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Thesis

Following Teva Pharmaceutical's (TEVA) Analyst Day, investors were met with a disappointing sell off of roughly 10% within a week, in response to downgrades issued by Leerink Swann and RBC. Teva CEO Jeremy Levin's words appeared to indicate a shift in strategy, away from "large acquisitions" to one "built on mid-size to small transactions." This is necessitated by Teva's projections in which their effective tax rates are expected to increase from 13.5% to 20% over the next 4 years in addition to the loss of patent exclusivity in 2015 on one of their best selling drugs, Copaxone, responsible for roughly 20% of their yearly revenue. Restoration of Teva's Shareholder value will result from proper diversification of their portfolio, a task which I believe they are adequately prepared to carry out, given key statements issued during their analyst day presentation.

Salient aspects of the Conference

1.Strong Cash Flows Allow for Inorganic Growth

In order to restore Shareholder value, Teva will have to focus revamping their pipeline. This process begins with "cost saving opportunities of approximately $1.5 billion to $2 billion, (allowing) for a stable and robust operating profit, and (generating) a strong cash flow." The strong cash flow and robust operating profit allows for "the opportunity to invest in inorganic growth," strongly implying the usage of M&A as a means of generating equity.

2. Pipeline Refocusing

Teva's pipeline refocusing must address three closely related key questions:
1. How will Teva respond to the continuing loss of patent exclusivity?
2. How will it increase the breadth of its product portfolio?
3. What new pharmaceutical solutions will Teva add to said portfolio?

These questions were answered by Michael R. Hayden, Teva's Chief Scientific Officer and President of Global R&D. Teva plans to address the loss of patent exclusivity, quite simply, by increasing their portfolio through the development novel products. Teva plans to focus on a new sector of pharmaceutical products known as New Therapeutic Entities ((NTES)) in addition to the development of biologics.

3. NTEs and Biologics

Teva will have "$10 billion over the next 5 years" to fund 18 new programs in addition to the development of 10-15 NTEs. What are these NTEs? Hayden elaborates:

"In terms of the NTEs, I've told you a little bit about them. Let me share more with you. As we've said, these are new therapeutic entities, known molecules that are formulated, delivered, used in novel ways, sometimes combined to address specific patient needs. So we would look at the unmet need, think about known molecules many, for example, in our branded or in our generic pipeline that we're using, and then think about novel approaches, novel indications, novel delivery, novel formulations or combinations and this represents the fundamental basis for the development of NTEs.

There is a strong rationale for NTEs at Teva. This is an initiative that's capitalizing on these profound strengths in generics that I've told you about. It will also work and capitalize on the strengths in our Specialty Pharma, and these teams will now work together in profound ways where the net effect will be greater than the sum of the individual parts. This will be profound synergy."

NTEs represent a method of revitalizing or recycling their currently novel portfolio. By combining certain drugs currently not approved to be used in conjunction, drugs that have lost their novelty will regain their novelty and help boost Teva's profitability.

In addition to the NTEs, Teva appears to be committing to their biologics program. Biologics, or bio-betters (bio-similars) are a new breed of pharmaceutical products that have been coming to the forefront of biotech. Like Synergy's (SGYP) Plecanatide compound and Prolor's (PBTH) hGH-CTP compound, biologics represent a modification of chemicals already produced by the human body in a way that improves the half-life (duration in the body) or efficacy of said chemical. The similarity between these two pathways is the relative success ratio of these products in comparison to completely new products, leading to a reduction of clinical risk in the development of NTEs and Biologics.

Growth Drivers

For large biotech companies, M&A represents the most efficient method of accelerating the growth of their portfolio. It's my firm belief that with $10 billion in cash available over the next 5 years, that Teva will enter a phase of inorganic growth. Teva is known for having grown through acquisitions, examples include buyouts of Barr Pharma and Cephalon, both huge companies with enterprise values over $6 billion. Teva's shift from large acquisitions to mid-size and small transactions, results from Teva's establishment as the global leader in generic drugs. As such, Teva's logical path is to acquire many smaller companies that will help expand their portfolio of novel drugs.

Revisiting Prolor

In regards to the Biologics discussed by Dr. Hayden, one that caught my attention was Teva's own development of a long acting version of Human Growth Hormone (HGH) with Phase 1 recently completed. Clinical trial information reveals the development of a transdermal (patch) system. Although study results have yet to be disclosed, I find myself doubting the viability of a transdermal delivery system for HGH, given the size of the HGH molecule (it's very large). At the same time, I'm reminded of Prolor and their hGH-CTP compound. Acquisition of Prolor appears to be logical, in light of several factors, such as Teva's strong cash flow, desire to restore shareholder value, loss of patent exclusivities, and from a pipeline acceleration standpoint, all points mentioned earlier. Given Prolor's position in which it is about to enter Phase 3 testing, a successful acquisition would accelerate Teva's deployment of a long-acting HGH product by up to two to four years. In response to the sell-off that followed Teva's Analyst day, a bid to acquire Prolor would restore investor confidence by putting substance behind their spoken words.

Source: Takeaways From Teva's Analyst Day: 'Restoring Shareholder Value'