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No. of Recommendations: 5
Teva Pharmaceuticals has been around for 100 years. They are now best known for their generic drugs. Teva's plants produced approximately 19 billion tablets and capsules in 2003. They manufacture solids, liquids and semi-solids, including dedicated facilities for penicillin and cephalosporin products, and sterile products (including plasma
fractionation products).

They have recently entered the proprietary branded market with Copaxone for multiple sclerosis and in 2003, Teva achieved another milestone in the development of its central nervous system franchise, by successfully completing two Phase III studies with rasagiline, its compound for Parkinson's disease.

Some generics you may have heard or even be taking that Teva manufactures include:
Remeron,Nolvadex, Amoxil, Vicoprofen, Univasc,Daypro,Megace, Serzone, K-Dur, Bactroban, Monopril and Purinethol. They have tentative approval for Glucophage, Lamisil(, Lotensin, Neurontin tablets and capsules, Oxycontin and Paraplatin(. A "tentative approval" letter indicates that the FDA has substantially completed its review of an application. Some of these medications are big sellers for the parent companies.

The potential for revenue growth of generic products in the United States is closely related to a company's pipeline of pending ANDAs abbreviated new drug applications with the FDA, as well as tentative approvals already granted. As of February 13, 2004, Teva had 94 product registrations awaiting FDA approval (including some from Biovail, Impax and Andrx), including 16 tentative approvals but not including the Sicor filings described below. Collectively, the brand-name versions of these products had corresponding U.S. 2003 sales exceeding $66 billion. Branded product market size is a commonly used measurement of the relative significance of a potential generic product. Generic equivalents of any given product are typically sold at prices below the branded price, and in those instances where there are multiple generic producers of the same product, substantially below the branded price.

Recent acquisition

In October 2003, Teva agreed to purchase Sicor, a generic pharmaceutical company based in California, with facilities in Mexico, Italy and Lithuania. The transaction closed on January 22, 2004 and cost $3.46 billion in a combination of cash and Teva shares. The transaction was accounted for as a purchase and began to impact Teva's results commencing in the first quarter of 2004. And in fact the impact was dramatic as Teva recorded a cost of $664 million for in progress R&D in the Mar 04 quarter. That was ten times the amount for December 03. They lost $0.72 per share. The current P/E reflects the lowered earnings stemming from the R&D expense.The TTM EPS gives them a P/E of 123.8. Exclude the Mar 04 quarter and use June 03 through June 04 and you get a more respectable 20.They have sold off sharply since June on no news, but the timing appears to be unrelated to the Mar 04 quarter.

This acquisition combines Teva's oral dose generic drugs franchise with Sicor's generic injectables business. The Sicor acquisition further provides Teva with new capabilities for the development and production of biological products. Sicor derives a large percentage of its sales from one product, propofol. Sicor's pipeline includes 18 ANDAs with a collective annual branded sales of approximately $2 billion.

Two branded drugs

Copaxone was first launched in Israel in December 1996, and in the United States in March 1997. In 2003, in-market global sales of Copaxone amounted to $720 million, of which $495 million was in the United States, where Copaxone reached a market share of 28.4% by year-end. Global sales of Copaxone(R)in 2003 grew by 34% over those of 2002, a rate of growth that exceeded the growth of the global market of MS products. They lost orphan drug exclusivity in 2003.

Rasagiline is a potent, second-generation, irreversible monoamine oxidase type B (MAO-B) inhibitor with neuroprotective activities.It addresses a significant unmet need in the treatment of Parkinson's disease. Over two million patients are affected by this chronic disease worldwide, and although many therapies are available, there is still a high level of dissatisfaction with many of these treatments, both in terms of their efficacy andtolerability.

