TEVA: What is Next?
Posted on: March 23, 2009 - Email Article - Printable Version
TEVA, the “Generic Giant,” as I once referred to it back in November when I recapped its quarterly earnings, continues to outshine and outclass its peers on pretty much every level. Since I have followed healthcare equities for quite some time now and kept my focus solely on this sector, it is easy for me to say that Teva [TEVA: 51.42, +0.31 (+0.61%)] is one of the best managed companies out there, and I think you would agree based on its recent performance and strategic moves. 
Earnings for the fourth quarter were highly scrutinized by all investors and Street analysts as our financial crisis continues onward, perhaps even getting worse. Many companies unloaded their books for fourth quarter earnings, marking down what is left. Others squeaked out positive gains but still were hesitant on guidance. Well, I obviously do not blame Teva, but how can a company who provides guidance at the low-end of the Street and then misses on revenue have the Street ecstatic and excited about it going into the future? Why don’t we just take a closer look at Teva, and I will provide you those reasons.
Successful Acquisition Strategy
Teva’s acquisition strategy has brought tremendous growth to a once small wholesale drug business in Jerusalem that began distributing imported medicines to customers by the backs of camels and donkeys. So why does Teva have such a strong acquisition focus? Many investors often criticize firms with such a strategy, because they believe that acquisitions destroy shareholder value when companies continuously grow inorganically. In Teva’s case, that is simply not true. Since the focus and need for global expansion hit our economy in recent decades, Teva has been extremely proactive and has sought after developed and under-developed nations ranging from micro-mid cap companies in the generic and pharmaceutical market. Why can’t its competitors do this? Some have tried, like Mylan [MYL: 17.38, -0.07 (-0.40%)]. Mylan destroyed shareholder value for much o f 2007 and 2008 because of its poor capital structure and lackluster management following the Merck KGA acquisition. In simple terms, nobody amongst its peers has the flexibility and cash on hand to expand like Teva.
First, I will discuss the most recent acquisition, Barr Pharmaceuticals. The price tag of the acquisition was $7.46 billion to take-over the fourth largest generic drug maker, with revenues behind Mylan and Novartis [NVS: 53.00, -0.30 (-0.56%)] (Sandoz). In terms of prescriptions per day within the United States, the now “generic behemoth” has 50% more than the #2 player, Mylan. Since Teva typically does not make large acquisitions, it is fully committed to digest Barr and will not really be on the prowl in the short term. Some key developments were released in the most recent earnings report:
- Cost synergies will be over $400 million versus the initial estimate of $300 million
- Accretion will be accretive to earnings in third quarter 2009 versus the initial estimate of fourth quarter 2009
- Leverage will return to the level it was before the Barr acquisition in 1 year (decrease from 34% to 24% by the end of 2009)
The Barr acquisition has expanded Teva’s global presence. It is now the number three player in the Poland generics market, and in Germany it will move to become a top five contender. In Russia, it sees huge growth potential and looks to expand rapidly focusing heavily on the new market. Its acquisition strategy has allowed Teva to create a global supply chain, unmatched across the sector.
Favorable Political Climate
So, now that Teva has the global footprint, what is in its favor within the United States where a majority of the revenue is derived? If you have ever heard President Obama speak regarding healthcare, one of his main points is his pledge to support generic products to help drive down increasing healthcare costs, which affects millions of Americans. Recently, Obama went public with his hopeful healthcare reform and has requested $20 million in 2013 to help speed up the development of generic drugs. This will begin the process of allowing for FDA approval of generic versions of biologic drugs. The budget explains that this change would save the government about $9 billion over a 10-year period. Teva reports that the biologic market will exceed $200 billion by 2015. The “Big Pharma Effect” as I typically call it, directly relates to increased generic usage. Especially with the global footprint that Teva has, its reach is unmatched. Patent expiration will only open the doors for additional revenues from generic companies such as Teva, Mylan, Watson [WPI: 44.50, +0.35 (+0.79%)] and Novartis’ Sandoz division.
Teva is a firm that you could put in your portfolio to capture the growing worldwide generic market and still have some pharmaceutical exposure with some of its leading drugs like Copaxone and Azilect. Like management affirmed, I do not expect Teva to make any more large acquisitions until it can fully digest Barr, but do not put it past the company if it comes across a micro-cap firm that will allow it to continue to sweep up world market share.
-Ryan Savitz
Disclosure: The fund that the author manages is long TEVA.
The Following Stocks Were Mentioned In This Article: MYL, NVS, TEVA, WPI
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