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Can Teva Pharmaceutical Get Its Groove Back?
Established in 1901 and headquartered in Israel, Teva Phamaceutical (TEVA), whose ADRs began trading on the NASDAQ in October, 1987, is no novice in the drug space. The company develops, manufactures, and markets an extensive array of generic and branded pharmaceuticals, in addition to active pharmaceutical ingredients, targeted at various medical illnesses and conditions. In addition, through a smaller division, it focuses on developing biosimilars (or biogenerics). Teva boasts one of the largest generic drug portfolios in the industry, making it the top generic drug outfit in the world, and a leader in the U.S., with over 20% of the nation’s market share. Its branded products business is primarily focused on the central nervous system, respiratory, women’s health, and oncology areas. The company’s biggest proprietary brandname drugs are Copaxone, which is prescribed to treat relapsing-remitting multiple sclerosis (MS), followed by Azilect, for Parkinson’s disease. By geography, the U.S. currently represents about 54% of total sales, while Europe makes up 26%, and the rest of the world (including Israel, Canada, Eastern Europe, Latin America, and Asia) amounts to 20%.
Teva ADRs had a pretty good run in the most recent decade, when the company seemed to undergo fairly strong growth, driven by a combination of global market-share gains of its top-selling MS therapy Copaxone, new generic drug offerings, and strategic acquisitions. But after topping out in early 2010, the stock descended steadily, before recently settling in the low- to mid-$40 range, as concerns grew over the sustainability of the core Copaxone franchise as a primary growth driver, amid heightened competition. Initiatives to counter the eventual slowdown have done little so far to ease investors’ worries, though it’s a sure bet that Wall Street will be watching Teva closely for signs of renewed growth under its new President and CEO, Jeremy Levin, who is set to take the reins in May.
Indeed, for years, Copaxone has been Teva’s bread and butter, with the injectable MS drug generating a huge chunk of the top line (about 20% for 2011) and markedly benefiting earnings in the process. But the drug already faces fierce competition from a number of comparable brandname medications that have crawled onto the stage. A new MS treatment in pill form made by Novartis (NVS) called Gilenya, which became available not too long ago, might pose a greater threat to Copaxone sales, given its more convenient and less painful administration, though serious side effects and a short track record are drawbacks. Still, competition is likely to increase over time, as Copaxone’s patents expire in 2014 and rival generics try to enter the market sooner. While the company has sought for ways to stave off competition, including taking legal action to delay entry of Copaxone replicas and developing its own oral version of the MS therapy (laquinimod), recent setbacks have made things challenging. At this point, Copaxone sales are expected to peak in 2012, and recede thereafter.
Surprisingly, Teva’s generic side of the business hasn’t picked up much of the slack lately. Despite an ever-expanding portfolio of copycat medications, including those of such blockbuster branded products as depression treatment Effexor and cholesterol drug Lipitor, the generics heavyweight has had fewer significant nonbranded launches this past year.
That said, Teva’s top brass is counting on an expansion strategy that promises to revive profit growth. The plan largely involves shifting the focus from generics to branded drugs, where more lucrative opportunities may exist, as well as tapping emerging markets more heavily.
Expanding the business via strategic acquisitions has worked quite well for Teva in the past. In fact, taking this route has enabled it to not only broaden and diversify its generic and branded drug portfolios in various therapeutic areas, but also widen its geographic reach. Along with tuck-in acquisitions, major purchases have included the $8 billion buyout of IVAX, in 2006, which enhanced Teva’s generic offerings, added a respiratory category, and provided access to markets in Central/Eastern Europe and Latin America, followed by the Barr Pharmaceuticals purchase for $7.5 billion just two years later. The latter gave Teva a position in the women’s healthcare market, as well as increased exposure to Central/Eastern Europe.
And late last year, the drugmaker completed its $6.8 billion acquisition of Cephalon, which helped to primarily strengthen the company’s branded business and bolster its global presence, while adding a pipeline of more than 30 late-stage candidates with substantial growth opportunities. Additional acquisitions are likely, especially within emerging markets.
Meanwhile, joint ventures, including a partnership formed recently with Procter & Gamble (PG - Free Procter & Gamble Stock Report), ought to be a boon to the Israeli drugmaker, as well. Together with the consumer products giant, Teva will have access to the $200 billion over-the-counter drug market in fast-growing regions in Eastern Europe, Latin America, and Asia. Combined sales may reach $4 billion in a few years. We see potential here.
Likewise, we think the biosimilars/biogenerics area has much to offer, especially given the FDA’s long-awaited move to create guidelines for approving generic copies of biological (or biotech) drugs that never existed before. Unlike synthetic drugs, which are developed through a combination of chemicals, biological products are engineered using living cells, and thus more difficult to replicate by competitors. This finally opens the door for drugmakers to produce “biosimilars” (or generics) of biological drugs, and spells opportunity for Teva.
While the initiatives to offset the slowdown of the core Copaxone franchise are encouraging, there is still a degree of uncertainty as to whether Teva will make a successful comeback. We tend to believe the stock will revive in the coming years, making this a reasonably good selection for long-term portfolios, especially at the current price. At the very least, strong finances, supported by a healthy cash balance, a manageable level of debt, and solid cash flow, allow Teva to reward shareholders through both stock buybacks and dividends.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.