Mixed Prognosis for This Big Pharma Stock

07/28/2010 9:42 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

It’s great earnings for the second quarter (announced on July 27) versus long-term worries for Teva Pharmaceutical Industries (Nasdaq: TEVA) right now. With an assist from some selling on good news, long-term worries are winning at the moment.

For the second quarter, earnings climbed to $1.08 a share. That was an increase of 30% from the 83 cents a share in the second quarter of 2009. The Wall Street consensus had projected earnings of $1.04.

In its conference call, the company raised its guidance for the year to $4.50 to $4.60 a share, up from the prior forecast of $4.40 to $4.60.

Oddly enough for the world’s largest maker of generic drugs, the long-term worries focus on a proprietary Teva drug, Copaxone. About 20% of Teva’s $3.8 billion in sales in the quarter came from Copaxone, a drug for multiple sclerosis that could face a challenge from a generic being developed by Novartis (NYSE: NVS) and Momenta Pharmaceuticals (Nasdaq: MNTA).

That worry got a boost on July 23 (hence the selloff in the stock that began that day) when the US Food and Drug Agency approved a generic version of Sanofi-Aventis’ (NYSE: SNY) Lovenox from those same two companies. (For more on the Lovenox approval, see this post.) The thinking is that the approval of generic Lovenox makes the approval of generic Copaxone more likely because both generics are biosimilar drugs. The Food and Drug Administration is still developing its policy toward biosimilar generics. Biosimilar generics present difficult regulatory challenges since the original biologic drug generally shows a high degree of molecular complexity that potentially makes its efficacy extremely sensitive to any change in the manufacturing process.

Teva is betting that Copaxone will face generic competition by the end of 2010. In its conference call, the company said it projects losing $1 billion in Copaxone revenue to generic competitors by 2015. In the second quarter, Copaxone sales were $773 million.

Teva’s other worries are a lot smaller. Revenue in Europe suffered in the quarter from a decline in the euro and the pound versus the US dollar.

I expect the company’s recent acquisitions, especially of Ratiopharm, to help balance the loss in revenue from Copaxone. (The effect of the company’s recent acquisitions wasn’t included in guidance.)

I’d be a buyer on weakness here, but as of July 28, I’m leaving my target price at $61 a share by May 2011.

Full disclosure: I don’t own shares of any company mentioned in this post in my personal portfolio.

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