Can Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) Survive Generic Drugs Pricing Pressure?


Politics and industry consolidations are raising the stakes in the pricing of generic drugs. What does that mean for Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA), the world’s largest generic pharmaceuticals company? This Teva analysis article examines how the company is trying to cope with pricing challenge in its generics business. First is a summary of 1Q2016 earnings.

1Q2016 summary

Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) generated revenue of $4.81 billion in 1Q2016, down 3.5% YoY. EPS of $1.20 was down from $1.36 a year ago but easily beat the consensus estimate of $1.17. Analysts expected revenue of $4.77 billion in 1Q2016. Despite generic pricing pressure, Teva managed to keep margins nearly steady in 1Q2016.

Teva reported that its generic sales fell 17% to $2.2 billion in 1Q2016, but branded drugs sales rose 10% to $2.2 billion, thanks largely to strong sales of respiratory and CNS therapies.

2Q2016 outlook

The management provided projections for 2Q2016 financial performance whereby revenue is seen coming in the range of $4.7 to $4.9 billion. EPS for the quarter is expected to be in the band of $1.16 to $1.20. Analysts on the average are modeling revenue of $4.89 billion.

The chart below shows Teva’s revenue for the last five quarters:

Capture

Research cost

Teva’s R&D costs in 1Q2016 rose 14% to $375 million. R&D spending in the quarter was 7.8% of the quarterly revenue, up from 6.6% in the year ago quarter. The company is funning more resources to R&D to enable it grow its speed up pipeline development and expand its portfolio of both branded and generics.

Generic market share

Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) controls more than 12% of the worldwide generic market measured in revenue. But it plans to grow its generic business even bigger in the coming years to enable it take up more market share to allow for more accelerated growth.

Generic dominance

Here is a look at what is Teva doing to grow its generics business and what could come out of those efforts.

Adding scale

Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) is in the process of buying Allergan PLC (NYSE:AGN)’s generic business for $40.5 billion. Regulators in Europe, where Allergan is headquartered, have already approved the transaction but they require the companies to divest themselves of certain assets before the deal can close. The transaction is expected to close in June 2016 if everything goes according to plan. It is estimated that Teva will have to divest itself of assets worth $2 billion to get regulators’ nod to close the deal.

For Allergan, the sale of the generics unit will unlock funds to eliminate outstanding debt and also return value to shareholders. Allergan hopes to return nearly $10 billion to shareholders in the form of shares repurchase. About $4 to $5 billion of the buyback is expected within the first four or six months after closing the transaction with Teva.

As for Teva, the purchase of Allergan’s generic business will boost its own generic portfolio and add scale that is necessary to take on competition in the copycat medicines market. After adding Allergan’s generic business to its portfolio, Teva expects its generic division to expand to account for at least two-thirds of its total revenue. In 2015, Teva’s generics business shrank to just about half of the company’s sales.

Tough competition has limited Teva’s generic revenue growth as demonstrated in 1Q2016.

It is worth noting that Teva postposed the acquisition of Allergan’s generic arm twice as U.S. regulators required more time to examine the transaction.

The deal by Allergan is expected to yield $1.4 billion in cost-savings for Teva in the third anniversary of the deal’s closing.

Dealing with generics pricing pressures

Although there have been growing concerns about deteriorating pricing environment for copycat medicines, Teva officials recently begged to disagree. The head of Teva’s generic business, Sigurdur Oli Olafsson, said that they had not seen any significant adverse shift in the pricing of their generic products. He pointed out that pressure in generic pricing comes down to the business model of each company.

Management’s show of confidence regarding the future of generic business is important given that generic pricing has been a major concern for investors in the recent times. Calls for lower drug prices have intensified, especially in the U.S. where lawmakers in Washington and others in the 2016 presidential campaigns have attacked expensive drug prices.

Besides politics, competition is also a factor in eroding generic prices. The competitive pressure on generic pricing has been exacerbated by consolidation of the pharmaceutical industry.

How does Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) hope to cope with price erosion in the generic market? The company said that generic prices fell 4% in 2015 and expects a similar percentage decline in prices in 2016. But its rivals are guiding steeper price declines this year, which means that Teva is feeling more secure over the generic pricing issue. So, what does the company have up its sleeves? Teva believes that building a more powerful generic business will help it escape serious effects of generic price erosion. Additionally, the company is betting on its deeper generic roots to sidestep any pricing pressure in the business.

For example, while the company launched 450 generic drugs in 2015, it expects to add more than 1,000 this year after closing the purchase of Allergan’s generic division. The management is projecting even more generic launches in 2017 and the coming years. The marathon pace at Teva wants to grow its generics business should be out of rich of its rivals, thus allowing the company to expand its market share faster and grow sales quickly to mitigate the impact of weaker prices.

What about specialty medicines?

Outside of generics, Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA)’s branded drugs business is doing well. Sales in the division rose 10% in the latest quarter a time when generic sales shrank 17%. Teva is willing to funnel more resources to R&D to allow for accelerated growth of its specialty arm. However, in the specialty business, Teva also has to cope with exposure to generic competition as key drugs lose marketing exclusivity.

Takeaway

On the issue of coping with pricing pressure in the generics market, Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) appears to have a credit strategy.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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