Although Teva Pharmaceuticals (NYSE:TEVA) is primarily known for being the largest generic drug manufacturer in the world, its recent success has been largely attributed to patent-protected (specialty) pharmaceutical products. In fact, specialty pharmaceuticals generated 42% of Teva's revenues in the first three months of 2014, and 67% of the company's operating income.
The bulk of this specialty pharma revenue comes from Teva's drug Copaxone (glatiramer acetate), which was the single best-selling multiple sclerosis drug of 2013 with impressive revenues of $4.3 billion. But with a recent court ruling, generic competitors were allowed to end Teva's party.
While everyone knew that Copaxone's May 2014 US patent expiration was coming, there was some hope that the company would at least be able to delay the launch of generic drug competitors to Copaxone being introduced by Mylan and Momenta Pharmaceuticals.
But with the recent loss of its lawsuit against the FDA's approval of these generic (which was meant to block competing glatiramer acetate formulations without additional bioequivalency trial data) it's clear that the new 40 mg/mL formulation of Copaxone is now the only thing preventing Teva's Copaxone brand from totally losing its market share in multiple sclerosis given its current price.
Can Copaxone fight generic competitors?
In January 2014, the FDA approved a new 40 mg/mL dose of Copaxone after Teva submitted an sNDA based on a 1155-patient phase 3 trial that successfully proved the bioequivalence of the new dose to the old 20 mg/mL dose.
For patients, the key difference between the original 20 mg/mL and the 40 mg/mL versions of Copaxone has to do with the dosing schedule. MS patients originally had to receive daily injections of Copaxone at the 20 mg/mL dose, but they can now opt to receive three injections each week instead. In addition to the improvement of convenience added by the 40 mg/mL, the new dose could also reduce the frequency of injection-site reactions.
Because the 40 mg/mL dose will retain its patent until year 2030, we can also understand why the new formulation is so important to Teva. It allows Teva to differentiate and protect a "new" Copaxone from generic competitors who will have a clone of the 20 mg/mL version of the drug.
But ultimately, 40 mg/mL Copaxone has only proven its bioequivalence to 20 mg/mL in MS (as mentioned earlier). There are no data that prove that the new formulation is safer, more tolerable, or more efficacious than the old one. This is great news for health insurance providers, who should have an easier time pushing patients toward generics and out of Teva's $60,500/year reformulation.
This could lead to rapid insurer pushback against 40 mg/mL Copaxone, which isn't necessarily priced into Teva yet.
Teva guidance suggests that we should see Copaxone sales between $3.1-3.2 billion for fiscal year 2014 in a scenario where generics enter the market after the May 2014 patent expiration. Although this revenue guidance range is $500 million lower than the $3.6-3.7 billion estimate proposed for a scenario where generic competition was delayed, an optimistic market still decided to bring shares to a 52-week high.
This drug has been crucial to Teva's bottom line growth throughout the few years, and constitutes a big part of the company's valuation. And because there are no drugs that can quickly replace 21% of Teva's revenue stream in the short run, damage to Teva's top and bottom line growth seems inevitable.
The 40 mg/mL version of Copaxone is the only thing that seems capable of fending off generic competitors, but payer pushback could be a real issue.
What else should we consider?
Teva also offers a nice dividend with over a 2% yield that should support the valuation of the stock to some degree, and also boasts a healthy balance sheet that provides enough resources for an acquisition.
There are also a number of specialty pharmaceutical product that have been growing sales figures steadily throughout the last few quarters – like Treanda and ProAir – but these products are simply too small in comparison to Copaxone to make a significant impact on Teva's top and bottom line performance.
So overall, I don't see much upside for Teva's $50 billion valuation given its current pipeline. I also see risks (other than Copaxone) that could put serious pressure on this stock, including ongoing legal investigations.
On the whole, I'm comfortable watching how Teva responds to these problems from the sidelines.