How one analyst saw red flags at Teva long before the recent headlines … and helped subscribers bank 100%+ returns from it
Lies … greed … collusion …
Today’s Digest includes a cautionary tale of corporate greed at its worst. Deceit and manipulation so severe, that the involved companies are now embroiled in multiple lawsuits.
But it’s also a story of how one man saw red flags with the company at the center of the storm long in advance … and showed his subscribers how to bet against its share price.
They’re now sitting on 131% gains … with a small position still open just in case the company in question goes to $0 … which is a possibility, and would make subscribers huge returns.
So, while our sympathies go out to those individuals who have been burned by the corporate greed we’re about to discuss, there’s at least partial redemption in knowing that some investors not only sidestepped the danger, but profited from it.
Let’s dig in …
***”This is an organized effort to conspire and fix prices — a highly illegal violation of antitrust laws.“
It was a little more than a week ago when Connecticut attorney General William Tong made that comment, claiming 20 drug companies “systematically” divided up the market for generic drugs to avoid competing with one another.
As part of the lawsuit brought against the companies, there’s the charge that pharmaceutical executives conspired to either prevent prices from dropping, or even conspired to raise them.
One company in particular is in the center of the storm …
“Apparently unsatisfied with the status quo of ‘fair share’ and the mere avoidance of price erosion, Teva and its co-conspirators embarked on one of the most egregious and damaging price-fixing conspiracies in the history of the United States,” the complaint said.
Just how damaging were these price increases among the colluding companies?
A few examples … Between 2013 and 2014, the cost of a bottle of doxycycline exploded 8,281% from $20 to more than $1,800. A bottle of asthma medication, albuterol sulfate, shot up more than 4,000%, from $11 to $434. And Pravastatin, a popular cholesterol drug, rose more than 500%, from $27 a bottle to $196.
During a 19-month period beginning in summer 2013, Teva allegedly increased prices on roughly 112 different generic drugs. And on at least 86 of those increases, it colluded with some drug companies it referenced as “high quality” competitors.
Charges allege that the defendants knew their conduct was unlawful. Therefore, they usually decided to communicate in person or by phone “in an attempt to avoid creating a written record of their illegal conduct.”
***Long before this collusion news hit headlines, Eric Fry was seeing red flags with Teva
Eric is probably the most successful investor you’ve never heard of. In 2016, some of the world’s best money managers and stock pickers participated in an annual investing contest. Leon Cooperman, David Einhorn, Bill Ackman … Eric beat them all, winning by posting a one-year, contest gain of 150%.
These days, we’re thrilled that Eric shares his ideas with subscribers through his newsletter, The Speculator.
It was around a year ago that Eric wrote about the challenges facing Teva. He noted falling generic drug prices, the looming loss of a major revenue stream as Teva’s multiple sclerosis drug faced new generic competition, Amazon’s entrance into the pharmaceutical business, and Teva’s debt load.
Here’s how Eric described that last challenge:
Teva’s debt load is nothing short of titanic. In absolute terms, the company’s net debt totals $29 billion — up from just $3 billion three years ago.
For added perspective, this mountain of debt totals more than nine times the company’s annual gross earnings (EBITDA). That’s a very big number. In fact, it is so big, it could be life-threatening.
Teva amassed most of its debt load when it launched an ill-timed $40.5 billion buyout of Allergan PLC’s generics business in August 2016. Generic drug prices have been falling ever since, making the repayment of this debt burden even more burdensome.
So, on one hand, Teva had suddenly been saddled with massive new debt. What was the state of its revenue position in terms of handling that debt?
Here again, things looked bad. The main reason? The entrance of Amazon into the pharmaceutical market.
Here’s how Eric explained it:
Now that Amazon has decided to make a push into the pharmaceutical business, we should expect the company to do what it usually does: lower prices, improve the customer experience, grab market share and undermine the profitability of established competitors.
Amazon’s foray into the pharmaceutical business may not make any immediate visible impact. But this “category killer” company is likely to make a long-term impact.
“Alexa, please refill my generic drug prescriptions,” is a phrase that could become very costly to a company like Teva down the road.
***Given the challenges facing Teva, Eric recommended subscribers bet against the company
Eric originally made this call last summer, but re-introduced the trade at InvestorPlace last fall on October 5th. The trade bounced around for about a month. But in early November, Teva began falling … fast.
So, on December 20th, Eric told his subscribers to take gains on their position. But here’s what Eric did differently — and it’s something that often separates good investors from great investors …
Eric recommended only selling one-quarter of the investment.
Now, keep in mind, the gains on the trade at that time were 75%. I don’t know about you, but I’d have a hard time stopping myself from selling the entire position with those kinds of returns on the table. Remember, it had been less than three months.
***But Eric believed the contagion had further to spread, and so he made the bold call to hold
Now, when the market roared back in early 2019, Teva’s stock climbed with it. And for some weeks, it appeared Eric’s call was working against him. Even though he’d locked in 75% gains on a portion of the investment, three-quarters of the remaining position — still open — was losing value.
But as February turned, the stock began falling again. The selloff continued after Teva reported its fourth-quarter and full-year results on Feb. 13. The key issue behind this sell-off was the company’s soft guidance for 2019.
Nearly every day Teva’s share price was dropping, but Eric continued to hold.
Finally, the collusion news hit headlines on May 13th, and Teva plummeted 16%. Eric decided it was finally time to sell again. Another quarter — this time locking in gains of 134% on the sold position.
Over the next two days, investors continued to flee the stock, and Eric decided to take advantage. On May 15th, he sent subscribers another notice to sell their third quarter, locking in a gain of 162% on that portion.
That brings us to this week …
As of market prices on Monday, the blended percentage gain on all of Eric’s closed and open positions is now 131%.
Compare that to the 75% gain an investor would have walked away with had he decided to pull the trigger on the entire Teva position back in December. But again, the foresight and discipline Eric showed is often what separates the good from the great.
Here’s how the entire trade looks …
By the way, we put this trade on your radar in our February 15th Digest, noting that Eric still believed the trade had more room to run.
Eric recommended paying up to $5.50. Given that entry price, an investor who acted in February would have pocketed a quick 100% gain when Eric recommended subscribers sell at $11 last week.
***Now, you’ll notice Eric and subscribers still hold a final, quarter position in Teva. Why?
Well, as Eric told me Monday, “there is a very real risk that the company falls to zero, which is why I’m maintaining the remaining 25% of the position.”
If that happens, it will be a staggering fall from grace for the generic drug maker.
Pulling back, there are those innocent individuals who were harmed as Teva jacked up medication prices hundreds and thousands of percent. And there are those innocent investors who saw their money vanish as the market woke up to the massive fraud from Teva managers and fled the stock. Again, our sympathies extend to both groups.
As for Eric’s subscribers, we’ll see what the future holds for this remaining quarter share. But if Eric is right — as he has been nearly every step of the way so far — additional declines in shares could be coming.
With all due respect to those affected by the greed, congratulations to Eric and his subscribers for making a tough call, yet getting it right. We’ll keep up updated as the Teva drama plays out.
Have a good evening,