As an investment, Israeli companies have much to offer thanks to their different approach to western methodologies. Primarily, they don’t carry much debt — if at all — thereby promoting a more conservative style. However, exceptions exist. Unfortunately, Teva Pharmaceuticals (NYSE:TEVA) is a prime example. TEVA stock is down almost 37% this year, compared to about a 17% gain for the iShares MSCI Israel Capped ETF (NYSEArca:EIS), which has the drug maker in the top three of its 76 holdings.
From a fundamental and legal perspective, it’s hard to find a more embattled name than Teva Pharmaceuticals. Although it’s the world’s leading generic drug manufacturer, TEVA has made headlines for all the wrong reasons. Worryingly, the company finds itself in the epicenter of the opioid crisis, which has powerful generation implications.
To be fair, Teva stock isn’t the only culprit in this health and societal epidemic. Big pharmaceuticals like Johnson & Johnson (NYSE:JNJ) have also faced costly litigation involving this raging calamity. However, what separates TEVA from other embattled pharmaceuticals is that its legal problems seemingly have no bounds.
For instance, our own David Moadel laid out the harsh realities surrounding the generic drug maker, including its price-fixing scandal. As of December 2019, 44 states are suing 20 generic specialists, including Teva. Particularly, Connecticut Attorney General William Tong decried this scandal as “the largest cartel case in the history of the United States.”
Even worse for Teva stock, the allegations indicate that the firms in question colluded willfully and knowingly. The New York Times’ Heather Murphy wrote that the conspirators “avoided written records by coordinating instead at industry meals, parties, golf outings and other networking events.”
If so, that augurs incredibly poorly for Teva stock holders. Yet shares are up nearly 50% since the beginning of October. Is this merely the law of small numbers at work or is there something more here?
Possible Pathway for Teva Stock
If you have any aversion to risk, you must reconsider your options. As my colleague David points out, investors shouldn’t fight the tape. And they certainly shouldn’t fight the government. Although it’s hackneyed advice, it’s nonetheless relevant: better choices exist … and they are plentiful.
While TEVA undoubtedly risks catastrophic losses from the combination of litigation and awful public perception, it also has a pathway toward market profitability. Indeed, it might even be a legitimate contrarian opportunity.
The reason I’m making this outlandish statement is that not all litigatory actions are the same. Definitely, not all PR nightmares have the same impact. If TEVA was involved in a competitive and discretionary industry, I’d wholeheartedly agree with David. Cynically, though, the underlying company offers vital services, both societally and economically.
While the drug maker faces a criminal investigation involving the opioid crisis, again, not all crimes are the same. What I’m getting at is that Americans are willing to forgive criminals if they provide salvageable benefits for society.
For example, former Nazi scientists helped develop our space program. And no, this is not an Alex Jones-style conspiracy. Even NASA admits this. If the U.S. government can forgive Nazi officers — and provide them a pathway to American citizenship, no less — I’m sure TEVA will receive a balanced, not crippling consequence.
More importantly, we have precedence for dealing generously or patiently with bad players in big pharma. A few months back, I wrote that:
a surprising number of companies have successfully fought back from scandals. Most notably in this sector, health investigators discovered that Merck’s (NYSE:MRK) arthritis drug Vioxx caused multiple heart attacks. That wasn’t all: those heart attacks led to 38,000 deaths.
However, Merck recovered rather quickly from the scandal despite killing people.
Another point we should discuss is that while price gouging in the pharmaceutical industry obviously carries terrible optics, in many ways, it’s a necessary evil.
A prime example is TEVA’s generic copy of Valeant Pharmaceuticals’ Syprine drug, which treats a rare condition called Wilson’s disease. Valeant pumped the price of Syprine to $21,267 in 2015. The generic wasn’t much of a discount at $18,375.
However, Wilson’s disease only affects about 1 in 30,000 people worldwide. Then, factor in that the world extends beyond our myopic American utopia. Considering the seven billion-plus people on earth, the annual average salary of an earthling translates to approximately $10,000.
Tell me, how do pharmaceuticals for rare disease make their money? Unfortunately, by gouging American patients (or their insurance companies).
Granted, this situation is a mess. But let’s not pretend that TEVA is the only bad player in this corrupt industry. And let’s also not pretend that the company won’t find a reprieve because it will. Given their specialty, we really have no choice.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.