Investment house Clal Finance published an updated review of Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) today. Analyst Jonathan Kreizman believes that Teva needs a large acquisition to plug holes in its performance.
The upper end of Teva's sales guidance for 2011 is $19 billion, while the low end of the guidance for 2012 is $21 billion. According to Kreizman, this means that Teva will need to make a substantial acquisition, probably of a generics company, this year. If it does not, "organic growth of 11% in 2012, a challenging target in itself, will only be sufficient to reach the lower range of the five-year plan, a long way from where the company says it is positioned."
However, Kreizman points out that generic drug companies in Latin America (with a clear reference for Brazil or Mexico), at a reasonable price that makes sense for Teva, are not waiting in line. For those that are available, Teva is competing with the ethical drug companies that, like it, are also seeking to gain a better foothold in the generic drug industry taking shape in emerging markets. Meanwhile, Teva finds itself buying a marginal Peruvian company with annual sales of less than $60 million, that is, less than 0.5% of Teva's sales.
Kreizman estimates that, in an attempt not to succumb to the trend, Teva is likely to continue with a similar tactic of buying several small and medium-size companies with more sensible multiples from its point of view.
The gap between Teva's current rate of growth and management's forecast for 2012/2015 strengthens the view that Teva will buy the growth it requires to meet the high targets it has set for the coming years. With the company generating $4 billion cash a year, and considerable capacity to take on debt, Teva will be in a position to plug the holes in its organic activity through larger acquisitions than it originally envisaged.
Despite everything, Kreizman remains positive about the share. "In the light of the company's guidance being lower than our estimates, we are cutting cut profit estimate for 2012 and onwards. This brings in train a cut in our price target to $58 from $60." This compares with a closing price in New York on Friday of $51.04.
Teva is traded at p/e ratios of 8.8 and 10 on market estimates for 2011 and 2012. The target price reflects p/e ratios of 10.6 and 11.3 on Clal Finance's estimates for 2011 and 2012.
"At its current pricing, the generic opportunity created by the approaching wave of patent expirations, together with possible development of Liquinimod and other drugs, outweigh the potential future erosion of Copaxone," Kreizman concludes.
Teva has a market cap of nearly $46 billion. In the past week, its share price has fallen about 6.5%.
Published by Globes [online], Israel business news - www.globes-online.com - on February 14, 2011
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