In an Ironic Twist, Generics Take Aim at Teva Pharmaceutical

Teva Pharmaceutical's (TEVA) top-selling drug is the long-standing multiple sclerosis therapy Copaxone. The drug racks up billions of dollars in annual sales for the generic-drug powerhouse, but that could change, because Teva Pharmaceutical's generic rivals are challenging Copaxone's patents. Can Teva Pharmaceutical sidestep this threat? In this episode of The Motley Fool's Industry Focus: Healthcare podcast, the team discusses what's at stake for Teva Pharmaceutical and its investors.

Also, the duo weigh in on Biogen Inc.'s (BIIB 4.56%) fourth-quarter earnings and discuss the company's decision to spin off its hemophilia drugs as Bioverativ (BIVV). Can Biogen reward investors in 2017?

A full transcript follows the video.

This podcast was recorded on Feb. 1, 2017.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your host, Kristine Harjes, and it's Feb. 1. As usual, I'm talking today to Motley Fool healthcare specialist Todd Campbell, who is calling in via Skype. How are you, Todd?

Todd Campbell: Hi, Kristine! Can you believe that it's February already? What a crazy January!

Harjes: Yeah. It's been so packed with news and excitement, I feel like it just flew by.

Campbell: Amazing. At this pace, I think we'll wake up tomorrow morning and it'll be 2018.

Harjes: It wouldn't surprise me. So let's dive right in. We have two focuses for our show today: Teva Pharmaceutical and Biogen. We'll get to Biogen in a little bit. But first, let's open up with what is Israel's largest company, Teva.

Campbell: Yeah, a giant company. Not just in Israel, either. This is a worldwide drug manufacturer. It creates generic drugs for some of the best-known medicine that's sold throughout the planet. What we're going to talk about today is a challenge to its best-selling drug.

Harjes: Which is kind of an interesting story for a lot of reasons, the first of which is, this therapy, the best-selling drug, is a branded therapy. It's called Copaxone, and it's actually the most common multiple sclerosis therapy. But as you mentioned, this is fundamentally a generics company. So it's kind of interesting there that they have this one drug which is a branded therapy and accounts for 20% of their overall revenue.

Campbell: Right. This is a monster drug in its indication. It's used to treat multiple sclerosis. This drug has been on the market since 1996, so it's getting a little bit long in the tooth, as you can imagine. Because it's getting long in the tooth, that means it's being exposed to patent expiration, and the threat of companies that, normally, it's on the dishing end of this, but now it's on the receiving end of these generic threats to this drug.

Harjes: Right, it's kind of an ironic situation. They've actually been very strategic in how they've handled it. The version that was approved in 1996 was a 20 mg formulation of the drug. It is a daily subcutaneous injection. So all of a sudden, it is nearing its patent expiration, and Teva says, "I don't want other companies doing to us what we tend to do to them," meaning develop a generic. So what they did is develop a 40 mg version of the same drug, which you only need to inject three times a week. So it went from daily to three times a week. That's a huge improvement, so they were very successful in switching most of its patients to this new formulation.

Campbell: Yeah, that was kind of like a ta-da moment, right, Kristine? Ta-da! Here's this new, improved version! You can picture the box: New! Improved! Better than ever!

Harjes: Yeah. You can argue whether or not it's worth having a new patent just for a slight tweak to the drug. But that is the case. 

Campbell: Well, yes, Kristine, and that's exactly what they're doing. This is exactly what they're doing. The 20 mg version lost patent protection. That cleared the way for Novartis, via its Sandoz generic drug unit, and Momenta to collaborate and launch Glatopa, a competitor to that 20 mg version. But, again, the ta-da moment, being able to reduce patient burden by shrinking it from a daily injection to an every-three-days injection, that's a huge selling point with patients, and it has basically trumped the discount of being able to pay less and get Glatopa, versus that 20 mg formulation. This has allowed Teva to protect, for the last year and a half, about $4 billion a year in sales. And that's all coming back in jeopardy again, because these generic manufacturers have come out and said, "Wait a minute! You shouldn't approve new patents on this drug! This drug is the same; it's just the formulation with a larger dose that's allowing this to have a longer half-life."

