Andreas Halvorsen's $26-billion fund, Viking Global, just released its most-recent buys -- and you should take notice. Although I'm not into blindly following billionaire stock buys -- after all, they're fallible, too -- you don't amass Halvorsen's $2.8 billion personal fortune, and manage more than $20 billion of other people's money, by being someone who can't pick the right stocks. So I like to check billionaire buys when I'm looking for new stock tips.
Viking Global just bought 8.9 million shares of Teva Pharmaceuticals (NYSE:TEVA). That's $500 million, or about 1.9%, of the portfolio that they just plowed into the Israeli pharmaceutical giant.
Good move or bad move?
Why buy Teva?
There are three compelling reasons to buy Teva.
1. Acquisitive nature. Everywhere in healthcare, from insurance to hospitals, from pharma to med devices, and from pharmacies to biotech, companies are bulking up. With good reason: When one industry in healthcare begins to consolidate, others need to follow suit if they're going to negotiate on a level playing field. Teva is no exception.
After a failed bid for Mylan earlier this year, Teva successfully inked a deal in July to purchase Allergan PLC's generics business for a whopping $40.5 billion. That expands an already substantial generic footprint -- more on that below -- and should help Teva extend its already enormous scale.
Management has also earmarked $5 billion for additional acquisitions through the end of 2016, $2.3 billion of which was recently spent to purchase Mexican drugmaker Rimsa. Rimsa should help open up Latin American markets for Teva. Here lies the opportunity and the risk for Teva: These acquisitions are eating up a lot of cash, so they need to deliver on promised growth and synergies.
2. Strong play on generics. Teva receives about half of its revenue from generic drugs, and it's the largest generic drugmaker in the world. Adding Allergan's generics business -- which is expected to bring in around $6.5 billion in revenue in 2015 -- helps enormously with that scale.
Unless you've been living under a rock, you know that healthcare payers, from private insurers in the U.S. to governments around the world, are concerned about cost. The most likely beneficiaries? Makers of low-priced generics. Like, you know, Teva.
3. Powerful multiple sclerosis (MS) franchise. Teva has the pole position in the MS market, with its Copaxone maintaining roughly 30% market share despite generic competition from biosimilar Glatopa. Glatopa is a generic for Copaxone 20 mg, which must be dosed daily, and Teva responded by introducing Copaxone 40 mg, which only has to be taken three times a week -- and doesn't have generic competition.
Uptake is strong, with Copaxone 40 mg already achieving 72.5% market share of the Copaxone space, with 22% going to Copaxone 20 mg and the balance (roughly 5.5%) to Glatopa. Copaxone 40 mg isn't just a defensive play either -- its uptake in Germany is outperforming Biogen's (NASDAQ:BIIB) leading competitor drug, Tecfidera.
While it's not surprising that Tecfidera is struggling in Germany -- Biogen highlighted it as a difficult market for Tecfidera in its most-recent earnings call -- it is nice to see that Copaxone 40 mg is the primary beneficiary. Bottom line: MS is a strong -- and growing -- franchise for Teva. So far, competitors like Biogen -- which is struggling after Tecfidera was recently linked with a rare, deadly brain infection in a patient -- have failed to unseat it.
Trouble in paradise
Of course, it's not all roses for Teva. Chief among its risks? Copaxone 40 mg could face generic competition as soon as 2017 if the U.S. Patent and Trademark Office invalidates its patents. (They're currently under review -- we'll know more next year).
That's a big risk to Teva's earnings, given that Copaxone is the single-largest drug by sales for Teva -- $1.1 billion last quarter, just under a quarter of Teva's total revenue -- and as a high-margin specialty drug, as opposed to the low-margin generics Teva also manufactures, represents an outsized portion of Teva's earnings.
Fortunately, by doubling down on generics -- and with its substantial specialty pipeline -- Teva is working hard to diversify away from its Copaxone risk. It's an interesting stock with lots of opportunity, and Viking made a good call by opening up a small stake (well, for them anyway!) in it.
As for me, I'm going to add it to my watch list and look for its rich valuation -- it trades at a P/E of more than 30 based on the trailing-12 month EPS -- to come down a bit. But despite the bump in the road from Copaxone, Teva looks set to have a nice growth path during the next several years.
Michael Douglass owns shares of Biogen. The Motley Fool recommends Biogen and Teva Pharmaceutical Industries. 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.