A Long Road To Recovery For Teva Pharmaceuticals; Morgan Stanley Downgrades

After a disastrous week last week for Teva Pharmaceutical Industries Ltd (ADR) TEVA shareholders, this week is off to a bumpy start as well. Just days after Teva reported a second-quarter earnings miss, lowered guidance and slashed dividend by 75 percent, Morgan Stanley stepped in and downgraded the stock from Equal-Weight to Underweight.

Teva shares are down 36.3 percent in the past five trading sessions, but analyst David Risinger sees more pain ahead. Morgan Stanley underestimated the impact that generic competition would have on Teva’s earnings potential, and the company has an uphill battle ahead fighting off generic competition to its top franchise, Copaxone.

“We believe that Teva's disappointing generic business performance will take more time to improve given a combination of the generic industry's intensifying secular challenges and Teva's own difficulty in executing on its pipeline,” Risinger wrote on Monday.

Related Link: Teva Loses Another Bull; Credit Suisse Downgrades

Morgan Stanley expects Teva will continue to rely on debt to advance its pipeline, leaving the company in a precarious long-term position. The firm estimates Teva will operate with a debt/EBITDA ratio of around 4.0 through at least 2019.

Despite Teva losing more than a third of its market cap in a matter of days, Risinger said the stock’s 8.2 EV/EBITDA of 8.2 based on Morgan Stanley’s 2018 projections suggests the stock may still be overvalued at over $20 per share.

Looking ahead, the firm is forecasting -1 percent compound annual revenue growth through 2020 and a 5-percent annual decline in EBITDA during that time.

Morgan Stanley has cut its price target for Teva from $36 to $16.

At time of publication, shares of Teva were down 13.26 percent at $20.60.