Is Teva About to Tear Itself Apart?

According to Israeli newspaper Haaretz, Teva Pharmaceutical (Nasdaq: TEVA  ) is considering dropping its entire branded drug segment. Depending on what type of investor you are, that's either the best decision ever or a reason to hit the sell button.

Let's start with why it's a horrible idea, so we can end on a positive note.

Simply put, I see branded drugs as the biggest growth driver for Teva. The company has become such a large generic-drug player that there are limited opportunities to expand further through acquisitions. The company will continue to develop new generic drugs, but it's hard for those to produce exponential growth. There are only so many opportunities for new generics, and as more generics are developed for the same drug, prices are pushed downward, so some of every new drug launch is just replacing lost sales on older generics in the portfolio.

Of course, competition also happens for branded drugs. Copaxone, Teva's best-selling branded drug, has to compete with Biogen Idec and Elan's (NYSE: ELN  ) Tysabri, Merck and Pfizer's (NYSE: PFE  ) Rebif, and other multiple sclerosis drugs. Furthermore, Copaxone will eventually face generic competition. Momenta Pharmaceuticals (Nasdaq: MNTA  ) and Mylan (Nasdaq: MYL  ) have already said they're developing generic versions of the drug. Selling branded drugs provides increased growth, but it's also riskier.

Getting rid of the branded drugs would also substantially decrease the amount of money spent on research and development, which will be higher this year after the acquisition of Cephalon. If Teva divests of its branded drugs, that spending can trickle to the bottom line and could be used to boost the dividend that stands at just a 1.8% dividend yield. Capital growth would decrease, but the move would likely attract more dividend investors.

Of course, this might all be a moot point if Teva can't maximize value by selling off the assets. When Mylan bought Merck's generic-drug business it came with branded drugs, which the company wasn't able to find a buyer for.

Teva could just spin off the branded drugs into a new company, which might be the best move since it'll satisfy both growth and dividend investors that can pick and choose whether they'd want to own the generics, the branded side, or both.

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Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Momenta Pharmaceuticals. Motley Fool newsletter services have recommended buying shares of Teva Pharmaceutical Industries, Momenta Pharmaceuticals, and Pfizer. The Motley Fool has a disclosure policy.
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Read/Post Comments (3) | Recommend This Article (5)

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  • Report this Comment On April 14, 2012, at 12:35 AM, mrconnors0531 wrote:

    If you want to put even more into the discussion what about OTC drugs that Teva can put on the shelfs that J&J has failed to keep there. I can't begin to think of the lost revenues in the last couple of years do to recalls. Replace branded drug revenue with a major line of OTC's. They have shown the ability to make deals in generics why not add to that by putting a J&J mix of their own together isn't that where old generics go, to the counter.

  • Report this Comment On April 14, 2012, at 4:04 PM, Mega wrote:

    "According to Israeli newspaper Haaretz, Teva Pharmaceutical (Nasdaq: TEVA ) is considering dropping its entire branded drug segment."

    Brian, the lack of reading comprehension (or maybe it's exaggeration for page views) puts this article way below your usual standards.

    The new CEO merely wants to review the development pipeline (not the established branded drugs) on a case by case basis. There is absolutely no hint of "dropping branded drugs" or "spin-off".

  • Report this Comment On April 14, 2012, at 11:33 PM, steven107 wrote:

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