Shares of Teva Pharmaceutical Industries Limited TEVA shot up around 5% in after-hours trading on Tuesday after it was revealed that Warren Buffett's Berkshire Hathaway Inc. (BRK.B) has doubled its investment in the company in the first quarter
Berkshire said it owned about 40.5 million Teva American depositary receipts (ADRs) at the end of March, up from 18.9 million ADRs at the end of 2017. The changes were reflected in a regulatory filing by Berkshire on Tuesday.
What Attracted Buffett to Teva?
The big question now is what led Buffett to increase stake in the Israel-based generic drugmaker, which has been facing significant challenges. This includes accelerated generic competition for its blockbuster multiple sclerosis drug, Copaxone; new competition for branded products, pricing erosion in the U.S. generics business and a massive debt load of more than $30 billion.
Mylan’s MYL earlier-than-expected launch of the first generic version of the 40-mg strength of Copaxone in October was a major setback for Teva. In the same month, Mylan also launched the second generic version of the 20 mg formulation of Copaxone. The first generic version of the 20 mg formulation has been marketed by Momenta Pharmaceuticals, Inc. MNTA and Sandoz — Novartis’ NVS generic arm — since 2015
With the entry of the generic version of the 40 mg formulation and the entry of a second generic version of the 20 mg formulation, there has been rapid erosion in sales of Copaxone. Moreover, a second generic version of the 40 mg formulation (Glatopa) was launched by Sandoz in February this year, much earlier than its scheduled launch in April.
However, Teva has undertaken some strategic and restructuring initiatives to revive growth.
The company divested some non-core assets last year (mainly in the Women’s Health business) to cut its significant debt load. It also has a new organizational structure in place, is closing plants, cutting down its generics portfolio, eliminating low-value R&D projects, and aims to cut its global workforce by more than 25% over the next two years as part of a restructuring plan it revealed in December last year. Teva is progressing well on these re-structuring activities and still expects to save almost $3 billion by the end of 2019 from these initiatives.
Its financial position also seems more stable than before as it is regularly paying down debt.
Earlier this month, Teva announced its first-quarter 2018 results, beating expectations for both earnings and sales while also raising its full-year outlook for both the metrics
Numbers in Favor of Teva
After declining sharply in 2017, Teva’s shares have also picked up this year. The stock has risen 7.1% this year so far against the industry’s decline of 7.5%.
Earnings estimates for 2018 and 2019 increased a respective 7.4% and 2.1% over the past 30 days.
The stock also trades at an attractive valuation as evident from its favorable P/E, P/S and P/B ratios compared to the generics industry.
Its median P/E F12M (forward twelve months) for the past year is 6.72X, which is a discount to the stock’s high of P/E F12M of 8.96X in the same time frame. The stock also trades at a discount to the generic industry’s P/E F12M of 9.89X, which shows that the stock has the potential to grow further.
Similarly, the median level trailing-12-month price to sales (P/S) ratio for Teva is 0.84 for the past year, a discount to 1.82 for the industry.
Teva currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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