Still too soon to talk about Teva's recovery

Eli Tsipori

Teva has no growth engine to compensate for Copaxone and the fall in US generics prices.

1.

Forget about all the analysts' short-term games with headlines saying that Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) outperformed these forecasts or raised its profit-per-share guidance. Look at the long-term trends. If anyone thought or hoped that the meteoric rise of Teva's share price over the past year followed or reflected the fastest turnaround in history by a company of Teva's size and type, the company's second-quarter reports showed all the investors that there are no miracles emerging from a crisis. The recovery process in a large company like Teva is not like a card trick or pulling a rabbit out of a hat. It is a long, Sisyphean process with many challenges that do not depend solely on the company and its managers. It is not a process that can be completed in one year, or even two years, especially not in such a difficult market as the pharmaceutical market.

Keep in mind that even after a jump of over 100% in Teva's share price in less than a year, it is still trading at only a third of its all-time peak price. Don't get carried away.

2.

It was clear to everyone that Teva's struggle for survival would include an aggressive streamlining campaign, cuts in expenses, and layoffs. Teva is boasting about its reorganization plan designed to save $1.5 billion out of a total of $3 billion. That's nice, but it's not enough. The expenses side can be handled in the best possible way, and it appears that Teva is doing it well (again, for lack of choice), but as long as it has a tough problem with revenue, problems will be quick to surface.

Teva has a two-faceted problem with revenue. First of all, the golden Copaxone era is over, regardless of how much Teva boasts about doing a pretty good job of retaining its market share. That retention came at a heavy price: substantial price erosion caused by competition from generic products causing a nose-dive in the drug's phenomenal profit margins and volume of profits - the company's main anchor for many years.

One figure highlights the entire problem: $464 million in Copaxone revenue in North America in the second quarter, compared with $859 million in the corresponding quarter last year - 46% less. Price pressure is also having a negative impact on Teva's generics business. This is part of a trend that Teva cannot really do anything about except for streamlining. The weakness in the US market is well reflected in the revenue line in North America: $947 million in sales of generic products in the second quarter, compared with $1.33 billion in the second quarter of 2017, a decline of nearly 30%. If Teva's main market is in the doldrums and its Copaxone cash cow is no longer supplying the same goods, the company has a problem.

3.

Teva has a problem because as of now, it has no growth engine up its sleeve to compensate for the dramatic erosion in its regular activities. The branded drugs in the pipeline are far from being Copaxones, at least for now. The drug for treatment of undesirable movement disorders has been growing nicely since it was launched, but it still amounts to just $44 million a quarter. The drug for treatment of migraines is still waiting for a decision from the FDA. There is not a ghost of a chance that either of the two drugs, or both of them combined, can make up in the short term for the rapid decline in Copaxone's performance.

Worst of all, Teva generated only $162 million in cash flow from current activity in the second quarter. In Teva's terms, that is very little. When combined with a debt that has settled at $30 billion (albeit mostly long-term), Teva's managers have plenty of financial challenges to overcome before they can heal the company. When added to the operational challenges, the state of the generic drugs market, competition and price pressure in the market, it is definitely no picnic.

Teva is still struggling to survive, that has not changed, and to remain independent. As of now, after its share price took a beating following its recent reports, Teva's market cap is $22 billion, the value of a small-to-middling company in the drug market. With a value like that, no one will be surprised if Teva's board of directors agrees in the future to sell the company if a bid is on the table.

Published by Globes [online], Israel business news - www.globes-online.com - on August 2, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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