The Single Biggest Reason Teva Pharmaceutical Industries Imploded and Fell 22% in October

Published November 02, 2017
Motley Fool

What happened

Shares of Teva Pharmaceutical Industries (NYSE: TEVA), a developer of branded and generic drugs and the largest generic drugmaker in the world, tumbled another 22% in October, according to data from S&P Global Market Intelligence. While the company is facing a plethora of headwinds, as evidenced by its 70% loss over the trailing year, its October weakness can be traced to a single negative event early in the month.

So what

Following the closing bell on Oct. 3, 2017, rival Mylan (NASDAQ: MYL) announced that it had been granted approval for a generic version of the three-times-a-week 40 mg injection of multiple sclerosis drug Copaxone, along with a 20 mg once-daily injection. Copaxone is Teva's top-selling branded drug, which accounted for more than $4 billion in sales last year, and at one time comprised around 20% of its annual sales. As a branded, high-margin therapy, it's also one of the company's biggest profit-makers.

The entrance of generic Copaxone into the marketplace wasn't unexpected, but the news was nevertheless devastating for two reasons. First, a generic entrant wasn't anticipated until 2018, meaning the Mylan approval came a few months ahead of schedule. That's bad news for Teva, which has been trying to milk Copaxone for everything its worth in order to pay down its debt.

The other issue with this approval is that it included the 40 mg three-times-a-week formulation. Teva reformulated Copaxone from a once-daily to three-times-weekly injection in order to avoid generic competition, but lost a patent case that could have protected its 40 mg formulation earlier this year.

Long story short, there's a decent chance of Copaxone facing some very tough competition in 2018 from Mylan's generic Copaxone, which will drag on Teva's operating results.

Now what

Making matters worse, on top of the bribery settlement, debt levels, and management changes, the company wound up reporting weaker-than-expected third-quarter operating results before the opening bell on Thursday, Nov. 2. Despite reporting a 4% increase in constant-currency sales, largely helped by its acquisition of Actavis, Teva noted that generic pricing weakness accelerated during the quarter, and that it wouldn't get any better throughout the fourth quarter. This resulted in less cash flow and the need for Teva to slash its full-year sales and profit guidance once more.

Despite these near-term issues, I remain bullish about Teva over the long run and am eager to add to my position in about a week, once the volatility settles down a bit.

Investors should understand that Teva has multiple avenues with which to pay down its debt. The company has already sold its women's business in three separate transactions, netting nearly $2.5 billion, and it's put its European pain and oncology segments on the block. In addition to asset sales, the company slashed its dividend by 75% in August in order to save $1 billion annually that it can put toward repaying its debt, and it still should be good for $2 billion to $3 billion in annual operating cash flow.

Teva is also the leading generic drugmaker in the world, and that comes with perks. Though the pricing environment is weak now, it's not expected to remain weak beyond a few more quarters. Growing demand for generics, along with an aging population, puts Teva in the driver's seat for long-term growth and pricing power.

Teva is being taken to the woodshed while Wall Street ignores the long-term opportunity. I believe that's a perfect recipe for patient investors to consider jumping in.

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Sean Williams owns shares of Teva Pharmaceutical Industries. The Motley Fool recommends Mylan. The Motley Fool has a disclosure policy.