Can Change Save Teva From Falling Off The Patent Cliff?

| About: Teva Pharmaceutical (TEVA)

Founded in 1901, Teva Pharmaceuticals (NYSE:TEVA) was a small business distributing imported drugs in Israel. By 1945, operations in the United States were formed as Lemmon Pharmacal Company, which was acquired by Teva in the 1980s.

Teva has grown into a huge international corporation that specializes in the development, production and marketing of a wide range of generic and branded products, as well as active pharmaceutical ingredients (API). Headquartered in Israel, Teva operates in 60 countries and has 46,000 employees worldwide.

Teva is the largest generic drug maker in the world. The company manufactures 71 billion tablets a year in 77 pharmaceutical and API facilities around the world.

Teva distributes products to over 120 markets. Over 1.5 million Teva prescriptions are written each day in the United States alone.


On May 9, 2012, Jeremy M. Levin, DPhil, MB, BChir, became President and Chief Executive Officer of Teva. Prior to joining Teva, Levin was the Senior Vice President of Strategy, Alliances and Transactions at Bristol-Myers Squibb (NYSE:BMY). At Bristol, Levin was responsible for the "String of Pearls" strategy that he implemented to "accelerate the discovery and development of new therapies by complementing and enhancing the company's internal capabilities through innovative alliances, partnerships and acquisitions."

Before joining Bristol, Levin served as the Global Head of Strategic Alliances at the Novartis (NYSE:NVS) Institutes of Biomedical Research, where he managed alliances with universities and biotechnology and established strategic collaborations.

Levin holds a BA in Zoology from Oxford and an MA and doctorate (DPhil) in Cell Biology and Chromatin Structure from the University of Oxford. He also holds an MB, BChir degree (Bachelor of Medicine, Bachelor of Surgery) from the University of Cambridge.

Levin is making substantial changes at Teva, promising that the pharmaceutical giant will look like a "a very different company" in the future. Some of the major changes that are being made include:

  • slashing $1.5 billion to $2 billion in costs;
  • finding new uses, alterations of existing medicines;
  • changing the company's growth policy away from large acquisitions to an increased reliance on developing branded drugs through research and licensing agreements; and
  • becoming less dependent on one product for an excessive portion of profit.


Teva's blockbuster multiple sclerosis (MS) drug, Copaxone (glatiramer acetate injection), generates about 20% of Teva's sales and 50% of the company's profits. Teva's patent for Copaxone will expire in 2015. Levin has made it clear that he does not like Teva being so dependent on one product for such a significant portion of the company's profits.

The MS market is large and lucrative. predicts that the global MS market will grow from $12.3 billion in 2011 to $17.3 billion in 2016. Copaxone dominates the U.S. and global MS markets in sales as well as market share. Copaxone's U.S. MS market share is over 40%.

Some analysts contend that Teva has underperformed this year because investors are worried that Copaxone may lose market share to new MS treatments like Novartis AG's Gilenya (fingolimod), which was approved by the US Food and Drug Administration (FDA) in September 2010, and Biogen Idec's (NASDAQ:BIIB) yet to be approved BG-12 (dimethyl fumarate). In October 2012, the FDA extended its review of BG-12 by three months. The FDA will make a ruling on BG-12 at the end of March 2013 rather than by the end of 2012. Copaxone received FDA approval in 1996.

Copaxone has stiff competition against the current top-selling MS drugs, which are Biogen's Avonex (Interferon beta-1a), Biogen and Elan's (NYSE:ELN) Tysabri (natalizumab), Bayer's (OTCPK:BAYRY) Betaseron (interferon beta-1b), Pfizer's (NYSE:PFE) and Merck's (NYSE:MRK) Rebif (interferon beta-1a), and Novartis's Extavia (interferon beta-1b). The combined annual sales of these drugs is about $11 billion.

In June 2012, the U.S. District Court for the Southern District of New York found that Momenta Pharmaceuticals (NASDAQ:MNTA)/Novartis subsidiary Sandoz and Mylan Laboratories Inc. (NASDAQ:MYL)/Natco Pharmaceuticals (NATCO.BO) infringed Teva's patents covering the chemical composition of Copaxone as well as the methods of using the product and processes for manufacturing the drug. This decision covers several patents, the last of which expires on September 1, 2015.

