“We are upgrading our recommendation for Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) from “Market perform” to “Market outperform” with a target price of $62 a share. The transferring of patients from a 40 mg dosage has dramatically decreased the risk of lower profits from Copaxone in the coming years, and we believe that the share’s expected upside is mostly from mergers and acquisitions, ” Bank of Jerusalem Brokerage head of research Jonathan Kreizman writes today in his review.
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After lowering its forecast for 2015, which already takes into account competition from a generic version of Copaxone, Kreizman sees only limited risk in the share at a profit multiple of 11. “Our target price still leaves Teva as the cheapest share in the sector, ” he states.
“The US Food and Drug Administration’s slackness (FDA) is looking more like winter hibernation than an afternoon nap. We are getting a strong impression that the FDA plans to continue its procrastination on the question of approving a generic version of Copaxone. While the main threat of competition with Copaxone comes from orally administered drugs, Teva’s clock is ticking more slowly than ever, and greatly reduces the generic risk for Copaxone. The FDA’s neglect and the transferring of 60% of the patients to the 40 mg version (the target for 2015 is 70-80%) bring us to revise our forecasts, and to give greater weight to Copaxone in the valuation model, ” Kreizman writes.
Kreizman believes that the reason for the share’s rise depends to a large extent on Teva’s ability to continue cutting costs, but even more importantly, on the high probability that the company will make a major acquisition or a number of medium-sized acquisitions in the coming year. Kreizman emphasizes the Teva CEO’s statement last week that “Mergers and acquisitions will play a much more significant role in 2015.”
Bank of Jerusalem Brokerage is much more skeptical about the ability of Teva’s pipeline to provide a substitute for the upcoming wave of expiring drug patents, but notes that Teva reported interesting data for two future launchings: a drug for chronic asthma and a drug for pain. “Either way, most of the question marks about the backlog potential are not expected to clear up during the coming year, and we predict that the share will respond to mergers and acquisitions developments even without major news from the pipeline.”
Is Teva capable of joining the mergers and acquisitions trend? “The factors in the company’s favor are the rise in its share price, which makes to it easier for management to use equity to financing acquisitions, and a drop in leverage to 1.76 in terms of the ratio of debt to EBITDA, which makes it possible to raise at least $9 billion for mergers and acquisitions, if necessary. Furthermore, current management has many more and more varied tools than those that were previously available to Teva. In our opinion, new appointments to the board of directors are bringing knowledge and experience that are critical for spotting and assessing the coming acquisitions. On the other hand, while the market would prefer large-scale acquisitions, the lessons from the acquisition of Cephalon are causing excessive care that is likely to cause Teva to avoid getting caught up too big a gamble, while sticking to innovative acquisitions on a relatively limited scale, similar to those it has made up until now.”
After setting his profit forecast for the next two years around $5 a share, Kreizman predicts that the main risk in the coming year is an early generic version of Copaxone. The company estimates a loss of $30-50 million for each month with early generic competition, compared with the optimal scenario, and $100 million in added annual profit if no generic version of Copaxone is launched in the US during the coming year.
Published by Globes [online], Israel business news – www.globes-online.com