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Pharmaceutical Industries Ltd. Hila Kollnesher Ronald Adler Eugene Katchalov Erin Goglick Lisa Vortsman.

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Presentation on theme: "Pharmaceutical Industries Ltd. Hila Kollnesher Ronald Adler Eugene Katchalov Erin Goglick Lisa Vortsman."— Presentation transcript:

1 Pharmaceutical Industries Ltd. Hila Kollnesher Ronald Adler Eugene Katchalov Erin Goglick Lisa Vortsman

2 What to expect from us:  What makes this grass greener  Why its crucial to spot investment opportunities in Emerging Markets  Unexpected Outcomes

3 Investing in Israel "The land of the prophets is becoming the land of profits"  Impressive growth of Israel's economy has been attracting foreign capital to Israel  Investments in infrastructure  Increases in industrial exports  Privatization of government companies  Control of inflation  Liberalization of capital markets  Steady growth of Israel's GDP

4 Israel: the land of milk and money (what makes our project unique – its major contributions)  Sometimes it pays to search troubled regions for investment ideas – With Iraq out of the way, the Bush Administration will be more likely to prioritize resolving the Israeli-Palestinian conflict  Take advantage of Israel's Free Trade Agreements with the EU and with the US  The taxation climate is quite favorable

5 Teva: Make Medicine, Not War  World’s largest generic pharmaceutical amongst top 35  One in every 15 prescriptions in the U.S. is a Teva product  It produces and sells more than 300 generic drugs in North America, Israel, and Europe; from antibiotics to painkillers and heart medicines  It plays the all-important patent game so well that it regularly wins patent and marketing battles against drug companies 10x its size –built its dominance by beating rivals to lucrative opportunities and introducing scads of new drugs at a rapid-fire pace  For Teva having headquarters in Israel but operating for the most part outside, the investment pros are suggesting that the biggest danger is that they might “lose their mail”

6 Teva Pharmaceuticals  World’s number 1 generic drug company  About 140 generic products  Specializes in the generic equivalents for brand name drugs for heart disease, heartburn, antibiotics  Develops own proprietary drugs focusing primarily on neurological disorders and autoimmune diseases.

7 Teva Pharmaceuticals  Founded in 1901 in Jerusalem.  Dealt primarily with drug distribution  1951 – IPO on Tel Aviv Stock Exchange  Since inception, many of company’s successes attributed to R&D Spending  Major Player in this >$300 Billion industry

8 Teva Pharmaceuticals  Expansion into European Marketplace  Strong North American presence: –Teva Pharmaceuticals US –Recent acquisition of Canadian drug maker Novopharm  2002 Sales: $2.08 Billion  2002 Net Income: $278.2 Million

9 Teva Pharmaceuticals Generic Pharmaceuticals Industry  Teva Focuses primarily on: –Human Pharmaceuticals (generic drugs in dosage forms such as tablets, creams, liquids, etc.) –Active Pharmaceutical Ingredients (used in the manufacturing process) Generic DrugmakersDrugmakers Teva PharmaceuticalsMerck Alpharma Inc.Johnson & Johnson Mylan LabsPfizer Watson PharmaceuticalsGlaxoSmithKline IVAXNovartis (ranked by sales)

10 Life in Israel  Creation –Created by the UN after WWII for the Jewish people. –Land: Majority desert, not suitable for agricultural growth. –Almost no natural resources, dependant on human capital for economic growth.  Population –80.1% Jews, 14.6% Muslims, and 2.1% Christians –Languages: Hebrew, Arabic and English –Immigration from the former Soviet Union –1 Million migrants to IL, 17% of the electorate

11 Education  Globally competitive in telecommunications, biotechnology and high-tech industries  1999: 13% of employed residents were educated professions, 14.5% were professionals/technicians and 15% of the labor force has 16 or more years of proper educations  Minimum wage law, average wage per employee is about $1,680/yr

12 Israel’s Right to Exist  Israel’s existence has been plagued by numerous wars and terrorist attacks.  Israel’s neighbors’ believe land was unfairly taken  Improvement in relations with neighbors: 1979 Israel-Egypt and 1994 Jordan-Israel peace treaties.  Israeli/Palestinian violence increased after Sept  Israeli/Palestinian violence increased after Sept 2000.

13 Military, Patriotism and Peace  Military Draft: Israel needs to defend itself and protect its people who are threatened by terrorism. –All citizens, men and women, serve in the military for a certain period of time after completing school.  Israelis are known for their extreme patriotism. –Very proud and will sacrifice anything, –won’t be discouraged by terrorists and live their lives without fear.  The two halves of Israel: Peace can’t be achieved until neighboring countries begin to accept Israel as a country. The other half believe peace is achievable regardless. –Assassination of Prime Minister…current prime minister different from previous one

14 Israel’s Macroeconomic State and Structure 1999 – 2000  Transition from a consumption growth pushed by Russian immigrants to a expert influenced growth period.  GDP in 2000: US$17,000 Higher than Portugal, Greece and New Zealand.

