Teva's Risk Outweighs Reward

Since the beginning of the year, I have been incredibly bullish on the health care sector and the broad market as a whole. While a governmental showdown and the debt ceiling debate have influenced the economy, most consumers don't decrease their spending on necessary health care procedures even with constant headlines from Washington. So far this year, I have highlighted a number of industries within the health care sector including equipment, supplies, and biotechnology that are set to benefit from a number of key trends.

Our aging population, in combination with increasing access to health care, has set the sector up for a rapid rise in demand over the next couple of decades. Not all health care exposure remains equal, however, and in this article I would to highlight one name in particular that I feel will underperform over the next couple of years. Teva Pharmaceuticals (NYSE: TEVA  ) is known by many as a generics manufacturer, producing a large portfolio of medications for a fraction of the cost of traditional treatments. Teva also operates a specialty pharma business segment that has accounted for the vast majority of its growth in recent years.

The problem
Teva has been in the headlines a lot this year. Legal troubles, patent expirations, and cost-cutting measures have left shareholders with constant concerns. Shares of the company have greatly underperformed the S&P 500. Year to date, shares have moved higher by 8%, which equates to roughly 20% underperformance in comparison to the broad sector. Much of this underperformance has been a result of increasing risk surround the company's key drug Copaxone.

Copaxone is used to reduce the frequency of relapses in patients with Relapsing-Remitting Multiple Sclerosis (RRMS), including patients who have experienced a first clinical episode and have MRI features consistent with multiple sclerosis. For Teva, 20% of revenues come from Copaxone. Moreover, the high margins associated with the drug attributed to 50% of profits.

Injectables vs. pills
Whenever a company is highly dependent on a single good or product, investors should ask consider the ramifications of losing said product. For Teva, increasing competition and a generic could hurt its margins and drastically reduce profitability for the company. Earlier in the year, Biogen Idec's (NASDAQ: BIIB  ) Tecfidera won approval and has made treating MS easier for patients. Tecfidera is an oral therapy approved in the United States for the treatment of relapsing forms of multiple sclerosis, including RRMS, which is the most common form of the disease.

The drug has been proven to significantly reduce important measures of the disease activity, including relapses and development of brain lesions, as well as to slow disability progression over time. With Tecfidera, patients can avoid injectable treatments through an alternative pill form. I would expect even without a generic alternative to Copaxone, Teva will be subject to decreased market share as a result of competition from Biogen.

Generic threats
On the generic front, we have Momenta Pharmaceuticals (NASDAQ: MNTA  ) , which has announced it expects to have a generic form of Copaxone on the market by as early as 2014. M356 (glatiramer acetate injection) is the generic version of Copaxone that the company seeks to release. Its a synthetic polypeptide medicine, developed in collaboration with Sandoz and currently under review by FDA. 

Teva claims there will be a delay in generic approval due to the complexity of the drug, though the street puts a 40 to 65% chance of approval according to analyst reports. Personally, I do not feel that owning Teva is worth the risk of non-approval. What's the reward? Slow growth. Even if the generic is delayed, growth will remain stagnant and the generic will eventually gain approval. Should the drug be approved in generic form, I would expect shares of Momenta to gain momentum and hit the analyst price targets in the high teens.

The move
At this time, I feel that the risks of owning Teva outweighs the rewards. Should Copaxone continue down its dire path, Teva will be subjected to a great drop in revenues and an even steeper drop in profits. The company's recent cost-cutting measures and drastic layoffs speak toward the concern within management. There are better vehicles for exposure to the health care sector. I would most assuredly take Biogen over Teva for the long term. 

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  • Report this Comment On October 28, 2013, at 4:56 PM, HRosenLDGT56A wrote:

    Yes, the loss of copaxone is a huge negative. However, at 8x earnings I believe that the loss of the drug is baked into the price. If a generic launch is delayed TEVA will have another year to bolster its pipeline. Even with the copanone loss earnings are expected to grow in 2014. Compare this to estimates for LLY. You also fail to mention the move into OTC in partnership with Perrigo, a world leader in this field. Throw in Levin's cost cutting measures for good measure. Collect the dividend while you wait. I see this as along-term bargain basement special for patient investors.

  • Report this Comment On October 28, 2013, at 7:42 PM, someconcerns wrote:

    HRosen,

    I agree with your assessment. Analysts have been emphasizing for at least a year the approaching expiration of the patent on Copaxone and Teva's inability to extend it in another formulation in the US. However, some other analysts have pointed out how each generic version of Copaxone will separately have to demonstrate to the FDA it's bioequivalence to Copaxone before it will be allowed to be marketed in the US. Also bioequivalence of a specific generic does not mean it will necessarily act the same way in each person and many physicians may continue to prescribe Copaxone until they see how well each generic works in their patients. They won't change all of them over at once. Therefor, the expiration may not lead to quite the same cliff-like drop in revenue. I expect Teva will cut the price as needed to maintain much of their market share.

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