2What to expect from us: What makes this grass greener Why its crucial to spot investment opportunities in Emerging MarketsUnexpected Outcomes
3Investing 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 IsraelInvestments in infrastructureIncreases in industrial exportsPrivatization of government companiesControl of inflationLiberalization of capital marketsSteady growth of Israel's GDP
4Israel: the land of milk and money (what makes our project unique – its major contributions) Sometimes it pays to search troubled regions for investment ideasWith Iraq out of the way, the Bush Administration will be more likely to prioritize resolving the Israeli-Palestinian conflictTake advantage of Israel's Free Trade Agreements with the EU and with the USThe taxation climate is quite favorable
5Teva: Make Medicine, Not War World’s largest generic pharmaceutical amongst top 35One in every 15 prescriptions in the U.S. is a Teva productIt produces and sells more than 300 generic drugs in North America, Israel, and Europe; from antibiotics to painkillers and heart medicinesIt plays the all-important patent game so well that it regularly wins patent and marketing battles against drug companies 10x its sizebuilt its dominance by beating rivals to lucrative opportunities and introducing scads of new drugs at a rapid-fire paceFor 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”
6Teva Pharmaceuticals World’s number 1 generic drug company About 140 generic productsSpecializes in the generic equivalents for brand name drugs for heart disease, heartburn, antibioticsDevelops own proprietary drugs focusing primarily on neurological disorders and autoimmune diseases.
7Teva Pharmaceuticals Founded in 1901 in Jerusalem. Dealt primarily with drug distribution1951 – IPO on Tel Aviv Stock ExchangeSince inception, many of company’s successes attributed to R&D SpendingMajor Player in this >$300 Billion industry
8Teva Pharmaceuticals Expansion into European Marketplace Strong North American presence:Teva Pharmaceuticals USRecent acquisition of Canadian drug maker Novopharm2002 Sales: $2.08 Billion2002 Net Income: $278.2 Million
9Teva PharmaceuticalsGeneric Pharmaceuticals IndustryTeva 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 DrugmakersDrugmakersTeva PharmaceuticalsMerckAlpharma Inc.Johnson & JohnsonMylan LabsPfizerWatson PharmaceuticalsGlaxoSmithKlineIVAXNovartis(ranked by sales)
10Life in Israel Creation Population 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.Population80.1% Jews, 14.6% Muslims, and 2.1% ChristiansLanguages: Hebrew, Arabic and EnglishImmigration from the former Soviet Union1 Million migrants to IL , 17% of the electorate
11EducationGlobally competitive in telecommunications, biotechnology and high-tech industries1999: 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 educationsMinimum wage law, average wage per employee is about $1,680/yr
12Israel’s Right to Exist Israel’s existence has been plagued by numerous wars and terrorist attacks.Israel’s neighbors’ believe land was unfairly takenImprovement in relations with neighbors: 1979 Israel-Egypt and 1994 Jordan-Israel peace treaties.Israeli/Palestinian violence increased after Sept
13Military, 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
14Israel’s Macroeconomic State and Structure 1999 – 2000Transition from a consumptiongrowth pushed by Russianimmigrants to a expertinfluenced growth period.GDP in 2000: US$17,000Higher than Portugal,Greece and New Zealand.
15Before 1996 Domestic Deficit after Total Fiscal PolicyGoals 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 GDPBefore 1996 Domestic Deficit after Total
16Privatization 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 decreasingthe total deficit from US$2.9 Billion in 1999 to US$ .7billion in Deficits toAsia and the EU, however,continued to increase.
17Interest RateInflation RateThe Bank of Israel sets the nominal interest rate every month to maintain the inflation target set by the government.Nominal Interest RateIn comparison to more stable economies, the interest rate for residents is relatively high despite a decrease in the nominal rate as of 2001.
18The Capital MarketThe 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 % in 2000.665 companies currently listed on TASEOver 2000 securities with a total market capitalization of approximately $80 billion
19Current State: Economy began to stagger due to a decline in private consumption with a rise in public consumption.Israel’s GDP declined 1.1% in 2001 and .6% in 2002.Three factors that influenced Israel’s Recession:Following the 9/11 attacks on WTC travel and tourism revenue declined as the risk of traveling increased (in the ME).After 2000 the global economic recovery began to slow. large slump in the global markets show signs that the market decline has not yet bottomed.Israel’s economy is increasingly affected by the rising security problems as well as a possible future US war with Iraq.While Israel’s economic growth in GDP has slowed, comparatively, Israel is one of the most developed countries in Western Europe, with GDP per capita of US$ 20,000 in 2001.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.
20Israel’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 Governmentno separation between state and religionPrime ministerresponsible for selecting a cabinet and forming a government from the coalition parties.
