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Better Buy: Novartis vs. Teva Pharmaceutical

By Rachel Warren – Jun 19, 2020 at 8:17AM

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It's a face-off between an incredibly cheap stock and a pharmaceutical giant.

Novartis (NVS -2.04%) and Teva Pharmaceutical (TEVA -0.80%) are two very well-known names in the big pharma space. Shares for both companies have recovered well since their lows during the coronavirus crash. Novartis is a popular high-growth stock, and Teva's mouthwateringly cheap share price has attracted legendary investors including the Oracle of Omaha himself, Warren Buffett. If you're wondering which of these stocks is the better buy, you've come to the right place. 

Let's dive right in. 

A pill bottle and pills on a table

Image source: Getty Images.

The case for Novartis

Novartis shares slumped dangerously near the stock's 52-week low of $69.18 in the March downturn, going from about $100 per share in the middle of February to about $70 in the third week of March. While the stock has yet to recover to its starting point earlier in the year, shares have been steadily hovering at about $85 since the beginning of April. The company entered the coronavirus bear market from a strong performance in 2019, when full-year revenue was $47.4 billion, up by 9% from 2018.  

Investors were on tenterhooks in anticipation of Novartis' first-quarter earnings release, which came April 28 and certainly didn't disappoint. Net sales in the first quarter were up by 13% on a year-over-year basis, totaling $12.3 billion. The pandemic had a negligible impact on Novartis' supply chain

The company reported a 24% spike in net income in the first three months of the year, along with a boost of 34% to its core operating income. Novartis also saw an 8% increase in free cash flow to $2 billion. The company's blockbuster heart failure medication, Entresto, was responsible for $569 million of Q1 earnings. Two other major revenue drivers for Novartis in the first quarter of the year were plaque psoriasis medication Cosentyx and targeted cancer therapy Kisqali, which brought in $930 million and $161 million, respectively.

In response to the pandemic, Novartis is taking part in numerous research initiatives, including the COVID-19 Therapeutics Accelerator, which is being spearheaded by the Bill & Melinda Gates Foundation, Wellcome, and Mastercard. Novartis has also launched three separate phase 3 clinical studies of investigational and approved medicines as prospective coronavirus treatments.

The company is collaborating with Incyte (INCY -1.67%) to study the efficacy of bone marrow disorder drug ruxolitinib when used with and without the standard of care to treat patients with pneumonia caused by the coronavirus. A second phase 3 study focuses on anti-inflammatory drug canakinumab, which is also being tested on COVID-19 patients who have developed pneumonia. Novartis' third phase 3 clinical study is regarding hydroxychloroquine, which is being administered to hospitalized coronavirus patients both with and without bacterial infection treatment azithromycin. The company stated in its Q1 report that it would be donating up to 130 million doses of generic hydroxychloroquine worldwide.

The U.S. Food and Drug Administration (FDA) had issued an emergency use authorization (EUA) for hydroxychloroquine back in March, but it revoked it Monday, which could significantly squelch demand for the drug. Also, on May 28, it was announced that Novartis subsidiary AveXis is partnering with Massachusetts Eye and Ear and Massachusetts General Hospital to manufacture a gene-based coronavirus vaccine called AAVCOVID. AveXis will be manufacturing it free of charge, with clinical trials on the vaccine candidate expected to begin within months.

The case for Teva 

Teva's stock has been volatile in recent years, as the company has grappled with overwhelming debt, falling drug sales, and tremendous legal troubles. It has made considerable strides to reduce its debt burden, thanks in no small part to President and Chief Executive Officer Kare Schultz, who was brought on board in 2017. In 2019, the company closed out its two-year debt restructuring initiative, having lowered its net debt by over $9 billion. Q4 2019 revenues were up by a slight 1% on a year-over-year basis, totaling $4.5 billion, while full-year 2019 revenues were $16.9 billion. The company also reduced its base spending by $3 billion in 2019. Teva closed out 2019 with about $27 billion in debt, as opposed to its nearly $29 billion debt burden at the end of Q4 2018.

The company reported its Q1 2020 earnings results on May 7, in which it reaffirmed its prior outlook for the year's net revenues to fall somewhere between $16.6 billion and $17 billion. First-quarter net revenues totaled $4.4 billion, up 5% from Q1 2019. Teva also reported a further reduced debt burden of $24.3 billion in Q1 2020, compared with its free cash flow of $551 million.

Teva is the largest manufacturer of generic medicines in the world. North American revenues for the company's generic drugs were down by 1% in Q1 2020, but this was counterbalanced by a major revenue spike for some of Teva's newer branded drugs. Teva experienced a 16% increase in generic products revenue in the Europe market in the first quarter of 2020, which it has mainly attributed to heightened demand because of the pandemic.

The company's Huntington's disease medication, Austedo, was responsible for $122 million of Q1 2020 revenues, with sales up by 64% from the first quarter of 2019. Another key revenue driver was migraine medication Ajovy, which posted North American revenue up 44% on a year-over-year basis to $29 million. On the other hand, combined North American revenue for chemotherapy drugs Treanda and Bendeka was down by 14%. Like Novartis, Teva has donated millions of doses of hydroxychloroquine to countries around the world, along with 500,000 units of azithromycin.

While Teva's financial outlook appears to show some promise after a rough few years, things on the legal front are a different story. Teva has been embroiled in a multitude of lawsuits alleging that the company played a role in fueling the opioid pandemic.

The company's multibillion-dollar legal troubles also include a federal probe spearheaded by the U.S. Department of Justice (DOJ), in which Teva is the lead subject. The DOJ is investigating Teva for its purported role in a price-fixing scheme. Teva was reported to have pulled out of settlement negotiations with the DOJ regarding the price-fixing allegations back in May, allegedly banking that its significant contribution of hydroxychloroquine would discourage the feds from taking further legal action.  

It remains to be seen whether Teva's alleged strategy to avoid federal prosecution will work. Just last week, New York Attorney General Letitia James stated that a coalition consisting of herself and 51 other attorneys general had filed a federal antitrust lawsuit against several generic-drug makers for alleged price-fixing, with Teva being among them.

The better buy 

In comparing these two stocks, Teva's financial history, product portfolio, and overall outlook pale in comparison with those of Novartis. Teva has made definite steps to boost revenue and cut back its debt over the past few years. But the company's ongoing legal woes could be the proverbial millstone around its neck for some time to come. That and the falling sales of some of its core products primarily explain why Teva shares are priced so low. 

Novartis, meanwhile, entered the coronavirus crisis from a position of strength and has only built on that impetus. Shares aren't too overvalued or undervalued, either, and the company's 3.5% dividend yield is a nice bonus. Right now, Warren Buffett is holding onto shares of Teva, but if you don't already own this stock, you may want to hold off for now. As to which stock is the better buy, Novartis gets my vote hands down. 

Rachel Warren has no position in any of the stocks mentioned. The Motley Fool recommends Incyte. The Motley Fool has a disclosure policy.

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