Analysis

A Strong Quarter, but Teva’s Not Yet Out of the Woods

Teva remains reliant on a small number of branded drugs that will face generic competition soon and is having trouble getting its pipeline of new treatments into the market

Israeli flag flies outside Teva Pharmaceutical facility building in Neot Hovav, Israel, in December 2017
Tsafrir Abayov/AP

The market’s love affair with Teva Pharmaceuticals last week was fleeting to say the least. Even though the company posted far better first-quarter earnings and made more progress on paying down debt than the market had expected, Teva’s shares in New York ended on Friday down 4.1% on their closing price before the earnings report.

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The fact is the market doesn’t believe Teva is by any means out of the woods. It remains reliant on a small number of branded drugs that will face generic competition soon and is having trouble getting its pipeline of new treatments into the market. Without those new drugs replacing the old, the company will have a hard time generating the cash flow it needs to repay its crushing debt.

Downer Teva results, $ billion*

As it is, Teva’s first quarter got a lift from one-time factors that left it in the odd position of reporting higher net income on a GAAP (Generally Accepted Accounting Principles) basis than on a non-GAAP basis.

Teva’s GAAP profit was a $1.03 a share versus 94 cents on a non-GAAP basis mainly because of $1.3 billion in settlements it made with Allergan (the company from whose generics business it bought in 2016, saddling it with huge debt) and the former owners of Rimsa (a Mexican company Teva bought in what it later claimed was a fraudulent deal).

Those two payments boosted Teva’s free cash flow to $1.9 billion, enabling it to trim its debt by $2.2 billion to $29.3 billion.

As to Teva’s cost-cutting program – the one that will lead ultimately to a 25% reduction in the company’s worldwide payroll -- CEO Kare Schultz could chart some real progress: Research and development spending was down 27%, sales and marketing by 20% and management overhead by 10%. As a result, while non-GAAP gross profit was down 18% year on year in the first quarter, its equivalent operating profit dropped just 11%.

The company is now expecting 2018 to be a better year than it had previously expected. It raised its outlook for adjusted earnings per share to a range of $2.40 to $2.65 from a previous $2.25 to $2.50. Revenue is now forecast to be between $18.5 billion and $19 billion, up from $18.3 billion to $18.8 billion. Analysts had been forecasting EPS of $2.47 on revenue of $18.7 billion.

Nevertheless, there are four question marks hovering over Teva that make the first-quarter less than a celebration. They are:

Will Teva have to lower the price of its Copaxone multiple sclerosis drug?

Teva workers protest outside the Teva Pharmaceutical Industries factory as the block a main road in Jerusalem, 2017
Ariel Schalit/AP

For years, Copaxine was the company’s big money spinner, but that came to an abrupt halt with the launch of Mylan’s generic version at the end of 2017. Schultz lauded the fact that Teva’s version remains the market leader for MS treatments, with a 24.6% share of all prescriptions).

But Teva did that by cutting Copaxone’s price in North America, where it now faces the generic competition. In dollar terms, sales of the MS drug worldwide dropped 40% to $476 million – in part due to losing 15% of the Copaxone market to Mylan and in part to price cuts.

More competition for Copaxone is waiting in the wings. Another generic version developed by Sandox and Momenta didn’t launch in the first quarter as expected, but Schulz said last week that it probably would in the current quarter. That will mean more price pressure on Teva’s drug.

What about Teva’s other proprietary drugs?

These were a bright spot for the company in the first quarter, helping to mitigate the 30% drop in its North American operating profits to $915 million. Revenues from Teva’s ProAir respiratory drug rose 7% and those of its Bendeka and Treanda for leukemia/lymphoma.

However, ProAir is due to face generic competition from Perrigo sometime this year and Treanda will feel the pinch in the second half of 2019.

When will Teva’s migraine treatment reach the market?

The company is counting on fremanezumab to replace the lost sales of its proprietaries. The estimates are fremanezumab could be taking in $1 billion in revenues by 2022 and $1.7 billion by 2025.

However, the company has run into obstacles from the U.S. Food and Drug Administration, which sent a letter in January saying that Celltrion, the Korean company manufacturing the active ingredients for the drug, had not been approved. Teva had hoped the matter would be cleared up in time for a June launch of fremanezumab, but last week Schultz said he only expects the approval by the end of the year.

Employees wear protective clothing as they pour chemicals into a container in the tablet production plant at Teva Pharmaceutical Industries Ltd.'s headquarters in Jerusalem, 2011
Bloomberg

Teva admits it has no option but to continue with Celltrion. The delay means that Teva will almost certainly reach the market behind two rival migraine offerings from Amgen and Eli Lilly (see The Ticker on this page). Being an also-ran in the race means Teva may not generate the cash flow from fremanezumab it had been counting on.

What about the partnership Teva has with Regeneron?

The two companies are developing asinumab, Regeneron’s antibody for osteoarthritis and chronic low back pain. Teva has invested $310 million in the drug so far and is committed to covering half its expected $1 billion in development costs.

But in October 2016 the FDA placed a clinical hold on a study testing their pain treatment after a form of joint damage was observed in an advanced osteoarthritis patient who was given a high dose of the injectable drug.

The only bit of good news in the branded-drug side of Teva is for its Austedo, which was approved by the FDA for the treatment of chorea associated with Huntington disease and launched in the United States in April 2017. Last August, the FDA approved Austedo for the treatment of tardive dyskinesia. Teva expects the drug to post sales of $200 million this year.

That would require doubling the number of patients getting it to 6,000, but the number only rose by 410 in the first quarter, a quarter the number in fourth-quarter 2017. Rival Neurocrine counted 12,500 patients for if Ingrezza in the first quarter.

Teva hasn’t said what its goal for patient numbers of for Austedo, but with 540,000 sufferers for all the conditions it treats, Austedo looks promising.