1Q23 Earnings Notes (Pt. 3)
Generics at <5x FCF with catalysts on the horizon
Generics are such an unloved industry that VanEck shuttered the only generic drug ETF back in 2019. I’ve long argued that industry fundamentals and company balance sheets are improving from the last cycle downturn… supply leaving, pricing improving, and blockbusters coming off patent.
I’ve been early but still feel the next few years will bring good returns for both of these stocks; I think they’re worthy of a small corner of your portfolio.
Here’s a quick look at Q1 results/outlook for these 2 companies…
Teva Pharmaceutical (TEVA)
Price: $7.91
Market Cap: $9bn
Valuation: 4.7x FCF
Category: GeneralTeva is a slow-motion deleveraging/turnaround story in the generic drug space.
Q1 results — Revenue was flat YoY but grew 4% excluding currency. Earnings were down 27% to $0.40/share in Q1, mainly from lower gross margins (product mix, cost inflation). Guidance is unchanged and they’ll see another year of ~$2bn in FCF along with positive revenue growth.
Teva is a bit more levered than Viatris (4x vs. 3x) but they’re closer to achieving sustained revenue growth, if not already there. They have 2 novel drugs that are growing rapidly and a handful of biosimilars with big potential.
Unfortunately, they’ll need to keep capital allocation focused on the debt for a few more years; so buybacks or dividends look off the table for the foreseeable future.
From 2010-2016 (last cycle downturn), Teva traded at 10-11x FCF; then from 2016-present, it’s averaged 4-5x FCF. At 10x FCF of $1.9bn this would be a $17 stock for more than a double. I think it’ll take another 1-3 years of sustained performance and deleveraging for investors to place a higher multiple on this one.