Headquartered in Israel, Teva Pharmaceuticals Industries Ltd. (TEVA) is the world’s largest generic pharmaceutical manufacturer. This global company also develops, manufactures and markets branded drugs, altogether with pharmaceutical ingredients in North America, Europe and ROW markets. Now, word is out that the current time is one of transition for Teva. The question is then: Will the company be able to make it through this "transition" for the best or the worst?
Teva has reported a 1.4 percent decline in revenues in its second quarter and is expected to be facing macro-headwinds in the future. These include EU pricing pressure, a higher cost base, fewer generic product launches compared to 2012, and potential new competition for branded products as one of its branded products goes generic and another – Copaxone, a drug for the treatment of multiple sclerosis – might as well. Copaxone makes up about half of Teva’s branded drugs segment, with about $4 billion in sales for 2012. Recently, the U.S. Federal Court of Appeals has been delivering unfavorable rulings regarding the validity of certain Copaxone patents. In this context, generic competition could materialize sooner than expected by the company – May 2014.
Doubts about the success of its pipeline continue to be raised as some of its trial drugs fail to meet clinical endpoints. It is also not clear whether Teva has any major potential product launches prior to Copaxone's patent expiration in 2014. Even if that was the case, clinical development of new drugs involves a high degree of risk. Teva is reportedly developing a Copaxone alternative that is already in phase 3 clinical trials. If it turns out to be as successful as the mother drug, then there’s little to worry about, but the development and regulatory setbacks for late-stage pipeline candidates are always a potential risk.
New Strategy
Although bearish analysts say that Teva might take some time to deliver, the company has already outlined a strategy that acknowledges the future challenges, and is determined to improve its situation. Teva said that it aims to accelerate growth platforms, protect and expand core franchises, expand its global presence, and pursue strategic deals as well as reduce the cost base.
The company also intends to pursue first-to-file and first-to-market opportunities and seek approval for complex generics which are likely to face less competition. This should help maintain its strong position as the world’s largest generic drug company in terms of both total and new prescriptions.
Teva is likely to accomplish this and minimize the threat of low-cost producers in emerging markets as it is the largest pharmaceutical manufacturer with vertically integrated operations, and is also one of the few generic firms with the financial resources and manufacturing capabilities to reproduce complex drugs, such as biosimilars and respiratory inhalers.
Furthermore, Copaxone’s manufacturing difficulty, combined with the cost-savings program that the company has also announced, which is expected to deliver savings of about $1.5 billion to $2 billion over the next five years and significantly improve its operating margin, should further help Teva insulate earnings from a potential generic Copaxone approval, if it were not able to push back this drug’s patent expiration.
Maybe It’s All for the Best?
Teva’s situation, as it stands right now, might seem a bit uncertain, and some regard it as the worst performing pharmaceutical company that is publicly traded in the U.S.
| Teva Pharmaceuticals (TEVA) | Industry Median | Takeda Pharmaceutical Co (TKPYY) | |
| P/E | 28 | 25.9 | 52.2 |
| Mkt. Cap. | 33.56 B | - | 38.48 B |
| ROE (%) | 8.6 | 6.8 | 6 |
| Net Margin (%) | 9.7 | 7.5 | 8.6 |
However, the stock’s valuation looks pretty good and the company seems to have the potential to carry out its strategy successfully. Consequently, this relatively cheap stock does not look like a value trap, but rather like a potentially worthy value investment. So thought the billionaire George Soros, the head of Soros Fund Management LLC, as he raised his stake in Teva by the end of last November, taking it up to 1.8 percent of the fund’s total U.S. stock portfolio, reportedly around $8 billion.
Disclosure: Victor Selva hols no position in any stocks mentioned.
