Why Teva’s Outlook Is Mixed

Teva Pharmaceutical is ready for a change after suffering terrible losses, but contrarians should carefully assess this trade before buying TEVA stock

Teva stock

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Teva Pharmaceutical (NYSE:TEVA) perfectly illustrates the dangers of trading volatile biotech stocks. Last year was particularly horrendous for TEVA stock. The company’s shares lost almost half their market value. It was also one of those stories that got worse as you read more about it.

I would know. Having considered the ugliness in the markets, as well as some positive fundamental factors, I felt TEVA stock was worth a speculative shot in July 2017. By late May, the shares had plummeted more than 23% before clawing back into recovery mode. Moreover, in 2016, TEVA had lost 43% of its value. How much worse could things get?

Unfortunately, the answer was a lot worse. In August 2017, TEVA stock shed slightly over 50% of its market value. The volatility began when the company reported disappointing earnings and sales results for the second quarter. Additionally, management downgraded its guidance. Investors instantly got cold feet. Subsequently, the shares fell by high double-digit percentage points.

But the other reality was that a perfect storm had capsized the company. Teva Pharmaceutical had  obtained a reputation as the world’s biggest generic drug producer. However, the interim CEO at the time, Yitzhak Peterburg, blamed sector saturation for TEVA’s underperformance. Furthermore, pricing pressure and rampant competition severely impacted the generic market.

These headwinds represented a double whammy for TEVA stock, as management made tragically untimely decisions. Primarily, it acquired Allergan’s (NYSE:AGN) generics division for $40.5 billion, a deal which did not pan out.

Due to its harsh growth challenges, Teva made the only decisions it could. Management announced steeper-than-anticipated job cuts. The company’s leadership team also looked to divest underperforming assets.

Despite Teva’s best efforts, it couldn’t keep its debt levels from ballooning out of control, although to be fair, the company’s debt has declined noticeably in recent quarters.

Still, is that enough for speculators, or should they just avoid TEVA stock?

Teva Pharmaceutical Faces Tremendous Pressure

Currently, contrarians have solid reasons to believe in Teva’s comeback story. For one thing, TEVA stock is up nearly 37% year-to-date. That’s a far cry from its ugly performances in recent years.

Contrarians are also considering the company’s fundamentals. Although the drug maker recently reported mixed Q2 results, Teva delivered a strong earnings per share beat. Against a consensus EPS target of 64 cents, the company’s EPS came in at 78 cents.

Earlier this spring, our own Bret Kenwell noted that Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) Warren Buffett eagerly bought TEVA stock. At the time, Buffett more than doubled his position.

Ultimately, the reason that Buffett and other notable bulls are optimistic is that they’re confident in Teva’s turnaround campaign.  The worst of the pain is behind the company. But management, rather than feeling sorry for itself, is revamping the organization to enable it to succeed in the future.

That sounds great, but the real challenge again is the generics market. While the headlines focus on high-profile cases of alleged pharmaceutical price gouging, generic competitors are experiencing the exact opposite trend. Prices for copycat medicines are falling, sometimes to ridiculous levels. This trend applies direct pressure to generic drug makers’ margins, which can choke already-stressed organizations like Teva.

Even worse, experts expect the problem to worsen. The FDA’s leadership seeks to encourage competition in generics, which is also politically palatable. After all, nothing riles people up more than pharmaceutical makers gouging dependent patients. To further boost this trend, the government watchdog agency has eliminated multiple backlogs in generic drug approvals.

Theoretically and over the long-term, this action assists patients because it provides a pathway towards affordable treatment alternatives. Ironically, though, the initiative both helps and hurts TEVA stock. While Teva is one of the best duplicators in the world, it now faces an increasingly competitive environment.

Last-Minute Reprieve for TEVA Stock?

Rather than a distinct contrarian opportunity, I now view TEVA stock more as a coin flip. But if I had to be more specific, I’d say the embattled company has a 52% chance of succeeding.

Teva may have received a last-minute reprieve. Just recently, the FDA approved the drug maker’s generic version of Mylan’s (NASDAQ:MYL) EpiPen. Used primarily to treat anaphylactic reactions to severe allergies, EpiPen became well-known due to angry accusations that the company which had invented it had gouged millions of allergy sufferers.

Teva Pharmaceutical will benefit in two ways from its launch of a generic version of EpiPen. First, it’s a PR win for Teva. Simply put, the company can legitimately claim that it’s the “good guy” in this otherwise unscrupulous industry. Second, the company has a first-mover advantage because it is the first to develop a generic version of EpiPen.

According to The New York Times, the six-month period after a drug goes generic is the most lucrative for the first duplicator. Furthermore, experts predict that Teva could generate more than $200 million in sales from the generic EpiPen.

That’s a big win, but remember that Teva still has a tough road ahead. Its Q2 2018 revenue haul was awful compared to the year-ago quarter. A $200 million lift helps, but it needs multiple FDA approvals to boost its shares.

Don’t get me wrong; this is significant news for TEVA stock. I’m just saying to tread carefully with this comeback story.

 

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2018/08/why-tevas-outlook-is-mixed/.

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