TEVA—The Most Overlooked Value In Pharmaceuticals Today
Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Israel-based Teva Pharmaceutical (NYSE: TEVA) is probably the biggest pharmaceutical house you've never heard of. It may also be one of the best value buys in pharmaceuticals because of the nature of its business.
Teva is the world's largest producer of generic drugs, which are the largest sector of the pharmaceutical market. Generic drugs now account for 78% of all prescriptions written in the United States. Unlike traditional drug makers, such as Eli Lilly (NYSE: LLY), Novartis (NVS), and Pfizer (PFE), Teva actually stands to profit as medications fall over the patent cliff. Eli Lilly lost 73% of the sales for its Zyprexa antidepressant when it lost the patent on that drug.
Generics Are the Future of Pharmaceuticals
The reason sales fall after patent expirations is that health plan operators in the United States, such as Medco (MHS), CVS Caremark (CVS), and Express Scripts (ESRX), mandate the use of generics because they are cheaper. Government-run health insurance systems like that in Japan and Medicare in the United States also mandate the use of generic prescriptions. Unlike traditional pharmaceutical houses, Teva stands to gain revenue when drugs lose patent protection because much of its business is generics.
Teva is in a unique position to see more profits this year because a number of blockbuster drugs have just gone over the patent cliff or are about to. AstraZeneca (NYSE: AZN) just lost patent protection on its schizophrenia treatment, Seroquel, which had $4 billion in sales in the U.S. last year. To add icing to the cake, in 2016 AstraZeneca will also lose patent protection on Crestor, with $4.4 billion in sales in 2011, and Nexium, which had $6.2 billion in sales in the U.S. will lose patent protection in 2014. AstraZeneca is just the tip of the iceberg; almost every U.S. pharmaceutical house has at least one blockbuster drug headed for the patent cliff in the next five years.
Teva has the resources and expertise to cash in on the stampede to the patent cliff in a big way. It currently manufactures 71 billion pills a year and fills more than 1.5 million prescriptions a day in the U.S. alone. The company has a track record of bringing out generic versions of very sophisticated drugs created using biotechnology.
The Food and Drug and Administration (FDA) just approved Teva's version of Amgen's (AMGN) Neupogen, for sale in the U.S. Amgen sold $959 million worth of Neupogen last year. Unfortunately Teva will not be able to sell its version of Neupogen in the U.S. until November 2013 because of a lawsuit. It's already selling its version of Neupogen in the European Union.
Generic Potential Not Reflected in Share Price
The interesting thing is that the patent cliff is not currently helping Teva's share price very much. As you can see below, Teva's share price has fallen dramatically since May.
As of September 4, 2012, Teva's share price was $39.70 at the close of business. The stock is headed back towards its June low of just over $37.50. The potential of massive growth in the generic drug business does not seem to be helping Teva's share price that much.
Part of the reason for the decline in value might be Teva's financial numbers. The company reported a 13.60% increase in sales growth and a 15.89% rate of income of growth in the last twelve months. Yet it also reported a 17.20% drop in income. Like Eli Lilly, Teva is reporting a drop in income even as sales increase. This unusual performance might be what's scaring the investors off.
Naturally, value investors will wonder if Teva is a good buy right now. It is a good company with a proven track record in a growing business. The answer is possibly because it looks like Teva's share prices are going to keep falling for the foreseeable future.
Exposure to Traditional Pharmaceuticals
The reason for the fall in share value is that, unlike Mylan (MYL), Teva is exposed to the traditional pharmaceutical business, including the patent cliff. Unlike Mylan, which just does generic drugs so it has minimal R&D costs, Teva also does a lot of research and development on its own.
Teva has lost revenue because its Copaxone injection for multiple sclerosis is facing stiff competition from products from Biogen Idec (BIIB) and Novartis. Teva stands to make $3.8 billion from Copaxone in 2012, which accounts for 21% of its sales. Teva is testing a new drug called Laquinimod, which is supposed to take Copaxone's place. Early trials indicate that the new drug seems to be effective.
With or without Laquinimod, Teva is still a good value play because of its expertise in generics. Generics are where the growth and money in pharmaceuticals are these days. Teva is well poised to take advantage of all the blockbuster drugs going over the patent cliff. The interesting question will be: Can increased generic revenue make up for Copaxone losses if they occur?
BillEdson11 has no positions in the stocks mentioned above. The Motley Fool owns shares of AstraZeneca plc (ADR). Motley Fool newsletter services recommend Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.