Teva Pharmaceutical: Predictable Growth, Good Value

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 |  Includes: AGN, FRX, MYL, TEVA
by: Chuck Carnevale

History

Conventional wisdom would indicate that finding a sure thing in the stock market is an impractical dream. However, Teva Pharmaceutical Industries, Ltd. (NYSE:TEVA) may be as close as you will ever get. As one of the top 20 pharmaceutical companies in the world this leader in generic and biogenerics is well positioned to prosper in today’s healthcare environment.

Teva, however, is much more than just the largest generic manufacturer and distributor; they also are one of the most innovative participants in the important fields of neurology for treatments of devastating diseases, other autoimmune diseases, and oncology.

Teva is highly regarded for their innovative and advanced pipeline for new treatments for multiple sclerosis as well as Parkinson’s disease, Alzheimer’s disease, Lupus, hematological cancers and other tumors. Their innovative R&D efforts have developed several branded and innovative product offerings in various phases of clinical development. Many of their most promising potential therapies are new formulations of their top selling branded drug Copaxone or in combination with it. In the second quarter 2009 alone, Copaxone sales increased over 21% to $682 million and are expected to top $2.5 billion dollars in 2009.

This blend of generic, branded and innovative product offerings differentiates Teva from its peers. With over 100 years experience in the pharmaceutical industry, this powerful franchise based in Israel is a global powerhouse with operations in over 60 countries worldwide and employs over 36,000 people.

Figures 1-3 show that Teva has produced exceptional earnings growth for the past 20 (18+), 15 (13+) and 10 (8+) year periods. Note that Figure 3 depicts that their earnings growth over the past 10 year (8+) period is higher than their 15 or 20 year results at 29.7% compounded annually (Red circle).

Fig 1 – TEVA 20 Year Earnings Growth History and Forecast (see short video)Fig 1 – TEVA 20 year Earnings Growth History and ForecastClick to enlarge

Fig 2 – TEVA 15 Year Earnings Growth History and Forecast (see short video)Fig 2 – TEVA 15 year Earnings Growth History and ForecastClick to enlarge

Fig 3 – TEVA 10 Year Earnings Growth History and Forecast (see short video)Fig 3 – TEVA 10 year Earnings Growth History and ForecastClick to enlarge

Teva is forecast to grow at a rate of 15 – 20% or better far into the foreseeable future. Figure 4 illustrates the consensus 5-year earnings growth forecast of 18.5% per annum as reporting to First Call by 20 leading analysts.

A PEG ratio valuation of 18.5 times earnings, which is below Teva’s historical 20-plus PE ratio, implies a 24.8% compounded annual return to year-end 2015, excluding dividends. Add in a 1.1% current dividend yield growing by 18% per year and an investment in Teva appears compelling fort the long-term patient investor.

Fig 4 – TEVA 5 Year Earnings Forecast (see short video)Fig 4 – TEVA 5 year Earnings ForecastClick to enlarge

Thesis for Growth Forecast

There are numerous and highly visible reasons to believe that Teva will grow at or above current forecasts.

The growth potential for generic drugs alone is hard to argue against. As of April 27, 2009, Teva had 198 Abbreviated New Drug Applications (ANDAs), 132 Paragraph IV Filings and 82 First-to-file applications representing over $54 billion in total branded sales.

According to IMS Health an additional 114 patent expirations are expected between 2010-2012 and 121 patent expirations between 2013-2015. This represents over $288 billion of total branded sales coming off patent.

Increasing generic penetration is also expected worldwide. For example, in Japan penetration is forecast to increase from 18% in 2007 to as high as 30%-50% by 2012. The Obama Administration Health Care Policy has stated that "increasing the use of generic drugs in public programs and taking on drug companies that block cheaper generic medicine from the market” is a priority. And according to The Harris Poll™ generic preference of adults has increased from 68% to 81% between October 2006 and December 2008 and is growing.

There is also a large opportunity for Teva in biogenerics with many barriers to entry facing competitors. Strategic alliances and accretive acquisitions such as the recent Barr Pharmaceuticals, Inc. deal are adding to what is already considered the strongest pipeline in the industry.

Currently Teva derives approximately 85% of their sales from North American and Europe. However, a growing and aging world population represents a high future opportunity. Their renowned Innovative Research and Development Program positions Teva to elegantly exploit the many opportunities in front of them. In Figures 5-9 we compare several competitors using our Fundamentals-at-a-Glance tool in order to showcase Teva’s fundamental superiority.

Fig 5 – IPXL 15 Year Earnings Growth History and Forecast, Price Performance (see short video)Fig 5 – IPXL 15 year Earnings Growth History and Forecast, Price PerformanceClick to enlarge

Fig 6 – WPI 15 Year Earnings Growth History and Forecast, Price Performance (see short video)Fig 6 – WPI 15 year Earnings Growth History and Forecast, Price PerformanceClick to enlarge

Fig 7 – MYL 15 Year Earnings Growth History and Forecast, Price Performance (see short video)Fig 7 – MYL 15 year Earnings Growth History and Forecast, Price PerformanceClick to enlarge

Fig 8 – FRX 15 Year Earnings Growth History and Forecast, Price Performance (see short video)Fig 8 – FRX 15 year Earnings Growth History and Forecast, Price PerformanceClick to enlarge

Fig 9 – TEVA 15 Year Earnings Growth History and Forecast, Price Performance (see short video)Fig 9 – TEVA 15 year Earnings Growth History and Forecast, Price PerformanceClick to enlarge

CONCLUSION

It would not be prudent to call Teva a sure thing. However, our confidence in the future of this well-run and dominant franchise is very high. We believe it represents a core holding for the prudent long-term investor seeking capital appreciation and a growing dividend.

Full Disclosure: Long Teva (TEVA) at the time of writing.