Teva Raises Warning for All Makers of Generic Drugs

Advertisement

On Thursday, Teva Pharmaceutical Industries Ltd (TEVA), a maker of generic drugs, announced it was lowering its revenue outlook for 2015. Rather than the previous average analyst estimate of $20.3 billion, the company projected the coming year’s sales would fall somewhere between $19 billion and $19.4 billion.

TEVAThe reason Teva offered for the reeled-in outlook was telling regarding the organization’s future, but it may have been just as telling regarding the current state of generic drugs and the companies that make them.

Not just TEVA stock, but the entire generic drug sliver of healthcare stocks including Dr. Reddy’s Laboratories Ltd (RDY), Mylan Inc. (MYL) and other may be running into the same headwind Teva says it’s hitting now.

And the industry has the much-anticipated stumble off the patent cliff to thank for it.

Owners of TEVA Stock, Brace for Impact

Why is Teva looking for weaker sales in 2015? In simplest terms, it sees too much competition on the horizon for many of the generic drugs it sells.

A case in point is the drug Copaxone. Last year, Teva sold about $4.3 billion worth of the multiple sclerosis treatment globally, and $3.2 billion worth in the U.S. alone. It’s the company’s top-selling drug, largely because Teva enjoys the  pricing power linked to being the sole supplier of Copaxone.

Next year though, after the company loses its patent protection on it in the United States, two more drug companies — Momenta Pharmaceuticals, Inc. (MNTA) and Mylan — will be marketing generic versions of the multiple sclerosis treatment in the U.S.

All told, Teva Pharmaceutical believes the rollout of generic Copaxone from those other two makers of generic drugs could crimp operating margins by as much as $50 million per month next year, with Copaxone sales continuing to fall steadily in subsequent years.

By 2016, some analysts believe sales of Copaxone will be more than cut in half from its peak annual revenue above $4 billion as U.S. sales dry up in the face of new competition. It’s an outlook that jives with the usual 85% drop in a drug’s marketable price once generic versions hit the market.

For perspective, Teva generated $1.65 billion in operating profits last year on $20.3 billion in sales.

It’s hardly the first time investors of healthcare stocks — and pharmaceutical stocks in particular — have seen the introduction of generic drugs upend a company’s business to this degree. This is the first time owners of TEVA stock have been on this side of the table to this degree, though.

More often than not in the past, Teva Pharmaceutical was the one rolling out generic drugs and wreaking havoc for the original manufacturer of the branded drug once patent protection was lost.

Meet the New Norm for Makers of Generic Drugs

While the negative impact of Copaxone’s loss of patent protection will have on Teva seems like an extreme and unique case, it’s only a microcosm of the paradigm shift underway within the pharmaceutical world. Generic drugs are becoming the primary pharma battlefront, displacing breakthrough, blockbuster drugs as the industry’s centerpiece. The industry’s stocks are beginning to reflect this shift.

There are multiple reasons for the new normal, perhaps the biggest of which is the pharmaceutical industry’s stumble off of the patent cliff that began (in earnest) in 2012 and won’t stop happening until 2016.

Some of these drugs that have already lost patent protection and opened the door to generics have been plenty marketable too. Cholesterol drug Lipitor  was one such blockbuster. Lipitor sales reached nearly $13 billion in 2006, all of which was pocketed by Pfizer Inc. (PFE).

Last year though, Pfizer only saw $2.3 billion in sales of Lipitor as the generic version of the drug (atorvastatin) made by Ranbaxy Laboratories and Actavis pls (ACT) — previously Watson Pharmaceuticals — ate into Pfizer’s market share beginning in 2012.

One of the other key reasons driving new, fierce competition within the generic drugs market is legislation. The Affordable Care Act — aka Obamacare — explicitly favored and in some ways required the use of generic drugs, so much so that supply issues have surfaced, causing some generic drug prices to soar to levels not unlike those commanded by branded, patent-protected drugs.

While the Affordable Care Act only applies in the United States, similar pushes in favor of generic drugs are being made globally in an effort to control healthcare costs.

Bottom Line

All told, global spending on generic drugs is projected to reach somewhere between $400 billion and $430 billion by 2016, versus an expected spend between $615 billion and $645 billion on branded, patent-protected drugs in that same year.

For perspective on the growth (or lack thereof) for each, in 2010, only about 25% of the United States’ prescription drug spending was on generic drugs. The figure was comparable on a global basis. Now the proportion of generic drug sales for the entire pharma industry is expected to reach about 40% within two years, and should keep rising from there.

There’s little doubt where the growth is, which in turn leaves little doubt where the true competition will be.

It’s not just owners of TEVA stock that should be concerned here. Mylan, Dr. Reddy’s, and all other makers of generic drugs may want to study the storm Teva is about to weather, and batten down their own hatches.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2014/12/teva-warning-generic-drugs-healthcare-stocks/.

©2024 InvestorPlace Media, LLC