Teva Trips Out

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What's going on?

Shares of Teva, the worlds largest maker of generic drugs (i.e. ones that arent produced under patents), saw its shares tumble almost 18% on Thursday after its earnings fell short of Wall Streets expectations and it cut its profit outlook for the rest of the year.

What does this mean?

Teva makes copycat drugs (a.k.a. generics) that compete with established drugs which have had their patent protection lapse. Unfortunately for Teva, that market has become much more competitive recently: according to Teva, customers have merged with one another (improving their bargaining position) and more generic drugs have come onto the market. The combination has meant, in Tevas words, accelerated price erosion for its products (i.e. it cant charge as much). Adding to its woes is its $40 billion acquisition last year of drug giant Allergans generics business a decision that proved untimely and expensive.

Why should I care?

For markets: Teva is in a tough position and lacking a CEO is not helping.

The seemingly failed acquisition of Allergans generic drugs business contributed to the ouster of Tevas CEO earlier this year. Its extremely challenging to put together a turnaround plan when no one knows who will lead the effort. The sooner Teva gets a new CEO, the sooner it can begin to try to right the ship.


The bigger picture: This is why the stock prices of acquirers often fall there is risk when buying another business!

Often when a corporate deal is announced, the stock price of the acquiring company falls (while the company being acquired tends to shoot higher). The poor stock price reaction usually reflects investors skepticism over the deal. For example, whether the strategy makes sense and/or whether the acquirer is paying too much. Teva almost certainly paid too much when it acquired Allergans generic drugs business last year and with the stock price down 50% over the past 12 months, skeptical investors have been proven correct.

Originally posted as part of the Finimize daily email.

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