As Teva Pharmaceutical Industries Ltd. (TEVA)’s shares peaked last year, Ken Cacciatore was telling clients to buy. Seventeen months and a 41 percent stock drop later, he has yet to deviate from that call.
The Cowen & Co. analyst has plenty of company. Teva at its peak was the highest-rated stock among the world’s 20 biggest drugmakers, and still is today, according to Bloomberg data. Not one of the 32 analysts recommended selling at the March 2010 peak, and none does today either. They missed the plunge in part because they fell in love with the stock’s past gains, said Erik Gordon of the University of Michigan business school.
“It’s hard for them to switch right away from ‘buy’ to ‘hold,’ and as you know, ‘hold’ is the same as ‘sell it,’” Gordon, who studies the drug industry, said in a telephone interview from Ann Arbor, Michigan. “It’s easier to say, ‘The market has overreacted. I’m not wrong.’”
Now, the stock is so cheap that predictions of a rally may finally be right, said Ronny Gal, a Sanford C. Bernstein & Co. analyst who was one of the two analysts to cut his rating on Teva last year. Cacciatore acknowledged in a report to clients last week that his “outperform” rating had been wrong, and said he was sticking to his view.
The slide began in March 2010, after Petach Tikva, Israel- based Teva announced the 3.63 billion-euro purchase of German generic-drug maker Ratiopharm GmbH. Just as Teva was investing in Europe, governments there announced drug price cuts. Then the company’s biggest-selling medicine, the branded multiple- sclerosis injection Copaxone, gained a new competitor with the September approval of Novartis AG (NOVN)’s Gilenya, the first MS pill.
U.S. Sales Drop
This year, the company’s U.S. generic-drug sales tumbled because of manufacturing problems and the lack of new products, and laquinimod, the MS pill being tested as heir to Copaxone, showed disappointing results in two patient trials. Investors questioned where Teva would find the fourth-quarter revenue to meet this year’s profit target.
“This has become a ‘show-me’ stock -- show me you can hit your targets,” Cacciatore, who’s based in New York, said in a telephone interview.
Twenty-five analysts rate Teva “buy,” and seven analysts have a “hold” rating, according to Bloomberg data.
Teva’s American depositary receipts fell $1.51, or 3.8 percent, to close at $38.25 in Nasdaq Stock Market trading yesterday. One ADR represents one ordinary share. The ADRs closed at a record $64.54 on March 23, 2010. The 41 percent drop since then, which includes reinvested dividends, compares with a 10 percent return for the Bloomberg Europe Pharmaceutical Index. In the five years through the peak, Teva returned an average of 18 percent a year, compared with 4 percent for the index.
The disappointments hurt Teva management’s credibility, Gal said on a conference call with his clients last week. It’s “now the lowest I’ve seen from the company,” he said.
Yossi Koren, a spokesman for Teva, declined to comment on Gal’s view, or on analysts’ coverage of the company.
The shares may rise into the low-to-mid $50s in the next 12 months as earnings grow and as Teva convinces investors of the durability of its MS franchise, Cacciatore said. Teva sells for 7.8 times estimated profit compared with an average of 10.8 for the 20 largest drugmakers. That discount isn’t justified, given the likely prospects for the company’s revenue growth, he said.
In the Aug. 1 report, he wrote, “Our ‘outperform’ rating has simply been wrong, and we acknowledge it. But under the current valuation scenario, it is nearly impossible for us not to defend and recommend that investors either begin to initiate positions or add at these levels.”
Still, analysts have been burned before when they tried to call a bottom in Teva’s stock. Bernstein’s Gal cut his recommendation to “market perform” from “outperform” in July 2010 on concerns over a potential generic challenger to Copaxone. In May, he raised his rating to “outperform,” saying the shares were cheap at $47.08. They have since fallen about 19 percent. Catalysts including a victory in a patent case over Copaxone may build confidence and spark a share price rally in the second half, he said last week.
Others aren’t so sure. Christopher Holterhoff of Oppenheimer & Co. cut his rating on the stock to “market perform” from “outperform” on Aug. 2, after laquinimod failed a clinical trial. A patient trial comparing Copaxone with another potential MS competitor, Biogen Idec Inc. (BIIB)’s BG-12, may further depress investor expectations when results are reported before the end of the year, he wrote in a report.
Optimists are running into skepticism from their clients. Gal held the conference call for clients last week, complete with slide presentation, to review the argument for Teva.
“My investment case has evolved into ‘hope and pray,’” one institutional investor wrote in an e-mailed response to Gal’s invitation to the call. “Is there a slide on that?”
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