Harjes: Exactly. Just to be very clear, Glatopa, the generic competitor, is competing only with the 20 mg for now. What this new argument is about is whether or not they should also be able to compete with the 40 mg version. Last September, a patent review board invalidated three of four patents that were protecting the longer-lasting version until 2030. Then, just on Monday, which was the 30th of January, a District Court overturned four patents on the 40 mg version, which will probably end up being appealed by Teva, and that could add months or even years to this whole argument. The company says that it will probably keep these generics from competing with its long-lasting version until 2018. But still, Momenta and Novartis can launch as soon as the FDA approves. And there's a little bit of risk there with, if you launch, and eventually Teva wins its appeals process, then these two companies could end up having to make up lost sales to Teva and pay them a bunch of money. But it's kind of uncharted territory here; it's muddy waters.

Campbell: Yeah. They have to figure out how much risk they want to take on, they being Mylan and these other generic companies. Do they want to wait potentially a year and get an all-clear that they're good to go? Or do they want to roll this out sooner than that and potentially pocket hundreds of millions of dollars? In the beginning of January, Teva's management sat down with investors and outlined a particular scenario -- what would happen to our forecast for Copaxone sales if a generic version hit and was launched in February? And what they said could happen is that it could create a $1 billion drag on sales in 2017 and could knock $0.65 or more off its earnings projections. Now, my personal opinion is that we probably will see these companies wait until they have the all-clear. But again, there's a very good likelihood that the appeals fall short. Teva tried to delay the launch of the 20 mg version with all sorts of legal maneuvering and that fell short. So why would you think that these will actually hold through, and protect this drug until 2030? I think there's a very good likelihood that Teva's sales are going to, in the short term, face some pretty stiff headwinds once these generics roll out.

Harjes: I would agree, especially when you look at the political climate, and you consider how much pressure there is for drug prices to come down. I can see that having a little bit of an influence on these cases, and trying to get the generic version out there at a discount to the branded price. Let's take a minute to consider Teva as a whole. Copaxone is a very important part of this company, but it's not the entire company. Where's your head at regarding Teva as an investment as a whole?

Campbell: I think it's too risky to jump in right now until we get a little bit more clarity on when those generics might launch. I have short-term glasses on when I say that. If I put my long-term glasses on, then I guess I would change my mind a little bit and say, "Let's see how this shakes out, see how much the stock sells down." If we assume that not all of the sales will flow to the generics, and they will maintain some sales, and maybe there's a headwind of $1 [billion] to $2 billion, that's a lot smaller of a headwind than it was maybe a few years ago, before they also had acquired Actavis' generic unit. You're still talking about a big chunk of revenue, and a big part of their operating profit, and that creates a big short-term risk. But they do have a lot of opportunities to roll out biosimilars, which we talked about on the show before, which are basically, we'll call them generic alternatives to some of the top-selling biologic drugs that are available today for conditions like cancer, etc. They also have some intriguing stuff going on in their research pipeline, in asthma and pain management and migraines. Those could be top sellers, too. I think you need to stay on the sidelines here, watch and see how this plays out, see where the stock sells out. If you can buy this thing for bargain prices, if these generics launch, maybe I would step up at that point, for a long-term portfolio.

Harjes: Right. I'll also point out -- I think you made some great points, and I'll add to it by saying if the company is trading at just 6.5 times this year's earnings estimates, and it pays out a 4% dividend yield, which isn't growing a ton, but it only has 28% of its free cash flow in the past four quarters to pay it. So it seems like that's pretty safe. If you already hold Teva, I would say you probably want to just keep on holding on to it. If it were me, anyway. 

So we wanted to tell the Teva story because we found it really interesting. There's the irony of a generics company fighting against generics. I thought it was a good story. But, the next section of our show comes directly from a listener request we got via email. If you want to email us with the request of your own or any questions you have, you can always hit us up at [email protected]. Here we go: Tom from Davis, Calif., wrote in, and he asked us to do an update on Biogen. Their earnings came out last Thursday, and Tom had a ton of questions regarding Biogen and its future, which is going to make for a really interesting story as well. So, thanks, Tom, for writing in. Do you want to start with earnings, Todd?

Campbell: Biogen is one of the largest biotech companies in the world. So it's probably not much of a surprise to know that they rack up billions of dollars a year in sales. Total revenue last year was $11.4 billion, and that was up about 6% from 2015. If you back out the negative drag of currency conversion on sales that occurred overseas, total revenue was actually up about 9%, which is pretty solid growth for a company of this size. Giving a little background here for people who might not be as familiar with Biogen -- the reason that Biogen became such a large player in biotech is because it is the biggest drugmaker of therapy used to treat multiple sclerosis. So that market is valued at about $19 billion. Biogen controls over a third of that across all these different multiple sclerosis drugs.

