"The situation at Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) is not good and the share price does not lie," Sphera Global Healthcare Management LP managing partner Ori Hershkowitz told "Globes", the day after Erez Vigodman took up his post as president and CEO of the company. "Teva has a product that accounts for more than half of its profit, Copaxone, which is about to lose its patent, and other products that account for a large percentage of its profit and which will face generic competition by the end of the decade."
Hershkowitz adds, "Teva's working assumption is that 2014 will be a low year in profits, and that they will grow afterwards. The assumption relies on switching 30-50% of patients to three-times-a-week Copaxone. I agree with Momenta Pharmaceuticals Inc. (Nasdaq: MNTA) (which is developing a generic version of Copaxone) that Teva's forecast for switching patients is too aggressive and overoptimistic."
The more patients that Teva is able to switch to three-times-a-week Copaxone, the milder will be the reaction of Teva's share price to the launch of generic Copaxone, says Hershkowitz. "If they succeed in switching 20% of patients, the approval of generic Copaxone will send the share price down by over 10%," he estimates.
Hershkowitz is not enthusiastic about Teva's new therapeutic entities (NTE) plan, either. "I do not think that they will generate enough growth," he says. "I estimate that more than half of the NTEs will never reach market, and of those that do make, only 5-10% will have more than $100 million in sales."
The NTEs are part of the strategy introduced by former Teva CEO Jeremy Levin. "Levin is one of the smartest men in the pharmaceuticals industry. I was optimistic when he was appointed, and I was very wrong," says Hershkowitz. "Levin brought in a clique of middle managers who joined the existing middle managers, and introduced a strategy that is divorced from reality and does not meet the logic of the pharmaceutical industry. Did the board of directors force this strategy on him, or did Levin choose it himself? I think that the former possibility is more likely."
"Globes": What can Vigodman do?
Hershkowitz: "What Levin should have done is no longer possible for Vigodman. The Biotech Index, which tracks the companies that Teva could acquire, is up 100% since the start of the Levin era, and the acquisitions options are very limited. Vigodman can finally implement the promised streamlining plan, but streamlining won't boost the share price; growth engines are needed for that. He can sell non-strategic assets, such as the growing OTC venture for which he can get a good price, and use the proceeds to acquire strategic assets that will contribute to profits."
Nevertheless, Teva's share is cheap. Given its risk-reward profile, isn't it worth buying?
"It's very cheap, assuming that profits are maintained. But if the company does not carry out some kind of initiative to bring in profit-generating growth engines, and the ones it has lose their patents, there will be no profits and the share price will no longer be cheap. There is uncertainty now, and things will be very bad if 75% of the profits disappear and there is great uncertainty about what is going to replace them."
Published by Globes [online], Israel business news - www.globes-online.com - on February 13, 2014
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