21Political Issues affecting Business Climate People afraid of investing because of constant violencePast agreements act as hope for the possibility of peace in the futureExamples: 1979 Israel-Egypt peace treaty, the Regional Conference of 1991 in MadridIsrael- PLO RecognitionSigning of the Declaration of Principlesa timetable for achieving permanent and complete peace between Israel and Palestine
22Attempting Peace The Interim Agreement 1995 granted the Palestinians self-government in the West BankViolence breaks - peace agreements collapseSuicide bombingIsraeli occupationBoth lead to escalating hostilities
23Pros for investing in Israel Large numbers of professionals135 engineers, scientists, and physicians per capita per 10,000 people (largest per capita in the world)Hotbed for foreign investmentLow corruptionAccording to the Transparency International Corruption Perceptions Index for 2003, Israel ranked 18th in the world (for a benchmark, the United States is currently ranked 16th)Government SupportNumerous support for research intensive projects and small businessesIsraeli Shekel pegged to a basket of 5 currenciesThe US dollar, German mark, British pound, French franc, and Japanese yen
24Cons for investing in Israel InstabilityContinuous conflict in the Middle East (Israel - Palestine/Much of the Middle East, US - Iraq)Global RecessionCurrent global economic situation is viewed by many as a “slump”Decline in tourismA vital revenue source for the country
25Business and PoliticsDuring 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.
26The Regression ModelOur 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 BetaA best-subset test was utilized to prove this was the most efficient model that could be used with the highest correlation.
27Variables 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 talks0: 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 occurredGrowth: 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.
28Descriptive Statistics Predictor Coef SE Coef T PConstantNegNegNegNegNegPosPosPosPosPosPENet MargBetaS = R-Sq = 53.9% R-Sq(adj) = 47.2%Analysis of VarianceSource DF SS MS F PRegressionResidual ErrorTotal
29Political ConclusionIsraeli 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
30Relative 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 pointsThe Multiples:Peg, P/S, Net MarginAssumptions:Both the value and the standardizing variable represent the equity claimholders of the firmThe 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.
32PEG AnalysisFor 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.
34Simple Relative P/S Valuation Conclusions: CompanyNet Ordered By Price to SalesSalesMarginIvax0.775.30%Cima Labs0.8412.90%Pharmaceutical Resources1.056.80%Serologicals1.147.90%Flamel Technologies ADR1.2710.20%Draxis Health1.287.10%Mylan Laboratories1.599.60%Barr Laboratories1.7911.30%DUSA Pharmaceuticals1.916.30%Perrigo2.5614.40%Hi-Tech Pharmacal2.6612.70%Medicis Pharmaceuticals A3.0723.20%Noven Pharmaceuticals3.097.70%Teva Pharmaceutical Industries ADR3.420.80%Shire Pharmaceuticals Group PLC ADR3.4811.90%NBTY3.7118.90%Price/NBTY3.7118.90%American Pharmaceutical Partners4.0820.40%ICN Pharmaceuticals4.416.40%Able Laboratories4.4322.20%Watson Pharmaceuticals4.5128.80%Lannett Company4.7515.40%King Pharmaceuticals5.0222.00%Allergan5.1216.50%Novo Nordisk ADR5.3921.20%Chattem5.565.80%Sanofi-Synthelabo ADR6.8614.40%Forest Laboratories7.0224.40%Biovail Corporation International7.1243.20%Sicor7.2823.60%Taro Pharmaceutical Industries7.3529.60%Endo Pharmaceutical Hldgs9.5935.90%Bentley Pharmaceuticals10.4529.80%Mean4.1417.39%MedianSimple 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.
35Price to Sales and Net Margin Regression Regression Predicted Price:Given a regression equation of: y = xAnd Price to Sales Multiple of : 3.4Predicted Price = * = $68.69By 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.
36Economic Value Added Developed by Stern, Stewart & Co. Maximizes Shareholder ValueCalculates Company’s True Profit using WACC
39Terminal Value Calculated by using Stable Growth Formula FCFF(n+1)/ (WACC-gn)Growth Rate taken from U.S. Ten Year Treasury Bond
40Target Price Calculation Used Terminal value and Free Cash Flows to Calculate Value Of AssetsTarget Price: $52.79Current Price $44.16
41Altman EM Z-Score Model Used to calculate risk of debt in Emerging Market CountriesZ-Score = (6.56)*X1 + (3.26)*X2 + (6.72)*X3 + (1.05)X4X1 = Working Cap./ Total AssetsX2 = Retained Earnings/ Total AssetsX3 = EBIT/ Total AssetsX4 = BV of Equity/ Total Liabilities
44Heal the world make it a healthier place Baby-boomers will soon be taking more medicine to stave off illnesses connected with old ageBy 2030 the ranks of the elderly are expected to double to more than 70 million people, or 20% of the U.S. populationIn the next 4 years patents will expire on brand-name drugs worth some $36 billion in annual sales, broadening the field for generics makers