Teva Pharmaceutical is a leading pharmaceutical company, marketing myriad of drugs worldwide. As one of the largest producers of generic drugs, the company has shown high margins and stable revenue growth. However, in the last few years it has been hit by patent expires and the dwindling sale of its bestselling label drugs. To get out of this rut, TEVA has taken a unique approach. Instead of increasing dividends the company is focusing on finding innovative ways to fill the gap left by Copaxone. I had initially expected TEVA to increase its dividends in December last year but the increase came a little later in February and is one of the reasons the valuations have remained stable despite a lack luster pipeline.
Teva Pharmaceutical Industries Limited (TEVA) is an Israeli company engaged in developing, manufacturing, marketing, and distributing pharmaceuticals in the U.S. and Europe. It's a $34.4 billion market capitalization company, with a line of operation including generic drug lifecycle, innovative drug lifecycle, active pharmaceutical products (API), and new therapeutics entities. It has a global presence in 60 countries, with over 46,000 employees worldwide, a competent management, and boasting a position among the top 10 pharmaceutical companies of the world. Further, it distributes its products in over 120 markets, and has 54 pharmaceutical production plants and 21 API production facilities with over 300 products supplied TAPI (Teva API). Teva's plants in 2012 approximately manufactured 73 billion tablets & capsules, and more than 720 million sterile units. It has subsidiaries in Africa, Israel, Asia, North America, South America and Europe, and number of academic and corporate partners.
The company has a joint venture with Procter & Gamble Company, PGT Healthcare, to market a wide range of over the counter (OTC) medicines, which include medicines for analgesics, digestive wellness, minerals and supplements, vitamins, cough/cold and allergy, and skin medications. PGT Healthcare will partner with Australia's Swisse Wellness to expand the vitamins, minerals and supplements (VMS) globally.
Products and Candidates
The company has focused on three primary areas, including specialty, generic and OTC medicines. Additionally, the APIs are being used in drug development the world over under license from the company, and have more than 300 products. The specialty area is expanded in central nervous system (CNS), respiratory, oncology, women's health, and pain therapeutic areas.
The CNS therapeutic area includes Copaxone, a treatment for relapsing remitting multiple sclerosis (RRMS); Azilect, treating signs and symptoms of Parkinson's disease (PD); Provigil and Nuvigil to improve wakefulness; and Gabitirl adjunct treatment for partial seizures in epileptic patients. Among these products Copaxone is the star for Teva, since it has generated revenues in billions, with $20 billion last year, with $1.05 billion in the third quarter of 2013. However, the drug is faced with the threat of competition once the patents expire and generic products hit the market.
The respiratory therapeutic area includes Qvar for asthma; ProAir HFA to treat and prevent bronchospasm; and Qnasl a nasal aerosol for treating nasal symptoms related to allergic rhinitis.
The women's health products include Quartette and Zoely, a 91-day and 28-day respectively, oral contraceptive; Plan B One-Step, an emergency contraceptive; Enjuvia for menopause symptoms; Seasonique and Paragard for contraception.
The pain products include Fentora and Actiq for managing breakthrough cancer pain; and Amrix for muscle spasms associated with musculoskeletal conditions.
The oncology products include Myocet for metastatic breast cancer in women; Treanda for treating chronic lymphocytic leukemia (CLL) and non-Hodgkin's Lymphoma (NHL); Trisenox for acute promyelocytic leukemia (APL); Tevagrastim for neutropenia; Eporatio for treating symptomatic anemia related to chronic renal failure in adults and in adult cancer patients; and Synribo for adult patients with chronic myeloid leukemia (CML). Among these products, Treanda has earned an Orphan drug status for NHL and has a sixth month pediatric exclusivity. It generated sales of $531 million in the three months ended September 30, and $184 million in the third quarter of 2013. It was approved in the U.S. in March 2008 however Teva gained the rights to the drug following its purchase of Cephalon Inc. in 2011.
