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Is This Rare Berkshire Hathaway Miscue Finally a Buy?

Warren Buffett’s highly diversified holding company Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) isn’t known for making mistakes with investors’ hard-earned money. Over the past 57 years, its shares have failed to produce positive annual returns only 11 times.

What’s more, Berkshire stock has outperformed the S&P 500, in terms of total annual returns, a whopping 38 times since Buffet took the company over in 1965. Not all of Berkshire’s stock picks have been winners, however.

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Berkshire’s big miss on Teva Pharmaceutical

In late 2017, Buffett’s investing team bought an initial $358 million stake in the struggling generic and branded drugmaker Teva Pharmaceutical Industries (NYSE: TEVA). Berkshire went on to significantly ramp up its position in Teva in the first quarter of 2018.

Earlier this year, however, Berkshire reported, via its 13F filings with the Securities and Exchange Commission, that it no longer held any Teva shares by the end of 2021. Berkshire thus appears to have taken a loss of several hundred million dollars on its four-year-long Teva bet.

Why did Buffett’s team buy Teva stock in the first place? They likely bought it in the hope that CEO Kåre Schultz could successfully bring the drugmaker back from the brink, after a series of poor business development moves by its former management.

Teva’s woes began when the company badly mishandled the patent expiration for its flagship multiple sclerosis medication Copaxone. And after failing to properly prepare for this eventuality, Teva’s prior brain trust decided to go all-in on a $40.5 billion acquisition of Allergan’s generic drug unit. This ill-fated transaction would ultimately scorch the drugmaker’s balance sheet, and fail to create any significant top-line growth. As a direct result, Teva’s share price lost an eye-popping two-thirds of its value over the 30-month period following the costly Allergan deal.

Unfortunately, Schultz’s turnaround efforts — drastic cost-cutting moves, a deleveraging campaign, and an emphasis on new drug launches — failed to bring stability to the company’s share price. The reason? During Schultz’s early tenure as CEO, Teva became embroiled in two major lawsuits: one for generic-drug price-fixing, and another for its ties to the opioid crisis via its Allergan deal.

Did Berkshire exit too soon?

Despite a raging bear market this year, Teva’s stock has risen by a healthy 18% in 2022. The main impetus behind this sudden course reversal is the drugmaker’s deal in principle to settle its nationwide opioid lawsuit. In a worst-case scenario, this suit could have posed an existential threat to the drugmaker. But with a $4.2 billion agreement on the table, Teva seems to have dodged a bullet.

This proposed settlement isn’t the only reason investors have bid up Teva’s shares this year, however.

During the company’s 2022 second-quarter earnings report, Schultz and his team laid out a fairly promising outlook for the drugmaker’s prospects over the back half of the decade. Thanks to an ocean of blockbuster products set to go off-patent soon, Teva is staring down a commercial opportunity estimated at around $425 billion across both the generic-drug and biosimilar markets. Now, Teva is far from the only company vying for a piece of this enormous pie. But it does sport key competitive advantages in these red-hot growth markets.

What’s more, Teva believes that its newer products, such as the migraine medicine Ajovy and the tardive dyskinesia drug Austedo, will continue to post blistering sales growth in the years to come. The company is thus calling for mid- to low-single-digit top-line growth by 2027. The drugmaker also noted that a return to top-line growth, on a consistent basis, could permit it to add some much-needed talent via a handful of small bolt-on acquisitions.

All told, Teva’s dark ages finally appear to have an expiration date. So while Berkshire may have hit the eject button on this beaten-down pharma stock, bargain hunters might want to consider adding this intriguing turnaround play to their portfolios soon.

George Budwell has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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