In my recent analysis of Teva Pharmaceutical Industries Limited (TEVA), I explained why I believed the company should be looking to increase its dividend yield and focus on returning wealth to shareholders. My target price of $49 assumed that TEVA would increase its dividend to match the industry average yield of 4%. Yesterday's conference call put all such hopes to rest, triggering a 3% decline in share price.
My Dividend Discount Model (DDM) gives a price target of $31 at current dividend levels. I believe that when the market is expecting growth of 2.9%, dividend discount models are the best way to asses TEVA's value. These valuations show that the company is currently trading at a 32% premium to the value of its DDM. The stock has lost approximately 8% of its value in the last five years and 21% in the last three years. As I do not see any capital appreciation in the near future and with a dividend yield 35% below the industry average of 4%, I am giving a Sell rating on TEVA.
Takeaways
According to CEO Jeremy Levin, the company is focusing primarily on diversifying its business. A primary investor concern is the 2015 expiry of Coxapane; the drug accounts for nearly 20% of TEVA's revenues. TEVA's primary business is generic drugs, and it's the largest manufacturer of generic drugs in the world. I have been expecting a shift in TEVA strategy and hoped the company would realize that it's now a mature company that should return more wealth to shareholders. The company has instead decided to renew its quest for growth. According to Levin, the company is looking to drive growth by focusing on branded segment, over-the-counter products, and making TEVA more diversified and integrated. The company is looking to expand its branded business by focusing on central nervous system disorders and respiratory diseases:
In addition to the CNS, we're going to be further developing and achieving a leading presence in respiratory. We're going to optimize our life cycle current products. We're going to develop existing molecules on the unique device that Teva has in-house, the Spiromax that we've developed.
In the OTC segment, TEVA is looking to focus on its partnership with P&G to drive revenues. As you can see in Figures 1 and 2 below, the company has increased its focus on OTC products. According to TEVA, it is betting on its P&G partnership to increase its OTC revenues. The companies are expecting $4 billion in sales from this joint venture, within the decade. The partnership will primarily focus on markets outside of North America, according to Dennis Chetverikov (TEVA Russia):
It's very important in the OTC business to have actually critical mass in buy and media, and we have seen all these access to P&G. We have brought us this critical mass. And we've got, I think, a significant boost in our share of voice in TV.
We see market development organization for PGT and we are leveraging all our resources we have in the pharmacy channel and in the physician channel, for instance, launching Vicks. And we see that our OTC business has accelerated its growth within the last few months.
The company is also going to focus on NTEs (new therapeutic entities). The NTEs could be new uses, delivery methods, combinations, or formulations of existing products. According to the company:
Such products are going to be the NTEs, these new therapeutic entities, that are known molecules that are formulated, delivered or used in a novel way to address specific patient needs.
These NTEs, according to TEVA, have a higher chance of bringing in more returns because they have already proven their success. The company aims to get approval of 10-15 NTEs by 2013 and plans to get them into the market by 2016.
Figure 1: Revenue Breakdown Table
(Millions) | 1Q11 | 2Q11 | 3Q11 | 4Q11 | 1Q12 | 2Q12 | 3Q12 |
Generic | $ 935 | $ 1,009 | $ 1,090 | $ 1,776 | $ 1,497 | $ 1,365 | $ 1,468 |
Branded | $ 944 | $ 908 | $ 863 | $ 1,242 | $ 1,219 | $ 1,054 | $ 1,074 |
OTC | $ 1 | $ 1 | $ 1 | $ 30 | $ 33 | $ 42 | $ 56 |
Others | $ 2 | $ - | $ 1 | $ 3 | $ 3 | $ 3 | $ 3 |
Total | $ 1,882 | $ 1,918 | $ 1,955 | $ 3,051 | $ 2,752 | $ 2,464 | $ 2,601 |
Figure 2: Revenue Breakdown
Click to enlarge image.
Conclusion
The company has laid out an exciting plan for the future, but investor concern right now are more short term. The company has failed to generate capital appreciation in its stock price and is paying a dividend way below the industry average of 4%. I believe TEVA investors are disappointed by the lack of a dividend increase, and that's bound to reflect in the stock price. I will recommend investors stay away from TEVA due to the very limited chance of capital appreciation and its low dividend yield.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
