UBS made news over the weekend with its list of six stocks that could soar behind key catalysts not priced into each respective company. Within that list is Teva Pharmaceuticals (NYSE:TEVA), a company that UBS believes will benefit from continued patent expirations , and generic drug introductions in the coming years. Hence, it's a long-term catalyst that UBS foresees, but in looking at Teva's competitors Actavis plc (NYSE:AGN) and Mylan Inc (NASDAQ:MYL), is it really the best opportunity of the bunch?

Underperformance equals value?
Teva, Actavis, and Mylan are all generic drug manufacturers, with Actavis and Mylan's stock easily outperforming Teva during the last five years.

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The generic drug market as a whole has benefited greatly from an era known as the patent cliff, a period between 2011 and 2016 where more than $130 billion of brand drug sales lose patent protection.

While many of the biggest drugs have already lost patent protection, other blockbusters such as Nexium, Celebrex, Cymbalta, Abilify, and Crestor are still on tap to lose protection. Hence, UBS must think that Teva's underperformance equals value now.

Why has Teva underperformed its peers?
In looking at Teva, Actavis, and Mylan from a fundamental perspective, the reasons for the former's underperformance couldn't be clearer. For one, the company's 8% annualized revenue growth rate over the last three years lags its peers; Actavis has grown at a 34.5% rate over the last three years.

While much of this growth comes from acquisitions, Actavis has also hit the jackpot with high profile generic drug launches, including Suboxone, Lamictal, Nuvigil, Onglyza, and Lidoderm in the last year.

For Mylan, its 8.2% growth rate over the last three years is marginally better than Teva, but the stock's near 20% gains this year can be traced to catalysts including its victory in gaining rights to the 50mg generic version for the blockbuster Celebrex later this year.  Also, Mylan got a big win at the expense of Teva.

Specifically, Teva is not just a generic drug manufacturer, but also sells brand products like the blockbuster multiple sclerosis drug Copaxone. In 2013, Copaxone generated $3.2 billion in the U.S. alone with growth of 11% year-over-year . In other words, this one drug accounts for more than 15% of total sales.

Teva is in the process of losing patent protection on Copaxone, but has been fighting relentlessly to protect some pieces of the blockbuster's revenue. Already, back in May Teva lost a court case to delay the generic form of Copaxone,  which means that Mylan will gain rights to sell a 20mg dosage of the drug. Now, the company's only hope lies in switching patients to a longer lasting 40mg dose, but the problem is that generic forms will still be cheaper, even with the dosing advantage.

As a result, Teva will lose at least a portion of its Copaxone revenue immediately, and a probably more. No doubt in part due to gains at Teva's expense,  Mylan's revenue growth is expected to accelerate in 2014 to 12.7% while analysts expect Teva's revenue to be flat in 2014 and down slightly in 2015.

Is Teva that cheap?
In retrospect, while Mylan and Actavis benefit from the patent cliff, Teva is about to feel the pinch of losing significant annual revenue from one single drug. Therefore, its generic business may create growth, but the losses from Copaxone will essentially make those generic gains fundamentally irrelevant, putting Teva in a multi-year slump of flat growth.

With that said, why would UBS call it the main beneficiary of the patent cliff, and not Mylan or Actavis? From a fundamental growth outlook, it significantly lags its peers into the next couple years, which is when the period will end. Therefore, UBS's call has to be valuation-related, right?


Forward P/E Ratio







As you can see, Teva does trade at a cheaper multiple than either Mylan or Actavis, but the real question is whether that discount is enough to justify its lack of growth. Essentially, you can pay 11.3 times forward earnings for a company that will have no growth over the next two years (per analyst estimates), or 13 times next year's earnings for a company that'll grow revenue 45% and 23%, respectively, in the same period in Actavis .

Foolish Thoughts
With all things considered, UBS might have got this one wrong, discounting the fact that Copaxone's lost patent means Teva will struggle even with the tailwind of the patent cliff over the next two years. Meanwhile, Mylan and Actavis both look cheap, and while the former has had some nice generic wins in recent months, Actavis' growth is unprecedented. As a result, at just 13 times next year's earnings, Actavis looks to be the best-in-class stock, one that still has a lot to gain.


Brian Nichols owns shares of ACTAVIS. The Motley Fool recommends Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.