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Last week, Merrill Lynch analysts Greg Gilbert, Haim Israel and Sumant S. Kulkarni published an update on Teva Pharmaceutical Industries Ltd. (NYSE:TEVA) in which they reiterated their “Hold” rating. After re-examining their model, the analysts decided to lower their revenue forecast for 2007 by $100 million to $8.7 billion and their EPS estimate to $2.04 from $2.14, way below the consensus estimate of $2.16. The analysts were intrigued by the company’s low multiple and the negative sentiment surrounding it at present, but were nevertheless concerned about its long-term growth potential in an increasingly competitive market.

I am at loss to understand why they have doubts about Teva’s growth forecasts. They suspect that the forward growth estimates management provided include mergers and acquisitions, while their own model does not include them. After studying the figures for estimated revenue from new generic product lines, Teva’s core growth engine, the analysts produced three scenarios: good, mediocre and bad. Their estimates are based on a mid-range figure of $450 million revenue from new products in 2007.

In the worst-case scenario, Teva will have $200 million in revenue from new product lines, a figure that will bring EPS down to $1.90. The best case scenario sees Teva’s sales of new generic products in 2007 coming in at $700 million, a figure that will lift EPS to $2.19. As you can see, the $450 million sales figure is the average range between $200 million and $700 million.

As far as I can remember, Teva has beaten analysts’ forecasts for generic products, especially since the wave of patent expirations began at the turn of the century. I have no reason to think Teva should or could file fewer generic product license applications in 2007 than in any other year. Last February, Washington Post correspondent Marc Kaufman reported that 2006 opened with a record number of more than 800 generic product applications. Kaufman added that the FDA backlog is expected to balloon in the near future, with $60-70 billion a year in brand-name drugs such as Zoloft and Zocor coming off patent in the U.S. over the next four years.

According to Merrill Lynch, Teva is trading at a consensus multiple of 15 for 2007 and 14.7 for 2008. In the past, such multiples would have earned Teva a “Strong Buy” rating, yet today, analysts are worried by them. As I am neither a psychologist nor a clairvoyant, and do not, at present, have a single reason to suspect that Teva will not continue to do in future what it has done in the past, why should I agree with the analysts? The model on which they have based their fears isn’t rock solid either. In the same measure as they fear increasing competition, Teva could just as easily surprise in 2007 with significant progress in the treatment of Alzheimer’s disease. Will the multiples remain as they are if that happens?

TEVA 1-year chart:

Published originally by Globes [online], Israel business news -
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007. Republished on Seeking Alpha with full permission.

Source: Teva: What Are the Analysts Afraid Of?