Teva Pharmaceutial Industries (TEVA -0.44%) is a dirt-cheap pharma stock. The company's shares are trading at a rock-bottom price-to-sales ratio of 0.88. That's a cut-rate valuation for any large cap pharma play, especially for one with a well-established global footprint like Teva. Nevertheless, this deeply discounted drugmaker has still failed to attract bargain hunters this year.
Why are investors passing on Teva even at these bargain-bin levels? Let's look at the company's negatives and positives to find out.
Teva's $40.5 billion acquisition of Allergan's (AGN) Actavis generic-drug unit in 2015 might go down as the worst business development move in history. This singular transaction nearly forced Teva to close its doors for good.
What happened? A few months after Teva officially closed on Allergan's generic unit, the bottom fell out of the North American generic-drug market because of a potent combination of price erosion and new competition. These dual headwinds have lopped off about a third of Teva's global generic-drug sales from their high-water point.
Teva's debt also ballooned to around $35 billion as a direct consequence of this ill-fated acquisition. This monstrous debt load forced the company to jettison its dividend program and institute a highly unpopular restructuring plan in late 2017. And despite these emergency measures, the drugmaker's long-term debt still stood at an unsightly $26.7 billion at the end of the first quarter of 2019.
Why did Teva's former management team feel compelled to buy Allergan's generic-drug business in the first place? The drugmaker's prior brain trust was attempting to lower the pending impact of Copaxone's loss of exclusivity. This top-selling multiple sclerosis drug had been Teva's bread and butter when its patent protection ran out, and the company didn't have a viable replacement.
Underscoring this point, Copaxone was consistently raking in around $1 billion in sales per quarter around the time Teva was negotiating this deal with Allergan. Fast-forward to today, and Copaxone is expected to generate $1.3 billion in sales for the whole of 2019 as a result of generic competition. So there was a solid reason behind this transaction. Teva's former leadership simply picked the wrong horse.
The company has also been stung by falling sales of other key products like ProAir and Bendeka/Treanda during this tumultuous period. The net result is that Teva has been unable to alter the trajectory of its faltering top line, despite some key wins on the regulatory front in the interim.
Teva's decision to hire Kare Schultz as its CEO in late 2017 has proved to be a brilliant move. Schultz is the architect behind the company's ongoing restructuring plan that's designed to deleverage Teva's balance sheet and return the company to top-line growth by no later than 2021.
While Schultz's road map for Teva's turnaround has been controversial because of the high number of layoffs and plant closings involved, the bottom line is that these unpopular moves have probably kept the company out of bankruptcy court.
Apart from its change in leadership, Teva's clinical pipeline has also been a key part of the company's turnaround story. In 2017, the Food and Drug Administration (FDA) green-lit the drugmaker's Huntington's disease and tardive dyskinesia medicine, Austedo. This year, Austedo is forecast to haul in a healthy $350 million in annual sales.
Last year, Teva also snagged FDA approval for its migraine treatment, Ajovy. This regulatory approval should turn out to be a big deal for the company. Ajovy, after all, is forecast to achieve peak sales of $500 million, despite stiff competition from Amgen and Novartis' Aimovig, as well as Eli Lilly's Emgality.
Teva is hoping to grab another major regulatory approval with the experimental pain medication fasinumab that's being co-developed with Regeneron Pharmaceuticals (REGN 1.37%). Teva and Regeneron have blockbuster aspirations for fasinumab as an alternative to addictive opioid painkillers. But this entire class of drugs has been plagued by dangerous skeletal side effects in clinical trials. The duo think they've found a dosage that maximizes the drug's risk-to-reward ratio, but only time will tell.
Where do things stand now?
Even though the North American generic drug market appears to be leveling off, Teva has two other fundamental problems. First, the company lacks a product capable of replacing Copaxone from a revenue generation standpoint. Austedo and Ajovy are solid earners, but neither is a true star like Copaxone. Fasinumab's regulatory approval is also far from guaranteed.
So with no heir apparent to Copaxone, Teva's other major problem -- its heavy debt load -- looms large. The company may no longer be in danger of going belly-up, but the process of lowering its debt-to-equity ratio to a reasonable level could take upwards of a decade to accomplish.
Despite these problems, however, Teva does have a clear path forward. The company's top line should flatten out toward the back end of 2019 and start heading northward early in the next decade. So there is a light at the end of the tunnel.
So why are investors avoiding this stock?
Teva's turnaround story is going to take five to 10 years to fully play out. That fact alone seems to explain Wall Street's apparent lack of interest in this stock. After all, this is a highly unusual market environment. Pot stocks, crypto-currency plays, and developmental biotechs have all made investors oodles of money in almost no time at all. Not many investors are willing to forgo these powerful growth vehicles for a company with a balance sheet loaded with debt, a declining top line, and a long road to recovery ahead of it.