DOJ Probe a Potential Code Blue for Teva (TEVA), HSBC Lowers Rating

By Carrie Williams

DOJ Probe a Potential Code Blue for Teva (TEVA), HSBC Lowers RatingIn a research note issued today, HSBC analyst Steve McGarry downgraded the rating of Teva Pharmaceutical (NYSE: TEVA) from Buy to Hold and lowered the price target to $44 from $66. The current PT of $44 is still an upside of ~12% from the last close price of $39.20. The stock is lately trading close to its yearly low of $37.82.

The prominent Israel-based multinational pharmaceutical company had slid down by more than 21% within the past few weeks after receiving a subpoena from The US Department of Justice (DOJ) on the anti-trust probe of 25 drugs. The ambiguity surrounding US election is also said to have played a role in the decline of its prices, as the Democratic candidate Clinton had already announced to take action against companies found guilty of raising drug prices steeply. This new development has also negatively impacted the prices of pharma stocks which were already in hot water due to public outrage over the escalating costs of certain medicines.

TEVA was among the dozen generics companies undergoing the investigation by DOJ on price collusion charges. If the charges are proved, the federal government can prosecute companies for collusion, seek penalties, as well as potentially send executives to jail. The U.S. Charges in the Generic-Drug probe that began two years ago, is expected to be filed by end of this year.

McGarry seems to have taken a stand of better-safe-than-sorry regarding TEVA, thanks to the current uncertainty surrounding the stock. However, other than assigning a higher discount rate in the risk-adjusted DCF valuation (WACC increased from 7% to 9%), there were no changes made to revenue and earnings estimates of Teva.

Meanwhile, there are rumors floating about regarding a potential takeover of TEVA. Although the speculation about the acquisition of is yet unconfirmed, the stock had definitely reacted positively to the news in the past three trading sessions.

The analyst consensus on TEVA, however is currently still a Strong Buy according to Among the 16 analysts who weighed in on the stock in past three months, 87.5% rated the stock as ‘Buy’ while 12.5% gave it a ‘Hold’ rating. The average analyst price target for the stock is $68.21 which is an upside of 74.1% from the current levels.