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Teva Pharma - A Safe Prescription?


Teva Pharma - A Safe Prescription?

Hit by a triple whammy of pipeline woes, an onslaught of blockbuster patent expiries, and regulatory stringency, the once-invincible branded-drugs giants are engulfed in a fog of uncertainty. While the upcoming spate of patent expirations spells trouble for the branded-drugs companies, it creates a big opportunity for generic drug makers.

Of late, there has been a remarkable transformation in the landscape of generic drug companies following a spike in consolidation among them. The relative 'might' of generic drug companies may further be strengthened by President Obama's proposed 2010 budget plan. The President's budget proposal supports a regulatory pathway for bio-generics, and seeks to put an end to "evergreening" by which branded drugs companies reformulate their drugs with minor changes to renew or extend the patent life of the drugs.

Let's take a look at generic drug maker Teva Pharmaceutical Industries Ltd. (TEVA), which has continued to outperform the broad market index every single year, blazing a trail.

Company Profile

Based in Israel, Teva, which was incorporated in 1944, develops generic and branded drugs as well as active pharmaceutical ingredients, or APIs. Shares of Teva are listed on the Tel Aviv Stock Exchange and on the Nasdaq. Teva, which closed first day of trading on the Nasdaq at 61 cents on March 26, 1990, has now topped $45. The company's operations are spread across North America, Europe, Latin America, Asia and Israel. The company generates 58% of its revenue from the U.S.

Earnings - Gleaming... And Still Growing

Teva is not a pure-play on generic drugs and as previously mentioned, has three lines of business - generic pharmaceuticals, branded pharmaceuticals and API. In 2008, generic drugs accounted for 73% of the company's revenues, while branded drugs and API made up a modest 22% and 5% of revenue, respectively.

Over the past ten years, Teva's revenue has never shown a year-over-year drop. Barring three years -- 2004, 2006 and 2008, net earnings have increased in each of the years from 1999 through 2008.

Teva's fiscal year ends in December. Net income in 2008 declined to $635 million or $0.78 per share from $1.95 billion or $2.38 per share a year before, hurt by charges primarily related to the acquisition of Barr Pharmaceuticals. However, excluding items, net earnings in 2008 were $2.37 billion and per share earnings were $2.86, reflecting increases of 22% and 20%, respectively. Net sales improved 18% to $11.1 billion in 2008.

Mergers & Acquisitions in 2008

Teva has a successful track record in mergers & acquisitions. The most notable deal sealed in 2008 was the acquisition of Barr Pharma. Teva acquired Barr, a U.S.-based multinational generic pharmaceutical company, in a stock and cash deal valued at $7.46 billion plus about $1.5 billion of net debt.

Teva's share of total pharmaceutical prescriptions is the highest of any pharmaceutical company in the U.S., including both branded and generic. In 2008, Teva increased its share of total pharmaceutical prescriptions in the U.S. by 0.7% to 16.4%. The acquisition of Barr is expected to further expand Teva's leadership position. Barr's share of the U.S. generic pharmaceutical prescriptions in 2008 was 5%. With a 24% share of total prescriptions, Teva holds the "No.1" rank among generic drug companies.

The acquisition of Barr substantially expands Teva's operations in Germany and Poland, besides providing significant opportunities in Croatia and Russia through Pliva, which was acquired by Barr in late 2006. According to Teva, Pliva's share of the Croatian generic market is approximately 14%. Barr has also added a number of brand-name women's health products, including several contraceptives, to Teva's roster of products.

Teva expects the Barr acquisition to become accretive to its GAAP earnings in the third quarter of this year.

In February 2008, Teva expanded the capabilities of its biogenerics business by acquiring CoGenesys Inc. for $412 million in cash. The acquisition has helped Teva gain access to albumin fusion technology, enabling the development of long-acting biological drugs and additional protein-based medicines.

Seeking to expand its operations in Spain, Teva purchased Bentley Pharmaceuticals Inc. in July 2008 for $366 million in cash. Bentley markets branded and generic products primarily in Spain, but also sells in other parts of Europe.

Rich Generic Pipeline

Teva has a rich generic pipeline. As of February 5, 2009, Teva had 201 abbreviated new drug applications pending at the FDA, compared to Sandoz's 123, Mylan Inc.'s (MYL) 119 and Watson Pharmaceuticals Inc.'s (WPI)'s more than 60 pending ANDAs.

In settlement of a patent dispute with Wyeth over the generic version of antidepressant Effexor XR, Wyeth granted Teva a royalty-bearing license to manufacture and sell generic Effexor in the U.S. beginning on July 1, 2010. The license is exclusive for the first six months after the launch.

Teva expects final approvals for most of its applications within the next three years.

The brand-name versions of drugs for which Teva has filed ANDAs, generated sales exceeding $110 billion in the U.S. last year. According to Teva, 128 of its ANDAs have *Paragraph IV certification. The company is believed to be the first-to-file on 85 products, the branded versions of which had U.S. sales of over $53 billion in 2008.

(*The paragraph IV certificate means that the listed patent covering the drug is invalid or will not be infringed. A paragraph IV certificate gives the innovator of the drug the right to file an infringement suit against the generic drug company within 45 days, thus triggering a 30 month automatic delay of the generic approval).

