Congratulations, folks! We've finally reached the halfway point of 2020. Sure, it might have felt like it's taken five years to get here, but history suggests there will be brighter days ahead.
Thus far in 2020, we've witnessed the fastest bear-market decline in history, a record-breaking volatility reading, courtesy of the CBOE Volatility Index, and one of the most ferocious rebound rallies from a bear-market low. If this incredible volatility has taught investors anything, it's the importance of trusting in your investment thesis over the long run.
As we begin our descent toward the latter half of 2020, I'd like to introduce you to my single best investment idea for the month of July: brand-name and generic-drug developer Teva Pharmaceutical Industries (TEVA -1.23%).
Take a quick peek at Teva's five-year chart, and most investors would probably make a beeline for the exit. On a trailing-five-year basis, Teva has lost 78% of its value, equating to a more than 120-point underperformance relative to the benchmark S&P 500 over the same time frame. But as you're about to see, turnaround stories really do exist on Wall Street.
Teva's fall from grace
However, before diving into the numerous reasons behind my long-term optimism for Teva Pharmaceutical, let's first go over some of the catalysts that sank this stock.
One of the biggest issues plaguing Teva has been a loss of confidence in management. Back in 2016, the company settled with the U.S. government to the tune of $519 million over bribery charges in a handful of overseas countries. More recently, Teva is one of a number of drugmakers that's been named as a potential perpetrator of the opioid crisis.
Another pretty big problem for Teva was the company's acquisition of generics drugmaker Actavis from Allergan. Point blank, Teva grossly overpaid for the deal that made it the largest generic drugmaker in the world. As a result, its debt swelled past $35 billion by the end of 2016, giving the company very little financial flexibility. When its issues began to mount, Teva was forced to completely abandon what had once been a sizable dividend payout.
A third concern for Teva, which had been looming for a while, was the expected loss of patent exclusivity on top-selling brand-name drug Copaxone. At its height, multiple sclerosis drug Copaxone generated around $4 billion a year for Teva. But since the introduction of generic competitors, Copaxone has seen its sales dip to what'll likely amount to $800 million in 2020. Replacing more than $3 billion in lost revenue doesn't happen overnight.
There's simply no debating that Teva has had its fair share of issues and then some. Now, let's take a closer look at all the reasons buying Teva actually makes a lot of sense.
Here's why now is the time to buy Teva Pharmaceutical
Though there are quite a few reasons to be bullish on Teva, none stands out more than CEO Kare Schultz. Following Teva's multiple issues in 2016 and 2017, the company turned to Kare Schultz, a turnaround specialist, as its new CEO. Since taking the helm, Schultz has helped Teva to unload noncore assets to reduce the company's debt load. He's also overseen an approximate $3 billion reduction in annual operating expenses. This has allowed Teva to reduce its net debt from $34.2 billion to $24.3 billion in less than three years. With much better financial flexibility, it's no wonder the company recently extended Schultz's tenure through at least late 2023.
Teva is also a logical beneficiary from an aging global population. The expectation is that an aging population with increased access to medical care will demand more maintenance therapies over time. That's good news for generic drugmakers that are counting on volume to drive their growth.
But it's not just volume that's on Teva's side. Additionally, the price for brand-name therapies continues to soar, and, as noted above, exclusivity for brand-name drugs is finite. This puts the focus on generics playing an even larger role in the health and well-being of patients in the future.
Beyond generics, Teva has a number of relatively new brand-name therapies that are just beginning to ramp up and should help to push revenue growth in the right direction. Austedo, which is used to treat tardive dyskinesia and Huntington's disease, delivered $122 million in first-quarter sales, which was up 64% from the prior-year period. Meanwhile, migraine-prevention medication Ajovy saw sales rise 44% in Q1 2020 to $29 million. It's a bit of a slower start for Ajovy than expected following its September 2018 launch, but the release of a brand-new auto-injector device in April 2020 should help sales really pick up.
This is also a story about value. While Teva still has work to do in regard to reducing its debt levels, the company is fully capable of generating in excess of $2 billion in operating cash flow each year, which should allow it to continue chipping away at its remaining debt. Currently, shares of Teva can be had for 1% below its book value and less than 5 times next year's forecast earnings per share. Again, with its financial situation greatly improved, a sub-5 forward price-to-earnings ratio is almost unheard of for a pharmaceutical stock.
Finally, don't overlook the growing likelihood that Teva's improved financial situation will allow the company to refinance some of its existing debt to a considerably more attractive interest rate.
Though Teva remains a work in progress, the combination of Kare Schultz, the company's newer brand-name therapies, and stronger generic demand has made sure that the arrow is most definitely pointing higher.