The pharmaceutical business is a love-hate affair. Right now, Wall Street is feeling the latter for Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA). Although the Israeli pharma is one of the most respected names in the industry, TEVA stock plays the opposite role. On a year-to-date basis, shares are down roughly 14%. In contrast, the broader benchmark SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is up nearly 10%.
To be fair, any firm would see a downgrade in their equity if they experienced the same problems that Teva Pharmaceutical has in recent months.
The critical difference, however, is that many of the challenges are self-induced. As InvestorPlace contributor Lucas Hahn noted, TEVA suffered internal turmoil. Key executives were either ousted or resigned. The company is also looking for a fresh strategy.
The latter point is vital to the future success of TEVA stock. Multiple sclerosis drug Copaxone — a pivotal product for Teva Pharmaceutical — faces an unknown future. InvestorPlace’s Ryan Fuhrmann explains:
“Copaxone accounts for about 40% of total company operating profits and is losing patent protection, which opens it up to generic drug competition from the likes of Novartis AG (ADR) (NYSE:NVS), Mylan NV (NASDAQ:MYL) and Dr.Reddy’s Laboratories Ltd (ADR) (NYSE:RDY).”
As Fuhrmann additionally notes, “Teva Pharmaceutical is known as a generic drug maker, but makes a ton of money on patent-protected Copaxone and a large stable of specialty medicines.” Therefore, management has to make serious decisions. Do they continue allocating research and development costs to high-margin specialty treatments, or just go generic altogether?
The lack of decisiveness — as evidenced by the internal merry-go-round — has undoubtedly impacted TEVA stock for the worse.
TEVA Stock Is Still Risky
I don’t blame anyone for abandoning TEVA stock. Not only is the company in the grips of a major transition, the pharmaceutical industry itself is a minefield.
As Hahn wrote about in his article, pharmas face substantial political and societal headwinds. Whatever is ultimately behind it, the optics of skyrocketing drug prices is not helping TEVA stock nor its competitors. I have a gut feeling that despite President Donald Trump’s current disapproval, if he solves the healthcare crisis, his popularity will soar.
But time heals all wounds, and this is particularly true in the markets. Right now, the political firestorm is “Russia, Russia, Russia.” Seemingly, we’ve forgotten about the recent healthcare scandals. Of course, significant volatility risks still exist. However, much of TEVA stock’s downside risk may already be priced in.
We also have to remember that bears are humans too; they just look at the charts upside down. Particularly, investors should think like bears. Would it be worth pounding on Teva Pharmaceutical in light of the fact that it’s lost over 42% in the trailing year? Even a sympathy rally could really damage a short position.
The worst part about being bearish now is that an unexpected piece of good news could cripple the trade. About a week ago, Reuters reported that TEVA’s “experimental drug to prevent migraines cleared another late-stage study, setting it on course for U.S regulatory approval and launch in the second half of 2018.”
Analysts expect that the migraine treatment, called fremanezumab, “could generate at least $1 billion in sales annually.” Considering that 40 million Americans suffer from the temporarily debilitating condition, that figure isn’t out of the question. Cynically, migraines are incurable, which should provide Teva Pharmaceuticals excellent cash flow.
What’s Bad for the Bear Is Good for the Bull
If I was a bear, TEVA stock is a trade I would avoid. The risk-reward balance is quite cloudy. On one hand, you have the terrible internal struggles, and the upcoming off-patenting of Copaxone. But Teva is showing great promise with other drug pipelines. Let’s also not forget that this is an industry titan, and titans never go down easy.
Translation-wise, TEVA stock is a speculative buy. Don’t get me wrong — I don’t like the specific nor the broader challenges facing the pharmaceutical. But I think the markets are coming around to it. So far, the hemorrhaging has stopped. For this month, TEVA shares are up over 9%.
Of course, it’s way early to tell if TEVA stock is on a genuine recovery. Then again, the best rewards come from buying into a recovery that has yet to actually materialize. Given some positive developments for TEVA and that the bears have likely filled their stomachs, I’m willing to take a cautious bet.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
