Harriet Lefton

About the Author Harriet Lefton

Harriet originates from the UK where she worked as a journalist specializing in the metal markets. She graduated from the University of Cambridge before becoming a qualified UK lawyer.

Should You Gamble on Teva Pharmaceutical Industries Ltd (ADR) (TEVA) and TherapeuticsMD Inc (TXMD)? Benjamin Smith’s Hedge Fund Did

Billion-dollar Laurion fund initiates new positions in TEVA and TXMD.


Benjamin Smith is a co-founder of the privately owned Laurion Capital Management, where the trading whiz manages 5.9 billion dollars in regulatory AUM (assets under management). In the last quarter, just-released SEC forms reveal that Smith is making a risky bet on embattled healthcare giant Teva Pharmaceutical Industries Ltd (NYSE:TEVA). At the same time, the fund also initiated a new position in a much smaller and more promising stock – TherapeuticsMD, Inc. (NYSE:TXMD).

Smith founded the firm back in 2005 following a stint as an equity trader at JP Morgan. His co-founder Sheehan Maduraperuma was also a former JP Morgan equity trader. The fund grew quickly- it now has 52 employees and uses a combination of quantitative and qualitative analysis to make its investments. However, the New-York based firm made headlines when it shut down its macro fund back in 2016. The macro fund survived for four years, and had $1.1 billion to its name when the end came. Investors could subsequently move funds to Laurion’s less volatile main fund. According to Reuters, the fund had lost 4.6% in 2016 through April. Indeed, last year brought with it a host of unexpected macro events including Brexit and China’s devaluation of the yuan.

Now let’s take a closer look at two of the most intriguing moves from the last quarter for Laurion’s main fund:

Teva Pharmaceutical

In the third quarter, Smith made the surprising move of initiating a new position in troubled healthcare stock Teva Pharmaceuticals. He snapped up 163,089 shares valued at $2.87 million.

Unfortunately for Smith the outlook for Teva seems to be getting worse rather than better. Earlier this week credit rating agency Fitch downgraded Teva from an investment-grade company to junk status. Even more worrying is the fact that the agency said it has a negative outlook on TEVA. Not only does this mean that a turnaround is unlikely anytime soon, but it also suggests further downgrades are lurking on the horizon.

“Teva is facing significant operational stress at a time when it needs to reduce debt,” says Patrick Finnegan, a Fitch analyst. “Pricing pressure in Teva’s North American generics segment and erosion of sales of Copaxone will continue to weigh on free cash flow in the near term, requiring the company to continue to sell assets or find external capital resources to meet debt obligations.”

Following its acquisition of Allergan’s generics business for $40 billion, Teva amassed a huge debt burden of around $35 billion. Currently about 80% of this debt is a fixed rate loan. But for the other 20% interest on the repayments could now rise significantly. Teva has previously said that a 1 notch downgrade could cause borrowing costs on $6 billion in term loans to increase by about 25 basis points. Now TEVA has been downgraded by 2 basis points its annual interest could rise by around $15 million. The downgrade is also likely to damage sentiment which could send shares even lower.

The company initially crashed on the back of disastrous second quarter earning results, and depressing third quarter results did little to improve the mood. Indeed, prices dropped by over 5% at the beginning of this month following the earnings release and have yet to fully recover. At the beginning of the year shares were trading at over $35. Only last month, rival, Mylan received approval for a generic version of Teva’s Copaxone for multiple sclerosis. Copaxone currently accounts for at least 45% of Teva’s EBITDA.

Overall, we can see that the stock has a very cautious Hold analyst consensus rating on TipRanks. In the last three months, analysts have published 3 buy ratings, 12 hold ratings and even 4 sell ratings on the stock. Meanwhile, as prices continue to crater the average analyst price target of $14.93 translates into upside of close to 11% from the current share price.

TherapeuticsMD

Smith also initiated a new position in women’s health pharma TXMD in the third quarter. He picked up 660,152 shares in the company with a value of $3.49 million. TherapeuticsMD is one of the only pharmaceuticals in the world that solely focuses on developing drugs for female health problems.

And in contrast to TEVA, TXMD has just received some good news. The FDA, the US regulatory body, announced earlier this month that it will accept the resubmission of TXMD’s new drug application (NDA) for its TX-004HR product candidate. As a result, shares exploded by 55%- taking prices from $4.36 all the way to $5.74. The drug is designed to help relieve atrophy pain that afflicts millions of post-menopausal women worldwide.

The FDA had previously said that it needed more safety data to decide whether patients taking the drug experienced any serious issues. This could have required another large trial at great expense and time to the company (about another 2 to 3 years). However, in an unexpected turn of events, the FDA has approved the resubmission without extra trial data. One possible influence in this respect is the appointment of the new FDA Commissioner Scott Gotlieb.

So far it would appear that he has a much more lenient and flexible attitude towards applications, with the goal of bringing drugs to patients in need as quickly as possible. In this case, if TXMD receives approval it will then be required to carry out a post-marketing safety study. However, the drug will still need to pass the NDA safety and efficacy test to even make it to market- at which point it will be hit by the further hurdles of ensuring sufficient patient uptake, and passing the post-marketing safety test.

TipRanks reveals that TherapeuticsMD has a bullish ‘Strong Buy’ consensus rating from the Street. If we take a closer look we can see that the stock has received 7 buy ratings and just 1 hold rating from analysts in the last three months. These analysts have an average price target on the stock of $15.43. This translates into huge upside from the current $6.05 share price of 155%.

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