Has the nation abandoned "the people's share"? Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA), the biggest and most successful company to have come out of Israel, was always considered a symbol of everything that an Israeli company should wish to be: huge growth, acquisitions of foreign companies, and a market cap in the billions of dollars. Accordingly, its stock became part of any investment portfolio in Israel.
In recent years however its status has changed. The stock has drifted, and lags behind the relevant indices, its liquidity has declined, and fewer analysts cover it.
In May, Dr. Jeremy Levin will complete a year as CEO of Teva. Levin, who replaced Shlomo Yanai in the post, has been navigating the drug company in a new different direction. Levin was previously a vice president at Bristol Myers, and had a considerable part in the success of its "string of pearls" strategy colaborations and the sale of less profitable lines of business.
Teva under his management is already different in many senses from the company it was a year or two ago: many senior managers have been replaced, a new business strategy has been announced, and some of the projects that were under development have been abandoned. But in other areas there have not been significant changes: the company's flagship product, multiple sclerosis treatment Copaxone, continues to contribute substantial sales and profits, and at the same time to be a source of concern for investors because of the growing competition. And, as mentioned, the share price continues to mark time at about $40, a long way from its 2010 peak.
"The past year has been wonderful," Levin said at a briefing for journalists that Teva held last Thursday. "It has been a year of change and renewal. Not just for Teva, for me too I'm a new immigrant, I came to live here, and to build a company in Israel. Before I came to Teva it was a good company, and we can make something even better here," he said optimistically.
But do investors have real cause for optimism? In what follows, we shall try to examine how Levin has fared in his first year in charge, and how the company will look under his leadership as time goes on.
Teva's share price jumped 6.8% the day after Levin's appointment was announced, in January 2012. After a handover period of a few months, Levin took over as CEO in May last year, and since then the share price has fallen by 10%, and the company's current market cap is $33.6 billion.
Have the investors who welcomed Levin with open arms already managed to become disappointed in him? The answer is probably that they have not, but that many of them prefer to wait on developments (or for a further rise in the dividend). "Levin has still not delivered the goods, and that's not his fault, for changes like these take time", says analyst Richard Gussow of DS Brokerage. "At present, sentiment is negative, and investors are looking for something that will give the share a push. We saw Teva's plans, but investors are saying 'Show me the money'"
"In the past year, Levin has set out a route for a long-distance run," says analyst Jonathan Kreizman of Clal Finance. "Along the way we will be able to understand better, but for the time being the market is not especially happy, because the horizon is far away. Investors don't always like to hang onto a stock for developments that will come along in a year or more."
Copaxone's sales figure in 2012 was $4 billion, a record, but the expectation is that sales will be eroded in the future.
For several years now, the market has been fearful of the effect of the expected decline in Copaxone sales. This is a drug estimated to account for 40-60% of Teva's net profit, and the threats to it come from two directions: competition from new original drugs administered orally, rather than by injection, and competition from companies that will launch generic versions of Coapxone itself.
The first threat has already materialized. Biogen recently launched Tecfidera (formerly known as BG 12). This is the third orally administered drug on the market, and apparently the most effective and the safest of them. Generic competition is still some way off; Teva has been successful over the past year in legal proceedings it brought against the generic companies.
"At present, Teva is enjoying the best possible scenario for Copaxone," says Kreizman. "It won in court, and the most likely probability is that the patents protecting Copaxone will last at least until the end of 2015. On the other hand, Biogen has launched Tecfidera, which is more effective and has a higher safety profile than Gilenya (Novartis's oral treatment, S. H-V), which has annual sales of over $1 billion, and there is no reason that Tecfidera shouldn't reach a similar rate of sales."
"Copaxone will be with us for many more years," says Gussow, who thinks that the market currently values it at zero. "Teva is traded at a p/e ratio of 7-8 on 2013 profits, and the generic companies have an average p/e ratio of 16," he explains. "If we deduct Copaxone's contribution to net profit, about 50%, Teva is traded like any normal generic company, or in other words, Copaxone is worth zero, and that's just not true, even if it is true that its market share will decline."
