Teva Pharmaceutical: Predictable Growth, Good Value

History

Conventional wisdom would indicate that finding a sure thing in the stock market is an impractical dream. However, Teva Pharmaceutical Industries, Ltd. (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 2 – TEVA 15 Year Earnings Growth History and Forecast (see short video)

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

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)

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 6 – WPI 15 Year Earnings Growth History and Forecast, Price Performance (see short video)

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

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

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

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.

Comments

[nibor:]

Chuck,
Very thorough analysis! I own WPI and found your 15 Year Earnings Growth History and Forecast, Price Performance chart to be in line with my research. I also own ONXX and was very displeased when they decided to dillute their stock price by offering 4.6m shares of stock without any indication on how they would spend the extra cash. Based on your analysis of TEVA, I intend to evaluate selling ONXX and purchasing TEVA. If you have any thoughts on ONXX I would certainly apprecate any feedback. Thanks again for the analysis on TEVA.

Aug 20 09:22 AM

[Chuck Carne...:]

Unfortunately,I don't follow ONXX,so a truly learned opinion cannot be offered. However,I can offer a cursory comment based on our Fundamentals at a Glance tool. Onxx has yet to generate much in the way of earnings as of yet,but are forecast to earn$.81 in '09 vs $.08 in '08,and FirstCall forecasts 30% 5yr growth going forward.

There is no debt on the balance sheet which is good. Valuation,though,appears high at 55 times blended EPS,however forward PE is more reasonable at just under 25. These are really not comparable companies though,as ONXX is still unproven and TEVA is well established. Once again these are cursory comments,not thorough analysis on ONXX.

Hope this is helpful,and thanks for your kind words.

Chuck

Aug 20 10:23 AM

[busy:]

Hi, Churk. Thanks for sharing your thoughts with we, the readers here.

TEVA is HQ in Israel, if I remember correctly. That part of the world is unlikely to see real peace for many years to come.

Q: TEVA has manuf sites all over the world, rather than just in the Middle East, Correct?

Jay


On Aug 20 10:23 AM Chuck Carnevale wrote:

> Unfortunately,I don't follow ONXX,so a truly learned opinion cannot
> be offered. However,I can offer a cursory comment based on our Fundamentals
> at a Glance tool. Onxx has yet to generate much in the way of earnings
> as of yet,but are forecast to earn$.81 in '09 vs $.08 in '08,and
> FirstCall forecasts 30% 5yr growth going forward.
>
> There is no debt on the balance sheet which is good. Valuation,though,appears
> high at 55 times blended EPS,however forward PE is more reasonable
> at just under 25. These are really not comparable companies though,as
> ONXX is still unproven and TEVA is well established. Once again these
> are cursory comments,not thorough analysis on ONXX.
>
> Hope this is helpful,and thanks for your kind words.
>
> Chuck

Aug 20 11:07 AM

[Chuck Carne...:]

Jay,
Thanks. Yes TEVA has production facilities and other offices and centers in Israel, North America, Europe, Asia, Africa and Latin America. Through acquisitions they are gaining additional facilities as well.
Chuck

Aug 20 11:30 AM

[tc1:]

Very informative and useful article on TEVA, Chuck.

I'd already decided last night to buy TEVA for the longterm and your article prompted me to make it my first "buy" of the day.

I was very impressed reading a recent interview (in BusinessWeek, i believe) with a top executive for TEVA who is lobbying the US govt (and she is extremely well-connected with several representatives in Congress), making the case that it is in the govt's and consumers'/patients' best interests to let TEVA "genericize" many brand drugs in a much shorter time-span. It's very likely this time frame will be shortened by political fiat, and then TEVA's market share and profitability will expand in a huge way, really popping that stock.

I'm willing to buy TEVA now for the long term and experience any dips with near-term market corrections to our 5-month rally. If TEVA goes down with any such major market dips, i'll buy even more.

Btw, seeing how many stock-splits TEVA has enjoyed makes it very promising that anyone buying TEVA now could be enjoying significantly higher dividends within a decade or two.

Aug 20 12:25 PM

[cab454:]

Chuck, I really enjoy your work. Thanks for the MHS call. I'll be watching TEVA on my trading screen.

Aug 21 07:20 PM

[Chuck Carne...:]

Chris,
Thanks,keep in mind my calls are for at least a business cycle(3-5yrs.).
Chuck

Aug 21 09:47 PM

[Owen:]

Any long-term price chart that uses linear, rather than logarithmic scale cannot be taken seriously.

Prices, inflation, and compound growth are all log-normal ("exponential") phenomena. Representing them on a linear scale gives a false overweight to recent years while artificially deemphasizing the past.

Aug 22 09:35 AM

[Chuck Carne...:]

Owen.
The tool I use does calculate both linear and logariithmic. The facts don't change.Also,these charts emphazize business results with price overlayed, they are not price focused.
The principle is that earnings determine long-term shareholder returns.These charts depict this perfectly.
Thanks for the comment,
Chuck

Aug 23 07:34 AM