Warren Buffett. Picture: REUTERS/JIM YOUNG
Warren Buffett. Picture: REUTERS/JIM YOUNG

Tel Aviv — Warren Buffett stoked hopes of a transformation at the world’s biggest generic drug maker as his Berkshire Hathaway became a top shareholder weeks after pledging to cut soaring US healthcare costs.

Shares of the drug maker, Israel’s troubled Teva Pharmaceutical Industries, surged the most in two months after Berkshire disclosed it had bought about $350m worth of stock.

Teva is working on a turnaround after getting bruised by the recent slump in US generics prices. It supplies one in six copycat medicines used by Americans, and its ability to develop cheaper copies of complex treatments could play a role in an ambitious effort to lower healthcare costs announced last month by Berkshire, Amazon.com and JPMorgan Chase.

"Drug costs continue to escalate, Trump is all over prices, and Teva, along with the rest of the generics industry, is part of the solution," Elliot Wilbur, an analyst at Raymond James & Associates, wrote in a note to clients that sought to describe "the 30,000 ft view approach that may have led Buffett to Teva".

Teva shares surged as much as 11% in Tel Aviv trading. With about 1.9% of Teva’s US-traded shares, Berkshire became the tenth-biggest shareholder in the world’s largest manufacturer of generic medicines.

Buffett is buying into Teva at the early stages of its own repair. The Israeli drug maker took on a mountain of loans in 2016 to bulk up its copycat medicines business as profit margins declined in the US, the world’s most lucrative market for pharmaceutical companies.

Worse, rival drug makers began selling cheaper copies of Copaxone, a blockbuster multiple sclerosis injection, dragging profits of Teva’s highest grossing product.

The stock lost nearly half its value in 2016 and the following year again.

New Teva CEO Kare Schultz laid out a vast cost-cutting plan in December, halting dividend payments and eliminating 25% of the global workforce. He has repeatedly stated that his biggest priority is to curb the company’s $31.4bn debt pile.

Berkshire has not revealed the reasons why it bought Teva shares. But the fact that it staked money supports the view of those who say that Teva "is taking the right steps to execute on a successful turnaround", Citigroup analyst Liav Abraham wrote in an e-mailed note to clients.

© 2018 Bloomberg LP

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