Although Copaxone's patent will expire in 2015, some analysts believe that a generic version of the drug may not be on the market immediately. Teva contends that Copaxone is "a highly complicated product to develop and manufacture, and given the inability to fully characterize the active ingredients of Copaxone, Teva has serious doubts about any generic applicant's ability to demonstrate conclusively that the composition of its product is identical to that of Copaxone."

Any generic version of Copaxone would need FDA approval before the drug would be available to the public. At this point, it is unclear what the requirements would be for approval of a generic synthetic peptide. A generic version may require lengthy and costly clinical trials to test efficacy and safety of these drugs before receiving FDA approval.

Teva is submitting a more convenient 40mg, 3 times a week dose for Copaxone to replace the current 20mg, daily dose version of the drug. This formulation could reach the market in 2013.

Teva is conducting research combining laquinimod with Copaxone or other drugs to better treat MS as well as address other neurodegenerative disorders such as Alzheimer's disease, ALS and Parkinson's disease.

Teva is also working with a Swedish firm, Active Biotech (OTC:ATVBF), to develop and commercialize Active's molecule, laquinimod. Several clinical trials may be initiated as early as 2013, including a third Phase 3 clinical trial of laquinimod in relapsing-remitting MS, as well as a Phase 3 clinical trial of laquinimod in progressive MS.

Laquinimod is also being studied as a treatment for Huntington's disease, and additional neurodegenerative diseases, such as Alzheimer's disease, amyotrophic lateral sclerosis (ALS), and Parkinson's disease.

In addition to Copaxone's patent expiration, Teva's U.S. patent for Treanda (bendamustine), Teva's second best selling drug, a chronic lymphocytic leukemia treatment, also expires in 2015. Treanda is Teva's second top selling drug. Teva acquired Treanda when it purchased Cephalon in 2011. Treanda had sales last year of $131 million. Teva has projected Treanda sales to be $670 million next year.

Brand Drugs

In 2013, Teva forecasts generic medicines' net revenues of between $10.3 billion and $10.7 billion, and brand medicines net revenues of between $7.6 billion and $8.0 billion.

Some analysts predict that Levin will change Teva's growth strategy to focus on branded drugs instead of generics. Teva, like most large pharmaceutical companies, is looking for new drugs to replace those brand drugs that must compete with low price generics due to patent expirations.

In addition to Copaxone and Treanda, several of Teva's top selling brand drugs have imminent expiry dates.

Teva's third best selling product is the ProAir (albuterol sulfate) asthma inhaler. In 2011, Teva reported $436 million in ProAir sales, which represents 2.4% of its revenue. In September 2012, Teva filed a patent infringement suit against Perrigo (NASDAQ:PRGO) and Catalent Pharma Solutions over their joint generic version of the generic version of ProAir HFA aerosol inhaler. Although Perrigo cites data by Wolters Kluwer Health that brand ProAir has $1.07 billion in annual sales, in November 2012, Teva forecast Pro Air sales to be between $400 and $440 million in 2013. According to Teva, its ProAir patents expire in 2017 and 2023.

Other best selling drugs include the Parkinson's disease drug, Azilect (rasagiline), with forecast sales of $340 to $380 million. In the United States, Azilect is protected by several patents that expire between 2012 and 2027. European patents expire between 2011 and 2014. In the third quarter of 2012, Azilect revenues increased 8% to $77 million, while global in-market revenues increased 6% to $103 million, primarily due to increased demand in the U.S. and Europe.

Qvar (beclomethasone dipropionate HFA) is an inhaled steroid used to treat asthma. Qvar patents have expired, but no generic versions are available.

In September 2012, Teva bought Huntexil (pridopidine/ ACR16), a treatment being developed to improve hand movement and balance in people with Huntington's Disease (HD) from Ballerup, Denmark-based NeuroSearch (OTC:NEUSF) for $26 million.

Huntexil is an oral small molecule dopamine D2 stabilizer being developed for the symptomatic treatment of non-choreic motor disorders, including for HD. HD affects about one person in 10,000 in North America and Europe and generally results in death within 15 to 25 years of diagnosis.

Teva intends to design and complete new clinical studies of Huntexil to assess its potential for symptomatic relief of HD. Advanced-stage clinical studies of Huntexil conducted in the U.S., EU and Canada in patients with HD demonstrated a significant treatment effect on Total Motor Score (TMS), but failed to meet the primary endpoint (Modified Total Motor score [(mTMS]). Data from the clinical studies were presented to the FDA and EMA in the first half of 2011, but were found insufficient to file for marketing approval.

