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Analyst: Dennis J. Ganahl Jr.

dennyganahl@gmail.com

Teva Pharmaceutical Industries Limited (TEVA) | Long | Price: $51.02


(Graph from Yahoo, represents 2-year activity)

Investment Thesis

1. Teva is undervalued with strong upside potential.

2. Teva is the global leader in generic pharmaceuticals.

3. Globally, there is a paradigm shift towards generic pharmaceuticals.

4. Tevas new cost reduction program is projected to cut $1B in expenses
by end of FY14.

5. The possibility of Teva maintaining exclusivity of Copaxone, or
producing its generic equivalent, has not been considered.




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Potential market catalysts for Teva
The 0.S. Supieme Couit iuling in favoi of Teva's maintenance of Copaxone
exclusivity (iuling expecteu by eaily 2u1S)
Fuithei goveinment legislation that incieases uemanu foi geneiic
phaimaceuticals
Teva's iealizeu piofitability exceeus investoi expectations uue to successes of
companywiue cost ieuuction plan
Teva use of veitical integiation anu extensive company iesouices to establish
ievenue geneiation in emeiging maikets

Factors that are currently holding back Tevas market value
The potential expiiation of Copaxone's patent coulu mean a significant ieuuction
in Teva's Specialty uivision ievenue
Theie was a ieuuction in net ievenues fiom $2u.S17B in FY2u12 to $2u.S14B in
FY2u1S
Competitois in emeiging maikets use of aggiessive piicing coulu impact Teva's
uominance in these maikets.

Business Description

Company Profile
Teva Phaimaceuticals (TEvA) is an Isiaeli baseu company that tiaues on both the NYSE
anu the Tel Aviv Stock Exchange, anu it is the laigest geneiic phaimaceutical company in
the woilu. Teva can be uiviueu into foui majoi business segments: ueneiics anu Active
Phaimaceutical Ingieuients (API), Specialty Neuications, New Theiapeutic Entities
(NTE), anu 0vei-the-Countei (0TC). 0TC is a joint ventuie with Pioctoi & uamble, anu
Integiateu R&B foi both the ueneiics anu Specialty uivisions. Teva's position as a
leauing global phaimaceutical company is soliuifieu with ovei a 1,uuu-molecule piouuct
poitfolio. Teva cuiiently has uiiect piesence in appioximately 6u countiies. In 2u1S, the
company ieacheu ievenues of moie than $2u.S billion.

Generic Pharmaceuticals

Description of Divisions
In Q12u14, ueneiics hau ievenues of moie than $2.S9 billion, making up appioximately
48% of Teva's total ievenue that quaitei. The ueneiics uivision pioviues patients anu
healthcaie systems with affoiuable, yet high quality, geneiic meuicines to tieat
thousanus of conuitions anu uiseases. ueneiics piouuce ovei 1,uuu piouucts in Euiope
anu ovei 4uu in the 0niteu States.





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Market Demand for Generics
Naiket uemanu foi geneiic phaimaceuticals has been incieasing since the miu-198us.
Theie aie a numbei of factois contiibuting to this giowth. Bemanu foi geneiics has been
uiiven by an incieasing acceptance of geneiic meuications on a global scale. The
woiluwiue giowth of goveinment healthcaie piogiams, anu theii push to ieuuce
healthcaie spenuing encouiages the consumption of geneiic meuicines.


This chait shows that the maiket shaie of geneiic phaimaceuticals is pieuicteu to giow
substantially by 2u1S. Bevelopeu maikets aie anticipateu to giow an aveiage of 4.87%
by the enu of 2u1S. Teva's position as the global geneiics leauei places them in a
position with a stiong upsiue potential.

Generics are already saving government healthcare systems billions



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Affordable Care Act and Generics
Accoiuing to Eu Silveiman, a !"#$%& contiibutoi coveiing the phaimaceutical inuustiy,
piesciiption meuicine is expecteu to giow ovei S.2% in 2u14 because of the Affoiuable
Caie Act (ACA). The incieasing numbei of insuieu Ameiicans means highei spenuing on
healthcaie anu phaimaceuticals. Biuce }aspen, anothei !"#$%& contiibutoi in a uiffeient
aiticle, uiscusseu how analysts pieuict an inciease in phaimaceutical piofits between
$1u-$SS billon ovei the next uecaue. This tianslates to a $476 billion inuustiy by the enu
of 2u2u, which is appioximately a SS% inciease fiom the $SS9 billion value in 2u12. The
0.S. goveinment claims that ovei S million people so fai have gaineu insuiance coveiage.

TEVAs Major Divisions



ueneiics in Q114 geneiateu almost Su% of Teva's total ievenues. The neaily $2.4
billion in ievenues fiom geneiics makes Teva the global leauei in geneiics. A fuithei
captuiing of geneiic maiket shaie will continue to soliuify Teva's uominance uespite
incieasing competition on a global scale.


