TEVA - Teva Pharmaceuticals

[Viking]

Some names in big pharma still looks pretty cheap. Teva looks like an interesting opportunity. It has sold off recently and currently trades at $50.81. Dividend = $0.75 = 1.5%. Earnings for this year should = $4.50 (before writedowns I think); PE = 11. Earnings growth over the next few years should be in the low double digit.

 

Looks to me to be a good medium term opportunity with decent downside protection (given recent sell off) and nice upside potential. I would not look to park a big chunk in this name; looks like a decent pick to go in a high risk/high return portfolio (i.e. 10 names that make up 20% of total portfolio).

 

RBC has it rated outperform; Jim Cramer also likes the name (please, I added this for humour  :D)

 

Thoughts?

 

Here are a few articles I found doing a quick search:

http://seekingalpha.com/article/224392-our-predictions-for-the-generics-industry?source=thestreet

http://seekingalpha.com/article/194282-high-conviction-the-dominant-generic-drugmaker-will-widen-its-lead

 

[biaggio]

Vikin,

 

I have liked the generic sector as well (so may be you should reconsider, LOL).

 

We're in the midst of a lot of large blockbuster drugs going off patent + we have a lot of positive demographics (we re all getting older + needing Rx)

 

Big pharma has not had good success replacing these with bigger + better drugs. I can foresee them getting into generics. Maybe they will want to buy out current players? or they will be competitors?

 

I own Myl...smaller,though more leveraged, with some questionable moves in past (they gave old CEO lifetime use of company jet I believe).

 

People criticize this sector as having commodity products.  Certainly their is a lot of price competition, but margins are still in the 50% range. I don t think it is that easy to set up manufacturing plant. I believe their (TEVA) economy of scale, their current relations with distributers, large drug store chains + HMO's is of some competitive advantage.

Do you think there any sustainable competitive advantage i e moat? Or is their moat narrow + that is why you think it is higher risk.

 

There seems to be a lot of cheap companies in the health care sector.

 

Viking thanks for posting idea

[Guest Bronco]

This has a pretty big market cap.  I remember doing their tax return a decade ago with nothing but losses.

 

I think you have hit THE company for the generic secular trend.  The true question is what is a good price for TEVA. 

 

I think under $50 you have a decent risk/reward profile.  Best of luck.

[Viking]

Biaggio, regarding competitive advantages, I like what I see. Here is the link to their 2015 Plan and go to page 15 for company SWOT. www.tevapharm.com/pdf/strategy_final_webcast.pdf

 

I like the long term, strategic focus around decision making (not all about hitting quarterly numbers). After listening to the conference call I get the impression the stock is suffering due to risks (patent threat to one of their branded drugs and government pricing pressure) but near term opportunities appear to NOT be factored in. A question was asked regarding future deployment of free cash flow (questioner was looking for a higher dividend or stock repurchases). Management said cash flow would be used to support long term strategic plan via aquisitions and also dividends and possible stock buybacks; they still see growth as the major value driver (meaning higher dividend or stock buybacks are not likely). Given their size, future aquisitions will likely be large and perhaps this uncertainty is scaring analysts. Mgmt also commented that they use debt to finance aquisitions and then aggressively pay down using cash flow resulting in very strong financial position (i.e. they are not piling on debt with aquisitions). Seems like very shareholder friendly, frugal, smart operators.

 

Market leader, strong growth prospects (more than offset near term risks) and low valuation.

[biaggio]

Viking, thanks for the presentation.

 

I think the story looks good.

 

What about current price/current valuation?

 

Using trailing FCF of $3,28 (could be wrong, but co. is projecting FCF of $3.10 for 2012) + 15% growth + 10% discount rate gives me a fair price or IV of $70.(selling at ~ 70% of IV)

 

Using co. number of $7.50 in 2015 + 15 x multiple gives me a future value of $112.50  vs $50.70 today.

 

Do you rough #'s like above to decide on buying.

 

 

[Viking]

Biaggio, understanding pharma is very hard. Valuing pharma is also difficult given all the noise in the quarterly releases. I try and keep things as simple as possible.

 

Here is what RBC expects TEVA's adjusted earnings to be (before bad stuff):

2009A = $3.37

2010E = $4.56

2011E = $5.18

2012E = $5.80

 

I then take these numbers down 20% to come up with a number that I feel is a reasonable estimate of what their earnings after bad stuff should be.

2010E = $3.65; stock price = $50.70; PE = 14

 

Paying $50.70 (and a PE of 14) for a stock that should grow 12-15% for the next 5 years looks pretty reasonable to me.

[roundball100]

[...] Using trailing FCF of $3,28 (could be wrong, but co. is projecting FCF of $3.10 for 2012) + 15% growth + 10% discount rate gives me a fair price or IV of $70.(selling at ~ 70% of IV) [...]

 

Biaggio - I can't suggest anything better, but how do you justify using a 10% discount rate in the present environment?  That's one parameter that I always find can wildly vary estimated value.  The danger is that the math gives us precise numbers, so as they say, we can sometimes be precisely wrong. 

