Teva: Riding a Zocor pop
World's leading generic drugmaker seen in good position after favorable court ruling.
NEW YORK (CNNMoney.com) - Teva Pharmaceutical Industries, the world's biggest maker of generic drugs, could enjoy hundreds of millions of dollars in extra revenue this year and a substantial increase to its earnings, thanks to a court ruling this week regarding the cholesterol drug Zocor.
Teva (up $0.77 to $42.88, Research), an Israeli company, could add as much as 10 cents to its 2006 earnings per share, if the Food and Drug Administration honors a Monday ruling from the U.S. District Court for the District of Columbia. The court ruled that the FDA had unlawfully denied Teva its exclusive rights to make and market specific dosages of Zocor, a blockbuster drug from Merck (up $0.18 to $34.42, Research) that loses patent protection on June 23. Zocor, Merck's number one seller, totaled $4.4 billion in 2005 sales.
Teva's stock price surged 4 percent after the ruling on Monday.
Adding a generic form of Zocor, or simvastatin, to its roster could mean an additional $400 million in annual sales for Teva, or $200 million in extra profits, translating into an additional 10 cents in EPS for 2006, said Andrew Forman, analyst for W.R. Hambrecht & Co.
"Teva asked the court to let my earnings grow," said Forman, who said the timing couldn't be better. "We see this really as a gift from God, because next week they have to give the guidance."
The stock price could make its next prominent move on May 10, when Teva is expected to release its 2006 EPS guidance for the first time after acquiring generic drug maker Ivax Pharmaceuticals. Forman, who rates the company a "buy" with a 12-month price target of $50, said that guidance could increase from $1.90 EPS for 2006, its current level, to range of $1.95 to $2.05.
Rich Watson, analyst for William Blair & Co., said the Ivax acquisition could raise Teva's EPS to $2.30 in 2007. Watson did not include generic Zocor in this projection, because it hasn't been approved by the FDA. Watson said the May 10 guidance could lift the stock price, but the increase probably won't be as prominent as the 4 percent jump on Monday.
"It's had a really nice pop now with the Zocor news, so that raises the bar on what they need to do to raise the stock [further] after the meeting next week," said Watson.
The analysts said that if Teva manages to acquire generic Zocor exclusivity, it could mute the layoffs and plant closures that are expected following the merger with Ivax.
"I continue to think that they're the best positioned company [among the generic drugmakers] that provides stable long-term growth," said Ken Cacciatore, analyst for SG Cowen, who forecasts a stock price increase of 10 to 15 percent over the next 12 months.
The pharmaceutical industry is facing patent losses on $100 billion worth of drugs over five years. Price and revenue tend to drop drastically after branded drugs lose patent protection. Nonetheless, Teva and other generic drugmakers, like Barr Labs (up $0.58 to $61.37, Research) of Woodcliff Lake, N.J., no. 2 worldwide, and the Indian companies Ranbaxy Labs and Dr. Reddys Labs (up $2.01 to $36.91, Research), are expected to reap hundreds of millions or billions of dollars from patent losses in coming years.
Pending the FDA decision on the Zocor court ruling, this could be the latest drug product coup for Teva. The generic drug maker also secured exclusive rights to produce a generic form of Zoloft, the antidepressant from Pfizer that totaled $3.3 billion in 2005 sales but will lose patent protection on June 23. For six months following the expiration, Teva and Pfizer will be the only companies producing Zoloft and its generic equivalent, sertraline hydrochloride, and the price and revenues are expected to plunge about 40 percent during this time. After that, other drugmakers are permitted to make and sell generic Zoloft, sending the price and revenues down another 40 percent, according to analyst projections.
Teva also secured the exclusive rights to produce a generic version of Pravachol, or pravastatin sodium, the cholesterol drug from Bristol-Myers Squibb (down $0.08 to $24.92, Research) that lost patent protection on April 20. Pravachol sales totaled $2.3 billion for Bristol-Myers in 2006. As with Zoloft, Pravachol price and sales will probably drop 40 percent during the first six months after the loss of its patent, followed by another price plunge after Teva's exclusivity runs out.
The analysts interviewed for this story do not own shares of Teva stock.
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