Generic and specialty drugmakers have been experiencing a profit bonanza as former top-selling products have lost patent protect in recent years. Actavis plc (AGN), for example, has grown total revenue by a whopping 34% in the past year alone.
Not all generic-drug makers have participated in this windfall, however. Diluted earnings per share for Teva Pharmaceutical Industries Ltd. (TEVA 0.51%), for instance, are expected to flatline(TEVA 0.51%)moving forward(TEVA 0.51%)as its best-selling product, Copaxone for multiple sclerosis, faces generic competition for certain formulations. Specifically, the U.S. patent covering the 20 mg dosage of Copaxone expired last May, helping to drive a 5.8% drop in sales year over year.
Although Teva posted weak sales growth in recent quarters and an anemic outlook, its stock has done surprisingly well -- rising a noteworthy 41.7% in the past year. Here are three reasons it could continue to push higher moving forward.
Reason No. 1
To fight off generic competition for its best-selling and most profitable product, Teva is switching Copaxone patients to a double-dose formulation of 40 mg administered three times weekly. Patients might prefer this new formulation, given that the 20 mg dose is taken daily.
That being said, Mylan (MYL), Momenta Pharmaceuticals, and Dr. Reddy's Laboratories have all reportedly been looking into challenging the patent covering this double-dose formulation. And because of the uncertainty surrounding Copaxone's exclusivity, Teva issued a fairly wide guidance for 2014 in the second quarter, ranging from $4.50 to $5.10 for the full year.
My take is that this legal drama will take a while to unfold and therefore shouldn't dramatically affect Teva's double-dosing strategy anytime soon. Even so, this issue is certainly important for investors to keep tabs on going forward.
Reason No. 2
Wall Street apparently still believes in this stock. Per the latest numbers, institutional holdings edged up by 3.11% in the second quarter.
What's particularly interesting is that institutional holdings increased last quarter even after a handful of top holders, such as Soros Fund Management, sold off big chunks. Before the second quarter, Teva was one of the Soros Fund's largest holdings, but the closely followed fund sold nearly 30% of its Teva stock in the second quarter.
All told, I see this net-positive churn in the underlying institutional buyers, in the wake of some big sales, as a sign that the Street is remaining bullish on this stock.
Reason No. 3
Teva looks fundamentally undervalued at current levels. Although the company isn't expected to post strong top-line growth in the near future, the stock is trading at a forward price-to-earnings ratio of 11.6 per the bearish scenario for Copaxone sales. By comparison, the sector average is currently hovering around 25.
Keeping with this idea, Teva shares are trading at a mere 1.9 times book value. To put this metric into context, Actavis shares are currently trading right around 4 times book value and Mylan's are closer to 5 times. In short, Teva's shares look cheap when compared with some of the company's chief rivals.
Foolish wrap-up
Teva is a prime example of why investors need to look beyond top- and bottom-line growth when attempting to value a company. From a growth perspective, it would be hard to argue that Teva is worth consideration. Diluted EPS is projected to dip slightly by 0.49% next year, and questions abound regarding potential generic threats to the company's top product.
That said, the company looks cheap from a forward price-to-earnings and book value perspective, especially compared with its peers in the generic-drug space. As Teva also offers a stable dividend yield of 2.27% at current levels, I think this stock is certainly worth a look for value and income investors alike.
