In a rare move, Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) pulled a stock from the pharmaceutical sector in the fourth quarter as its only new buy.
The stock, Teva Pharmaceutical Industries (TEVA, Financial), is an Israel-based drug company that focuses on generic medicine. It joined the Berkshire portfolio as events converged to lower its valuation and harm its financial situation in recent months.
Given that Buffett makes only giant purchases, the size of the position suggests that one of his deputy portfolio managers, Ted Weschler or Todd Combs, made the decision on Teva. Berkshire purchased 18,875,721 shares of the company when the price averaged around $15. The $357.7 million stake represents 1.86% of the company and merely 0.19% of the portfolio.
Not only the modest size of the position, but the state of the company’s balance sheet indicates that it might not be the type of high-quality company Buffett generally captures. Instead, it presents as a company undergoing potentially temporary challenges. Teva offered $28.83 billion in long-term debt at the end of the fourth quarter. On the cash end, Teva had only $963 million in the fourth quarter.
In 2015, long-term debt stood at $8.36 billion, and skyrocketed to $35.5 billion in 2016 when Teva acquired Allergan (AGN, Financial)’s generics business that August. The businesses combined had 338 product registrations awaiting FDA approval and a pipeline with 5,000 possible launches in Europe, as well as reach into growth markets in Asia, Africa, Latin America, the Middle East and Russia. Teva announced in the release that it planned 1,5000 generic launches for 2017 globally.
Financial strain deepened as evidenced in net income. Teva posted a net loss of $16.3 billion, or $16.26 per share, in 2017, compared to net income of $68 million, or 7 cents per share, in 2016. Many of the charges contributing to GAAP results related to the acquisition, including a $17.1 billion impairment of goodwill principally in its U.S. generics segment.
In another 2017 development, Teva suspended its dividend. A cessation of shareholder payouts, dire results and heavy debt prompted the market to run from the stock. Over the past year, the price plunged 43% and trades around $20 per share at market close Friday.
During the free fall, though, it adopted an attractive price-sales ratio. In the fourth quarter, the ratio dropped as low as 0.49, an all-time trough and has since increased to a historically meager 0.9.
Berkshire was not the only major investor that gravitated to Teva in the fourth quarter. Francisco Garcia Parames, a value investor often compared to Buffett, started a position worth 1.24% of his portfolio at Cobas Asset Management. Jana Partners (Trades, Portfolio) also initiated a stake that spanned 1.79% of its stock portfolio.
