Teva Pharmaceutical Is Poised To Grow

Teva Pharmaceutical Industries Limited (NYSE:TEVA) develops, manufactures, and markets generic, branded and OTC medicines. Teva Pharmaceutical is the world’s largest generic company and has grown by acquisitions. The company’s shares increased 31.2% year to date. Currently there are 10 analysts that rate Teva Pharmaceutical as a buy and no analyst rates it as a sell. In my article I will analyze the company’s pipeline and its financials.

Source: Morning Star

Recent Performance at a Glance

The company reported neither encouraging nor disappointing fiscal year 2014 second quarter results. Revenue increased by only 2% compared to the second quarter of 2013 leading to a slight increase of 3% in earnings per share. This performance is attributed to 12% global decline and 19% decline in the US sales of the company’s star drug Copaxone. Copaxone is critical to Teva’s success because it accounts for almost one fifth of the company’s revenue. Copaxone is expected to lose 50% of its revenue by 2016 after its generic copies are launched. In order to deal with this threat Teva introduced an improved version of Copaxone with a higher dosage. Teva’s CEO claimed that around 51% of patients have converted to the new product.

Development in Pipeline

Recently Teva Pharmaceutical announced positive data from the phase 3 study of the company’s anti-IL5 monoclonal antibody, reslizumab, in patients with moderate to severe asthma. The reslizumab treatment resulted in significant improvements in lung function and asthma control and showed a safety profile compared to the placebo. The results showed that reslizumab cuts the frequency of clinical asthma exacerbations by half. Based on these positive results Teva Pharmaceutical is considering filing for reslizumab regulatory submission in the US during the first half of 2015 followed by filings in the EU and other regions.

Asthma is one of the most common diseases in the world that roughly affects 300 million people. Despite the available treatments, millions of people suffer from poorly controlled asthma. According to a report by Express Scripts the direct costs associated with caring for asthma patients are $50 billion a year. Asthma is the fifth most expensive disease in terms of drug spending. Teva estimates that the market for medicines used to treat moderate and severe asthma is $7.5 billion in the US and Europe alone. Based on these facts and figures I believe reslizumab has the potential to be Teva’s next billion-dollar blockbuster.

Recently Teva Pharmaceutical announced the launch of generic equivalent of Baraclude (Entecavir) tablets, 0.5mg and 1mg, in the US. Baraclude is an anti-viral medicine used to treat patients with chronic hepatitis B. Teva was the first to file making the product eligible for 180 days of marketing exclusivity. Baraclude, marketed by Bristol-Myers Squibb (NYSE:BMY), had annual sales of $328 million in the US. With exclusive marketing rights Teva can generate a significant amount of sales from its generic version.

Teva Pharmaceutical also won its case against AstraZeneca (NYSE:AZN) in the UK High Court. The case involved Teva’s alleged infringement of AstraZeneca’s patent for its SMART (Single inhaler Maintenance and Reliever Therapy). AstraZeneca demanded an extension on its SMART patent based on some “added material”. However, the court ruled in favor of Teva and declined AstraZeneca’s patent amendment request. The court’s ruling paved the way for Teva to launch its own formoterol / budesonide combination named DuoResp Spiromax in the UK. DuoResp Spiromax will be a valuable addition to the currently available inhaler devices for the treatment of asthma and COPD. In Europe 30 million people are affected by asthma and 23 million people by COPD.

Dividend and Valuation

Teva Pharmaceutical is currently trading at a dividend yield of 2.3% which is slightly higher than the S&P 500’s yield of 1.9%. The company has a long history of rewarding its shareholders in the form of juicy dividends. With a payout ratio of almost 30% Teva has plenty of room available to further increase its dividend payment.

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Source: Company’s Second Quarter Earnings Presentation

The company’s dividend payments are backed by strong free cash flows and cash and cash equivalents. The company has around $2 billion in free cash flows which gives it the opportunity to reinvest in its pipeline as well as reward its shareholders.

Teva Pharmaceutical is currently trading at a price to earnings multiple of 16.8 compared to the industry multiple of 57.1 making the company relatively undervalued. The company’s forward price to earnings multiple, after the incorporation of future earnings growth, is 10.2. This also justifies the company’s relative cheapness compared to the industry.

Source: Morning Star

Conclusion

Teva Pharmaceutical has a hybrid system and the advantage of the hybrid system is that it will allow the company to take advantage of both profits and the peril associated with patents and their loss of exclusivity. Teva seems to be well positioned with a growing portfolio of generic and branded drugs. Therefore, I recommend buying the stock.