It is difficult to characterize Teva (TEVA) - is it a generics company or a biopharmaceutical? It would appear it is the best of both worlds, a hybrid of the two. For the year 2009, Teva derived 67% of its revenue from the sale of generics and the rest from novel drugs and specialty products. Low margin generics were balanced by high margin branded drugs. It spends relatively little on research - around 6% of sales - improving operating margins significantly. In fact, at 27%, its operating margins are in-line with those of the largest pharmaceutical companies.
Teva had $13.9 billion in net revenue in 2009, up 25% from 2008, due in large part to the acquisition of Barr Laboratories. The company’s stated goal is an annual 15% growth rate through 2015 with revenue of $31 billion in that year, while at the same time maintaining a product mix of 70% generics and 30% branded and specialty drugs. That would make it one of the fastest growing companies in the large cap pharmaceutical space. Only Celgene is currently growing faster, but no one’s prediction mid-teen growth rates into 2015. Investors appear to believe; Teva has a trailing P/E of about 17, only Celgene’s incredible P/E of 30 is higher.
Teva’s generic side:
Teva is the world’s largest generics company - its closest competitor is Sandoz, a unit of Novartis (NVS), and Rambaxy Laboratories. It has achieved this through a combination of organic growth and roll-ups of smaller generic companies, including the recently announced purchase of Germany’s Ratiopharma for about $5 billion. In the last decade or so, it has picked up Barr Laboratories in 2008 for $7.5 billion, IVAX in 2006 for $7.4 billion, Sicor in 2004 for $3.4 billion, Novopharm in 2000 for 4.2 million shares of stock, and Copley Pharmaceuticals in 1999 for $220 million.
In the US alone, Teva sells over 400 generic drugs; it is also awaiting approval from the FDA on another 216 generics for approval. Of those, 140 are Paragraph IV filings, which challenge the validity of a drug’s patent. This is according to its annual report. It also launched 19 new generics in 2009 and has been approved for another 27 in 2010. Teva’s size and structure allows it to pursue drugs that are difficult to produce, formulate, or source. Its financial strength allows it to pursue patent challenges, as evidenced by the large number of paragraph IV filings.
The company has benefited along with the rest of the generics industry from current political and demographic trends. As the population ages and more patients take medication, cash strapped governments in developed countries have aggressively encouraged switching from branded drugs to generics. According to the Generic Pharmaceutical Association, 69% of all prescriptions in the US are for generics.
Even with Teva’s spate of acquisitions, the generics industry is highly fragmented; in 2008, the 10 largest generics companies accounted for less than half the worldwide generics market. Teva led with 11%, followed by Sandoz, 9%, and Mylan with 8%. It appears increased consolidation is inevitable.
Today, Teva generates a whopping 85% of its revenue from the US and Europe. And while it is doing well in both of these markets, it cannot ignore the rapid growth offered by large developing nations, especially those in Latin America. The Wall Street Journal has highlighted its interest in acquiring Brazilian generics manufacturers- in particular, Teuto, which had 2009 revenues of $171 million.
Teva’s innovative side:
Teva’s sells two novel drugs, Copaxone for Multiple Sclerosis, and Azilect for Parkinson’s Disease. Although they account for only 19% of sales, they provide more than one-third of profits. Copaxone is Teva’s first novel drug and was launched in the US in 1997, it has gone on to become the world’s leading MS treatment with 2009 sales of well over $2 billion. Azilect followed considerably later with a 2006 US launch. It has successfully completed a recent clinical trial showing it may have the ability to delay the progression of PD- a first for any drug. Analysts project peak sales of the Azilect of anywhere between $500 million and $1 billion.
Teva’s dependence on novel drugs to drive profits requires it to maintain a pipeline of developmental candidates. It typically licenses compounds after proof of concept has been reached, and now has five compounds in Phase III testing. These products are: Laquinimod, an oral treatment for MS; Debrase, an enzyme for removal of burn tissue; Diapep-277, a treatment for Type 1 Diabetes; TV-1011, an antisense treatment for solid tumors; StemEx, a cell therapy for blood cancers. Results from a large Phase III trial for Laquinimod will be available 2011, and an EMEA filing is already being prepared for Debrase due to the early stopping rules in the EU.
So while Copaxone continues to run strong, and Azilect sales begin to boom, at least one new drug looks to join the novel drug lineup. Should Laquinimod succeed, it will bolster the MS franchise and give Teva an offering in the new generation of oral MS drugs.
Teva looks to remain highly successful in the coming years. Its operating margins are close to double that of smaller generics companies such as Mylan, while its growth is far superior to the biggest pharmaceutical companies.
Meanwhile, Big Pharma has seen the potential in the sale of generics. Novartis was early with the formation of its Sandoz generics unit in 2003. Pfizer (PFE), GSK, and Sanofi-Aventis (SNY) have all entered the generics fray. These moves by Big Pharma are defensive and they will always be careful when emphasizing generics so as not to eat into their bread and butter brand name drugs.
On the other end of the spectrum, generics companies are busy developing novel drugs. These companies include Rambaxy, Dr. Reddy’s, Mylan, Watson, Impax, and Momenta. It looks like Teva’s strategy has influenced its peers. Over time, as these companies grow and their pipeline of novel drugs fills out, expect the line between generics companies and biopharmas to continue to blur.
Disclosure: Long NVS