It is perhaps a little ironic that generics giant Teva Pharmaceutical (NYSE:TEVA) finds itself in a position similar to what it helped create for many other pharmaceutical companies over the years. The company is facing increasing competition for its blockbuster MS drug Copaxone, while also having to deal with more pushback on pricing and a thinning pipeline for major generic releases. While Teva does have to face up to some near-term challenges, success with biosimiliars and a decision from management to double-down on internal efficiency and profitability would likely go a long way toward improving investor sentiment.

Applying The MACD Indicator With MetaTrader 4: How to use MetaTrader 4, a trading platform used for online trading in the forex, CFD and futures markets.

Some Good, Some Bad, with Third Quarter Results
Teva gave investors a mixed performance for the third quarter. Sales and gross margin came in a little light, but lower operating expenses helped cushion the blow.

Reported revenue rose 14% for the third quarter (with flat sequential growth), as the contributions from the Cephalon acquisition boosted results. Organic revenue growth was more on the order of 1%. Teva saw generic revenue increase just 1%, while branded sales growth of 38% was led by the inclusion of Cephalon drugs like Provigil, Nuvigil and Treanda, and better-than-expected growth (up 13%) in Copaxone.

While gross margin was slightly disappointing, it nevertheless improved on both a GAAP and adjusted basis; GAAP gross margin improved about a half-point, while adjusted gross margin improved more than two points. Operating income rose 6% on an adjusted basis, as lower-than-expected R&D and SG&A spending helped the company's reported results.

SEE: Everything Investors Need To Know About Earnings

Even Generics Aren't Immune to Price Pressure
Part of the bullish thesis on generic drug makers like Teva, Mylan (Nasdaq:MYL) and Watson (NYSE:WPI) has been that their cheaper drugs are the answer to tighter national healthcare budgets. While it is true that Teva seems relatively better positioned than branded companies like Pfizer (NYSE:PFE) or Lilly (NYSE:LLY), tighter spending nevertheless limited growth in Europe to just 1%, and revenue did decline 8% on a sequential basis.

Remember, generics don't generally launch at their final price. There are benefits to being the first to launch a new generic drug, and companies like Teva are often able to charge 50% or more of the branded drug price before new entrants push the price down. So a combination of fewer launches (particularly exclusive launches) and more price resistance from national healthcare systems can be problematic for these companies.

Teva Has Some Changes to Go Through
Part of the bullish thesis on pharmaceutical companies like Pfizer, Merck (NYSE:MRK) and Sanofi (NYSE:SNY) is that they've largely gone through the worst of their patent cliffs and corporate restructurings. In the case of Pfizer and Merck, for instance, there have been substantial layoffs and corporate restructurings (including divestitures like Pfizer's sale of its nutrition business).

Now it's Teva's turn.

The company's OTC drug partnership with Procter & Gamble (NYSE:PG) has already been pretty successful, and I would be surprised if the company didn't look to pursue this even further. At the same time, however, I would expect Teva's new CEO to launch a company-wide restructuring aimed at streamlining manufacturing and improving margins.

Last and not least, Teva needs to reinforce Wall Street's confidence that biosimilars will be a meaningful boost to revenue over the next decade. The company recently got FDA approval for tbo-filgrastim, and while this is not technically a biosimilar to Amgen's (Nasdaq:AMGN) Neupogen (Teva filed for approval before the FDA created the new biosimilar pathway and submitted a full BLA), I expect analysts and investors will be looking at this as a test-case for new biosimilars.

SEE: Patents Are Assets, So Learn How To Value Them

The Bottom Line
There's still quite a bit of uncertainty as to just how much new MS drugs from Biogen Idec (Nasdaq:BIIB) and Sanofi will impact Copaxone revenue and how much impact biosimilars will have at the top and bottom lines. Consequently, there's a pretty big spread between analyst estimates for 2015 to 2017. While that uncertainty increases the risk, it also paves the way for the shares to outperform if Teva can deliver solid financials.

I do believe that Teva can continue to grow its free cash flow, as I think there is room for improvement in the company's manufacturing and sales processes. That said, companies like Merck, Pfizer and Sanofi seem to offer almost as much upside (if not more) as Teva, and a lot of the execution risk is behind them. So while I am basically bullish on Teva at these prices, it's not my best or favorite idea in drugs or healthcare today.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  2. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  3. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  4. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  5. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  6. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  7. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  8. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  9. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  10. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!