Teva Pharmaceutical Industries Limited (TEVA) shares fell more than 8% during Monday's session after Morgan Stanley downgraded the stock to Underweight from Equal Weight and lowered its price target from $16 per share to $6 per share. Analyst David Risinger is worried that the company – along with competitors like Endo International plc (ENDP) – faces "underappreciated risks" from buying group pressure being worse than expected, increasing generic competition, and opioid litigation that is "just getting started" with thousands of new lawsuits.
The bearish sentiment comes shortly after Argus Capital upgraded Teva stock to buy with a $12 price target on July 5, 2019. Analyst Jason McCarthy noted that Teva was making progress in resolving its "numerous challenges" over the past several years and added that generics are stabilizing. McCarthy believes that the company's then-3.9x multiple was an "excessive discount" to its historical average of 8.6x earnings and the peer average 6.7x earnings. However, most other analysts remain bearish on Teva stock amid opioid risks.
President Trump's anticipated executive order will likely contain a "favored nation" clause that will become the basis for Medicare reimbursement. The new reimbursement rates will match those of the country paying the lowest prices instead of an index of drug prices around the world. Drug manufacturers are expected to push back against the proposal, but the end result could be margin pressure across the industry.
From a technical standpoint, Teva stock broke down toward its prior lows made in mid-June after experiencing a brief relief rally. The relative strength index (RSI) moved toward oversold levels with a reading of 36.83, but the moving average convergence divergence (MACD) could see a near-term bearish crossover. These indicators suggest that the stock could test prior lows before a potential breakdown lower over the intermediate term.
Traders should watch for a breakdown from prior lows of around $8 per share to fresh lows. If the stock rebounds higher, traders should watch for a breakout from prior resistance at $10 per share or the 50-day moving average at $10.18 per share.
The author holds no position in the stock(s) mentioned except through passively managed index funds.