The pharma industry is characterized by low barriers to entry, and Teva Pharmaceutical Industries Ltd. (TEVA, Financial) has reached economies of scale and vertical integration as part of a cost reduction plan.
The company produces generic drugs as well as branded drugs, led by Copaxone, a prescription medicine used for the treatment of relapsing forms of multiple sclerosis, which accounted for one-fifth of the company's revenue last year. Increased competition can create risks in the company.
There are some things that help to protect the bottom line. Although it is difficult to launch other key products such as Copaxone, new innovative drugs should diversify the product portfolio. Copaxone has become the world's leading MS treatment and contributes in an important way to the operating profit.
The acquisition of Allergan’s (AGN, Financial) generics unit creates tax synergies of about $1.4 billion. Further, cost savings help support earnings in a market where new opportunities are difficult to launch and price competition has been enhanced. Moreover, other strategic moves, like the joint venture with Procter & Gamble (PG, Financial), should help the profitability.
The stellar product, Copaxone, could fall on declining demand as Novartis (NVS, Financial) launches the generic Copaxone 40mg version. To offset the domestic slowdown, Teva should move more acquisitions, partnerships or licensing agreements.
Cash to investors
The company demonstrates its commitment to return cash to investors in the form of dividends. The current dividend yield is 4.25%, which is considered high versus the industry median of 1.23%.
Relative valuation
In terms of valuation, the stock sells at a trailing price-earnings (P/E) of 3,200x (the reason is that EPS were too low), trading at a premium compared to an average of 26.93x for the industry. To use another metric, its price-book (P/B) ratio of 1.07x indicates a discount versus the industry average of 2.8x while the price-sales (P/S) ratio of 1.4x is below the industry average of 2.97x. These metrics indicate that the stock is relatively undervalued and seems to be an attractive investment relative to its peers.
The stock price has a downward trend in the last 12 months. Shares of Teva have lost 40% in the past year and 24% in the last six months.
Final comment
The drugmaker has several key drivers for growth; the cost-savings plans, more market share in emerging markets, new products and strategic acquisitions should boost revenues in the future.
Hedge fund gurus have been active in the company. Francis Chou (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) initiated new positions in the stock in the first quarter. Jim Simons (Trades, Portfolio) upped his stake considerably by 122% to 4.82 million shares and Vanguard Health Care Fund (Trades, Portfolio) by 31% to 11.72 million shares.
Disclosure: Author holds no position in any stocks mentioned.
