Instant Analysis: Is Teva Pharmaceutical Industries a Buy on the Dip?

By Cory Renauer Markets Fool.com

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What happened?

Teva Pharmaceutical Industries(NYSE: TEVA)took another stock market hit after a U.S. District Court invalidated four method of use patents protecting a long-acting version of Teva's multiple sclerosis drug, Copaxone. The recently invalidated patents were holding back competition from a generic version named Glatopa, developed byMomenta Pharmaceuticals, Inc. (NASDAQ: MNTA)and marketed in partnership with the Swiss pharma giant Novartis.

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Does it matter?

Teva Pharmaceutical Industries Ltd (ADR) shares have steadily slid more than 50% from high water marks set in mid-2015. Overall erosion of generic drug pricing power is partly to blame, but encroaching generic competition for its popular multiple sclerosis therapy, Copaxone, has given investors another reason to be nervous for quite some time now.

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Glatopa has been steadily eating into sales of the shorter duration 20mg Copaxone dosage, but the losses could have been far more severe. A couple years back, Teva successfully converted a large percentage of existing Copaxone patients from a lower dosage that lost patent protection to a longer-lasting 40mg dosage that retained some of the brand's pricing power.

In the third quarter of 2016, Copaxone sales of about $1.06 billion comprised around 19% of Teva's total revenue, and about 83% of U.S. prescriptions are for the 40mg long-lasting version that is under threat following the latest court decision. When the company provided its 2017 financial outlook recently, it forecast a potential revenue reduction of between $1.0 billion and $1.2 billion for the year. On the bottom line, the company is predicting adjusted earnings to fall between $4.90 and $5.30 this year, but it also thinks incominggeneric competition for long-lasting Copaxone could reduce adjusted earnings this year by between $0.65 to $0.85 per share.

After sliding for over a year, shares of Teva are low enough that an abrupt loss of Copaxone sales in the U.S. already seems priced in. The stock is trading at just 6.5 times this year's earnings estimates. Although it hasn't risen its quarterly dividend payment of $0.34 in more than a year, at recent prices the stock offers a tempting 4% yield. Dividend payments over the past four quarters required just 28% of free cash flow generated over the same period, which means the distribution will remain on solid ground even if Copaxone sales fall off a cliff this year. The stock might fall further, but those dividend payments could make holding on a lot easier while waiting to see how the latest court decision shakes out.

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Cory Renauer has no position in any stocks mentioned. The Motley Fool recommends Momenta Pharmaceuticals and Teva Pharmaceutical Industries. The Motley Fool has a disclosure policy.