It has been an awful, awful run for Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA). And the lousy performance in TEVA stock is showing no signs of giving up this week.
When Teva Pharmaceutical announced its acquisition of Allergan plc’s (NYSE:AGN) generics business in July 2015, shares climbed on the news and soon hit an all-time high above $70.
Since then, however, TEVA stock has faced an almost uninterrupted decline.
The stock has lost over 60% of its value in less than two years — for a number of reasons. Sentiment has soured on the generic market. Mylan N.V. (NASDAQ:MYL) shares have fallen by nearly half over the past two years, for instance. The $34 billion in Teva’s debt, much of it created by the Allergan acquisition, has created concerns similar to those facing Valeant Pharmaceutical Intl Inc (NYSE:VRX).
Meanwhile, the company’s blockbuster MS drug, Copaxone, is facing patent challenges. Mylan, Momenta Pharmaceuticals, Inc. (NASDAQ:MNTA), and others are looking to produce generic versions of the drug.
It simply has been a chorus of bad news that’s prevented Teva Pharmaceutical from making even a brief rally. Not even what appeared to be a solid Q1 earnings report in early May has stemmed the tide.
For contrarian investors considering TEVA stock — which does look cheap – the question is what catalysts can finally reverse the negative sentiment. And as bleak as it looks for Teva Pharmaceutical, there are a few on the horizon.
A New CEO for Teva Pharmaceutical
Step one at this point is to actually hire a new CEO — one that sticks. Chairman and interim CEO Yitzhak Peterburg is the company’s fourth CEO this decade. The lack of a permanent CEO contributes to the concern that Teva doesn’t have a coherent, overarching strategy for dealing with its current troubles.
Finding a new CEO may be easier said than done for the Israeli-based company. Former CEO Jeremy Levin lasted less than two years amidst squabbles with the Teva board. The amount of debt on the balance sheet likely will require asset sales, and limit flexibility going forward.
But Teva remains the world’s No. 1 generic drug manufacturer. The debt situation isn’t nearly as bad as Valeant’s, where a possible fire sale may ensue. Teva bonds generally yield under 3% – compared to 6%-7% for Valeant. The bond markets, anyway, aren’t pricing in a restructuring.
Rather, Teva just needs a plan, particularly relative to its short-term bank debt. A new CEO with a plan on that front would go a long way toward assuaging investor concerns.
Getting the Bad News on the Table
Similarly, Teva might benefit from a new CEO’s ability to create a “kitchen sink” quarter.
TEVA stock has been pummeled by the Chinese water torture of consistent drips of bad news. Getting that bad news into one report — through guidance revisions, writedowns of Copaxone, layoffs, refinancings, asset sales, and anything else required — might finally allow investors to look forward. Clearly, few investors are looking at Teva’s forward prospects. They’re too concerned with near-term issues like Copaxone competition or whether the company can hit 2017 guidance.
Teva Pharmaceutical needs to show that it understands the issues it’s facing and has a plan to answer them. Again, it likely needs a new CEO to do so.
Until that happens, investors are going to capitulate.
Can Earnings Save TEVA Stock?
The bull case for TEVA stock at this point is that even with all the bad news, the stock still is cheap.
Even if Copaxone generics enter the market, and even if the company misses 2017 guidance, the business as is still is capable of generating $3-plus in earnings per share. That’s a single-digit earnings multiple for a global drug leader — largely in a generics space that, while challenged, still is more popular with governments and regulators than branded rivals.
There are risks, and the balance sheet needs to be deleveraged. But, again, this isn’t a Valeant-type scenario where the company has to worry about divesting significant earnings contributors. There’s enough here to more than support the current price.
But investors need to have some faith in Teva Pharmaceutical — and right now they don’t. To be honest, many of those investors aren’t wrong.
The company has to take steps to fix that problem to stabilize TEVA stock. A new CEO would be a good first move. But the company still has a lot of work to do after that.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.