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Analysis

Teva Is Pulling an Ace From its Sleeve in its Attempt to Reinvent Itself

With one anti-cancer biosimilar launching this week and another expected to hit the market soon, Teva could be creating a new growth engine worth hundreds of millions of dollars a year

Uri Tal-Tene 14:5711.11.19
The third quarter reports Teva Pharmaceutical Industries Ltd. published Thursday highlighted many of the company’s continuous challenges. Teva’s U.S. generics business is still weak, the company’s leverage is still high, and it is still dependent on the revenues generated by its biggest seller Copaxone. On the other hand, Teva’s risk related to the U.S. opioid abuse litigation has lessened due to the settlement Teva is in the process of negotiating. If signed, the deal will leave the company with more financing options.

 

The biosimilar sector

 

One positive piece of news for Teva is the launch of Truxima, a biosimilar for Roche’s oncology drug Rituxan. Biosimilars are generic, nearly identical versions of drugs manufactured from biological sources such as blood or tissue instead of from chemical compounds. Teva has announced it will start selling the drug in the U.S. this week, initially for its main indication, treatment of Non-Hodgkin’s Lymphoma in adults. The drug also has indications for other conditions, mainly rheumatoid arthritis, and Teva is expected to expand the sale of its biosimilar to those conditions in the second quarter of 2020.

 
Teva CEO Kåre Schultz. Photo: Bloomberg Teva CEO Kåre Schultz. Photo: Bloomberg

 

 

In 2016, Teva signed a collaboration agreement with Celltrion Inc. to develop biosimilars for Rituxan and Herceptin, a Roche drug for treating breast cancer. Celltrion oversaw development and production while Teva is in charge of marketing in the U.S. and Canada, with the two splitting the profits. Teva paid Celltrion $160 million for the deal. That investment, made under then-CEO Erez Vigodman near the end of his tenure, seems to be working out rather well for Teva.

 

Celltrion received approval to market both biosimilars in the U.S. at the end of 2018. During 2019, both drugs received approval in Canada as well. Their launch date, however, depended on Teva and Celltrion’s agreement with brand manufacturer Roche, which made clear in its latest reports that it expects generic competition for both drugs as of the second half of 2019.

 

Rituxan is sold in the U.S. as part of a collaboration between Biogen Inc. and Roche subsidiary Genentech Inc., while Roche sells it directly globally. In the U.S., the drug brought in $2.28 billion in the first six months of 2019, while its global sales brought in another $1.06 billion. These figures, however, were lower than in previous years, following the launch of a biosimilar in Europe mid-2017 and Japan mid-2018. Around 70% of all Rituxan sales are for oncological indications, the same category Teva is now entering.

 

Teva only has a short period of generic exclusivity. Pfizer Inc. has already received approval in the U.S. for a Rituxan biosimilar and is expected to launch in January 2020, though the exact date depends on its agreement with Roche. Teva has announced its wholesale price will be 10% down from Rituxan’s current price tag, though it is likely the company will offer further discounts to hospitals. In any case, Truxima’s market integration is expected to be slow, as the drug will be prescribed only to new patients and not to those already receiving the brand drug.

 

In the earnings call that followed Thursday’s reports, Teva’s leadership stated it intends to launch Herceptin’s biosimilar towards the end of the first quarter of 2020. Herceptin’s North American sales brought in $1.51 billion for Roche in the first half of 2019. The drug already has generic competition in the U.S. following the July launch of a biosimilar manufactured jointly by Amgen Inc. and Allergan PLC. Mylan NV is also expected to beat Teva to the market when it launches its own biosimilar in the next few weeks.

 

It should be noted that though Rituxan and Herceptin have sales in the billions of dollars in the U.S. and Canada, comparable biosimilars have had a slow time integrating into the market. Amgen has reported that its U.S. sales for the two biosimilars it launched in July—for Herceptin and Roche’s biological anti-cancer drug Avastin—totaled $81 million in the third quarter of 2019. And Amgen’s sales were likely bolstered by the creation of hospital stockpiles following the launch. Roche reported U.S. sales of $1.63 billion in the first six months of 2019 for Avastin.

 

It is likely, therefore, that Teva and Celltrion will see sales in the few hundreds of millions of dollars a year for their two biosimilars. While it is still difficult to estimate the value the biosimilar domain will generate for Teva, it could support the company’s bottom line in the next few critical years. Though the two biosimilars will be facing increasing competition in the next several years, the number of manufacturers is expected to stay low due to the drugs’ complexity, meaning Teva could expect long-term profitability from both.

 

Copaxone: the curse of the fourth quarter

 

Teva’s multiple sclerosis drug Copaxone was still its biggest cash cow in 2019. It brought in $1.13 billion in the first nine months of the year, accounting for 28% of Teva’s operating profit for that period. The first quarter recorded a drop in sales, the second saw an increase, and the third was stable. This is due to the seasonal nature of drug sales, where contracts are renewed at the beginning of the calendar year.

 

The fourth quarter, however, is another matter. In 2017 and 2019, Copaxone’s fourth-quarter sales were 17% lower than its third-quarter sales. This was due to customers cutting stock ahead of the end of their annual contracts, a move induced by the significant price cuts offered by Mylan in its attempt to reach a large market share. The first quarter of both 2018 and 2019 then showed a further drop of 20%-30% in Copaxone revenues compared to the fourth quarter of the preceding year, both because Teva lost some market share and because it cut its own price in response to Mylan.