Following successful completion of the development program of rasagiline, a new drug application was submitted to the FDA in September 2003 for its use as an initial therapy in early stage disease and as an adjunctive treatment to levodopa in more advanced patients. Shortly thereafter, in October, applications to market rasagiline for the treatment of Parkinson's disease were submitted in the EU and Canada. These applications were based on data from three Phase III clinical trials which included over 1,600 patients with Parkinson's disease at different stages of the disease.

Active pharmaceutical ingredients division

In addition to its production and sale of pharmaceutical products, Teva manufactures and sells active pharmaceutical products. Teva's active pharmaceutical ingredients division facilitates Teva's entry into new drug markets and offers a cost-effective source of raw materials. The objective of the API division is to provide Teva with the benefits of vertical integration while maintaining and growing a significant third party business. Teva's recent acquisition of Sicor added complementary API operations to Teva's existing capabilities.

The active pharmaceutical ingredients business is run independently from Teva's finished pharmaceutical product businesses and sells products to third parties in a competitive market for APIs intended for generic products. Additionally, sales to other Teva units are on an arm's-length basis, fulfilling Teva's generic and proprietary manufacturing needs. Teva's API sales are affected by the pharmaceutical trends and are directly related to the ability of its API customers, both Teva itself and its third party customers, to launch new products and maintain market share.

Teva is a global business

Sales by Geographical Areas

Sales for the Period 2003 2002 2001 % of % of 2003 2002
2003 2002 from from
2002 2001

------------------- --------- ----- ----- ---- ---- ------ ----
U.S. dollars in
North America 2,055 1,611 1,288 63% 64% 28% 25%
Europe 861 600 457 26% 24% 44% 31%
Rest of the World 360 308 332 11% 12% 17% (7)%
Total 3,276 2,519 2,077 100% 100% 30% 21%

Sales are increasing in all areas. They are increasing most rapidly in Europe although the US remains their biggest market.

In 2003, pharmaceutical sales in North America amounted to $1,827 million, representing an increase of 26% over 2002. The increase in sales was attributable to:

(1) products that were launched during 2003, including the generic equivalents of the following products (listed in the order of their launch during the year): Remeron, Nolvadex, Amoxil, Vicoprofen, Univasc, Daypro, Megace, Serzone, KDur, Bactroban( and Monopril

(2) continued growth in sales of Copaxone, which reached a market share of 28.4% of total U.S. MS prescriptions by year-end

(3) the sales of Purinethol

In 2003, the pricing environment for generic products in the United States continued to be relatively stable. While during 2003 practically all the increase in sales over 2002 were the result of organic growth, in the future Teva anticipates that its recent acquisition of Sicor and joint ventures will have a positive impact on supplementing its growth in North America.

Pharmaceutical sales in Europe in 2003 amounted to $751 million, an increase of 47% compared to 2002, primarily due to the launch of new products by Teva in Europe during 2003, including the generic versions of Neurontin, Zocor and Diflucan, the continued penetration of Copaxone in Europe and the 20% revaluation of the Euro against the US dollar (when average compared to average). In addition, as of December 31, 2003, 111 compounds representing 240 formulations and 420 marketing
authorization applications are pending approval.

Teva's pharmaceutical sales to markets outside of North America, Europe and Israel amounted to $64 million, an increase of 17%. This increase represents a turning point in the trend Teva faced in the previous year of decreasing sales to countries where financial conditions were unstable, such as Latin American and the CIS countries, and also reflects increased sales of Copaxone.

Breakdown of sales by division

Sales by Business Segments

Sales for the Period 2003 2002 2001 % of % of 2003 2002
2003 2002 from from
2002 2001

------------------- --------- ----- ----- ---- ---- ------ ----
U.S. dollars in
Pharmaceuticals 2,885 2,241 1,838 88% 89% 29% 22%
API 371 259 219 11% 10% 43% 18%
Other 20 19 20 1% 1% 4% (5)%
Total 3,276 2,519 2,077 100% 100% 30% 21%

Total sales grew 30% and the finished pharmaceuticals were 88% of the business.