Meanwhile, Teva is developing oral treatment Laquinimod, but it failed to meet the main endpoint in its clinical trial. Levin believes in the product, and the company recently began a further trial, but the product's time to market has lengthened. "I'm more optimistic than I was in the past about Laquinimod," says Gussow. "This is a drug that could complement Copaxone, and the combination between them apparently enhances efficacy. It could thus contribute to Copaxone sales in the future."
Kreizman is less optimistic: "There may perhaps be a surprise in relation to Laquinimod in Europe, but in the US Teva is at least three years away from the market, and this is a train that Teva is slightly missing."
Teva has made one acquisition in the past year. In the past, Teva grew through acquisitions, and made deals in the billions of dollars, among them the acquisitions of Barr, Ratiopharm, and Cephalon. In 2012, Teva made do with buying rights in a treatment for neurological disease Huntington for $26 million. Another deal was with Xenon, for a down-payment of $41 million and up to $355 million in the future, but that is a commercialization deal, not an acquisition.
This situation is not happenstance. This is Teva's general direction at present: without massive buys, but with targeted acquisitions, in amounts that will probably not exceed a few hundred million dollars. "We are moving form an acquisitions concept to organic growth," Levin said. This direction stems from, among other things, the erosion of one of Teva's strongest growth engines in past years, namely "paragraph 4", a legal proceeding in the US that enabled generic companies to challenge the patents protecting original drugs, and to argue that they were invalid for one reason or another. "In the past, paragraph 4 generated strong cash flows that made it possible to carry out acquisitions, but it is no longer what it was," said Levin.
In Kreizman's view, Levin's most significant card is the ability to make innovative acquisitions (i.e. in the area of original drugs). "I certainly expect more acquisitions, with the focus on small to mid-size innovative companies," Kreizman says. In his view, there will be no generic acquisitions for the sake of geographic expansion. "Teva has been stuck for several years over expansion in emerging markets. The multiples of companies there have risen steeply, and Teva is not the only company looking for acquisitions.," he says.
Teva employs 45,948 people, 43% of them in Europe, 30% on the American continent, 16% in Israel, and 11% in Asia. The geographic spread may change somewhat in the future, because Teva has marked the East as a target for expansion. "In the US, one in six prescriptions is for Teva, and that's just the start; it can be done all over the world," " Levin said. "We have to expand geographically. There are great economic changes taking place today, and a great deal of drug consumption will be in the East. We will be there, certainly."
Teva recently set up a joint venture with a South Korean company with the aim of entering the Korean market, and further such ventures may follow in the future. China is also a huge market in Teva's sights, especially for respiratory products. Another joint venture is with Procter & Gamble in non-prescription (OTC) drugs.
Gussow sees Teva as 50% generic and 50% innovative. In the past, Teva was mainly in generics, but Gussow points out that, with Levin, the focus has been diverted more towards innovative drugs.
In generics, Teva has marked a new growth engine, NTE, combining existing drugs with the aim of meeting other needs. According to Teva's chief scientist, Dr. Michael Hayden, the potential is in the billions of dollars. In innovative drugs, the emphasis is on the central nervous system and treatment of pain, gynecology, respiratory products, and, to a certain extent, oncology. Teva recently halted several developments, some of them being pursued with other companies. For example, development of a product for treating cancel with CureTech, controlled by Clal Biotech, was stopped.
According to the average price target of the analysts covering Teva, its share price will rise by 14.6% over the coming year. "In the second half of the year, we may perhaps start to see the effect of the retrenchment program, and that could restore investor confidence," Gussow says. Teva has stated that it will cut costs by $1.25-1.5 billion over the next five years.
Published by Globes [online], Israel business news - www.globes-online.com - on April 17, 2013
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