MARKET DIGEST ARGUS. * Value Stock: Teva Pharmaceutical Industries Ltd.: Hurt by dwindling Copaxone margins and high debt (Jasper Hellweg)

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1 ARGUS Independent Equity Research Since 1934 MARKET DIGEST DJIA: DJIA: 19, MONDAY, DECEMBER 4, 2017 DECEMBER 1, DJIA 24, DOWN Good Morning. This is the Market Digest for Monday, December 4, 2017, with analysis of the financial markets and comments on Teva Pharmaceutical Industries Ltd. IN THIS ISSUE: * Value Stock: Teva Pharmaceutical Industries Ltd.: Hurt by dwindling Copaxone margins and high debt (Jasper Hellweg) CONFERENCE CALL ANNOUNCEMENT: Argus Research will host a conference call for clients at 11 a.m. ET on Wednesday, December 6, The call is entitled Argus Analysts Top Picks for Argus Director of Research Jim Kelleher, CFA, will host the call, which will be in webinar format. He will be joined by Argus President John Eade. Jim and John will describe the operating outlooks, including competitive advantage and growth dynamic, as well as valuations for a group of high-quality stocks that our analysts regard as well-positioned for outperformance in We will also review the performance of our 2017 top picks. Please note that the Investment & Wealth Institute has accepted Argus Monthly Conference Call for one (1) hour of continuing education (CE) credit toward the CIMA/CIMC/CPWA certifications. The program has also been accepted by CFP Board for one (1) hour of CE credit. Visit to register for this call. Once on the site, follow simple instructions to sign up for the call and receive a call-in number and passcode. If you have any problems registering, please contact us at clientservices@argusresearch.com or by calling (212) The call, as always, will be interactive with a question-and-answer period. We will be recording the call, and a rebroadcast will be available on the password-protected portion of our website. Slides related to the presentation will be posted on our website the day of the call and also will be available via the webcast itself. MARKET REVIEW: Stocks rebounded from sharp intraday declines on Friday to close with modest losses of 0.2% for both the Dow and the S&P 500, and 0.4% for the Nasdaq Composite. However, progress on tax-cut legislation in the Senate helped pushed the Dow up 2.9% for the week, with the S&P 500 rising 1.5%. Only the Nasdaq was unable to move higher, finishing down 0.6% for the week. Year-to-date gains are now 27.2% for the Nasdaq, 22.6% for the Dow, and 18.0% for the S&P 500. Strong readings on the U.S. economy also provided a favorable backdrop for the week s trading, led by Wednesday s revised 3Q GDP growth estimate of 3.3%, up from an initial estimate of 3.0%. Nonresidential investment and inventory growth provided the upside from the earlier reading. New home sales are also booming, with Monday s announcement that sales rose 6.2% in October to an annualized 685,000, well above expectations. Meanwhile, the consumer confidence index rose to in November, a 17-year high, on favorable expectations for both employment and the stock market. Only motor vehicle sales came in slightly below expectations, at an annualized 17.5 million in November, though this followed significantly higher sales in the previous two months, driven by hurricane-replacement demand. We believe that improved economic growth is aiding stock market gains. The 10-year Treasury yield ended the week at 2.36%, up slightly from 2.34% a week earlier. Despite strong economic readings, inflation has not surfaced, keeping longer-dated yields in check. Following three 25-basis-point moves in the Fed Funds rate over the past year, the Fed is widely expected to hike rates again at its December meeting. We also expect additional hikes in 2018, pushing the rate to 1.75% by the end of the year. However, with still tame inflation, we do not expect the 10-year yield to exceed 3% in 2018, resulting in a slightly flatter yield curve than today. A R G U S R E S E A R C H C O M P A N Y 6 1 B R O A D W - A 1 Y - N E W Y O R K, N. Y ( ) LONDON SALES & MARKETING OFFICE TEL / FAX

2 We share the market s enthusiasm for tax cuts. Although lower corporate taxes would not kick in until 2019, cuts for individuals would take effect in 2018, even if distributed somewhat unevenly based on the use of deductions. Assuming this windfall is partly spent (and partly saved), consumer spending would benefit. The independent Tax Foundation has forecast that the Senate bill would result in a 3.7% increase in GDP, a 2.9% increase in wages, and an additional 925,000 new full-time jobs. While raising the deficit by some $1.4 trillion, proponents of the legislation believe that higher federal revenues from economic growth would provide offsets. On the corporate side, a new 20% tax rate would help to reduce inversions to countries with lower taxes, keeping more of the tax base in the U.S. It would also free up funds for increased share buybacks and dividends, and lower the cost of capital