Seeking Alpha
Deep value, special situations, contrarian, long only
Profile| Send Message|
( followers)  

This year is expected to be an interesting year for Teva Pharmaceuticals (TEVA). The company is becoming more popular again with investors after a long period of skepticism towards the sustainability of Teva's superior earnings momentum. I already wrote an article about Teva on November 15 when the stock price was still around $40.

The company now has taken note and is more willing to listen to shareholders where strategy is concerned. This means: more focus on other growth areas besides Biotech pharma products (although these are very successful), more diversification into new growth businesses (generics including biosimilars, OTC medications) and collaboration with other firms. The latest joint venture with Procter&Gamble is a good example.

A large number of high-value branded pharmaceuticals have begun to go off-patent, and many more will lose patent exclusivity in the next few years.

Major revenue generating blockbuster medicines like Pfizer's (PFE) cholesterol drug Lipitor, Eli Lily's (LLY) antipsychotic drug Zyprexa and Johnson & Johnson (JNJ) Levaquin lost patent exclusivity in the U.S. in November, October and June of last year, respectively. Teva has launched their generic version of Zyprexa, India’s largest generic maker Ranbaxy Laboratories Ltd. (OTC:RBXZF) has launched a generic of Lipitor in partnership with Teva.

Further, in the 2012-2018 timeframe, many more blockbuster drugs are expected to lose patent protection in the US. Important among these are: Forest Laboratories' (FRX) depression drug Lexapro (March 2012), Bristol-Myers Squibb/Sanofi's (SNY) hypertension drug Avapro (March 2012) and blood thinner Plavix (May 2012), Novartis’ (NVS) hypertension drug Diovan (September 2012), Merck’s (MRK) asthma drug Singulair (August 2012), Pfizer’s erectile dysfunction drug Viagra (2012), Abbott Laboratories’ (ABT) dyslipidemia drug TriCor (mid-2012), Eli Lily’s depression drug Cymbalta (2013) and diabetes product Humalog (2013), Teva’s multiple sclerosis drug Copaxone (2014), Forest’s Alzheimer’s drug Namenda (early 2015) and Pfizer’s central nervous system drug Lyrica (2018).

The generic makers with a robust pipeline are sure to exploit the patent cliff overhanging the pharma industry, especially with so many blockbuster branded medicines slated to lose patent protection in 2012.

Important 2012 U.S. generic launches for Teva include drugs like Avandia, Avandamet, and Avandaryl, Actos/Actoplus and Entocort EC ready for 2012 launch.

Further, the industry stands to gain from an increasing awareness of generic products. Given the uncertain economic outlook, various government agencies as well as privately managed care organizations are taking initiatives to promote generics in place of costlier branded treatments.

These factors, together with an aging population and a corresponding increase in healthcare costs, should lead to continued expansion of the generics marketplace. Besides, U.S. healthcare reform that works at bringing more people under the purview of prescription drug benefit would catalyze generics uptake.

Reliable data from IMS Health reveal that market share for branded medicines fell from 70% in 2005 to 64% in 2010, a function surely due to sour economic conditions. The percentage is expected to deteriorate further, to 53%, through 2015.

The biggest news came out last week. Teva announced a change of CEO per May 2012. The new man in charge is to be Jeremy Levin, who is currently a senior executive with Bristol Myers Squibb (BMY). Mr. Levin has also worked for Novartis.

At Bristol Myers Levin has been responsible for implementing the 'creating pearls'

strategy with the company investing in smaller promising pharmaceuticals that have developed powerful new molecules and helping to make new drugs based on these innovations come to market. More on this strategy you can read in here.

This strategy has been one of the reason why BMY is now successfully making the transition from a chemicals based to a biologically based pharmaceutical.

Final Conclusion

The announcement of a new CEO with a great track record is a good step forward again for Teva, which has been suffering from an increasingly poor perception of its outlook by US analysts especially. Teva is doing many things right, but poor communications and a strategy that was increasingly seen as not convincing to assure future growth has hurt the share price.

With a very strong position in the global generics market and a blockbuster biotech drug like the leading MS treatment Copaxone continuing to sell very well, the cash flow intake is impressive and keeps on adding to the cash position in the balance sheet of Teva. This solid base can now be used to further expand the biotech portfolio and Mr. Levin can leverage on his experience with BMY to broaden the product and R&D range by investing in smaller firms to develop the 'pearls' planted now by Teva.

Teva shares remain very attractively valued as the company keeps on delivering high EPS growth. EPS estimates by consensus are now at $5.70 for 2012. Share buy backs can also be done from here and will add value to the credibility of the company.

Source: Jump On The Bandwagon Called Teva Pharmaceutical