Time to add to Teva Pharmaceutical

We are adding to our position in Teva Pharmaceutical (TEVA), which is already a holding on our recommended buy list.

Canaccord Genuity just initiated coverage of Teva; analyst Randall Stanicky placed a "buy" rating and $52 price target on the stock. We agree with his analysis and are making a second purchase of this beaten-down stock.

"Teva has been a frustrating healthcare stock over the last year given a plethora of headwinds," Stanicky wrote.

"We believe that?s about to change as we head into 2012, where we see an inflection point on all fronts with sentiment at its lows. Bottom line: set-up here is attractive and we would be buyers into the high $40s."

Among the opportunities the analyst sees in 2012 are a better U.S. generics market, accretion from recent deals, the resolution of manufacturing issues, the takeback of Copaxone rights in the EU, and the potential for a more aggressive buyback plan.

As a result, Stanicky sees the potential for a greater than 30% sustainable EPS benefit compared to 2011.
The Canaccord note on Teva, which spans about 25 pages, is one of the best analyst write-ups we've seen in awhile.

Teva has been beaten down relentlessly over the past year, largely over fears of competition, both branded and generic, to its Copaxone franchise.

However, as Canaccord points out, the stock is cheap even taking Copaxone out of the equation; Teva has opportunities to extend its MS franchise through variant dosing; and Copaxone may cause generics to take longer to gain share given its complexity.

We also believe that the chances of generics impacting Copaxone before the drug is officially set to lose its patent protection in 2014 are small.

Meanwhile, as the biggest generics company in the world, Teva should start to benefit from the next impending generic drug cycle, and the takeback of Copaxone rights in the EU will be a big boost to profits next year.

The company is also gaining a strong branded pipeline with its acquisition of Cephalon, which, if the pipeline lives up to expectations, should start to replace any lost Copaxone revenue right when the drug is officially set to go off patent.

While Teva has performed poorly, we think the valuation is just too cheap on both an absolute basis and a relative basis compared to its pharmaceutical peers. As such, we're going to make our second purchase of the stock.

However, we will lower our target price from $69 to $63, which is just an 11x multiple on the 2012 consensus of $5.71. Note that analysts are projecting 2013 EPS consensus of $6.07 and the 2014 consensus is $6.05.




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