In an Ironic Twist, Generics Take Aim at Teva Pharmaceutical

By Todd Campbell and Kristine Harjes Markets Fool.com

Teva Pharmaceutical's(NYSE: TEVA) top-selling drug is the long-standing multiple sclerosis therapy Copaxone. The drug racks up billions of dollars in annual sales for the generic-drug powerhouse, but that could change, because Teva Pharmaceutical's generic rivals are challenging Copaxone's patents. Can Teva Pharmaceutical sidestep this threat? In this episode of The Motley Fool's Industry Focus: Healthcare podcast, the team discusses what's at stake for Teva Pharmaceutical and its investors.

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Also, the duo weigh in onBiogen Inc.'s (NASDAQ: BIIB) fourth-quarter earnings and discuss the company's decision to spin off its hemophilia drugs asBioverativ(NASDAQ: BIVV). Can Biogen reward investors in 2017?

A full transcript follows the video.

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This podcast was recorded on Feb. 1, 2017.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your host, Kristine Harjes,and it's Feb. 1. As usual,I'm talking today toMotley Fool healthcarespecialist Todd Campbell, who is calling in via Skype. How are you, Todd?

Todd Campbell: Hi, Kristine! Can youbelieve that it's February already?What a crazy January!

Harjes: Yeah. It's been so packed with news and excitement,I feel like it just flew by.

Campbell: Amazing. At this pace,I think we'll wake up tomorrow morning and it'll be 2018.

Harjes: Itwouldn't surprise me. So let's dive right in. We have two focuses forour show today:Teva PharmaceuticalandBiogen. We'llget to Biogen in a little bit. But first, let's open up withwhat is Israel's largest company, Teva.

Campbell: Yeah, a giant company. Not just inIsrael, either. This is a worldwide drug manufacturer. It creates generic drugs forsome of the best-known medicine that'ssold throughout the planet. What we'regoing to talk about today is a challenge to itsbest-selling drug.

Harjes: Which iskind of an interesting story for a lot of reasons, the first of which is,this therapy, the best-selling drug,is a branded therapy. It's called Copaxone, andit's actually the most common multiple sclerosis therapy. But as you mentioned,this is fundamentally a generics company. So it's kind of interesting there thatthey have this one drug which is a branded therapy and accounts for 20% of their overall revenue.

Campbell: Right.This is a monster drug in its indication. It's usedto treat multiple sclerosis. This drug has been on the market since 1996,so it's getting a little bit long in the tooth,as you can imagine. Because it's getting long in the tooth,that means it's being exposed to patent expiration,and the threat of companies that,normally, it's on the dishing end of this, but now it'son the receiving end of these generic threats to this drug.

Harjes: Right,it's kind of an ironic situation. They've actually been very strategic inhow they've handled it. The version that was approved in1996 was a 20 mgformulation of the drug. It is a daily subcutaneous injection. So all of a sudden, it is nearing its patent expiration, and Teva says, "Idon't want other companies doing to uswhat we tend to do to them," meaningdevelop a generic. So what they did isdevelop a 40 mg versionof the same drug, whichyou only need to inject three times a week. So it went fromdaily to three times a week. That's a huge improvement,so they were very successful inswitching most of its patientsto this new formulation.

Campbell: Yeah,that was kind of like a ta-da moment, right, Kristine? Ta-da! Here's this new, improved version! You canpicture the box: New! Improved! Better than ever!

Harjes: Yeah.You can argue whether or not it's worth having a new patentjust for a slight tweak to the drug. But that is the case.

Campbell: Well, yes, Kristine, andthat's exactly what they're doing. This is exactly what they're doing. The 20 mg version lost patentprotection. That cleared the way forNovartis, via its Sandozgeneric drug unit, andMomentatocollaborate and launch Glatopa, acompetitor to that 20 mg version. But, again, the ta-da moment,being able to reduce patient burden by shrinking it from a daily injection to an every-three-daysinjection, that's a huge selling point with patients,and it has basically trumped the discount ofbeing able to pay less and get Glatopa, versus that 20 mg formulation. This has allowed Teva to protect, for the last year and a half, about $4 billion a year in sales. And that's allcoming back in jeopardy again,because these generic manufacturers have come out and said, "Wait a minute! Youshouldn't approve new patents on this drug! Thisdrug is the same; it's just the formulation with alarger dose that's allowing this to have a longer half-life."

