Even after the publication of Teva Pharmaceutical Industries Ltd.'sa> (Nasdaq: TEVA; TASE: TEVA) negative results from the Liquinamod clinical trial, analysts still place generous recommendations on buying Teva's shares at $55 - $65, 30-50% higher than its current price. If this is correct, then why has Teva's share price lost more than 40% of its value over the past 18 months? And is the current price really a buy opportunity?
There are numerous reasons for the fall in Teva's share price and the concern for its future. For example, the rise in generic drug competition. Also, a large part of Teva's two-digit growth over the last few years has resulted from large strategic acquisitions that might not repeat themselves in the near future.
Despite this, the main concern is the fact that the Copaxone patent, Teva's only branded drug, will expire in three years. The significance is a loss of revenue that could reach $3 billion a year beginning in 2014. Moreover, the regular Copaxone treatment (given by injection) will be replaced by a pill version over the next few years. At this stage, especially following Teva's failure to develop its drug, it appears that there are more popular "favorites" that could become leaders in the field, for example Novartis' Gilenya.
Can Teva fill the hole in its revenue with the help of Cephalon, Teva's most recent acquisition from a few months ago? Maybe. The company was indeed bought at an excessive price, and the patent on Cephalon's flagship drug, Provigil, will expire in one year, however this acquisition will still add $1.5 billion a year to Teva's revenue.
Cephalon has thirty new drugs in various advanced stages of development, and requests for US Food and Drug Administration (FDA) approval have been filed for three of them. In my estimation, Teva's current platform, together with Cephalon's, will help the company become one of the leading players in the field.
The uncertainty about future events definitely make it difficult to assess Teva's value. However, in order justify the low point that Teva's share price has recently reached, we must assume that Teva will halt future acquisitions, growth will be measured in low single digits, and profitability will decline.
In my opinion, this is not what will actually occur. Over the next three years, we will witness a wave of patent expirations of numerous branded drugs, and Teva has hundreds of generic drugs in various stages of development to take their place.
Company management is talking about "significant improvement" in second half results this year. Does Teva know about a new generic drug to be launched that it hasn't told us about yet? Maybe.
There are additional reasons to be optimistic. One is Teva's attempt to penetrate the Japanese pharmaceutical market, which is about to undergo a substantial revolution as part of the Japanese government's strategic plan to lower the country's drug purchasing budget. Countries like Russia and Brazil, that have also been "closed" to generic drugs, are now moving in this direction, and Teva is striving to enter these markets.
I have seen more attractive investment opportunities than Teva in my life. However, although I'm giving the company a conservative valuation, all of the considerations that I have mentioned, together with Teva's well-oiled platform, lead me to conclude that at around $40+, the share looks attractive for investors who can withstand the short-term volatility.
The above should not be considered a recommendation for taking action in the securities mentioned or in any other securities. The writer does not own shares in any of the companies mentioned. His blog can be viewed at www.bursa4u.com.
Published by Globes [online], Israel business news - www.globes-online.com - on August 7, 2011
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