Teva Pharma Industries (NYSE:TEVA) is finally roaring back, and it could still have a way to go before finding a new plateau. It may not regain its old highs for years, but the bloodletting appears to be over. A combination of new FDA approvals for key generics, a successful restructuring program so far, and renewed confidence from Warren Buffett and Berkshire Hathaway (NYSE:BRKa) have catapulted shares from lows at $10.85 to now trade over $25 for gains of 133% since bottoming.
Why could there still be room to run before shares start leveling off? We have to look at why the stock cratered so hard in the first place. The selling I believe was not set off by any one specific development, but mostly had to do with bad timing as a confluence of bearish news and developments overlapped one another causing a wave of selling, with the final plunge aided by margin calls and capitulation.
As Teva began to fall in 2015/2016, the chief concern was patent expiration and subsequent generic competition against Copaxone, its flagship multiple sclerosis drug, which in 2016 accounted for 20% of the generic giant’s revenue. In 2016, patents that would have protected Copaxone from competition into 2030 were invalidated, increasing investor anxiety and accelerating the stock’s fall.
At the same time that these patents were being invalidated, Teva’s acquisition of Allergan's (NYSE:AGN) generics unit for $40.5 billion was closing, miring Teva in enormous debt, just around the same time that generics pricing in the United States was taking a dive. The acquisition began to look like a giant generic mistake and Teva began to take up a persona non grata status in portfolios. Then, in 2017, the final nail in the coffin of Copaxone patent protection was delivered. That’s when the stock finally bottomed.
The situation Teva is now in is the inverse of what happened in 2015/2016. Any isolated piece of bad news would have damaged the stock, but that it all happened in succession is what really cratered the shares. Now, good news is piling on in succession as Teva rockets back up.
First, new CEO Kåre Schultz stepped in, whose biggest job was arguably to stand up to the political pressure against Teva’s restructuring plan, which involved taking Israel’s crown jewel corporation and axing factories and thousands of workers. As a non-Israeli, Schultz had a better shot at standing firm than a native Israeli, and did just that and pushed the plan through.
Now that its expected blockbuster migraine drug fremanezumab is on the verge of reaching market with a PDUFA date next month, the FDA having just approved a generic version of the Epipen, in great demand in the U.S. considering recent pricing controversies, and Warren Buffett upping his stake, broadcasting confidence to Wall Street, it looks like the precipitous decline is finally over.
Another factor that may be affecting sentiment positively is the Trump Administration’s health care plans, which include among other things directives to the FDA for quicker approvals of generic drugs in order to get healthcare costs downs. This, on net, should help Teva in the face of falling generics prices, for which the price declines may be over now with inflation picking back up generally.
What about debt? Teva still has a lot to pay back, but the debt situation is far from critical. 60% of Teva’s now $28.4 billion in debt is not due until 2023 or later. 98% of that debt load is fixed rate, meaning Teva is not exposed to a rising rate environment.
As for Copaxone, sales will continue to decline, but fremanezumab revenues will slowly but surely be taking its place.
Teva may have trouble growing organically over the next few years until it pays off much of the debt holding it down, but in order for the stock price to recover it doesn’t really have to grow that quickly. It just has to show that the worst is over, that it is improving its balance sheet and that it has stopped hemorrhaging. This doesn’t mean it will catapult to old highs, but even getting back to its 200 week moving average would mean a 60% gain from here.
While Teva may not be a growth stock for quite a while yet, it can easily be a capital growth stock in the medium term.
Disclosure: No positions