Teva Pharmaceutical Industries (NYSE:TEVA) is a well known generic drugmaker that's attracted the attention of a number of well-known investors in the past. Most notably, Warren Buffett's Berkshire Hathaway bought shares of the company a number of years ago due, in no small part due to how cheap the stock was at the time.
While the drugmaker does have a couple of promising drugs on the horizon, there are also some major problems that investors should know about. Whether that be the loss of its previous patents or its alarmingly high debt, investors might want to take a closer look at this cheap healthcare stock before making any investment decisions.
Understanding the business
Teva's business can be split up into two main areas: its generics business and its own branded drug products. Teva's generics business hasn't changed much over the past year, with revenue figures staying relatively unchanged since 2019. While almost half of all the company's revenue comes from its generics business, this segment hasn't historically been much of a growth driver.
As for Teva's branded drugs, it has a few noteworthy treatments, but most of them have seen their sales decline over the past year. The two best-performing drugs in terms of revenue growth include its Huntington's disease treatment, Austedo, as well as its promising migraine drug, Ajovy.
Huntington's disease is a rare condition where the nerve cells in the brain eventually breakdown, leading to various motor dysfunctions and cognitive problems. While there are no treatments that can stop the condition from worsening, there are a handful of drugs that can help mitigate symptoms.
That's where Austedo comes in. The drug helps treat involuntary muscle movements associated with Huntington's disease. With little competition in this space, it's not surprising that sales have seen significant growth. Between Q1 2019 and Q1 2020, North American sales have grown to $122 million, a 64% increase. While that's only a portion of Teva's $4.4 billion first-quarter revenue, Austedo is the company's best hope for a new blockbuster product at the moment.
Ajovy, one of Teva's newer drugs, has also seen strong growth. While quarterly sales are up 44% from last year, the total figure is still only $29 million in North America (or $33 million globally). For a migraine drug, which has a large potential customer base, that's a disappointingly paltry figure. While that could also be due to the fact that there are many migraine drugs already on the market, Ajovy's performance so far has been lackluster to say the least.
Revenue for most of the company's drugs has been falling. Copaxone, a former best-selling multiple sclerosis drug, has seen quarterly global sales tumble to just $319 million from the $645 million seen in Q1 2018. The new generic competition that emerged since the expiration of Copaxone's U.S. patent has been a major hit to the company's top line.
While generics sales have stabilized over the past year, they're still down a little from where they used to be. Three years ago, quarterly global sales for generic products came in at $2.9 billion. Now, global generics sales came in at just $2.4 billion for Q1 2020.
Perhaps a bigger worry for the company is its debt levels. The pharmaceutical company reported that it had $28.4 billion in total long-term liabilities, more than double its $13.1 billion market cap. While this is an improvement from the $34.3 billion in total long-term liabilities reported two years ago, it's still quite a large sum for a company whose revenue figures appear to be stagnating.
Putting all that aside, Teva also faces a considerable number of lawsuits due to its involvement in the opioid epidemic. The company did propose a deal back in October where it would provide over $23 billion in opioid addiction treatments (a drug called naloxone) alongside $250 million in cash, but some plaintiffs involved have yet to agree to the deal. It wouldn't be surprising if some prosecutors try to push for a better offer from the company in the months and years to come.
Is there a silver lining?
Despite these issues, Warren Buffett is still holding his position in this company. The biggest reason why is that the stock's extraordinarily cheap, more so than it was a couple ago years ago. Shares are trading at only 0.8 times its price-to-sales (P/S) ratio. Other pharmaceutical companies, like Merck and Pfizer, trade at a 4.1 and a 4.2 P/S ratio, respectively.
As mentioned before, Teva has managed to pay off $5.9 billion of its total liabilities in just two years. If it can keep this up, Teva could pay off all its debts within a decade. The fact that the company has a realistic pathway to paying off its debt is definitely a point in Teva's favor.
Just because a stock is incredibly cheap doesn't necessarily mean that it's an automatic buy. Teva's growth opportunities seem rather limited, with most of its products losing market share rather than gaining. The company's best chance of hitting a home run would be with Austedo, but even that is still uncertain.
At the same time, while Teva's focused on paying off its debt, other large pharmaceutical companies are focused on growing their revenue and developing new candidates. In the end, I think there are other stocks worth investing in over Teva, especially since there are many healthcare companies that are both trading cheaply and have significant growth potential.