UM,
Since I just went thru the trouble of copying it, here it is:
Headline: Teva: Rpts 3Q97; Cut 98 Est.; Long Term Outlook/Valuation Compelling
Author: Richard B. Silver 1(212)526-5387
Rating: 1
Company: TEVIY
Country: SEO CUS
Industry: PHARMS
Ticker : TEVIY Rank(Prev): 1-Buy Rank(Curr): 1-Buy
Price : $47 52wk Range: $69-43 Price Target: $70
Today's Date : 11/11/97
Fiscal Year : DEC
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EPS 1996 1997 1998 1999
QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr.
1st: 0.31J 0.51A 0.51A - -E - -E - -E - -E
2nd: 0.25A 0.55A 0.55A - -E - -E - -E - -E
3rd: 0.39A 0.59E 0.58A - -E - -E - -E - -E
4th: 0.49A 0.65E 0.65E - -E - -E - -E - -E
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Year:$ 1.44A $ 2.30E $ 2.29E $ 4.25E $ 3.55E $ - -E $ - -E
Street Est.: $ 2.34E $ 2.33E $ 3.36E $ 3.35E $ - -E $ - -E
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Price (As of 11/11): $47 Revenue (1997): 1.1 Bil.
Return On Equity (97): 23.7 % Proj. 5yr EPS Grth: 45.0 %
Shares Outstanding: 62.6 Mil. Dividend Yield: 0.6 %
Mkt Capitalization: 2.94 Bil. P/E 1997; 1998 : 20.5 X; 13.2 X
Current Book Value: $9.89 /sh Convertible: None
Debt-to-Capital: 23.2 % Disclosure(s): C
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* Earlier today, Teva reported 3Q97 EPS of $0.58 vs. $0.39, shy of our $0.59
estimate, but in line with the First Call consensus. Accounting for the
difference was a lower-than-expected top line partly offset by lower SG&A
spending and other income.
* We are trimming our 1997 EPS estimate to reflect the lower reported figure.
We are also cutting our high-end 1998 EPS estimate to $3.55 from $4.25 to
reflect more conservative penetration assumptions for MS drug Copaxone.
* Teva announced today that the FDA has approved a change in the storage
requirements for Copaxone from frozen to refrigerated conditions, with an
additional convenience of up to seven days storage at room temperature when
refrigeration is unavailable. Although expected, we believe the more
convenient storage requirements will improve market acceptance of the drug.
* We reiterate our 1-Buy investment rating based on compelling valuation. At
current levels, we believe that investors are paying little or nothing for
Copaxone. By separately valuing Teva's base business and Copaxone, we can
conservatively arrive at a near-term price target of $66 (see details below).
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REVISED FORECAST DETAILS - EXPECT MODEST, STEADY GROWTH FOR COPAXONE: For
1998, we are cutting our worldwide Copaxone end-product sales forecast to
$105M from $225M, primarily to reflect slower-than-expected market penetration
in the U.S., which is supported by recent audited prescription trends for the
drug Our revised 1998 U.S. sales forecast is $75M, down from $175M, which
assumes an average of 8,800 patients treated with Copaxone for the year.
Based on audited prescription data from IMS, we estimate that 6,500-7,000
patients were being treated as of late October. For Europe ($30M in sales vs.
previous $50M), we now assume a U.K. approval in 1Q98, with other European
approvals to follow within 3-6 months.
Although our growth rate forecast for Copaxone is more modest now, we believe
that given the relatively low market penetration of all MS drugs (currently
around 30%), the long-term growth outlook remains positive. In our opinion,
one of the key drivers of improving market penetration is educating physicians
and patients on the benefits of drug therapy (i.e. getting patients to begin
treatment in the first place). Based on conversations we have had with
neurologists, we do not believe that patients are trying Copaxone and thendiscontinuing therapy. Over time, earlier intervention in treating MS with
drugs will become more widely accepted.
CONFERENCE CALL YIELDS LITTLE QUANTITATIVE DATA ON COPAXONE: On today's
conference call, we were disappointed that management did not provide
substantive quantitative information on Copaxone's commercial trends, such as
the company's estimate of patients on drug and/or quarterly revenue figures.
We believe that this incremental information would have complemented the
weekly audited prescription data that we currently track, which is more useful
for analyzing trends rather than for providing a reliable correlate of
absolute patients numbers. Management did state that revenues from Copaxone
were up sequentially over 2Q97. Citing the lack of reliable data to
determine precise number of patients treated with Copaxone, management appears
unlikely to share information it has until some undetermined time in the
future when the information becomes reliable.
