Goldman Warns of Teva Selloff as Copaxone Threat Looms

Teva Pharmaceutical Industries Ltd.’s best quarterly rally since 2003 prompted analysts at Goldman Sachs Group Inc. to abandon their sell rating on the stock earlier this year. Now they’re telling investors to buy insurance against a potential plunge in the shares.

Petach Tikva, Israel-based Teva, the world’s largest generic drug maker, has soared 29 percent this year to $51.77, the best performance on the Bloomberg Israel-US Equity Index. In Tel Aviv today, shares rose 1.8 percent to 179.30 shekels ($51.45), nearing their highest close since April 22.

Goldman recommends buying put options on the stock to protect against a fall of as much as 10 percent if Mylan Inc. introduces a generic version of the company’s best-selling multiple-sclerosis drug Copaxone. The copycat medicine could come as soon as May 27, Goldman said in a May 21 report.

Teva has proven bears wrong this year by fending off threats to Copaxone, which represents 21 percent of revenue, with legal efforts to block cheaper generic versions and by successfully shifting patients to a longer-acting version that won’t face competition until 2030. Still, its stock may sink if Mylan introduces a copy of the drug following the expiration of Teva’s patent on May 24, according to Goldman.

“Mylan currently gets no credit for generic Copaxone and a launch in the next month would surprise the Street,” Goldman analysts including Jami Rubin and John Marshall wrote in the report. The options market is “underpricing the potential for Teva shares to be volatile around Copaxone.”

Approval Delays

Goldman is recommending investors buy put options with a $49 strike price expiring in June to protect against a potential drop in Teva’s U.S.-traded stock. Bearish Teva options, which will become profitable if the stock drops 5.4 percent or more from last week’s close before the June 21 expiration, were the second-most active on May 22 as about 1,300 contracts changed hands, up from 42 the day before and compared to a daily average of approximately 260 over the previous month.

Leslie Shribman, a spokeswoman for Goldman Sachs in New York, declined to comment on the report. Denise Bradley, a spokeswoman for Teva, didn’t respond to a phone call and e-mailed request for comment. An e-mail and a phone call to Canonsburg, Pennsylvania-based Mylan’s press office wasn’t returned.

Mylan, which partnered with Natco Pharma Ltd. to copy Copaxone, said this month there may be “procedural” delays to FDA approval. The company has signaled it may launch the drug in the third quarter, according to the Goldman report.

The threat of a generic version of Copaxone, which garnered Teva $4.3 billion in sales last year, has split stock analysts, with 15 recommending buying Teva and 15 rating the stock neutral out of 31 covering the company, according to data compiled by Bloomberg.

Generic Drugs

The average 12-month price target for the stock is $57.16, compared with $44.26 at the start of the year, the data show.

Teva has made enough progress converting patients to its new three-times weekly version of Copaxone that the impact of generic competition has diminished, according to Douglas Tsao, an analyst with Barclays Plc in New York who has had a buy rating on Teva shares since March 7.

Even if rivals win FDA approval for copycat drugs, the drop in Teva’s stock would be limited to about 1 to 2 percent, Tsao said in May 22 telephone interview.

“They’ll recover those losses anyway, because I think the pace of adoption of generic versions will be modest,” he said.

Setting aside Copaxone, Teva has made progress in the rest of its business as well, improving operating margins in the first quarter and winning regulatory approval for new generic drugs, Tsao said.

Relative Value

“The multiple the stock trades at doesn’t reflect the underlying strength of the business,” said Tsao, who has a $65 price target for Teva’s U.S. shares.

Teva trades at 11 times 12-month projected earnings, compared with an average of 18.2 among global peers, data compiled by Bloomberg show. The company’s forward price-to-earnings ratio has averaged 9.3 over the past five years.

If no generic versions of Copaxone are released this year, Teva’s stock could jump to $60, according to Goldman.

Teva rallied 32 percent in the first quarter of 2014 as the company said it was making progress in its push to maintain Copaxone market share and a boom in mergers and acquisitions in the pharmaceutical industry lifted investors’ growth expectations.

The rally prompted Goldman, JPMorgan Chase & Co., and Morgan Stanley analysts to upgrade the stock to neutral from sell in March.

Goldman’s Rubin is maintaining her hold rating on the stock. “The growth outlook for Teva remains flattish with or without generics,” she wrote.

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