Monday, February 23, 2009

Teva Pharmaceutical: A Fair Price

Teva Pharmaceutical Industries Ltd. (TEVA) is the Israel-based maker of generic drugs and pharmaceuticals. TEVA is among the world’s largest and most successful generic drug companies. TEVA develops, produces and markets generic drugs covering all treatment categories. The Company has a pharmaceutical business, whose principal products are Copaxone for multiple sclerosis and Azilect for Parkinson’s disease, as well as a specialty pharmaceutical business, which consists primarily of respiratory products.

Standard and Poor’s rates TEVA as a strong buy with a target price of $56. This is based, in part, on S&P’s forecast of a 29% rise in sales for 2009 from the acquisition of Barr Pharmaceuticals, the introduction of new products and sales in new markets.

TEVA is selling at a lofty 65x trailing twelve month earnings of $0.78; 3.4x sales and 2.3x book value.

Quarter over Quarter, sales increased about 10% for the quarter ending 12/08. Sales for the TTM increased about 17.8% vs. TTM 1 year ago. These sales growth rates are substantially below the 5-year average of 27.6%

Earning per share for the most recent quarter crated by 227% vs. the 1-year ago quarter. Similarly, EPS declined 70% for the TTM compared with the prior year period. The 5-year EPS growth rate is -7.7%.

Gross margins for the TTM at 53.84% exceed the 5-year average gross margin of 50.89%. However, operating margins for the TTM period are at 10.33% as compared to the 5-year average of 16%. Net margins are down to 5.79% for the TTM period from the 5-year average of 11.7%.

Measures of management effectiveness also show deceleration. Trailing twelve month ROA, ROI and ROE are all below 5-year averages.

We agree with the analyst at S&P who considers TEVA a company with good prospects ahead. Generic drugs are definitely a growth market worldwide and TEVA has a strong product pipeline.

However, we disagree with his conclusions. In our assessment, TEVA is currently fairly priced in the $46-$47 range. We base our estimate on our evaluation of TEVA’s profitability, ability to generate free cash flow, and balance sheet adjustments for intangible assets and long term debt.
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