Teva's Cost-Cutting Plan Nets A Mizuho Upgrade

After a turbulent 2017, Mizuho analysts now see upside potential for Teva Pharmaceutical Industries Ltd (ADR) (NYSE: TEVA)'s stock.

The Analyst

Mizuho Securities USA's Irina Koffler upgraded Teva's stock rating from Neutral to Buy with a price target boosted from $16 to $23.

The Thesis

Teva's recent announcement that it plans on cutting $3 billion in costs by 2019 is a number that is both conservative and achievable, Koffler said in the upgrade note. (See the analyst's track record here.) 

The cost-cutting guidance makes the Israeli company "less risky" and improves Mizuho's weighted average cost of capital estimate from 9 percent to 8 percent. Mizhuho's model for Teva's terminal growth decline was also improved from a 3-percent to a 2-percent decline.

Koffler is projecting a 10-percent decline in Teva's generic U.S. business in 2018 as the company exits unprofitable categories. On the other hand, the competitive landscape for Teva's Copaxone therapy appears to be less intense than previously thought after rival Momenta Pharmaceuticals, Inc. (NASDAQ: MNTA)'s management demonstrated a "cautious tone" about its generic Glatopa 40mg, she said. 

Teva is likely to see a lower tax rate in 2018 from impairments and restructuring charges that could positively impact the company's leverage ratio over time, Koffler said. While the leverage ratio could fall above 5.0x in 2018 on the basis of a meaningful reduction in 2018 revenue, it could improve next year — and Teva is likely to offer a conservative guidance in February, according to Mizuho. 

Teva's cost cutting initiatives, exiting of unprofitable businesses and slower-than-previously-expected deterioration in the Copaxone market is reason enough to turn bullish, Koffler said. 

Price Action

Shares of Teva were trading higher by more than 2 percent Tuesday morning.

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Goldman Sachs: Now Is The Time To Get In On Teva's Turnaround

Photo courtesy of Teva.