Teva Pharmaceutical Industries Ltd (TEVA)
Recommendation
Teva Pharmaceutical Industries is a strong buy because it has an upside of $45 that is mainly attributable to
impending favorable market conditions for generic drug makers, exciting drugs in the pipeline, and
significant growth projections in 2008.
Industry
The Biotechnology and Drug Industry had an extremely good year in 2006 as prescription drug sales rose
8.3 percent to $274.9 billion because of the Medicare drug benefit. Use of generic medicines increased, and
new treatments for diseases such as cancer and diabetes were developed. Particularly in regards to
generics, sales of unbranded generics increased by 22% to $27.4 billion. Sales growth is expected to slow in
2007 without projections of more major changes in legislation that contributed to its heady year in 2006.
However, this growth rate is projected to be at 14% - 17% over the next five years. This steady growth in
generic drug sales is attributable to the $78 billion of annual revenue currently generated by prescription
drugs that will be opened to generic competition by 2008.
Drugs will continue to remain a strong industry as the baby-boomer generation enters into retirement and
later years. Demand for drugs to meet their needs is projected to increase.
Overview
Company
Incorporated on February 13, 1944, Teva Pharmaceutical Industries produces and markets generic drugs for
a variety of diseases in North America, Europe, Latin America, Asia and Israel. Teva acquired in the past
fiscal year Ivax Corporation, a multinational generic pharmaceutical company, and also increased its
holdings in Tianjin Hualida Biotechnology Company Ltd., known for its Interferon Alpha 2B product, to 60%.
Teva’s operations are comprised primarily of:
1) Generic Division
2) Specialty Pharmaceutical Product Division
3) Biogenerics and Biopharmaceutical Operations
4) Active Pharmaceutical Ingredients Division
5) Animal Health Division
The Active Pharmaceutical Division allows for vertical integration and streamlining in the manufacturing of
the drugs. The Generic Division is the key driver of Teva revenue, and Teva has developed a reputation for
aggressively challenging patents in court. This aggressive stance makes it more likely for Teva to win
exclusivity, which is the optimal condition when marketing and selling generic drugs. Teva has a strong hold
on the generic market, particularly in the United States, Europe, and Canada. Holding over $5.3 billion in
sales, Teva is the market share leader in the generic pharmaceutical market and is expected to continue to
increase its market share.
Management
Position
Eli Hurvitz
Phillip
Frost
Shlomo
Yanai
Dan
Suesskind
Chairman of the
Board
Vice Chairman of
the Board
CEO
CFO
Time
with
Company
Experience
Exposure
Key Points
Since
1973
Former Teva President
and CEO (Over 25 Years),
Chairman of the Board of
the Israel Democracy
Institute, Chairman of
Israel Export Institute,
Chairman of the Board at
Bank Leumi Ltd
Pharmaceutical
Industry,
Politics, Finance
Exposure to Politics and
Finance
Jan-06
CEO, President, and
Chairman of the Board of
Ivax Corporation
(acquired by Teva in
January 2006), Director
of Continucare
Corporation (healthcare),
and Director of
Ladenburg Thalmann
Financial Services, Inc.
Pharmaceutical
Industry,
Healthcare,
Finance
Familiarity with Ivax
Corporation and
allegiance to Teva
should facilitate
transition very well.
Since
March 1,
2007
Former CEO of and
President of Makhteshim
Agan, Head of IDF's
Southern Command and
Head of Planning
Generic
companies,
Recognized by
Dun &
Bradstreet as
one of Israel's
Ten Best
Business Leaders
Fairly new to business
management, but
Makhteshim Agan was
the largest generic
company for crop
protection, and he
succeeded with them.
Since
1978
Former Consultant and
Securities Analyst with
International Consultants
Ltd. , Director of Teva,
Director of ESC Medical
Systems, Director of First
International Bank,
Member of Investment
Advisory Committee of
Jerusalem Foundation
Finance,
Pharmaceuticals,
and Medical
Industry
Significant Experience
in Finance
There is wide speculation on why Israel Makov (Yanai’s predecessor) would have left his prestigious
position as CEO of the world’s largest generic drugs company after a mere 4.5 years. Some believe his
resignation could have been prompted by the 30% loss in Teva share value over the last year preceding his
resignation, and the lack of the board’s faith in him to be able to increase share value. Others believe he
may have taken too much credit for Teva’s successes, like the acquisition of Ivax Corporation, without
taking responsibility for the failures. Though Yanai was brought in from an industry other than the generics
drug company, he is widely recognized as a strong manager and officer. Since Yanai’s instatement as CEO
on March 1, 2007, Teva share value has risen from $35 to its current price of $38.
