Teva back where Vigodman started

Erez Vigodman  photo: Tamar Matsafi

Since becoming CEO, Erez Vigodman has seen Teva's share price climb 40%, and slide all the way down again, but the sell-off may have been overdone. 

The share price of Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) is at about the same level now as it was at on the last day of Jeremy Levin's term as CEO in early 2014. After Levin's successor and current CEO Erez Vigodman took over at the helm, Teva's share price rose 40%, reaching a peak in July 2015, when the company announced the acquisition of Actavis, the generic division of pharmaceuticals giant Allergan. Since then, however, the added value has been completely wiped out. Teva currently has a market cap of $39.6 billion, so that the value it has lost since the peak is $15.8 billion.

For some time, worried voices have been raised on the market about the future of the company and its stock, and there have been questions about Vigodman's responsibility for the situation. After all, he received a great deal of credit when the share price rose.

Analysts and Israeli market capital sources say that the most recent fall in Teva's share price is out of proportion to events at the company. "The share is currently traded at a p/e ratio of about seven, which is low for the industry," says IBI pharma and biotech analyst Steven Tepper. Leader Capital Markets analyst Sabina Podval Levy agrees. "The current price is not high," she says, "even if Teva does not beat its guidance, which is seen as a little overoptimistic."

Analysts in the US, by contrast, are divided: some rate the stock "Buy" and some are neutral at last week's price.

The two main reasons for the falls are factors beyond the company's control: the general trends in the pharma sector, which are putting downward pressure on drug prices; and the lawsuit currently taking place in the US, which will set the date for generic 40 mg dosage Copaxone to enter the market. Multiple sclerosis treatment Copaxone is Teva's main profit generator, and most analysts believe that Teva will lose the case.

Nevertheless, factors within the company's control have also contributed to the decline: the fiasco of the acquisition of Mexican company Rimsa and Teva's allegation of deception on the part of the sellers; the huge acquisition of Actavis, which was lauded at first but now looks expensive; the halting of the trial of a back pain product shortly after it entered the company's pipeline; and general questions about Vigodman's acquisition strategy, which can now be examined over a year.

The main signal that the market is now looking for is an indication that Teva knows what it is doing: that it can present a plan for cutting costs at Actavis such as will justify the price paid; that it has a clear strategy as far as its product pipeline is concerned; that the mistake over the acquisition of Rimsa is a one-time occurrence; and, above all, that Vigodman is securely in control of events at the company.

"Since the last time Teva visited a share price like this, things happened that on the face of it were positive," says Levy, "Even if we assume a worsening of the business environment - further erosion of generics prices, the introduction of generic Copaxone but also risk-appropriate success of the innovative products - today's pricing does not look high."

Was Actavis necessary?

Actavis was Teva's biggest acquisition to date, at a price of $40 billion, which is similar to Teva's entire market cap. Does this acquisition justify the high leverage Teva took on in order to carry it out. Clearly, Actavis cemented Teva's status as the largest generics company in the world, at a time of consolidation in the industry, but is that status really needed? "In the past decade, every acquisition by Teva in generics actually led to a decline in its market share in the US, but they still continue to buy all the time," a senior pharmaceuticals industry source told "Globes".

"These acquisitions are different from those in the late Eli Hurvitz's time. He bought companies that had drugs with exclusivity periods under US generic drugs legislation (paragraph 4), and so he obtained products with high profit margins. Today, this tactic is irrelevant, and generics deals carry low profit margins," the source adds, "At $40 billion, could Teva not have bought businesses with higher profit margins? Now, when the deal is done, we can only hope that it will justify itself, and that depends on the ability to save costs.

"In the past decade, Teva has spent $70 billion on huge acquisitions - Cephalon and Actavis - and we would therefore expect its market cap to be at least $70 billion, but in fact it's half that, and the share price has fallen more steeply than the rest of the sector. The cost savings weren't enough to justify the acquisitions."

Copaxone: The price won't slump immediately

Copaxone currently accounts for 23% of Teva's revenue, and an even higher proportion - which Teva does not disclose - of its profits. Most US analysts believe that Teva will lose in the lawsuit, and that generic 40mg Copaxone, to which Teva has managed to transfer most patients in the past year, will enter the market in 2017. It follows that any surprise result in Teva's favor should improve the position of the stock.

Tepper: "Even if Teva does lose the case, that won’t mean that generic Copaxone will flood the market, or dominate it within a short time, and it also won’t mean that prices will drop immediately, as happens in generic markets with many competitors. For the time being, only the product of Momenta and Sandoz has been approved for marketing, and I believe that just as Teva is thought to have persuaded the FDA that Mylan's generic Copaxone is not similar to the original, it has some cards up its sleeve in relation to the other competitors. I see Copaxone revenue falling only by half by the end of the deacade."

