This yearBerkshire Announces document 13FTeva Pharmaceuticals, the world's largest generic (generic) pharmaceutical company, is committed to the research, development, production and promotion of generic drugs, patented brand drugs and active pharmaceutical ingredients.

Note: 13F documents are long position documents that institutional investors and hedge funds must submit quarterly, four times a year, no later than 45 days each time. Investors can see the investment trend of the market according to the positions of financial predators.

According to public data, Teva was founded in 1901. At first, it was a company in the Middle East that transported drugs on the backs of camels and donkeys. After more than a hundred years of development, today's Teva is a multinational company that can produce more than 120 billion tablets and capsules a year. The market spans Europe and the United States, so that every citizen in France, Britain and Germany can take its medicine every day. It accounts for 1/7 of the market share of general prescription drugs in the United States.

The company's main product line covers nervous system diseases, respiratory diseases, oncology and immunity. According to the official website, the company has 26 factories approved by FDA and 31 factories approved by EMA.

Success also mergers and acquisitions, failure also mergers and acquisitions

Teva Pharmaceuticals today's industry status and business scale stems from more than 20 years of large-scale mergers and acquisitions: starting from Israel, the acquisition of a series of local companies in Israel. In order to enter the US market, we have acquired the top generic drug companies in Europe and the United States one after another, and obtained the commanding heights in these target markets.

Throughout the 1990s, Teva Pharmaceuticals registered in the United States far ahead of its competitors in the total number of generic drug products, and accelerated the pace of business penetration into the global market through aggressive mergers and acquisitions and cooperation strategies.

Entering the 21st century, Teva has entered the stage of wanton expansion:

• In 2003, it sold 3.4 billion US dollars to acquire Sicor Company of the United States in cash and stock exchange, and gained its business advantage and technical platform of injectable generic drugs.

• Subsequently, Anvis was acquired with an offer of US $7.4 billion, which strengthened the Teva respiratory system product line and added new business channels in emerging markets such as Eastern Europe, Latin America and China.

• In 2008, Barr, the world's third largest generics company, and Priva Pharmaceuticals, the European arm of Barr, were merged with a price of $7.4 billion and a commitment to take on $1.5 billion in debt, bringing Teva's sales to more than $10 billion for the first time.

• In 2010, Tongyi Pharmaceuticals, a veteran German generic drug company, was acquired with an offer of nearly $5 billion, strengthening its leading position in the generic drug market in Germany and even in Europe.

• In 2011, it acquired Cephalon of the United States with an offer of US $6.8 billion, including its main products, neurodrugs and more than 30 products under research and development.

• In 2014, it acquired American neurospecialist NuPathe and Labrys, as well as Auspex, a rare disease drug company, hoping to consolidate its position in the nervous system and build an innovative drug product line in the post-Copaxone era.

• Subsequently, Teva acquired Rimsa, a Mexican pharmaceutical company, for US $2.3 billion, hoping to expand its operating share in the Latin American market.

• In 2015, it acquired Allergan's generic drug business for $40.5 billion.

……

Although these acquisitions have created the scale and position of today's Teva industry, any acquisition will expose the company to risks such as market, capital, finance, personnel, taxation and corporate culture integration; especially in recent years, acquisitions have caused the current financial crisis of Teva, and the asset-liability ratio of enterprises remains high.

In the face of crisis, Lao Bu stepped in.

Buffett first bought Teva Pharmaceuticals in the fourth quarter of 2017, when the financial data of Teva Pharmaceuticals have been disfigured by the acquisition turmoil of previous years: market capitalization has shrunk to $19 billion from $59 billion in 2015, long-term debt has increased from more than $8 billion in 2015 to $28.8 billion in 2017, and EBITDA profit margin in 2017 is-68.67%.

And the stock price has not performed well: from $72.3 in its glory days in 2015 to less than $20, the stock price has plunged and has not yet recovered, falling by as much as 60%.

K chart of Tiwa Pharmaceutical Day, source: Futu Niuniu

With such Teva Pharmaceuticals, Buffett added another 21.66 million shares in the first quarter of 2018 to a total of 40.5 million shares. As we all know, Buffett favors companies with strong long-term earnings, and short-term stock price fluctuations will not affect his investment strategy, while Teva Pharmaceuticals can stand out among many pharmaceutical stocks and be "spoiled" by the stock goddess. must have its own bright spot.

The industry is bright, Teva is not black.

According to the U.S. Department of Health and Human Services, the United States spends a lot of money on prescription drugs every year. In 2016 alone, Americans spent more than $450 billion on pharmacies, showing an increasing trend year by year. By 2020, a new generation of baby boomers is expected to increase health-care spending to 20% of GDP in the United States, up slightly from 18% today.

