On Friday, Lehman Brothers Equity Research published a report on Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) in which it referred to the top story in the generic pharmaceutical industry - that Wal-Mart Stores Inc. (NYSE:WMT) plans a pilot program “to make 291 generic products available for $4 per prescription for up to a 30-day supply.” The reports caused generic drug shares to fall; Teva fell 3.4% on Thursday on Wall Street on double its daily average trading volume.
Lehman Brothers kept its “Overweight” recommendation for Teva, with a target price of $47, a price reflecting a premium of over 35% on the share’s average opening price last week, before the report about Wal-Mart.
Referring to the subject of Wal-Mart’s prices, Lehman Brothers said, “Teva only supplies Wal-Mart with 20 product families, with national sales of only approximately $11 million, compared to Teva's total sales base of $8.5 billion.” Wal-Mart therefore accounts for less than 0.1% of Teva’s sales mix.
Lehman Brothers says Wal-Mart’s initiative will have a “minimal impact” on Teva for several reasons. First, Wal-Mart’s initiative is being launched as a pilot in Florida, and may be expanded to the chain’s other stores beginning in 2007, depending on the results of the trial period, which means that the initiative will have no effect on Teva’s 2006 results in any case.
Lehman Brothers adds that, in contrast to other opinions on the market, it does not believe that the initiative will inevitably lead to pricing pressure for generic suppliers because Wal-Mart “has no intention of extracting price reductions from suppliers and that no negotiations are currently taking place.” In addition, Wal-Mart’s method of buying in bulk, which makes it possible to cut costs and prices, will apply to the generic drug market as well. Lehman Brothers says, “Wal-Mart's move is primarily intended to enhance its public image,” following recently criticism concerning medical insurance for its employees (more than one million), which means that the retailer will absorb the price cut.
In an update on Friday, CIBC Capital Markets also referred to fears of falling prices in the generic drug industry. CIBC agrees with Lehman Brothers that there is no need for exaggerated worries about Wal-Mart’s initiative. CIBC said it resembled the hysteria that affected Teva’s share over the pricing for generic Zocor two months ago, when Merck & Co. (NYSE:MRK) threatened to cut the price of its authorized generic version of the drug before Teva launched its own generic version. Teva’s share fell sharply because of fears that subsequently turned out to be baseless. In its update, CIBC said that the ostensible new circumstances would not intensify price competition between generic drug makers, since this was already the case.
Published by Globes [online], Israel business news - www.globes.co.il - on September 25, 2006
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