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.
That is the right set of questions, so thank you for that. Purely on P/E, TEVA is still so low that compared to the pharmaceutical sector at large, that this makes the company attractive, but we should not use P/E as the only metric. Let me come back to that, but my bottom line is still that TEVA is attractive and offer long-term potential for gains.
TEVA vs Novo and the Pharmaceutical sector:
Novo and Eli Lilly has a long runway ahead of them, as it is still early days in Obesity and we will also see that both companies will extend their technology platforms into other indications such as Cardiovascular including hypertension and Alzheimers. Both companies have decades of growth ahead. They target therapeutic areas that are enormous, and if the companies are successful here it will catapult them into yet a new level of size. Novo is now the largest company in Europe and Eli Lilly is the 12th largest company in the world by market cap.
(Pfizer is a cautionary tale here; when they discovered and launched Viagra, the company believed there was no ceiling to its success and that they would become the largest company in the world. Viagra generated over $1 billion in sales every year for 17 years and reaching a peak of $2.1 billion in 2012. Yet they did not become the world´s largest and also since lost its mojo.)
TEVA has turned a corner and now resembles more a growth company than pure turnaround case, especially helped by its advanced in branded drugs, and the breakthrough in TL1A is particular interesting as it could have the potential to be a technology platform that can be used in other indications, among others for Rheumatoid arthritis. This is a huge area and the best selling drug ever, AbbVie´s Humira that peaked at more than $20 billion was indicated for this (along with numerous other indications).
Still the market wants to see consistent execution from TEVA including financial discipline around debt reduction and a continuous positive news flow from its R&D pipeline. So far, this is on a good track and there is good visibility on both pipeline and debt reduction.
Comparing TEVA to other Pharmaceutical companies by P/E:
- Novo Nordisk 35 - high growth anticipated by the market
- Sanofi 25
- AstraZeneca 18
- Lilly 81 - high growth anticipated by the market
- Pfizer 34
- Roche 18 - low growth anticipated
- Novartis 17 - low growth anticipated
- JNJ 24
- Merck 21
- AbbVie 60
Novo and Lilly are more priced as technology companies with high expected growth ahead. Eli Lilly looks overextended at this level, but so did NVIDIA and Amazon for a very, very long time.
Coming back to the P/E ratio and why it is good, but should not stand alone. The P/E ratio is just one of many tools for evaluating a company. A high P/E for a rapidly growing business doesn’t always indicate overvaluation, nor does a low P/E automatically mean a great deal. It’s crucial to dig deeper, analyze the factors influencing the numbers, and incorporate additional metrics like the PEG ratio or FCF yield for a more comprehensive perspective.
In many ways, this is not different from assessing conditioning or athletic performance. We want a somewhat broader view to also understand the strengths and potentials.
This became such a long answer, that I might turn it into a blog post. Thanks again for asking!
Thanks for your analysis on Teva. There are a couple of things I would like to mention:
- The company says that leverage will be under 2x Ebitda by 2027, so I don't think that by 2028 all debt will be paid. According to my numbers, debt will still be around 10 billion at 2028 which is fine, a 1,5x times Ebitda, healthy numbers still and much less interest expense to be paid therefore higher EPS.
- I generally use EV/FCF to value Teva, I don't believe we will see ratios as in the past (12x EV/FCF when Copaxone was at full thrust bringing revenue) but a bit lower valuation, 8-10 times FCF. That brings me a valuation of 30-34$ in 2027. It could be higher of course, but I do not see revenue growing at 10% in the next 5 years so the market will probably not pay higher valuations.
I see a more diversified branded drugs portfolio, but itself has more competitors in each field (migraine, TD, etc). At the time of Copaxone, it was the only available treatment and that was a blockbuster drug with very high margins. Even that Teva can regain record revenues in the next years (which are 22billion in 2017), I think Ebit margin will not reach +30%, will stay max at 27%.. Also all these years share count has increased about 30% as well, so all in all I am planning to exit Teva 1/2 position at 30$ and the rest at 34$. It can go higher, but I don't find the IRR to be attractive beyond this point.
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.
That is the right set of questions, so thank you for that. Purely on P/E, TEVA is still so low that compared to the pharmaceutical sector at large, that this makes the company attractive, but we should not use P/E as the only metric. Let me come back to that, but my bottom line is still that TEVA is attractive and offer long-term potential for gains.
