Teva 1Q15 Earnings Preview: Profitability Drivers

Generic drug business drives profitability

Teva Pharmaceutical Industries (TEVA) is now focused on improving its profitability rather than increasing its market share. Both margins and absolute profits for the segment have shown improvement in the last eight quarters. In 2015, the company is targeting a 27% operating profit, which would be an improvement of 300 to 400 basis points.

Teva 1Q15 Earnings Preview: Profitability Drivers

There are a few growth drivers in the generic drugs business:

  • production efficiency
  • new product launches
  • high-growth-market focus

Focus areas

Teva aims to reduce net costs by $500 million in 2015. To this end, it’s closing and selling non-profitable plants. For example, in March 2015 it sold its Sellersville plant. The company plans to reduce the cost per tablet unit from $15 to $10 in the next two to three years. It’s shifting manufacturing operations to low-cost areas to improve product profitability.

Teva has ~130 ANDAs (abbreviated new drug applications) pending approval. In comparison, Actavis (ACT) and Mylan (MYL) each have ~200 ANDAs pending approval. This is a bit surprising. At the same time, Teva’s product pipeline quality sets it apart from its competitors. It’s working on developing complex generics. Teva launched the generic version of Nexium in 1Q 2015. Nexium reported sales of ~$5.9 billion in 2013 but lost its exclusivity in 2014.

Teva is focused on high-growth markets. By divesting certain operations, it’s optimizing the size of its generics business. For example, the company is reducing its size in unprofitable markets such as Norway. This is a purely tender-based market in which the lowest bid gets the rights to produce and distribute a generic drug. In emerging markets, the company has decided to exit 30 markets where they have agent-based representation.

As an alternative to investing directly in Teva, you might consider pharmaceutical funds such as the iShares U.S. Healthcare ETF (IYH). This fund invests ~5.38% of its holdings in Actavis (ACT), Hospira (HSP), Mallinckrodt (MNK), Impax (IPXL), and Perrigo (PRGO).