VTRS - Teva Q2 Earnings: 5 Reasons Why Shares Rose By 30%

• Teva posted second-quarter results that exceeded market expectations.
• Teva's outlook looks bright.
• Opioid settlement another reason the stock added 30% after the earnings report.

When Teva Pharmaceutical Industries Limited ( TEVA ) posted second-quarter results, the stock rallied by over 30%. The company beat expectations and issued an updated outlook. The company also announced a $4.35 billion opioid settlement with states and Native American tribes. Markets like stocks that have clouds of uncertainty removed.

For three years, Teva shares traded in a tight range between ~ $7.00 to around $12.00. Trading at $9.29 at the time of writing, the stock is still below my $19 price target issued in April 2022. For investors who suffered for years waiting, will TEVA stock break out from here?

There are five reasons why Teva rose after the report.

1) Teva Beats Second Quarter Expectations

Teva posted non-GAAP earnings per share of 68 cents, beating estimates by 12 cents. Revenue fell by 2.6% to $3.8 billion. On a GAAP measure, the firm lost 21 cents in EPS. Readers will need to refer to slide 15 on the presentation deck for a GAAP/non-GAAP comparison.

The difference in GAAP and non-GAAP income is largely due to sales and marketing expenses and General and Administrative expenses. For example, the GAAP figure included higher litigation fees. Out of the $986 million in adjustments, $745 million is due to goodwill impairment. Legal settlements and loss contingencies totaled $729 million. The corresponding tax effect from an investment was $965 million:

2) Stable Revenue from Generics

Teva’s revenue from generic products fell by only 3%. In North America, the unit benefited from strong sales of Revlimid. This is a biosimilar version of Rituxan. The strong performance suggests that Teva will protect its high market share. In Europe, volumes rose for its generics and over-the-counter (“OTC”) products.

In the post-pandemic economy, Teva’s business is rebounding. Volumes are normalizing. In addition, generic sales will benefit from Teva’s biosimilar launch of Lucentis in the U.K.

From 2022 to 2027, the total biosimilars market will grow by 16.8% CAGR. Expect Teva to increase its market share in that time. This will result in Teva’s generic unit posting positive revenue growth.

3) Austedo and Ajovy Sales

Teva posted Austedo revenue of $204 million, up by 17% from last year. It dispensed ~48,000 prescriptions, up from ~38,000 last year or up by 27%. In the table below, notice the fourth-quarter seasonal strength in Austedo revenue at $282 million. Investors may expect the stock to respond better within two quarters. Strong Austedo revenue is a reason to own TEVA stock.

Ajovy sales are growing in the U.S., and market share is expanding in Europe.

Teva has a monthly normalized prescription market share (or TRx) of 24%. In Europe, it is the second leading brand with a 30.3% volume market share. After launching in 24 countries in Europe, the reimbursable drug should add meaningfully to results in the coming quarters.

Although Teva’s overall revenue outlook is lower, its Ajovy and Austedo revenue outlook is steady:

More importantly, Teva’s cash flow forecast is unchanged. It will need to deploy the cash to pay down debt and service the opioid settlement.

4) Debt Reduction

Chief Executive Officer Kare Schultz spent the last few years shedding Teva’s non-core businesses. It retained business units that have strong synergies. By integrating and optimizing them, the company will increase its gross margins. This will support the positive free cash flow ("FCF") growth in the year ahead.

In the image above, Teva’s FCF decelerated in 2020, rebounded in 2021, and continued an uptrend in 2022. Biosimilar launches and stronger sales of Ajovy and Austedo will increase cash flow. Teva will reduce its net debt-to-EBITDA to below two times by the end of 2027.

In an interest rate tightening environment, companies with heavy debt have above-average risks. The cost of servicing the debt is higher. Fortunately, Teva continues to demonstrate free cash flow growth in its business model. The risk of debt default is minimal.

5) Settlement

Teva announced a proposed settlement with U.S. states and Native American tribes . Under the settlement, states would receive $4.25 billion. Tribes would get $100 million. Over 13 years, Teva would pay around $300 million to $400 million annually in net cash.

CEO Kare noted that the agreement is contingent upon Teva reaching an agreement with Allergan concerning any indemnification obligations. Allergan is a unit of AbbVie ( ABBV ). Although AbbVie is not as comparable to Teva as Organon ( OGN ) and Viatris ( VTRS ), Teva’s strong growth score is interestingly notable:

Teva is not out of the woods. It is still engaged in ongoing settlement negotiations with New York State.

Your Takeaway

Teva historically rallies for a few weeks only to lose momentum. Is it different this time? The stock is range bound since 2019. Still, the opioid settlement removes major negative sentiment hurting the share performance. The market rewarded the company for posting a strong quarter. It may do so again when it posts strong Ajovy and Austedo sales in the fourth quarter.

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