Amid a harsh environment for generic drug manufacturers — and for pharmaceuticals in general — the surge in Teva Pharmaceutical (NYSE:TEVA) shares is a welcome sight for weary stakeholders. Since the beginning of October, TEVA stock has been on a tear, up nearly 81%. However, sharp declines since the middle of last week raise legitimate questions about viability.
On the positive end, optimists have reason to maintain their confidence in TEVA stock. Recently, the underlying drug maker released its earnings results for the fourth quarter of 2019. Heading into the disclosure, analysts forecast earnings per share to come in at 59 cents. Teva delivered 62 cents, which was up 17% against the year-ago quarter.
Also, the company rang up revenue of $4.47 billion. This exceeded Wall Street’s consensus target of $4.37 billion in sales. Further, the most recent tally exceeded its year-ago haul by 1%. And when adjusted for accounting changes in Teva’s Israeli distribution business, management provided solid guidance.
However, on the other end of the scale, TEVA stock faces many dark clouds. Overwhelming the current picture is the myriad lawsuits involving multiple entities — including several state attorneys general — awaiting the drug maker for its alleged role in the opioid crisis. Last fall, management struck a tentative deal where it would pay $250 million in cash and provide $23 billion worth of anti-opioid addiction drugs.
Such a deal would be huge for TEVA stock. But the problem is that it’s not finalized.
As Teva CEO Kåre Schultz put it: “It’s more the fact that you have a lot of parties here. You have 50 states, you have five defendants, you have 1,500 municipalities.”
Thus, TEVA still has a credibility issue.
The Messy Bull Case for TEVA Stock
For what it’s worth, Schultz is “cautiously optimistic” that the opioid deal will go through. It’s possible, although I don’t like speculating on legal matters. But even if Schultz’s organization gets the deal, TEVA stock would still have many challenges.
Before the opioid crisis dominated the headlines, Teva originally had another problem: severe pressure in its core generic drugs industry.
Early last decade, pharmaceuticals adopted opportunistic pricing on supply-demand dynamics such as shortages and monopolies, according to Credit Suisse analyst Vamil Divan. That’s a nice way of saying that they gouged patients. Naturally, a political firestorm ensued. Just before his inauguration, President-elect Donald Trump blasted pharmaceuticals as “getting away with murder.”
In response, Trump aimed to utilize competition to reduce drug prices. At the same time, generics faced pricing pressure in a bid to compete for lucrative pharmacy contracts. Teva took the price erosion especially hard, resulting in among other measures a sizable labor-force reduction.
Adding to the headwinds for TEVA stock is the underlying company’s unfortunate business decisions. Caught in the crossfire was Teva’s $40 billion acquisition of Allergan’s (NYSE:AGN) generic drugs unit. The timing couldn’t have been worse.
Despite these severe challenges, though, generics represent a vital cog in our broader healthcare system. Like many things in life, healthcare costs have ballooned to ridiculous levels. Thus, the concept of going to countries like Mexico for cheaper drugs seems a viable one for an increasing number of American families.
As Harvard Women’s Health Watch notes, “the bulk of research out there shows that taking the no-name brand [drugs] not only saves you money, but also provides you with a medication that is just as effective as the original.”
That’s really the key argument for TEVA stock.
Not an Easy Bet
Still, I can appreciate why many investors may not want to touch TEVA. Although the generics industry theoretically offers patients greater access to otherwise exorbitantly costly therapies, it hasn’t worked out so well in reality.
Again, when generics like Teva had an opportunity to serve their patients, they instead served their own bottom line. When that opportunistic pricing occurs, the savings between brand-name drugs and their copycats diminish rapidly and worryingly.
But penalizing bad actors in the generics space also has consequences. Last October, The New York Times reported that a critical drug that addresses childhood cancers is in short supply. Up until early 2019, Teva and Pfizer (NYSE:PFE) were the only providers. Since then, Pfizer is the last man standing. Teva made a “business decision to discontinue the drug.”
I don’t know what that means. Presumably, though, it’s not economically feasible for Teva to produce this drug. This ugly situation highlights the matter that the generics industry is a necessary evil. And that’s why I’m more optimistic on TEVA stock than pessimistic.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights to the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.