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Analysis

Teva’s Copaxone Successors Are Still Far From Success

Teva’s first quarter report for 2019, published Thursday, shows that while the drugmaker is progressing with its financial rehabilitation program, its net debt to EBITDA ratio is leaving the company in dangerous waters

Hezi Sternlicht 17:5705.05.19

As Teva Pharmaceutical Industries Ltd. is progressing in its aggressive financial rehabilitation program, the company’s first quarter earnings reports, published Thursday, show that its revenues are still being slashed and its profitability is continuing to decrease. Teva reported revenues of $4.3 billion and a GAAP diluted loss per share of $0.1. The company is looking to reduce a gross debt that as of March 31 stood at $28.6 billion.

 

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In 2016, Teva paid $40.5 billion for Allergan's generic unit Actavis, plunging the company into debt without significantly increasing its profitability. In December 2017, then newly appointed CEO Kåre Schultz launched a reorganization plan that included wide-spread asset divestment, terminations, and an expansive streamlining of the company’s portfolio, giving investors a brief period of hope. His positive effect on Teva’s stock has long since faded, and Thursday’s report indicates that the company is still far from seeing the light at the end of the tunnel.

 

Teva CEO Kåre Schultz. Photo: Sivan Farage Teva CEO Kåre Schultz. Photo: Sivan Farage

 

 

Teva missed the analyst consensus for its revenues, but met the mark on its profit, meaning the company closed Thursday 2.2% down on NYSE and Friday 1.95% up, leaving it at the $15.18 mark—above its lowest point of $11.23 in November 2017, but far below its peak in the good old days of Copaxone, when it traded around $70.

 

Copaxone, Teva’s blockbuster drug for multiple sclerosis, brought in 20% of the company’s revenues in 2016: in the first quarter of 2016, its sales stood at a little over $1 billion. During the first quarter of 2019, it brought in $208 globally, only 5% of Teva’s overall revenues—a 58% decrease year-over-year and a 75% decrease within two. That erosion is in a large part due to the approval of generic versions in Europe and the U.S. in late 2017.

 

While Teva declined in the past to reveal Copaxone’s profit margins, market estimates were that the drug’s contribution to profitability was even higher than its contribution to revenues, and stood at 40%-50% of Teva’s quarterly profit in its peak years.

 

Teva is trying to set up two successors for Copaxone: Ajovy, known generically as fremanezumab, a preventive migraine treatment, and Austedo for Huntington's disease and tardive dyskinesia. Austedo brought in revenues of $74 million in the first quarter of 2019, a 146% increase within a year.

 

Ajovy, first released in the U.S. in September 2018 and approved in Europe last month, finished the first quarter with revenues of $20 million—a success according to Schultz, who emphasized that the drug’s true revenues are higher, as Teva is currently offering an indemnity plan for the drug and intends to increase patient share later this year. As of March, Teva achieved a 28% market share in the U.S. for Ajovy.

 

While both drugs have seen an increase in sales, they are still far from compensating for Copaxone’s weakness.

 

Meanwhile, Teva’s Net Debt to EBITDA ratio continues to rise, now reaching a truly worrying 5.45. While the company has reduced its net debt from $34.5 billion to $26.7 billion, its profitability has been slashed much quicker, from an EBITDA of $7.5 billion to $4.9 billion in the first quarter of 2019.

 

The ratio has risen somewhat over the past two years, mostly due to the decrease in profit, which dropped faster than the debt has been repaid, Teva’s executive vice president and chief financial officer Mike McClellan told Calcalist in an interview. The company expects to see the ratio continue to increase slightly over the next two quarters, at which point it will start decreasing, he added.

 

No longer euphoric over Schultz’s appointment, Investors are now realizing Teva’s rehabilitation will be long. While Teva has seen its stock trade at around $25 the past summer, with a company capitalization of $26.3 billion, the past weekend pushed Teva back down to $16.6 billion, similar to the $16.8 billion the company was trading at when Schultz was appointed.

 

Schultz did manage to prove the harsh cutbacks were necessary, by achieving a $2.5 billion reduction in the company’s spend base out of the $3 billion cut planned, reducing the company’s expenses from $16.3 billion in 2017 to $13.8 billion at the end of the first quarter of 2019. Another $500 million are set to be slashed by the end of the year.

 

 

However, Teva still has two significant threats to contend with. One is the possibility that even its restructuring and new drugs may not be enough to lift the company out of the mud it has found itself in. The second is legal complications, and specifically the current U.S. crusade against opioids and opioid manufacturers, in which Teva has already found itself a defendant.

 

Schultz himself has referred to the latter issue in the company’s call with investors Thursday, stating that while plaintiffs—around 1,500 lawsuits and counting have been filed so far against drugmakers in the U.S.—are looking for big payoffs, they will not be seeing any large settlements from debt-laden Teva.
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