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Barclays Pharmaceuticals Analyst: Teva Must Be Aggressive with Acquisitions


Barclays analyst Douglas Tsao sees the success of double-dose Copaxone as a platform for expansion.

Douglas Tsao

“The mergers and acquisition phenomenon is one of the most notable trends in the global pharmaceutical market today. Many deals have taken place, and there are many more potential deals. Just a few days ago, it was announced that Mylan would acquire a suite of drugs from Abbott for $5.3 billion. I expect that in the coming months we will see more big deals – there are companies that will devote resources to this, and I expect that Teva will be one of them, ” said Barclays Pharmaceuticals analyst Douglas Tsao in an interview with “Globes” last week.

Tsao’s belief that there would be additional deals has proven correct and, a few days after the interview, another international pharmaceutical mega-deal was announced: Abbvie will acquire Shire for $55 billion. The second part of his forecast – acquisitions by Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA)) – is likely to come to pass in the future. According to Tsao, “In light of Teva’s abilities, and its success in transferring patients from regular Copaxone to double-dose, the company will be able to be more aggressive with acquisitions. The reason for this is that there is now greater certainty for Teva.”

Strong performance in generics

Tsao joined Barclays in 2008, and he covers a number of Specialty Pharma companies. One of the stocks he covers is Teva, and he has a particularly positive opinion of it: his recommendation is “outperform” and he has set a new target price at $70, 29% higher than the current market price.

On the of reasons for his positive attitude towards the company is Teva’s success in transferring patients from regular Copaxone (20 mg), which is administered daily, to the double-dose version, which is administered three times a week. The patent for the regular dose is no longer valid in the US, and Teva could theoretically encounter generic competition in the near future. The more patients Teva succeeds in migrating to the new version, which is patent protected, the less the expected generic competition is liable to harm it. Copaxone is Teva’s flagship drug and, in 2013, its sales totaled $4.3 million. Copaxone sales are credited with roughly half of the company’s profit, according to estimates.

“Teva’s success in migrating patients significantly narrows the potential downside to the profit, ” says Tsao. According to him, it is not likely that a generic version of Copaxone will be approved in the immediate future, and he even believes that Teva will win its appeal to the US Supreme Court (Teva is appealing the patent expiry having been moved up from September 2015 to May 2014).

“In addition, Teva is performing well in generics, it is implementing changes in its corporate structure, such as reducing the size of its board, and, most importantly, it has appointed former Actavis Pharma president Sigurdur Olafsson to manage generics, which is very significant, because he adds a great deal of experience and credibility to Teva. I believe that this indicates that Teva is much more open to change, compared with Teva a few years ago. I call it ‘The New Teva, ’” says Tsao.

How much is this change related to the new CEO Erez Vigodman, if at all?”

“Some of it started beforehand, but Erez has a big part in it. To a certain degree, the strategy, and what Teva needs to do, is known – preserve Copaxone, reorganize generics, and use the cash that company generates. I expect that Teva, under Vigodman, will create smart deals that will add to the shares’ profit.”

What kind of deals?

“Larger acquisitions in Specialty pharma, and seizing opportunities, should there be any, in generics. In Jeremy Levin’s time, the focus was on acquiring technologies that did not have a financial impact. With Vigodman, I expect we will see more emphasis on deals that have a financial impact. In generics, there is consolidation, and Teva can acquire assets that will help it in certain markets, or reduce expenses, or add technology. Teva has enough capital to carry out acquisitions, even for a few billion dollars.”

Increased regulation has a positive effect

Teva is the largest generic pharmaceutical company in the world, despite the fact that in recent years investors have focused primarily on its branded drugs, particularly Copaxone. Tsao focuses on generics. “I think that a big part of the rise in the stock price (39% from the beginning of the year – S.H.V.) stems from the success of the double-dose Copaxone, but the real engine – and the reason for the target price we set – is the improvement in generics, ” he says.

“This is the source of the upside, because investors ignore it, because they are always focusing on Copaxone. We definitely see an improvement in the pricing dynamic in generics, ” he says, “Much of this stems from the consolidation in the market. Also increased regulation has a positive effect on a company like Teva.”

Tsao points out that a few Indian generics companies have encountered “regulatory challenges” recently. Beyond these challenges, according to Tsao, “The Indian companies today are busy consolidating with each other; for example, Sun announced its acquisition of Ranbaxy. The Indian manufacturers are competition for Teva, but the dynamic in the market is currently working in Teva’s favor.

How does the US generics market, which is Teva’s primary market, look today?

“In the past, Teva was focused on Paragraph 4 (a process that made it possible to challenge an existing patent that protects an original drug and to launch a generic version under certain circumstances -S.H.V.), which worked very well for it. Today, there are fewer opportunities in this field, and more companies are operating in it, so I believe that the goal today is to improve products. In addition, insurance coverage in the US has grown, and a lot of this will lead to greater demand for generics, so the dynamic in the market is favorable.”

Given his positive attitude towards the generics market, it is not surprising that there are three generics companies among Tsao’s recommended stocks: Jazz Pharmaceutics is one of Barclay’s favorites, and he also recommends Mylan, and Actavis.

Among the stocks you cover, which should investors stay away from right now?

Tsao thinks for a minute and finally says Zoetis, a veterinary drug company that spun off from Pfizer, and whose shares were issued independently a few quarters ago. “The current situation in the market leads me to be very positive about many stocks that I cover, so this is a difficult question, but Zoetis is a little less recommended for the coming year.”

Published by Globes [online], Israel business news – www.globes-online.com

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