Teva Pharmaceuticals: Valuation Is Too Depressed On Worries About Copaxone

| About: Teva Pharmaceutical (TEVA)
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Shares of Teva Pharmaceutical Industries (TEVA) rose more than 2% over the past week. The global pharmaceutical and drug company known from its drugs Copaxone and Azilect reported its third quarter results on Thursday.

Third Quarter Results

Teva Pharmaceuticals reported third quarter revenues of $4.97 billion, up 14% on the year. Revenues fell slightly short of analysts expectations of $5.07 billion.

Teva reported a GAAP net loss of $79 million, or $0.09 per diluted share. This compares to a profit of $916 million, or $1.03 per diluted share. Net losses were explained by two large charges which Teva took during the quarter. Teva took a $670 million provision for a loss contingency related to the pantoprazole patent infringement litigation. Teva took another $481 million charge after reviewing its R&D portfolio. The R&D charge was related to the purchase of Cephalon last year, as some drugs have less potential than previously thought.

Excluding the two charges, earnings per share came in at $1.28 per diluted share, ahead of analysts consensus of $1.25 per share.

CEO Jeremy Levin commented on the results:

We are pleased to report solid operating results for the quarter and look forward to closing the year within the guidance we provided in May. In addition we were also encouraged by results from the ongoing development of both Copaxone and laquinimod and pleased by the approval of Synribo. These successes underpin our commitment to provide the best therapeutic options to multiple sclerosis and other patients worldwide.

Segmental Information

Revenues in the US were up 33% to $2.60 billion. Revenues in Europe were up 1% to $1.36 billion, while sales in the rest of the world fell by 3% to $1.01 billion. Sales in Europe and the rest of the world were negatively impacted by the result of a strong dollar.

Generic Sales

Total generic sales were up 1% to $2.49 billion. US generic sales rose 24% to $1.07 billion as the company launched nine new generic medicines during the quarter, and benefited from launches earlier this year.

European revenues fell 13% to $798 million, and were down 3% in constant currencies. Poor macro-economic conditions and healthcare reforms are impacting sales. Teva is becoming more selective in its approach for tender offers. Revenues in the rest of the world fell 11% to $620 million, predominantly as a result of government-imposed price reforms.

Branded Sales

Revenues for branded drugs in the US rose 35% to $1.47 billion. Growth was strong as well in Europe, were branded sales were up 55% to $376 million. Sales in the rest of the world were up 34% to $177 million.

The acquisition of Cephalon boosted revenues significantly. Sales from Cephalon's Treanda drug came in at $160 million worldwide. Nuvigil generated $94 million in sales and Provigil reported $53 million in quarterly sales.

Teva's most important drug Copaxone, a leading multiple sclerosis therapy, rose by 13% to $1.05 billion for the quarter, making up for 21% of firmwide revenues.


For the full year of 2012, Teva expects revenues to come in between $20.1 and $20.7 billion. Non-GAAP diluted earnings per share are expected to come between $5.32 and $5.38 per share.


Teva ended its third quarter with $1.4 billion in cash and equivalents. The company operates with $13.3 billion in short and long term debt for a net debt position of $11.9 billion.

For the first nine months of 2012, Teva generated revenues of $15.1 billion. The company reported a net income of $1.6 billion, or $1.88 per diluted share on a GAAP basis. Non-GAAP earnings came in at $3.5 billion.

The market currently values Teva at $36 billion. This values the pharma company at 1.8 times annual revenues, 8 times non-GAAP earnings, and a roughly 16 times GAAP net earnings.

Teva currently pays a quarterly dividend of $0.25 per share, for an annual dividend yield of 2.4%.

Investment Thesis

Year to date, shares of Teva are trading largely unchanged. Shares rose from $40 to $46 in January of this year. Shares fell back to $38 in May of this year and are currently exchanging hands at $41 per share.

Shares rose from $40 in 2008 to reach highs of $65 in the beginning of 2010, before falling back. The company has aggressively grown its business almost doubling its annual revenues from $11.1 billion in 2008, to an expected $20.4 billion this year. Net income rose from $609 million in 2008 to an expected $2.2 billion this year.

Teva has largely grown by making a string of acquisitions. In 2008, the company acquired Barr Pharmaceuticals for roughly $7.5 billion. In 2010, it acquired generic producer Ratiopharm for $5.0 billion, followed by the $6.8 billion acquisition of Cephalon last year.

Over the past ten years, shares of Teva have more than doubled. Unlike some of its competitors, the firm has made several medium-sized acquisitions, and refrained from mega-mergers. As a result of the acquisitions, the company has aggressively grown its operations. Teva does operate with a sizable $12 billion net debt position as a result.

Teva generates roughly half of its revenues from generic medications which have lower margins, but reduce the dependency on branded blockbusters. The sizable generic activities largely explain the revenue multiple discount to many of its competitors, given the lower profit margins.

Another medium term worry is the threat of the loss of exclusivity of key therapeutics drug Copaxone, which represents 21% of the firmwide revenues and 50% of branded sales over the past quarter. Seekingalpha writer Gabriele Grego wrote an excellent article, discussing the future of the top performing drug. The main conclusion is that loss of exclusivity only becomes a real threat in or after 2015. Furthermore the demise of Copaxone is expected to be gradual as the fabrication of generics for competing drugs in rather complex.

Teva's valuation already prices in a painful loss of the contribution of blockbuster Copaxone in the medium term. I think there is room for an upside surprise in the coming periods.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.