Why Teva Is One Solid Stock To Buy

| About: Teva Pharmaceutical (TEVA)

Generic drug manufacturing companies are always looking for patent expirations of other companies' blockbuster drugs. This enables generic drug companies to develop a cheaper version of these highly marketable drugs and capture the enormous growth opportunities with competitive pricing. It also allows these companies to enter various markets, which were untapped previously.

Teva Pharmaceutical Industries (TEVA) is the largest generic drug manufacturing company in the world, and it is focusing on building a stronger generic drug portfolio. The company has received approvals from the FDA to develop generic drugs. In this article, we are analyzing the FDA approval for two drugs, which we expect will drive its future earnings. Let's find out how these drugs will positively impact Teva's growth prospects and drive investors' interest.

Building a stronger generic portfolio

In September 2013, Teva launched the generic version of AbbVie's (ABBV) "Niaspan," a cholesterol management drug, in the U.S. Teva received FDA approval to launch Niaspan in three different compositions, 500mg, 700mg, and 1000mg. This drug maintains the cholesterol level in patients with higher levels of lipids in their bloodstreams. It also helps build "good" cholesterol, or HDL, which is essential for normal body functioning. Teva is first to file a generic version for this medication, and it will enjoy the exclusive generic marketing rights for Niaspan for 180 days. During this period, no other company can market this drug.

According to IMS, Niaspan's annual U.S. sales were $1.12 billion as of June 2013. This launch is one of the most important achievements for Teva. In the second quarter of 2013, it reported year over year revenue decline of 1.4% to $4.92 billion, whereas its generic business in the U.S. decline by 8% year-over-year to $970 million.

We expect Niaspan will boost the company's generic business performance. To grow further, Teva has a pipeline of 20-25 generic drugs, which are scheduled to launch in the second half of 2013. This will enhance its generic business and nullify its first half declines.

On other hand, Niaspan is marketed by AbbVie, and this drug generated revenue of $911 million in 2012. In May 2013, the company raised Niaspan prices to offset the decline in sales, which supported Niaspan to post year-over-year sales growth of 10% to $232 million in the second quarter of 2013. However, the company faced generic competition for Niaspan, and the recent approval by the FDA for Teva's generic equivalent will impact AbbVie's growth prospects in the cholesterol drug market. To offset its revenue decline from this patent loss, AbbVie is focusing on developing its Hepatitis C Virus, or HCV, drug, which recently experienced success in its phase II trial. By the end of the second quarter of 2014, it is expected that the company will file the dossier for FDA approval, and if accepted, this drug will be commercially available in 2015.

Another opportunity in Cancer drug market

Recently, Teva became the first company to receive FDA approval for marketing and developing the generic version of Roche Holding's (OTCQX:RHHBY) cancer drug, "Xeloda". This drug helps treat colorectal cancer and breast cancer that can spread to other body parts. It is expected to boost Teva's generic portfolio and will launch the generic equivalent, "capecitabine," which will available in 150mg and 500mg doses. Generic drugs have to pass the same quality standards and strength as of the brand-name drug, and Teva's generic version met all the FDA guidelines. Being a generic drug, it possesses the same level of efficacy as of Xeloda in slowing down the growth of cancer cells and their distribution to other body parts.

According to The US National Cancer Institute, "142,820 people in the US will be diagnosed with and 50,830 will die of colorectal cancer in 2013, and 232,340 women in the US will be diagnosed with breast cancer, and 39,620 women will die of it."

Further, colorectal cancer is the fourth most common cancer found in both men and women, and this generic medication will help cancer patients have access to affordable treatment options.

On competitor ends

The FDA approved Xeloda in 1998, and it generated revenue of $1.65 billion last year, emerging as the fifth largest drug for Roche. This drug is approved in more than 90 countries globally, and Xeloda's year-over-year sales grew by 2% to $830 million in the first half of 2013. This growth was mainly due to its strong marketing and distribution effort in emerging countries. However, Xeloda's patent will expire by the end of this year, which is expected to hamper its future earnings. To overcome this, the company has built a strong drug pipeline and is focusing on developing its GA101 and RG7601 blood cancer drugs, which are now in trail phase. In May 2013, on the back of its positive phase III result of GA101 in treating chronic lymphocytic leukemia, or CLL, Roche received priority review status from the FDA. Additionally, in June 2013, RG7601 demonstrated strong phase I results; it achieved the overall efficacy level of 84% and is expected to show much better results in its later trial phases.

Chronic lymphocytic leukemia is the most common type of blood cancer, and it is estimated that in 2013 nearly 5,000 patients will die from CLL in the U.S. The efforts by Roche in developing these CLL drugs and their positive results in the trial phases, will allow the company to deepen its footprint in the CLL market. We expect these drugs will offset the revenue losses by Xeloda's patent expiration.

Conclusion

In its second quarter of 2013, Teva reported revenue of $4.9 billion with a year-over-year decline of 1%. The primary factors were exchange rate fluctuations and decline in revenue of generic drugs in the U.S. and Europe. In its earning guidance, the company expects to generate revenue of around $20.5 billion with the diluted EPS in range of $4.85 to $5.15 per share. Further, by analyzing the growth prospect of these two drugs, we expect these will definitely boost Teva's top-line, and Teva may post higher revenue than its expectations.

Additionally, the company is trailing at the price-to-sales ratio of 1.60 with the sales-per-share of $23.31. Currently, Teva has outstanding shares around 845 million, and based its revenue guidance, sales-per-share come to around $24.26, which is higher than its trailing sales-per-share. This indicates that Teva's stock is priced at a fair value, and the contribution by its new generic drugs will raise it revenue and contribute a meaningful price appreciation in its stock price too.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Satya Prakash, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.