Harjes: Right. When you look at their earnings, you have to break it down into top line and bottom line here. They had fairly sluggish revenue; it was only up 1% year over year to $2.87 billion in the fourth quarter. But that was very much made up for by reduced expenses. If you take a look at their adjusted earnings, adjusted as in non-GAAP, they had to take out some things that were affected by a settlement with Forward Pharma over some patents -- when you get to adjusted EPS, they had a 12% increase year over year in the fourth quarter. For a company this size, that's really solid. I think the one story you really need to focus on here with Biogen, particularly given that today is the day, Biogen is spinning off its hemophilia franchise -- I shouldn't even say "is spinning off." As of today, they have spun off this company called Bioverativ as a stand-alone company that will focus on hemophilia. How are you thinking about this spinoff?

Campbell: It's a really interesting decision on their part. The drugs that are being spun out, Alprolix and Eloctate, those two hemophilia drugs are their fastest-growing drugs in their product lineup. So they decided to take this part of their business and spread it out so that they can focus more on these neurological disorders like multiple sclerosis and, like we'll talk about in a minute, things like Alzheimer's disease and Parkinson's disease and whatever, that's going to be what's left at Biogen. Then, they're taking these smaller drugs that are less core but also very fast growing, and spinning them off. I think there are some intriguing reasons why they're doing this. It's kind of speculative on my part, but I think the reason they're doing this is, this is an increasingly competitive market. To back up for a second, those two hemophilia drugs from Biogen reshaped hemophilia treatment. Again, similar to the conversation we just had on the last part the show, reducing the patient burden by lowering the number of doses of the medicine that they need to take every week. By doing that, reshaping that and reducing the patient burden, these drugs have really taken off and become pretty meaningful drugs. Combined, they generated over $800 million in sales last year.

Harjes: This is a pretty big indication. There's 400,000 people in the world affected by hemophilia. This company launched today. Its ticker, if you're interested, is BIVVV. How the spinoff works is that Biogen shareholders, at the close of business on Jan. 17, received one share of the new company for every two shares that they had of Biogen. Did I get that ratio right?

Campbell: Yeah. Probably the biggest question on people's minds, Kristine, right now -- since it was a spinoff, do I hold these shares? If you're a Biogen investor right now, and you just received these shares in this new spinoff, should you keep it or not? I think one interesting thing to keep in the back of your mind, I was talking about the competitive landscape, while these two drugs reshaped treatment, all of the other hemophilia players have also been developing their longer-lasting formulations as well, and those have all been hitting the market and becoming available over the last 12 months. So, 2017 and 2018, we could see a much more drastic slowing in the top-line growth for this new company. People are going to have to keep that in mind. On the other side of that, they have to say, we also know, because it's so competitive, there has been a lot of acquisition activity. Shire spent a truckload of money to buy Baxalta, one of the largest players in the space, just a couple years ago. So it wouldn't be too shocking. That was also a spinoff, by the way, that was spun off by Baxter. So it wouldn't be too shocking to me if this company, maybe, ends up becoming a target at some point in the next couple years. No, that's not necessarily a reason to hold the stock. But it's something to keep in the back of your mind.

Harjes: Great. What about Biogen itself? This was actually one of Tom's questions directly. He said, "Is Biogen less valuable? Or is it potentially more focused after the spinoff?"

Campbell: I think one of the biggest questions that I have about Biogen right now is actually due to a competitor. Celgene has been working on a drug that is taken orally for multiple sclerosis, and data is expected in the first half of this year. If that data is good, then theoretically, you have what could be or prove to be a best-in-class solution that reshapes the oral market for MS drugs. And as a reminder, in case you don't follow this company closely, one of the best-selling drugs at Biogen is Tecfidera. Tecfidera rakes in about $4 billion a year, and it is the leading oral drug right now. So you have to watch very carefully here in the next few months what comes out of Celgene, because there could be a big threat in 2018 to Biogen's growth because of that drug. So I think it's great to see that Biogen is more focused. But there is a threat there that we need to be aware of, especially since there is not a tremendous amount of news flow expected in 2018 regarding Biogen's pipeline.

