Teva Pharmaceuticals (TEVA) is not a company I would typically consider investing in. It was a mere three years ago that it hit an all-time high of $70, only to sink to $11 in November 2017. The decline in stock price correlated with the spike in debt and to many, the glory days of Teva had officially come to an end.
This decline makes sense. Teva specializes in manufacturing generic pharmaceuticals. In other words, once a drug comes off patent, it is generally a race to the bottom to manufacture drugs and ensure they meet strict safety profiles to be sold at a steep discount.
The term for when a drug comes off patent to then face generic competitors is called a “patent cliff,” and it is one of the greatest fears a pharmaceutical company has. Some pharmaceutical companies even attempt extreme measures to extend intellectual property rights. For example, Allergan attempted to transfer patents to the Saint Regis Mohawk Tribe to “dismiss a certain brand of patent challenge from generic drugmakers.” As a result, it is no surprise that margins are naturally going to be significantly lower for companies specializing in generics compared to those of heavyweight pharmaceutical and biotechnology companies such as Amgen, Pfizer and Sanofi.
Despite is enormous size and strength, Teva has endured tremendous pressures from virtually every direction, with increasing competition, ballooning debt and eroding prices for current drug offerings. These complications resulted in plant closures, R&D project cuts, a reduction in workforce of over 25% and a dividend suspension.
For these reasons, it surprised many when Warren Buffett first began to buy Teva stock, building a stake of approximately 43.2 million shares valued at over $1 billion.
Jim Cramer put it well when he said: “It is amazing that Warren Buffett (Trades, Portfolio) goes for what I largely regard as the worst of the worst.”
However, Teva is also undergoing a radical change to its structure, and the results are beginning to show. Revenues have remained strong compared to historical averages despite challenges and have remained above $4 billion a quarter since June of 2010.Ă‚ It has set a goal of slashing $3 billion in costs by 2019.Ă‚
Teva also has a very strong track record of inorganic growth. One bold move was the acquisition of Allergan (AGN)'s generics business, Actavis Generics, in August 2016 for $40 billion.
Teva then bought Allergan’s Anda Inc., the fourth-largest distributor of generic pharmaceutics in the U.S., for a total of $500 million.
These acquisitions helped secure Teva’s position as a generics leader in the U.S. and have yielded results. First quarter 2018 growth figures were impressive, with the U.S. segment growing 14%, Japan 6.6%, Europe and Canada 2% and emerging markets 6.2%.
Teva also has very strong branded pharmaceuticals, as well as non-generic drugs and biosimilars awaiting approval (listed below). This pipeline of candidates in late-stage approval status is encouraging given that Teva’s own blockbuster drug Copaxone is facing generic competition from Glatopa and from Mylan (MYL), which launched its own generics version in October 2017. Copaxone, which generated $3.8 billion in sales for 2017, is forecast to hit only $1.8 billion in 2018.
| Branded Name | Indication(s) | Approval Status |
| Copazone | Multiple Sclerosis | Approved |
| Azilect | Parkinson’s Disease | Approved |
| Treanda | Cancer | Approved |
| Bendeka | Cancer | Approved |
| Cinqair | Severe Asthma | Approved |
| Fasinumab (Partnered with Regeneron REGN) | Moderate/Severe osteoarthritis pain of the hip or knee | Phase III |
| Fasinumab | Lower back pain | Phase III |
| Fremanezumab | Migraine | PDUFA date extended by three months to September 16, 2018. |
| Fremanezumab | Post-Traumatic Headache | Phase II trial initiated 2H 2017. |
| CT-P10; Rituxan (rituximab) biosimilar | Autoimmune disease and cancer | PDUFA 1Q 2018. Overdue. |
| CT-P6; Herceptin biosimilar | Breast cancer | PDUFA date 1H 2018. Overdue |
| AUSTEDO SD-809 | Tourette Syndrome | Phase III trial commenced 1Q 2018. |
In addition to the above pipeline, Teva recently secured approval of a generic version of Mylan’s EpiPen, a market that Mylan dominates with 89% presence. This was significant because the original attempt at approval was rejected, a huge disappointment given that at the time, the price of EpiPen increased from less than $100 to over $600.
Intense pressure from the public in response to the steep price increase forced Mylan to begin selling its own generic version of EpiPen for $300. With EpiPen profits reaching $1.1 billion a year, there is significant market share that Teva will be able to claim. It is also currently the only major competitor that is able to offer an alternative to Mylan’s own generic, and it has the experience to execute aggressive sales and marketing initiatives.
Last, there is more demand than ever to sell the EpiPen due to a recent shortage caused by manufacturing troubles at the Pfizer plant (PFE) that supplies the EpiPens. This shortage is so severe that the FDA has actually extended the expiration dates of specific lots of EpiPens by four months.
In summary, Teva has seen better days, but the future does seem bright. Teva has positioned itself to not only grow its generics business, but also lean on a strong pipeline of promising drug candidates in late development and the generic of Mylan’s EpiPen. While many investors remain skeptical (and with good reason) on Teva’s long-term outlook, it is very arguable that Teva’s stock price is undervalued, which is why it has grabbed the recent attention of Warren Buffett.Â
Disclosure: I do not have positions in the stocks mentioned.