According to the statistics of BioSpace, the generic drug market has changed significantly in recent years. With policy support, about 88% of all prescription drugs in the United States are generic drugs. In general, the annual turnover of the generic drug market can reach 224 billion US dollars.

It is an international practice to reduce drug prices and health expenditure by encouraging the development and use of generic drugs, and the United States is no exception. Low-cost generic drugs save a lot of medical expenses in the United States.

Generic drugs have saved medical and health expenses in the United States in the past decade, source: statistics

Investors are also optimistic about the health care industry, with hedge funds investing in health care assets accounting for more than 17% of total assets at the end of the second quarter of 2018, according to Goldman Sachs Group. This proportion is also the largest proportion of hedge fund portfolios. This is comparable to the proportion of technology stocks held by hedge funds a year ago.

Caution about the broader economy, undervaluation of pharmaceutical stocks and less exposure to policy risks are the main reasons why investors are bullish on the medical sector, according to Bloomberg.

The data is good and the boss is safe.

The development of the industry is very good, what is the position of Teva Pharmaceutical in the industry?

From Bloomberg peer-to-peer comparisons and peer companies published by BioSpace, we compared the financial data of several companies in the generics industry over the past decade. The results show that, despite the risks, Teva is firmly at the top of the list in terms of operating data.

Compared with the companies are:

• TEVA:$Teva Pharmaceutical (TEVA.US) $It is the largest generic drug manufacturer in the world.

• PRGO:$Prico (PRGO.US) $Is a global healthcare provider, mainly engaged in the development, production and sale of over-the-counter and over-the-counter drugs.

• LCI:$Lannett Co., Inc. (LCI.US) $Production and distribution of own-brand drugs and generic drugs.

• MYL:$Mylan Pharmaceutical (MYL.US) $Production of generic drugs and specialty drugs.

• HSP:Hospira is the world's largest manufacturer of generic injection drugs.

In terms of operating income, Teva Pharmaceuticals far surpasses other companies. (note: data as of June 30, 2018)

Source: Bloomberg

Teva's operating income in recent years is inseparable from its patented drug Copaxone,Copaxone, which is the most valuable patented drug of Teva Pharmaceutical, and its revenue provides a lot of funds for the acquisition and merger of Teva in recent years.

Copaxone is a drug developed by Teva for the treatment of multiple sclerosis and the largest market share of the disease in the United States.

However, in the second half of 2017, FDA approved Mylan to produce Copaxone generics, and analysts predict that the launch of the Copaxone by Mylan, also a generics giant, could reduce Teva's overall Copaxone sales by 70 per cent. The company's latest earnings data also show that global sales of Copaxone are also declining.

Source: company website

Sales of Copaxone fell sharply, debt soared as a result of the acquisition of Allergan, and Teva's net profit was severely affected. Before 2017, Teva's net profit was higher than that of other generics companies, but now it faces massive layoffs, deep wage cuts and huge debt repayments.

Source: Bloomberg

Although Teva Pharmaceuticals is now heavily in debt, its cash flow is relatively healthy, with free cash flow of $559 million, operating cash flow of $162 million in the second quarter of 2018 and $2.7 billion in 2017. The company expects free cash flow to reach $3 billion to $3.2 billion in 2018.

Ronnie Gal, an analyst at Sanford C. Bernstein, who has a "hold" rating on Teva, points out that whether to invest in Teva is a typical value investment choice. "if you think they can earn $3.5 billion to $4 billion a year in free cash flow to repay debt, then you buy the stock." If your figure is only $2.5 billion to $3 billion, sell the stock. "

But if interest rates rise, Teva must refinance at higher rates. If interest rates remain low, they will be able to reduce debt, and in the current situation, most Fed officials have concluded that interest rates continue to rise steadily and gradually, which is really bad for Teva.

Source: company website

Compared with R & D expenditure, Teva Pharmaceutical also invests more than other companies. Teva's position today is inseparable from a large amount of R & D investment.

Source: Bloomberg

Generics do not mean that there is no need for innovation, although it is "imitation", it also requires a higher cost, although the cost is much lower than that of the original drug. In order to carry out generic drugs, we must first get the first imitation rights. in addition to the original research drug companies, only the companies that get the first imitation rights can quickly gain a firm foothold in the market. Only by being willing to put in can we gain a firm foothold in the market.

When the financial data are basically healthy, the fundamentals are good, and the industry outlook is good, but debt is also a problem that cannot be ignored. But Buffett, with $100 billion in cash, did. Can he make money from Teva? Let's wait and see.

(Wen / Jiang Wenwen)