Is Teva Pharmaceutical Industries Ltd. Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Teva Pharmaceuticals Ltd (ADR) (NYSE: TEVA  ) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Teva's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Teva's key statistics:

TEVA Total Return Price Chart

TEVA Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

26%

Fail

Improving profit margin

(69.8%)

Fail

Free cash flow growth > Net income growth

(35.6%) vs. (61.9%)

Pass

Improving EPS

(59%)

Fail

Stock growth (+ 15%) < EPS growth

7.5% vs. (59%)

Fail

Source: YCharts.
*Period begins at end of Q4 2010.

TEVA Return on Equity (TTM) Chart

TEVA Return on Equity (TTM) data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(65.3%)

Fail

Declining debt to equity

72.3%

Fail

Dividend growth > 25%

35.2%

Pass

Free cash flow payout ratio < 50%

49.4%

Pass

Source: YCharts.
*Period begins at end of Q4 2010.

How we got here and where we're going
Teva is looking a bit sickly in its second assessment, as it's lost three passing grades since last year's analysis to finish with only three out of nine possible passing grades. Teva's revenue has improved at a better rate than that of most of its competitors, but its earnings have tanked as the company battles increasing competition from generic-drug manufacturers worldwide. One of Teva's passing grades was more of a technicality than a genuine improvement -- both net income and free cash flow have been in decline, but the former has fallen more rapidly over the past three years. Can Teva's new CEO, Erez Vigodman, help the company reverse its sagging fortunes? Let's dig a little deeper to find out

Teva topped Wall Street's expectations on both top and bottom lines for the fourth quarter thanks to strong sales of generic versions of popular off-patent drugs Niaspan, Temodar, Cymbalta, Tobi, and Pulmicort in the U.S. However, these gains were partially offset by weakness in the French, Russian, and Japanese markets. Teva's oral multiple sclerosis treatment laquinimod has endured stiff competition from other oral MS drugs in the U.S., and Fool contributor Selena Maranjian notes that European regulators withdrew Teva's laquinimod from those markets in January, despite approving the company's asthma and COPD treatment DuoResp Spiromax. Offsetting this disappointment was FDA approval for Teva's supplemental new drug application for a less-regulated Copaxone formulation and for oncology treatment Synribo.

The Supreme Court recently agreed to consider Teva's appeal to protect Copaxone's patent, a true hail-Mary pass in the battle against Momenta Pharmaceuticals' effort to launch a generic alternative. Momenta had partnered with Novartis to launch that alternative by this May, and Fool contributor Cory Renauer notes that the company should generate more than $3 billion from Copaxone sales if it receives an additional 16 months of U.S. exclusivity. On the other hand, Teva and other generic drug manufacturers have already lost a major legal battle to Eli Lilly (NYSE: LLY  ) -- the Indianapolis District Court upheld Lilly's patent for Alimta, which will protect the lung cancer drug from generic competition until 2022. The Supreme Court also upheld Mylan's (NASDAQ: MYL  ) Perforomist Inhalation patents, which effectively freezes Teva's effort to produce a generic Perforomist until mid-2021.

These aren't the only legal skirmishes on the company's plate, either. Teva and Ranbaxy Pharmaceuticals reached a settlement with New York Attorney General Eric Schneiderman early this year, which forces Teva and Ranbaxy to terminate an anti-competition agreement between them. The two generic-drug makers teamed up to manufacture a generic version of Lipitor in 2010, and their agreement not to compete with each other may have resulted in an increase in drug prices. The FDA has also launched an investigation into Teva's marketing practices for Copaxone and Azilect, and the agency will dig all the way back to 2006 for evidence of wrongdoing.

On the plus side, Teva ought to file over a dozen regulatory submissions with the FDA over the next five years, which will reportedly include a generic version of blockbuster asthma drug Advair, and plans to potentially launch 30 New Therapeutic Entity (NTEs) drugs by 2020. Teva also expects to find as much as $2 billion in annual cost savings with its major streamlining and restructuring initiatives by the end of 2017.

Putting the pieces together
Today, Teva has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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