Teva: Babe Ruth on Steroids

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

The 2006 season is shaping up to be a great year for this grizzled veteran. Last week, Teva announced a 77-percent surge in second-quarter sales to $2.2 billion. Fully diluted earnings per share soared 83 percent to 66 cents. That jump blew the doors off analysts’ original estimates of 46 cents by a whopping 50 percent.

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Even more impressive than Teva’s earnings surprise was the expansion of its margins, which rose to 55.4 percent from 47.4 percent. Teva’s secret weapon? The largest launch of a generic drug in the history of the industry.

While the June 23rd patent expiration on Zocor — a $4.4 billion drug — was a major blow to Merck, it’s been a boon to the generic manufacturer. Teva had secured the rights to produce simvastatin — a generic version of Zocor — with only limited competition for a period of 180 days. Such rights are granted to the first company to file for approval of a generic version of a branded drug. Teva was well-prepared to milk this exclusivity for everything it was worth, with several 18-wheelers loaded up, ready to ship simvastatin the minute Merck’s patent expired.

Just a few days after the Zocor patent expired, Pfizer’s patent ran out on the antidepressant Zoloft — a $3.3 billion drug in 2005. Teva has exclusive rights for 180 days to make the generic form of this blockbuster — called sertraline — as well. And Teva has been already producing pravastatin since April, when the generic version of the cholesterol-cutting drug Pravachol from Bristol-Myers Squibb Bristol’s patent ran out. The combination of big sales in high-margin generics guarantee that this year will be one that Teva fans will remember.

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Indeed, the benefits of exclusivity on three former blockbusters will make Teva’s 2006 sales and earnings a hard act to follow. But Teva is not a company to rest on its laurels. It has 148 more applications for generic drugs filed with the Food and Drug Administration and has first-to-file status with 46 of those applications. That represents $84 billion in U.S. sales, and potential exclusivity for $35 billion in U.S. brand-name sales. The old slugger may have many more years like 2006 left in him.

So buy Teva (TEVA) at market today, and place your stop at $29.50. For even more upside, I recommend the January $35 call options (TVQAG.X)

PORTFOLIO UPDATE

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