Needham partly attributes the optimism that Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) offers in its reiteration of its 2011 guidance, despite tepid financial reports in the first half of the year, to its price hikes for generic drugs. Needham reiterates its "Buy" recommendation with a $58 market cap for the share, 50% above Friday's close.
Needham analysts Elliot Wilbur and Serge Belanger say that while Teva's current share price reflects a lack of investor confidence, the company is the "top dog in generics pricing". They say, "Teva has taken a massive round of increases, the largest we can recall, on a basket of mainly old line generics, over 60 in total - Adderall, Pulmicort, amoxicillin, clarithromycin - with sales totaling nearly $1 billion. In total, the increases amount to at least $250 million in incremental gross profit after adjusting for overstated IMS sales numbers and royalty to AstraZeneca on Pulmicort."
Wilbur and Belanger add, "The impact isn’t small by any means, boosting US generic segment sales by nearly 10% based on first half annualized numbers and potentially adding $0.20-$0.25 to annualized earnings per share." This amounts to $179-224 million non-GAAP net profit. Needham predicts that Teva will report non-GAAP earnings per share of $4.90-5.20 for 2011, amounting to $4.39-4.66 billion.
Wilbur and Belanger state that although there are signs that generic drug companies' ability to raise prices is becoming limited, "Teva remains uniquely positioned to maximally exploit its market share clout." They add, "One of what seems to be a never ending series of 'concerns' on the name remains how the company will bridge the gap in terms of second half EPS guidance which calls for a 35% jump over first half of 2011 levels. This recent round of pricing increases could account for as much as 15% of this required bridge."
They conclude, "While not a sentiment changer by itself, Teva is still top dog when it comes to the generic pricing game and this latest round of increases should at a minimum give a solid boost to the second half of 2011 numbers confidence."
Teva's share price fell 0.2% on Nasdaq on Friday to $38.73, giving a market cap of $34.5 billion, and fell a further 1.6% in after-hours trading. The share price fell 1.7% by midday on the TASE to NIS 137.
Published by Globes [online], Israel business news - www.globes-online.com - on August 21, 2011
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