Teva's overall sales growth for 2003 was driven principally by the organic growth of both the pharmaceutical and the API business segments, together with the impact of favorable currency trends, which contributed 19% of the increase in consolidated sales.

Sales of active pharmaceutical ingredients to third parties in 2003 amounted to $372 million, an increase of 43%. The increase in sales to third parties is the result of higher sales of API products in the U.S. and worldwide, as well as the contribution of twelve months of sales from Teva Pharmaceutical Fine Chemicals as compared to six months in 2002. At the same time, intercompany sales of active pharmaceutical ingredients during 2003 increased 38% and amounted to $283 million. These intercompany sales represent 38% of total raw material consumption of Teva's pharmaceutical businesses. The high proportion of intercompany sales reflected the strategic importance of vertical integration and is one of the reasons for Teva's continued improvement in gross profitability. Total sales of the API division in 2003, including intercompany sales, increased by 41% to $655 million.

Income statement ratios

2003 2002 2001 2000 1999
gross margins 46% 43% 41% 40% 40%
operating margins 27% 21% 18% 14% 15%
net margins 21% 16% 13% 8% 9%
growth revenue 30% 21% 19% 36% --
growth gross 39% 29% 22% 34% --
growth operating 67% 43% 46% 30% --
growth net 68% 47% 87% 26% --
growth COGS 23% 16% 16% 38% --
growth SGA 28% 13% 19% 35% --
growth EPS diluted 41% 43% 49% 29% --
growth EPS cont operations 48% 42% 54% 29% --
tax rate 21% 17% 19% 29% 28%
increase in interest -91% 97% -40% 52% --

*Gross profit margins reached 46.4% in 2003, compared with 43.5% in 2002 and 40.8% in 2001, reflecting a continuing improvement of product mix, including higher sales of newly launched products and Copaxone, as well as the increasing benefits of Teva's vertically integrated API division. Gross margins also improved due to the favorable currency fluctuations and synergies

*While gross research and development expenses and net research and development expenses as a percentage of sales remained practically the same, they increased in 2003 in absolute terms by 26% and 29%, respectively, the result of increased spending on both generic R&D andinnovative R&D. Generic R&D expenses in 2003 accounted for 54% of gross R&D expenses, an increase of approximately 44% compared to 2002, due to increased R&D activity for North America, including R&D efforts for Novopharm, as well as generic R&D efforts for Europe.

*Innovative R&D expenses amounted to approximately 33% of gross R&D expenses for 2003, an increase of 8% compared to 2002, due to higher expenditures resulting mainly from MS-related activities and pipeline projects. The balance of 13% was dedicated to the development of other products, principally new products for the API division.

*In 2003, Teva substantially increased its research efforts to enhance the development of its generic pipeline. During the course of the year, Teva submitted an additional 38 ANDAs to the FDA, 20 abbreviated new drug submissions in Canada, an additional 86 product registrations to various European country regulatory agencies and 13 submissions in Israel.

*SG&A expenses in 2003 amounted to $521 million, an increase of 28% over 2002, but as a percentage of sales remained essentially at the same 16% level as for the full year 2002. These results reflect conflicting factors such as increased expenses mainly caused by the consolidation for the twelve month period of two European subsidiaries acquired in mid-2002 and higher insurance premiums, offset by higher sales volumes. It is anticipated that SG&A will continue to fluctuate as a percentage of sales on a quarterly basis within the range of 15%-17%, which is representative of Teva's anticipated quarterly levels in 2004.

* Gross, operating and ne margins are all high and increasing yoy. Net and operating margins are nearly double over 5 years. Teva attributes a large part of this to its vertical integration--supplying raw pharmaceutical products to its own manufacturing facilities.They also cite a better product mix favoring higher margin items.

*Growth over 5 years is impressive--double digit gross, operating and net growth. The really impressive part of this is that the company does this mainly through organic growth and very few acquisitions. It is too early to tell if Sicor will prove to be a valuable asset.