 

BTW, I hold 4 in the broad pharma sector: JNJ+ABT (both conservative IMO), GILD+TEVA (both aggressive IMO).  These are respectively 6%, 4%, 4%, 4% of my present stocks held.  My own strategy in this segment is perhaps naive and coarse:  I believe the overall sector is at a fair to low valuation, that long-term the sector won't disappear, and these are the players I am most comfortable with (on a risk/reward basis). 

[biaggio]

"...but how do you justify using a 10% discount rate in the present environment? "

 

I figure 10% would be the minimum return a private business should return. I basically use 10% discount + then look at current price. I try to look for companies selling at 50% of this number, acknowledging that the figure is roughly right + that the calculated estimate is usually not precise.

 

For my own exercise I have not used a smaller discount rate. I have read that one can use risk free rate(say 30 year T bill rate) plus 6% , that would be <10%, but I think interest rates are artificially low, and I would not want to commit capital for 5-10 years at such low interest rates

 

I picked this up from Pabrai's book, Dhando Investor.

 

Makes sense to me. I am always open to learning new tricks however.

[roundball100]

"...but how do you justify using a 10% discount rate in the present environment? "

 

I figure 10% would be the minimum return a private business should return. I basically use 10% discount + then ...

Is this mixing up two things - the present value of future money which depends on expected interest rates (or inflation), and the rate of investment return considered reasonable for good companies?

 

I'm not criticizing here, rather trying to learn.  I've read a bit but not nearly enough on this matter.

[biaggio]

I am learning as well.

 

I am probably mixing things up...but basically I am trying to buy $1 for $0.50. I am using discount rate etc as a way of getting a rough estimate of intrinsic value which is the present value of all  money that the business will return,  which depends on expected interest rates (or inflation).

 

To paraphrase others from this board (that I have learned from), first qualitatively estimate if it is a good business (profitable, not requiring a lot of capital, scalable, induring competitive advantage/moat, etc)...then estimate roughly what you think it may be worth...then try to buy at a discount (or margin of safety) ie 50 cents on the dollar.

 

re rate of return reasonable for good companies-that I believe will vary from person to person, as well as vary from month to month for myself personally depending on my emotion or how confident in myself or how confident I am in the company I may be researching. The imprecise math helps to keep my emotions in check.

 

I like the following quote :

 

Mr. Graham proposed that the price of every stock consists of two elements. One, "investment value," measures the worth of all the cash a company will generate now and in the future. The other, the "speculative element," is driven by sentiment and emotion: hope and greed and thrill-seeking in bull markets, fear and regret and revulsion in bear markets.

[roundball100]

Viking, biaggio, bronco - any of you looking at others in pharma?  One that has caught my eye is FRX (Forest Labs, $31.56, PE 14.8 ttm, fwd 7.6).  $12 cash per share, no debt.  Some claim strong pipeline (what the heck does that mean? high quality steel?)  Oh yes, forgot to mention, in the ball-park of 80% of revenue from drugs that go off-patent near-term.  Nonetheless seems limited down-side  given present valuation.  Cap 9B relatively small for big pharma.  Is it worth looking deeper, or too-hard already as we can't tell which pipeline drugs might be successful?

[biaggio]

I own good amount of FRX. I am a sucker for no debt + 1/2 market share in cash.

 

In October I figured their cash + current products were worth $47/share...so you re getting the pipeline for free.

 

I recently learned that Michael Price looked at Pharmaceuticals this way.

 

[Viking]

roundball100, I have not looked at FRX in any detail. The little I have read talked about their 'patent cliff' and the challenge they have had with their investments trying to re-fill their drug pipeline. Big pharma has been trading sideways for 10 years; all this tells me for sure is they were grossly overvalued 10 years ago. My guess is a basket of well run companies should offer at least decent value today (perhaps great value... we will find out in a few years).

[Ross812]

TEVA is down to $45 in pre market today on poor drug trial results.  This is starting to look interesting.

[Guest Bronco]

I think TEVA has one or two non-generic drugs.  You probably get a good value play here but I don't see much growth in this stock.  I would rather own JNJ or ABT - companies that can rip off paupers like me with baby formula and the like.

 

In pharma I am a GIANT proponent of diversification - including pet, baby, but moreso consumer products (band aids ain't going out of style) and medical devices.

 

For me, and I used to get a paycheck from Pfizer, JNJ made a great deal when they bought the consumer products from PFE. 

 

That is why JNJ and ABT are the only ones I will touch (but actually just sold).

 

I think more pharmas like PFE will sell generics and take market share from TEVA.

 

Sad thing is, I remember doing their (and Cephalon's) first tax returns when they were making ZERO.

 

Makes me feel old.

[S2S]

ABT is not as diversified as people like to think. Humira, their blockbuster rheumatoid arthritis drug, makes up less than 20% of revenues but 40% of profits as GMs on "orphan drugs" like these are spectacular. And that 40% number is set to rise in the next 2, 3 years as the franchise approaches peak sales.

