Teva's credibility gap

Shiri Habib-Valdhorn

Positive statements from Teva, and analysts, are not convincing investors.

Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) investors' severe reaction to the favorable news about a rival to the company's oral multiple sclerosis treatment, Laquinimod, sent the share price tumbling 8.5% on Nasdaq on Friday, slashing $3.7 billion from the company's market cap.

Teva corrected 1.6% on Nasdaq yesterday and rose a further 0.7% in early trading today to $46.04, giving a market cap of $43.3 billion. But this does not change the basic fact: since its peak in March 2010, Teva - the "people's share" - has shed over $16 billion in market cap.

Because of the second Passover holiday, there was a delayed reaction by Israeli investors to the plunge on Wall Street, and the share price fell 4.7% in Tel Aviv today to NIS 157.80.

Teva's share price plunged in response to statements by Biogen Idec Inc. (Nasdaq: BIIB) about clinical trial results of its company's oral multiple sclerosis treatment, BG-12, a rival to Laquinimod, which is due to reach market in 2012.

It is quite possible that Teva investors overreacted to the news about BG-12. Several analysts covering Teva believe that its current share price reflects worst-case scenarios for the company and do not take into account events that could give the share a boost.

Bank Hapoalim analyst David Levinson went so far as to say, "Teva's share price does not reflect the future of Copaxone and/or Laquinimod." He believes that Copaxone will continue to generate revenue and profits for Teva for years to come, and that Laqinimod will contribute in subsequent years.

Levinson is no hurry to say which oral multiple sclerosis treatment - Laquinimod, BG-12 or Novartis AG's (NYSE:NVS; LSE: NOV; SWX: NOVZ) Gilenya, which is already on the market - is the preferred treatment. He therefore reiterates his "Outperform" recommendation for Teva, despite high uncertainty about oral multiple sclerosis treatments, in view of its current share price.

Psagot Investment House Ltd. analyst Limor Gruber also believes that Teva's current price reflects a worst-case scenario. She believes that even in such an unlikely scenario, in which Copaxone revenue falls 10% in 2011, 90% in 2012, and a further 50% in 2015, the derived target price for Teva is $45.

According to "Bloomberg", the analysts' average target price for Teva is $63.17, 38% above its current market price.

Teva's flagship product, Copaxone, an intravenous treatment for multiple sclerosis, will see lower sales over time as oral treatments win market share at the expense of current treatments. Copaxone had $3.3 billion in sales in 2010, and is estimated to account for a third of Teva's profits.

On Thursday, in an unusual step, Teva responded to the drop in its share price, issuing a press release, which said, "We acknowledge the results of the DEFINE study seem promising for patients. It is important to note that as a general rule, results obtained in clinical trials in multiple sclerosis cannot be compared, unless agents are tested in a head-to-head manner in the same trial."

Teva added that differences between the clinical trials of Laquinimod and BG-12, mainly in the definition of the key endpoints, only underscore the inability to compare these two important clinical trials. It concluded by saying "Teva believes that Laquinimod has the potential to be a safe, convenient and effective, once-daily oral therapy option with a unique mechanism of action that will address unmet needs for multiple sclerosis patients."

While Teva may be considered the "people's share" in Israel, the people's future will be determined in the US. Most trading in Teva shares takes place on Wall Street. In the past three months, average daily trading volume in New York has been almost 7.7 million shares - 12 times the average daily turnover in Israel. That is what usually happens when a share's fate is determined on Wall Street, and Israeli investors merely play catch-up to foreign developments.

This is the reason that, on the first trading day on the TASE after the Passover holiday, leading indices fell, despite gains on European markets. The blame falls on Teva, which accounted for the day's largest trading volume and closed the negative arbitrage gap. Teva is the largest share on the Tel Aviv 25 Index, accounting for 9% of it.

In other words, were it not for trading in Teva on Nasdaq, it is quite possible that the TASE would have gained ground and the Tel Aviv 25 would have broken Thursday's all-time high.

The sharp reaction by Israeli investors to Teva's fall on Nasdaq last Thursday may reflect another problem: it seems that the market is skeptical about statements by Teva's management. When Teva published its strategic plan for 2010-15, and spoke about reducing its dependence on Copaxone, investors welcomed the news and sent the share price soaring.

But doubts have been spreading since then. Teva says that it does not expect competition from generic Copaxone in the near future? The market does not rush to accept the good news, and every report on the subject causes volatility in the share price. Teva predicts that Laquinimod will have over $1 billion in sales? Investors believe that BG-12 is a risk and send Teva's share tumbling.

So is Teva is over-optimistic, or is the market over-pessimistic?

Published by Globes [online], Israel business news - - on April 26, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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