There are stocks you can buy, and then there are stocks you just
admire. These "admirable" companies are strong operators,
generating consistent annual growth and always finding new paths to
growth. But since they perennially perform so well and are so
deeply admired by investors and analysts alike, you can rarely buy
them at a bargain price. Instead, you can only admire them. Lucky
for us, a bargain has just emerged.
I have been following
Teva Pharmaceutical Industries (Nasdaq:
for some time, first interviewing the company's then-Chief
Financial Officer, Dan Susskind, for an article back in 1998. Teva
was the third-largest maker of generic drugs at the time, and it is
now the world's leading player, with an 18% share in the United
States. To complement its generic drug business, Teva started to
develop its own branded drugs, with the most notable success coming
from Copaxone, a drug that treats the symptoms of Multiple
). Copaxone has gone on to become a blockbuster, nowaccounting for
roughly one-third of Teva's profits.
Yet Copaxone is also whyshares of Teva are in the doghouse
currently, having fallen from the $60 in late March to a recent
Biogen Idec (Nasdaq:
, a competitor in the biotech space, announced that a
newly-developed MS drug known as BG-12 has shown to be even more
effective in clinical studies than Copaxone. If all goes according
to plan, BG-12 will hit the market in late 2012 or the first half
of 2013. If that happens, then sales of Teva's Copaxone would lose
Yet investors are missing one important point. Losing market share
is inevitable: Copaxone loses its patent protection in 2014 anyway,
a fact the company had already been fully prepared for some time.
Analysts at UBS have long assumed Copaxone would generate roughly
earnings per share (
for Teva in 2013, dropping to $1.08 a share in 2016. After Biogen's
drug was announced, analysts have become locked in a debate over
whether Copaxone will still throw off such
in 2016 or if Biogen's drug will secure the whole market, pushing
Copaxone sales to zero.
Management has been well aware that Copaxone is approaching the end
of an era and has been pursuing several tracks to rebuild sales and
profits. One of those attempts involved Laquinimod, which could
have picked up a decent share of the MS market, which had proven to
be even more effective in clinical trials than Copaxone and had
many years left on its patent. Now, the betting is that Biogen
Idec's BG-12 will prove to be the biggest drug in the space. That
remains to be seen. It's just too soon to declare Laquinimod a
loser in this race.
Moving away from the MS opportunity completely, Teva is ready to
take aggressive moves to boost sales and profits. For starters, it
has signed a far-reaching deal with
Procter & Gamble (NYSE:
to join forces to make and sell all of P&G's over-the counter
drugs outside of North America.
Each company brings plenty to the table: Teva has strength in
global distribution, R&D, regulatory dealings and
manufacturing. From a regional market perspective, Teva is strong
in places like Russia, while P&G is strong in places like
India. At the retail level, Teva has deep ties to drugstore chains,
while P&G is strong in many other retail channels. The deal
won't bring an immediate boost to profits, but it could become
significant within a few years.
Teva is also beefing up spending to develop drugs in the area of
women's health and has an active slate of generic drugs it will
pursue once their branded counterparts lose patent protection
within the next 24 months. The loss of market share in the MS space
has perhaps caused investors to overlook an otherwise robust
franchise. (Teva's generic drug business accounted for roughly 70%
of the company's $16 billion in revenue last year.) As analysts at
Needham recently noted, "We continue to believe recent weakness
tied to annihilation of expectations for oral MS agent Laquinimod
present an excellent accumulation opportunity for investors with
12-month plus investment horizons." They seeshares rising from a
current $46 to $65.
Analysts at UBS concur: "Eventually, we think investors will look
at the underlying fundamentals and realize that the
free cash flow
) build up at this company is significant, that it's mergers and
acquisitions track record is pretty good and that Copaxone is
probably worth more than nothing." Free cash flow has indeed been
phenomenal, topping $4 billion in 2010 and its likely to be even
higher in 2011.
Of course, the eventual loss of Copaxone is bound to hit Teva's
free cash flow, perhaps by 25-30%. Analysts at Israel-based Meitav
think declining sales for Copaxone in coming years "is increasing
the pressure on management to make large acquisitions."
Action to Take -->
Teva is in transition. In the next few years the company will be
selling internally-developed or acquired drugs to help to make up
for the hole Copaxone will create in the business. With
at a 52-week low and not far from where they stood five years ago,
it's hard to ignore a glass half-full view.
Management is expected to broadly discuss all of these issues when
first-quarter results are discussed in early May. In light of the
recent share price slump, don't be surprised if Teva announces a
large stock buyback program. It may not immediately boost the
stock, but could help to sharply lower the share count ahead of
Teva's next growth phase.
The stock trades for just around nine times projected 2011
and just nine times projected 2012 profits. This is the lowest
forward multiple the stock has had in the past 10 years -- by a
. Perhaps this stock doesn't deserve to trade for 15 or 16 times
forward profits anymore, but a forward multiple in the very low
teens makes sense in light of management's stellar track record
that extends back to 1901. By my math, I see 25-35% upside from
-- David Sterman
P.S. -- I don't know if you're aware of this or not, but a
20-year energy agreement between the United States and Russia is
about to expire. The problem is, this deal supplies 10% of
America's electricity. When the Russians refuse to renew the
agreement, the U.S. will face an entirely new kind of energy
crisis. This disruption could send a handful of energy stocks
through the roof. Keep reading…
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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