Inside Wall Street: Battered Teva is coiled to snap back

The pharmaceutical company's share price reflects the bad news but not the potential positives.

By Gene Marcial Nov 29, 2011 8:23AM

Photodisc/SuperStockOnce a highflying growth darling on Wall Street, TevaPharmaceuticalIndustries (TEVA)has fallen from favor. Many nervous shareholders bailed out of the stock because of a string of adverse events, including the pending loss of patent protection in 2014 for its blockbuster MS drug Copaxone. Shares of Teva have tumbled about 40% to $38 a share from a high of $64.54 in late March 2011.

 

But for opportunistic and not "of the herd" investors, the world’s largest generic-drug maker should be an enticingly attractive buy. And some of the smart-money crowd have been snapping up shares in anticipation of a sharp snap-back.

 

In spite of the many issues that now challenge Teva, "we believe the company will still grow at a rate of at least 7% to 8% based on its global leadership in the generics business," says Karl O. Mills, the president of the San Francisco investment firm Jurika, Mills & Keifer, which has accumulated shares. "All the bad news is out and already reflected in Teva's shares," Mills argues. Yet several potential positives have yet to catch up with the stock, he adds.

 

Mills is the first to concede that "there have been missteps in some of the company's manufacturing operations" that have undermined confidence in management. But he asserts that Teva's "deep pipeline of potential branded drugs, which include some novel biotech drugs," aren't yet reflected in the stock.

 

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With its strong and clean balance sheet enhanced by a low debt level, significant cash flow of $4 billion a year, and an impressive return on equity of 20%, Teva continues to be a strong performer, says Mills. Trading at just 7.4 times projected 2011 earnings and 6.7 times 2012 profit estimates, the stock is definitely undervalued, Mills says. He figures Teva will earn $5.00 a share in 2011 and $5.50 in 2012.

 

Teva’s outsized line of generics, which accounted for 67% of total sales in 2010,  consists of 400 products including antibiotics, cardiovascular, and anticancer and anti-inflammatory drugs. A big part of Teva’s rapid and robust growth over the years has been due to its aggressive acquisitions of companies that manufacture both generic and branded medicines.

 

Teva's latest acquisition, Cephalon, which became part of the company on Oct. 14, 2011, is a "new avenue of growth for Teva," Mills says. With its broad array of branded innovative treatments for central nervous system disorders, pain, and cancer, Cephalon is expected to offset some of the projected  losses from the expiration of patent rights for Copaxone. Another branded drug in  shelf is Agilect/Azilect for Parkinson’s disease. Teva's recent acquisitions of Barr Pharmaceuticals and Ratiopharm were all aimed at boosting its branded segment.

 

Teva is currently engaged in a major legal battle aimed at delaying the entry of Copaxone copycats, and so far it has had some success, notes J. Susan Ferrara, analyst at investment research firm Value Line. A court has recently determined that Teva's claim of patent infringement against two rivals is valid, which clears the way for the case to go to trial, says Ferrara. The company is taking steps to help offset slower sales of Copaxone, including plans to launch a slew of generics this year and next, she adds.

 

Based on her revised three-to-five-year earnings estimates and stock price projections, Ferrara says Teva shares "offer attractive capital appreciation potential" through the middle of the decade. And "despite the inevitable slowdown in the Copaxone franchise, Teva can still prosper in the years to come, assuming its growth strategy succeeds."

 

Indeed, Teva is no longer just about generics and branded drugs. Ultimately, it is about betting on fast growth in an industry that's considered mature. With Teva's the stock trading so cheaply, Ferrara says, investors "still have an opportunity to purchase shares in a premier global pharmaceutical play -- at a discount."

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