QUALITATIVE DATA SUPPORTS LONG-TERM POSITIVE OUTLOOK: Despite the absence of
new quantitative data, the qualitative information management shared does bode
well for continued increasing patient acceptance of Copaxone and long-term
growth. Management stated that Teva Marion Partners' sales representatives
have received double the time of reps for competing products with the
physicians they visit. In addition, enrollment in Teva Marion Partners
disease management program, Shared Solutions, continues to grow. Furthermore,
recently-completed market research indicates that patient compliance with
Copaxone is 80%-90%, substantially higher than the average of 60% for all
patients self injecting medications on a daily basis.
EASED STORAGE REQUIREMENTS FOR COPAXONE TO IMPROVE MARKET ACCEPTANCE: We
believe that the change in the storage requirements for Copaxone from frozen
to refrigerated conditions, with an additional convenience of up to seven days
storage at room temperature when refrigeration is unavailable is meaningful.
Although expected, we believe the more convenient storage requirements will
improve market acceptance of the drug. At the wholesaler/pharmacy level, it
will more convenient storage and handling. For the patient, traveling with
Copaxone will be easier as will the daily routine of preparing the drug for
administration. Perhaps as important, the product will no longer be hampered
from a marketing standpoint -- as the frozen requirement has provided
ammunition for negative selling by competitors. During the next few months,
we expect audited prescription trends to reflect accelerated market
penetration of Copaxone due to the change in storage requirements.
VALUATION - RISK/REWARD PROFILE COMPELLING; LITTLE CREDIT FOR COPAXONE: Based
on our revised 1998 forecast, conservatively assigning a $45 per share value
to Teva's base business (18x our $2.50 estimate, a substantial discount to
Mylan Labs, currently trading at 23x CY98 earnings) and $21 to Copaxone (20x
our $1.05 estimate), we would arrive at a total value of $66 today. Near-term
stock outperformance may be limited by the absence of major catalysts.
However, we believe that longer-term investors will be solidly rewarded, given
Teva's substantial earnings power from Copaxone supported by a robust base
business.
QUARTERLY RESULTS - LIGHT REVENUES OFFSET BY LOWER OPERATING EXPENSES AND
HIGHER NET INCOME: Total revenues in the quarter were $287M, up 21% from a
year ago but below our $304M estimate. Teva's base business, in particular
Teva USA, continues to outperform expectations, posting strong 3Q97 sales of
$124M, up 27% from a year ago and better than our $117M estimate. As
expected, the largest contributors to the increase included generic versions
of Klonopin (clonazepam) and anti-ulcer compound Carafate (sucrulfate), in
addition to strong sales of antibiotics. Although Teva is facing additional
generic competition for clonazepam, we forecast an offset to lower clonazepam
sales by contributions from new product introductions and growth in
sucralfate. This translates into modest growth in 1998 for Teva USA, aided by
greater realization of top line synergies from Teva's 1996 acquisition of
Biocraft. Outside the U.S., Israeli pharmaceutical sales were essentially
flat at $51M and below our $55M estimate. The difference was attributable to
a new arrangement between Teva and Merck, whereby sales of Merck's products tothe Israeli Health Funds are no longer recorded by Teva. European sales were
up 44% to $55M, representing positive contributions from APS/Berk (acquired in
late 2Q96). Overall, the gross margin declined 1.0 percentage point
sequentially to 39.3%, reflecting pricing pressures, an increased volume of
sales of antibiotics in the U.S. (which have a lower gross margin), and the
new arrangements in Israel with Merck. Operating expenses, at $64M, were
lower than our $69M estimate, with R&D essentially in line at $16M and SG&A at
$48M, below our $53M estimate. The lower SG&A was largely attributable to
additional synergies that were realized from Teva's merger with Biocraft.
Management expects additional cost savings to occur (likely in 4Q97/1Q98) with
the shutdown of additional manufacturing facilities related to product line
rationalization.
BUSINESS DESCRIPTION: Israeli-based, fully integrated, int'l pharma co. &
third largest generic drug firm in the U.S. through its wholly owned
subsidiary Teva USA. Also produces bulk pharmaceuticals & hospital supplies.
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Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the
past three years a public offering of securities for this company. B-An
employee of Lehman Brothers Inc. is a director of this company. C-Lehman
Brothers Inc. makes a market in the securities of this company. G-The Lehman
Brothers analyst who covers this company also has position in its securities.] |