Harjes: Exactly. Just to be very clear, Glatopa, the generic competitor, iscompeting only with the 20 mg for now. What this newargument is about is whether or not they should also be able to compete with the 40 mg version. LastSeptember, a patent review boardinvalidated three of four patents that wereprotecting the longer-lasting version until 2030. Then,just on Monday, which was the 30thof January, aDistrict Court overturned four patents on the 40 mg version, which willprobably end up being appealed by Teva, andthat could add months or even years to this whole argument. The company says that it will probably keep thesegenerics from competing with its long-lasting version until 2018. But still,Momenta and Novartis can launch as soon as the FDA approves. And there'sa little bit of risk there with, if you launch, and eventually Teva wins its appeals process, then these two companies could end up having to make up lost sales to Teva andpay them a bunch of money. But it's kind of uncharted territory here; it's muddy waters.

Campbell: Yeah. Theyhave to figure out how much risk they want to take on, they beingMylanand these othergeneric companies. Do they want to wait potentially a year and get an all-clear that they're good to go? Ordo they want to roll this out sooner than that andpotentially pocket hundreds of millions of dollars? Inthe beginning of January, Teva'smanagement sat down with investorsand outlined a particular scenario --what would happen to our forecast for Copaxone sales if a generic version hit and was launched inFebruary? And what they said could happenis that it could create a $1 billion drag on sales in 2017 and could knock$0.65 or more off its earnings projections. Now, my personal opinion is thatwe probably will see these companies waituntil they have the all-clear. But again, there's a very good likelihood that the appeals fall short. Tevatried to delay the launch of the 20 mg version withall sorts of legal maneuvering and that fell short. So why would you think that these will actually hold through, andprotect this drug until 2030?I think there's a very good likelihood that Teva's sales are going to,in the short term, face some pretty stiff headwinds once these generics roll out.

Harjes: I would agree, especially when you look at the political climate,and you consider how much pressure there is fordrug prices to come down. I can see that having a little bit of an influence on these cases, andtrying to get the generic version out there at a discountto the branded price. Let's take a minute to consider Tevaas a whole. Copaxone is a veryimportant part of this company,but it's not the entire company. Where's your head atregarding Tevaas an investment as a whole?

Campbell: I think it's too risky to jump in right nowuntil we get a little bit more clarity onwhen those generics might launch.I have short-term glasses on when I say that. If I put my long-termglasses on, thenI guess I would change my mind a little bit and say, "Let'ssee how this shakes out,see how much the stock sells down." If we assume that not all of the sales will flow to the generics,and they will maintain some sales, and maybe there's a headwind of $1 [billion] to $2 billion,that's a lot smaller of a headwindthan it was maybe a few years ago,before they also had acquiredActavis'generic unit. You're still talking about a big chunk of revenue,and a big part of their operating profit,and that creates a big short-term risk. But they do havea lot of opportunities to roll out biosimilars, which we talked about on the show before, which are basically, we'll call themgeneric alternatives to some of the top-sellingbiologic drugs that are available todayfor conditions like cancer, etc. They also have someintriguing stuff going on in their research pipeline, inasthma and pain management and migraines. Those could be top sellers, too. I think you need tostay on the sidelines here,watch and see how this plays out,see where the stock sells out. If you can buy this thing for bargain prices, if these generics launch,maybe I would step up at that point, for a long-term portfolio.

Harjes: Right.I'll also point out --I think you made some great points,and I'll add to it by saying if the company is trading at just 6.5 times this year'searnings estimates, and it pays out a4% dividend yield, whichisn't growing a ton, but it only has28% of its free cash flowin the past four quarters to pay it. So it seems like that's pretty safe. If you already hold Teva,I would say you probably want to just keep on holding on to it. If it were me, anyway.

So wewanted to tell the Teva storybecause we found it really interesting. There's the irony of a generics companyfighting against generics. I thought it was a good story. But,the next section of our show comes directly from a listenerrequest we got via email. If you want to email uswith the request of your ownor any questions you have,you can always hit us up at industryfocus@fool.com. Here we go: Tom fromDavis, Calif., wrote in, and he asked us to do an update on Biogen. Theirearnings came out last Thursday, and Tom had a ton of questions regarding Biogen and its future, which isgoing to make for a really interesting story as well. So, thanks, Tom, for writing in. Do you want to start with earnings, Todd?

Campbell: Biogen isone of the largest biotech companies in the world. So it's probably not much of a surprise to know that they rack upbillions of dollars a year in sales. Total revenue last year was $11.4 billion,and that was up about 6% from 2015. If you back out thenegative drag of currency conversion onsales that occurred overseas,total revenue was actually up about 9%,which is pretty solid growth for a company of this size. Givinga little background here for people who might not be as familiar with Biogen --the reason that Biogen became such a large player in biotech is becauseit is the biggest drugmaker of therapy used totreat multiple sclerosis. So that market is valued at about $19 billion. Biogen controls over a third of that acrossall these different multiple sclerosis drugs.

