Mylan’s (MYL) generic Copaxone is here and it is putting a dent in Teva’s (TEVA) blockbuster multiple sclerosis drug. According to Credit Suisse analyst Vamil Divan, Mylan has taken about 10% of total prescriptions:
The copycat boasts a 10% piece of the total-prescriptions pie, Credit Suisse analyst Vamil Divan, M.D., wrote to clients, citing IMS Health data from the week ended Dec. 22. Long-acting Copaxone is hanging on to a 72% share, while Teva’s original formulation of the multiple sclerosis blockbuster, Copaxone 20 mg, still has 12%.
Glatopa, a generic from Novartis’ Sandoz of that older product, has just a 5% share after launching in June of 2015, highlighting just how quickly Mylan’s knockoff has ascended. In early October, the company trumpeted approvals of both its 40-mg and 20-mg versions after years of delays and a June “information request” from regulators that left some analysts convinced an OK wouldn’t arrive till next year.
Teva is reeling from price erosion in its core generics business. A hit to Copaxone where it generates hefty margins is the last thing the company needs. Below I will attempt to parse through the implications of Mylan’s encroachment on Teva’s turf.
Potential Revenue And EBITDA Hit
Teva’s Q3 revenue was up 1% Y/Y. Generics and Copaxone were off 8% and 7%, respectively. Copaxone was hurt by an increase in managed care rebate accruals due to the arrival of generic Copaxone. The Specialty segment (19% of total revenue) saved the day with a 6% increase, powered by respiratory and oncology drugs. The following chart outlines the potential impact of generic Copaxone on Q4 revenue and EBITDA.
- The company’s Q3 revenue and EBITDA were $4.6 billion and $1.6 billion, respectively. Assuming an 81% EBITDA margin for Copaxone, the drug would equate to about 49% of Teva’s total EBITDA.
- I assumed that half of generic Copaxone’s 10% share could come from Copaxone, thus the 5% sequential decline in revenue.
- I understand Teva is meeting Mylan’s price cuts. I assumed 40% of its run-rate revenue was subject to 30% price cuts. This resulted in an additional revenue decline of $113 million.
- Net revenue after market share loss and price cuts would be about $825 million for Q4. This would represent a sequential decline of about 16%.
- I assumed flat EBITDA margins of 81% for Copaxone. EBITDA of $668 million would also decline 16% sequentially. This could be optimistic.
I kept revenue and margins ex-Copaxone constant despite the fact the generics business continues to erode. Combined revenue of $5.4 billion would be down about 3% sequentially; EBITDA of $1.5 billion would be off 8%. Copaxone has tremendous margins so any hit to its revenue could have an out-sized impact on Teva’s overall EBITDA.
Impact On Teva’s Outlook
If Q3 revenue growth of 1% Y/Y was enough to create negative sentiment among investors then how would a 3% decline sequentially be received? It will likely get worse as Mylan takes more share and/or Teva cuts prices to meet Mylan’s price cuts. Mylan is reeling from the diminution in its EpiPens franchise and needs to grow its generics revenue to offset it. I expect Mylan to be formidable going forward and take extreme measures to garner more market share. That said, if Q4 results do not sink TEVA then management’s outlook just might. Losing revenue that is brought on at 81% EBITDA margins would be difficult for any company to overcome.
To its credit Teva has stepped up its new product launches. Along with Mylan the company recently launched a generic version of Allergan’s (AGN) Estrace vaginal creme. Assuming FDA approval it could launch a generic version of dry eye regimen Restasis which is a $1.8 billion market in the U.S. alone. FDA recently denied Allergan’s third petition to block generic Restasis; it could clear the runway for Mylan and Teva to enter the market this year. The downside is that generics have much lower EBITDA margins (less than 20%) vis-a-vis Copaxone.
CEO Kare Schultz has also announced he would lay off 25% of the workforce and expect to generate cost savings of about $3 billion. Headcount reductions will likely be phased in over time. Meanwhile, margin erosion will likely occur in real time. This will likely not help Teva’s ability to restructure its $34 billion debt load. The company has $5 billion in debt due in 2018 and $13 billion due over the next three years. Management would rather forgo raising equity, but new debt might have to be raised with extremely high interest rates. The company’s average interest rates appear to be less than 2%. The company would potentially face rate increases as its core business erodes.
Conclusion
TEVA is up over 55% since its disappointing Q3 results. That could change once investors realize the impact of generic Copaxone is not just a rumor. TEVA remains a sell.
On Trump And the Global Economy
Trump And The Global Economy Town Hall took place October 24th in Fort Greene. It Featured Professor Lance Brofman, Coconut Rob (Coconut Rob Smoothies), Wuyi Jacobs (AfroBeats Radio) and Ralph Baker, author of Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead.
The event was well-received by the community. We parsed through President Trump’s proposed tax plan and [i] how it was pure economic folly and [ii] high net worth individuals could potentially game the system by shifting income around. Apparently, Kansas Coach Bill Self did this when the state of Kansas cut taxes in the past. We discussed the pros and cons of technology on workers and the economy. How will the economy and country prosper under Trump’s leadership vis-a-vis Obama? What’s behind the verbal sparring with black athletes, ESPN’s Jemele Hill and North Korea’s Kim Jong Un?
