Teva Pharmaceutical Industries Ltd. ADRs (TEVA)

Wal-Mart recently announced a plan to offer generic prescriptions for $4 and they are rolling it out. After the announcement, there was an immediate negative impact on stocks of Wal-Mart’s competitors in the pharmacy business, but also a negative impact on the shares of generic drug manufacturers that I thought was overdone. For if generic prescriptions are going to become very affordable, won’t volume of sales increase, and won’t the increase be good for business in the long run? At least it will be for the largest and strongest manufacturers, who are in a position to profit by increased volume and economy of scale: Companies like Teva Pharmaceuticals, the world’s largest manufacturer of generic drugs. Teva has their headquarters in Israel but does most of their business in North America and Europe. They just took over Ivax Corp. last year.

Although TEVA shares are down about 24% from their 52-week high, the long-term chart is just spectacular. The ADRs are now 34 and change, and they would have to drop to somewhere between 15 and 20 next year just to reach the trendline on a log scale chart.

Teva’s dividend yield is only .68% now, but they have increased the cash dividend by an average of 33% a year for at least the last five years, and there have been numerous stock splits. If this trend continues, a small dividend now could grow into a handsome yield on the original investment.

In addition to Teva’s human and animal generic pharmaceutical business, they also seek to develop and patent original drugs, and it is possible they could produce a blockbuster.

Clearly Teva could be an excellent investment if the shares could be purchased at a good low price.

Yesterday it was announced that Chief Executive Officer Israel Makov would retire in 2007 and be replaced by Shlomo Yanai. The stock dropped more than 3% on the news before recovering a bit. Mr. Yanai, a retired Israeli Army general, has experience in agricultural chemicals but he has no experience in the drug business. The stock of his current employer rallied on news he is leaving. It is thought Teva has considerable talent in house and it is mystifying that the board would select this particular person to be their next CEO. Perhaps they know something the market does not. Could this event be the catalyst for Teva to become undervalued? Time will tell.

I do not have a position in any of the companies mentioned at this time, except as a possible holding in mutual funds.

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One Response to “Teva Pharmaceutical Industries Ltd. ADRs (TEVA)”

  1. Umagumm Says:

    If a generic drug used to sell at wmt for $11 a month and now it sells for only $4 who’s getting squeezed? Only wmt knows for sure. I can see wmt willing to sacrifice a little profit to increase floor traffic, but I’m willing to bet that companies like Teva will really see margins shrink. Teva, unfortunately, is in no position to bargin. If they don’t go along with it, wmt can just buy the generic from someone else.
    Something to think about anyway.

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