Because billionaire investors can have a disproportionately large impact on how markets behave in the short term, their buys and sells tend to be closely scrutinized. And controversial hedge-fund manager George Soros is one of the most widely watched superinvestors on Wall Street, stemming from his uncanny ability to build market-crushing portfolios, time and again.
Last week's 13F filings with the SEC gave us an overview of Soros' market activity in the fourth quarter, and the billionaire surprisingly decided to dump three top dividend payers in the healthcare sector. Specifically, he sold off his entire positions in drugmakers AbbVie (NYSE:ABBV) and AstraZeneca plc (NYSE:AZN) and continued slashing his stake in the world's largest generic-drug manufacturer, Teva Pharmaceutical Industries Ltd. (NYSE:TEVA).
As dividend stocks are generally viewed as long-term buys given that they generate income, Soros' decision to sell these stocks might be something people view as a major red flag. With this in mind, let's consider whether lay investors should also avoid these three names.
AbbVie's hep C treatment fails to impress; Humira's patent expiration looming
In the third quarter, AbbVie was a Wall Street darling, with several major funds pouring into the stock ahead of the launch of the company's new hep C treatment, Viekira Pak.
How times have changed. According to the recent 13F filings, we learned that the Soros Fund, among others, sold off their entire AbbVie holdings in the fourth quarter.
So, what's going on? The main problem is that AbbVie's hep C drug has gotten off to a slower start than expected because Gilead Sciences (NASDAQ:GILD) is offering steep discounts to numerous payers for its competing drugs, Sovaldi and Harvoni. As a result, Viekira Pak sales are now expected to fall well short of the $3 billion first-year sales estimate that some industry experts predicted at one point.
Topping it off, Merck is close to entering the hep C market with its own offering, which will probably affect Viekira Pak sales far more than Sovaldi or Harvoni's.
Then there is the issue of AbbVie's top-selling anti-inflammatory drug, Humira, going off patent in the U.S. in December 2016. Humira currently composes well over half of the company's profits, so investors were looking toward Viekira Pak to both help diversify AbbVie's revenue base and help soften the blow from losing exclusivity for Humira.
Viewed in light of these serious headwinds, Soros appears to be playing it safe by looking for growth opportunities elsewhere.
AstraZeneca's turnaround story hinges on a high-risk strategy
Like most big pharmas, AstraZeneca has gotten walloped by the ongoing patent cliff. Specifically, the loss of exclusivity on its top-selling acid reflux drug, Nexium, caused revenue to crater by nearly 30% in the fourth quarter compared with a year ago. Making matters worse, its megablockbuster cholesterol drug, Crestor, is set to lose patent protection in the U.S. in 2016.
Management has thus looked toward the promising field of immuno-oncology to help reverse this trend. To do so, it has built one of the most comprehensive and integrative immunotherapy programs in the business.
AstraZeneca's early stage immuno-oncology platform centers on three therapeutic target areas: antigen presentation, T-cell killing, and the tumor's micro-environment. The company is also conducting numerous clinical trials employing a combination of immunotherapies, with the goal of hitting multiple therapeutic targets at once.
While AstraZeneca believes it can boost sales by a staggering 70% by 2017, you should bear in mind that a large chunk of this forward-looking revenue estimate is based on immunotherapy products that are still in the early stages of clinical testing. As there is no guarantee they will prove to be effective -- or even safe, for that matter -- AstraZeneca's huge bet on immuno-oncology is a risky proposition to say the least, which is probably why Soros dumped the stock completely in the fourth quarter.
Questions hang over Teva's revenue stream
Not long ago, Teva was Soros' largest holding, but this position has been gradually reduced over the past few quarters, with the fund dumping another 22% of its stake in the generic- and specialty-drug maker in the fourth quarter.
Teva has two overarching problems. First, the company is seeing generic-drug sales plummet because of the introduction of numerous competitors and unfavorable currency exchanges in ex-U.S. markets.
More importantly, though, Teva's multiple sclerosis drug, Copaxone, is likely to be negatively affected by the introduction of generics by September of this year.
The company has been doing a great job so far at switching patients over to a more convenient higher-dose formulation of the drug, but there's no telling how payers will react once generics enter the market. Put simply, insurance companies may favor cheaper generics over a high-priced reformulation, especially since there's no difference in efficacy.
As Teva has little in the way of a replacement for Copaxone revenue in case the worst comes to pass, you'll probably see Soros continue reducing his exposure to this stock.
Should investors follow Soros out of these dividend stocks?
In the case of AstraZeneca and Teva, I think following Soros' lead is a wise move. Both of these stocks could see their cash flows come under significant pressure moving forward, meaning that their dividends may be at risk in the near term.
AbbVie, though, is a different animal altogether. The Illinois-based drugmaker has a top-notch pipeline, and the threat of generic Humira looks, to me, overblown. Generic biologics known as biosimilars aren't known to exactly crash the sales of their branded counterparts, and they face tough regulatory hurdles in the United States.
As AbbVie just raised its dividend, yet again, to $0.51 per share on a quarterly basis and earnings are expected to grow by a whopping 34% this year, this stock remains compelling, in my opinion.
George Budwell owns shares of AbbVie and Gilead Sciences. The Motley Fool recommends Gilead Sciences and Teva Pharmaceutical Industries. The Motley Fool owns shares of Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.