*They remain committed to R&D expenditure--the lifeblood of a pharmaceutical company. Without successful R&D they cannot hope to continue to grow

Ratios for the balance sheet
                                   2003    2002    2001    2000    1999
current ratio 2.1 1.9 2.9 2.0 1.6
quick ratio 0.6 0.5 1.0 0.5 0.1
AR growth 24% 31% 20% 47% --
DSO 148.4 155.7 143.6 142.0 132.2
inventory days 208.6 200.3 169.1 173.7 167.1
growth in payables 34% 48% 20% 74% --
growth in inventory 29% 37% 13% 43% --
CCC 138.8 154.5 155.0 163.1 178.3
ROE 21% 22% 20% 13% 16%
ROA 12% 9% 8% 5% 7%
ROIC 16% 12% 11% 8% 10%
debt/equity 35.5% 94.2% 105.3% 100.4% 90.0%
debt/capital 26% 49% 51% 50% 47%
book value 5.9 3.5 2.6 2.2 1.4
cash/share $1.90 $1.57 $1.50 $0.82 $0.15
NC WC 1316.7 1129.7 877.4 745.9 572
change in NC WC 187 252.3 131.5 173.9 572
increase in LT debt -346 -85.5 433 422.5 391.4
payable days outstanding 218.2 201.5 157.7 152.5 121.0

*Debt paid down substantially
*AR growth smaller than growth in revenue
*Inventory growth in line with revenue growth
*ROE,ROIC and ROA reasonably good
*Cash conversion cycle is improving

Inventory days DSO

140 73 Dr Reddy's Labs
39 38 Merck
228 58 Novartis
175 77 Bristol Myers
216 74 Pfizer
107.7 70.7 JNJ
208 148 Teva

*They compare unfavorably with other pharmaceutical companies in these two measures. Dr Reddy would be a close competitor and beats them on both of these measures. However, Dr Reddy's ROIC and ROE are slightly lower than Teva.
*DSO has improved slightly in 2003 but days inventory on hand has risen slightly.
*Their DSOs are concerning--I am unable to understand why they are so much longer than others in the industry. Other measures do not suggest premature revenue recognition. I have emailed the company to ask why. The one part of their business model that differs from other pharmas is the sale of raw ingredients. This is such a small part of the overall revenue, it seems unlikely it should increase DSO significantly. Their revenue recognition policies seem standard--recognition on transfer of title.

Revenue is recognized generally when title and risk of loss for the products is
transferred to the customer. Provisions for chargebacks, estimated returns, customer volume rebates, discounts and shelf-stock adjustments are established concurrently with the recognition of revenue. Accordingly, reported net sales is net of these allowances.

Cash flow statement ratios

2003 2002 2001 2000 1999

growth in operating cash flow 77% 30% 65% 8% --
operating cash/revenue 19% 14% 13% 9% 12%
operating cash/net income 91% 86% 98% 112% 130%
operating cash/debt+interest 1.75 0.57 1.16 0.42 0.50
growth capex 32% 136% 12% 58% --
capex/operating cash 34% 90% 49% 72% 187%
free cash flow 410.7 37 139 45.7 -134.2
free cash flow/share $0.74 $0.07 $0.27 $0.09 $(0.27)

*Operating cash flow is not being consumed in relation to revenue and net. It has increased in 2003. Even though DSO is high, it is not increasing and inventory remains well controlled.
*Debt and interest are covered by operating cash flow, but not by much
*Capex is covered by operating cash flow
*Free cash flow positive

Debt and convertibles

In January 2004, upon the consummation of the acquisition of Sicor, approximately 23.3 million additional Teva ADRs were issued, which shares will be added to the base of shares outstanding for EPS calculations beginning with the first quarter of 2004. This reflects a 7% dilution.
In connection with the Sicor acquisition, a Teva finance subsidiary issued an aggregate of $460 million of 0.50% Series A Convertible Senior Debentures due 2024 and $634.45 million of 0.25% Series B Convertible Senior Debentures due 2024, both of which series have contingent conversion features. These convertibles represent a further 15 million share potential dilution.