TEVA vs Novo and the Pharmaceutical sector:
Novo and Eli Lilly has a long runway ahead of them, as it is still early days in Obesity and we will also see that both companies will extend their technology platforms into other indications such as Cardiovascular including hypertension and Alzheimers. Both companies have decades of growth ahead. They target therapeutic areas that are enormous, and if the companies are successful here it will catapult them into yet a new level of size. Novo is now the largest company in Europe and Eli Lilly is the 12th largest company in the world by market cap.
(Pfizer is a cautionary tale here; when they discovered and launched Viagra, the company believed there was no ceiling to its success and that they would become the largest company in the world. Viagra generated over $1 billion in sales every year for 17 years and reaching a peak of $2.1 billion in 2012. Yet they did not become the world´s largest and also since lost its mojo.)
TEVA has turned a corner and now resembles more a growth company than pure turnaround case, especially helped by its advanced in branded drugs, and the breakthrough in TL1A is particular interesting as it could have the potential to be a technology platform that can be used in other indications, among others for Rheumatoid arthritis. This is a huge area and the best selling drug ever, AbbVie´s Humira that peaked at more than $20 billion was indicated for this (along with numerous other indications).
Still the market wants to see consistent execution from TEVA including financial discipline around debt reduction and a continuous positive news flow from its R&D pipeline. So far, this is on a good track and there is good visibility on both pipeline and debt reduction.
Comparing TEVA to other Pharmaceutical companies by P/E:
- Novo Nordisk 35 - high growth anticipated by the market
- Sanofi 25
- AstraZeneca 18
- Lilly 81 - high growth anticipated by the market
- Pfizer 34
- Roche 18 - low growth anticipated
- Novartis 17 - low growth anticipated
- JNJ 24
- Merck 21
- AbbVie 60
Novo and Lilly are more priced as technology companies with high expected growth ahead. Eli Lilly looks overextended at this level, but so did NVIDIA and Amazon for a very, very long time.
More about Obesity and Novo Nordisk here:
https://ditlev.substack.com/p/novo-nordisk-pioneering-the-future?r=na9z
https://ditlev.substack.com/p/obesity-the-other-type-of-hyper-scaling?r=na9z
Coming back to the P/E ratio and why it is good, but should not stand alone. The P/E ratio is just one of many tools for evaluating a company. A high P/E for a rapidly growing business doesn’t always indicate overvaluation, nor does a low P/E automatically mean a great deal. It’s crucial to dig deeper, analyze the factors influencing the numbers, and incorporate additional metrics like the PEG ratio or FCF yield for a more comprehensive perspective.
In many ways, this is not different from assessing conditioning or athletic performance. We want a somewhat broader view to also understand the strengths and potentials.
This became such a long answer, that I might turn it into a blog post. Thanks again for asking!
Hello,
Thanks for your analysis on Teva. There are a couple of things I would like to mention:
- The company says that leverage will be under 2x Ebitda by 2027, so I don't think that by 2028 all debt will be paid. According to my numbers, debt will still be around 10 billion at 2028 which is fine, a 1,5x times Ebitda, healthy numbers still and much less interest expense to be paid therefore higher EPS.
- I generally use EV/FCF to value Teva, I don't believe we will see ratios as in the past (12x EV/FCF when Copaxone was at full thrust bringing revenue) but a bit lower valuation, 8-10 times FCF. That brings me a valuation of 30-34$ in 2027. It could be higher of course, but I do not see revenue growing at 10% in the next 5 years so the market will probably not pay higher valuations.
Thanks for your points Carlos, very thoughtful and in agreement to a large extent. How do you view the branded portfolio potential vs peak Copaxone?
I see a more diversified branded drugs portfolio, but itself has more competitors in each field (migraine, TD, etc). At the time of Copaxone, it was the only available treatment and that was a blockbuster drug with very high margins. Even that Teva can regain record revenues in the next years (which are 22billion in 2017), I think Ebit margin will not reach +30%, will stay max at 27%.. Also all these years share count has increased about 30% as well, so all in all I am planning to exit Teva 1/2 position at 30$ and the rest at 34$. It can go higher, but I don't find the IRR to be attractive beyond this point.
Thank you. Your point is super interesting, and I would love to read a blog post on this vertical; you nailed it. Thank you for sharing!