So far, 2017 has been a good one for the pharma and biotech sectors despite the lowest level of merger-and-acquisition activity in many years. The biotech sector is up about 20% after underperforming the market significantly in the 18 months leading up to the start of this year. However, one large company that has not participated in the rally is leading generic drugmaker Teva Pharmaceutical Industries Ltd. (TEVA) .
Teva's stock has seen nearly two-thirds of its value disappear over the 12 months. The wounds are largely self-inflicted.
Under previous leadership the company pursued an aggressive growth strategy via acquisition. First, it was rebuffed in an attempt to take over competitor Mylan (MYL) . When that pursuit did not pan out, it brokered a deal to buy the generic drug business of Action Alerts PLUS holding Allergan plc (AGN) , which at the time was itself working to be part of a megamerger with Pfizer Inc. (PFE) . Allergan's hook-up attempt finally was derailed by the Treasury Department in April 2016.
Teva ended up paying $40 billion for Allergan's generic divisions, of which around 80% was in cash. The company took on a great deal of debt to enable this transaction. The Israeli-based drug colossus could not have picked a worse time to double down in generic drugs, where it already was the market leader. While the 2016 election was full of rhetoric around drug price gouging, what was happening on the ground in the generic space was quite the opposite.
These trends got worse when the new administration appointed new leadership at the U.S Food and Drug Administration (FDA). Under the new commissioner, focus is shifting in the world of biotech and pharma. The agency is quite determined to make new drug development easier and less costly. At the same time, it is pushing hard to bring more competition to drugs that have come off patent.
The FDA has stated recently that it wants to see at least three manufacturers for each generic drug. The additional competition could force more price deflation on the industry.
Finally, Teva is going to face additional competition around its multiple sclerosis drug Copaxone, from which it gets around 10% of overall sales. Teva's stock was down more than 10% this morning on reports of the FDA's approval of Mylan's generic version of the drug.
Teva has started to take steps to address its challenges. It slashed its dividend to reduce expenses and expand cash flow to pay down debt and will make small divestitures toward that end. It also just brought in new CEO Kare Schultz, who is well-respected in the industry. The shares had gotten a bit of a boost from that recent decision as Teva started to address concerns the company was rudderless.
I have retained some shares in Teva, but I am not adding to that stake for the time being. I don't think the company is a version of Valeant Pharmaceuticals International Inc. (VRX) . However, Teva is going to take time to turn around and probably will be dead money until it shows signs of doing so under new leadership. I much prefer Allergan, which got the better end of its transaction with Teva, as well as numerous other plays in the large-cap pharma space.
This commentary originally appeared on Real Money Pro at 11:30 on Oct. 4. Click here to learn about this dynamic market information service for active traders.
