see ROIC move from around 19% in 2024 to 32% by 2028, reflecting enhanced operational efficiency.
I estimate that Teva will grow revenues with around 15% from 2024 to 2024 and in the same period EBIT will grow by around 30%.
Free Cash Flow Yield: Estimated at 9.8% for 2024, rising to over 16% by 2028, underscoring its ability to generate sustainable cash flows.
Catalysts
Duvakitug Full Data Presentation (1H25): A potential market-moving event as detailed results validate its Phase 2 success.
API Sale Announcement (Early 2025): Likely to surpass expectations, unlocking hidden value in Teva’s portfolio.
Risks
Delays or suboptimal results in Phase 3 trials for Duvakitug.
Disappointing clinical results from Olanzapine LAI
Slower-than-expected adoption of products like Uzedy and Austedo.
Macroeconomic pressures impacting healthcare spending.
With that, thanks for reading. I really appreciate your interest.
Other Readings
The first thread I wrote about Teva: https://x.com/KontraInvest/status/1394639009280823298
Update on Teva from 2023: https://x.com/KontraInvest/status/1687361579480727553
Q3´2024 update:
With current's valuation 8x and estimated 10% annual EPS growth, also considering catalysts like the API sale and ROIC projected to exceed +30% by 2028; how do you view the risk-reward compared to other pharmaceutical stocks? Considering potential trial delays, macroeconomic and geopolitical pressures, and government healthcare spending in key markets, how does they stack up against players like NVO? Personally, I see NVO as having significant long-term potential over the next decade or more. Not saying TEVA is different, just I know them less and primarily from the education & writing you have done about them.