After years of underperformance, drug stocks and biotech startups are starting to fall less. That could signal the downtrend in the segment ended. Without worries over governments interfering with drug pricing, investors must consider companies that produce cash flow growth through new product release.
Teva Pharmaceuticals (NYSE: TEVA) benefited when Berkshire (NYSE: BRK.A) filed its holdings increase in the stock. Despite generic drug competition and high debt, why is Berkshire holding $1 billion worth, or 43.2 million shares of Teva? The holding increased from $358 Million in the March quarter to more than double, for the quarter ended June 30, 2018. The nearly 5% holding by market cap is a positive vote of confidence for Teva.
Teva has heavy debt to contend with but it has a structured approach in cutting it. The operating cost reduction, asset sales, and a slew of new products will lead to operating profit and cash flow growth. Markets will eventually realize the 8.5x forward P/E is too low for the stock.
Comparable Generic Suppliers
Endo International (NASDAQ: ENDP) nearly tripled this year as the business stabilized. Mylan (NASDAQ: MYL) is range-bound while Bausch (NYSE: BHC) trades at a forward P/E of six times.
Takeaway
The downtrend in generic drug suppliers is at an end. Value investors should consider all mentioned companies as part of their portfolio.