15 Fiscal Policy  Goals to reduce the budget deficit as a percentage of GDP and governments debt relative to GDP.  Despite five changes in political leaders in the 1990’s Israel maintained economic stability. Deficit as % of GDP Before 1996 Domestic Deficit after Total

16 Privatization and Foreign Trade  Over the past three decades Israel has induced privatization in order to stimulate a market based economy and help finance the budget.  Israel is a member of both the WTO and Government Procurement Agreement and has free trade agreements with most of its major partners (US, EU, EFTA, Canada)  In 2000 the trade deficit between the US and Israel (to US) was balanced decreasing the total deficit from US$ 2.9 Billion in 1999 to US$.7 billion in Deficits to Asia and the EU, however, continued to increase.

17 Interest Rate  The Bank of Israel sets the nominal interest rate every month to maintain the inflation target set by the government. In comparison to more stable economies, the interest rate for residents is relatively high despite a decrease in the nominal rate as of Nominal Interest Rate Inflation Rate

18 The Capital Market  The Tel-Aviv Stock exchange is the major exchange in Israel.  As of 1997 TASE runs on an automated system, and allows its members to offer online services to investors.  The real value of stocks traded increased by 59% in  665 companies currently listed on TASE –Over 2000 securities with a total market capitalization of approximately $80 billion

19 Current State  : Economy began to stagger due to a decline in private consumption with a rise in public consumption.  Israel’s GDP declined 1.1% in 2001 and.6% in Three factors that influenced Israel’s Recession: –Following the 9/11 attacks on WTC travel and tourism revenue declined as the risk of traveling increased (in the ME). –After 2000 the global economic recovery began to slow. large slump in the global markets show signs that the market decline has not yet bottomed. –Israel’s economy is increasingly affected by the rising security problems as well as a possible future US war with Iraq.  While Israel’s economic growth in GDP has slowed, comparatively, Israel is one of the most developed countries in Western Europe, with GDP per capita of US$ 20,000 in  Recession in past 2 years, value-added exports, a skilled workforce, and a committed government help post positive GDP growth by the end of 2003.

20 Israel’s Political System  Three branches of government: –legislative, executive and judicial. They also have a president who serves a ritual function and has no real power.  Religion in the Government –no separation between state and religion  Prime minister –responsible for selecting a cabinet and forming a government from the coalition parties.

21 Political Issues  Political Issues affecting Business Climate  People afraid of investing because of constant violence  Past agreements act as hope for the possibility of peace in the future –Examples: 1979 Israel-Egypt peace treaty, the Regional Conference of 1991 in Madrid  Israel- PLO Recognition  Signing of the Declaration of Principles –a timetable for achieving permanent and complete peace between Israel and Palestine

22 Attempting Peace  The Interim Agreement 1995 –granted the Palestinians self- government in the West Bank  Violence breaks - peace agreements collapse –Suicide bombing –Israeli occupation –Both lead to escalating hostilities

23 Pros for investing in Israel  Large numbers of professionals –135 engineers, scientists, and physicians per capita per 10,000 people (largest per capita in the world)  Hotbed for foreign investment  Low corruption –According to the Transparency International Corruption Perceptions Index for 2003, Israel ranked 18th in the world (for a benchmark, the United States is currently ranked 16 th)  Government Support –Numerous support for research intensive projects and small businesses  Israeli Shekel pegged to a basket of 5 currencies –The US dollar, German mark, British pound, French franc, and Japanese yen

24 Cons for investing in Israel  Instability –Continuous conflict in the Middle East (Israel - Palestine/Much of the Middle East, US - Iraq)  Global Recession –Current global economic situation is viewed by many as a “slump”  Decline in tourism –A vital revenue source for the country

25 Business and Politics  During the decade preceding 2000 moderate peace was maintained and communications between countries continued in hope of forming a new Middle East. Peace in the Middle East made high growth and margin companies like TEVA extremely attractive. From the years 1991 to 1998, when the peace process appeared to be making strides, Teva’s stock price rose as it increased its drug pipeline, M&A opportunities and released Copaxone internationally. Teva has managed to avoid any major interruption to its business, despite the terrorism and turmoil in and around Israel. Nonetheless, escalating conflicts in the Middle East have made more risk averse investors shy away from the stock as war is eminent and there appears to be no end to the on going violence.  In order to statistically determine if Teva is affected by political events a regression analysis was done.

