Investors are buying Teva's new story, and the company is aiming for the S&P 500 index

From a generics giant to an originator drug manufacturer: The sharp jump in Teva's stock on Wednesday, against the backdrop of second-quarter results, pushed its market value to over $40 billion and completed a return of more than 100% since the beginning of the year. As a result, Teva is flirting with the idea of reaching a state where the pharmaceutical company could be included in the flagship American index, the S&P 500.

Wall Street favors the moves led by CEO Richard Francis, who managed within a few years to bring about a turnaround at Teva, previously identified mainly as a generics giant, and turn it into a company focused on profitable originator drugs. This turnaround not only restored investor confidence in the stock but also changed the way the market prices Teva. The company currently trades at earnings multiples similar to, and sometimes even higher than, those of innovative pharmaceutical giants like Pfizer and Sanofi. At the same time, the upgrade of the company's credit rating to investment grade — for the first time in over a decade — returned it to the radar of international investors.

Direct Listing in New York

Simultaneously with the publication of the financial reports for the second quarter, Teva announced a move with additional strategic significance: a transition to a direct listing of its shares for trading on the New York Stock Exchange. Teva, which was initially issued in Israel and only afterwards began trading in the USA, has been trading for about four decades via American Depositary Shares (ADS). This structure prevents some institutional investors from purchasing its shares and makes it difficult to add it to major stock indices.

Eli Kalif, Teva's CFO, estimated in a conversation with Calcalist that after the completion of the direct listing, planned for September 14, the company could be included in the Russell 1000 index and later, if its value continues to grow, also in the S&P 500 index. "We are receiving more and more inquiries from investors who want to hear Teva's story," said Kalif.

Growth in Originator Drugs

Indeed, Teva's story today looks completely different from that of a few years ago. Its three main originator drugs generated for the first time a combined revenue of more than $1 billion in one quarter. At the same time, the company holds five drugs in advanced stages of development, with significant commercial potential, which are expected to reach the FDA in the next five years, as well as a portfolio of 15 biosimilar drugs, which is expected to almost double to 29 products in the coming years.

The main growth engine is Austedo, the drug for treating movement disorders, to which Ecopipam for treating Tourette syndrome was recently added, following the acquisition of the American company Alkem for $700 million. The acquisition, which was completed in June, hurt the company's second-quarter results, but investors are willing to absorb the temporary hit to profitability in exchange for the potential of Ecopipam, which enjoys orphan drug status and is on an accelerated regulatory path with the FDA.

Financial Performance

Reports published by Teva reflect this transition. The company did miss earnings per share forecasts slightly, but beat revenue forecasts, with sales of $4.1 billion. For the first time, revenues from originator drugs crossed the $1 billion mark in a quarter, after growing by 43% compared to the same period last year. Austedo increased its revenues by 40% to $696 million. Ajovy, for treating migraine, grew by 56% to $244 million, while Uzedy, the new drug for treating schizophrenia, recorded revenues of $77 million — an increase of 43%. Following the performance, Teva raised the combined revenue forecast from the three drugs to $3.7 billion this year — a growth of 17%.

The sharp growth in Teva's originator drugs offset a 15% decline in generic activity, which was hurt, among other things, by the cessation of revenues from the drug Revlimid. In the profit line, results were significantly affected by the completion of the Alkem acquisition. Research and development expenses jumped to $970 million compared to $244 million in the same quarter, mainly due to a one-time recording of $726 million related to the deal. As a result, Teva moved to an operating loss of $231 million and finished the quarter with a net loss of $576 million. Excluding one-time items, Teva recorded an adjusted profit of 2 cents per share. However, the acquisition did not hurt the cash flow, which amounted to $622 million.

Despite the temporary hit to profitability, Teva left the annual forecast unchanged. The company expects revenues of $16.5–16.85 billion, adjusted operating profit of $3.8–4 billion, and free cash flow of $2–2.4 billion.