Teva Pharmaceutical Industries Ltd (NYSE:TEVA) came on my radar around 1996, when a friend who had just been diagnosed with multiple sclerosis mentioned that TEVA had a drug called Copaxone that treated the disease. This was intriguing because it was also the first time TEVA had ventured into creating its own drugs. It was, at that time, a big player in the generics market.
In fact, the Israeli company was one of the first businesses to emerge on the public markets after the creation of the State of Israel, going public in 1951. Over the ensuing decades, it made many acquisitions and expanded operations.
By 2010, it had sales of over $16 billion, and continued with its acquisition binge, snapping up familiar names like Barr Pharmaceuticals, Arana Therapeutics, Cephalon and Actavis Generics.
It now has subsidiaries all over the world, and continues to manufacture and distribute both generic and specialty medicines. In fact, it is the world’s largest manufacturer and marketer of generics.
On the specialty side, besides Copaxone, it owns Azilect for Parkinson’s, Nuvigil for narcolepsy, and numerous respiratory products. If you know anyone with asthma, there’s a good chance they are using ProAir or QVAR, made by TEVA stock. The company is also pushing several new biosimilar drugs to market.
However, TEVA stock has been slammed pretty hard by a host of bad PR lately. There are now forty states which are suing Teva stock, along with other generic companies, for allegedly colluding to push up the prices of an antibiotic and a diabetes drug. Analysts at Argus project generic prices to fall 7%-10% this year. Copaxone went off-patent. Worst of all, the CEO stepped down after it was disclosed a Department of Justice investigation into bribery in Russia and Mexico.
Meanwhile, TEVA took on a ton of debt to buy out Actavis. $5.3 billion of debt is due in 2018, and another $16 billion due over the next four years.
And all of this is exactly why I’m interested in TEVA stock. When bad news keeps hitting a company, it creates opportunity for the patient value investor. Teva stock is a profitable business, and the largest darn generics maker in the world. It’s difficult to ignore the top dog.
Free cash flow is like clockwork, generating about $4 billion every year, and with last year’s dividend increase, it uses only $1.5 billion to pay its 4% dividend. It has a billion dollars of cash on hand, spends $5 billion on R&D annually, and is now more than 50% off its all-time high. The last time it was trading at these levels — $32.63 — was ten years ago.
Here’s the thing — all of this bad news is going to go away at some point. Fines will be paid. Litigation costs will be incurred. A new CEO will steer the ship properly. The bribery scandal will get settled.
And TEVA stock will be seen as undervalued, while the company remains the largest generic manufacturer in the world … trading at a price-to-earnings ratio of 7 and an EV-to-EBITDA ratio of 9.5. Mylan N.V. (NASDAQ:MYL) also trades at 7x earnings but at an EV-EBITDA of 10.4.
Right now, the stock is in free-fall. I think it may have more downside, but I’m not sure how much. So I think you have two moves here, moves that I think I may also execute on. First, you may want to nibble a little bit here — say 20% of what your total investment might be. Add another 20% every time the stock falls another couple of points.
In addition to, or separate from this, consider selling some naked puts. I’ll talk more about specific ones in my options column for this week, and I’m considering buying the stock for my forthcoming stock advisory newsletter The Liberty Portfolio.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.