Analysis

FDA Bombshell Hits Teva's Cash Cow at Worst Possible Time

Amid generic competition for Copaxone, the company may have to make deeper payroll cuts, sell more assets and cut its dividend further

teva  lab technician
Inside Teva Pharmaceuticals. Ofer Vaknin

Last week’s loss of exclusivity for Teva Pharmaceutical Industries’ flagship multiple sclerosis drug was inevitable, but the speed and timing sent the stock down to a 15-year low Sunday as the company considered how to recover.

The setback leaves Teva and its incoming CEO Kare Schultz with another round of difficult choices in the form of more asset sales and layoffs, a further cut in its dividend and perhaps a break-up of the company, Israel’s largest, into two – one a maker of generic drugs and the other focused on original treatments.

The extent of Teva’s woes was clear Sunday when its shares ended down 13.7% at 56.32 shekels ($16.00) on the Tel Aviv Stock Exchange.

Teva shares had already plummeted on Wall Street last week after back-to-back approvals for generic versions of the MS drug, Copaxone, in the United States and Europe. But the TASE has been closed for the Sukkuot holiday until Sunday.

Even though Teva is the world’s biggest maker of generic drugs, Copaxone accounted for a huge part of its profits and cash flow since its U.S. launch in 1996. Its global sales totaled $41 billion over the last 21 years and it generated at least $30 billion in cash. Last year alone it accounted for more than $4 billion in revenues.

Cold turkey for Teva Copaxone sales, $ billions

But on Tuesday the U.S. Food and Drug Administration approved applications by the drug maker Mylan for both 20- and 40-milligram versions of Copaxone. Two days later, Alvogen and Synthon said they had received European approval for a 40-milligram dose of generic Copaxone.

JPMorgan analysts said Teva now faced full generic competition for the drug nine to 12 months earlier than expected. The impact of the two generic Copaxone launches to Teva’s fourth-quarter earnings could be a reduction of at least 25 cents a share, or about $250 million, according to an early assessment by the company.

Teva had been battling to ward off competition for the drug for a decade, challenging generic versions in court and devising the 40-milligram version (which is taken only three times a week rather than once daily). But Teva lost the basic patent to Copaxone three years ago, and today Momenta Pharmaceuticals and the Sandoz unit of Novartis sell a 20-milligram generic version of the drug.

That setback had been minimized because Teva managed to shift most users to the 40-milligram dosage, which now accounts for more than 85% of Copaxone prescriptions in the United States. But both the courts and the U.S. Patent Office eventually denied most of the 40-milligram patents as well, leaving Mylan and others to develop their own versions.

The new generic competition comes at a particularly bad time for Teva, which is struggling with huge debt, price pressure on its core generic drug business in the United States, and a leadership vacuum. The company amassed $35 billion in debt buying Actavis Generics last year, a deal that became so discredited that Teva CEO Erez Vigodman was forced out a few months later.

While awaiting a new boss, the company announced it would lay off 7,000 of its 57,000 employees globally, close 45 plants worldwide and cut its dividend 75%. It also put some of its businesses up for sale, including oncology, women’s health and pain management. More retrenchment may be on the way.

As CEO of the Danish drug maker Lundbeck, Schultz laid off 15% of the company’s payroll even though Lundbeck wasn’t in nearly the trouble Teva is today. Based on revenue figures, Copaxone alone provided an estimated $3.2 billion in cash flow annually that will now severely contract.

But looking further ahead, there is potentially good news for Teva. Over the years the company had failed to find another blockbuster drug that could take Copaxone’s place, but it does have two treatments in the pipeline that could cushion the loss.

One is Austedo, which was approved by the FDA this year for tardive dyskinesia in adults and the chorea associated with Huntington’s disease. Tardive dyskinesia is characterized by uncontrollable movements of the tongue, lips, face, trunk and extremities that affect about 500,000 Americans; Huntington’s affects some 35,000.

While Teva estimates that Austedo could generate revenues of $2 billion annually in three to five years, analysts say the range is more likely $500 million to $1 billion.

The other hope in the pipeline is fremanezumab, which is undergoing clinical trials as a treatment for migraines. In June, Teva announced positive results from the second Phase III study of the drug, whose sales the company said could reach $1.7 billion in 2025.