Warren Buffet’s Next Interest is “Generic Medicine” – Did his remedy go down well?
Warren Buffet’s Berkshire Hathaway Inc., has acquired $358 million equivalent shares of Teva Pharmaceutical Industries Ltd., one of the world’s largest Israeli pharmaceutical companies. This move clearly indicates Berkshire’s interest in the generic medicine sector.
Did it go down well for everybody? Some people are viewing it as a godsend for Teva, which is one of the top 25 brands that investors maintain a short position in, while some are harshly criticising it as “a drop in the ocean” or “ cashing in on the misery facing healthcare shares at low prices.”
Berkshire has just disclosed their entry into the healthcare market with the announcement for establishing a non-commercial healthcare system under the partnership with Amazon.com Inc., and JP Morgan Chase & Co.
On other hand, they sold the majority of IBM shares and bought the shares of Apple Inc. worth about $28 billion. It is taken as a sign of their growing interest in the technology field.
“The last lender” salvages one of the world largest generic drug makers
Berkshire Hathaway announced that they have taken 1,890 million shares of Teva Pharmaceutical Industries Ltd (equivalent to $358 million). The debt-laden Teva was on the verge of bankruptcy, despite being one of the world’s largest generic drug makers with a 110-year tradition.
Ronny Gal, an analyst with Sanford C Bernstein & CO., LLC., projected that the debt is $23 billion. They carried out restructuring for cost-reduction to improve their stagnant sales, however, further difficulties may lie ahead due to the fact that the patent term of a core product, “Copaxone,” a medicine for multiple sclerosis, is due to expire this year. Miles Highsmith of Deutsche bank, forecasted that the annual sales volume of Copaxone could drop from $3,8 billion to $1,8 billion (CNBC, 15th February)
Generic medicine, also known as “generic drug,” whose prominent feature is that the development cost is less expensive though it is identical to new pricy medicine regarding active ingredients, effectiveness, quality and safety. Teva is already in the Japanese market as a large generic drug maker, however their corporate bonds sharply dropped last October after Mylan N.V, a rival company, developed a Copazone-like generic medicine, and received approval from the U.S. Food and Drug Administration.
According to the data from Trade Reporting and Compliance Engine; Trace,
the reimbursement price in 2046 was 81.0 cents, a record low, and in 2026, it declined by 3,2% to 89.6 cents, the record largest decline (Bloomberg, 4th October, 2017)
In January, Teva announced the issue of bonds worth of $5 billion to improve the business. As a part of relief measures, they merged two sections of generic drug and special medical care and carried out closure of some facilities and a lay-off of over 25% employees in the second half of 2017. Prior to their implementation, the Israeli company already informed their intention to save costs by 2019. (Reuter, 3rd January 2018)
Just after the release of news that Buffet, dubbed as “the last lender”, took the shares of Teva, the stock value having dropped by a third, $18,80 (as of 13th February, 2018) suddenly increased to $20,81(Bloomberg data on 15th February).
Generally, Buffet’s remedy is taken mostly positively. However, some people are expressing criticism or negative views, such as “ Berkshire Hathaway cashed in on the failing healthcare shares” or $3 billion cost-reduction will not contribute to improve Teva’s stagnation.”
Plan to change healthcare system with Amazon and JP Morgan Chase &Co
A well-known Buffet’s remedy strategy is: “Invest in a failing company with low-cost, and then yield enormous profits.” Assumingly, this trade is driven by his endless ambition to enter the healthcare industry.
Berkshire Hathaway revealed in January that they would establish a new healthcare system with Amazon.com Inc., and JP Morgan Chase &Co. This project will be a non-profit business to enable the combined over 1 million U.S. employees to access the healthcare system easily. The underlying concept is to have their own joint-system which will not require any intermediaries, to bring a cost-friendly healthcare service (Bloomberg, 3rd January).
The joint project is still at too early a stage to have the details. However, we can at least speculate that these 3 large companies may have a great influence on the current healthcare market, and that we, we may possibly see a dramatic change to the framework of the supply system. It is going to be a non-profit organization. It could be “ an investment for future interests” for Buffet. Following Amazon who has been selling medical supplies, Buffet may increase healthcare shares by buying stocks.
Apple surpasses Wells Fargo & Co, and Most IBM shares are ditched
Buffet acquired 9,8 million Apple shares for the first time in May 2016 although he was cautious about technology shares. After that, it was reported that a part of the shareholding was sold. That being said, Berkshire actually continued to increase their Apple stocks to 165 million shares worth $28 billion (as of September, 2017), which surpassed the Wells Fargo & Co shares worth $27,8 billion. The day following his purchase of Apple shares, the price increased by 3,4% to $172,99.
Besides, they have been increasing their stock holdings in companies such as The Bank of New York Mellon Corporation, U.S Bancorp, Wells Fargo & Co., American Airlines Group, General Motors Company, Biochemical makers, Phamatheutical and biophamatheutical technology makers, Monsanto Company and Sanofi Company.
IBM shares are shed. Philips 66 agrees to buy back its stocks from Berkshire
Berkshire sold IBM shares worth $5 billion amongst the shares that Buffet purchased in 2011, and decreased their holdings by 205 million shares worth $3,140 million. When Buffet attended at the general shareholder’s meeting in May, he admitted his miscalculation, saying, “ I expected that IBM shares would have risen more” (USA TODAY, 14th February, 2018).
Moreover, Buffet agreed with Philips 66, a large oil refiner and seller, to sell back a total of 3,500 shares worth about $3,3 billion, which is equivalent to over 43 percent of total shared. He said in a statement: “It was solely motivated by our desire to eliminate the regulatory requirements that come with ownership levels above 10 percent” and added “ We remain one of Phillips 66’s largest shareholders.” (Reuter, 14th February, 2018)
Buffet’s endless ambition draws us in, shrugging off rumor that his days are numbered.