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Teva (TEVA) Gains as Bernstein Discusses 'Transformational Deal'; Lifts PT to $69

March 26, 2015 10:46 AM EDT
Get Alerts TEVA Hot Sheet
Price: $14.11 -2.22%

Rating Summary:
    12 Buy, 25 Hold, 1 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 13 | Down: 11 | New: 11
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Teva Pharma (NYSE: TEVA) is gaining early (+2%) Thursday following bullish comments from Bernstein analyst Ronny Gal. The analyst reiterated an Outperform rating while raising his price target to $69.00 (from $60.00), noting business progress even as the company struggles with the ''transformational deal." Gal's comments follows participation in a series of investor meetings with Teva executives in Israel.

On business development, the analyst notes, "The Teva message on business development was a similar, if richer, version of the one previously given. Teva's strategy is to gradually shift the generic business to a more differentiated, more global base and deepen its pipeline and product offering in Neurology and Respiratory." The analyst notes the company is interested in targeted acquisitions in generics (EM, biosimilars, and technical capabilities) and specialty pharma development stage or recently launched assets in the two target TA's. Teva evaluated 200 targets and in January 2015 narrowed it to 25 preferred targets. Gal notes this list did not include ‘transformative’ acquisitions, which he said are inherently unpredictable. The analyst notes there are few generic companies that would yield very substantial synergies. He also notes the company said that no such deals are imminent.

On a 'transformative deal', the analyst noted there were several other statements supported of a deal:

(i) When asked why the hurdle rate (6.8%) is so low, Teva CEO Vigodman stated the current cost of debt and that equities are actually cheap right now if one believes interest rates would remain at current levels for a prolonged period; (ii) Teva did not explain well the communication emphasis on deals in investor meetings and press releases (“bold moves”, “transformative times for the company and industry”) other than stating these comments were in response to investor questions; (ii) Teva officers noted they can do such a transformative deal and follow with a series of smaller branded deals or vice versa; (iii) It is hard to explain why Teva chose to put a specific synergy number in the public domain (up to $2B) or why it stated that the $15B maximum debt capacity it does not include EBITDA of the acquired company or synergies, or cash generated between now and the time the deal will close. Teva has clearly run some numbers recently.

Gal, however, noted that there were a few curveballs which did not sit well with the takeout thesis, especially Mylan (NYSE: MYL).

(i) There was a direct statement, that ‘there is nothing imminent on the table’ and comment by the CEO that he received multiple in-bound calls encouraging a transformative deal. Thus, this could be a miscommunication where Teva is answering investor questions and inadvertently building expectations (ii) Teva noted they have ‘no interest’ in transactions that make it bigger only in the US commodity generic business, which is a mature business. (iii) Specifically regarding Mylan - Teva officers acknowledged there are material cultural differences between the two companies. Further, Teva’s head of GRx R&D stated they expect an answer on Epipen around mid-year and are hopeful they will get approved as an AB-rated generic, but it's difficult to predict what the FDA will decide.

Overall, the analyst came away believing that while a deal may not be imminent, it is being considered. The analyst believes Teva is right about looking at large generic companies which may be available. Based on their analysis there are basically four logical candidates - Mylan, Actavis GRx, Pfizer GRx, and maybe Valeant GRx (OUS).

The analyst said Teva can pay pay $81 for Mylan and with $2B in synergies and 4.0x Debt/EBITDA leverage can get to $7 in EPS post synergies. The analyst said even if EPS is flat going forward, Teva stock would likely trade to $77 post deal.

"It is difficult for a CEO to ignore this kind of potential stock appreciation," the analyst said.

For an analyst ratings summary and ratings history on Teva Pharma click here. For more ratings news on Teva Pharma click here.

Shares of Teva Pharma closed at $61.27 yesterday.



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