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Chandan Dubey
Chandan Dubey
Articles (150) 

Teva Is Driving Forward

February 28, 2012 | About:

Teva (NYSE:TEVA) reported its fourth-quarter 2011 and fiscal year 2011 results in February 2012. I want to touch on some of the things from the report and the conference call.

Some juicy bits:

  • Sales are up 14%, EPS up 9% and income up 7% (non-GAAP measure) from 2010. There was a $901m legal settlement/restructuring charge that effected the GAAP results. The GAAP results were also effected by severance charges and restructuring costs because of Cephalon acquisition.
  • Cephalon acquisition is going more quickly than expected. Furthermore, the EPS contribution from Cephalon came on the high end of the expectation. This shows that management has performed quite well in restructuring Cephalon (or was very good at predicting the EPS figures). Both ways, it shows a competent management.
  • The patent for Forest Labratories Inc’s (FRX) drug Lexapro is expiring in March 2012. This drug owns nearly 18% of the total anti-depressant prescriptions market and has sales of $2.3 billion in the fiscal year 2011. Teva’s biggest generic launch this year is going to be a copycat version of Lexapro, sometime in 3Q or 4Q-2012.
  • Teva has in its pipeline copycat versions of branded drugs that had sales of nearly $77 billion in 2011. It expects $650 million in sales from new generic launches and another $20 million from successful launch of Lexapro.
  • Teva hikes its quarterly dividend by 25% and now pays 26.8 cents a share. Teva has recently announced an additional share-buyback plan of $3 billion in a drive to return more money to shareholders. There is a 25% withholding tax on Teva’s dividend for people residing outside Israel.
  • Teva purchased 21.5 million shares in 2011 at an average price of $46.3.
  • Teva forecasts that it will make $5.48 to $5.68 in earning per share for 2012 barring items like legal settlements.

Balance sheet: important figures

Items (in $ million)2011201020092008
Cash & equivalents1,7481,5492,4652,065
Working capital3,7663,8353,5923,944
Short-term debt4,2802,7711,3012,906
Long-term debt10,2364,1104,3115,475
Total assets50,14238,15233,21032,520
Total debt14,5166,8815,6128,381
Total equity22,34322,00219,25913,864


Capaxone is an interesting drug in Teva’s portfolio. It contributes a large part of its profit (can be as large as half) and the patent is expiring in 2014. Capaxone, however it seems is not easy to replicate. The exact molecular structure is not known. It is a mixture of 4 different chemicals that combine in a random way until the resulting polymer reaches a certain size. This makes copying the medicine a bit difficult. FDA has already rejected a formulation change of Capaxone that was submitted in 2010. It is also possible that to gain approval FDA may ask to perform clinical trials to show the same clinical effectiveness. This would be good news for Teva and bad news for Mylan and Sandoz who are fighting it in the courts.

Worrying bits, risks and other tidbits
  • Copaxone is nearly one-fifth of the revenue and an estimate one-third to one-half of Teva’s profit.
  • 35% of the sales of Teva still comes from branded drugs in 2011.
  • Cephalon acquisition was totally financed by debt and and we see the corresponding increase in the long term debt. The acquisition cost Teva $6.8 billion and has made the balance sheet less attractive. The debt/equity ratio has more than doubled from 0.31 in 2010 to 0.65 in 2011.
  • Sales in drug store chains has gone down from 53.5% to 43% and the wholesalers are up from 33.7% to 38%. The wholesalers generally has lower margins as they supply the drug to the chains.
  • Shlomo Yanai, who has been CEO since 2007 is retiring in May this year and will be replaced by Jeremy Levin, who was former senior executive at Bristol-Myers Squibb (NYSE:BMY).
  • The directors as a group hold 2.2% of the outstanding shares. Dr. Philip Frost holds 1.4% of the shares outstanding.

About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

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