Teva Pharmaceutical (TEVA)

Politicians love to hate drug stocks, because they are the most obvious part of the healthcare system and they can badmouth them. As a generic manufacturer, the only cost they have is the pill, and they can drive down the price. As governments globally tried to encourage generic pharmaceuticals, to take pricing pressure off, there was a lot of government support for them. Now that most of the major drug companies have been genericized, they are squeezing them as well. This company consolidated and took on a lot of debt, and are still being squeezed. 7.5% dividend yield.

Sell or hold? A global generic company based in Israel. They've had a couple of CEO's they've gone through. The stock has fallen a lot. A new CEO is coming in, who had really turned around another company. Expects the 8.4% dividend will be cut even more. The generic business has been a lot tougher over the last while. The place to buy this is after they've cut the dividend. It's going to be much more volatile over the next little while.

Sell? This has been a disaster. If considering dumping, is this in a taxable account and do you need losses? If you are a long-term investor, this is a really good stock. Ask yourself, “If I didn’t own this, would I buy it today?”. He believes in the long-term thesis of this company, growth in generics. They control about 20% of the global generics drug market. As the global population grows and people get older, are countries like China and others going to care for their citizens? They are going to need generic drugs, because they are going to be significantly cheaper.

Stayed away from this because of the balance sheet. They ran into issues with their covenants. On the debt side they borrowed a significant amount of money to buy Octavis’ generic business. The income was less than expected because of deterioration in the pricing of generic drugs. About half the company’s operating profit was coming from Copaxone for MS, and the competition was able to invalidate the patent on the 3X a week dosage, and was able to take some share.

Had a really tough go. They’ve been good operators but made some acquisitions where some of the products got price squeezes. Also Mylan (MYL-Q) recently put out a drug for multiple sclerosis which got approved. It is a generic version of Teva’s non-generic version. There’s too much risk.

Some of the larger pharmaceutical stocks can do quite well during the 4^th quarter. Not sure this company falls into that category, but it does follow that same seasonal timeline. A Buy date of Oct 20 and a Sell date of March 10, has produced a 5.92% average return above the markets, and has been positive 15 out of the past 20 periods. There is a period of seasonal strength coming ahead, but looking at the technicals, do you really want to enter now when it is probably not ideal. The chart shows a series of lower highs and lower lows. It had a gap in August. Whenever you have a gap, it indicates support or resistance on the retracement. Not a good time to be in this, and he would stay away.

He got in in January. It was hard to make that decision. He sold because the outlook on generic drug prices became weak (down 8-10%). A new CEO came in recently. He does not like their business and does not know if it will decline further. Wait and see if there is recovery.

There is a long road for new management. A lot to do and very significant fundamental risks. There are a number of well-flagged horrendously long list of knocks against the company right now. It has recently had a nice upswing, so if you own it, lock it in and walk away.

This became the largest generic drug manufacturer globally. Then they changed their business model because they wanted to get into making branded pharmaceuticals, and that has been a disaster. At the same time, they took on a huge amount of debt to make acquisitions, which he was not hugely crazy about. Generics are now under the same types of pressures as branded pharmaceuticals. They simply have way too much debt. Not the kind of business you want to be in.

This has been frustrating. Healthcare has been battered generally by politicians and high costs. Just completed a huge acquisition of Allergan’s generic portfolio, which added a lot of debt. You have all this promise, but about $30 billion in debt. He still likes the company because of its exposure to emerging markets. It has the largest generic portfolio, but also has branded drugs including Copaxone which will be facing generic competition, but is a difficult drug to replicate from a generic point of view. There is a lot more tailwind for this company. You are basically getting $20 billion of healthcare revenue for only $15 billion of market cap, about 80% off of what you would pay for Pfizer (PFE-N).

Has been following this closely, because he had owned it for the past 15 years, although exited it about 2 years ago. The reason for the last sudden drop is because of 2 or 3 developments. First of all, they don’t have a CEO or CFO. They cut the dividend, and also indicated that there would be some issue complying with debt covenants. Made some ill-advised acquisitions, at a time when there was a lot of generic inflation. Also, Copaxone came off patent. He wants to wait for them to either raise some capital, do some asset sales or something else to get the debt that he is more comfortable with.

A very complicated business. It is contractually driven. They build the company based on accumulating assets from institutional investors. The stock has been a fabulous performer. He thinks there is more upside.

TEVA-N vs. MYL-Q. He does not like either at these prices. They are both generics manufacturers. There are lots of headwinds on pricing in these categories. We have had a lot of noise on pricing of pharmaceuticals. The FDA is going to alleviate the delays on getting new drugs to market. He wants to be in pharmas that have innovation. He is concerned about how their business model will fair over the next 5 years.

It was their guidance that hit them as well as an earnings miss. There were a number of factors that came up. Technically, it has broken badly, and fundamentally there are major question marks. If you own, take your capital and invest it somewhere that has more near term brighter prospects.

A very interesting company. They’ve fallen because they cut their dividend, etc., and are going through a new CEO. It is one of the biggest generic drug companies globally. Just made a big acquisition, which is not going very well. However, they have some really great products. There is a good opportunity if you buy it at these levels that you could do very well.