Good Time to Buy TEVA Stock?

The world's largest generic drug company is an Israeli firm: Teva Pharmaceuticals. Founded in 1944, with a current market capitalization of $49 billion, Teva makes up 8% of the Tel Aviv 25 index. Shares can be purchased on Wall Street and in Israel. It's stock price has fallen 18% since March 2010, which begs the question: is this is a good time to buy Teva stock?

The company

For years, Teva (ticker symbol: TEVA) has been one of Israel's flagship health care companies and is a world leader in the generic and branded drug manufacturing industry. The company employs 35,000 workers, a fifth of whom work in Teva's facilities in Israel. In August 2010, Teva acquired Germany's second largest generic drug maker, ratiopharm. Standard and Poor's sees Teva as well positioned to benefit from anticipated legislation in the U.S. mandating a new regulatory pathway for generic biologics, giving a price target of $62. Teva supplies the world's leading multiple sclerosis drug (Copaxone, sales ~$3 billion) , a drug for Parkinson's disease (Agilect/Azilect), and also supplies bulk pharmaceutical chemicals. The company markets 400 individual products and sells them around the world.

The stock

Teva's stock price has greatly outperformed the general market over the past 20 years, returning almost 6,900% vs. the S&P 500, which returned 281% during the same period.

Teva even performed well during the recent global economic crisis: as the general market (S&P 500) fell between Oct, 2008 - Feb, 2009 by 38%, Teva fell only 3%. The stock price is generally very stable (beta 0.2, which make it one-fifth as volatile as the overall market). The stock has a Price-Earnings (P/E) ratio of 15 (the lowest in three years), which in-line with the general market. Paying a dividend since 1997, Teva stock currently yields 1.4%, with annual revenues of over $16 billion. Gross margins rose to 62.5% in Q3/2010 from 59% the previous quarter, and higher than the 57-60% normal long-term margins.

What's driving the price down?

Is this a good time to buy Teva stock? With all the great data points listed above, why do we see that the company's share price has fallen 18% since March, 2010?

 

Firstly, Teva has increasingly intense competition in the generic drug market from other generic drug manufacturers and brand-name drug companies.

Eric Barden, President and Chief Investment Officer at Texas-based Barden Capital Management ,says, "current analyst and investor sentiment is positive, but not euphoric. Investors widely recognize the exceptionally high quality of Teva’s growth but they appear unwilling to pay a premium relative to Teva’s slower growth competitors. Perhaps the assumption is that at [$49] billion in market cap, growth will inevitably slow."

Another catalyst for Teva's lagging stock price likely started with the early 2010 legal verdict against Teva. In May, 2010, a Las Vegas jury awarded $356M in punitive damages against Teva Parenteral Medicines. The company was sued for not fully labeling its propofol product for single patient use only: the jury believed the plaintiff contracted hepatitis as a result of the poorly labeled product. Teva claimed the product was clearly labeled as single patient and was blatantly misused at the clinic in question. Teva believes that there are numerous grounds for appeal, and plans to contest the verdict vigorously.

There was also some concern that the acquisition of European drug company ratiopharm wouldn't be effective. It made Teva the largest European generic drug company at a time of European economic slowdown, curtailing Teva's sales and add pricing pressures, leading to lower profits. However Teva recently indicated that the integration of ratiopharm was "making excellent progress, and is likely to be completed ahead of schedule." Also, 55% of Teva's Q3/2010 sales growth was attributable to this acquisition. Teva has compensated for pricing pressure by expanding European sales volumes.

Another answer may also be that sales of Teva’s leading branded product Copaxone will eventually face increased competition from generic competitors. Some investors also wonder if Teva can continue its growth rate given the fierce generic competition and questions about when the FDA will clear its newest drugs.

What do analysts think?

Teva has a 4 out of 5 star rating at Morningstar. Standard and Poor's has rated Teva a "Strong Buy" for the past 3 years, recently downgrading it to a "Buy" from "Strong Buy".

Natali Gotlieb, analyst at the leading Israeli brokerage firm IBI, has a "Buy" rating with a $73 per share price target (41% above its current price), reiterating that the current share price presents a buying opportunity. IBI believes Teva delivered solid Q3/2010 results, and that the company has taken a commanding position in European sales despite pricing pressure. Its two flagship branded drugs, Copaxone and Azilect posted strong sales. She believes that the potential alternate MS therapy "fears and risks are now priced into the share" price, and that Teva is poised to continue to outgrow and outsell its competition.

Teva has a "Strong Buy" or "Buy" rating by 23 of 28 analysts following the stock, with a $66.52 average target price (28% above its current price).

Technical indicators

Since October, 2010, the technical indicators have been mostly bearish (avoid).  In December share prices started to see improvement with a 6.8% jump December 9, 2010 on good Phase III trial news. MarketEdge indicates Teva is a not yet a buy candidate, but shows "mildly improving conditions".

Bottom line

Teva has historically been a great company, and a good investment choice. It's not a short-term investment proposition, though. Those that make money in this stock generally are in it for the long haul. If you want to invest in a solid Israeli pharmaceuticals company with strong earnings and sales growth, low historical volatility, while earning a small dividend, this stock is currently at a relatively low price point.

Teva stock can be purchased on the NASDAQ as an American Depository Receipts stock (ADR) or directly on the Tel Aviv Stock Exchange in Shekels through an Israeli investment account.

Disclosure: The author does not currently own Teva shares, but may purchase in the future.