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The coipoiate expense ieuuction plan implementeu in Becembei 2u12 has continueu to
boost company piofitability in neaily eveiy segment. With the exception of the ueclining
ievenues fiom Copaxone (NS-Specialty uivision), eveiy othei segment in Q114
incieaseu fiom Q11S. The uiveise piouuct pipeline in Teva's aisenal mitigates
piofitability losses fiom the patent expiiation of Copaxone. The maiket has faileu to
consiuei the mitigation of Copaxone losses by a uiveise piouuct pipeline in Teva's
maiket piice. 0veiall, Q114 shows a 7% inciease in companywiue piofitability as
compaieu to Q11S. This is iepiesentative of a companywiue shift towaius incieasing
piofitability, which shoulu continue thiough FY2u14.

Generics

In Q12u14, Teva's geneiics uivision's ievenues incieaseu by moie than 17% compaieu
to Q12u1S. Its piofitability uuiing that same timefiame was up S1%. Teva's ueneiics
uivision is its single laigest ievenue uiivei. In Q214, ueneiics geneiateu ievenues of
appioximately $S.u B, a 2% inciease ovei Q21S. In that same Q214, 0.S. geneiics weie
up 1u%, uespite the changing healthcaie anu phaimaceutical lanuscape with the
intiouuction of the ACA by the 0bama auministiation.


Teva is combating an increase in generic competition with cost reduction
The incieasing competition in the geneiics maiket, especially in Asia, has causeu a
ueciease in piofitability maigins foi Teva ueneiics. Bowevei, a coipoiate wiue cost
ieuuction plan was implementeu to help offset the ueciease in piofitability maigins. The
company aims to ieuuce appioximately $1.u B in its cost stiuctuie by yeai-enu
(FY2u14). Costs aie being significantly cut by the ieuuction of appioximately 1u% of its
laboi foice (neaily S,uuu jobs). Since 2u12, it has ieuuceu company costs by $6uu
million, anu will continue cutting expenses until the $1 billion goal is ieacheu. By
FY2u17, Teva plans to cut a total of $2.u billion in gioss expenses. This tianslates to
ioughly $Suu million in net savings by enu of FY2u17.

This continueu cost ieuuction piogiam will not only inciease company piofit maigins,
but will also pioviue a cash flow foi acquisitions anu piouuct pipeline uevelopment.



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The effectiveness of Teva's companywiue effoit to inciease piofitability thiough a cost
ieuuction piogiam can be seen above. Segment piofitability has been noticeably
incieaseu as compaieu to Q21S.

Specialty Pharmaceuticals

The seconu laigest ievenue geneiatoi foi Teva is the Specialty Phaimaceuticals uivision.
This uivision incluues all Teva's bianueu uiugs as well as the phaimaceutical uivisions
focuseu on specific conuitions anu uiseases. Foi example, Teva has aieas focuseu on
0ncology, Respiiatoiy, anu Cential Neivous System (CNS), incluuing Nultiple Scleiosis
(NS). Teva's Specialty uivision maue up appioximately 41% of company net ievenues
foi FY2u1S.

Teva has maue it cleai that it is piimaiily focusing its Specialty uivision anu bianueu
phaimaceuticals in the 0niteu States foi the time being. Specialty uiugs face intense
global competition fiom a myiiau of laige companies like Novaitis anu Pfizei. Teva's
extensive R&B uepaitment, as well as global veitical integiation, allows it to focus on
patient anu pioviuei neeus anu specific theiapeutic aieas such as CNS, women's health,
anu iespiiatoiy conuitions.



Copaxone
The patent on Copaxone, a NS uiug anu laige ievenue uiivei, may expiie in miu 2u14.
Although Copaxone ievenues aie anticipateu to fall by appioximately S6%, the 0S
Supieme Couit will heai an appeal on the uiug's patent expiiation anu exclusivity with
the Teva bianu. The maiket has not given sufficient consiueiation to the eainings
iecoveiy by othei sectois in the coming yeais. It also has not weigheu the oppoitunity
that Copaxone will iemain exclusive in Teva's piouuct line. Insteau, the maiket has
focuseu too heavily on the lost neai-teim piofits if Copaxone exclusivity is lost.

When consiueiing the potential loss of Copaxone exclusivity, NS ievenues will begin to
slow. This will leau to a uip in the EBITBA cuive fiom appioximately 2u14-2u16. The
maiket uoes not seem to take into consiueiation the ability foi Teva's othei coie
uivisions to mitigate losses causeu by the potential appioval of geneiic foims of
Copaxone in the neai futuie. The tempoiaiy uip in EBITBA is expecteu to iecovei anu
noimalize in the coming yeais. The following giaph comes uiiectly fiom Teva anu
iepiesents the anticipateu futuie iebounu of EBITBA if couits giant legal geneiic
equivalents to Copaxone.

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Generic Copaxone
If Teva uoes not maintain exclusivity of Copaxone, anu it is appioveu foi geneiics, Teva
still has options. Fiist, Teva has been the sole piouucei anu maiketei foi Copaxone. It
alieauy has the uistiibution lines, ingieuients, anu a moleculai foimula cieateu anu
implementeu. Theiefoie, Teva coulu easily piouuce its own geneiic veision of
Copaxone. The auvantage of this woulu be that they coulu combat othei phaimaceutical
companies fiom uominating the geneiic Copaxone maiket (known as ulatiiamei
acetate).

