We understand that Teva Pharmaceutical Industries (TEVA) has had some challenges recently, which explains why it has declined from its 2010 peak of $64.95 per share. However, we find it absolutely ridiculous that Teva should be trading at an adjusted 2012 PE of ~7X earnings and a reported PE of 11X earnings. Teva is the industry leader in the generic drug segment. Teva has generated a higher net income in the last 12 months than its four biggest competitors [Perrigo, (PRGO), Forest Labs (FRX), Mylan (MYL) and Watson Pharmaceuticals (WPI)] put together and yet is trading at a PE ratio well below those companies, with the exception of Forest Laboratories.
Source: Morningstar Direct
On May 23rd, Teva's new President and CEO Dr. Jeremy Levin held an investor call to issue TEVA's updated outlook. Highlights from the call include the following key figures:
- Total net sales of approximately $20-$21 billion, consisting of total U.S. net sales of $10.5 billion, total European net sales of $5.8 billion, and total ROW net sales of $4.2 billion. This was down from $22 billion.
- Outlook was revised downward due to the negative effects of the eurozone debt crisis. $600M was estimated due to negative currency impact from the weak Euro currency and $400M was estimated due to negative macroeconomic impacts.
- Outlook also revised downward due to efforts undertaken to reduce wholesaler inventory in the US market. This had a negative impact on TEVA's outlook of $540 million, including $400 million in generic products.
- Adjusted non-GAAP EPS of $5.30-$5.40, down from $5.48-$5.68
- COPAXONE sales of $3.8 billion
- Net research and development expenses of about 7% of revenue, including clinical support of 30 late stage innovative drug candidate programs.
Dr. Levin and his management team are taking a hard look at TEVA's position and by the end of the year he will present a full, comprehensive strategic plan to enable TEVA to keep moving forward in its industry. Levin also addressed the patent challenge on COPAXONE and on June 23rd, the U.S. District Court for the Southern District of New York has found in favor of Teva in its patent infringement lawsuit against Momenta Pharmaceuticals, Inc.(MNTA)/Sandoz Inc. and Mylan Laboratories Inc./Natco Pharmaceuticals regarding COPAXONE. The decision covers several patents, the last of which expires on September 1, 2015.
Levin has announced that 12 year company veteran Mike Dearborn will be in charge of Teva's Global Compliance organization and will work with Teva's Global Head of Quality Fran Zipp. He promoted Allan Oberman to lead the U.S. Generics team after leading the EMEA region and Canadian region previously. These positions are in addition to the hire of Dr. Michael Hayden, President of Global Research and Development and Chief Scientific Officer. Teva has a solid pipeline of potential new generic and branded drugs that include 16 candidates in Phase III clinical trials, 11 candidates in Phase II and 14 in Phase I.
In conclusion, we are not only long TEVA, but we recently increased our position in TEVA due to its dirt-cheap price relative to its intrinsic value as well as relief from its patent-infringement victory on Saturday June 23. In our full, comprehensive report on TEVA, we initiated coverage on it as a Strong Buy with a $52.53 Fair Value Target share price. We think that less than 8X 2012 adjusted EPS is an insanely dirt-cheap price for the industry leader in generic pharmaceuticals, especially when said industry leader upgrades its executive leadership team. Despite TEVA's malaise last year, it still generated $3B in free cash flows last year. We also see TEVA buying back over 1% of its shares during the rest of FY 2012, which should provide support for the stock price. Finally, we see that the after-tax dividend yield on TEVA's shares exceed that of the 10-Year U.S. Treasury Bill, the average US Municipal Bond and the average 15 year German Government Bund as reported by Bloomberg on June 25th. We actually have more faith in TEVA covering its obligations than the US and German governments since TEVA actually balances its budget(s) and makes a profit, and does so without coercing people to give it money for nothing. We also like to note that TEVA's dividend yield was quoted on an after-tax basis, whereas the bond yields were quoted on a pre-tax basis.
Source: Bloomberg LP
Disclaimer: Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this report. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.
Disclosure: I am long TEVA.