Why TEVA Stock Fell 40% in Three Days

All the drama surrounding the U.S. healthcare industry these days has not put a damper on biotech stocks. The iShares Nasdaq Biotechnology ETF (IBB) is up nearly 20% year to date, and 11.6% since the beginning of June, with many of the top biotechs going into overdrive this summer. But Teva Pharmaceuticals (TEVA) has gone in the opposite direction, and now TEVA stock is in complete free fall.

Shares of the world’s largest producer of generic drugs plummeted 40% in three trading days, falling from 31 to 18 in the blink of an eye. What triggered the sudden cratering in TEVA stock? In a nutshell, the company has $35 billion in debt. To pay it off, Teva is slashing its dividend by 75%, cutting jobs and selling non-core assets. Oh, and it currently has neither a CEO or CFO, and hasn’t for months.

Investors Punish TEVA Stock

Those are all the characteristics of a sinking ship, and Wall Street no longer wants any part of TEVA. It’s a shocking fall from grace for a stock that traded as high as 69 two years ago, and for a company that earned $3.58 per share as recently as 2014. It lost $5.94 per share in the last quarter.

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The culprit behind Teva’s steep fall from grace was its decision to shell out $40.5 billion for Allergan’s (AGN) generic-drugs division last year. In doing so, Teva dug itself a deep financial hole, and sales of its generics empire haven’t been nearly enough to make up the difference.

Under Donald Trump, the U.S. Food and Drug Administration (FDA) has been more lax in its approval of generic drugs, meaning increased competition for Teva essentially since the time it bought Allergan’s generic-drugs empire. Making matters worse, some of those new generics will soon be taking business away from Teva’s signature non-generic and biggest seller, Copaxone, which treats multiple sclerosis. In June, the company lost its patent protection on the drug, opening it up to competition from cheaper generics. Oh, the irony!

So, basically, it’s been a very bad stretch for Teva, and this week, investors brought the hammer down on TEVA stock. For all the strength in biotech stocks of late, what has happened to TEVA demonstrates the risk that comes with investing in such a volatile sector. The IBB, for example, has a beta of 1.35, much higher than the betas of other sector ETFs such as the Financial Select Sector SPDR Fund (XLF) (beta: 0.90), the SPDR S&P Homebuilders ETF (XHB) (beta: 0.97), or the Energy Select Sector SPDR Fund (XLE) (beta: 1.01).

Other Good Biotech Stocks Out There

Even when biotechs are red-hot, it’s such a fickle industry that if you invest in a dud like TEVA stock, it can potentially put a real dent in your portfolio if you don’t set strict loss limits.

If you’d like some help investing in the right biotech stocks while the sector remains hot—and avoiding the next TEVA—I recommend you subscribe to one of our growth-related investment advisories, in particular, Cabot Top Ten Trader or Cabot Small-Cap Confidential. The former is a weekly unveiling of the market’s 10 strongest growth stocks, which right now includes plenty of biotech stocks not named TEVA. The latter is a small-cap stock service that’s heavy on the biotechs; it currently has an average return of 30% on its 12 positions.

Don’t let TEVA’s implosion scare you out of a high-reward sector with tons of momentum. In a market that has been stagnant for the better part of a month, biotechs are (mostly) a good place to invest right now.

Chris Preston

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Investment analyst and Chief Analyst of Cabot Wealth Daily, Chris Preston brings you all the latest from the investing world. Sign up to get updates and breaking news delivered FREE to your inbox. Get unlimited access to our library of complimentary investing reports.

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