Harjes: Right. When you look at their earnings,you have to break it down into top line and bottom line here. They had fairly sluggish revenue; it was only up 1% year over year to $2.87 billion in the fourth quarter. Butthat was very much made up for by reduced expenses. If you take a look at their adjusted earnings, adjusted as in non-GAAP, they had to take outsome things that were affected by a settlement withForward Pharmaover some patents -- when you get to adjusted EPS, they had a12% increase year over year in the fourth quarter. For a company this size, that's really solid. I thinkthe one story you really need to focus on here with Biogen,particularly given that today is the day,Biogen is spinning off its hemophilia franchise --I shouldn't even say "is spinning off." As of today, they have spun off this company calledBioverativas a stand-alone company that will focus on hemophilia. How are you thinking about this spinoff?

Campbell: It's a really interesting decision on their part. The drugs that are being spun out,Alprolix andEloctate, those twohemophilia drugs are their fastest-growingdrugs in their product lineup. So they decided to take thispart of their business and spread it outso that they can focus moreon these neurological disorderslike multiple sclerosis and,like we'll talk about in a minute,things like Alzheimer's disease and Parkinson's disease and whatever, that'sgoing to be what's leftat Biogen. Then, they're taking these smaller drugs that are less corebut also very fast growing, and spinning them off.I think there are some intriguing reasonswhy they're doing this. It's kind of speculative on my part,but I think the reason they're doing this is, this is anincreasingly competitive market. Toback up for a second, those twohemophilia drugs from Biogenreshaped hemophilia treatment. Again,similar to the conversation we just hadon the last part the show, reducing the patient burden bylowering the number of doses of the medicine that they need to take every week. By doing that,reshaping that and reducing the patient burden,these drugs have really taken off and becomepretty meaningful drugs. Combined, they generated over $800million in sales last year.

Harjes: This is a pretty big indication. There's 400,000 peoplein the world affected by hemophilia. This company launched today. Its ticker, if you're interested, is BIVVV. How the spinoff works is that Biogen shareholders,at the close of business on Jan. 17,received one share of the new companyfor every two shares that they had of Biogen. Did I get that ratio right?

Campbell: Yeah. Probably thebiggest question on people's minds, Kristine, right now --since it was a spinoff, do I hold these shares? If you're a Biogen investor right now, and you justreceived these shares in this new spinoff,should you keep it or not?I think one interesting thing to keep inthe back of your mind, I was talking aboutthe competitive landscape, while these two drugs reshapedtreatment, all of the other hemophilia playershave also been developing theirlonger-lasting formulations as well,and those have all been hitting the marketand becoming available over the last 12 months. So, 2017 and 2018, we could see a much more drastic slowing in the top-line growth for this new company. People aregoing to have to keep that in mind. On the other side of that, they have to say, we also know,because it's so competitive, there has been a lot of acquisition activity.Shirespent a truckload of money to buy Baxalta, one of the largest players in the space, just a couple years ago.So it wouldn't be too shocking. That was also a spinoff,by the way, that was spun off byBaxter. So it wouldn't be too shocking to me if this company, maybe,ends up becoming a target at some point in the next couple years. No, that's not necessarily a reason to hold the stock. Butit's something to keep in the back of your mind.

Harjes: Great. What about Biogen itself? This wasactually one of Tom's questions directly. He said, "IsBiogen less valuable? Or is it potentially more focused after the spinoff?"

Campbell: I think one of the biggest questions that I have about Biogen right now is actually due to acompetitor.Celgene has been working ona drug that is taken orallyfor multiple sclerosis, and data isexpected in the first half of this year. If that data is good, then theoretically, you have what could be or prove to be a best-in-class solution that reshapes the oral market for MS drugs. And as a reminder, in case you don't follow this company closely, one of the best-selling drugs at Biogen isTecfidera.Tecfidera rakes in about $4 billion a year,and it is the leading oral drug right now. So you have to watch very carefully herein the next few monthswhat comes out of Celgene,because there could be a big threat in 2018 to Biogen's growth because of that drug. So I think it's great to see that Biogen is more focused. But there is a threat there that we need to be aware of,especially since there is not a tremendous amount of news flow expected in 2018 regarding Biogen's pipeline.

Harjes: Exactly. Theydon't have a lot of short-term opportunities to provethat they have more firing power if they were,potentially, to lose market share in MS. The one thing that couldpotentially be a big growth driver for this company is a drug called Spinraza, which was justapproved on Dec. 23 for SMA, which isspinal muscular atrophy. This could be a huge drug.I believe we talked about it on the show. It's priced at $750,000 a year, which is just a mind-blowing price tag. Todd,what do you think the odds are that this drug will succeed?