The company is focused on expanding its pipeline and product portfolio, and as illustrated above the proprietary pipeline has three candidates in phase I, five in phase II and III each, and two approved products.
The company was upgraded last month, from Neutral to Positive from Susquehanna with a price target of $50 from $43. However, JPMorgan downgraded to Underweight last month, with a price target of $38, a decrease from $43. Overall, the company has a consensus price target of $46.91, with a high of $65 by Standpoint Research and a low of $38 by JPMorgan. The overall rating is Neutral, with 10 analysts rating it a buy, 14 as neutral and 3 as sell.
The company has a dividend yield of 3.22%, above the industry average of 1.87% and 1.82% of the sector. It recently paid $0.32 dividend on the 2nd of December. The company is expected to review the dividends in February next year, and according to the company's interim CEO Eyal Deshah dividends are expected to rise in 2014.
The year to date performance of Teva has been a dismal 5.8%, with the share prices seeing a lower performance, owing mainly to lawsuits, patent expiration of Copaxone coming earlier then expected and uncertainty regarding management.
The company will be reporting the fourth quarter financial results of 2013 on the 6th of February, 2014. Financial results meeting or exceeding analyst estimates will positively impact the share prices.
The company is currently seeking a CEO to fill Dr. Levin's position, once a suitable candidate is hired, it would help boost share prices. The Annual Shareholder Meeting 2014 is expected to better highlight the management issues regarding both the CEO and the Vice Chairman of Board of Directors.
Throughout the year 2014, the company expects to launch six specialty medicines and also is expected to submit 10 more for regulatory approvals. The incidence of these events will cause the share prices to soar.
Fundamentals and Potential Risks
The company has strong revenue generation, and is profitable, with revenue of $5.1 billion in the third quarter. Out of these revenues, the U.S. accounted for the major chunk of sales. Generic medicines attributed $2.5 billion, specialty medicines $2.1 billion, and OTC medicines $286 million. The company has cash and equivalents of approximately $1.4 billion, as of September 30. However, the company had a negative free cash flow in the third quarter, attributed largely to the litigation settlement payments made. The company has also undertaken cost-cutting efforts, the effects of which are expected to show in 2015. This cost cutting is expected to cut $2 billion annually by the end of 2017, as compared to 2012 costs. Out of these cost reductions $1 billion is expected by the end of 2014.
The patent expiration for Copaxone in next year, May, exposes the company to increased competition in the form of generic products for Copaxone. This will adversely affect the sales of the drug, a major cash cow of the company, an approximate $500 million drop in revenues according to the company. Currently, two generic versions of Copaxone are expected to hit the market next year, thus the estimates, if there are more generic versions the sales will be affected accordingly. However, for every month of Copaxone's exclusivity the company expects to make an addition of $78 million in sales. In a recent presentation, Teva tried to reduce investor apprehensions about the expected decline in sales of Copaxone and the entire business. According to the company, revenues and EPS ranges with and without Generic is as follows:
· FY14 outlook with generic: EPS of $4.20-4.50 on sales of $19.3-20.3 billion. The decline comes at approximately $1.1 billion on Copaxone's sales from 2013's anticipated levels. These estimates are based on the speculation that two generic versions of Copaxone reach the market in 2014.
· FY14 outlook without generic: EPS of $4.80-5.10 on sales of $19.8-20.8 billion, assuming no generic competition during 2014.
The company also has a series of ongoing lawsuits concerning patent infringements, patent expirations, anti-trust law violations, marketing issues related to GlaxoSmithKline, government investigations and drug pricing. Teva in 2007 was sued for patent infringement by Wyeth Pharmaceuticals, and in June 2013 following the ruling against Teva, it agreed to pay $1.6 billion. The company has paid $800 million and is mandated to pay the remaining in 2014.
