Teva's Several Billion Dollar NTE Opportunity Largely Overlooked

Aug.12.13 | About: Teva Pharmaceutical (TEVA)

Leading generic pharma firm and Best Ideas Newsletter portfolio holding Teva Pharmaceuticals (NYSE:TEVA) issued mediocre second-quarter results. Net revenue was roughly flat on a year-over-year basis as weakness in generic sales in the US and Europe was mostly offset by strength in Treanda, ProAir and multiple-sclerosis drug Copaxone, the latter accounting for about 20% of revenue and half of profits. Teva continues to address ongoing hurdles associated with Copaxone, as CEO Jeremy Levin outlined on the firm's second-quarter conference call:

"The U.S Federal Court of Appeals confirmed validity of select COPAXONE patents through May 2014, but not others including one patent expiring in September 2015. We are disappointed with this part of the Appeals Court decision and we will appeal that decision. I want to remind you that COPAXONE is a complex synthetic peptide. We believe that a purported generic version would need full scale, placebo-controlled clinical trials in RRMS patients. As a consequence, we are not sure of a generic timing or approval. In addition to appealing the court's decision, this company has been preparing for the potential launch of the generic COPAXONE. In May 2013, the U.S. FDA accepted our submission for a more convenient schedule of three times weekly dosing of COPAXONE, 40 milligrams per meal. We anticipate FDA actions in the first quarter of 2014, and if approved we are prepared with an aggressive launch strategy for the first half of 2014."

Though top-line pressures existed in the period from generic Lexapro (the firm had exclusive rights in the second quarter of last year), the absence of royalties related to the sales of generic Lipitor, and a decline in sales of irbesarta tablets and irbesartan HCTZ tablets, management continues to be excited about the positive momentum of its generics business, particularly in the US, as CFO Eyal Desheh outlined on the conference call.

"We do expect, however, that our U.S. generic business will materially improve in the second half of the year with launches of new generic products, particularly of Niacin which is expected by the end of Q3."

We're also very enthused by the long-term opportunities presented by increasing generic penetration rates across the globe, though the firm experienced reduced sales in Italy and Spain in the quarter. With healthcare cost pressures increasing across the world, the generic opportunity remains robust. The progression of the firm's R&D portfolio also represents another key source of upside, particularly with respect to NTEs (new therapeutic entities) - new formulations or combinations of older drugs (combining a antipsychotic with a weight-loss drug, for example). Management outlined the opportunity on the conference call:

"Over the past quarter, our R&D team has doubled the NTE (new therapeutic entities) pipeline identifying four new products for development, including abused-deterrent opioids and addiction treatments, bringing the total number of NTEs under development to eight. As a result of our efforts, we expect approximately 10 NTEs in clinical developments over the next two years which we believe will begin to generate sales as early as 2016 ... If you look at a portfolio, if you had 10 to 15 in 2013, the major area of submission will be 16 and 17 and all of these would be expected to be on the market within five years subject to various patents and other issues making sure IP is protected, so this is, in our opinion, a multibillion-dollar opportunity and it's going to be enhanced as you are going to go forward. This is equivalent to putting 10 products into Phase III development every year from now going forward."

Quarterly non-GAAP operating income of $1.3 billion in the second quarter fell 9%, as a result of slightly lower gross margins which were impacted by reduced sales from certain high-margin generics. Adjusted non-GAAP earnings per share came in at $1.20 in the period, down from $1.28 in last year's quarter. Looking ahead, Teva anticipates ending the year near the mid-point of its original 2013 guidance of revenue in the range of $19.5-$20.5 billion and non-GAAP diluted earnings per share of $4.85 to $5.15. The firm's cost-cutting plans should allow it to achieve the bottom-line target.

Valuentum's Take

Teva's global generic opportunity is arguably the best within our coverage universe, and we're excited about its NTE pipeline, which we're expecting to be a multi-billion dollar revenue stream in coming years. Teva is uniquely-positioned to capture the NTE opportunity because of the firm's ability to combine its generic and branded-drug expertise across indications. Still, we continue to be mindful of patent expiration of its current large profit-driver Copaxone in May 2014, roughly a year earlier than we had been expecting prior to initiating our position in the firm in our Best Ideas portfolio - we'll be watching Momenta Pharma's (NASDAQ:MNTA) development efforts for a generic Copaxone. We fully expect the next 12-24 months to be difficult for the company with respect to year-over-year comparisons, but we still feel comfortable holding shares in our portfolio. The long-term opportunity for lower-cost generics in an environment where governments across the globe are looking to cut expenses and become more efficient is just too great to pass up, in our view.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: TEVA is included in our Best Ideas portfolio.