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Profit From Teva's Travails
Without question, I have made more money by investing in stocks beaten down by over-heated worries than any other way. This comes to mind when I look at Teva (Nasdaq:TEVA), the world's largest generic pharmaceuticals company. While Teva management seems to be addressing these concerns as directly as they can, the stock's valuation suggests that investors might still have room to profit from Wall Street's lingering doubts.
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The Quarter That Was
Teva's June quarter certainly did not provide any particular causes for concern. Revenue rose 12% to $3.8 billion, as the company saw high-teens growth in the North American business. Teva's largest single product, the MS drug Copaxone, saw revenue grow 13% to a bit under $800 million, as strong North American sales offset weaker European results.
The profit side of the ledger was likewise solid and mostly uneventful. Gross margin ticked up a bit, but the company saw good leverage on the sales and marketing lines. Some of this improvement was a result of synergies from acquisitions (including Barr), but some as well came from the end of payments to Sanofi-Aventis (NYSE:SNY) relating to Copaxone. The end result, then, was 22% operating income growth and 30% EPS growth.
The Road Ahead
One of the desirable aspects of Teva's business is that although there is the appearance of a lot of risk and activity, the reality is that the business tends to progress rather smoothly. The company invests considerable resources in its labs and lawyers, and this ensures a steady stream of generic pharmaceuticals flowing into the market. To wit, the company has over 200 abbreviated new drug applications (ANDA) awaiting FDA approval and 83 of those are first-to-file applications.
Of course, it is not all good news these days.
In what may be an ironic twist, part of the weight on Teva shares comes from the threat of generic competition to Teva's hugely successful proprietary branded drug Copaxone. The end of this drug's patent protection is in sight and Mylan (NYSE:MYL) is looking to launch a generic. Teva is not giving up without a fight, though, and management has argued that the FDA should require Mylan to run a clinical trial to prove the equivalence of their generic version of Copaxone.
Elsewhere, Teva got a setback last week when they lost the race to be the first with a generic form of Sanofi's Lovenox. Novartis (NYSE:NVS) and Momenta (Nasdaq:MNTA) beat Teva to the punch on this one and will benefit from the exclusivity period that comes with that, but Teva will ultimately get their generic version on the market as well.
The Bottom Line
I have been surprised recently to see just how cheaply many healthcare stocks are trading. Teva has scarcely ever been what I would call "cheap", so the fact that it now looks undervalued by more than 25% is an eye-opener to me. Teva is not going to wipe away the worries about its stock overnight, so investors should not go into this expecting a quick pop.
I think one of the best ways to profit in the market is to buy quality stocks that are trading down on temporary problems. There is nothing structurally or fundamentally wrong with Teva, and the industry fundamentals for generic drugs look as good as they ever did. Teva is not the most exciting opportunity in the market, but if you can put quality names into your portfolio at a 25% discount, that is not a bad way to invest. (Learn more about pharmaceuticals, see Measuring The Medicine Makers and Stocks On Drugs: What It Takes To Get High.)
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IN PICTURES: Retire A Millionaire In 10 Steps
The Quarter That Was
Teva's June quarter certainly did not provide any particular causes for concern. Revenue rose 12% to $3.8 billion, as the company saw high-teens growth in the North American business. Teva's largest single product, the MS drug Copaxone, saw revenue grow 13% to a bit under $800 million, as strong North American sales offset weaker European results.
The profit side of the ledger was likewise solid and mostly uneventful. Gross margin ticked up a bit, but the company saw good leverage on the sales and marketing lines. Some of this improvement was a result of synergies from acquisitions (including Barr), but some as well came from the end of payments to Sanofi-Aventis (NYSE:SNY) relating to Copaxone. The end result, then, was 22% operating income growth and 30% EPS growth.
The Road Ahead
One of the desirable aspects of Teva's business is that although there is the appearance of a lot of risk and activity, the reality is that the business tends to progress rather smoothly. The company invests considerable resources in its labs and lawyers, and this ensures a steady stream of generic pharmaceuticals flowing into the market. To wit, the company has over 200 abbreviated new drug applications (ANDA) awaiting FDA approval and 83 of those are first-to-file applications.
In what may be an ironic twist, part of the weight on Teva shares comes from the threat of generic competition to Teva's hugely successful proprietary branded drug Copaxone. The end of this drug's patent protection is in sight and Mylan (NYSE:MYL) is looking to launch a generic. Teva is not giving up without a fight, though, and management has argued that the FDA should require Mylan to run a clinical trial to prove the equivalence of their generic version of Copaxone.
Elsewhere, Teva got a setback last week when they lost the race to be the first with a generic form of Sanofi's Lovenox. Novartis (NYSE:NVS) and Momenta (Nasdaq:MNTA) beat Teva to the punch on this one and will benefit from the exclusivity period that comes with that, but Teva will ultimately get their generic version on the market as well.
The Bottom Line
I have been surprised recently to see just how cheaply many healthcare stocks are trading. Teva has scarcely ever been what I would call "cheap", so the fact that it now looks undervalued by more than 25% is an eye-opener to me. Teva is not going to wipe away the worries about its stock overnight, so investors should not go into this expecting a quick pop.
I think one of the best ways to profit in the market is to buy quality stocks that are trading down on temporary problems. There is nothing structurally or fundamentally wrong with Teva, and the industry fundamentals for generic drugs look as good as they ever did. Teva is not the most exciting opportunity in the market, but if you can put quality names into your portfolio at a 25% discount, that is not a bad way to invest. (Learn more about pharmaceuticals, see Measuring The Medicine Makers and Stocks On Drugs: What It Takes To Get High.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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