The purchase price was $3.46 billion and comprised of $2.0 billion in cash and $1.4 billion in Teva ADRs. Teva borrowed $1.13 billion in cash toward the cash portion of the Sicor acquisition price. The balance of approximately $890 million in cash was derived from Teva's existing cash resources, including funds derived from prior convertible debt issuances. On January 22, 2004, Teva announced the closing of the Sicor acquisition and issued convertibles to pay off the short term loan of $1.13 billion. An aggregate of $460 million of 0.50% Series A Convertible Senior Debentures due 2024 and $634.45 million of 0.25% Series B Convertible Senior Debentures due 2024 were sold, yielding aggregate net proceeds of approximately $1.076 billion.

A total of 23,328,834 ADRs have been issued, which amounted to approximately 7.7% of the issued and outstanding share capital of the company shortly after the allotment.

The entire deal is now funded by the convertibles and the issuance of 23.3 million shares of stock. This deal is not included in the following 2003 results.

The following table summarizes Teva's contractual obligations and commitments
as of December 31, 2003:
                                          Payment due by period 

Total Less than 1-3 years 3-5 years More
1 year than
5 years

------- --------- --------- --------- -------
U.S. $ in millions
Long-term debt obligations 1,169.3 360.6 * 265.4 525.8 ** 17.5
Operating lease obligations 64.1 16.5 23.3 12.0 12.3
Purchase obligations (including 527.7 524.0 3.7 -- --
purchase orders)

------- --------- - --------- --------- -- -------
1,761.1 901.1 292.4 537.8 29.8

* Includes $352.5 million 0.75% Convertible Senior Debentures due 2021 with a first redemption date of August 20, 2004.
** Includes $449.9 million 0.375% Convertible Senior Debentures due 2022 with a first
redemption date of November 18, 2007.
The current total debt is approximately $2.9 billion with the acquisition of Sicor. This raises debt/equity to around 51% including the debt value of the convertibles. Even this level of debt reflects a massive pay down from previous years.

An underfunded pension plan

Obligations are $86.6 million at the end of 2003 and the fair value of plan assets is $52.7 for a shortfall of $33.9 million. I t is certainly not one of the worst underfunded pension plans I have seen. It would be nice if they had a surplus. They did make money on their investments and the plans value has increased since 2002.

They have more realistic expectations of returns at 6.2%. It is worrisome to see pension plans figuring 9-10% returns and the 6.2% will help to curb future drastic shortfall.

An unexplained insider business transaction

In September 2003, Teva purchased 14,021,000 units issued by Viventia Biotech Inc., a publicly traded Canadian biotech company, for CDN $2.8 million. Each unit is comprised of one common share and one common share purchase warrant. Leslie Dan, a director of Teva, is a major shareholder and director of Viventia. In addition, in February 2004, Teva's audit committee and Board of Directors approved the purchase of certain property in Canada owned by Mr. Dan. The property serves as the manufacturing facility for Teva's penicillinmanufacturing operations. The sale price for the transaction, which is scheduled to close shortly, is approximately CDN $6.25 million. Why did Teva buy shares of this biotech? They do not discuss it.Was it intended as an investment or a favor to Mr. Dan. There is no discussion of quid pro quo for the acquisition of the shares except its link to the subsequent sale of the property. Did one hinge on the other?


The weighted average fair value of options granted during the year, estimated by using the Black & Scholes option-pricing model, was $ 19.3, $ 13.08 and $ 16.72 for the years ended December 31, 2003, 2002 and 2001, respectively.