Another case worth mentioning is the patent expiration case involving Copaxone, which entails patent expiration to occur in 2014 instead of 2015. The court gave a ruling against Teva, and it is currently prepping for appeal while requesting a stay from the Supreme Court to halt the generic products of Copaxone to hit the market. The stay request hasn't yet been entertained by the high court. Teva also hopes to persuade the FDA into requiring additional clinical trials before the generic drugs are approved, this could help delay the drugs reaching the market and thus adding to the company's sales.
Teva and Pfizer were involved in a patent litigation case for the Pfizer's erectile dysfunction drug Viagra. Pfizer sued Teva in 2010, when the latter planned to launch a generic version of Viagra, owing to the patent expiration of the drug's key active ingredient sildenafil citrate. However, Pfizer has another patent for the use of Viagra for ED that extends into April 2020, thus saving it from the generic versions. As part of the settlement agreement for this case, Pfizer has granted Teva rights to develop a generic version of Viagra and launch it in December 2017, or sooner. The company will pay Pfizer royalty for the license to produce the generic version.
The company is currently going through management issues with the President and CEO, Dr. Jeremy Levin resigning from his position in October, after only 18 months with the company. This resignation has been attributed to a dispute between Dr. Jeremy and Chairman Phillip Frost, on structuring and direction of the company. This event has led to skepticism regarding the company and until a new CEO is hired the company is faced with risk.
Another management representative leaving his post is Professor Moshe Many, the Vice Chairman of Board of Directors. He will be leaving on January 1, 2014, but will remain a member of Teva's Board. The reason for his departure has been labeled as personal, but a second resignation within three months leaves us indeed slightly skeptical.
The company's dividend on the American Depository Receipts (ADRs) is subject to foreign currency risk, since Teva is an Israeli company. Also to note here is that the dividends will be subject to 15% withholding tax which decreases the cash actually received by the American investors.
Teva Pharmaceuticals has an extended history of operations, and successful ones as well. It's among the top 10 pharmaceuticals company in the world, which it has achieved through quality operations, and building multiple competitive advantages. It is currently going through a rough patch, with little growth occurring year-over-year, the patents' expiration on the horizon, management inconsistencies, negative analyst and investor sentiment and the speculations of a merger or acquisition. The interim CEO did however state that the company wasn't for sale, which does put these speculations to rest, but he also hinted that a deal opportunity wouldn't be ignored.
The company's sales of Copaxone are expected to fall once the generic products reach the market upon patent expiration. These products are expected to enter the market in mid-2014, which will upset the major chunk of market share owned by Copaxone in multiple sclerosis. The analysts expect the revenue of the company to fall this year, which hasn't happened in almost two decades.
Teva's utterly dismal performance this year, with a year to date performance of 5.8%, suggested that the company attained little growth. The company's problems are negatively affecting the value of the company and the plausible route for it is a merger, as suggested and rumored. Due to these problems it may become the target of an activist investor, which might help save the mega company from failing, but may also include availing the opportunity. The suggested merger companies include Mylan Inc. (MYL), Valeant Pharmaceuticals International Inc. (VRX), Actavis Plc and Pfizer Inc. Teva currently has an enterprise value of $45.78 billion, which somewhat secures it from the threat of a hostile takeover, however a merger is not out of question.
Summing up, the company must find a CEO soon to save it from the flailing condition. The previous proposed $2 billion restructuring plan of the company needs to be implemented; however, it does expose the company to political hazards in Israel. But necessary steps must be taken to curtail the fall. Financially, Teva is sound despite a debt of $12.6 billion, and the consequent repayment. Due to these issues, I maintain my sell rating on TEVA despite the hike in dividends.
1- Albeit a slim one, there is still a possibility that Teva acquires or develops another blockbuster like Copaxone.
2- The OTC JV with P&G exceeds expectation and results in revenue recovery.
3- The company has pinned its hopes on the NTE segment for now. It expects to generate around $3 billion in sales from NTEs by 2020. Any upside from the NTE business can play an effective role in filling the gap left by Copaxone.