26 The Regression Model  Our final regression model is one that uses the political rank as a dummy variable, P/E, P/S and Growth to predict the stock price. The model explains 53.9% of the variation in the stock price. The final regression equation is: Price Close = Neg Neg Neg Neg Neg Pos Pos Pos Pos Pos PE Growth P/S Net Margin Beta  A best-subset test was utilized to prove this was the most efficient model that could be used with the highest correlation.

27 Variables  Event Date: Date upon which event in question occurred  Event Rank: Events are given a rank ranging from -5 to 5. Negative ranks represent negative political events, the greater than rank the more serious the political crisis. Positive ranks represent positive political events.  -5: Political official or significant member of peace process is assassinated/wounded.  -4: Troops invade, attack or occupy foreign territory or political figure resigns.  -3: Terrorist Attack injures civilians or declared end of peace talks.  -2: Riots break out in protest. Political Leaders reputation is smeared.  -1: Rejection of an interim peace agreement/supplement or pause of peace talks  0: Normal Political day for Israeli Citizens: no significant events occur.  1: Elections occur or a meeting between officials is planned.  2: A Cease fire occurs or is planned.  3: A meet between officials occurs.  4: Troops are removed from occupied areas or land turned over to Palestinians.  5: Interim peace agreements or supplements are signed or agreed upon.  PE: PE ratio for the quarter in which the event occurred  Growth: Growth rate for the quarter in which the event occurred.  P/S: Price to sales ratio for the quarter in which the event occurred.  Net margin: Net Margin for the quarter in which the event occurred.  Predicted Price: Price predicted by the model given the about input multiples.  Price Close Prior Day: Stock closing price on the day prior to the event in question.  Price Close: Stock closing price on the day of the event in question.  Percentage Change: Percentage change in price from the prior day to the day in questions closing price.  Description: Description of the event in question.

28 Descriptive Statistics Predictor Coef SE Coef T P Constant Neg Neg Neg Neg Neg Pos Pos Pos Pos Pos PE Net Marg Beta S = R-Sq = 53.9% R-Sq(adj) = 47.2% Analysis of Variance Source DF SS MS F P Regression Residual Error Total

29 Political Conclusion  Israeli companies that react in correlation with political events should have negative beta-hats for negatively viewed events and positive beta-hats for positively viewed events. Teva, however, has successfully created an organization that has been successful in beating both the NASDAQ and S&P 500 over the past two years, as well as limiting its exposure to political risk. The regression equation shows that Teva’s stock price is negatively correlated with political events. An event deemed a -2 on a -5 to 5 scale was the only negative event, on average to reduce the stocks price (-22.1 cents). In addition, positive events, which are likely to increase the stock price, on average were in some instances associated with a decrease in stock price ( +2 and +3 events). One can therefore conclude that though political events must have some effect on the company and the mindset of investors, the company has proven its ability to withstand even the worst of events. Investors should view Teva as an undervalued stock that is capable of high returns with limited political risk. Teva, S%P 500 and NASDAQ

30 Relative Valuation  Our Sample –From this group only companies that were significantly comparable, given their focus, growth rate, cash flows and risk were included as initial basis points. In order to control for large difference within the sample, two outliers were removed: Bradley Pharmaceuticals (BPRX) and First Horizon Pharmaceuti (FHRX), leaving 32 basis points  The Multiples: –Peg, P/S, Net Margin  Assumptions: –Both the value and the standardizing variable represent the equity claimholders of the firm –The multiples used were uniformly estimated: accounting principles to measure earnings multiples are consistent across all firms in the sample. –All simple relative valuations will utilize the median rather than the mean, as it is often a more reliable comparison point.

31 Simple Valuation PEG Ratio CompanyPEG Lannett Company King Pharmaceuticals 0.52 American Pharmaceutical Partners 0.58 ICN Pharmaceuticals 0.63 Endo Pharmaceutical Hldgs 0.65 NBTY0.7 Serologicals0.73 Biovail Corporation International 0.77 Draxis Health 0.77 Noven Pharmaceuticals 0.82 Cima Labs 0.83 Sanofi-Synthelabo ADR 0.83 Bentley Pharmaceuticals 0.85 Shire Pharmaceuticals Group PLC ADR0.88 Ivax Barr Laboratories 0.91 Hi-Tech Pharmacal 0.97 Taro Pharmaceutical Industries 0.98 Sicor1 Able Laboratories Able Laboratories 1.02 Flamel Technologies ADR 1.03 Chattem1.06 DUSA Pharmaceuticals 1.1 Pharmaceutical Resources 1.14 Teva Pharmaceutical Industries ADR 1.14 Forest Laboratories 1.23 Mylan Laboratories 1.29 Medicis Pharmaceuticals A 1.37 Watson Pharmaceuticals 1.43 Novo Nordisk ADR 1.56 Allergan1.64 Perrigo1.88 Mean Median0.89