Teva has initiated 18 new research and development programs this year and has discontinued 12 programs. Teva plans to begin development of 10 to 15 new therapeutic entities in 2013.

Branded medicines' net revenues in the third quarter of 2012 were $2 billion, an increase of 38% compared to $1.5 billion in the third quarter of 2011. Branded revenues consisted of:

  • U.S. revenues of $1.5 billion, an increase of 35% compared to the third quarter of 2011.
  • European revenues of $376 million, an increase of 55%, or 73% in local currency terms, compared to the third quarter of 2011.
  • Rest Of World revenues of $177 million, an increase of 34%, or 42% in local currency terms, compared to the third quarter of 2011.

Branded revenues comprised 41% of total revenues in the quarter, compared to 34% in the third quarter of 2011.


One in six of the 2.6 billion generic prescriptions written in the United States is filled with a Teva product. Generic drugs typically cost 50% to 70% less than their brand-name drugs. According to the FDA, last year, approximately 78% of the more than three billion new and refilled outpatient prescriptions dispensed in the United States were filled with generics. During the last decade, generic drugs have provided more than $931 billion in savings to the nation's healthcare system.

In 2012, more than 40 brand-name drugs representing about $35 billion in annual sales lost their high quality enabling generic drug companies to make their own lower-priced formulations of brand name drugs, but in 2013, generic drugs worth only $17 billion are expected to lose patent protection.

Levin believes producing high-quality generic products is becoming increasingly important.

With the enactment of the Generic Drug User Fee Amendments of 2012 (GDUFA) on July 9, 2012, the FDA will receive funding from the generic drug industry for the first time. Due to limited resources, the FDA has not been able to keep pace with the growth of the generic drug market. The FDA has a backlog of more than 2,500 applications for new generic drugs seeking approval. With this new legislation, the FDA will have the resources and staff necessary to eliminate this backlog and bring generic drugs to the market more quickly. During the five-year period from fiscal year 2013 through 2017, the generic drug industry will pay the FDA an inflation-adjusted $299 million each year in user fees to supplement the agency's budget for assessing the safety of generic drugs.

Teva has the largest generic pipeline of products waiting to receive FDA approval to market.

Levin thinks there are opportunities for generic companies expanding into global markets. While an estimated 80% of prescriptions are filled with generics in the United States, generic drugs are less popular in Europe and Japan.

Teva's generic net revenues in the third quarter of 2012 were $2.5 billion, an increase of 1% compared to the third quarter of 2011. Generic revenues consisted of U.S. revenues of $1.1 billion, an increase of 24% compared to the third quarter of 2011. The U.S. generics business continued its positive trend benefiting from the launch of nine new medicines this quarter.

Teva's generic drugs had European revenues of $798 million, a decrease of 13% compared to the third quarter of 2011. This decrease was caused primarily by ongoing macro-economic conditions and healthcare reforms in key European markets. To address these conditions, Teva is adjusting its market strategy in Europe to focus more on profitable and sustainable growth rather than market share.

Rest Of World revenues from Teva's generic drugs were $620 million, a decrease of 11% compared to the third quarter of 2011. Teva had strong performance in Israel, Russia, and other Eastern European markets, which was offset by a decrease in generics sales in Canada, which were unusually high in the third quarter of 2011, and were also impacted by government-imposed price reforms and a small decline in market share this quarter.

Cost Cutting

Levin claims $1.5 billion to $2 billion in cost savings can be achieved over the next five years by centralizing global purchasing power, shifting from many small production facilities to larger, more efficient manufacturing sites, and divesting non-core assets.

Teva considers the company's veterinary medicine unit to be a non-core asset. In January 2013, Bayer HealthCare announced that the company had received Federal Trade Commission (FTC) clearance to complete its $145 million acquisition of Teva's animal-drug division.

Teva is also ending development of StemEx, a technology that expands umbilical stem cells for cord blood transplants to leukemia and lymphoma patients. The company's relationship with its partner Gamida Cell Ltd. is under review.

Teva also terminated a partnership with Tel Aviv-based Clal for the development of PolyHeal and NexoBrid wound products. Teva is looking for a partner to help advance a Type 1 diabetes treatment it is developing with Clal's subsidiary, Andromeda Biotech.

