It is not uncommon for the elderly to become forgetful or confused. But there is a simpler reason why octogenarian Warren Buffett was unsure in a Monday television interview about why his Berkshire Hathaway had recently bought a $377m stake in Teva Pharmaceutical, the troubled Israeli generic drugmaker.
His top stockpicking deputies had made the call. Shares in Teva dropped 1.5 per cent per cent, perhaps because they did not have the Buffett imprimatur or because there was no grand plan for the company to be a part of the healthcare initiative created by Berkshire, JPMorgan and Amazon. Still, with the stock down as much as 80 per cent in the past three years, Teva’s prospects as a value play look interesting enough.
Whatever their reputation for providing value in the healthcare system, generics manufacturing was a lucrative sector. The likes of Teva, Mylan and Perrigo could boast 30 per cent operating margins as their positions as unbranded providers themselves were almost as protected as the drugs they replaced. In Teva’s case a key driver of its popularity came from a branded drug, Copaxone.
But this model has been undermined. Drug buying is now dominated by three huge consortiums driving down prices. Copaxone now faces its own generic competition. Multiple generics are being approved for disease treatment more quickly, eliminating those monopoly profits for the initial generics provider.
The shakeout has hit Teva particularly hard as it has $32bn of M&A-fuelled debt with billions of that coming due in the next two years. It has embarked on a furious cost-cutting programme to get its debt level below four times annual cash flow. The new Teva boss says the correct ratio should be below two times.
This newly humbled Teva will not approach its previous heights any time soon. But analysts are expecting drug prices to stabilise by next year. A modest punt on a battered Teva is reasonable even if the boss is fuzzy on the details.
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