To The Moon

US stocks closed last week with a mixed course amid growing economic uncertainty and concerns over tech shares' valuations. The $Dow Jones(.DJI)$ was up 0.16%, or 74.8 points, to close at 46,987.1, while the $S&P 500(.SPX)$ rose 0.13%, or 8.48 points, to 6,728.8. On the other hand, the $NASDAQ(.IXIC)$ fell 0.22%, or 49.46 points, to end the week at 23,004.54.

The best-performing concepts is Cannabis Concept. Considering the different perceptions of the stock, this time TigerPicks chose $Teva Pharmaceutical(TEVA)$ to have a fundamental highlight to help users understand it better.

In the past five days, TEVA's share price has risen by 17.04%.

$Teva Pharmaceutical(TEVA)$

Teva Pharmaceutical Industries Ltd is a Israeli-based pharmaceutical company. The Company operates through three segments: North America, Europe and International Markets. Each business segment manages entire product portfolio in its region, including generics, specialty and over-the-counter (OTC) products.

Overview of the Company’s Performance

Company Quarterly Report

Overall, compared to the second quarter of 2024, revenue for the second quarter of 2025 increased by only 0.3%, and the gross margin improved from roughly 48.6% to roughly 50.3%.

Product Sales

To be more specific, the reason for the stagnant growth is the poor performance of its generics. While the company’s innovative products, such as Austedo or Ajovy, have shown strong growth, global generic revenue declined from $2,479 million to $2,411 million, which is a -2.7% decline

Guidance

For the 2025 guidance, the company reaffirmed its revenue guidance of $16.8b~$17.2. It also slightly raised the low end of its diluted EPS guidance to a range of $2.50 to $2.65, up from the previous $2.45 to $2.65. Overall, I believe the second quarter’s earnings and its guidance were in line with the market expectations.

Thesis 1: Turnaround

While the company’s current revenue growth may not be impressive, I believe investors should focus on its goal of improving its operating margin to 30% by 2027.

Company's goal

The company’s strategic vision is to transform into a biopharmaceutical company with innovative pipelines and to achieve a 30% operating margin by 2027 through cost-cutting measures. To become more profitable, the company is reducing its workforce and streamlining its business models. Divesting API business was a good example of the company’s pivot to a growth strategy.

Gross Margin / Operating Margin

Compared to 2020, the company’s gross margin increased from roughly 46% to 50%, and the operating margin increased from roughly 18% to 21%. Teva's current CEO, Richard Francis, launched the company’s pivot to growth strategy in 2023. Therefore, it is still too early for these initiatives to materialize into significant results. However, given its strong push for restructuring, I believe the company will become more profitable in 2027. In other words, the company's valuation has the potential to increase, driven by a rise in operating profits.

Thesis 2: Upside Potential

Company's goal

Given the company’s promising pipelines, its revenue growth is likely to accelerate in the near future. One example is duvakitug. I believe duvakitug is one of the pipelines with the potential to become a blockbuster. The drug is designed to mitigate the overactive immune response by targeting a protein called TL1A and is currently in Phase 3 clinical trials. If the trials succeed, it could become a new treatment for conditions such as inflammatory bowel disease (IBD).

Description of Duvakitug

The company is expecting peak sales of $2 billion to $5 billion for duvakitug. Considering the therapeutic utility of TL1A, ranging from Crohn's disease to asthma, the drug candidate could contribute significantly to the company’s revenue once it is commercialized.

Clinical Data

To be more specific, duvakitug showed positive results in treating moderate-to-severe ulcerative colitis (UC) and Crohn’s disease (CD) during its phase 2b study. In the UC cohort, 36% (450mg dose) and 48% (900mg dose) of patients who received duvakitug reached clinical remission at week 14 compared to placebo. In the CD cohort, 26% (450mg dose) and 48% (900mg dose) of patients who received duvakitug reached clinical remission at week 14 compared to placebo.

Clinical Trials Data

In fact, innovative drugs targeting the TL1A are poised to be an excellent alternative for patients suffering from ulcerative colitis (UC) and Crohn's disease (CD).

According to research from Prometheus Biosciences (acquired by Merck), Tulisokibart (PRA023) demonstrated superior clinical results when compared to other available therapies (Humira/Adalimumab, Entyvio/Vedolizumab, Stelara/Ustekinumab, Xeljanz/Tofacitinib, Zeposia/Ozanimod, Rinvoq/Upadacitinib, and Skyrizi/Risankizumab).

To summarize, given duvakitug's superior Phase 2b clinical trial results and the inherent innovativeness of TL1A-targeted drugs, I believe duvakitug is likely to gain market share rapidly if the company completes phase 3 clinical trials successfully.

Valuation

EV/EBITDA Multiple

Firstly, I recommend investors monitor the company’s EV/EBITDA (TTM) multiple when determining the entry point timing. The chart above shows the EV/EBITDA (TTM) line for the last 5 years. From 2021 to 2025, the company’s valuation in terms of EV/EBITDA fluctuated in a fairly narrow band between 7 and 8. Given the company’s future potential, I believe the best entry point is when the EV/EBITDA multiple falls below 7.

Secondly, the company's pipeline is poised to serve as a catalyst for a stock valuation rerating. Specifically, I strongly believe there is huge upside potential when duvakitug successfully passes Phase 3 clinical trials. Assuming an EV/EBITDA multiple of 7, duvakitug is likely to add roughly $1.8 billion to $4.6 billion to the stock valuation.

To sum up, I recommend investors gradually accumulate this stock whenever there is a market correction. I believe that stable cash flow from generics is likely to serve as a floor for the stock valuation, while the innovative pipeline will act as a catalyst for stock price appreciation.

Risk

First, one of the primary concerns regarding the company's balance sheet is its substantial debt load. However, the company is improving its financial soundness by reducing its debt.

Total Debt/EBITDA

Second, due to the strong prospects for drugs utilizing the TL1A mechanism, several other companies, including $Merck(MRK)$ , $Roche Holding Ltd(RHHBF)$ , and $Pfizer(PFE)$, are also pursuing similar development programs. However, assuming each company succeeds in its clinical trials, Teva could have a greater upside, given the market capitalization of its competitors.

Third, if the company’s pipeline fails its Phase 3 clinical trials, it would negatively impact the stock performance. In other words, the stock's performance is likely to be volatile based on the clinical trial results.

Conclusion

In conclusion, despite the risks associated with Teva, I believe there are more reasons to buy rather than short this company. I recommend investors gradually accumulate this stock when the EV/EBITDA multiple reaches 7.

Stock Price Forecast:

Here are the target price forecasts for the next 12 months from analysts.

Based on 6 Wall Street analysts offering 12 month price targets for Teva Pharmaceutical in the last 3 months. The average price target is $29.20 with a high forecast of $32.00 and a low forecast of $28.00. The average price target represents a 21.82% change from the last price of $23.97.

Resource:

https://seekingalpha.com/article/4828210-teva-pharmaceutical-turnaround-driven-by-huge-pipeline-upside

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