by reducing marginal tax rates on labor and investment. We expect the earnings benefit of the cuts to be in the 5%-8% range for larger companies. S&P 500 companies had an effective tax rate of about 25% in Among our market indicators, our technical composite posted strong gains last week, aided by improving NYSE breadth on a rise in the bullish percentage, despite a setback on Friday in net advances. CBOE trading measures also matched a post-brexit high on improved up volume and in the put/call ratio from short covering. Composite technicals are bullish and are trending up. Our strategic indicators posted a modest rise. Market internals benefited from an improvement in cyclicals versus defensives, and a surge in Transports, Financials and Industrials. Market externals were little changed amid a sharp drop in emerging versus developed stocks, while currencies remained steady and global Treasuries (versus the U.S.) improved. Our composite strategic index is neutral with a flat/up trend. In this week s economic calendar, Monday brings factory orders for October. On Tuesday, the ISM non-manufacturing index for November will be released. On Friday, nonfarm payrolls for November and preliminary consumer sentiment for December will be reported. Last week, Argus analysts upgraded International Game Technologies (IGT) and Fortive Corp. (FTV) to BUY from HOLD, and downgraded Itron Inc. (ITRI) and Priceline Group (PCLN) to HOLD from BUY. They also initiated coverage of KLA- Tencor Corp. (KLAC) with a BUY rating. The average stock in the Argus universe gained 1.9% last week. The largest percentage gainers were L Brands (LB: HOLD; +15.5%), Macy s (M: HOLD; +14.8%) and United Natural Foods (UNFI: BUY; +13.0%), while the largest percentage decliners were Universal Technical Institute (UTI: SELL; -18.2%), Autodesk (ADSK: HOLD; %), and Micron Technology (MU: BUY; -15.5%). (Stephen Biggar) - 2 -

3 TEVA PHARMACEUTICAL INDUSTRIES LTD. (NYSE: TEVA, $15.26)... HOLD TEVA: Hurt by dwindling Copaxone margins and high debt * We are maintaining our HOLD rating on Teva. Although the shares are trading at low valuation multiples, Teva is plagued with problems, including generic price erosion, high debt, and a DOJ investigation. * On November 2, Teva posted 3Q17 non-gaap EPS of $1.00, down from $1.31 a year earlier and $0.04 below consensus. Revenue rose less than 1% from the prior year, to $5.61 billion, and missed the consensus forecast by $10 million. * We are lowering our 2017 EPS estimate to $3.85 from $4.39 and our 2018 EPS estimate to $3.15 from $4.20. * The company recently slashed its dividend by 75% to an annualized $0.34. The current yield is 2.2%. ANALYSIS INVESTMENT THESIS We are maintaining our HOLD rating on Teva Pharmaceutical Industries Ltd. (NYSE: TEVA). TEVA shares are trading near their ten-year low and at relatively low valuation multiples. But Teva is plagued with problems, including pricing erosion in the generics space, a wall of upcoming debt maturities following the Actavis generics purchase, the challenging integration of that business, dwindling sales of Copaxone amid generic competition, management turnover, and bribery/price-fixing litigation. We don t expect the shares to move higher until we see a change in the generic pricing environment, significant debt reduction, signs of stronger growth from new products, or benefits from the recently announced business reorganization. RECENT DEVELOPMENTS TEVA shares have underperformed over the past quarter, falling 4.1% while the S&P 500 has gained 7.7%. They have substantially underperformed over the past year, with a loss of 60.7% versus a gain of 20.4% for the index. The beta on TEVA is 0.72, below the peer average of 1.0. The shares have lagged due in part to headwinds in the generic pharmaceutical industry. Manufacturers are being hurt by price erosion, a marked reversal from several years ago when they were able to raise prices on an annual basis. Pharmaceutical distributors in our coverage universe forecast price erosion for generics of 7%-10% in 2017, which will shrink margins for both distributors and manufacturers. In addition, although Teva could potentially grow through acquisitions, it is likely to face antitrust hurdles. Since the company s acquisition of the Actavis generics business in August 2016, there are few (if any) attractive targets. On November 2, Teva posted 3Q17 non-gaap EPS of $1.00, down from $1.31 a year earlier and $0.04 below consensus. Non-GAAP net income came to $1.08 billion, down from $1.36 billion in 3Q16. Revenue rose less than 1% from the prior year, to $5.61 billion, and missed the consensus forecast by $10 million. Compared to 4Q16 the first full quarter to include the acquired Actavis Generics business revenues declined 15.7%, reflecting the devaluation of the Venezuelan bolivar, price erosion, the loss of exclusivity on certain specialty drugs, and the sale of UK assets related to the Actavis acquisition. The company ended 3Q17 with billion shares outstanding, down