As a long suffering investor in Teva Pharmaceutical Industries (TEVA), I have wondered many times why the valuation that the market gives Teva is so much lower than most other large pharmaceutical companies. Among the many reasons I have come up with are:
- Lumpy revenue and profits depending on exclusive generic launches, as well as the associated legal expenses.
- Lack of transparency on executive compensation.
- History of acquisitions, which only seem to add to the top line and not the bottom line.
- Company is based in Israel, although this really shouldn't impact much other than the foreign exchange rate between the shekel and the dollar for dividend payments.
- Potential patent expiration of Copaxone, as well as competition from new oral MS drugs.
The fifth reason is probably the biggest driver for Teva's valuation. Copaxone brought in $1.1 billion of revenue in the 2Q 2013, which represented about 22.4% of total revenue in the quarter. With new oral MS drugs getting approved by the FDA, in particular Biogen Idec's (BIIB) Tecfidera, Copaxone is unlikely to keep growing at a fast pace. But while you can argue about how much market share Tecfidera will take from Copaxone, the bigger issue is probably the looming patent expiration. Both Momenta Pharmaceuticals (MNTA) and Mylan (MYL) have reportedly developed a generic version of Copaxone and have been sued for infringement of patents by Teva. On June 24, 2012, a U.S. court upheld Teva's patents until the last one expires on September 1, 2015, but this verdict was promptly appealed.
On July 26, 2013, the U.S. Court of Appeals for the Federal Circuit ruled that the last patent was invalid and would allow a generic version of Copaxone to be launched May 24, 2014, assuming FDA approval of course. Whether or not a generic would be approved, given that Copaxone is considered a "pseudobiologic", is a topic for another article in itself, but I am assuming that a generic will be launched in May 2014. As crazy as it sounds, this may actually be a good thing for Teva by getting rid of one big "overhang" that the company is facing.
Here is a look at what happened to the revenue in the quarter before and the quarter after 5 different pharmaceutical companies lost patent protection on their blockbuster drugs, as well as how the stock price reacted in the year leading up to drug exclusivity loss:
Pfizer lost Lipitor exclusivity in November 2011, which was the best selling drug of all time.
3Q 2011 Worldwide Lipitor Sales: $2.602 billion (15.1% of total revenue), total revenue: $17.193 billion
1Q 2012 Worldwide Lipitor Sales: $383 million (2.49% of total revenues & 85% decrease from 3Q 2011), total revenue: $15.4 billion
Pfizer stock price first week of December 2010, 1 year before loss of Lipitor: $16.50, which marked low point from then until now.
Pfizer stock price first week of December 2011, after loss of Lipitor: $19.50 (18% gain, excluding dividends)
Forest Laboratories (FRX)
Forest Laboratories lost Lexapro exclusivity in March 2012, which was the most prescribed branded anti-depressant.
4Q 2011 Lexapro sales: $593 million (49.4% of total revenue), total revenue: $1.2 billion
2Q 2012 Lexapro sales: $110 million (13.4% total revenue & 81% decrease from 4Q 2011), total revenue: $821 million
Forest stock price mid March 2011, 1 year before loss of Lexapro: $31, with the lowest price in November 2011 at $28.50.
Forest stock price mid March 2012, after loss of Lexapro: $34 (10% gain). Forest Laboratories currently trades about $43 per share.
Eli Lilly (LLY)
Lilly lost Zyprexa exclusivity in October 2011.
3Q 2011 Zyprexa sales: $1.18 billion (19.2% of total revenue), total revenue: $6.15 billion
1Q 2012 Zyprexa sales: $0.56 billion (10% of total revenue & 52.5% decrease from 3Q 2011), total revenue: $5.60 billion
Lilly stock price at the end of October 2010, 1 year before loss of Zyprexa: $35, with the lowest price in November 2010 at $34.
Lilly stock price at the end of October 2011, after loss of Zyprexa: $38 (9% gain, excluding dividends). Lilly currently trades about $52 per share.
Bristol Myers Squibb (BMY)
Bristol Myers Squibb lost Plavix exclusivity in May 2012.
1Q 2012 Plavix net sales: $1.69 billion (32.2% of total revenue), total revenue: $5.25 billion
3Q 2012 Plavix net sales: $0.064 billion (1.71% of total revenue & 96.2% decrease from 1Q 2012), total revenue: $ 3.74 billion
Bristol Myers Squibb stock price May 2011, 1 year before Plavix exclusivity loss: $28, with the lowest price in mid-June 2011 at $27.
Bristol Myers Squibb stock price mid-May 2012, after loss of Plavix: $33 (18% gain, excluding dividends). BMY currently trades about $42 per share.
Endo Health Solutions (ENDP)
Endo has an agreement with Actavis (ACT) subsidiary Watson for the exclusive generic version of Lidoderm to launch on September 15, 2013, with FDA approval. The actual patent expiration date is October 27, 2015. Since the Lidoderm generic has yet to launch, going over the revenue numbers and generic impact is not applicable. It is interesting to note, however, that the stock price is following a similar pattern to the other companies I have detailed.
Endo stock price in the first week of September 2012, 1 year before Lidoderm exclusivity loss: $32, with the lowest price in the first week of January 2013 at $25.
Current Endo stock price is about $41, or 28% gain in the past year.
All 5 stocks saw gains in the year leading up to exclusivity loss of a blockbuster drug, with gains ranging anywhere from 9% - 28%. In 4 of the 5 stocks, with Pfizer being the exception, the lowest stock price happened less than 1 year before loss of exclusivity, with the low point averaging 8.5 months prior to exclusivity loss. I don't know if I can explain exactly why this happens, but would be interested in hearing any reader's theories. My thought is that the various management teams had to start keeping a keen eye on expenses, and the ability to control expenses is very important for investor confidence. I also wonder if just simply removing the "patent overhang" allows management to focus on growth again.
SO WHAT DOES THIS MEAN FOR TEVA?
Since the July 26, 2013 announcement that TEVA would lose Copaxone exclusivity in May 2014, the stock has fallen from $40 per share to the current price of $38.25. If the average lowest stock price of 8.5 months prior to the loss of exclusivity holds true, then this current price will mark the low point for the stock going forward. This would certainly be welcome news to every patient TEVA investor.