Generic pharmaceutical companies
Generic pharmaceutical companies haven’t fared well in 2019. Most of these companies have been battling lawsuits, industry-wide pricing pressures, and increasing regulatory oversight. Investors have been shying away from these companies, and some even seem to be on the brink of bankruptcy.
Let’s see how Teva Pharmaceutical (TEVA), one of the most punished generic pharmaceutical stocks of late, is positioned this month.
Teva’s share price movements
On June 20, Teva Pharmaceutical closed at $8.12, the lowest the stock has closed on the NYSE since January 1, 2001. Since June 20, the stock has recovered to $9.60 as of Wednesday, 1.80% higher than its previous day’s close, following the announcement of positive data from its Phase 3b FOCUS study evaluating fremanezumab as a migraine prophylaxis therapy for patients responding inadequately to two to four other classes of migraine-preventive therapies. The investor sentiment also seems to have perked up slightly following the news of the launch of 1% sodium hyaluronate in pain indications in the US.
Teva Pharmaceutical is facing multiple challenges
Teva Pharmaceutical’s current share price is a far cry from the high of $66.99 it saw on July 27, 2015. The stock is down 37.74% YTD (year-to-date). It’s already struggling with the generic erosion of its flagship Copaxone franchise, and it received a big blow on May 10, when the attorneys general of 44 states filed a lawsuit against 20 generic pharmaceutical players, accusing them of price-fixing activities for ~144 drugs. Teva Pharmaceutical was one of the most prominently accused companies in the suit. Although Teva vehemently denies the claims, the news caused its stock to lose ~24.88% of its market cap by the middle of May compared to the start of the month.
On May 26, Teva Pharmaceutical announced an $85 million settlement with the State of Oklahoma related to a lawsuit alleging its contribution to the opioid crisis due to deceptive marketing tactics in the state. While the company continues to deny the accusation, the settlement seems to indicate its weak legal positioning. Wall Street analysts fear the probability of the company’s having to provide significant payouts to other states in the US related to the opioid crisis. Read What’s Pulling Down Teva Pharmaceutical Stock? to learn more.
While lawsuits pose a big challenge to companies at the best of times, these particular suits have come at a rather tenuous time for Teva. According to its first-quarter earnings call, the company carried debt of $26.7 billion on its balance sheet at the end of March and was scheduled to repay $1.6 billion worth of that debt by mid-2019. The company’s net debt-to-EBITDA ratio is 5.46x. Most of this debt was raised to fund its $40.5 billion acquisition of Allergan’s Generics segment.
Teva Pharmaceutical has been striving to reduce its expenses through its ongoing restructuring program, which has involved site consolidation and the laying off of more than 10,000 full-time employees. Additional expenses in terms of penalties and legal expenses may suppress the company’s margins in the coming quarters.
It doesn’t help that Teva expects 2019 to be a trough year in terms of revenue as the generic erosion of Copaxone 40 mg accelerates. According to its first-quarter earnings call, the company is guiding for revenue of $17.0 billion–$17.4 billion in 2019, lower than the $18.9 billion it reported in 2018. Other metrics such as operating income, EBITDA, EPS, and free cash flow are also expected to be lower YoY. To learn more, read Teva Pharmaceutical’s Earnings Guidance for 2019.
Copaxone’s North American revenue fell from $3.12 billion in 2017 to $1.76 billion in 2018. According to its first-quarter earnings call, Teva expects Copaxone’s revenue to be $800 million in the US in 2019 and to continue to fall 45% YoY in subsequent years.
Upsides in Teva Pharmaceutical’s portfolio
Ajovy and Austedo are the two major growth drivers in Teva Pharmaceutical’s portfolio. Ajovy has been approved by the FDA and the European Commission for the treatment of migraine prophylaxis. Teva is targeting 28%–30% of the NBRx (new-to-brand prescription) share in migraine prophylaxis indications in the US. Ajovy had already attained a 28% NBRx share and a 23% normalized total prescription share by the end of March. The company has guided for Ajovy’s sales to be close to $150 million in 2019. To learn more about Ajovy, read Ajovy: One of Teva Pharmaceutical’s Key Growth Drivers.
Approved by the FDA in tardive dyskinesia indications, Teva’s Austedo is expected to see sales of $350 million in 2019. To learn more about Austedo, read Ajovy and Austedo: Teva Pharmaceutical’s Growth Strategy.
Although Ajovy and Austedo are promising assets, they don’t seem capable of offsetting the negative revenue impact associated with the generic erosion of Copaxone—at least not in the next few years. Teva’s high debt and weak cash position will also make inorganic growth difficult for it.