from billion a year earlier. On August 30, the FDA approved Teva s Austedo tablets for the treatment of tardive dyskinesia, a debilitating and often irreversible movement disorder, in adults. The condition affects approximately 500,000 people in the U.S. The FDA has also granted priority review status to fremanezumab, a potential preventative treatment for migraines. During the fourth quarter, the company plans to launch generic versions of Viagra, Reyataz, and Viread. Erez Vigodman, who became CEO in early 2014, unexpectedly resigned from the company in February For the next seven months, Chairman Yitzhak Peterburg served as interim CEO while former Celgene CEO Sol Barer served as chairman. In September, the company named Kare Schultz as its new president and CEO. Mr. Schultz had previously served as CEO of the Danish pharmaceutical company H. Lundbeck. Mr. Barer remains the company s chairman. In late November, Teva announced a business reorganization as well as several management changes. Rather than separating generics and specialty medicines into distinct business units, the company will integrate these businesses into a single commercial organization with a North American group, a European group, and a group for Growth Markets. Each of these groups will be responsible for a full end-to-end P&L. The R&D functions for generics and specialty medicines will also be combined in an effort to maximize ROI. Teva also named interim CFO Michael McClellan as its permanent CFO and Hafrun Fridriksdottir as EVP of Global R&D. Mr. Fridriksdottir previously served as president of Global Generics R&D

4 EARNINGS & GROWTH ANALYSIS Teva currently reports results for three segments: Generic Medicines (54% of 3Q sales), Specialty Medicines (36%), and Other (10%). Third-quarter results for these businesses are discussed below. Generics revenue fell 8.4% to $3.01 billion, driven mainly by price erosion in the U.S. and increased competition. On a currency-neutral basis, sales fell 2%, driven by a 9% decline in the U.S. In Europe, sales increased slightly on a local-currency basis and 6% on a reported basis. In other markets, sales increased 5% in local currency, but fell 18% on a reported basis. The gross margin fell to 38.5% from 48.8% in 3Q16. The segment profit margin, which excludes G&A expenses, fell to 20.6% from 30.1% a year earlier. Despite the weakness in 3Q, Teva has a strong generics pipeline, with over 300 ANDAs filed as of November 2, It also has approximately 300 additional products under development that have not yet been filed. According to Teva s internal estimates, the branded versions of these drugs, excluding overlaps, represent more than $200 billion in annual sales. Specialty revenue declined 70 basis points on a reported basis and 200 basis points in constant currency, to $2.03 billion. The gross margin contracted by 70 basis points to 86.4% while the segment profit margin expanded by 300 basis points to 56.6%. The segment includes Copaxone, which accounted for about 48.5% of segment revenue and 17.6% of total company revenue in 3Q. Copaxone revenues fell 7.5% to $987 million due to lower sales of the 20mg/mL version and increased competition. Glatopa, a generic version of Copaxone from Momenta and Sandoz, and Glatiramer Acetate, a generic from Mylan, pose significant threats to future growth. The Specialty drug pipeline includes products for asthma, MS and migraines. Third-quarter earnings in the Specialty segment rose 5% to $1.15 billion, reflecting lower marketing, sales, and R&D expenses. The Other segment, in which Teva acts as a distributor and provides contract manufacturing services, posted a 122% increase in revenue, to $569 million. The increase reflects Teva s acquisition of distribution company Anda in 4Q16. Companywide R&D expenses fell 18% from the prior year to $545 million, or 9.7% of total revenue. Management has noted headwinds from lower pricing and reduced volume, as well as from increased competition and the consolidation of purchasing by customers. Prices fell 10% during the third quarter, compared to a 6% decline in 2Q17. Management expects pricing pressures to continue to weigh on revenue and earnings. The company is divesting certain noncore assets in an effort to pay down its $34.7 billion debt balance. On November 1, it completed the sale of its ParaGard contraceptive for $1.1 billion. In early November, it sold Plan B One-Step for $675 million. It plans to sell its remaining women s health business for $703 million. In all, it expects to generate at least $2.3 billion from asset sales by the end of Management has revised its 2017 guidance. It now expects revenue of $22.2-$22.3 billion, down from a prior estimate of $22.8-$23.2 billion; cash flow from operations of $3.15-$3.30 billion, down from $4.4-$4.6 billion; and non-gaap EPS of $3.77-$3.87, down from $4.30-$4.50. The reduced EPS guidance reflects the earlier-than-expected at-risk launch of Mylan s generic 40mg Copaxone; increased competition for generic