Bernstein Research analyst Ronny Gal was skeptical about some of the things said and projections made by top officials from Teva Pharmaceutical Industries Ltd., during a conference call with analysts on Tuesday. The reason for the call was to give financial guidance and projections for 2014.
But everything is relative.
Gal wrote in a note to clients that the risk-reward calculation for Teva has improved for three reasons, but the first was a case of being damned by feint praise.
"Valuation of other companies we cover has expanded materially," Gal wrote. "Their 'reward' has declined and thus Teva looks better in comparison. In discussions with investors we most often find Teva
gets an additional 'look' because there aren't that many alternatives."
Teva is based in Israel and has several facilities in suburban Philadelphia, with about 2300 Pennsylvania employees. Wednesday's Inquirer has a story on Teva (link here).
There are several swirling issues with Teva:
- No CEO. Jeremy Levin and the board of directors couldn't agree on how to operate the company, but they did agree that Levin should resign on Oct. 30.
- Copaxone is the big money maker for Teva, producing about 20 percent of total revenue, but it could face two generic competitors on June 1. Gal wrote that he expects an FDA decision on generics by May 14. Teva offered two scenarios for revenue in 2014, one with generic competition and one without. The difference is about $500 million in revenue. Teva hopes to launch a new Copaxone formulation that is patent protected until 2030, but what it will provides compared with the past is uncertain.
- Teva is an iconic Israeli company, the largest in the country. But with the stock price lagging those of pharmaceutical competitors, big investors have been talking about moving the headquarters out of Israel, according to the Globes, an Israeli business publication.
- Taxes. As Teva noted in Tuesday's call, the company's taxes might rise in 2014 because some tax breaks given to the company by Israel will expire in 2014. And since Teva spoke of laying off Israelis as part of its cost-cutting, there is no great rush to give Teva more tax help.
- Cost cutting. Before departing, Levin accelerated the $2 billion cost cutting program that he announced in 2012. One aspect of that is cutting 10 percent of the workforce or about 5,000 jobs. While being laid off is often financially catastrophic for an employee, stockholders (and the analysts who serve them) are anxious to see some of those cuts reach the bottom line. Teva said Tuesday that much of the early "cutting," was actually re-allocation of funding to research new medicine. But such new medicine wouldn't produce results for years to come.
- "The cost cut argument is sensible, but should be taken with caution," Gal wrote. "We understand the argument for reinvestment and the logic that more investment is needed upfront and later savings will drop to EPS [earnings per share]. However, we take it with a bit of caution; future cost cuts are not the same as today's cost cuts."
- Takeover. With all of its struggles, Teva has become a potential takeover target. "Teva is not for sale," acting CEO Eyal Desheh said when asked Tuesday. However....."If Teva fails to execute, odds of a transaction become more material," Gal wrote. "Interest rates remain low and there are an increasing number of companies looking to grow via acquisitions in the generic/specialty space. As these companies digest recent acquisitions, their management can begin to consider Teva."