As a financial professional who has worked on Wall Street for 25 years, I feel that I have to put some rationality into the discussion about Teva. No one is talking about the risks. I do not believe that Teva is a stock suitable for widows and orphans anymore.
I know all the reasons to buy Teva. The main ones are the potential synergistic savings to earnings with the purchase of Ivax, the pipeline of future drugs, and the excellent management. There is the slim chance of a takeover. There is even the possibility that Teva could be “Buffetized” like Iscar.
But I think all the analysts are discounting the risk of several new events. The most important being the new competitive threat of Wal-Mart to Teva. Wal-Mart recently not only unveiled a $4 price tag on a group of 300 generic drugs in its Tampa, Florida store but moved up the start of the program. The drugs at this low price will be available to insured and uninsured consumers. For some prescriptions, there will be a savings of up to 49%. Wal-Mart already sells $17 billion worth of drugs each year.
Most stock analysts do not see this initial program as a competitive threat to Teva, and they maybe right about that. But in my opinion, Wal-Mart will not stop with the initial rollout of this plan. Wal-Mart will do what they always do and try to dominate this consumer category, as they have done with hundreds of other products like groceries and toys. With their buying clout, they will soon begin to pressure the generic drug companies to lower their prices. Their competitors will follow suit.
Even though securities firm WR Hambrecht & Co is predicting a “monster quarter" for Teva, they still predict a decline in gross margins of 5.4% to 50%. At some point, the pressure on gross margins will affect the stock performance of Teva.
My doomsday scenario will surprise no-one who has followed Wal-Mart for years. Critics of Wal-Mart say they single handily destroyed Main Street USA and small town America. Almost any strip mall that was situated within a ten mile radius of a Wal-Mart closed down shortly after Wal-Mart arrived in town. Teva may not go the way of the strip mall, but it could be bloodied.
When Zocor went off patent this summer, Merck did not sit back and do nothing as usual. They signed an agreement with an Indian generic drug maker, Dr. Reddy’s Laboratories, to produce an “authorized” version of Zocor. Even worse, Merck signed a deal with several health insurers to make the cost of the copy of Zocor below Teva’s planned offering price of the generic version. To paraphrase General Patton, “Merck has just begun to fight.”
It is fine to buy Teva, as long as you are not blind to the risks.
Laura Goldman worked on Wall Street for over twenty years for such firms as Merrill Lynch and UBS Warburg. She now runs her own investment advisory, LSG capital, from Tel Aviv.
Published by Globes [online], Israel business news - www.globes.co.il - on October 17, 2006