All The Bad News For Teva (TEVA) Is Now Priced In

Most of us have, at some time in our lives, experienced a sequence of events when it seems that nothing can go right. Bad news piles on bad news and we seem to go through a run of making bad decisions, albeit for all the right reasons.

Corporations, as Mitt Romney once famously reminded us, are people too, and it seems that they also go through the same thing. Take the Israeli generic pharmaceutical company Teva (TEVA) for example.

It wasn’t that long ago that generic pharma companies were all the rage and a chart like the one below was unthinkable. As big pharma companies hit what became known as the patent expiration cliff, the future for companies like Teva, which make generic versions of blockbuster drugs, looked bright.

The companies themselves obviously thought so. Just over a year ago hardly a day went by without a story of a huge hostile takeover in the industry. Teva, Mylan (MYL) and Perrigo (PRGO) the three big players in generics, got involved in a weird ménage a trios where everybody seemingly tried to buy out everybody else.

Once the dust from all of that had settled, though, all three companies remained independent. Teva did, however, close a somewhat friendlier deal, buying the generic arm of Allergan (AGN) for over $40 billion. At the time some questioned the wisdom of that deal, and given that TEVA is now trading at just over half of its price a year ago it looks, on the surface, as if they were right.

The alternative view, however, which may be more accurate, is that, given time, that deal will turn out to be much better than the current stock price would indicate. It takes time for an acquiring company to realize cost savings and other synergies that come from a takeover at any time, and that is even more so for one this size and degree of complexity.

TEVA’s underperformance over the last year or so is the result of more than their purchase of Allergan’s generics business. When they were expanding in 2015, it was as the pharma industry in general was beginning to look unstoppable, but market sentiment towards the sector has shifted.

As drug pricing came more into political focus, stocks throughout the industry came under pressure, and Teva’s aggressive growth moved from an asset to a liability. While generics are the company’s main area of focus, they have also acquired some patents for drugs along the way, and even that was anything but plain sailing.

TEVA dropped significantly again this morning after a judge’s ruling that multiple patents relating to their top selling multiple sclerosis drug Copaxone invalid. That decision will be appealed, but it is obviously a blow to the company. What it is not, though, is much of a surprise. The lawsuit concerned has been going on for some time, and many analysts expected this outcome. The loss of those patents was priced in to a large extent, yet TEVA still lost more than ten percent overnight.

After some unfortunate timing and a change of political mood that was largely out of their control, Teva have been through one of those periods when they seemingly can do no right. Now, with the worst possible outcome of the Copaxone trials priced into the stock, and just as the effects of synergies from their takeover begin to be felt, the mood of the street seems to be gradually changing. Bank of America issued a “Buy” rating this morning, following Deutsche Bank, who have a $54 price target for the stock.

They, like me, obviously feel that the selling of Teva is now way overdone, with existing and projected bad news all accounted for. That makes it unlikely that there will be negative surprises from here. It also means that even moderately good news could easily have an outsized effect, making the stock a good buy on a risk reward basis.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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