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Teva Pharmaceuticals
 

Teva Pharmaceuticals

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Teva Pharma Equity Research Report CJ Wei

Teva Pharma Equity Research Report CJ Wei

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  • Healthcare costs are rocketing higher in the U.S. and it won’t be long before the Baby Boomers push our healthcare spend over 20% of GDP.  Cuts to Medicare and medical device/pharma levy taxes aside, we’re going to need to focus more of our efforts on generic drugs; particularly in the biogenerics space.  So much innovation in the therapeutics space comes at the hand of biotech companies these days, and their biologic drugs can cost anywhere from $10,000 to $150,000 per year.  The health reform bill aims to implement a path for biogeneric or biosimilar drugs that will continue to reward innovative biotech companies for their work, but that will also bring down drug costs.  TEVA is at the forefront of biogeneric innovation and stands to benefit once final legislation is put into place.
  • Net sales grew to $16.1 billion, an increase of $2.2 billion from 2009 salesSales grew in each principle market in North America by $1,403 million, in Europe by $676 million and in our International markets by $143 million, with growth in local currency Historical growth rate of 28% a year, 5 times the growth rate of the S&P of 5.2%Dividend growthMerck & Co grew 3.5% and Pfier grew 8.1%J&J grew 10.4%Teva Pharmaceuticals is the leading generic drug company in the US400 generic products in more than 1,300 dosage strengths and packaging sizesGlobal presence covers North America, Europe, Latin America, Asia, and Israel with operations in more than 60 countries38 finished dosage pharmaceutical manufacturing sites in 17 countries15 generic R&D centers operating mostly within certain manufacturing sites and 21 API manufacturing sites around the world
  • RatiopharmOn August 10, 2010, we acquired the Merckleratiopharm Group (“ratiopharm”), a global pharmaceuticalcompany with operations in more than 20 countries, for a total cash consideration of $5.2 billion. Ratiopharm’sresults of operations were included in our consolidated financial statements commencing August 2010. With theclosing of the acquisition, we are now the leading generic pharmaceutical company in Europe, with the numbertwo position in Germany and leading market positions in other key European markets and in CanadaLaboratoireThéramexOn January 5, 2011, we acquired LaboratoireThéramex for €269 million paid at closing (approximately$360 million at current exchange rates) and certain limited performance-based milestone payments. Théramexoffers a wide variety of women’s health products, and expands our women’s health business into importantgrowth markets in Europe and the rest of the worldCorporaciónInfarmasaOn January 26, 2011, we acquired CorporaciónInfarmasa (“Infarmasa”), a top ten pharmaceutical companyin Peru. Infarmasa’s product offerings significantly enhance our portfolio in the market, especially in the area ofantibiotics, where Infarmasa has the leading brand in Peru. The combination of Corporación Medco (our existingoperation in Peru) and Infarmasa will be one of the top two pharmaceutical companies in the countryOn January 26, 2011, we acquired CorporaciónInfarmasa (“Infarmasa”), a top ten pharmaceutical companyin Peru. Infarmasa’s product offerings significantly enhance our portfolio in the market, especially in the area ofantibiotics, where Infarmasa has the leading brand in Peru. The combination of Corporación Medco (our existingoperation in Peru) and Infarmasa will be one of the top two pharmaceutical companies in the country
  • Initiatives to promote generic pharmaceuticalsNegative impact on big pharmaceuticalsCutting the number of years a drug maker could market brand-name biologic drugs to seven years from 12 yearsLimits on “pay-for-delay” deals that set back lower cost rival drugs with settled patent challenges and agreements between big pharma and generic manufacturers
  • In 1994 the dividend was a little more than half a cent  per share per quarter.  In the year 2000 the dividend was about a penny and a half per share per quarter. By 2007 they were up to about 10 cents per share per quarter and they are currently at about 18 cents per share per quarter.  The math shows 15 dividend increases in the last 5 years, with a 197.9% dividend growth rate over 5 years and a very sustainable 15.9% payout ratio.
  • The company is in the right business for the foreseeable future. They make cheap drugs for an aging population, and they make them well. They have over 400 generic products with 216 more potential ones currently in the pipelines. The company is managed well financially, they do not have a lot of leverage, they are growing earnings, making strategic acquisitions,  have a strong pipeline and are rewarding shareholders with a fast growing dividend. If the economy is to stay weak for the foreseeable future, health care is one thing that people can’t scrimp on due to inelastic demand. 

