It’s great earnings for the second quarter (announced on July 27) versus long-term worries for Teva Pharmaceutical Industries (TEVA) right now. With an assist from sell on the good news, long-term worries are winning at the moment.
For the second quarter earnings climbed to $1.08 a share. That was an increase of 30% from the 83 cents a share in the second quarter of 2009. The Wall Street consensus had projected earnings of $1.04.
In its conference call the company raised its guidance for the year to $4.50 to $4.60 a share, up from the prior forecast of $4.40 to $4.60.
Oddly enough for the world’s largest maker of generic drugs, the long-term worries focus on a proprietary Teva drug, Copaxone. About 20% of Teva’s $3.8 billion in sales in the quarter came from Copaxone, a drug for multiple sclerosis that could face a challenge from a generic being developed by Novartis (NVS) and Momenta Pharmaceuticals (MNTA).
That worry got a boost on July 23 (hence the selloff in the stock that began that day) when the U.S. Food & Drug Agency approved a generic version of Sanofi-Aventis’s (SNY) Lovenox from those same two companies. (For more on the Lovenox approval see my post https://jubakpicks.com/2010/07/26/update-teva-pharmaceutical-industries-teva-2/ ) The thinking is that the approval of generic Lovenox makes the approval of generic Copaxone more likely because both generics are biosimilar drugs. The Food & Drug Administration is still developing its policy toward biosimilar generics. Biosimilar generics present difficult regulatory challenges since the original biologic drug generally shows a high degree of molecular complexity that makes its efficacy potentially extremely sensitive to any change in the manufacturing process.
Teva is betting that Copaxone will face generic competition by the end of 2010. In its conference call the company said it projects losing $1 billion in Copaxone revenue to generic competitors by 2015. In the second quarter Copaxone sales were $773 million.
Teva’s other worries are a lot smaller. Revenue in Europe suffered in the quarter from a decline in the euro and the pound versus the U.S. dollar.
I expect the company’s recent acquisitions, especially of Ratiopharm, to help balance the loss in revenue from Copaxone. (The effect of the company’s recent acquisitions wasn’t included in guidance.)
I’d be a buyer on weakness here but as of July 28 I’m leaving my target price at $61 a share by May 2011.
Full disclosure: I don’t own shares of any company mentioned in this post in my personal portfolio.
I have come to the conclusion that pharma companies are just too hard to own unless you have some inside info regarding a new product. On top of all the patent/generic/obsolescence issues we have a worldwide margin pressure issue caused by the budget situations in many countries. The US was a place to make up for the discounts demanded by government plans around the world until the Obama people got involved. Pharma can no longer count on the US so I think they are going to see a further margin squeeze over the next decade. Higher demand in places like China and India will not make up for it since I think they will simply “steal” the science if they cannot get the product very cheaply.
There may be some great trading situations but I cannot see holding any of them long term.
Good in depth piece on SeekingAlpha:
http://seekingalpha.com/article/216412-new-challenges-to-tevas-business-model
The new disclaimer should read:
Full disclosure: I do (or don’t ) own shares of X company mentioned in this post through the JUBAX fund
Sanofi sues FDA over generic approval: http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2010/07/28/BUNQ1EKHE5.DTL
RE: Jims personal position. In a previous post, he stated that he had liquidated all his personal positions due to the startup of JUBAX and seemed to imply he was fully invested in the fund. He may have even said, I just don’t recall.
Lately Jim we have not seen any responses from you on our emails.
What has not been taken into acct are two new factors. Teva has had to pay quite a number of large fines this year for overpricing.
Also sanofi and others will now start to look for biotech companies for more generic drug developmeny by traditional pharma companies. Also if the European cuts on reimbursement continues as economies weaken, the buyout will not be so great !! Jim is this correct? Anyone???
I made about 10k on CVS stock, when it dropped out of favor because of some stupid reason. I would buy TEVA at around $45, but at $48 I still see plenty of other opportunities with better reward/risk ratios.
“So Jim, now that you have launched you’re new fund, are all stocks that you mention go to be tagged “I don’t own shares of any company mentioned in this post in my personal portfolio”?”
I think Jim has always made this disclosure. What am I missing?
So Jim, now that you have launched you’re new fund, are all stocks that you mention go to be tagged “I don’t own shares of any company mentioned in this post in my personal portfolio”?
Thanks,
Mac
Thanks for the update Jim. I agree with you that Teva is a long term buy and I added to my position on its recent weakness. I am impressed by their management and am confident they will balance out revenue if copaxone faces generic competition. The other unknown with this is the impact of the new FDA policy. (Full Disclosure: I own shares of TEVA)