The other mid- and late-stage programs Teva is cutting are Obatoclax for lung cancer, placulumab for sciatica, and MultiGeneAngio for peripheral arterial disease.


In the past, Teva grew through large scale acquisitions.

In 2008, Teva bought Barr Pharmaceuticals, a rival generic drug maker, for $7.46 billion to expand in both the United States and Europe.

In 2010, the company bought the German generic drug company, Ratiopharm, for $4.9 billion. The acquisition enabled Teva to expand in Europe.

In 2011, Teva bought Taiyo Pharmaceutical for $934 million. Taiyo is the third largest generics manufacturer in Japan.

Teva also bought Cephalon in 2011 for $6.8 million, which increased the company's oncology, respiratory disease and pain management portfolios.

In the future, Teva plans to make targeted acquisitions in its core areas of expertise. These areas of expertise include respiratory disease and central nervous system disorders, such as Huntington's disease and pain. Levin also wants to develop "new therapeutic entities," or NTEs, which include not only the development of new drugs, but also finding new uses, formulations, and delivery systems for existing drugs, as well as finding effective therapies with combinations of existing products and new drugs.

On December 11, 2012, Teva and Xenon Pharmaceuticals Inc. announced that the two companies would collaborate on the development of XEN402, a drug that targets sodium channels in sensory nerve endings that can increase in chronic painful conditions, such as postherpetic neuralgia and erythromelalgia, Teva believes the drug may be effective for a broad range of disorders. Under the agreement, Teva will pay Xenon an upfront fee of $41 million. Teva also agreed to pay development, regulatory, and sales-based milestones totaling up to $335 million. Xenon is entitled to royalties payable on sales and an option to participate in commercialization in the United States.

0n December 16, 2012, Teva and Handok Pharmaceuticals Co., Ltd. announced that they would establish a business venture in South Korea, allowing Teva to gain entrance into the $14 billion Korean pharmaceutical market. Under the terms of the agreement, Handok will be responsible for the sales and marketing, distribution, and regulatory affairs for a broad range of Teva manufactured drugs. Teva will have a controlling stake in the new business venture, with a profit split of 51% to Teva and 49% to Handok.. Founded in 1954 as a joint venture with Hoechst/Aventis/Sanofi, Handok has established strategic collaborations with other pharmaceutical companies such as Sanofi-Aventis (NYSE:SNY) and Spectrum Pharmaceuticals (NASDAQ:SPPI).

Secrecy and Salaries

Teva is involved in a class action litigation over the company's policy of concealing executive salaries. In November 2012, two Tel Aviv University law professors who are Teva shareholders claimed that the company must report compensation details for each of its top executives. Although U.S. law requires domestic and foreign companies that issue securities must disclose information about executive and director pay on an individual basis, these payments can be disclosed on a group basis when the laws of a corporation's home country do not require disclosure on an individual payment basis. Israel does not require individual disclosure. Teva, like most other Israeli dual-listed companies, conceals this information.

Other shareholders believe Teva's payments to the company's directors is excessive. In September 2012, Teva shareholders approved an increase in directors' salaries from an average of approximately $76,000 a year to $190,000 annually. In addition, directors will continue to receive $2,000 for each board meeting.

Despite objections, shareholders also approved increasing Chairman Phillip Frost's salary to $900,000 annually, a significant increase from his $700,000 salary in 2011. Shareholders also approved paying Frost travel expenses of $700,000 for the use of his private plane, as well as additional expenses of $298,000 for 2011.

Teva claims that "more than 82 percent of the shares were represented at the annual general meeting by proxy voting or by physically attending the meeting."


Teva has $10 billion available for business development over the next five years.

On December 13, 2012, Teva announced that Fitch Ratings gave the company an initial long-term issuer rating of A-, with a stable outlook. Teva has an A3 stable outlook rating from Moody's and an A- rating from Standard & Poor's, with a stable outlook.

The credit rating agency said that the rating reflects Teva's strategic position as the world's largest generic drug manufacturer, financial discipline, strong cash flow and liquidity, and capital deployment toward debt reduction.

"Our decision to obtain a credit rating from Fitch further supports our significant presence in the international capital markets," Eyal Desheh, Teva's Executive Vice President and Chief Financial Officer stated. "We place a high priority on sustainable access to the capital markets and ensuring a strong long-term capital structure for Teva, and believe that a Fitch rating is an important milestone in achieving these objectives."