Teva Pharmaceuticals Teva Pharmaceuticals Presentation Transcript

  • CJ Wei 4/19/2011 Recommend: BUY Target Price: $58.60
    TevaPharmacare Industries
  • Key Stats and Pricing
    Teva’s current price provides an attractive entry opportunity
  • Presentation Overview
  • Recommendation
    Teva Pharmaceutical is a strong long-term investment with an attractive current price
  • Investment Thesis
    Why do I like Teva Pharmaceuticals?
    • Leading position in pharmaceutical industry, strategically positioned in attractive markets
    • Attractive growth prospects, yields, unique value
    • Low risk, defense stock
    • Hybrid of generic and innovative pharmaceutical products allow stable cash flows
    • Compliments our overweight healthcare perspective and diversification strategy
  • Teva Pharmaceuticals
    Teva Pharmaceutical’s product offerings are divided into three categories
    • Generic animal pharmaceuticals
    • Market proprietary dermatological and nutraceutical veterinary products in the US
    • Copaxone
    • Azilect
    • Speciality Respiratory Products
    • Women’s Health
    • Biopharmaceuticals and Biosimilars
    • Sold at prices below originator pharmaceuticals
    • Global reach: North America, Europe, International Markets
  • Generic Drug Industry
    Key drivers that contribute to a positive revenue outlook
    Expiring Patents
    Growing Middle Class
    Positive Revenue Outlook
    Aging Population
    Emerging Market Growth
  • Investment Thesis I:Global Muscle and Reach
    Teva’s global operations positions the company to capture generic pharmaceutical growth
  • Investment Thesis II:Growth, Yield, Value
    Growth potential shown by recent acquisitions and product launches
    Strategic Expansion Strategy
    • Barr Pharma in 2008 Recent acquisition of Ratiopharm, LaboratoireTheramex, CorporacionInfarmasa
    • P&G Joint Venture
    • Strong cash position
    Launches in the U.S. of five significant new generic products
  • Investment Thesis II:Growth, Yield, Value
    Health care reform should increase the demand for cheaper drugs
  • Investment Thesis II:Growth, Yield, Value
    Generous dividend payments
    Dividend yield of 1.77%, growing at an 25% annual clip
    15 dividend increases in the last 5 years
  • Investment Thesis II:Growth, Yield, Value
    Nearing lower end of 52-week trading range
    Currently trading at 11.9 times current year earnings
    Discount of 15.2 times earning level that
    52-week trading range: 46.99 - 62.82
  • Investment Thesis III:Low Risk Investment
    Low risk going into summer months
    • Managed well financially
    • Low leverage
    • Strong and diverse pipeline
    • Health care stability due to inelastic demand
  • Case Study 1: September 2000 through April 2002
    Teva demonstrates price stability in turmoil
    September 2000 to April 2002
    Teva stock declined in price only about 26%
    NASDAQ declined 67%
  • Case Study 2: February through October 2008
    Teva demonstrates price stability in turmoil
    February through October 2008
    Teva stock declined in price only about 22%
    NASDAQ declined 47%
  • Investment Thesis IV:MSF + Reynolds Strategy
    Health care reform should increase the demand for cheaper drugs
    • Neither funds have positions in a brand or generic pharmaceutical
    • Low volatility in uncertain summer months
    • Healthcare unintentionally underweight
  • Additional Company Info
  • Management
    Superior Management team that aims to maximize value for shareholders
    “Thanks to the expertise of our integration teams, we will be able to hit the ground running terms of maximizing our new scale and seizing the opportunities for further growth that our leadership position brings us.”
    CEO ShlomoYanai
  • Competitors Analysis
    Superior Management team that aims to maximize value for shareholders
    TevaPharma (TEVA)
    Watson Pharma (WPI)
    MylanInc (MYL)
    ROA: 9.43%
    ROE: 16.28%
    Prof. Marg: 8.75%
    Op. Marg: 23.38%
    ROA: 3.13%
    ROE: 5.85%
    Net Prof. Marg: 5.14%
    Op. Marg: 8.55%
    ROA: 3.09%
    ROE: 6.64%
    Net Prof. Marg: 6.34%
    Op. Marg: 13.34%
  • Key Financials
    Revenue and positive key financials over industry
    From 2009 to 2010, Teva increased sales 16%, earnings per share 35%, and cash 23%
    On pace to nearly double sales by 2015
  • Valuation
    DCF Analysis
    Target Price: $58.6
    WACC: 12%
    Terminal Growth: 2%
    TVM of FCF: 10x
    Catalyst
    Recent company acquisitions
    Generic pharmaceutical growth
    Slowed revenue growth due to competition
    Time Horizon
    Approximately 1 Year
  • Investment Management Professionals
    Currently held by many hedge fund managers including Paulson, Soros, Buffet
  • Risks
    Health care reform should increase the demand for cheaper drugs
    • Success depends on Teva’s ability to commercialize additional pharmaceutical products
    • Revenue and profits decline easily in generic drug arena
    • Sales of branded products such as Copaxone could be adversely affected when patent expires
    • Acquisitions diverse risks
  • Summary
    BUY recommendation at market price
    • The constant demand for pharmaceutical products should provide a safe investment for summer months:
    • Dominant player in pharmaceutical industry
    • Growth, value, yield
    • Compliments MSF and Reynolds healthcare strategy
  • Disclosure Appendix
    Each student research analyst(s) primarily responsible for the preparation and content of all or any identified portion of this Investment research report hereby certifies that: With respect to each issuer or security or any identified portion of the report and/or with respect to an issuer or security that the research analyst covers in this research report, all of the views expressed in this research report accurately reflect their personal views about those issuer(s) or securities.
    This report does not constitute investment advice and should not be used to make investment decisions.
    This student prepared investment research report is for the sole use of the Applied Investment Management (AIM) course and its students in the management of the student run investment portfolios and may or may not have resulted in implementation of the investment recommendation included therein. This investment research report has been prepared as an educational exercise and may not be complete or reflect all available information. The Kenan-Flagler Business School and the University of North Carolina make no direct or implied warranties as to the accuracy of data or statements in this report. External interested parties should not rely on any securities recommendations made in this student prepared investment research report.
    The student and/or faculty advisors may have positions in the securities discussed in the report.
    This student prepared investment research report and the Applied Investment Management course are not affiliated in any way with the University of North Carolina Management Company or any of the University’s other endowment funds.
    The student may have received assistance from the subject company(ies) referred to in this report including, but not limited to, discussions with management of the subject company(ies). The student may have received assistance in the preparation and/or review of this student prepared investment research report from member(s) of the faculty and other related persons. This information is provided on an "as is" basis.
    © 2011 Kenan-Flagler Business School (KFBS), University of North Carolina, Chapel Hill North Carolina. All rights are reserved. Any unauthorized use, duplication, redistribution or disclosure is prohibited by law and will result in prosecution. Where included in this report, KFBS sourced information is the exclusive property of Kenan-Flagler Business School. Without prior written permission of KFBS, this information and any other KFBS intellectual property may not be reproduced, re-disseminated or used to create any financial products, including any indices.