The recently-released second quarter results did not reflect the effects of this improved business strategy. Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) barely managed to meet expectations, with margins and revenues below expectations.
However, there are indications that it will start reaping the benefits of an improved business strategy by the end of this year. The rewards from NTE focus and recent acquisitions can improve valuations
New Strategy
The company has decided to strive for growth rather than focus on returning shareholder value. The company will limit its branded segment to CNS and Respiratory. It is also trying to acquire promising candidates in these segments and find more applications of existing molecules.
In the last few quarters, Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) has emerged as a major player in OTC due to its partnership with P&G. It already has more than $600 million in OTC sales, and expects to cross the $1 billion mark by next year. The global consumer healthcare industry is approximately a $200 billion industry, and is expected to grow by more than 10% in coming years. Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA)’s presence in OTC will ensure diversified revenues, reducing the threat of a single drug’s patent expiry.
The most intriguing part of this new strategy by Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) is its increased focus on NTEs (New Therapeutic Entities). The company plans to discover novel uses of molecules already in its current portfolio, including molecules in both its generic and its branded pipeline. Teva will focus on novel applications of these molecules and formulating innovative combinations. The beauty of this strategy lies in its cost effectiveness. As the world’s leader in generic drugs, Teva has hundreds of compounds in its pipeline. This will allow it to find new products without any further expenses on R&D or extensive clinical trials. Clinical trials would still be required, but they are usually less lengthy and costly for already-approved compounds.
Acquisitions
In the recent past, the company has made a number of interesting acquisitions. Last month it acquired MicroDoseTherapeutx for $165 million, which includes $125 million in terms of milestone payments and royalties. Microdose is involved in developing treatments to prevent viral respiratory infections. This acquisition will give Teva MDT-637, a treatment for respiratory syncytial virus.
Teva has also completed the acquisition of Taiyo Pharmaceuticals for a whopping $943 million in cash. This acquisition will allow Teva to enter the highly lucrative Japanese generics market. Japan is the second largest pharmaceutical market in the world, valued at $96 billion, with a low generic penetration hovering around the 25% mark. The government is trying to increase this percentage to around 30%. Taiyo’s 550 product portfolio will allow Teva to establish a dominant presence in the growing Japanese generics market.
Dividends
Teva’s valuations have remained stagnant during the last few years–it is stuck between the high $30’s and low $40’s. With this poor shares performance, the only reward for investors is its dividend yield. The table below compares this dividend to other key players in the healthcare sector.
| Company | Yield | Payout | OCF Yield | 5-year Growth |
|---|---|---|---|---|
| Teva | 2.7% | 43% | 13% | 20% |
| Pfizer | 3.3% | 43% | 8.3% | -5% |
| AstraZeneca | 7.5% | 62% | 10.7% | 8.4% |
The payout ratio of Pfizer Inc. (NYSE:PFE) and Teva match at 43%, but Pfizer Inc. (NYSE:PFE) pays a 20% higher dividend. The company has also cut its dividend yield, reflected by the negative 5-year dividend growth rate. Teva has the highest OCF yield and the highest 5-year growth rate of 20%. Therefore, while its dividends are not the best in the industry, it certainly has the most room for dividend growth. The company has shown interest in increasing dividends in the past; shown by the average growth of 20%.
Way Forward
Teva met market expectations with its second quarter results. However, there was nothing to boast about, as revenues and margins both came below expectations. The company expects that the effects of the strategic shift will start materializing in the 4th quarter. There seems to be no immediate catalyst (drug launch, pipeline update) that can inspire some life into Teva’s shares. NTEs and laquinimod are a possible investing theme for the future, but the market will wait for solid news before jumping in again, especially considering the poor past performance of its shares.
Teva’s dividend yield is mediocre at 2.7%, but has substantial room to grow. The company is focusing on growth, but if these ambitions fail, it can always go back to increasing dividends. The acquisition of Taiyo can have a positive impact on generic revenues. Although there are more lucrative healthcare investment options available, investors can still bet on success of the NTE strategy and the potential of laquinimod.
The article A Safe Investment With Growth Promise originally appeared on Fool.com and is written by Mohsin Saeed.
Mohsin Saeed has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Mohsin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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