Monday, May 15, was an important day for Wall Street and investors. It was the last day for money managers with more than $100 million in assets under management to file 13F paperwork with the Securities and Exchange Commission that, in effect, discloses their portfolio holding as of March 31, 2017.
On one hand, there's an inherent flaw with 13F flings: They're backward-looking by a minimum of 45 days. Considering how active some of the top-notch billionaire money managers are with their investments, a lot could have changed over the past months and change.
However, 13F filings can also provide valuable information to Wall Street and investors. Getting an understanding of why billionaires are buying or sell certain stocks or industries can help us key in on trends that may not otherwise have been apparent. It also gives us a pretty good bead on investor sentiment for the most popular stocks.
Billionaires dumped these drug stocks in Q1
One pretty notable theme during the first quarter was that billionaires weren't too thrilled with drug stocks. Whether it was an issue with valuations or concern that President Trump could follow through with instituting drug-price cap legislation, some pretty notable drugmakers were jettisoned or reduced from some high-profile portfolios.
Here are three drug stocks that were dumped big-time in the first quarter, in no particular order.
Teva Pharmaceutical Industries
Considering its recent troubles, it probably comes as little shock that Teva Pharmaceutical Industries (TEVA -0.44%), a branded-drug developer and the largest manufacturer of generic drugs in the world, was among the most sold drug stocks in the first quarter. As a whole, per WhaleWisdom, money managers dumped nearly 34 million shares of Teva stock, or about 5.6% from the sequential fourth quarter. More specifically, David Tepper's Appaloosa sold 2.88 million shares, or 56% of its stake in Teva, while Paulson & Co. jettisoned 4.93 million shares, equal to 30% of its holdings.
Teva has four main issues that have weakened in share price recently. First, it's lugging around more than $34 billion in debt following its acquisition of generic-drug maker Actavis, and investors are clearly worried its debt is too burdensome. Secondly, it recently settled bribery charges in three countries, which has reduced trust in management. Third, Teva has seen turmoil at the top with its CEO and CFO leaving. And finally, there's worry about generic competition for lead branded drug Copaxone, an injectable multiple sclerosis treatment.
Though these issues can't be overlooked, this Fool has been actively nibbling on shares of Teva's stock from time to time in recent months.
To begin with, Teva has the ability to organically pay down its debt given that it generates around $5 billion in operating cash flow each year. Also, having Actavis under its wing is expected to result in $1.5 billion in annual cost savings this year, and its broad generic portfolio may even help lift its pricing power. And if organic progress isn't enough, the company also happens to be actively looking for bidders for its women's-health division and European oncology and pain segment. In other words, Teva has a means to get its debt levels under control.
The company has also done a pretty good job of growing Copaxone in light of generic competition knocking on the door. It's been able to use the legal system to keep generics off pharmacy shelves, and it's also reformulated Copaxone from a once-daily injectable to a thrice-weekly injectable, which is more convenient for the patient. Even when generics do enter the market, Teva may be able to hang onto more patients than Wall Street is giving it credit for.
At less than seven times forward earnings, Teva is far more a "buy" than a "sell" in my book.
Specialty-drug developer Allergan (AGN), which is the company that sold Actavis to Teva, was a popular stock to sell among billionaire money managers in the first quarter. WhaleWisdom's aggregate 13F data shows that hedge funds dumped more than 25 million shares during Q1, or 8.3% of what they'd held as of the sequential fourth quarter. Notable sellers included Tepper's Appaloosa, which sold 1.32 million shares (Appaloosa still own 2.94 million), Paulson & Co., which dumped nearly 613,000 shares (it still owns 2.94 million as well), Seth Klarman's Baupost Group, which shed 1 million shares, and Carl Icahn, who sold all 425,000 shares he owned.
Why no love for Allergan? One of the bigger issues (as it is with all three of these drugmakers) is the company's debt. Allergan's debt situation has improved since selling Actavis, but it's still carrying around almost $32 billion in debt, or $22.8 billion in net debt. There are concerns that this debt constrains Allergan's ability to be financially flexible.
Also, Republicans' push for a border-adjustment tax would hurt Ireland-based Allergan, which counts on the U.S. for a good portion of its revenue and profit.
A final issue for Allergan is that it got hosed with its sale of Actavis. On top of accepting $33 billion in cash, it also received 100 million shares of Teva, which have devalued since the deal was announced. This resulted in a nearly $2 billion writedown on the value of its stake in Teva in the first quarter.
However, Allergan looks pretty inexpensive, debt worries aside. Lead drug Botox generated nearly $309 million in Q1 sales, up 13% from the prior-year quarter, while gastrointestinal drug Linzess delivered steady 8% growth to $148 million. Unlike the other drugmakers on this list, Allergan hasn't struggled recently with its pricing power, which leads me to believe its recent share price swoon could be an intriguing buying opportunity.
And once again, the drug industry's ragdoll, Valeant Pharmaceuticals (BHC 0.10%), was the subject of pretty steady selling during the first quarter. According to data from WhaleWisdom, aggregate ownership in Valeant declined by 12%, or 24 million shares. The notable sellers included billionaire Bill Ackman of Pershing Square Capital Management (previously Valeant's largest shareholder) who dumped all 18.1 million shares his fund owned, and James Simons' Renaissance Technologies, which sold all 2.91 million shares it had held since the second quarter of 2016.
Valeant essentially has three major issues that have bottlenecked its stock for nearly two years. First, it's lost most of its pricing power after its now-former CEO admitted that the company made "mistakes" in pricing its drugs (e.g., Nitropress and Isuprel). Secondly, its core operations have struggled under an unfavorable drug distribution deal and poor PR. Finally, Valeant is lugging around $28.5 billion in debt, which is viewed as far too much given its deteriorating business model.
In this instance, I'd opine that billionaire money managers are smart to be running for the exit.
Despite reducing its debt by $3.5 billion over the past year, Valeant's actually in worse shape than it was when it had $32 billion in debt. The reason? Valeant has had to restructure its debt on multiple occasions over the past year, and each time it does so it accepts fees and higher interest rates. During the first quarter, Valeant paid $471 million in interest expenses, but saw its EBITDA fall to only $861 million. That's an EBITDA-to-interest coverage ratio of just 1.83-to-1. If this ratio continues to fall, it could eventually trigger a debt covenant default from the company's secured lenders.
There are also no clear signs that Valeant's business is improving. Though it did report 4% constant currency growth in its core Bausch & Lomb segment in the first quarter, its Branded Rx division saw sales slump another 9%. Valeant's acquisition of Salix Pharmaceuticals hasn't worked out well at all, and we've seen no definitive turnaround plan from management to suggest it's going to get better anytime soon.
Valeant is a stock investors are probably wise to avoid.