Concerta, the company s largest product; a lower-than-expected contribution from new generic launches in the U.S.; increased price erosion and volume declines; and lower cash flow from operations. Teva has also lowered its 2017 forecast for revenue from product launches to $400 million from $500 million. It expects to achieve cumulative net synergies and cost reductions from the Actavis Generics acquisition of about $1.6 billion by the end of We expect the operating margin to contract in 2017 as the company continues to integrate Actavis and Anda. We also expect margin pressure from price erosion and the currency devaluation in Venezuela. We are lowering our 2017 EPS estimate to $3.85 from $4.39, reflecting the company s third-quarter earnings miss and reduced guidance, the approval of Mylan s Copaxone generic, the loss of sales from the newly divested business units, and our expectations for continued generic price erosion. On the positive side, earnings should benefit from new product launches and Actavis acquisition synergies. We are also lowering our 2018 EPS estimate to $3.15 from $4.20 based on our expectations for diminished earnings from Copaxone and the impact of asset sales on earnings. FINANCIAL STRENGTH & DIVIDEND Our financial strength rating for Teva is Medium-Low. The company achieves mixed scores on our three main measures of financial strength: leverage based on debt/cap, profitability and interest coverage. Teva had cash of $680 million at the end of 3Q17, up from $599 million at the end of 2Q17, but down from $2.7 billion at the end of 3Q16. The debt/total capitalization ratio was 49.2%, up from 44.9% at the end of 3Q16. The company posted an adjusted gross margin of 47.1%, down from 51.2% in 3Q16; an adjusted operating margin of 26.2%, down from 32.3%; and an adjusted profit margin of 18.0%, down from 24.5%. The decrease in the gross margin reflected the acquisition of the lower-margin Anda distribution business, as well as lower margins - 4 -

5 in the generics segment. Adjusted financing expense rose to $229 million from $151 million a year earlier, reflecting higher expenses related to net foreign exchange losses, as well as debt raised for the Actavis acquisition. Operating cash flow fell to $1.12 billion from $1.46 billion a year earlier and covered finance expense by a factor of 4.9. Free cash flow fell to $0.9 billion from $1.2 billion. Teva pays a quarterly dividend. However, on the 2Q earnings call, management announced a 75% decrease in the quarterly payout to $ The reduction will save the company approximately $260 million per quarter and provide resources to pay down debt. The new annualized rate is $0.34, for a yield of about 2.2%. Our dividend estimates are $0.34 for both 2017 and The company holds about $34.7 billion of debt, of which roughly 8% is classified as current. Management says that the company is on track to pay down $3.5-$4.0 billion of debt by the end of 2017, down from an earlier estimate of $5.0 billion; it also has $5.3 billion of debt coming due in The company s debt is rated Baa3/negative by Moody s, lowered from Baa2 in early August, and BBB-/negative by Standard and Poor s, lowered from BBB in mid-september. RISKS Risks for Teva include competition for Copaxone, which accounts for a substantial share of the company s total profit. Management has called Copaxone durable, noting that patients and doctors trust the product more than competing drugs. However, we are concerned about the impact of generic competition, particularly following the launch of Mylan s 40mg generic. The company also faces risks related to the integration of Actavis as well as the shift to its new organizational structure. Teva also faces legal and regulatory risks. In November 2016, Teva, along with other generic pharmaceutical companies, received subpoenas from the DOJ related to its marketing and pricing practices for multiple products. Specifically, the DOJ is looking into whether pharma companies colluded to raise prices on generic drugs. On December 15, 2016, 20 states filed a civil antitrust lawsuit against Teva and other generic drug companies. The states allege that Teva and other companies fixed prices for the drug Glyburide. A spokeswoman for Teva said that the company has not found evidence that would give rise to any civil or criminal liability. The federal criminal investigation, led by Connecticut attorney general George Jepsen, is ongoing. Separately, in February 2016, the company became the target of a police investigation in Israel for alleged bribery in Mexico, Russia, and Ukraine. The company is accused of having paid hundreds of millions of dollars in bribes to government officials, and of falsifying documents to hide evidence of these bribes. In December 2016, Teva paid $519 million in the U.S. to settle alleged violations of the Foreign Corrupt Practices Act related to its conduct in the same three countries. Israeli bribery investigations are ongoing. COMPANY DESCRIPTION Teva Pharmaceutical