The problem with companies like Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) lies not just in the entry of large speculators that disrupt normal trading in the stock, but also the fact that the new generation of analysts tends to write for millions of day traders.
In the more distant past, the model used when assessing Teva was to look at it as a unit that included several profit centers. The analyst would look at each unit individually viz-a-viz its respective market and at the end of the process he would summarize the estimates and arrived at a conclusion. The analyst of today does the same, but the emphasis is placed on specific events in defined fields. For example, Teva's stock can suffer a substantial loss in value because the company fails in the development of a single popular generic drug. It can be severely harmed by a change of CEO, and it can also be severely harmed if another company develops alternative drug to Teva's, even if that alternative is not even on the market yet, or failed on the real market, as was the case with Tysabri. Ever since it first faced the challenge from Tysabri in 2004, the damage caused to Teva's stock has often been quite severe and when Tysabri was approved, the stock responded as if Copaxone had been completely neutralized completely in the real market.
Teva started 2006 at $44.50, while Elan Corp. plc (NYSE: ELN) (the company that developed Tysabri) started at $14.30. As the end of June approached Teva stood at $30.50, while Elan was almost at $17. Elan's gain of more than 30% stemmed in its entirety from the hopes that Tysabri had aroused in the stock. Conversely, Teva's 31.5% drop stemmed largely from a fear of Tysabri.
Let's take a closer look at that period. Tysabri sent Wall Street crazy and that it caused everyone to forget the fact that, with all due respect to this drug, it was still not on the market. Copaxone sales were continuing to climb steadily every month despite the fears that Tysabri could make it redundant, including during the six months in which Teva's stock fell while Elan rose. In addition, during those first six months of 2006, two truths became clear to analysts and investors; one was that even if Tysabri was a resounding success the chances that it would force Copaxone out were extremely low; the second and more important truth was that Copaxone, important as it might be, is not Teva's main product. Yet Teva still tumbled and Elan rose.
When it transpired that Tysabri for all its amazing qualities could still kill patients, Teva should have regained ground against Elan, and everyone agrees that this should have been the case. But what happened in practice was that in the month following the announcement about the risk of death from Tysabri, Elan fell 30% while Teva gained 18% only. This tells us that Tysabri had a tremendous affect on Teva's stock as long as it remained a dream. Once reality set in Elan certainly took a hammering, but Teva did not return to its old self. If you look at what happened to Teva during the first six or seven months of 2007, you'll notice that there were nothing but improvements. Even the fear of incompatibility in the Ivax acquisition faded completely.
Let's leave the stock aside for a moment and look at the analyses of Teva at that time. The overwhelming majority of analysts placed a lot more focus on the extent of the effect that Copaxone was having on Teva than on the company itself as a complete unit. I wrote at the time that the preoccupation with the strange relationship between Teva and Tysabri was misleading, and not just because Teva as a group was continuing to move forward as its management had promised. It was misleading because in their all enthusiasm over Tysabri, the analysts forgot to weigh the possibility of the entry of a new drug to the already saturated market.
If you go back 20 years to 1987, when Teva was first floated in the US, and compare the progress of its stock with that of leading drug companies you will discover something interesting. I have compared Teva's stock with that of the following companies: Pfizer Inc. (NYSE: PFE), Novartis AG (NYSE: NVS), Mylan Laboratories Inc. (NYSE: MYL), Eli Lilly & Co. (NYSE: LLY), Bristol-Myers Squibb Co. (NYSE: BMY), and Merck & Co. Inc. (NYSE: MRK). Until 1992, Teva was in the middle of this group in terms of stock gain, just above Bristol-Myers and below the others. Since 1992 onwards, save for a three-year interval from the summer of 1997 through the summer of 2000, when Pfizer was ahead of Teva, Teva found itself further and further ahead of the group, Pfizer included.
As most of the holders of Teva stock throughout these years were global entities, usually American, two questions must be asked. Firstly, why is Teva being increasingly preferred by healthcare investors? Second, why does Teva continued to be prone to periodic bouts of short-term volatility? Answering the second question is easy. This volatility is a function of the new IT world and the traders and hedge funds that inhabit it. It is an occurrence that is becoming increasingly commonplace as comprehension levels fall, and it is the same whether the company in question is Teva, Microsoft, or Click Software. There is no difference here between big and small companies.
The first question is more difficult to answer. I have firm views about this and I have reiterated them from time to time. Like other companies such as perhaps Given Imaging, or NDS, Click Software, M-Systems or even Saifun, Teva is what I describe as a leading company that has taken the lead in a new and rapidly developing field, thanks to its innovation, originality and the strict adherence to its strategic goals.
It took time for the world to realize that Teva is the leader in the generics industry, and a bit longer to realize that this industry just keeps growing. Teva's investors have nothing to fear from the likes of Tysabri, and not even the arrival of a new inexperienced CEO who, to judge by his past record, does not look like the right candidate for the job. Why? Because if the management team continues the tradition of innovation, originality and adherence to strategy laid down by Eli Hurvitz, there is no reason why what happened in the last 20 years should not repeat itself in the next 20. The normal investor (of which there are less and less), should stick to the facts and take the ephemeral histrionics in his stride.
As for the bidding for the generics division of German company Merck KGaA, Teva is currently believed to have a 50% chance of clinching the tender, with Mylan the only other contender left in the race. As for Copaxone, it appears that this drug is not likely to have a change in fortunes in the foreseeable future. Quite the contrary; it has now emerged from the ongoing testing and research that Copaxone is even better than they thought it was. So as I have said repeatedly for the last 20 years, it is possible and sometimes it is even worthwhile playing the markets, but only with a portfolio that is built for the long-term and which has stocks such as Teva, Elbit Systems, NDS and their ilk.
I'll end today with a true story about someone called Berkovitch who died and left an inheritance consisting of 200,000 Teva shares. He first bought 20,000 shares back in 1987 and "put them in the safe." Over the years I asked him from time to time why he didn't sell as he would have made a small fortune. "Why sell?" he would ask rhetorically, "Has anything gone wrong at Teva? Is the generics industry about to vanish?" This is the way to treat stocks and companies like Teva. As it happens, I noted that most analysts are pretty hot about Teva at the moment. What happened? Has anything changed since the end of last year? Has Israel Makov returned? Nothing has changed at all.
Published by Globes [online], Israel business news - www.globes.co.il - on May 9, 2007
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007