Are Teva Pharmaceutical's Best Days Behind It?

By Todd Campbell Markets Fool.com

After losing a patent challenge in U.S. District Court, it's become increasingly likely that Teva Pharmaceutical Industries' (NYSE: TEVA) top-selling Copaxone will face generic competition soon. Since Copaxone accounts for 16% of Teva Pharmaceutical's sales, and over 40% of its operating profit, investors are right to be nervous. Can Teva Pharmaceutical side-step the risk to Copaxone and reward investors?

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Image source: Getty Images.

A bit of background

Teva Pharmaceutical is the world's biggest generic-drug maker. However, the company gets a significant proportion of its revenue from sales of its branded multiple sclerosis drug, Copaxone.

Initially approved in 1996, 20 mg Copaxone went on to become the planet's most prescribed multiple sclerosis (MS) drug, with global sales of $4 billion in the $19 billion MS market.

Patents protecting Copaxone against generic competition, however, expired two years ago, and despite Teva Pharmaceutical's legal efforts, generic-drug makers Novartis (NYSE: NVS) and Momenta (NASDAQ: MNTA) launched Glatopa, a 20 mg generic alternative, in 2015.

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So far, Teva Pharmaceutical has side-stepped most of Glatopa's threat by launching a longer-lasting 40 mg formulation of Copaxone.Because this 40 mg variation is dosed three times weekly, rather than daily, Teva Pharmaceutical successfully shifted most 20 mg patients to it, thereby blunting Glatopa's threat.

Approaching risk

Teva Pharmaceutical's 40 mg gambit may only have been a temporary reprieve, rather than a long-term solution to risks facing the company from Copaxone look-a-likes.

Last year, a patent review board invalidated three patents protecting 40 mg Copaxone,and this week, a U.S. District Court found in favor of generic competitors, invalidating four key patents that are keeping their 40 mg alternatives at bay.

The news increases the likelihood that40 mg Copaxone copy-cats will be available sooner rather than later, despite appeals that could delay launches. If so, then Teva Pharmaceutical faces a big problem.The company estimates Copaxone sales of between $3.8 billion and $3.9 billion, and that means that Copaxone sales account for about 16% of Teva Pharmaceutical's worldwide revenue. In patients that continue to use the 20 mg version of Copaxone, 60% converted to Glatopa following its launch. Since Glatopa lauched with a list price that's 15% to 18% below Copaxone, and a 40 mg generic will likely be similarly discounted, a significant amount of Teva Pharmaceutical's sales are at risk.

It's not all bad news

The availability of a 40 mg generic Copaxone would undeniably be bad news for Teva Pharmacuetical in the short run.In early January, management conceded that a launch of a 40 mg generic in February could reduce revenue by $1 billion and non-GAAP EPS by $0.65 or more this year.

Undeniably, modeling for such a big hit to its financials following a launch demonstrates how significant the threat is to this company. However, Teva does still have opportunities that -- eventually -- could allow it to overcome headwinds tied to generic Copaxone.

For example, Teva Pharmaceutical can generate billions of dollars in revenue by developing complex biosimilars to expensive biologic drugs that are losing patent protection. It's also working on new brand-name drugs that have nine-figure (or better) potential, including therapies for big-value indications like chronic pain, migraine, and asthma.

Importantly, that innovation will happen against a backdrop of cost savings associated with the integration of Actavis' generic business, which Teva Pharmaceutical acquired last year. Teva thinks it can carve out $1.4 billion in synergies by 2019.

Looking ahead

Teva Pharmaceutical comes with a lot of patent risk, and that makes investing in its shares very dangerous in the short term. However, the company is likely to remain a profitable leader in generics, and if shares continue to decline over the next year or two because of Copaxone competitors, then it could present an intriguing long-haul buy opportunity. Until then, however, I'm content to focus on other ideas that could be less risky.

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Todd Campbell has no position in any stocks mentioned.His clients may have positions in the companies mentioned.The Motley Fool recommends Momenta Pharmaceuticals and Teva Pharmaceutical Industries. The Motley Fool has a disclosure policy.