Leading Product Portfolio

The company has a well-stocked quiver with over 380 products. In 2008, Teva launched 28 generic versions of branded products in the U.S., received 24 final generic drug approvals and 11 tentative approvals.

As recently as April 1, Teva won FDA approval for the generic version of Bayer Healthcare Pharmaceuticals' oral contraceptive Yaz tablets. Last year, Yaz generated $616 million in sales in the U.S. Teva, which has been awarded a 180-day period of marketing exclusivity for generic Yaz, plans to launch the drug in July 2011 under terms of a supply and licensing agreement with Bayer.

Other news that made headlines on April 1 was Teva's launch of the generic version of Shire Pharmaceuticals' Adderall XR, indicated for the treatment of Attention Deficit Hyperactivity Disorder. Annual sales of Adderall XR were approximately $1.5 billion in the United States for the twelve months that ended February 28, 2009, according to consulting and data services company IMS Health.

Teva's branded business includes innovative drugs -- multiple sclerosis drug Copaxone and Parkinson's disease treatment Azilect; respiratory products; biopharmaceuticals and biogenerics; and women's health products - the proprietary business acquired as part of the Barr acquisition.

Copaxone, a leading multiple sclerosis therapy in the U.S., raked in global sales of $2.26 billion in 2008, an increase of 32% over 2007. In the U.S., sales of the drug increased 26% to $1.4 billion, driven mainly by price increase and partly due to volume increase.

According to Teva, Copaxone has thus far been approved for marketing in 52 countries worldwide. Last year, in the U.S., total prescriptions of Copaxone rose by 10.5% year-over-year.

Azilect, which is available in 35 countries, including the U.S., fetched worldwide sales of $175 million in 2008 compared to $120 million in 2007.

ProAir and Qvar are some of Teva's respiratory products, which are meant for asthma, chronic obstructive pulmonary disease, or COPD, and allergic rhinitis. The respiratory products are marketed directly to physicians, pharmacies, hospitals, managed healthcare organizations and government agencies. The company's global respiratory portfolio recorded sales of $778 million in 2008, a 5% increase over 2007.

The biopharmaceutical drugs, which are produced using live organisms, are used to treat diseases like cancer, arthritis, and rare genetic disorders. Teva's primary biopharmaceutical products are interferon alpha 2b and GCSF (granulocyte colony-stimulating factor). While most of these products are being sold in certain markets in Europe, Teva sells hGH (human growth hormone) in the U.S., pursuant to an agreement with Savient Pharmaceuticals Inc. (SVNT).

In September 2008, Teva received EU approval for TevaGrastim --a biosimilar product of Amgen Inc.'s (AMGN)Neupogen, a granulocyte colony stimulating factor, as a treatment of chemotherapy-induced neutropenia. During 2008, Teva's sales of biogeneric pharmaceuticals increased to $63 million from $50 million in 2007.

Teva added women's healthcare products like oral contraceptives, intrauterine contraception and hormone therapy treatments to its roster following the acquisition of Barr.

Patent Expirations and Biogenerics - Opening The Door For Future Growth

According to IMS Health, about $114 billion worth of drugs will be going off patent between 2010 and 2012, and another $121 billion worth of drugs are slated to lose patent protection between 2013 and 2015. Generic drug makers like Teva stand to benefit from the patent expirations.

Though regulatory issues have long hindered the development of biogenerics in the U.S., it is expected that a regulatory approval pathway for biosimilars may soon be crafted. Teva is one of the serious contenders in this niche field.

Healthy Balance Sheet

The company has a strong balance sheet. At the end of 2008, Teva's cash flow from operations was $3.2 billion and free cash flow was $2.2 billion. Cash and marketable securities as of December 31, 2008 totaled $2.1 billion.

Following the additional debt taken on by Teva in connection with the acquisition of Barr, its total debt-to-total debt plus equity at December 31, 2008 rose to 34% from 24%. The company expects to shrink the ratio, which is a measure of financial leverage, back to 24% by the end of this year.

Gross profit margin in 2008 was 53.9%, up from 51.8%, thanks mainly to higher Copaxone sales, higher respiratory product sale and a better generic product mix.The company's current ratio, a measure of short-term financial strength, is 1.35. If the current ratio is 1 or greater than 1, it means a company can take care of its current debt.

Upward Revision of Estimates

Over the past 60 days, Wall Street analysts have revised up Teva's Q1 and Q2 earnings estimates, taking into account the macro and external conditions that support continued growth of generic pharmaceuticals, including biologics, the company's rich generic pipeline, and synergy benefits arising from the integration of Barr. The consensus earnings estimate for the first quarter has been boosted by 2 cents to $0.68 per share, while the consensus earnings estimate for the second quarter has been raised by 9 cents to $0.80 per share.

Stock Performance

Thus far, TEVA has hit a 52-week low of $35.89 and a 52-week high of $48.74. The stock has recovered nearly 24% from its 52-week low and trades above both its 50-day and 200 day moving averages. TEVA is currently trading at $45.18, up 1.73% on a volume of 2.25 million shares.
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