Teva’s current officers possess a breadth of knowledge in the Pharmaceutical Industry, Politics, Health, and
Finances. This implies that they are competent of growing the company within the industry, while being
cognizant of politics and of the effects of their actions on stock price.
Competition
5-Year Sales Growth Rate
PE Ratio Comparison
NVO - Novo Nordisk AS
ZMH - Zimmer Holdings, Inc.
SGP - Schering Plough Co.
ESALY - Eisai Co., Ltd
PEG Ratio
Competitor Comparisons
Income Statement Margins and Profitability Metrics
TEVA
NVO
SGP
ESALY
ZMH
Net Profit Margin
20.05% 16.44% 10.58% 10.17% 26.22%
Operating Margin
16.50% 20.10%
9.05%
Return on Average Equity
16.99% 23.68% 16.67% 12.66% 20.19%
26,670
23,172
7.11%
15.65% 36.24%
Return on Average Assets
Employees
15.64%
14%
-
9.05%
9,081
16.53%
6,900
Technical Analysis
TEVA’s Performance
TEVA is a steadily growing stock and is projected to maintain its growth into the future due to the
aforementioned projected increases in earnings. Rallying of stock price prior to the releases of quarterly
earnings statements and the subsequent adjustment of price after the earnings reports, may explain, in
part, the minor fluctuations in Teva’s stock price.
TEVA’s Performance Relative to S&P 500
Teva has steadily outperformed the market over the past five years. Even if the economy were to weaken,
demand for Teva’s products – generic drugs – will hardly be affected; medication is absolutely necessary,
regardless of one’s economic status. Further, demand for generics may increase in times of economic
downturns, because more individuals will be unwilling to pay the premium for brand name drugs.
Financial Statement Analysis
(First Quarter 2007 Results to be released on Wednesday, May 2, 2007)
Income Statement
Quarterly
(Dec '06)
Annual
(2006)
Annual
(2005)
Total Revenue
2,277
8,408
5,250
Gross Profit
1,102
4,259
2,480
Operating Income
375
801
1,312
Net Income
459
546
1,072
7,640
7,640
5,505
20,471
20,471
10,387
Total Current Liabilities
4,071
4,071
2,260
Total Liabilities
9,329
9,329
4,345
Balance Sheet
Total Current Assets
Total Assets
Total Equity
11,142
11,142
6,042
1.88
-
-
9.05%
3.57%
3.57%
ROE
4.9%
-
-
Return on Assets
2.7%
-
-
.41
-
-
Current Ratio
Return on Average Assets
Debt/Common Equity Ratio
Cash Flow
Net Income/Starting Line
459
546
1,072
Cash from Operating
764
2,058
1,370
Cash from Investing
33
-4,058
-537
Cash from Financing
-325
2,024
-312
-2,148
-
-
Net Free Cash Flow
Key Stats & Ratios
Net Profit Margin
20.05%
6.55%
6.55%
Operating Margin
16.50%
9.53%
9.53%
Financials indicate significant growth in the company with an increasing operating cash flow. The
significant increase in net profit margin indicates high earnings per dollar of sales, and the higher operating
margin signals efficiency in the company. Free cash flow could have been negative in 2006 because of the
acquisition of IVAX Corporation.
Valuation
Company Industry Sector
P/E Ratio (TTM)
P/E High - Last 5 Yrs.
P/E Low - Last 5 Yrs.
