Seeking Alpha
Research analyst, oil & gas, tech, mid-cap
Profile| Send Message| ()  

Teva Pharmaceutical (TEVA) is the largest generic drug manufacturer in the world, and it is continuously focusing on strengthening its generic drugs portfolio. In July 2013, the U.S. court ruled against Teva's cash-cow, "Copaxone", an immunomodulator drug, which is used to treat multiple sclerosis, or MS, and it will lose its patent in May 2014 instead of September 2015. The other generic drug manufacturers like Sandoz, a subsidiary of Novartis (NVS), and Momenta Pharmaceuticals (MNTA) are now allowed to develop and market the generic version of this drug in the U.S.

After the U.S. court decision, the Dutch Court recently rejected the patent revocation suit for Copaxone, which was filed by Mylan Laboratory. The court decided that Teva's Copaxone European patent is valid and will not expire before May 2015. This is the second favorable ruling for Teva; the previous one was from the U.K. court, which has also validated the Copaxone patent in the U.K. until May 2015. Copaxone contributes nearly 20% to Teva's revenue, reporting a year-over-year growth of 13% to $2.13 billion in the first half of 2013.

Cost-cutting program to improve financial

The verdict by the U.S. court is one of the worst decisions for Teva, which led the company to announce its cost-saving program. This program is expected to generate annual cost-savings of around $2 billion for the company by the end of 2017. For these savings, it will incur one-time pre-tax costs of around $1.1 billion. In this initiative, it plans to reduce the work force by 10%, or around 5,000 employees, and expects to complete most of this reduction by the end of next year. It is estimated that the company will achieve 50% of the annual savings, or nearly $1 billion, in 2014 and 70% by the end of 2015. With this pace, we believe the company will be able to attain its target on time, which will help Teva deepen it foothold in the generic drug manufacturing market.

Funds Utilizations

Teva will utilize or reinvest part of its initial cost-saving generated in 2014 and 2015 in high-growth areas. It will aggressively invest in research and development, or R&D, to identify opportunities in developing other companies' off-patent blockbuster drugs. It will also enhance its footprint in emerging markets and develop its own complex generics and specialty pharmaceutical pipeline. Currently there are around 30 late-stage drugs in its pipelines. The investment in R&D will enable it to develop drugs efficiently, which will lead to faster regulatory approval and help enhance its future growth prospects. In October, Teva received the FDA approval for developing two generic equivalents, enabling the company to build its generic pipeline stronger, boosting its future revenue.

Strengthening the generic drug pipeline

On October 1, 2013, Teva launched the generic version of AbbVie's (ABBV) "Zemplar", a parathyroid disease treatment drug. Zemplar is an active form of vitamin D, which is used to prevent and treat secondary hyperparathyroidism in patients suffering from Stage 3 or Stage 4 chronic kidney disease and Stage 5 patients on dialysis. The FDA approved Teva to develop the generic equivalent of Zemplar in the U.S. on September 30, 2013. Teva is the first company to receive the approval for the development of this parathyroid disease drug, and it will enjoy the exclusive generic marketing rights for Zemplar for 180 days. During this period, no other company is allowed to market this drug in the U.S.

As per the IMS, Zemplar generated annual sales of $115 million in the U.S. alone as of June 30, 2013. This is the second approval for developing a generic version of AbbVie's drugs. Previously, in September 2013, Teva received FDA approval to produce and market the generic equivalent of AbbVie's blockbuster cholesterol management treatment drug, "Niaspan". This drug generated sales of around $1.12 billion as of June 2013. These back to back approvals will help Teva build its drug pipeline stronger, which we expect will cover its second quarter year-over-year revenue decline of 1.4% to $4.92 billion, and 8% year-over-year decline in generic business in the U.S. These approvals will also help maintain its future revenue and earnings.

AbbVie maintaining growth step by step

Previously AbbVie had the right to develop and market Zemplar and Niaspan. These drugs contributed nearly 6.7%, or $606 million, to its total revenue in the first half of 2013. However, the generic competition for these drugs and Teva's recent FDA approval to develop a generic version will somewhat diminish AbbVie's revenue. To overcome revenue decline from these two drugs, AbbVie is targeting to build its drug pipeline stronger.

It is currently developing a HCV drug, which reported that 90% of the patients were treated successfully after completing the eight-week regimen in the phase II trial study. It is expected that by the end of the second quarter of 2014, AbbVie will file the application for FDA approval, and if accepted, this drug will be commercially available in 2015.

Furthermore, AbbVie signed two global license agreements, one with Galapagos (OTCPK:GLPYY) and another with Ablynx (OTC:ABLYF), for developing drugs for the treatment of Rheumatoid arthritis, or RA, and Crohn's disease, an inflammation disease. Galapagos GLPG0634, JAK1 inhibitor for the treatment of RA and Crohn's disease is about to enter in phase IIb trial for RA and phase II trial for Crohn's disease. The phase IIb trial for RA will be performed simultaneously with the phase II trial for Crohn's disease.

In the deal with Ablynx for its ALX-0061 drug, which is in phase II trial study, Ablynx is responsible for completing this phase II trial for treating RA and other inflammatory diseases. These two deals are expected to generate additional growth opportunities for AbbVie, which will enable it to maintain its position in the pharmaceutical drugs market.

Opportunity for Momenta Pharmaceutical

After the U.S. Court of Appeals invalidated Teva's Copaxone U.S. patents, Momenta seized the opportunity to develop its "M356", the generic equivalent of Copaxone. M356 is co-developed by Momenta and Sandoz. The company has filed an Abbreviated New Drug Application, or ANDA, for M356 and is currently under FDA review. Both the companies are confident that the FDA will approve the ANDA under the section 505(j) pathway as an interchangeable generic Copaxone. Section 505(j) is the FDA process to approve the ANDA for generic drugs that contain the same active ingredient as the brand drug. Momenta Pharmaceutical is expected to launch the generic version, M356, by early 2014.

Copaxone has generated revenue of nearly $4 billion with the year-over-year growth of 12% in 2012 for Teva. This is one of the major MS accepted medications in the U.S. and rest of the world. We expect the approval by the FDA for M356 will help Momenta grab a major market share in the treatment of MS, and it has a good scope to generate higher revenue in the future.

Conclusion

The annual cost-saving program of $2 billion will enable Teva to improve its earnings. Further, the favorable decision by the court in the U.K. and Netherlands as well as the FDA approval for developing a generic version of AbbVie's blockbuster drug Niaspan and Zemplar will help the company maintain its future revenue. In its full 2013 earnings guidance, Teva expects to generate revenue of $20.5 billion with the EPS in range of $4.85-$5.15 per share. We also believe the company will easily achieve its EPS target, or maybe even higher than its guidance, due to its cost-saving initiative.

Additionally, the contribution from developing and marketing its new generic drugs will raise its revenue and earnings, resulting in some meaningful price appreciation in its stock price.

Source: Can Teva Survive Its Cash Cow Loss?

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Satya Prakash, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.