Teva Pharmaceuticals (TEVA) lost 24% last Thursday after reporting disappointing earnings. From the Seeking Alpha transcript of the conference call:
“All of us at Teva understand the frustration and disappointment our shareholders are feeling…
In our U.S. Generics business, we experienced accelerated price erosion and decreased volume, mainly due to customer consolidation, greater competition as a result of an increase in generic drug approval by the FDA, and some new product launches that were either delayed this quarter or got subjected to more competition..
…we expect to have no contribution from our businesses in Venezuela to earnings in the last two quarters of 2017…”
To fix the issues:
“…we are focusing on streamlining our businesses to meaningfully reduce our cost base…We recently concluded a full review of our specialty R&D pipeline with the assistance of an experienced outside adviser in order to rationalize and focus our pipeline assets and maximize return on investment. We are also in the final stages of engaging world-class consulting firm to support our U.S. Generics business. We like the full potential of these assets in light of the evolving environment…
…our board has authorized a reduction in our cash dividend by 75% to $0.085. This reduction represents approximately $260 million of cash per quarter.”
Investors clearly had no patience for any of this news. After three full days of non-stop selling and a devastating downgrade from Morgan Stanley (MS) going from equal to under-weight, TEVA has lost a stomach-churning 40.5% since its earnings.
The U.S. generics business is part of Teva’s troubles. A massive $40.5B deal Teva closed with Allergan (AGN) exactly two years ago sits right in the middle of those troubles. At the time, TEVA traded at an all-time high…and its ultimate peak. TEVA is down a stomach-churning 74.2% from that point. I note the irony because AGN still trades around the same price it had at the time of the deal’s announcement. Moreover, AGN came out of the deal with a 10% ownership in TEVA. Allergan’s stock is down slightly in sympathy with TEVA’s woes.
In a timely appearance, Allergan CEO and Chairman Brent Saunders appeared on Jim Cramer’s Mad Money show to talk about the business and its recent earnings report. At the beginning of the discussion, Saunders made it clear that selling AGN because of its TEVA stake made no sense: AGN holds 10% of TEVA worth “a couple of billion dollars” while AGN has “several billion dollars in cash.” AGN promised the market from the start of its deal with TEVA that the TEVA holding was not a long-term investment. The lock-up on the shares expired just a few days ago, but AGN plans to sell its stake in a “responsible way” over the next several quarters. My ears perked up when Saunders claimed that selling TEVA at current prices “doesn’t make much sense.” That was all I need to hear to sense a potential trading opportunity.
Firstly, after three days of heavy selling, TEVA is due for a large relief bounce: a lot of weak hands likely shook themselves out in this relentless selling. A relief bounce should also be due to the extent investors panicked out the stock to get ahead of AGN’s sales. Now we know the AGN overhang is at higher prices. As with most of these rebound trades, I am initially targeting a return to the lower-Bollinger Band (BB) which is now around $22.25.
It is possible that generics competitor Mylan (MYL) is also an opportunity. Mylan completes the irony of TEVA’s current troubles as TEVA made a last hour switch from pursuing MYL to AGN two years ago. Fast forward to today, and MYL sold off in sympathy with TEVA’s woes. Morgan Stanley added a downgrade to MYL for good measure.
While I remain a skeptic/critic of the company, I still have my eye on the bonus promised to CEO Heather M. Bresch if she can drive earnings per share to $6.00 by March, 2018. MYL is right on the edge with guidance of $5.15 to $5.55 for fiscal year (FY) 2017. Second quarter earnings before the market opens on Wednesday, August 9th will have to be good just to fight back the recent selling. The announcement will have to be downright fantastic to suggest the company might still hit the $6.00 EPS target. MYL must explain that the depths of TEVA’s woes are company specific. In other words, MYL could experience a post-earnings surge. With MYL Jan 2018 $35 call options costing a mere $1.70 or so, I find the risk/reward very attractive to start accumulating ahead of earnings. If MYL manages to disappoint post-earnings anyway, I will be looking to accumulate shares for holding into March, 2018…
Source for charts: FreeStockCharts.com
Be careful out there!
Full disclosure: no positions (yet)