Why Teva Pharmaceutical Makes Me Mad

The stock, not the company - and I blame the media.

I have an ax to grind with Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA) - sorry, not the company itself, but the stock. It takes note of the media more than any other leading stock, and if one panders to the media’s whims, it serves him right if people are mad at him. As a longstanding shareholder in this company, and one who has been a follower of Teva since 1969, I have long since arrived at the conclusion that this stock has a life of its own, and that it adamantly refuses to act like its mother, the company.

What has happened in practice is that over the years it has become apparent that the disobedience of the daughter, the stock, has an effect over the short-term, but with the passage of time, the stock has begun to act like the company. Note that it is the stock, not the company, which has become an obsession in Israel. Americans ask, “how’s Teva doing?” while, on the other hand the good folk in Israel ask, “what’s happening with the stock?” Are the stock and company two different things? Not over the long-term, but in the short-term they definitely are, and I’ll try and prove this below.

If you look back, you will find that 2006 was not a unique year for the stock. It has experienced numerous falls and then rallies in the past, but what they all have in common is that they never had anything to do with the business side of Teva. They always happened because of the media and commentators. There have been brief crises in the past, and there were also longer ones too, as in 2006, and each of them had nothing whatsoever to do with the company’s business situation.

One of the major crises in the last 20 years was the one concerning Copaxone. The analysts, commentators and experts decided that Teva had made a terrible error in allocating resources to an ethical drug. When they learned that the ethical drug in question was a multiple sclerosis drug based on pharmacological ingredients, there was an outcry. “Everyone is opting for proteins, and you’re opting for chemicals?” they railed. But professors Ruth Arnon and Menahem Sela managed, with the relentless backing by Teva chairman Eli Hurvitz and his board, to develop, produce and, most important of all, to convince the medical world that this was something unique.

Teva’s stock, on the other hand, which listened to the commentators day after day, took a beating. It fell by more during that period than it did during the previous year. At that time, I learned a thing or two about long-term investments from a group of American pensioners at an old age home in Boca Raton in Florida, who had formed an “investors club” for investments in Israel. I got a call from one from them asking what had caused the falls. “We can’t understand why the stock has gone down” they said. So I sent them a review written by a New York analyst, which explained the risks in Copaxone. They read it and replied, “Pick up Teva when it’s coming down, the man can’t tell the difference between dark and light. Does the fact that Teva has tried to develop an ethical drug mean that the generic industry is past its prime? Teva got an idea from two geniuses, one from the Weizmann Institute, and the other from Ness Ziona. So should Hurvitz have turned down their idea, given the cost involved? “Remember this, son,” the old folk from Boca Raton said back then. “If the stock falls because of commentaries that have nothing to with the company’s core business, buy!” I have regularly used that maxim in this column ever since.

Another occasion on which Teva collapsed was when the UK billionaire Robert Maxwell vanished at sea. He was a major shareholder and it was feared that the company that held his asset portfolio would offload two million shares onto the market, as all the experts and market makers predicted. I was reminded then of the investment club at Boca Raton; the stock listened to the experts and fell 22%.

Teva climbed to an all-time high of almost $46 in mid-December 2005. By July 2006 it had fallen 35% to $29.50. It hovered between $30 and $32 for the rest of the year, with slight gains either way. Since the beginning of 2007, it has climbed 20%. What happened to the company from mid-December to the end of 2006? Nothing. Quite the contrary, 2006 was the most successful year in Teva’s history. What is interesting here is that 2006 was also perhaps the worst year in the stock’s history.

What does this prove? That there’s no connection between company and stock? Perish the thought. It proves that the stock (the investors) listen to commentaries in the media, not the company. That’s all there is to it. And here is some proof to support this claim. Why did Teva rise to an all-time high at the end of 2005 (- and perhaps the stock gained a bit too much back then)? Because the prevailing opinion at that time was that both 2006 and 2007 would be record years for the company. In addition, there were also the highly positive developments in the generics sector, as well as, of course, Copaxone (that pitiful idea, remember?). To this one must also add the growth generated by the ongoing mergers and acquisitions policy.

Teva more than met all the expectations for 2005. But what about the stock? It collapsed. It started with the merger with Ivax Diagnostics (AMEX: IVD), which created a merger-based loss in the first quarter of 2006; it continued with the renewed fears over Copaxone, thanks to Elan Corp. (NYSE: ELN) and its Tysabri, and it ended with the announcement of the departure of president and CEO Israel Makov, the man who took Teva from $3 billion sales when he joined to $8 billion when he stepped down. It was from Makov that I learned that Teva is one of the most well-oiled business machines in the world. True, I imagine that the company would not have made the same rate of progress had he not joined it, and I have not a shred of doubt that relations between him and Hurvitz were strained, but it would be far fetched to attribute such a severe crisis in the stock to this.

What actually happened last week? The company continued as usual, but the stock sailed upwards, not because of the facts heaven forbid, but because of the songs of praise from all corners for the forecasts. In other words, those people who bolted because of one theoretical crisis or another, returned again and pounced on Teva stock, since those people who predicted the crisis are now marveling at the forecasts. The truth is that the fourth-quarter results did not meet the forecasts, and the stock, which would have probably fallen were it not for Teva’s strong guidance, rose. Great.

Save for a few professional players, Teva is a long-term investment for the simple reason that it is the leader in a business-medical niche that is only growing in size all the time. As one whose opinions on Teva have been common knowledge ever since this column began, I would say that the problems that led the analysts to lower their ratings for Teva in 2006 - i.e. the fears that it would be unable to repeat the phenomenal growth of 2006, Copaxone’s decline and the fear that incoming CEO Shlomo Yanai will be unable to step into Makov’s shoes, fears which I feel never had any justification, still exist today. The only difference is that the analysts don’t mention them any more.

TEVA 1-yr chart

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.

Comments

[mahesh reddy:]

Pharma in genral are in the DOGHOUSE...and the support for GENERIC ...are at ALL TIME LOW...But, when ever the price get cheaper....i mean dirt cheap....smart money will start poring in ....All i can say patience....

Mahesh Reddy

2007 Feb 16 02:07 PM