In the wake of prior narrowed 2012 projections, Teva Pharmaceuticals (TEVA) offered 2013 guidance on Friday morning that fell substantially short of Wall St. analyst estimates. Individual's on PropThink's editorial team have been following Israeli-based TEVA for more than a decade, and notably, this is the first down-earnings year that we've seen, a sign of the times for this leading global generic drug company. As the blockbuster drug patent expiration cycle comes to an end after >10 years of great times for the generic industry, TEVA is in need of a new strategy. The company brought in Dr. Jeremy Levin (former Bristol Myers' Head of Strategy and Business Development) as CEO and President earlier this year, and not surprisingly, we believe that new management has "kitchen-sinked" guidance in an effort to reset expectations and execute against a more conservative outlook. Most investors expected 2013 guidance to come in below Wall St. analyst's expectations, hence the muted reaction to the significantly lower-than-expected outlook provided by the company. We believe TEVA released the new guidance ahead of its Analyst/Investor Day (December 11th in NYC) in order to get the "bad news" of the financial guidance out of the way, so that the event can be focused squarely on the new strategy, led by Dr. Levin and his new team. Given this background, playing TEVA off of its lows today makes sense, and with the bad news out of the way and the good news to come, investors may have an opportunity to ride the shares higher into and through the Analyst/Investor Day. Trading at less than 8x forward earnings, the new TEVA investment thesis reminds us of big pharma stories like Pfizer (PFE) and Abbot (ABT), whereby "sum-of-the-parts" valuations, big cash flows, and big dividends drove major upside in stocks of businesses that have matured. Expect the company to focus on key metrics of its different divisions at its Analyst/Investor Day, as well as the potential to sell off certain business units to create shareholder value, and possibly offer a dividend to attract investors to the stock.
Guidance summary foreshadows the likely strategy. The company now expects 2013 revenue between $19.5 billion and $20.5 billion, ~4% shy of Wall Street's $20.85 billion average estimate, and management expects adjusted earnings of $4.85-$5.15 vs. the Consensus $5.71 mean estimate listed on Thomson Reuters I/B/E/S. Friday's 2013 guidance indicates an expected decline from this year's projected sales; guidance for 2012 revenue is in the range of $20.1 billion to $20.7 billion. The company gave specified business division sales and margin estimates, suggesting that the company is hoping analysts and investors will start valuing the "parts" of the business. We'd expect analyst research reports following the guidance to do just that when they are published later today or Monday. Based on this level of detail, the company is clearly signaling that a break up strategy could be on the table, and we expect that to be a major topic of discussion at the upcoming Analyst/Investor Day.
A major shift in strategy is usually a bad sign for a company, and for the long run, we still need to be convinced about who TEVA really will become. Meanwhile, low P/E, cash flow, dividend, and break up stories for big mature companies have worked very well over the last couple of years in the pharma sector, and we believe the large pools of institutional investor money will flock to TEVA in the near- and medium-term.
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