Teva's horizon

The 2008 pipeline, why 2009 will be tough, and how 2010 will make amends.

Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) has been enjoying a revival in recent months. At $45, its share is on the verge of an all-time high, reflecting a market cap for the company of $35 billion. When it comes to Teva, the world's largest generic drug company and one of the 20 largest pharmaceutical companies worldwide, investors are interested principally in the long-term. They have confidence in its ability to deliver results in the short-term, but are constantly preoccupied with the company's prospects for 2009-2010 and beyond. So what is likely to happen in 2008? What sort of year will it be for Teva after the strong year it had in 2007?

One group with the answers to these questions and even data on specific drugs is investment house Cowen and Company. In a review published today, analysts Ken Cacciatore, Ian Sanderson, Anant Padmanabhan, Steve Scala, and Jeff Goater, who rate Teva "Outperform", try to map out the company's direction in coming years and assess which drugs will have exclusivity and which will make a notable contribution.

"At the current valuation levels, and following very strong share performance year-to-date (a 45% increase), investors are looking forward in attempt to gauge the level of visibility to justify additional price movement," the analysts write. "Our analysis leads us to believe that indeed, the visibility for Teva remains very high, and we can build a very credible growth story through 2010. We have detailed our assumptions for 2008, which appears strong, as well as our initial take on 2009 (which appears a bit weaker but manageable) and 2010, which already looks compelling.

"At 17x our 2008 earnings per share estimate, we believe that the shares are reasonably valued, with another 15% upside versus the market ,possible over 12 months. Given the size and liquidity in this name, we believe that this type of return is compelling and recommend buying or adding positions here," the analysts add.

2008 - the year of exclusivity

The Cowen analysts assess the likelihood of Teva making an exclusive launch of its generic version of the drug Risperdal for the treatment of Schizophrenia in adults and adolescents aged 13 to 17. It also alleviates autistic symptoms, and it is also indicated for the short-term treatment of bi-polar disorders. Noting that Risperdal has $2.2-2.4 billion in brand sales, the Cowen analysts write, "We currently model $25-35 million in revenue, assuming a competitive introduction. However, if Teva is able to reclaim the exclusivity, generic Risperdal would likely contribute $300 million in high margin revenue." The drug was originally developed by Janssen Pharmaceuticals, and the events surrounding it bear a slight resemblance to Teva's battle to market a generic version of the cholesterol drug Zocor last year.

In 2001 Teva filed an abbreviated new drug application (ANDA) with the US Food and Drug Administration (FDA), with a paragraph IV certification, meaning that it would officially challenge the validity of the main patent on the drug. Later that year the FDA advised Teva that it had removed the patent from its Orange Book of registered patents, and that it would therefore have to amend its request.

The FDA's position today is that with the patent now delisted, no exclusivity should be granted on the drug and that all the generic companies will be able to enter the market in June 2008. Teva is arguing that this was not the intention of the legislator and that it should be given exclusivity. "We find Teva's words well reasoned. However, we would note that there is nothing specific in the statute to deal with this issue, and therefore it is left to the FDA's interpretation," say the Cowen analysts.

Teva filed a citizens' petition against the FDA earlier this year. "We - and most likely many investors - have not been focused on the issue, and therefore have modeled for a competitive launch. So an unfavorable decision would be likely viewed as a non-event," say the Cowen analysts. "However, if Teva is able to reclaim the exclusivity, generic Risperdal could contribute $300 million in revenue. We now believe that Teva may successfully lobby the FDA and a favorable ruling could provide a nice trigger for Teva shares." The analysts believe the winning of exclusivity could add an additional $0.10-15 to Teva's earnings per share, around $100 million, even if it is in a generic market approved by the owner of the ethical version of the drug.

What else will make 2008 interesting? There are three major drugs in the US on which Teva can win exclusivity even if it shares it with other companies - Wellbutrin XL, Lamictal, and Fosamax and Lotrel on which Teva will receive exclusivity for 2009. These products alone could generate more than $1.2 billion in revenue in 2008 ($800 million, excluding Lotrel), say the Cowen analysts. "Relative for a generic company, this is surprising and very good visibility."

Lamictal, a drug indicated for the treatment of epilepsy and bipolar disorder, was originally developed by GlaxoSmithKline plc (NYSE: GSK; LSE: GSK.L), and it is expected to generate $300 million in generic sales in 2008 for Teva, which will have exclusivity over it. Teva will then control 66.7% of the generics market. Fosamax, a drug for the treatment of osteoporosis, was originally developed by Merck & Co. Inc. (NYSE: MRK). Teva will be able to make an exclusive launch of its generic version, or share it with Barr Pharmaceuticals Inc. (NYSE: BRL) from February 2008, when Merck's patent expires. In any event, the Cowen analysts expect Teva to record $250 million in sales on this drug next year.

2009 - Challenges and opportunities

The Cowen analysts expect 2009 to be challenging year for Teva, although one pleasant surprise could come in the form of a generic launch of Protonix, provided that Teva can reach a settlement with the owners of the ethical drug Wyeth (NYSE: WYE). They note, however, that the most likely scenario is a generic launch of Protonix in 2010. As for Prevacid, a drug for the treatment of heartburn and acid reflux disease, the Cowen analysts note that it "is covered by seven Orange Book listed patents but Teva appears to have initially challenged just five. Patent protection is likely to be extended until November 2009." Teva is likely to have $300 million in sales of its generic version of the drug out of a total market worth $2.6 billion.

The Cowen team believe that 2010 will also produce a number of trump cards for Teva, with generic launches of drugs such as the anti depressant Effexor (estimated sales of $445 million), the hypertension drug Hyzaar/Cozaar (estimated sales of $250 million), an exclusive launch of the Alzheimer's drug Aricept (estimated sales of $80 million), and Protonix (estimated sales of $150 million).

With Cowen sounding so optimistic, one cannot but wonder whether there is still cause for concern. The investment house's analysts note that one issue of concern is the possibility that Schering-Plough Corp. (NYSE: SGP) could become more aggressive on its range of inhaler and respiratory products, a line of business in which Teva has been showing strong growth. There is also the risk that someone could challenge Teva's own patent on its multiple sclerosis drug Copaxone. One likely challenger could be Momenta Pharmaceuticals Inc. (Nasdaq: MNTA), but the Cowen analysts are optimistic about this too. "We believe that a generic formulation of Copaxone is unlikely to enter the market within the next 4-6 years," they conclude.

Published by Globes [online], Israel business news - - on December 18, 2007

© Copyright of Globes Publisher Itonut (1983) Ltd. 2007

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