Pat McKeough responds to many personal questions about specific stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for the Inner Circle.

This week, an Inner Circle member asked about the world’s biggest generic drug maker. This Israeli-based firm, which trades as an ADR, has grown steadily by acquisition. Pat examines the prospects for growth as an aging population demands more drugs, but he also looks at the challenges of increased competition and government regulation.

Q: Pat: What do you think of Teva Pharmaceutical? Thanks for your good work.

A: Teva Pharmaceutical Industries Ltd. ADRs, (symbol TEVA on Nasdaq; www.tevapharm.com) is the world’s largest generic drug maker.

In 2011, Israel-based Teva got 56% of its sales by making and selling more than 500 generic drugs.

The company also develops and markets some of its own name-brand drugs, including Copaxone, the second-highest-selling multiple-sclerosis treatment, and Azilect, a Parkinson’s drug. Branded drugs supplied 35% of Teva’s 2011 sales. The remaining 9% mainly came from over-the-counter drugs.

The U.S. provides 48% of Teva’s sales, followed by Europe (31%) and the rest of the world (21%).

Teva is one of the most successful companies in the highly competitive generic drug business. It regularly wins first-to-file applications on drugs whose U.S. patents are expiring. Approval of a first-to-file application gives Teva exclusive marketing rights for a drug’s generic version for six months.

Right now, the company has 63 first-to-file applications before the U.S. Food and Drug Administration (FDA). In all, the branded versions of these drugs have annual sales of over $44 billion. In addition, Teva has 80 other generic drug applications awaiting FDA approval. As well, it has a number of late-stage branded drugs under development, including treatments for women’s health, cancer, respiratory conditions and wounds.

For a rising portfolio Learn everything you need to know in 'How to Find the Best Growth Stocks' for FREE from The Successful Investor. Canadian Growth Stocks: CGI Group, CAE Inc., Fortis Inc. Stock and more.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Teva grows through acquisitions and joint venture with Procter & Gamble

The company has grown steadily by acquisition. In July 2011, Teva bought Taiyo Pharmaceutical Industry Co., Ltd., a Japanese firm that makes over 550 generic drugs, for $1.1 billion.

In October 2011, Teva paid $6.5 billion for U.S.-based Cephalon Inc., which makes several branded drugs, including Actiq (which relieves pain caused by cancer), Trisenox (for treating leukemia), Nuvigil (sleep disorders) and Gabitril (seizures).

Teva is also expanding its non-prescription drug business. It recently formed a joint venture with Procter & Gamble Co. (New York symbol PG) that will make and sell over-the-counter drugs outside North America. Procter owns 51% of this new business, called PGT Consumer Healthcare, and Teva owns the other 49%.

Thanks partly to these purchases, Teva’s sales rose 94.6%, from $9.4 billion in 2007 to $18.3 billion in 2011. Earnings jumped 127.4%, from $2.0 billion in 2007 to $4.4 billion in 2011.

Its overall sales rose 14.5% in the three months ended September 30, 2012, to $5.0 billion from $4.3 billion a year earlier. Excluding one-time items, earnings were unchanged at $1.1 billion. The company spent $324 million, or 6.5% of its sales, on research.

Teva had to borrow the money it needed to buy Cephalon. That helped push up its long-term debt to $12.7 billion as of September 30, 2012. It also held cash of $1.4 billion, or $1.65 per ADR.

The company recently won lawsuits in the U.S. and the U.K. against generic drug makers. That upheld its patents related to Copaxone, its multiple sclerosis drug. In the latest quarter, Copaxone accounted for 21% of Teva’s total sales. The company is now developing an oral version of Copaxone, which should help it compete when the drug’s patents expire in May 2015.

The company will probably earn $5.36 per ADR in 2012. The stock trades at 7.4 times that estimate. The shares yield 3.1%.

In the most recent Inner Circle Q&A, Pat notes that as demand for prescription drugs rises with an aging population, government and medical insurance providers will also be under pressure to cut costs by using more generic drugs. While that may be a positive for Teva, he also notes that government regulators will probably pressure generic drug makers to lower their prices. As well, increasing competition could lower profit margins for generic drug makers. He concludes with his clear buy-hold-sell advice on this stock.

(Note: If you are a current member of the Inner Circle, please click here to view Pat’s recommendation. Be sure to log in first.)

COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members

As people live longer and require more medication, do you believe that drug stocks represent a good long-term investment? Or do you think that fierce competition in drug technology and expiring patents make it difficult to rely on specific stocks? Let us know what you think?