Analysts Split Over Buffett’s Backing of Teva Pharma

Teva

Warren Buffett’s Berkshire Hathaway snapped up $358 million in Teva Pharmaceuticals, Inc. stock last week, and the move has some analysts scratching their heads as to why.

Shares of Teva are significantly off from this time last year.

Writing on Seeking Alpha analyst Terry Chrisomalis suggests that the billionaire investor Buffett may have made a mistake in acquiring 18.9 million shares of Teva. Chrisomalis said he expects the generic giant’s EBITDA to take a big hit in the first half of 2018 due to the availability of new generic versions of its multiple sclerosis drug Copaxone. Last fall the U.S. Food and Drug Administration approved a generic version of the MS drug manufactured by Mylan. Last week the FDA approved a second generic version of the drug made by Novartis and its development partner Momenta. With the challenges of two generics to its lead branded product, Chrisomalis predicts that the only way the company could successfully fight is to lower its pricing for the treatment.

Teva has certainly expected to lose money with the generic challenges. Last week the Israel-based Teva forecast a $2 billion loss of revenue over the next year. In 2017 Copaxone generated $3.8 billion, but forecasts for 2018 peg the drug at earning $1.8 billion. That’s a significant loss.

Chrisomalis noted that the generic drug market is becoming challenging. He said many of the larger companies are looking to offload their generic businesses. Last week it was reported that Novartis might sell off its generic business Sandoz – the same company that scored the FDA approval for the generic of Copaxone.

Another analyst writing under the pseudonym Shock Exchange also pointed to Teva’s massive debt. The company is grappling with about $32 billion in debt. Shock Exchange, who also wrote in Seeking Alpha, said the company will need to restructure anywhere “from $12 billion to $19 billion over the next three years. Teva has been reduced to junk status as a result of its massive debt – which could be problematic for Buffett and Berkshire Hathaway, the analyst wrote.

Still, other analysts see the addition of Teva to Berkshire’s holdings as promising. Writing in InvestorPlace James Bruley said the association of Warren Buffett’s name to Teva could signal other investors to snap up chunks of stock.

“Though the relationship won’t pay Teva’s bills, it can help the company raise funds if need be, and it might make the market look at Teva’s debt in a slightly less critical light,” Bruley wrote.

While the Berkshire Hathaway filing did not indicate why it took the stake in Teva, some analysts believe Buffett is supportive of the moves being made by Chief Executive Officer Kåre Schultz are the right ones. Fortune reported that Citigroup Inc. analyst Liav Abraham sent a note to clients informing them of that idea. Abraham said it appears Buffett and Hathaway believe Teva is “taking the right steps to execute on a successful turnaround.”

The backing of Buffett and Berkshire Hathaway will certainly be welcome news for Teva as it has a bleak outlook for 2018 that includes a further erosion of sales through 2018. That loss could result in a decline of about 18 percent to $18.3 billion. That’s about $1 billion less than analysts had initially forecast for 2018.

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