 Total shares outstanding 5.9 million
Total value @$19.30 = $113.8 million
Per share value=$0.19
Total dilution= 0.009% very small but they are diluting shares with convertibles and acquisitions . The Sicor acquisition was 7%.
Expense if all grants were exercised= $147 million


Assumptions and inputs

EPS $1.41 I had to normalize this due to a loss in the first quarter for a one time charge to
R&D acquired.

DS $0.05
Capex per share $0.35
Depreciation per share $0.21
Revenue per share $4.80
Non cash WC per share $2.16
Change in WC per share $0.31
High growth rate of 15% for 5 years
Stable growth of 3%
Beta 1
Risk free rate 4.45
Market risk premium 5.50%
Capex exceeds depreciation by 100%
Capex, WC, depreciation grow at same rate as earnings
Value $31.12
Value with options $30.93

The company is trading at a discount. The negatives that would make you want a bigger discount are
1) Fairly high debt
2) Underfunded pension plan
3) Questionable insider business transaction
4) Recent dilution of shares and high number of outstanding shares with no buyback in sight
5) Slow inventory turns

These are offset by:
1) Very good margins that are increasing
2) 5 year history of double digit growth
3) Organic growth rather than constant acquisition
4) 30 year history of paying dividends
5) Good returns on equity
6) Recent price decrease on no news

I would like to own Teva, but would like another 15-20% to feel really comfortable with expectations for price appreciation over the long haul. They may find some difficulties integrating Sicor which could detract from earnings. Management declined to raise 2004 earnings estimates--expecting difficulty from the acquisition?. In the short term, if they meet quarterly earnings with the acquisition, expect the price to climb. The March 04 quarter looked terrible due to the R&D charge so June and September may give Teva a lift.

News--no news

TEL AVIV, Aug 15 (Reuters) - Shares in Israeli drugmaker Teva Pharmaceutical Industries Ltd rebounded on the Tel Aviv Stock Exchange on Sunday after the firm last week sought to reassure investors over its outlook, dealers said. Teva's shares were up 2.2 percent at 123.00 shekels at 1314 GMT in very heavy trading in Tel Aviv, compared with modest losses on the broader bourse. Its turnover accounted for a third of all trading.

Teva, the world's largest generic drugmaker and one of Israel's biggest companies, had seen its share price slide nearly 10 percent the past few weeks despite second-quarter results that beat market expectations.

Teva, in a statement issued late on Thursday after the Tel Aviv bourse had ended trading for the week, said it knew no developments in its business or financial accounting that would explain the recent decline in company shares.

It added that its outlook remained strong.

Teva's Nasdaq-listed shares rebounded on Friday after falling 6.5 percent on Thursday. Its shares jumped 4.8 percent to $26.45 on Friday.

"The statement came out late on Thursday and people here (in Tel Aviv) did not have enough time to react. It looks like a reaction to (the statement)," a dealer with an Israeli brokerage said.

"The sell-off we have seen of late looks overdone on a technical basis and research on Teva is positive. Trading remains volatile and we will have to see if this is the end of the sell-off," the dealer said.

Earlier this month the firm reported higher second-quarter earnings beating analysts' forecasts. Despite posting stronger profits, the firm's shares fell -- partly because Teva declined to lift its 2004 estimates.

"Teva still looks positive. We must take into account the weakness in the generic drug sector as a whole which is out of favour with the market at the moment," the trader said.

Merrill Lynch analyst Gregory Gilbert, in a research report issued over the weekend, maintained its "buy" rating and $38 price target since "Teva is not the focus of an accounting probe of any kind".

Gilbert said that there was concern among investors over the coming launch of Irish drug maker Elan Corp's Antegren drug for multiple sclerosis, which will compete with Teva's Copaxone drug.

"(This) coupled with the lack of visibility for significant new generic product launches, could constrain stock performance in the near to-intermediate term," Gilbert wrote.

"That said, we believe that the company's strong fundamentals are intact." ($1 = 4.54 shekels)
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