Shares of Teva Pharmaceutical Industries (NYSE:TEVA), a developer of branded drugs and the current largest manufacturer of generic drugs in the world, continued its yearlong-plus tumble in May, according to data from S&P Global Market Intelligence, and nosedived another 12%. There appear to be three reasons Teva struggled so badly last month.
To begin with, Wall Street wasn't too thrilled with the company's first-quarter results on May 11. Even though the company's $1.06 adjusted per-share profit topped estimates by $0.03 per share, the $5.63 billion in sales reported in Q1 fell short of estimates. In particular, sales of its lead drug Copaxone, an injectable treatment for multiple sclerosis, fell 4% to $970 million, and its oncology sales grew by a meager 1%. Though Teva has aligned itself as a generic-drug leader for the future, investors are clearly concerned about how it'll fare once generic competition really begins to take a bite out of Copaxone, which generates a big chunk of its profits.
Second, mid-May brought the release of 13F filings with the Securities and Exchange Commission. Quite a few billionaires and big-name money managers sold their positions in Teva during the first quarter. According to WhaleWisdom, nearly 34 million shares of Teva stock were sold in Q1, representing a 5.6% reduction from the sequential fourth quarter. The sellers included David Tepper's Appaloosa, which sold 56% of its stake, and Paulson & Co., which dumped 30% of its Teva shares. If big money managers are selling Teva, short-sighted investors might soon follow.
Lastly, Teva is still deal with a number of recurring issues. These include:
- Having more than $34 billion in debt, mainly tied to a recent acquisition splurge.
- The departure of its CEO and CFO and the need to find a permanent CEO replacement.
- A recent settlement stemming from bribery charges in three foreign countries.
Long story short: There's little trust from investors in Teva's management team at the moment.
Despite these concerns, this Fool has been nibbling on Teva with a bit of regularity over the past two months. Aside from loving its 4% yield, which is among the best you'll find in healthcare, I believe the worries surrounding Teva may be overblown.
Teva's acquisition of Actavis for $40.5 billion may have been pricey, but it should transform the company's long-term business for the better. This year, Teva anticipates $1.5 billion in annual cost synergies from the merger, and looking further out I'd suggest that improved pricing power could result from its larger generic-drug portfolio. Not to mention that an aging global population is likely to turn to generics in growing numbers in the years and decades to come.
Teva's debt also isn't as big of a concern as Wall Street makes it out to be, considering it can sell some of its non-core assets and use its cash flow to organically reduce its debt. It's already put its European oncology and pain division on the chopping block and is actively seeking a buyer for its women's-health operations. All told, these segments might fetch in the neighborhood of $3 billion, combined. And, again, Teva has the potential to pay down perhaps $1 billion in organic debt each and every quarter.
The company also did a great job with reformulating Copaxone to a thrice-weekly injectable as opposed to once-daily. Not only is it more convenient for the patient, but it may help partially shield Teva as generic Copaxone enters the marketplace.
I'm inherently biased as a shareholder, but I take this recent weakness and shortsightedness as a buying opportunity.