Campbell: I think the odds are probably very good. There are no treatments for this indication. You get 13,000 new cases a year,about 20,000 people in Europe and the U.S. with the condition now that can be addressed by this drug. Yes,it's not cheap, but I think negotiations will happen. Evenif you take the conservative and say, at $500,000 a year, you don't need a lot of patients to turn this into a $1 billion drug. Now,Biogen is going to have to share some of that inroyalties to the drug's co-developer,Ionis Pharmaceuticals, but this still could be, I think, a nine-figure drug relatively quickly, and potentially a 10-figure drugover the course of the next two or three years. That would be onereally nice piece of upside and would obviously replace a lot of the lost salesfrom spinning off those two hemophilia drugs, which contributed over $800 million in sales last year.

Harjes: Right. Andmanagement agrees with you as well. I will point out that the CEO,on the latest call, said that Spinraza is "Biogen'smost exciting commercial opportunity for 2017." He noted that, in the early part of its launch, thatreimbursement is choppy,but ultimately, this is a necessary drug. The patients have no other options. So I really don't see insurers pushing back much on this price.

Campbell: They'll beslow to roll it out, and I'm surethey're going to try and put some blocks,kind of like we've seenwith some of the other high-priced drugs that have launched. But yeah,I think, ultimately,this is going to be a nine-figure drug or better, and that's going to be, maybe, the brightest spot for the company, as far as the story over the next 12-18 months. Again,the big question is, what's in the pipeline for Biogen further out? What news could be coming? Andwhat's going to happen on the competitive landscape inmultiple sclerosis,and how will that take outas far as market share in the next year or two?

Harjes: Right. Andspeaking of the pipeline,I think there's one drug that,we can't talk about Biogen without mentioning the potential and the opportunity here. This drug is calledAducanumab,and it is still in development, in trials. It's atreatment for Alzheimer's. If you've been following the healthcare landscape, you know this is a heartbreakingdisease to try to treat. These drugs get so close to the finish line, and then they fail, time and time again. So Biogen's candidate targets the same target asEli Lilly'srecently failed drug; the target is calledamyloid. But,there are some key differencesbetween the Biogen drug and Lilly's failed drug that,hopefully, for the sake of patients,and also, I guess, for shareholders of this company, those could be pivotal.

Campbell: Yeah. Biogen'smanagement was asked specifically about this -- how is your drugdifferent from the one that just failed at Eli Lilly? AndBiogen's response was,there are a couple different reasons that are important here. One, Lilly's drughad trouble passing through the blood-brain barrier,and getting to the brain where thoseplaques build up. They claim that their drug, Biogen's drug,does not face that risk, that it does pass through and does reach the brain, andtherefore could becomethe more efficacious in breaking down these plaques that are thought to be behind the disease.

Theother thing that they brought up was that the end point,what the trial was designed to prove is different in their trial versus Eli Lilly's trial. Andbecause they are using a different endpoint thatthey think they have a better chance of delivering the goods on, that this trial may not failin the same way that Lilly's drug failed. Time will tell. We'vetalked about this on the show. Alzheimer's disease is an incredibly important indication,very limited treatment options,nothing that slows disease progression. So, there's a big unmet need. But if you look at the 2002-2012 time period,more than 99% of the drugs that have gone intoclinical trials for Alzheimer's disease have not panned out. So there's anincredible amount of risk associated with this.

Harjes:Right. Hugerisk, but also a huge potential upside. If you are a shareholder of this company, or considering an investment,it's a drug that you'll want to keep your eyes on.

That will do it for today; we'rejust about out of time. Thanks so much, Todd, and thanks to everyone tuning in. AsI mentioned earlier,feel free to email the teamif you have any comments or questions. Ouremail address is industryfocus@fool.com. Also,quick shout-out to everyone who has already written in inthe past week or so. We have heard from Laura M., Ben W., Mark K., Sam M., and many more. You guys are awesome. You'rea lot of fun to hear from.

Asalways, people on the program may have interests in the stocks thatthey talk about, and The Motley Fool may have formal recommendations for or against,so don't buy or sell stocksbased solely on what you hear. For Todd Campbell, I'm Kristine Harjes. Thanks for listening, and Fool on!

Kristine Harjes has no position in any stocks mentioned. Todd Campbell owns shares of Celgene and Mylan. The Motley Fool owns shares of and recommends Biogen, Celgene, and Ionis Pharmaceuticals. The Motley Fool recommends Baxter, Momenta Pharmaceuticals, Mylan, and Teva Pharmaceutical Industries. The Motley Fool has a disclosure policy.