Teva has consistently increased its dividends

Teva is known foi giving investois consistent, incieasing uiviuenus since 2uu9.
Regaiuless of a ueciease in net ievenues anu net income between FY2u12 anu FY2u1S,
uiviuenus paiu to investois incieaseu by a notable level. The following giaph is fiom
Teva's 2u1S Annual Repoit. It iepiesents the consistently iising uiviuenu payouts to
investois.






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Earnings comparison of exclusivity retention
Teva can financially iecovei fiom a loss of exclusivity of Copaxone. In its Q114 iepoit,
Teva compaieu EPS uata between exclusivity ietention anu appioval of geneiics.
Cuiiently, Teva is anticipating appioximately $4.2u EPS (assuming loss of Copaxone
exclusivity) foi FY2u14, which equates to shaies tiauing at 12.S6 x's eainings
(calculateu using $S2.7S on 8S14).


Souice: Zack's Investment Reseaich


Bowevei, if Teva weie to ietain Copaxone exclusivity, FY2u14 EPS shaies will be tiauing
closei to 1ux's eainings.

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Teva has a bullish market sentiment with low short interest

Teva cuiiently has 8Su.7u million shaies outstanuing anu a float of appioximately
828.98 million shaies. As of Nay Su, 2u14, the company hau 9.96 million shaies shoit.
This gives Teva a shoit inteiest of only 1.2u%, which inuicates a veiy stiong long
position helu by shaieholueis. As the low shoit inteiest uemonstiates, investois aie
oveiall bullish anu see a stiong potential upsiue foi Teva.

Tevas Enterprise Valuation:


Top Four Companies Holding Teva

"# Fianklin Resouices, Inc. (49.27 million shaies; S.79%)
$# Capital Reseaich ulobal Investois (4S.S8 million shaies; S.1u%)
%# Wellington Nanagement Co. (S2.S6 million shaies; S.8u%)
4. FNR (27.u1 million shaies; S.17%)
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Risks

There is a potential expiration of the Copaxone patent as well as increasing
competition in Multiple Sclerosis market.
Copaxone makes up appioximately S6% of Teva's Specialty Biugs uivision sales. If the
0S Supieme Couit iules in favoi of patent expiiation of Copaxone (iuling expecteu by
eaily 2u1S), then theie is a substantial ueciease in ievenues anticipateu. A significant
ueciease in Copaxone ievenues coulu iesult in auveise effects to the opeiations anu
piofitability of the company, paiticulaily in the Specialty Phaimaceuticals uivision.

Teva may be unable to fulfill planned reduction of operating expenses to the
extent planned in the cost reduction program.
Theie aie a multituue of vaiiables that coulu aiise, which coulu stall the cost ieuuction
piogiam laiu out by Teva in Becembei 2u12. These unanticipateu hinuiances coulu
eithei slow the ieuuction piogiam oi halt it completely. An unsuccessful expense
ieuuction coulu tianslate into uecieaseu piofitability on a uivisional oi company wiue
basis.

Increased global competition in generics could adversely affect revenues and
profitability for Teva Generics.
ueneiic phaimaceuticals aie a veiy competitive inuustiy with many laige companies. As
uemanu foi geneiics incieases ovei the yeais, competition will follow. This iise in
geneiic competition coulu be uetiimental to the giowth of Teva's ueneiics uivision.

The increasing amount of global healthcare reform could negatively affect
Tevas business.
Theie has been an intense push on a global scale foi goveinmental healthcaie piogiam
iefoims. uoveinment inteiventions in the phaimaceutical inuustiy coulu auveisely
affect piouuct piicing anu company piofitability.

Teva could fail to acquire the right companies with the right product lines, and
it could waste capital and limit market growth.
The woiluwiue inciease in uemanu foi phaimaceuticals means new companies anu
piouucts will be enteiing the maiket. A key stiategy Teva employs is active acquisition
of key competitois anu piouucts. If Teva acquiies the wiong companies oi the wiong
piouucts, its competition coulu stiengthen anu piofitability foi the company coulu be
jeopaiuizeu.









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Competitor Analysis

The phaimaceuticals inuustiy is competitive. Teva's uiveise piouuct iange in
conjunction with its globally uominant geneiics uivision makes it a leauei in net
ievenues as compaieu to its laigest competitois.





*Figuies in millions 0SB

Teva is a leauei in net ievenues in compaiison to its competitois, anu is
stiategically positioneu as the global geneiics leauei, but it has not satuiateu the
maiket. By utilizing a combination of oiganic giowth anu stiategic acquisitions of
key competitois anu piouucts, Teva can still captuie significant maiket shaie.


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This iepiesents that Teva ovei the last 2-yeais has piouuceu stiongei iesults than the
S&P Suu as a whole. Also, Teva has outpeifoimeu both Nylan anu Pfizei ovei the same
time peiiou.




Tevas Financial Statements


The following financial statement tables aie taken uiiectly fiom Teva's 2u1S Annual
Repoit.

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