 

Teva's branded drug is the multiple sclerosis treatment Copaxone, which also contributes 40% or so of profits. The overhang here had been that (1) Copaxone is set to expire in 2014 and (2) outstanding legal disputes between Teva and numerous generic drugmakers that, if settled against Teva, would make generic Copaxone available immediately. Also, today's weakness is due to better than expected data from Biogen Idec's BG-12, one of many oral (vs. Copaxone, which requires more cumbersome injection delivery) MS treatments that are coming to market.

[Guest Bronco]

S2S - good comments.  I take it you are not buying TEVA in here.

 

I would pass as well.

 

JNJ is the one to one, even though I sold.  I still like ABT, just not as much as JNJ.  But not a fan of this sector at all.

 

Biotechs are where the money can be made but well outside my circle (or pebble) of competence.

[S2S]

not a fan of this sector at all.

 

Bronco - and you'd be in good company. Most people aren't either, which is why there is money to be made if one cares to look outside of the "market porfolio", JNJ ;D

 

If you think Biotech is growthy or exciting, check out AMGN. High-brow science companies with a handful of great drugs (vs. the one-hit wonders so common in Biotech) and decent management... yet the stock has gone nowhere in the last few years. Currently trading in-line with patent cliff bound big pharmas like LLY, SNY to boot.

 

TEVA might work at current level... a long term horizon is mandatory though.

 

[Viking]

Here is what Teva management had to say: 

 

Teva Pharma makes statement on DEFINE study results (TEVA): "We acknowledge the results of the DEFINE study seem promising for patients. It is important to note that as a general rule, results obtained in clinical trials in multiple sclerosis (MS) cannot be compared, unless agents are tested in a head-to-head manner in the same trial. Methodological differences between the DEFINE and ALLEGRO studies, mainly in the definition of the key endpoints, only underscore the inability to compare these two important clinical trials. There are many considerations when choosing a treatment for MS. Based on the ALLEGRO results, Teva believes that laquinimod has the potential to be a safe, convenient and effective, once-daily oral therapy option with a unique mechanism of action that will address unmet needs for MS patients. It is important to remember that MS affects each person differently. It is of vital importance that patients have numerous treatment options available to choose from in order to find a therapy that best meets their needs and manages their symptoms. We are proud to offer patients COPAXONE today, and look forward to bringing our laquinimod product to market in the future."

[goldfinger]

BG-12 uses a method that's less well understood than Copaxone and Laquinimod. It seems it brings gastro-intestinal issues among others.

These problems (known and unknown) will have to be studied in the future. Copaxone is known for being safe in the long run.

Also Laquiminod seems appropriate for use in a combination therapy and its test results are good. So it looks like it definitely has a place (maybe 1B$ market).

 

[goldfinger]

Other side effects of Tysabri and BS-12: brain infection (around 1% of patients after 2 years treatment):

http://www.foxbusiness.com/industries/2011/04/22/fda-reports-brain-infections-biogen-ms-drug/

[ubuy2wron]

I purchased Teva after the most recent sell off it looks to me to be VERY reasonably valued. I think it is worth while to value  Teva as two companies. One a generic manufacturer and two as a regular patent drug manufacturer. I believe as a generic producer they have very good moats and about as good a long term tail wind as any company out there and deserves a mutiple greater than the average drug co on that part of their earnings. As a regular  patent drug producer I am less confident on a proper valuation however MR Mkt has been intensely interested in their MS platform and has been pretty consistent in marking down the stock on any hint of weakness from this source.

[goldfinger]

After acquiring Cephalon, TEVA is probably on the hunt for other undervalued biopharma companies. Dr Frost is part of this strategy.

http://blogs.forbes.com/genemarcial/2011/05/17/teva-chairman-continues-to-seek-undervalued-biopharmaceuticals/?partner=yahootix

I believe they are more competent than I am at uncovering undervalued biopharma companies and also they bring multiple worldwide advantages of scale to those companies.

[FrankArabia]

I'm long TEVA. Purchased at roughly $38.00 (Oct/2011) and $40.00 (July/2012). Teva YTD has been the biggest laggard in the generic space (+5%) likely due to copaxone overhang/change in CEO/annual earnings guided down etc.

 

1) I think the company as if the branded arm is of little value (there is at least some value there but how much I don't know, but its not zero). Adjusted EPS to account for acquisition related items/litigation is north of $5.00. Taking away the roughly 40% contribution from Copaxone (the bulk, though not all of their branded revenues) we arrive at $3.00 per share. So we have a multiple of 13.5x p/e (w/ earnings close to cash earnings here) for the industry leader. Average multiple for the industry is roughly 15x with Watson trading north of 20x.

 

2) Dividends should also grow (as it has historically) as payout ratio (on GAAP basis) is less than 35%. Share buyback plans are also in place.

 

3) The industry will grow over the next ten years from demographics and generic adoption rates (especially Japan) due to cost concerns of health spending. 

 

Company has been a heavy acquirer to gain scale and weed out competitors. Balance Sheet as a result is stretched with Goodwill/Intangibles (this is common in the industry i.e. Mylan, Watson) but they're not overly levered (coverage >10x).

 

Your thoughts?

 

 

[mysticdrew]

I agree with point 3.  I think as the industry leader they'll definitely benefit from the continue shift and rise in generic usage that has been happening and will continue to happen for years to come.