I have recently finished a key figure analysis of eight listed companies within the pharmaceutical industry which involved the following companies:
- Teva Pharmaceutical Industries Ltd. (TEVA)
- Sanofi (SNY)
- Eli Lilly & Co. (LLY)
- AstraZeneca PLC (AZN)
- Pfizer Inc. (PFE)
- Merck & Co. Inc.(MRK)
- Novartis AG (NVS)
- Novo Nordisk (NVO)
I used financial results from 2008 to 2012. The main results are shown in this figure. Teva quickly caught my eye, and I will therefore focus this article on Teva as a long-term investment opportunity.
Teva Pharmaceutical Industries looks interesting
As you can see, one stock especially catches the eye: Teva Pharmaceutical Industries. The Israeli company was established in 1901 and is today listed on the NYSE representing a market capitalization of approximately $32,5 billion. With a total of 46.500 employees in 60 countries, Teva is among the ten biggest pharmaceutical companies worldwide and serves as the global leader within the area of generic pharmaceuticals. The product distributions spans over 120 markets contributing to one of the widest product portfolios in the industry, which is why the revenue sources are highly diversified. Even though Teva has one of the industry's largest product portfolios, their very successful drug, Copaxone, constitutes 20% of their total revenue. The patent on Copaxone expires in 2015.
Mr. Market is skeptical
The big question remains: How will the expiration of the Copaxone patent affect the revenue? Copaxone is an injection drug used for multiple sclerosis patients. As previously mentioned, the drug delivers approximately 20% of the total revenue, making it quite a blockbuster. Additionally, investors are skeptical about Copaxone's future revenue contributions following the expiration of the patent in 2015. However, numerous experts within the pharmaceutical industry strongly believe that Copaxone will keep a big part of the market share due to several facts which are listed below:
Copaxone has a very high level of effectiveness.
It is a highly advanced pharmaceutical product.
Due to its complexity, competitors will have difficulties in creating a proper product to compete with it. This may take several years, even if it is possible for them to develop such a product.
An unsuccessful attempt at switching medicine given to a multiple sclerosis patient can be fatal, so the reasoning behind replacing the already effective drug must be extremely convincing.
Due to these facts, Teva predicts the Copaxone sales to slightly decrease until it reaches around half of its current revenue, some years after the patent expires. Furthermore, Teva is currently working on a promising new and improved version of Copaxone, which can secure parts of the market share after the patent has expired. This could maybe even give Teva the possibility of extending the Copaxone patent. Another important thing to consider is that many of the competitor's branded drugs will lose patent in the coming years, creating an ideal opportunity for Teva to further diversify its revenue sources. Moreover, the global demographic trends indicate that the demand for Teva's products will increase substantially in the future partly due to the growing elderly population worldwide. Although I have a positive outlook for Teva, it is clear to me that the market expects an unsatisfactory performance for the years to come. With the current stock price taken in consideration, it seems that much of the downside risk is already integrated in the stock valuation.
It came as a surprise that Teva grows at such a consistent rate and continues to have a low valuation, even with an average annual EPS growth of approximately 40%. The company's profits have increased more than 30 times since 1997. Teva beats its peers in most of the key figures in my analysis, dating back to 2008. Only Novo Nordisk can compete with Teva's financial results, and as you can see in the figure, Novo Nordisk is a very expensive share with a P/E value of 21 and an astronomically high P/B value of 13. After all, it is quite rare to meet a market leader in the pharmaceutical industry with a P/E value of only 7.5 and a P/B value of 1.5 who delivers such results.
Still I notice in Teva's capital structure that the debt has more than doubled since 2010 while the equity has not grown substantially - resulting in a debt/equity-ratio going from 0.31 to 0.64. The rise in long-term debt seems to be mainly due to acquisitions, many of which are beginning to show strength and value. The short-term debt has almost been unchanged since 2008.
The following figure shows Teva's financial development since 2008:
Even though Teva's debt is growing, it still looks like a worthwhile long-term position. The company has a satisfying capital structure along with a sufficient, growing share of current assets to cover the short-term liabilities. The current dividend yield around 2.8% is not much, but keep in mind that the average yearly dividend growth is approximately 21%. Furthermore, the historical results which Teva has delivered are clearly remarkable. With a growing EPS and an acceptable payout-ratio there is no reason as to why Teva should not raise the dividend payments in the future. With the current P/E 2013 of only 7.5 and a P/B of 1.5, it looks like an undervalued stock in a distinctive defensive sector. This could very well be the time where Warren Buffett's quote fits: "Be fearful when others are greedy and be greedy when others are fearful". While the long-term investor waits for the market to appreciate the stock more, he or she can enjoy the consistent dividend growth, and hopefully the continuation of strong results. Teva can therefore be considered as a very interesting long-term position. I encourage readers to do their own due diligence on Teva Pharmaceutical Industries.