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Teva Loses Its Potency
02/25/2011 1:44 pm EST
When a “buy” no longer enjoys the strengths that made it a buy, you should sell it.
The company’s recent earnings stumble—fourth-quarter 2010 earnings came in 6.3% below fourth-quarter 2009 earnings—and the continued uncertainty about when Teva’s Copaxone will see generic competition are certainty significant worries about the stock.
But what really bothers me—what goes to the heart of why I bought Teva in the first place—are the manufacturing problems the company has had with its Irvine, Calif., and Jerusalem plants. Teva voluntarily shut down the Irvine plant after receiving a warning letter from the US Food and Drug Administration. The company is planning on reopening the plant in March.
Investors hoping that this was a one-time problem involving an older plant were disappointed when the FDA opened an inquiry into the company’s new Jerusalem plant in October. That concern turned to worry when the FDA decided that the company’s response wasn’t sufficient and issued a warning letter. The Jerusalem plant makes generic versions of Ambien, among other drugs.
One plant with problems is a mistake. Two plants with problems raise questions about management and company standards.
The two incidents are particularly troubling to me, because one of the reasons to own Teva instead of other generic drug makers is the company’s reputation for high manufacturing standards. The ability to routinely manufacture generics to a high standard of quality looks likely to get even more important—and more valuable—under the FDA’s new rules for generic versions of biotech drugs, also called biosimilars.
If Teva’s reputation for quality has been compromised, there’s less reason to own the stock.
Right now, that’s an open question—but one that carries a substantial element of risk with it. And my calculations don’t give me enough potential upside to offset this risk.
I get a target price of about $56 a share by the end of 2011. With the stock trading at $50.17 as I write this, that means I’m looking at roughly a 12% gain to that target. That’s just not the kind of gain I’d need to take on the risk in this stock.
As of February 25, I’m selling these shares with a 1.8% loss, since I added them to this portfolio on Oct. 13, 2009 at $51.08.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Teva Pharmaceutical Industries as of the end of January. For a full list of the stocks in the fund as of the end of January see the fund’s portfolio here.
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