Taro Pharmaceutical Industries Ltd. (NYSE:TARO) hardly gets the attention it deserves. The Israel-based generic-pharmaceutical manufacturer supplies in Israel, the U.S., Canada, the U.K., Ireland and in a few other countries. The company was listed on New York Stock Exchange Euronext in March 2012 and is currently one of the best pharmaceutical companies to invest in. In this article, I shall profile this relatively unknown company and discuss why it may be a good idea to observe and focus on this stock.
A little about Taro Pharmaceuticals
Taro Pharmaceutical Industries Ltd. (NYSE:TARO) manufactures hundreds of prescription and OTC drugs. It specializes in dermatological gels, ointments and creams. The popular lidocaine cream, which is a pain-numbing medication, is manufactured by the company too. Indian pharmaceutical giant Sun Pharmaceuticals holds a 67% stake in Taro Pharmaceutical Industries Ltd. (NYSE:TARO) and recently, Sun’s managing director, Dilip Shanghvi, was chosen as the chairman of Taro.
Parent-company Sun, which purchased a majority stake in early 2011, made two bids to acquire more shares at a lesser price. Both times, the merger/acquisition agreements were cancelled because Taro Pharmaceutical Industries Ltd. (NYSE:TARO) shareholders did not like the idea of Sun buying Taro shares for almost half of the current market value. Taro Pharmaceutical Industries Ltd. (NYSE:TARO) currently trades at $63 and Sun had offered $24.50 and $39.50, consecutively.
Generic-drug market makes Taro lucrative
The generic-drug market is lucrative and companies like Taro will find more interest in emerging economies like India, Africa, and Latin America. This is precisely because generic drugs are several times cheaper than drugs marketed by big pharmas. Moreover, Taro’s parent company, Sun Pharmaceuticals, is the third-largest Indian pharma company. This clearly indicates that Taro’s 200+ drugs, ointments, creams and lotions will find a huge market in India, which has a population of more than 1 billion. Indian doctors have usually favored prescribing generic drugs over branded ones because most Indians cannot afford expensive medications.
With a market cap of almost $3 billion and an enterprise value of $2 billion, Taro Pharmaceutical Industries Ltd. (NYSE:TARO) is not a small company. It has a very high profit margin at almost 40% and an operating margin of 54%. With revenue of $671 million reported in the last quarter, Taro certainly stands on its own, even when it can continue to rely on its larger parent company, Sun Pharma. The company has total cash of $553 million and debt of $30 million, which is not too much. I see this company growing further afield and enter emerging markets in India, Africa and elsewhere.
Teva pays consistent dividends
Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) has a market cap of $35 billion and an enterprise value of $45 billion. With a five-year expected PEG ratio of 1.1, Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) maybe walking into the overpriced territory. Goldman Sachsdowngraded Teva from a neutral rating to sell. The analysts noted that the company has been relatively quiet and that it faces a lot of pressure as it has fewer options with regard to capital allocation.
Going forward, the company’s revenue is expected to fall 1% year-over-year. A sell rating does not automatically mean a company is bad investment option. It just means in the short term, it may not see its revenue grow. In the long term, Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) will eventually increase its revenue thanks to rising demand for generic drugs in countries like China, India and even across the African continent.
Talking about generic and branded-generic drug manufacturers, Actavis Inc (NYSE:ACT) is another option that one can consider. Its OTC and prescription drugs are sold in more than 60 countries and most importantly, it is an American company.
If you are skeptical about investing in foreign companies, but would still like to try your hand in the generic drug industry, Actavis Inc (NYSE:ACT) may be a good option. Actavis Inc (NYSE:ACT) has a market cap of $17 billion and an enterprise value of $22.1 billion. With a PEG ratio of approximately 1.1, it is almost treading into the overpriced territory. Its profit margin is on the negative side, at nearly -1.0%.
On the upside, Actavis Inc (NYSE:ACT) may merge with Warner Chilcott, which sells branded drugs. Actavis Inc (NYSE:ACT) was also upgraded to outperform from market perform by analyst firm Leerink Swann. The company’s new formulations for patients with tension headaches include Fioricet and Fioricet with codeine. Both contain a lower dose of acetaminophen, making them relatively safer. These positive signs show that going forward, Actavis Inc (NYSE:ACT) may prove to be a very good investment option.
Take home
While Taro may not be a familiar name to most people in the U.S. or Canada, it is one of the largest generic drug manufacturers out there. It is supported by its parent Sun Pharmaceuticals, which is the third-largest pharmaceutical company in India and also the most profitable in that country. This ensures that Taro investors always have the buffer of the Indian market in the long term. If you prefer an American stock, Actavis is a good option.
Jaiyant Cavale has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Jaiyant is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Conquer the Generic Drug Market With Taro originally appeared on Fool.com is written by Jaiyant Cavale.
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