 

The second and third quarters then showed relative stability. The big question mark Teva is facing now is whether the same phenomenon will repeat itself in 2019, and if so, to what extent. Mylan no longer has a motive to encourage competition as it has achieved a market share of 35% of all Copaxone sales and 40% of all new prescriptions. A new pricing war will hurt it just as much as it will Teva. The third competitor, Sandoz Inc., controls only a few percentages of the market, meaning it has a larger incentive to do so—and indeed, last week, Sandoz cut the price tag for its generic Copaxone to $18,000 a year. That undercuts Mylan’s generic wholesale price of $23,400 a year by 24%. On the eve of the generic competition, Teva priced Copaxone at over $80,000 a year.

 

Sandoz is a subsidiary of Novartis International AG, which has a large marketing presence in the U.S. It is plausible that the recent generic price cut will force both Teva and Mylan to slash their prices further. It will not be surprising, therefore, if Teva will record falling sales in both the fourth quarter of 2019 and the first quarter of 2020, though they will likely be more moderate than those seen in the previous two years.

 

Ajovy falls, Austedo rises, U.S. generics hit a new low

 

Teva has marked its two brand drugs Ajovy and Austedo as main growth engines. Migraine-treatment drug Ajovy faces competition from two similar formulations manufactured by Amgen and Ali Lilly, and has a market share of only 19% in the U.S. because the other two can be self-injected. While Teva is awaiting FDA approval to release its drug in a similar syringe, until it receives it Ajovy is at a disadvantage.

 

Due to Ajovy falling behind, its U.S. sales are climbing very slowly, from $20 million in the first quarter of 2019, to $23 million in the second quarter, and now to $25 million in the third quarter. The overall sales of all three drugs have stabilized as well: while sales totaled $140 million in the second quarter, they reached just $157 million in the third quarter, a slower growth rate than previously estimated. Migraine drugs are a sector that is expected to continue growing in the U.S., and it has additional potential due to the European launch of these drugs, though currently, the European market isn’t bringing in significant revenues. But Ajovy’s slow growth rate and small market share make clear that it will not be the next Copaxone.

 

Austedo, used to treat Huntington's disease and tardive dyskinesia, is showing a stable rise in sales, which reached $105 million in the third quarter of 2019. Austedo has exclusivity in the Huntington's domain, but that is a very limited market. Its main market is tardive dyskinesia, estimated to affect 500,000 people in the U.S. alone.

 

Teva’s generic operations in the U.S. hit a new low in the third quarter, bringing in $914 million in the absence of any new launches. While seasonality negatively impacts generic sales in the third quarter, Teva’s generic EpiPen released last year was expected to counter the seasonal effect as schools stock up ahead of the new school year. While Teva’s epi was indeed its best-selling generic drug in the third quarter—followed by its generic version of the ProAir inhaler—it was not enough to prevent a slump in sales.

 

Teva has overall managed to cut the expenses of its U.S. generic business, but profitability in the sector depends greatly on exclusive launches, which as of now Teva has failed to achieve.

 

Profitability is down, legal complications are still not over

 

Teva’s non-GAAP operating profit in the first three quarters of 2019 was $3.08 billion. In its annual outlook, the company forecasted an operating profit of between $4 billion and $4.2 billion, meaning it expects an operating profit of between $920 million and $1.12 billion for the fourth quarter. The midpoint of its forecast is similar to its averaged operating profit for the first three quarters. The two variables that will determine whether Teva will achieve the upper point of its forecast are the rate at which Copaxone sales decreased in the fourth quarter and Teva’s Truxima sales.

 

Teva’s leadership hopes that 2019 will be the company’s rock bottom in terms of operating profit and that 2020 will signal a change. The company is expected to release its annual outlook for 2020 in February. The four main factors that will determine whether Teva’s profitability does rise are the drop in Copaxone sales, the U.S. sales of Teva’s two new biosimilars, exclusive generic launches in the U.S., and the legal discourse over the exclusivity of cancer treatment drug Bendeka in the U.S. Teva saw sales worth $361 million for the drug in the first three quarters of 2019, and a legal loss could usher in generic competition as of the second half of 2020.

 

 

Teva has put aside over a billion dollars so far for legal settlements and loss contingencies, mainly related to the opioid lawsuits. Those have almost no meaning though, because the company has written off the minimal amount of damage it estimated based on the scenario it considered likely. Only when a settlement is signed will Teva estimate the capitalized value of the damages and write off the difference between the final sum and what it has put aside so far.

 

The settlement in the works is that for a decade, Teva will provide drugs, worth $2.3 billion at wholesale prices, at no cost each year, and also pay $25 million a year. CEO Kåre Schultz has refrained from discussing the manufacturing costs of these drugs, but it is likely they will amount to 10%-15% of the wholesale price. If the settlement currently negotiated is approved, Teva is looking at expenses of between $255 million and $370 million a year for ten years. If Teva capitalizes its expenses according to a capitalization ratio of 8%, its total provision will be between $1.7 billion and $2.5 billion. However, Teva has yet to sign a global settlement, and the final terms could differ from current estimates.

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