2012 has been a do-nothing year for Teva Pharmaceuticals TEVA. Its stock is still at the same place where it started the year and the 2010 peak of $64 seems like Mount Everest. The stock is trading at a forward P/E of 6.9 and it's definitely worth investigating.
Teva is the largest generic drug manufacturer in the world. Led by former Bristol-Myers Squibb Executive Jeremy Levin, Teva Pharmaceuticals, tests, develops and manufactures generic and branded drugs. Teva has three operating segments, Generics, Specialty Pharmaceuticals (branded drugs) and OTC products.
The Israel-headquartered Teva is the leading generics seller in United States for more than a decade. With more than 50% of its revenue coming from generics, Teva has the experience and ability to capitalize on the expected spending shift to generics in the near future.
The Growth Story
If we create a list of fastest growing companies of the decade, Teva will automatically qualify itself. The $34.8 billion worth Teva touched $18.3 billion sales in 2011, more than seven times its 2002 sales of $2.5 billion (CAGR of 24.66% between 2002 and 2011). Net Income grew at a CAGR of 23.59% during the same period. Teva held on to its margin as it was growing bigger and bigger.
|(USD Millions)||2,002||2,007||2,009||TTM||2002-TTM (10 YR)CAGR||2007-TTM (5 YR)CAGR||2009-TTM (3 YR)CAGR|
As the table indicates, growth has been slowing down in the past few years. But they should be able to continue their growth story.
Not all of the growth achieved by Teva was fostered in-house. Along its ten year journey, Teva bought a number of companies, either to consolidate its leading position in generics or to balance its generic portfolio with branded drugs. Here is a list of important acquisitions made by Teva in the last few years:
|Date||Company Name||Deal Value||Products|
|Oct-11||Cephalon, Inc||$6.5 Billion||BioPharma - Branded Drugs|
|Dec-08||Barr Pharma||$7.5 Billion||Branded and Generics|
|Jan-06||IVAX corporation||$7.4 Billion||Generics|
Data Source: 2011 Annual Report
A buying spree of this magnitude cannot be without side effects, and Teva does have some problems for the future. Their debt to equity ratio is now 0.55, higher than comparable companies, and the intangible assets and goodwill now account for 57% of total assets. So it's normal to expect impairment charges to go up in the future, reducing margins and eating into some profits.
(In USD Millions)
|Total Intangible Assets and Goodwill||10,326||16,878||16,727||20,983||28,609|
|% of total assets||44.08%||51.90%||50.37%||55.00%||57.06%|
|Long term debt||3,259||5,475||4,311||4,110||10,236|
|Debt as % of assets||13.91%||16.84%||12.98%||10.77%||20.41%|
Data source: Teva Annual Reports
The Revenue Break-up
In terms of Geographical segments, Teva draws approximately 79% of its money from developed markets and 21% from rest of the world. Teva must be able to capture some of the emerging market generic spending in the next five to ten years.
Generics still account for more than half of Teva's revenues and it will remain its top earning segment for some more time. Branded drugs accounted for 35% of Teva's sales in 2011 and this is where Teva seems to be in trouble for the short term. Its top selling Multiple Sclerosis treatment Copaxone netted $3.57 billion in 2011. That's 20.69% of Teva's 2011 sales and more than half of its branded drug sales. Copaxone patent expires in 2015 and is already facing intense competition from oral treatments such as Gilenya (Novartis) and first-line beta-interferon products such as Avonex, Betaseron, Extavia and Rebif. Provigil (2011 Sales - $350 Million) is another important drug that lost its patent protection in April 2012.
A blockbuster drug that earns one fifth of a company's revenue can only replaced by another blockbuster drug and Teva is still searching for one. So the sales erosion has to be accounted for and it's huge enough to cause intense downward pressure on earnings and subsequently on the stock. Teva's stock is currently trading at 11 times its TTM earnings, much lower some drug companies.
Teva with and without Copaxone
Lets analyze Teva's revenue and growth with a Copaxone lens.
(In USD Millions)
Total Sales with Copaxone
Total Sales without Copaxone
Growth with Copaxone
Growth without Copaxone
In 2011, Teva's revenue grew 13.6% with Copaxone and 12% without Copaxone. So other products are growing at a healthy rate. But that doesn't necessarily mean the stock can move higher. We need to find Copaxone's impact on earnings to figure out how much value to assign for the company that grows at double digit rate without the blockbuster multiple sclerosis drug.
(In USD Millions except per share data)
* Assumptions by removing Copaxone sales from 2011.
So if we take out Copaxone from 2011 sales and assume the net margin to remain the same, we arrive at a net income of $2221.12 million with an EPS of $2.49, resulting in a P/E of 16.08. Not bad for a company that grew 12% in 2011/2010 without Copaxone. Teva looks decently priced at this level.
Things to watch out
- Impairment costs should run up higher for the next few years.
- Margins could edge lower.
- Management is planning to increase director pay and wants to allot 700,000 for its chairman to spend for his private jet. If Peter Lynch was around he will be really happy. (He liked companies that used less color in their annual report.)
- Iran-Israel conflict.