Shareholders of Teva Pharmaceutical Industries Ltd. (TEVA, Financial) are searching for any reasons to be optimistic that the battered, bruised and beaten-down generic drugmaker can emerge from the depths of despair.
In just over four years, the Israel-based company has lost 90% of its market value and currently trades at about $7. Beleaguered investors can take some consolation in the fact they’re in good company: Two of the largest owners of Teva stock are Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) and Capital Group Companies, one of the world’s biggest investment houses.
While Buffett has been hailed as one of the greatest stock pickers ever, he swung and missed badly on Teva. Globes, an Israeli business site, estimated in a mid-August article that the $756 million Berkshire Hathaway likely paid for its shares gives the company a paper loss approaching nearly $500 million.
The steep slide in shares of the world’s largest generic drug company can be attributed to a litany of factors:
- A 20% cut in the company’s 2019 profit estimate.
- Sinking generic drug prices in the U.S., the world’s biggest market for copycat products.
- Paying far too much to acquire Actavis Generics, which added $35 billion in debt and contributed to the negative outlook given by credit rating agency Moody’s, increasing Teva's borrowing costs.
- Eliminating its dividend.
- A substantial drop in sales for multiple sclerosis treatment Capaxone, the biggest contributor to the company's sales and profits.
- The company settled bribery charges stemming from allegations it had bribed doctors to prescribe its drugs. That led to the dismissal of its CEO and chief financial officer.
Teva also faces a round of lawsuits for the role it played in the opioid crisis. On Sept. 5, the company’s stock got dragged down by news that Mallinckrodt (MNK, Financial) may have to declare bankruptcy to mitigagte the billions of dollars it may have to pay out for its contribution to the epidemic. Mallinckrodt shares tumbled more than 35% on the news.
This chart tracks the steep decline in the value of Teva shares.
Are there are any reasons for investors to buy the stock, given the myriad of problems it faces? CEO Kare Schultz thinks so. He cited several positive developments in a February Bloomberg article. He said the company will grow in 2020 as it aggressively cuts costs and gets a boost from two new branded medicines, Ajovy and Austedo, for migraines and Huntington’s disease.
Sales of the two products are expected to be $500 million —double the 2018 figure. An article in Marketwatch noted the prestigious publication The Lancet recently shared results from a late-stage study showing that patients on Ajovy experienced a significant reduction in migraine days when compared to patients on placebo.
Another plus is the generic market pricing should stabilize because the demand for generics will grow as brand-name drugs become more costly.
So far, Buffet and Berkshire have been patient with Teva. Investors may want to follow their lead and take a chance that the company successfully navigates the numerous obstacles in its path and again emerges as a force in the generic industry.
Disclosure: The author has a position in Teva.
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