Generic drug suppliers are one of the most disliked segments of the pharmaceutical industry, at least in the eyes of government and the public.
So when Warren Buffett’s Berkshire Hathaway disclosed a new position in Teva Pharmaceuticals (NYSE: TEVA), markets followed the trade and bid the stock by around 10 percent on Feb 14 – 15. Why did Buffett buy Teva stock?
COPAXONE Sales Drop
Half of the sales decline in COPAXONE is due to generic competition. This of course led to a drop in Teva’s operating income. Teva forecast half of its restructuring program will lower its spending base by $1.5 billion.
Still, Teva’s operating spend will still go up in 2019. It forecast EBITDA of between $4.7 billion and $5 billion, or EPS between $2.25 and $2.50. Cash flow will be in the range of $2.6 billion to $2.8 billion.
With the forecast priced in the stock, Buffett may be betting that the worst is behind it for generic competition. Teva also has at least three major blockbusters that could potentially replace the lost COPAXONE business.
It will not happen overnight but could potentially replace its reliance on Copax by 2020 and beyond.
Takeaway
The massive job cuts, followed by cost controls, are a baseline for Teva’s turnaround. The recovery now depends on the new CEO executing on new product sales growth.
