Billionaire George Soros Bets Big Against 2 Struggling Drugmakers , But One Could Make a Big Comeback
Should you invest the way billionaire investors do? Do they know something the otherwise mere mortal investors don’t? It’s been noted that George Soros’ fund, Soros Fund Management, has beat broader markets consistently since it was founded in 1969. George Budwell, writing for The Motley Fool, notes that the Soros Fund recently placed put options—essentially betting that the company shares will drop—on Valeant Pharmaceuticals International and Teva Pharmaceutical Industries Budwell takes a closer look at the two companies.
1. Valeant Pharmaceuticals International
Based in Laval, Quebec, it’s been a year since the company shares tanked over a wide variety of scandals involving insider trading, price gouging and others, as well as a whopping $31 billion in debt. But since Joe Papa took over the reins from J. Michael Pearson, the company appears to be rebounding.
Papa has been aggressive about divesting noncore assets in order to knock back the debt and the company has brought out some new products, such as Vyzulata for glaucoma. Budwell writes, “Most critically, CEO Papa hasn’t been forced to dump the company’s main growth drivers—Bausch & Lomb and Salix Pharmaceuticals respectively—to avoid defaulting on its long-term debt obligations. As such, Valeant has started to attract bargain hunters, and a handful of large institutional investors in recent quarters.”
So why is the Soros Fund betting against the company? After all, shares have risen almost 52 percent this year after losing more than 97 percent of its value. Budwell points out that it’s consistent with Wall Street’s overall pessimism about the company. “According to the latest figures, Valeant’s short interest as a percent of the float remains at over 10.4 percent, despite the stock’s strong momentum of late. That’s a sizable short interest for any stock—implying that a large swath of investors remains unconvinced that Valeant can ultimately avoid divesting one or more of its core assets. The drugmaker is starting to run out of pieces to sell off to manage its monstrous debt load, and there’s no guarantee the company’s free cash flows can rise quickly enough to pick up the slack, after all.”
2. Teva Pharmaceutical Industries
Headquartered in Petah Tikva, Israel, Teva also has enormous debt, $35 billion. But it’s also been hit by dropping revenues of Copaxone, a big cut in dividends, and downward pressure on generic drug prices. The company’s credit rating took a hit, which pushed it into a major restructuring program.
The company is planning on cutting about half of its Israel employees. Israeli Prime Minister Benjamin Netanyahu personally asked the company’s chief executive officer, Kare Schultz, to not cut the jobs, but Schultz is continuing. In a statement, Schultz said, “The measures included in the restructuring plan are aimed to achieve our shared aspiration to sustain Teva as a strong global company, managed out of and based in Israel. These measures are painful, but absolutely vital.”
Which would explain why Soros is betting against the company turning around. Budwell writes, “While Teva’s ongoing cost-cutting measures should help the drugmaker to service its monstrous debt load, the bigger problem is that the company’s free cash flows going forward may not be sufficient to lay the groundwork for a comeback.”
As Budwell points out, Valeant might beat the odds. Papa appears to be making all the right moves, although it’s still a risky investment. “Teva, on the other hand,” he writes, “is a falling knife not to be grabbed at this point. There’s no telling when the generic drug space will start to stabilize, and the company has zero financial flexibility to bring in new blood, so to speak. That’s a recipe for disaster.”