32 PEG Analysis  For an investor looking for a simple relative valuation PEG can be used, however with some caveats: –High risk companies will often trade at much lower PEG ratios than low risk firms with the same expected growth rate. This often leads to companies appearing cheaper than the rest of the sample, however, they may be the riskiest firm in the group. –Companies that attain growth by investing less in lower retention ratios will have higher PEG ratios than companies growing at the same rate. This often leads to companies looking cheap on a Peg basis, however they may have high reinvestment rate and poor return on equity. –Companies with very low or very high growth rates will tend to have higher PEG ratios than firms with average growth rates. As an example, Teva is in the upper third of the sample with a high growth rate of 20%. –Though the data is easy to gather and analyze, dividing PE by expected growth does not neutralize the effects of expected growth because the relationship between growth and value is not linear and fairly complex.

33 Simple Price to Sales CompanyNet Ordered By Margin SalesMargin Ivax % Chattem % ICN Pharmaceuticals % Pharmaceutical Resources % Draxis Health % Noven Pharmaceuticals % Serologicals % Mylan Laboratories % Flamel Technologies ADR % Barr Laboratories % Shire Pharmaceuticals Group PLC ADR % Hi-Tech Pharmacal % Cima Labs % Perrigo % Sanofi-Synthelabo ADR % Lannett Company %Price/ DUSA Pharmaceuticals % Allergan % NBTY % American Pharmaceutical Partners % Teva Pharmaceutical Industries ADR % Novo Nordisk ADR % King Pharmaceuticals % Able Laboratories Able Laboratories % Medicis Pharmaceuticals A % Sicor % Forest Laboratories % Watson Pharmaceuticals % Taro Pharmaceutical Industries % Bentley Pharmaceuticals % Endo Pharmaceutical Hldgs % Biovail Corporation International % Mean % Median %

34 CompanyNet Ordered By Price to Sales Ordered By Price to SalesSalesMargin Ivax % Cima Labs % Pharmaceutical Resources % Serologicals % Flamel Technologies ADR % Draxis Health % Mylan Laboratories % Barr Laboratories % DUSA Pharmaceuticals % Perrigo % Hi-Tech Pharmacal % Medicis Pharmaceuticals A % Noven Pharmaceuticals % Teva Pharmaceutical Industries ADR % Shire Pharmaceuticals Group PLC ADR % NBTY %Price/ NBTY % American Pharmaceutical Partners % ICN Pharmaceuticals % Able Laboratories Able Laboratories % Watson Pharmaceuticals % Lannett Company % King Pharmaceuticals % Allergan % Novo Nordisk ADR % Chattem % Sanofi-Synthelabo ADR % Forest Laboratories % Biovail Corporation International % Sicor % Taro Pharmaceutical Industries % Endo Pharmaceutical Hldgs % Bentley Pharmaceuticals % Mean % Median % Simple Relative P/S Valuation Conclusions: Fundamentally investors should look for stocks that have low Price to sales multiples with high net margins. By analyzing the simple valuation result we see that Teva has a price to sales multiple slightly higher than the median and a net margin slightly below the median. We can therefore conclude that Teva is neither an extremely attractive or unattractive investment.

35 Price to Sales and Net Margin Regression Regression Predicted Price: Given a regression equation of: y = x And Price to Sales Multiple of : 3.4 Predicted Price = * = $68.69 By analyzing Teva’s current price fluctuations we can conclude that Teva is under-valued. Our recommendation, considering Teva’s ability to maintain economic stability and consistently beat the market is a strong buy.

36 Economic Value Added  Developed by Stern, Stewart & Co.  Maximizes Shareholder Value  Calculates Company’s True Profit using WACC

37 EVA (Calculated)

38 Free Cash Flows

39 Terminal Value  Calculated by using Stable Growth Formula  FCFF (n+1) / (WACC-g n )  Growth Rate taken from U.S. Ten Year Treasury Bond

40 Target Price Calculation  Used Terminal value and Free Cash Flows to Calculate Value Of Assets  Target Price: $52.79  Current Price $44.16

41 Altman EM Z-Score Model  Used to calculate risk of debt in Emerging Market Countries  Z-Score = (6.56)*X1 + (3.26)*X2 + (6.72)*X3 + (1.05)X4  X1 = Working Cap./ Total Assets  X2 = Retained Earnings/ Total Assets  X3 = EBIT/ Total Assets  X4 = BV of Equity/ Total Liabilities

42 Altman Z-Score Model

43 Profitability & Growth Ratios

44 Heal the world make it a healthier place  Baby-boomers will soon be taking more medicine to stave off illnesses connected with old age  By 2030 the ranks of the elderly are expected to double to more than 70 million people, or 20% of the U.S. population  In the next 4 years patents will expire on brand-name drugs worth some $36 billion in annual sales, broadening the field for generics makers


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