New CEO Will Cure Teva’s Ailments
We find it absolutely ridiculous that Teva Pharmaceutical (TEVA) should be trading at an adjusted 2012 PE of 7.75X earnings. Despite its stumbles under the previous CEO, Teva is still the industry leader in the generic drug segment and it is emerging as a major branded pharmaceuticals company in its own right. We also don’t believe that it was coincidence that about one month after Teva’s legendary former CEO Eli Hurvitz died, Teva’s new Chairman Philip Frost allowed Teva’s former CEO Shlomo Yanai to “retire” and picked Dr. Jeremy Levin of Bristol-Myers Squibb (BMY) to replace Yanai. We believe that eliminated a huge hole in the CEO’s office as Yanai was a career Army man with no health care experience and a mediocre record of performance as CEO of MAI while Levin was a well-respected senior executive with Bristol-Myers Squibb. We believe that Dr. Jeremy Levin willhelp find a cure for Teva’s ailments. Despite Teva’s stumbles, it has still generated $2.15B in reported profits over the last 12 months even with $1.7B in asset impairment and legal cost write-offs. Teva still earned more net profits in the last 12 months than its four biggest competitors (Perrigo, (PRGO), Forest Labs (FRX), Mylan (MYL) and Watson Pharmaceuticals (WPI)) put together and yet is trading at an adjusted PE ratio well below those companies.
In Q2, the U.S. District Court for the Southern District of New York found in favor of Teva in its patent infringement lawsuit against Momenta Pharmaceuticals, Inc./Sandoz Inc. and Mylan Laboratories Inc./Natco Pharmaceuticals regarding Copaxone. The decision covers several patents, the last of which expires on September 1, 2015. In August, Teva was one of three companies to get FDA approval to make generic versions of the asthma and allergy drug Singulair and it initiated its third Phase III trial for its oral Laquinimod treatment for relapsing remitting multiple sclerosis. Two previous trials have produced positive results. The FDA also accepted Teva’s New Drug Application for Quartette, the first ascending-dose, extended regimen oral contraceptive. Teva also took a $670M loss contingency provision relating to pending patent litigation concerning Teva’s generic pantoprazole and had to deal with an inquiry from the DOJ requesting information regarding possible violations of the Foreign Corrupt Practice Act in Latin America. Considering the DOJ’s recent activities in Latin America, we find it ironic that the DOJ is inquiring about Teva’s actions in Latin America. We think that to solve this, Teva’s CEO Dr. Jeremy Levin should have a Beer Summit with Attorney General Eric Holder and ask if “Is there anything we can do for your people in order to settle this?”