Harjes: Exactly. They don't have a lot of short-term opportunities to prove that they have more firing power if they were, potentially, to lose market share in MS. The one thing that could potentially be a big growth driver for this company is a drug called Spinraza, which was just approved on Dec. 23 for SMA, which is spinal muscular atrophy. This could be a huge drug. I believe we talked about it on the show. It's priced at $750,000 a year, which is just a mind-blowing price tag. Todd, what do you think the odds are that this drug will succeed?

Campbell: I think the odds are probably very good. There are no treatments for this indication. You get 13,000 new cases a year, about 20,000 people in Europe and the U.S. with the condition now that can be addressed by this drug. Yes, it's not cheap, but I think negotiations will happen. Even if you take the conservative and say, at $500,000 a year, you don't need a lot of patients to turn this into a $1 billion drug. Now, Biogen is going to have to share some of that in royalties to the drug's co-developer, Ionis Pharmaceuticals, but this still could be, I think, a nine-figure drug relatively quickly, and potentially a 10-figure drug over the course of the next two or three years. That would be one really nice piece of upside and would obviously replace a lot of the lost sales from spinning off those two hemophilia drugs, which contributed over $800 million in sales last year.

Harjes: Right. And management agrees with you as well. I will point out that the CEO, on the latest call, said that Spinraza is "Biogen's most exciting commercial opportunity for 2017." He noted that, in the early part of its launch, that reimbursement is choppy, but ultimately, this is a necessary drug. The patients have no other options. So I really don't see insurers pushing back much on this price.

Campbell: They'll be slow to roll it out, and I'm sure they're going to try and put some blocks, kind of like we've seen with some of the other high-priced drugs that have launched. But yeah, I think, ultimately, this is going to be a nine-figure drug or better, and that's going to be, maybe, the brightest spot for the company, as far as the story over the next 12-18 months. Again, the big question is, what's in the pipeline for Biogen further out? What news could be coming? And what's going to happen on the competitive landscape in multiple sclerosis, and how will that take out as far as market share in the next year or two?

Harjes: Right. And speaking of the pipeline, I think there's one drug that, we can't talk about Biogen without mentioning the potential and the opportunity here. This drug is called Aducanumab, and it is still in development, in trials. It's a treatment for Alzheimer's. If you've been following the healthcare landscape, you know this is a heartbreaking disease to try to treat. These drugs get so close to the finish line, and then they fail, time and time again. So Biogen's candidate targets the same target as Eli Lilly's recently failed drug; the target is called amyloid. But, there are some key differences between the Biogen drug and Lilly's failed drug that, hopefully, for the sake of patients, and also, I guess, for shareholders of this company, those could be pivotal.

Campbell: Yeah. Biogen's management was asked specifically about this -- how is your drug different from the one that just failed at Eli Lilly? And Biogen's response was, there are a couple different reasons that are important here. One, Lilly's drug had trouble passing through the blood-brain barrier, and getting to the brain where those plaques build up. They claim that their drug, Biogen's drug, does not face that risk, that it does pass through and does reach the brain, and therefore could become the more efficacious in breaking down these plaques that are thought to be behind the disease.

The other thing that they brought up was that the end point, what the trial was designed to prove is different in their trial versus Eli Lilly's trial. And because they are using a different endpoint that they think they have a better chance of delivering the goods on, that this trial may not fail in the same way that Lilly's drug failed. Time will tell. We've talked about this on the show. Alzheimer's disease is an incredibly important indication, very limited treatment options, nothing that slows disease progression. So, there's a big unmet need. But if you look at the 2002-2012 time period, more than 99% of the drugs that have gone into clinical trials for Alzheimer's disease have not panned out. So there's an incredible amount of risk associated with this.

Harjes: Right. Huge risk, but also a huge potential upside. If you are a shareholder of this company, or considering an investment, it's a drug that you'll want to keep your eyes on.

That will do it for today; we're just about out of time. Thanks so much, Todd, and thanks to everyone tuning in. As I mentioned earlier, feel free to email the team if you have any comments or questions. Our email address is [email protected]. Also, quick shout-out to everyone who has already written in in the past week or so. We have heard from Laura M., Ben W., Mark K., Sam M., and many more. You guys are awesome. You're a lot of fun to hear from.

As always, people on the program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. For Todd Campbell, I'm Kristine Harjes. Thanks for listening, and Fool on!