Morgan Stanley Downgrades Teva, Endo On Drug Pricing And Litigation Concerns

Pharmaceutical stocks have been under pressure for the past few trading days, but one Wall Street analyst said the worst is yet to come for a handful of specialty drugmakers.

The Analyst

Morgan Stanley analyst David Risinger made the following changes to his pharma stock coverage:

Endo International PLC ENDP downgraded from Equal-Weight to Underweight, price target lowered from $8 to $3.
Teva Pharmaceutical Industries Ltd TEVA downgraded from Equal-Weight to Underweight, price target lowered from $16 to $6.
Mylan NV MYL reiterated at Overweight, price target lowered from $32 to $22.
Amneal Pharmaceuticals Inc AMRX reiterated at Equal-Weight, price target lowered from $12 to $4.

The Thesis

Risinger said pharma investors can expect significant earnings multiple contraction due to extended buying group pricing pressures coupled with increasing competition among generic drug manufacturers. In addition, he said Endo and Teva are facing legal uncertainty as well.

“Although stocks have underperformed, we are most concerned about further potential downside for ENDP & TEVA due to branded opioid exposure,” Risinger wrote in a note.

There are thousands of opioid-related lawsuits that are just getting started, and Teva has already announced one opioid settlement with the state of Oklahoma. In addition to legal concerns about opioids, at least 44 U.S. states have joined a lawsuit alleging generic drug price fixing as well.

Risinger said these legal risks coupled with high debt leverage will likely discourage companies from extending their balance sheets on acquisitions, particularly Endo and Teva.