On Teva’s recent Q3 results conference call, the company’s US head, Bill Marth, admitted for the first time that the US generics market is now ex-growth, at least as far as Teva is concerned. Given that the company’s North American generic sales were down 48% in the quarter and 32% year to date, this may appear to be stating the obvious, but up until now, Teva has never officially acknowledged that it could be reaching the end of the road. Not that sales will never go up again – Q4 is expected to be the start of a temporary recovery, as some new 180-day exclusivities arrive – but with total US turnover in the region of $5bn, Teva is running out of pipeline products that are capable of doing more than just replacing the sales that it is losing through price erosion. This does not necessarily mean that other companies have the same problem; Teva is so much larger than its competitors that it has to work a lot harder to expand. Nevertheless, it should give the entire industry pause for thought when the global leader declares that it has run out of steam in the biggest generics market in the world. All the more so because the US is a relatively straightforward place to make money compared to most other countries, and US generics are currently the main growth driver for Mylan, Watson and even Sandoz. For the industry to replace US generic-led growth with ROW growth is not going to be that easy and Teva has further handicapped its chances by saying that it does not intend to make further major acquisitions*, implying that it expects organic growth to deliver most of the required results.
Of Teva’s sales in the first nine months of 2011, roughly 25% came from North American generics and 25% from North American brands (including both patented brands such as Copaxone and Azilect and branded generics such as respiratory drugs and women’s health products). A further 25% was from European generics and the remainder was a mixture of European brands and sales made in Israel, the CIS, Latin America and ROW, as well as Teva’s external API sales. Thus, 25% of total turnover can now be considered completely ex-growth (North American generics) and 25% largely ex-growth (European generics). The 25% of sales in North American brands should continue to grow strongly so long as Teva is able to keep on pushing up the price of Copaxone and no Copaxone generics are approved, which effectively means until some point in 2014. After that, sales growth is likely to slow fairly dramatically. As for the final 25%, prospects here are more encouraging, with Japan, the CIS and Latin America all likely to deliver sustainable growth in the medium term and Teva’s European brands less vulnerable to generic competition than their US counterparts.
In the short term, the consolidation of Cephalon and Taiyo plus the transfer of Copaxone ex-US from sanofi back to Teva will expand Teva’s top line in all its main regions. There should also be considerable savings to come from the integration of the company’s most recent acquisitions. Cephalon has its own problems with patent expiries, though, as its leading product, Provigil, will lose protection in April next year and some of its other compounds are also vulnerable. The post-2014 period thus looks to be difficult, with Teva’s developing market and non-Copaxone, non-Provigil brands having to carry the whole group. Of course, this is about the time when the first monoclonal biosimilars could start to kick in and Teva is presumably hoping that these, plus other branded drugs currently in development, will ride to the rescue. In our view, this could be a bit optimistic given the slow rate at which the FDA is moving and our lack of conviction that Teva is fully on top of what it takes to develop biologics, particularly to the level at which it is possible to convince the regulators to grant interchangeability. Converting Teva to a company that is mostly branded rather than one that is mostly generic will also require a big psychological shift, as Teva retains a tendency to see price-cutting as the solution to almost any marketing problem. All that said, Teva remains much better positioned to transition away from the US generic market than most of its peers, so we expect interesting times for all.
* But it would not be surprising if it made some ‘minor’ ones, i.e. costing up to about $2bn
Posted on 15th November 2011