Beta
Price to Sales (TTM)
Price to Book (MRQ)
Price to Cash Flow (TTM)
Price to Free Cash Flow
(TTM)
S&P
500
55.77
NM
NM
0.56
2.57
1.94
NM
30.8
48.49
17.5
0.95
8.45
6.4
2.92
25.82
47.36
17.18
0.73
5.23
5.26
19.23
19.9
36.37
14.48
1
2.77
3.88
13.97
15.03
40.96
34.46
32.57
Teva’s relatively high P/E ratio relative to the industry indicates that the company is priced higher than its
counterparts with the same earnings. However, this optimism is justified by the company’s strong pipeline
and projected performance in 2007 and 2008. Also, Teva sports a relatively low Price-to-Book ratio,
indicating that the company could actually be undervalued relative to its assets.
Using a fairly conservative PE multiple of 17x, and the earnings suggested in the 2007 Guidance Reports,
the price target is set at $45.
Investment Risks
Legislation
Pharmaceutical companies always stand to gain or lose significantly according to changes in legislation. The
political landscape is currently fairly unclear with the presidential race just beginning. Of particular note,
generic drug companies are currently attempting to have a law passed that would allow them to create and
market generic versions of biotech drugs, like those of Amgen and Genentech. It is facing considerable
resistance, particularly because it is unclear whether or not the companies can recreate the complex drugs
safely. If passed, this law can lead to significant gains in the generic drug sector. Teva’s strong research and
development puts it in an optimal position to gain from this opportunity, if made available.
Litigation Risks
There is always some significant risk of litigation associated with every pharmaceutical company. As case in
point, Teva is currently involved in a trial after ProNeuron accused it of executing clinical trials of a molecule
for neurodegenerative diseases that were not suitable according to scientific standards. The case has yet to
be developed. Despite the significant risk of litigation, if the company is managed correctly, it can remain
strong despite many allegations from competitors.
Investment Opportunities
Industry Conditions
Teva is expected to profit significantly when numerous major drugs lose their patents in the next two years.
Teva is particularly well-poised to take advantage of the opportunity because of its international presence,
aggressive tactics, and especially strong Research and Development division. Further, the industry is
expected to grow significantly because of the increasing medical needs of the baby-boomer generation.
Optimistic growth targets in 2008
Earnings per share targets for 2008 and 2009 are between $2.50 and $3.00. Considering the strength of the
company, and its aforementioned opportunities for growth, these targets are reasonable.
Comparison of Teva’s Estimated and Actual Quarterly Earnings.
Promising Pipeline
Product
Division
Indication
Status
Copaxone®(glatiramer
acetate for Injection)
Multiple Sclerosis
RelapsingRemitting MS
(R-R MS)
Approved world-wide. Phase
IIIb/IV studies on-going,
including a study in CIS patients ,
a study with a daily 40mg dose
and various
combination/induction protocols
Laquinimod
Multiple Sclerosis
Relapsing MS
Phase III
Azilect® (rasagiline
mesylate)
Neurological/
Neurodegenerative
Diseases
Parkinson's
disease
Approved world-wide as a
symptomatic treatment for both
early patients, as monotherapy,
and advanced patients, as
adjuncive treatment to
levodopa. A Phase IIIb to show
effect on disease progression is
on-going
Glatiramer acetate
Neurological/
Neurodegenerative
Diseases
ALS
Phase II
Rasagiline mesylate
Neurological/
Neurodegenerative
Diseases
Alzheimer's
disease
Phase II
Talampanel
Neurological/
Neurodegenerative
Diseases
ALS
Phase II
Edratide
Auto-Immune/
Inflammatory
Diseases
Lupus
Phase II in SLE
TV-3813
Auto-Immune/
Inflammatory
Psoriasis
Pre-clinical
Diseases
Stem Ex® (with GamidaCell)
Oncology
Talampanel
Oncology
Hematooncological
indications
Glioma
Phase III
Phase II
Further, the court decision regarding whether Teva will have exclusive, or co-exclusivity with Dr. Reddy's
laboratories, for a generic version of Aciphex (used in the treatment of upper gastrointestinal disorders) to
be launch in 2007, will be announced in mid-May. If successful, this brand sale is expected to total $1.3
billion.
Recommendation
Teva is a strong buy because of its increasing business mix, improving industry conditions, and optimistic
and practical growth targets in 2008. It is recommended that Smart Woman Securities acquire Teva at its
current price of $38 to sell at the target price of $45 for an 18.4% return.