On November 1, 2012 TEVA Pharmaceuticals (TEVA) reported their third quarter results. They stated growth of net revenues from $4.3 Billion in Q3 of 2011 to $5 Billion, a 117% increase in cash flow, in addition to other metrics. They reported a loss in their GAAP net income due to an "on-going review of our R&D portfolio, and mostly related to in-process R&D." More saliently, their revenues by product line revealed an 11% decline in their generics in contrast to a 34% increase in their branded drug section. During the conference call, Jeremy Levin, CEO of Teva, commented on this shift from generics to branded drugs:
"We believe a focused pipeline is essential to our company's future success and are committed to investing our resources in the right programs, in the right markets and at the right time."
"The acquisition of Huntexil is one of -- examples of our strategy to build a robust pipeline through combining a vigorous approach to managing internal programs with a targeted selection and acquisition of external opportunities."
This prompted Timothy Chiang of CRT Capital Group to ask if the company would further consolidate and engage in R&D. Levin replied:
"I think from my perspective, yes, we will certainly look at small assets. I'm not anticipating any major -- we're not anticipating leveraging up to secure large acquisitions at all."
The comment suggests that Teva will go after smaller companies with robust branded product offerings. This points towards a refinement of their usual M&A fueled growth. Teva is the world's largest producer of generic drugs, marked and grown by their acquisition of companies such as Barr Pharma and their subsidiary Pliva in 2008 for $7.5 Billion, IVAX Corp in 2006 for $7.4 Billion, Sicor in 2004 for $3.4 Billion, all companies that served to bolster their global generic drug presence.
If new growth is to be fueled by smaller acquisitions, Prolor Biotech (PBTH) stands out as an attractive opportunity. Prolor is a development-stage pharmaceutical company currently focusing on creating an analog of hGH (Human Growth Hormone) for long-term treatment of growth hormone deficiency due to inadequate natural production.
Growth hormone deficiency (GHD) leads to a series of symptoms: to name the obvious-it leads to growth failure and short height, reducing quality of life in conjunction by resulting in reduced strength, impaired concentration, and cardiac dysfunction. In addition to preventing and treating the mentioned symptoms, the FDA approved Growth hormone in 2004 to also be used for cachexia caused by AIDS, Turner syndrome, Prader-Willi syndrome, etc.
Despite treating growth hormone deficiency, the average cost of treatment runs around $6,000 a year. At the same time, current versions of hGH require daily injection underneath the skin or into muscle. Prolor's compound, hGH-CTP, was designed in response to the current necessity for daily injections. Prolor's successfully completed phase II clinical study of hGH-CTP in adults with GHD demonstrated "that a single injection could potentially replace seven consecutive daily injections of commercially available hGH therapies."
As of September 30, 2012, Prolor has a healthy balance sheet with over $36 Million in working capital, which the company believes will be sufficient to execute four clinical studies that will be ongoing through to YE2013, including Phase III testing and phase II testing in adults and children, respectively, with GHD. Prolor's phase II testing compares its hGH-CTP to Pfizer's (PFE) compound genotropin, which brings in $800 Million a year for Pfizer. Provided positive top-line results on the phase III study by YE2013 and subsequent approval by the FDA, the potentially once-weekly product will pose a serious threat for other hGH formulations sold by Eli Lilly (LLY), Novartis (NVS), Pfizer, and Novo Nordisk (NOVO). hGH-deficiency is a rapidly growing market and was forecasted by Global Industry Analysts, Inc., to reach $4.7 Billion dollars by the year 2018.
With an enterprise value of ~$242 Million, Prolor likely falls into the category of what Teva's Levin would consider a 'small asset'. Teva currently has $1,432 Million in cash listed on their balance sheet, and therefore would not require any leveraging (in the slightest) to acquire Prolor. In addition to the reasons stated above, this deal seems plausible for multiple other reasons.
Teva's establishment as a global producer and distributor of generic and branded drugs establishes the strong distribution channels necessary for rapid production and deployment internationally. In addition, the potential acquisition of Prolor would fall in line with Jeremy Levin's track record in creating value by acquiring multiple key companies (and their compounds)- a strategy he implemented during his time served as SVP of Strategy, Alliances and Transactions at Bristol Myers Squibb (BMY). Interestingly, Levin was brought on as the President & CEO of Teva by Phillip Frost, who happens to be Chairman of the Board of Directors for both Prolor and Teva. It can be said that Frost believes in the potential of Prolor from his participation for 1 million shares of Prolor at $5 back in May and duly suggests Prolor is being undervalued at these prices.
Teva will be hosting their Analyst day on December 11, which is when they will give guidance for 2013, and, perhaps more importantly, accompanying "plans" for the upcoming fiscal year. This could include further detail on the strategic acquisitions hinted during the conference call. On the basis of Prolor's compound in conjunction with possible signs from Teva, shares of PBTH have room for growth, in addition to the potential of a buy-out opportunity.