On December 18, Teva announced that the company entered into a new five-year, $3.0 billion unsecured revolving credit facility, which replaces its existing $2.5 billion credit facility.

"By signing this new revolving credit facility, with its increased size and extended term, we took another step on our recently announced new strategy and secured ample liquidity to support Teva's future growth," Desheh stated.

For the third quarter of 2012, Teva reported net revenues of $5.0 billion, compared to $4.3 billion in the third quarter of 2011, an increase of 14%. The company earned $1.28 per share, compared with $1.25 a year earlier. Revenue increased 14% to $5 billion.

Teva forecasts 2012 revenue to be between $20.1 and $20.7 billion and earnings per share to be between $5.32 and $5.38.

Teva's total equity at September 30, 2012, was $23.1 billion, compared to $22.9 billion at June 30, 2012.

During October 2012, Teva's board of directors declared a cash dividend for the third quarter of 2012 of approximately 25.7 cents per share. Tax was withheld at a rate of 20.7%.

Conclusion: Neutral

I think Teva is a prudent long-term investment. I would not recommend buying Teva for a short-term play. I do not see any drug or strategy that can replace Copaxone in the near future. Copaxone currently represents about 50% of Teva's profits, and Copaxone will go off the patent cliff in 2015. I also think that Teva needs to become more transparent by disclosing the company's top executives' salaries. What good is served by not reporting executive salaries on an individual basis?

Under Jeremy Levin's leadership, Teva will develop new drugs that are in the company's "core areas of expertise," which include therapies for central nervous system disorders and respiratory diseases.

Teva has 15 drugs in late-stage development and 13 programs in mid-stage trials. The company dropped 12 other programs that did not fit its new focused strategy.

Teva has plenty of cash, and cash is what is needed to bring new drugs into the market. On average, 5,000 to 10,000 compounds need to be screened in order to discover a new organic molecule, peptide or protein that can be used to treat or cure a disease. It can take 10 to 15 years to develop an innovative drug and costs can rise to over $1 billion.

Some investors are disappointed that there has not been more news about CT-011. In May 2011, Teva and CureTech, a portfolio company of Teva and Clal Biotechnology Industries announced preliminary topline results for CT-011, an investigational anti-PD-1 monoclonal antibody. CT-011 met the primary endpoint of improved progression-free survival, or PFS, in a Phase 2 clinical trial in patients with Diffuse Large B Cell Lymphoma DLBCL following autologous stem cell transplantation. Statistically significant results have also been achieved in the secondary endpoint of overall survival.

Preliminary analyses indicated that 70% of the patients treated with CT-011 were progression-free at the end of the follow-up period, as compared to only 47% in the historical control. The study also found that 84% of the patients treated with CT-011 were alive by the end of the follow-up period, compared to only 62% in the historical control.

Teva is focused on new therapeutic entities, or NTEs, which are developed from proven effective medicines, which the company believes will provide higher returns with lower risks than developing new molecules. Teva has set a goal of approving development of 10-15 NTEs in 2013 and getting them to market beginning in 2016.

Levin plans to streamline operations, reduce costs and make targeted acquisitions to build a focused pipeline. Levin has promised to make Teva "the most indispensable medicines company in the world."

Regarding dividends, Teva offers a relatively low dividend yield compared to other big pharma companies. Recently, Bristol-Myers Squibb had a dividend of 1.4 per share which represents an annual dividend yield of 4.2%. Merck had a dividend of 1.72 per share which represents an annual dividend yield of 4.1%. Novartis had a dividend of 2.48 per share which represents an annual dividend yield of 3.9%. Eli Lilly (NYSE:LLY) had a dividend of 1.96 per share which represents an annual dividend yield of 3.8%. Pfizer had a dividend of 0.96 per share which represents an annual dividend yield of 3.7%. Johnson & Johnson (NYSE:JNJ) had a dividend of 2.44 per share which represents an annual dividend yield of 3,4%. Teva had a dividend of 0.81 per share which represents an annual dividend yield of 2.1%.

Teva means "nature" in Hebrew. Business, like nature, is a process of natural selection where only the strongest survive. Companies die if they don't embrace change. Levin understands that fact of life, and promises that Teva will be a "very different company going forward."

Disclosure: I am long MRK, MNTA, SPPI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.