The generic sector is sizzling hot. Everybody knows Teva, the world’s biggest generic drug maker, which is speeding towards gorilla status. But Teva is not the only one. Few people know Taro Pharmaceutical Industries (Nasdaq: TARO), a Nasdaq-listed generic niche player, whose shares yielded the most impressive return in the sector in the past year. In fact, Taro’s shares are simply out of tune with the market. While Nasdaq was halved, Taro’s shares surged 150% to a record $30, reflecting a company value of $320 million, in six months. How did this happen?
The truth is that the writing was right there on the wall. In mid-1999, investment house Merrill Lynch assessed that an important generic drug approval won by Taro would considerably push up revenue, as well as the price of the share, which was then traded at $6 only. The drug in question was Warfarin, which has been marketed in Israel for decades. Warfarin is the generic version of US company DuPont’s Comadin, for treating thrombosis in heart patients.
Warfarin became one of Taro’s most important drugs, and its sales have reached $9-10 million. At the same time, Taro has only a small slice of the drug’s US market, estimated at $500 million. Merrill Lynch assesses that Taro is constantly increasing its share of new prescriptions, currently at 3% - up from 2.5% in Q3 and 2% in Q2. Merrill Lynch also estimates that the company’s market share will grow to 5% in 2001, with Warfarin sales reaching $12 million.
That’s all very well, but Warfarin alone does not furnish a sufficient explanation for the surge in Taro’s revenue from $73 million in 1999 to an estimated $100 million this year. Taro launches 6-8 new drugs every year, which, according to Taro Israel general manager Shmuel Rubinstein, account for the sustained increase in revenue.
A little history: “Taro is a 50-year-old company,” Rubinstein says. “We recently celebrated our 50th birthday. The company was set up by a group of pharmacists, and a few years later, in 1954-5, it was bought by the Levitt family, which has controlled the company ever since. Taro has 500 staff, of which 270 in Israel. We have subsidiaries around the world, and plants in Haifa and Canada.”
”Globes”: Is your development center in Israel as well?
Rubinstein:”Yes. We have two development centers: in Israel and in Canada, and some 100 R&D staff, of which 80 in Israel. It’s important to point out that all our plants are FDA-approved in both the chemicals and the pharmaceutical fields.”
Is the US your chief target market?
”Yes, we are mainly focused on the US market. We have a large marketing network there, and about $70 million of our annual revenue come from the US. The rest comes from the Canadian and Israeli markets. We started operating in Europe only recently. We set up a subsidiary in Britain, and we hope our activity there will pick up speed in the years ahead.”
On which drugs are you focusing?
”We’re developing and manufacturing mainly generic drugs whose market share is relatively small, so as to refrain from massive competition.”
But competition does exist.
”Most competition involves drugs with far bigger sales. The big companies are focusing on these drugs and we focus on drugs whose sales are smaller, because that’s where competition is less fierce. Big companies don’t want to develop a drug whose overall revenue is $30 million. They’re not interested in having a market share of 20-30% and selling for $6 million. We, on the other hand, are. At the same time, we also develop drugs such as Warfarin, whose sales are bigger.”
You appear to be complementary to Teva, which focuses on big-sale generic drugs. Isn’t cooperation with Teva just the thing?
”There’s no talk of a merger with Teva, if that’s what you have in mind. We’re trying to cooperate with Teva in manufacturing, not in marketing, but there’s nothing I can talk about openly. In any case, we’re talking with other companies, and in our field cooperation is common and natural. It’s simply a normal measure for cutting expenses.”
Taro’s shares are sky-high. Why?
”I don’t want to go into stock exchange issues, but I believe it’s due mainly to analyst reports – especially Merrill Lynch. They believe we’ll continue to post growth, and I hope we’ll indeed continue to receive 6-8 generic approvals each year.”
What about other markets?
”We’re making our first steps in Europe. We set up a new company in Britain, and it is currently focusing on obtaining marketing licenses from the health authorities. It’s a process that takes about two years, and we’re treating our activity there like a start-up. At the moment we have mostly expenses and hardly any revenue. We hope things will work out.”
Let’s go back to Merrill Lynch’s report following Taro’s improved Q3 financial statements. Merrill Lynch was surprised by the revenue, which grew to $27.2 million, and profit, which reached $2.8 million – 15% above forecasts. The investment house now estimates that, after Taro closes the year with a profit of $101 million - $0.80 per share – its revenue will reach $113.2 million and its profit will correspondingly rise to $0.95 per share, thanks to recently launched drugs and drugs about to be released on the market. In other words, Taro is currently traded at a future p/e ratio of about 30 – still low compared to other generic players.
Published by Israel's Business Arena on 14 December, 2000