US investment house Merrill Lynch has raised its estimates for Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) for 2006, but cut its estimates for 2007.
Yesterday, Teva shares fell 9.5%, weighed down by news of the rearguard action by Merck to protect the market share of its anti-cholesterol blockbuster drug Zocor. Merck announced it was negotiating a price reduction for Zocor with health insurer United Health Group Inc. Teva won a 180-day exclusivity period in which to market its generic version of the drug, simvastatin. Lower priced Zocor is liable to cut into Teva's potential market share.
Merrill Lynch estimates that Teva's earnings per share (excluding options expense) will rise by almost 10% to $2.01, but has cut its 2007 earnings per share estimate by nearly 6%, to $2.22.
Merrill Lynch's model assumes that Teva will market generic Zocor exclusively for six months, at a price 50% below that of the ethical drug. The investment bank sees a gross profit margin of 70% during the exclusivity period. Once the exclusivity period is over, Merrill Lynch sees a very competitive market developing, and says this will bring the price of the drug down by 95%.
Teva itself, Merrill Lynch notes, believes that its own forecast of a $0.20-0.25 addition to earnings per share from generic Zocor still holds, and that Merck's action harms competition. Senator Charles Schumer of New York has raised the issue.
Merrill Lynch says a further contribution to Teva's profit this year will come from its generic version of Pfizer's anxiety treatment Zoloft.
William Blair: Zocor becomes a three-horse race
Analysts at investment house William Blair & Company say the talks between UnitedHealth Group (NYSE: UNH), the second largest health insurer in the US and Merck, the ethical manufacturer of Zocor, is problematic news for Teva both from the aspect of pricing of Zocor (and its generic counterparts) and in terms of market share for Teva and the generic industry as a whole. This is set to continue if other ethical companies pursue similar strategies to that of Merck.
The analysts nevertheless believe that Merck’s strategy reflects a one-off attempt to maintain whatever market share it can for Zocor, its largest selling product (with 2005 US sales of $3.1 billion), rather than a wide ranging change in strategy. In any event, the agreement between Merck and UnitedHealth Group may well include other incentives aside from lower prices for Zocor.
William Blair concludes by rating Teva “Buy” in light of the stock’s current weakness.
Leader Capital Markets: Teva the most attractive stock in Israel
Analysts at Leader Capital Markets Ltd. (TASE:LDRC) have rated Teva “Buy”, and set a target price of $45, 40% higher than the current price on Wall Street after yesterday’s drop. They say that “Teva is the most attractive stock in the Israeli market.”
Leader analyst Uri Hershkovitz expects that Teva will post earnings per share of $1.90 in 2006, even if Merck sharply reduces the price of Zocor to the point that its contribution to profit is less than $0.10 per share.
Leader expects the synergy with Ivax Corp. (acquired by Teva), to contribute $0.10 earnings per share to Teva stock in 2007, giving it a multiple of 16, even if the growth in Europe in sales of Azilect and Copaxone (Teva’s ethical drugs) is offset by harm to revenue from exclusivity (Teva will launch Zoloft, Pravachol, and Proscar under exclusivity).
IBI: Zocor is an unique case; drug sales are likely to rise once the patent expires
Analysts at IBI Investment House Ltd. (TASE:IBI) have reiterated their “Buy” rating for Teva (target price update pending), and expect that given the lack of a substantive price differential between the original drug and its generic counterpart, Teva’s market share is likely to be substantially lower than that of the branded product.
IBI says, however, that Merck’s negotiation’s with medical insurer UnitedHealth Group were limited to a single product and may harm competition, thereby triggering intervention by the regulatory authorities.
IBI believes that Zocor is a unique situation where sales are likely to grow once the patent expires. This led Merck to conclude that it would be better to reduce the price of the branded product and increase sales, rather than maintain a high price and a reduced market share.
Citigroup: Little impact
" We believe this contract alone will have little or no impact on Teva's revenues and earnings from simvastatin (generic Zocor)," says Citigroup of Merck's deal.
"In general, drug pricing contracts between manufacturers and retailers or benefit managers are a battleground of discounts, rebates and other incentives - you win some, you lose some
"Merck has a strong franchise in managed care and may have similar contracts with other PBMs . As a result, the short-term implication of Merck's aggressive pricing on Zocor is that Teva may need to be more aggressive on pricing than previously expected
"We had modelled $311 million sales and $0.24 net EPS from simvastatin. Assuming lower pricing and volumes, we would project $231 million sales and $0.16 net EPS - a total loss of $75m sales and $0.08 EPS. We believe our forecasts are conservative
"Simvastatin is NOT YET IN OUR NUMBERS: we will add sales and EPS after market launch, due to remaining legal uncertainty
"Key medium-term question after Zocor: will branded companies be more aggressive on pricing ahead of future patent expirations? This could lower the value of generic pipelines and paragraph IV legal challenges
"Even so, we believe the 5% drop on today's news is overdone and more due to investor worries about the generic sector as a whole. We reiterate Buy/ High Risk (1H) rating and $51 share price target."
Published by Globes [online], Israel business news - www.globes.co.il - on June 22, 2006
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