Teva (TEVA) has been reeling from a $40 billion acquisition of Allergan’s (AGN) generics business in 2015 that has since gone awry. Generic drugs are losing pricing power and are being stung by a quicker approval of competing drugs by the FDA. Teva is now facing generic competition in its most profitable drug, Copaxone, as it still has to service its $34 billion debt load now at junk levels. The stock is off over 60% Y/Y.
According to reports billionaire investor Len Blavatnik recently expressed interest in making an a $3 billion investment into the company:
Two of Israel’s leading financial news outlets, Globes and The Marker, reported on Sunday that Blavatnik has been examining a large share purchase in Teva, whose stock price hit a 17-year low last week after the company again cut its annual profit forecast …
The Marker reported that Blavatnik was looking to acquire up to a $3 billion stake in Teva. The company has a $12.3 billion market cap.
The investment could either be done through a private stock listing, which would help Teva deal with its nearly $35 billion debt burden, or the shares could be bought from pharmaceutical firm Allergan (AGN), the report said.
Reuters news drove TEVA up about 9%. Commenters on my previous article were particularly excited about the prospects of the “smart money” entering the name:
Commenter 1: Reuters reported Billionaire Blavatnik was looking to acquire up to a 3 billion stake in Teva.
Commenter 2: That would put a stop on the bleeding. I am lucking at TEVA and VRX. I think VRX is closer to recovery and reports Tuesday. Teva could have some more bad months if market forces want to push it down.
The Reuters articles raised several questions, “What is Blavatnik’s play here? Is he an activist investor trying to spur the stock? Is Blavatnik attempting to be a good samaritan by helping to relieve selling pressure from Allergan (AGN)? Does he believe TEVA is a great investment and is currently undervalued? I will explore these three questions below.
Blavatnik Is An Activist Investor
Some of the best investors since the Financial Crisis have been activist investors like Carl Icahn or Pershing Square’s (PSHZF) Bill Ackman. The federal reserve policy of purposely spurring the stock market created a tailwind for activists. They typically can spur a stock by changing the narrative or convincing the market of an impending catalyst like an asset sale or break-up of the company.
In my opinion, activists’ true skill is creating buzz around their investments. They have a knack for getting [i] journalists and bloggers to write incessantly about what the “smart money” is doing, and [ii] individual investors to crowd into the trade. In this example TEVA rose at the notion of Blavatnik buying the stock. A true activist would have acquired a sizeable stake weeks in advance, and then spurred the stock through public relations. Describing Blavatnik as an activist would be erroneous in this example.
Blavatnik Is A Good Samaritan
I assumed TEVA would have fallen to single-digits after a disastrous Q3 which saw EBITDA fall by double-digits and management give weak guidance. This all occurred before generic Copaxone fully kicked in. Even after it was downgraded by Fitch to junk status TEVA still never sunk to single-digits. As one of Israel’s largest publicly-traded companies I do not believe the government will let Teva fail, so it could benefit from a halo effect. There is also a school of thought that a cadre of billionaires are waiting in the wings to save the stock from plunging:
When the Blavatnik news hit this was the first that ran through my mind. Why else would a billionaire be so eager to buy TEVA around $11 when the company was on the brink of insolvency. There were concerns that Allergan (AGN) was going to dump its 100 million or so TEVA shares onto the market and create extreme selling pressure. Only a “good samaritan” would step in and buy the stock above $11 when he could potentially buy it in the mid-single digits if Allergan dumped the stock. I doubt Blavatnik became a billionaire by buying overvalued stocks from the goodness of his heart. The “good samaritan” angle is probably not likely.
Blavatnik Might Believe Teva Is A Great Long-Term Investment
The narrative that Blavatnik wants to buy Allergan’s stake is also likely erroneous. After all, how does that help the company? Teva needs capital. I previously estimated generic Copaxone could cut its EBITDA by 34% and potentially create a $1 billion insolvency. A $3 billion investment in new TEVA shares would cure a potential insolvency and improve the company’s credit metrics. This would give CEO Kare Schultz breathing room to turn the company around and the flexibility to invest in R&D and make strategic acquisitions if needed.
The new capital would come at a price, however. Teva would have to issue new shares at a steep discount to its current price to reflect its precarious financial conditions. At the end of the day, billions of people use generic drugs every day and Teva is one of the largest generic drug makers. Blavatknik would get ownership of a best-in-class generic drug maker at a fair price.
I believe any investment by Blavatnik would involve Teva issuing new shares at a steep discount. The dilution and news of the “smart money” buying in single digits could send TEVA sharply lower. TEVA remains a sell.
Trump And The Global Economy
The second installment of Trump And The Global Economy Town Hall took place October 24th in Fort Greene. It Featured Professor Lance Brofman, Coconut Rob (Coconut Rob Smoothies), Wuyi Jacobs (AfroBeats Radio) and Ralph Baker, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead.
The event was well-received by the community. We parsed through President Trump’s proposed tax plan and [i] how it was pure economic folly and [ii] high net worth individuals could potentially game the system by shifting income around. Apparently, Kansas Coach Bill Self did this when the state of Kansas cut taxes in the past. We discussed the pros and cons of technology on workers and the economy. How will the economy and country prosper under Trump’s leadership vis-a-vis Obama? What’s behind the verbal sparring with black athletes, ESPN’s Jemele Hill and North Korea’s Kim Jong Un?