In the past Teva also feared non-generic rivals to Copaxone, but that fear has receded. The most threatening product, Biogen's Tecfidera, has not managed to undermine Copaxone's market leadership. Roche has a new and promising multiple sclerosis treatment in its clinical pipeline, but for the present it is perceived as a lesser threat to Copaxone than generic Copaxone.

Generics are both the problem and the solution

The pharmaceuticals companies are under political attack in the US, following sharp rises in drug prices in the past few years.

Will generic drug companies continue to be affected by this trend? Not necessarily, says Tepper. "Generics are both the problem and the solution here. If you encourage competition in generics, prices will fall. If legislation makes Teva and Mylan exit certain markets because they are no longer profitable, then there will be less competition in those markets. No politician wants to shoot himself in the foot like that."

What about non-generic products, such as Copaxone, whose price has risen several times over since it started being sold? Well, it looks as though the period of such steep price rises is over, but in Tepper's view the calls for lower prices will not result in harsh measures, even if Hillary Clinton, who has led the fight against soaring drug prices, is elected president of the US next month. "The politicians don't really want to harm healthcare R&D, or the giant US companies that employ thousands of people in quality research projects."

Levy: "Part of the change in the market has in any case already happened. Consolidation of the drug customers - the hospitals and insurance companies - has reduced generics prices. The elections are a cloud that will hang over the industry for the next few weeks, but sometimes when what is anticipated actually happens, the sector starts to recover."

Former Teva CEO Jeremy Levin, who has been very involved in the drug price issue recently in his new role as CEO of biotech company Ovid Therapeutics, said, "Price pressure will require generics companies to innovate in their production processes, and success in the market will come only to the companies that succeed in doing so."

On the effect of the US election results, he says, "I hope that the companies will conduct a sensible process of controlling prices before the politicians do it, because if the politicians manage the program, it certainly won't be a good one."

Rimsa: A one-time, uncharacteristic event

As far as Rimsa is concerned, apart from the immediate damage - a $2.3 billion acquisition that will now not yield the expected return - the question arises how Teva failed in its due diligence examination of the company, when the flaws went so deep. Teva was not the only bidder for Rimsa, and other companies of its caliber offered to buy it at the same time, but Teva agreed to pay a higher price.

Levy: "Rimsa is a one-time event, but not one that I would have expected to occur at Teva. Now, with questions being raised about the price paid for Actavis, and the price not reflecting what the company received in the case of Rimsa too, some investors are connecting the two things," that is, they fear that this is evidence of some problem in Teva's acquisitions machine. Nevertheless, these are ultimately two very different deals.

The innovative pipeline and Regeneron

Another large question, perhaps the largest concerning Teva today, is that of the innovative pipeline. It seems that the market has grown tired of asking whether and when Teva will have "another Copaxone", and measures taken at the company in recent years have indeed structured it in such a way that even without another Copaxone, that is, another best-selling drug bringing in billions of dollars a year, it is still viable as a leading company.

The company does however have products undergoing trials, and these are certainly aimed at markets that could develop to become similar in size to the multiple sclerosis market, if the drugs succeed. (A successful drug in a virgin market lengthens patients' lives, and encourages early diagnosis and treatment, so that the number of patients grows.) News of almost all these products is expected in the coming year.

This area of activity also had a part in the recent decline in Teva's share price. One of the leading products in the pipeline is a treatment for inflammation of the joints and chronic back pain, the subject of collaboration between Teva and highly-regarded biotech company Regeneron. Regeneron and Teva announced that a trial of the product had been halted because of severe side effects in one patient, but their announcement had a positive side as well: the companies ended the trial early, but the findings from it were that the drug was effective, and they are now planning a Phase III trial with a protocol designed to prevent the side effects. If all goes as planned, and the side effects do not recur in the Phase III trial, Teva and Regeneron will in effect have saved about six months in comparison with the original schedule. The analysts at UBS, who are neutral on Teva, claim that these side effects are inherent in the type of drug that Regeneron is developing, and that they had no expectations of this product because of the problems affecting the entire category.

If the product does fail, it will be possible to say that here too the flaws should have been identified before the purchase. If it succeeds, however, it could certainly become another Copaxone. The Regeneron deal is a gamble, but not a very expensive one. The collaboration has so far cost some $250 million, and further costs will be incurred only if clinical trials proceed successfully. "In my opinion, it's excellent that they bought a new drug, and Regeneron is an excellent company," says Jeremy Levin, "but why did they buy a drug for pain in the joints and not a neurological drug, the field that they have defined as their area of expertise? Are they going into inflammatory diseases? Or is the link to the central nervous system that Teva has said it will focus on the pain aspect?"

Published by Globes [online], Israel business news - www.globes-online.com - on October 25, 2016

© Copyright of Globes Publisher Itonut (1983) Ltd. 2016

Erez Vigodman  photo: Tamar Matsafi
Erez Vigodman photo: Tamar Matsafi
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