Industries Ltd. is the world s largest generic pharmaceutical manufacturer, with more than 120 billion tablets and capsules produced each year, more than 57,000 employees, and a presence in 80 countries. Its leading branded product, Copaxone, is the top prescribed treatment for multiple sclerosis. INDUSTRY Our recommended weighting on the Healthcare sector is Over-Weight. The sector accounts for 14.4% of the S&P 500, and includes companies in the pharmaceuticals, medical devices, healthcare services, and insurance industries. After underperforming in , the sector has bounced back in 2017 and has outperformed the S&P 500. While pharma stocks have attracted attention due to the high prices of certain specialty and oncology drugs, stocks of medical device and insurance companies as a group have outperformed pharma stocks over the past year. VALUATION TEVA shares appear fairly valued at current prices near $15, near the low end of their 52-week range of $11-$39, and close to levels seen in 2001 and From a technical perspective, the shares are in a bearish trend of lower highs and lower lows that dates to July On the fundamentals, the shares trade at 3.8-times our 2017 EPS estimate, below the average of 11.2 for a group that includes AGN, MYL, and PRGO. They are also trading below the peer average for price/sales and price/book. However, we believe that these discounts are warranted given the company s significant challenges. Our rating is HOLD. On December 1, HOLD-rated TEVA closed at $15.26, up $0.44. (Jasper Hellweg, 12/1/17) - 5 -

6 Argus Research Co. (ARC) is an independent investment research provider whose parent company, Argus Investors Counsel, Inc. (AIC), is registered with the U.S. Securities and Exchange Commission. Argus Investors Counsel is a subsidiary of The Argus Research Group, Inc. Neither The Argus Research Group nor any affiliate is a member of the FINRA or the SIPC. Argus Research is not a registered broker dealer and does not have investment banking operations. The Argus trademark, service mark and logo are the intellectual property of The Argus Research Group, Inc. The information contained in this research report is produced and copyrighted by Argus Research Co., and any unauthorized use, duplication, redistribution or disclosure is prohibited by law and can result in prosecution. The content of this report may be derived from Argus research reports, notes, or analyses. The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but Argus makes no representation as to their timeliness, accuracy or completeness or for their fitness for any particular purpose. This report is not an offer to sell or a solicitation of an offer to buy any security. The information and material presented in this report are for general information only and do not specifically address individual investment objectives, financial situations or the particular needs of any specific person who may receive this report. Investing in any security or investment strategies discussed may not be suitable for you and it is recommended that you consult an independent investment advisor. Nothing in this report constitutes individual investment, legal or tax advice. Argus may issue or may have issued other reports that are inconsistent with or may reach different conclusions than those represented in this report, and all opinions are reflective of judgments made on the original date of publication. Argus is under no obligation to ensure that other reports are brought to the attention of any recipient of this report. Argus shall accept no liability for any loss arising from the use of this report, nor shall Argus treat all recipients of this report as customers simply by virtue of their receipt of this material. Investments involve risk and an investor may incur either profits or losses. Past performance should not be taken as an indication or guarantee of future performance. Argus has provided independent research since Argus officers, employees, agents and/or affiliates may have positions in stocks discussed in this report. No Argus officers, employees, agents and/or affiliates may serve as officers or directors of covered companies, or may own more than one percent of a covered company s stock. Argus Investors Counsel (AIC), a portfolio management business based in Stamford, Connecticut, is a customer of Argus Research Co. (ARC), based in New York. Argus Investors Counsel pays Argus Research Co. for research used in the management of the AIC core equity strategy and model portfolio and UIT products, and has the same access to Argus Research Co. reports as other customers. However, clients and prospective clients should note that Argus Investors Counsel and Argus Research Co., as units of The Argus Research Group, have certain employees in common, including those with both research and portfolio management responsibilities, and that Argus Research Co. employees participate in the management and marketing of the AIC core equity strategy and UIT and model portfolio products