Is This Drug Maker’s Stock Too Cheap to Ignore?

Generic drug stocks have done very well over the past year. Companies like Mylan (NASDAQ: MYL  ) and Actavis  (NYSE: ACT  ) have seen their shares rise roughly 60% and 120%, respectively. One sector laggard has been Teva Pharmaceutical Industries (NYSE: TEVA  ) , however. Its stock has only seen a fraction of the gains achieved by competitors. Trading at a noticeable discount to its peers, are Teva's shares a compelling bargain?

Multiple problems sapping investor confidence
Teva Pharmaceutical investors haven't had much to cheer about lately. Turmoil in the executive suite has shaken confidence. The drug maker's Chief Executive Officer abruptly departed, apparently due to differences with the board of directors. Being in the position less than two years, his sudden exit and the recent appointment of an untested replacement has worried shareholders. An announced U.S. Department of Justice investigation into the company's marketing and promotional efforts for a couple of high profile products only increased anxieties.

One of the drugs under scrutiny is the blockbuster Copaxone. While the inquiry is certainly a concern, the compound's imminent patent expiration is even more troubling. Copaxone will could facing biosimilar competition in May and that means sales of this multiple sclerosis treatment will probably fall substantially. Being Teva's best seller (generating around 20% of all revenues), investors are understandably nervous about the upcoming expiration.

Intriguing opportunities for better times
Teva may be able to make up some of the decline with its budding oncology drug program. Its partnership with OncoGenex Pharmaceuticals on the drug Custirsen might pay off. A promising treatment for prostate and lung cancer, it's currently in a Phase III clinical trial. A couple of Teva's own drugs are intriguing as well. Lonquex, a novel biologic drug for patients getting chemotherapy for non-bone-marrow-related cancers, was recently introduced in Europe. Biologic drugs, or those derived from natural sources like humans or animals rather than purely chemical compounds, are at the forefront of current biomedical research.

The drug Granix is another exciting Teva product. The treatment, which reduces the risk of infection for patients receiving chemotherapy, was approved in the U.S. as a branded biologic. The same compound is considered a biosimilar in Europe, however. Biosimilars, which are basically generic versions of brand-name biologic drugs, offer enormous potential and drug makers are just beginning to explore the space. The development of generic biologics is costly and complex, though. Only those that have both the funds and experience will likely gain a lucrative place in this fledgling market.

Pharmaceutical giant Amgen is aiming to become a biosimilars leader, seeing it as a multibillion-dollar opportunity. Partnering with generic drug maker Actavis, both companies believe that success in generic biologics will be more likely when leading generic firms and major brand companies work together. If Teva can build on its biosimilar experience (besides Granix, it also offers a product called Ovaleap), its entering into a highly beneficial partnership with a major drug company is a strong possibility.

As good as the future could be, Teva investors appear focused on the company's current troubles. Trading at a modest 9.7 times analyst 2015 earnings expectations, which includes a full year of depressed Copaxone sales, the share's appear at a noticeable discount to peer drug companies.

Building a generic powerhouse
Actavis is one of Teva's peers. Created through a $6 billion merger between Swiss-based Actavis and U.S.-based Watson Pharmaceuticals in 2012, the firm became an industry leader. Increasing its scope, the acquisitive drug maker recently closed on a $5 billion takeover of Irish tax-based Warner Chilcott and recently announced the acquisition of Forest Laboratories.

Growth does not appear an issue for Actavis. Total revenues increased 67% year-over-year in the latest quarter, though much of the gain came from its 2012 merger. The Warner Chilcott deal looks to deliver another boost when current earnings per share are expected to climb 35% from 2013 levels, helped by merger-related cost savings. Actavis' longer-term outlook is also encouraging. It has five biosimilar products in development with partner Amgen.

It seems that the stock market is fully aware of the company's bright future. Valued at a hefty (though not outrageous) 14.8 times 2014 analyst estimates, investors might have to wait for a price pullback before Actavis becomes an appealing value-based consideration.

Multiple avenues for growth
Mylan, another Teva competitor, is taking a diversified approach to garner growth. An imminent launch of generic Lidoderm, a well-advertised no-pill option for shingles pain relief, and the springtime release of a generic version of Teva's Copaxone blockbuster should elevate sales in the company's core generic drugs business.

Looking to advance in the biosimilar space as well, Mylan recently introduced Hertaz in India. The drug, a generic version of Roche's Herceptin treatment for breast cancer, is an impressive debut in the potentially lucrative market. Further success is expected as the company has four other biosimilar products in development.

Mylan is also amenable to growth by acquisition. It recently purchased Agila, an India-based maker of generic injectable drugs, for about $1.75 billion. The deal will open markets and improve sales in some key growth regions. Trading at 13.4 times 2014 analyst earnings expectations, Mylan shares look reasonably priced though with upside potential if any one of their multiple growth paths should thrive.

Summary
Teva's shares have lagged over the past year. This is understandable, as the company faces some serous issues. Investors may have overlooked some promising opportunities and valued the drug maker too pessimistically, however. Teva's discounted share price, compared to rivals like Actavis or Mylan, may be of interest to bargain hunters. The company's stock could be primed to rise on any unexpected good news coming from the beleaguered drug maker.

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