The Value Line Investment Survey

Israel-based Teva Pharmaceutical Industries develops, manufactures and markets generic and proprietary-branded drugs, as well as active pharmaceutical ingredients. The company also offers humanbased pharmaceuticals (or biologics). It is one of the leading global pharmaceutical manufacturers, with North America representing more than 55% of sales. The flagship drug is Copaxone, a proprietarybranded medication used to treat multiple sclerosis. Teva stock is favorably ranked for year-ahead performance, and holds appealing 3- to 5-year price appreciation potential, based on our projections of strong sales and earnings growth.

A Growing Generic Market

No doubt, high healthcare costs have hurt consumers for years. Part of this problem is the dominance of expensive brand name drugs that enjoy patent protection, with no cheaper equivalent versions available on the market. But this situation is gradually changing. In fact, recent industry data suggest that roughly two-thirds of all prescriptions in the U.S. are for generics, and that figure is bound to rise, especially given the number of drugs with patent protections expiring over the next few years. Not surprising, generics are gaining considerable ground, as they are one way to combat rising healthcare costs. Teva appears to be well positioned to capitalize on the growing trend toward such low-cost alternatives that address a variety of unmet medical needs.

New Drug Offerings

Expanding and diversifying its portfolio of generics, within various therapeutic areas (e.g., neurology, oncology), remains a priority for Teva. Indeed, although record sales of Copaxone continue to drive the top line higher, the company is also notably benefiting from its line of generics, particularly those of multi-billion dollar blockbuster brand name drugs. These include cholesterol-reducing treatments, Zocor, acid reflux medication Protonix, and osteoporosis therapy Fosomax. The generic drug giant currently has about 150 product applications pending Food and Drug Administration (FDA) approval this year. The more FDA approvals, the better for operating results. Combined, the branded medications generate annual sales in excess of $90 billion. Some 50 of them may be eligible for six-month marketing exclusivity, which bars generic competition. Patent infringement lawsuits brought by rivals can present obstacles, however.

Geographic Expansion

Besides new product launches, Teva’s long-term growth strategy remains focused on expansion in key global markets. Acquisitions have played an essential role thus far, and chances are they will continue to do so going forward. Among the most notable purchases made not too long ago was that of IVAX (in 2006). Through IVAX, Teva has broadened its pipeline of generics and proprietary products, essentially in the respiratory area, and has strengthened its presence in such regions as Latin America and Central and Eastern Europe.

Likewise, we’re optimistic about the company’s most recent deal with Barr Pharmaceuticals, which should close in late 2008. The $7.5 billion buyout would make Teva the largest player in the generic drug industry. Barr’s product lineup would not only complement the company’s existing portfolio of drugs, but would help to further widen the footprint in emerging markets across Europe.

The combined company’s strong sales potential and the likelihood of sizable cost synergies, creating greater operating leverage, would yield a nice boost to bottomline momentum. By 2012, Teva expects sales to more than double, to over $20 billion, and produce net-profit margins of 20% or higher. Solid long-term returns on equity are likely, which should prove rewarding for buy-and-hold investors.

J. Susan Ferrara
Senior Analyst