Teva loses four patents on Copaxone; alright, what’s the good news?

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The News:

A US court invalidated four patents covering Teva Pharmaceutical Industries Ltd.’s (Petach Tikva ISR) three-times weekly version of Copaxone (glatiramer acetate) based on obviousness, following a challenge by a number of companies, including Mylan Inc. (Canonsburg PA). The Israeli drugmaker, whose shares fell as much as 10% on the news, said it plans to appeal the decision.

A US court invalidated four patents covering @TevaPharm 3-times weekly version of Copaxone Click To Tweet

The four patents were scheduled to expire in 2030, according to FirstWord Pharma. In December last year, the US Patent and Trademark Office’s Patent Trial and Appeal Board (PTAB) reaffirmed a prior decision that three of these patents are “unpatentable” in its inter partes review (IPR) proceedings initiated by Mylan. The PTAB is expected to issue a ruling on the fourth patent IPR by May 16 following a challenge by Mylan.

Heather Bresch, Mylan’s CEO, noted that the latest ruling by the District Court for the District of Delaware:

“is yet another positive step in our effort to bring to market a more affordable generic version of Copaxone 40 mg/mL.”

The company suggested that it is one of the first drugmakers to have filed a substantially complete abbreviated new drug application containing a paragraph IV certification for a three-times weekly version of the multiple sclerosis treatment.

Teva indicated that the latest patent infringement case involved five of six companies who have filed applications seeking approval of generic versions of the thrice-weekly version of Copaxone. The Israeli drugmaker added that it filed suit against all six companies on December 19, 2016 to assert a fifth patent.

Teva received FDA approval for its three-times-a-week formulation of Copaxone in January 2014. The product generated sales in the US of approximately $3.3 billion for the 12 months ending November 30, 2016, according to FirstWord.

Earlier this year, Teva announced that full-year global sales for Copaxone are expected to be in the range of $3.8 billion to $3.9 billion. At the time, the company noted that although it does not expect generic competition this year for the thrice-weekly formulation of the therapy, the possible launch of two generic alternatives in the US in February could suppress revenue by $1 billion to $1.2 billion.

Including the patent challenge to Copaxone, Teva has faced numerous recent hurdles, including integration of the Actavis generics business it bought last year for $40.5 billion and a US investigation into generic drug price fixing.

Teva last month provided a 2017 revenue and profit forecast below Wall Street estimates, sending its shares sharply lower at the time. Tuesday (January 31, 2017) morning, shares were trading down 6% on the week at $32.31 in New York.

Steve’s Take:

Doctor: I have some good news and I have some bad news; which shall I tell first?

Patient: Please begin with the bad news.

Doctor: Alright. You’ve just lost four of the patents on the long-acting version of your multiple sclerosis blockbuster Copaxone, putting billions of dollars in revenue at risk.

Patient: Oh no, that’s horrible. What’s the good news?

Doctor: The good news is that there’s no more bad news, at least not today.

It’s déjà vu for Teva Pharma and definitely not in a good way.

Last week, the Israeli drugmaker confirmed that the US District Court for the District of Delaware had basically killed four of its patents on the long-acting version of multiple sclerosis star Copaxone. It’s not yet an opening of the floodgates for generics makers, who have “several steps still to go before they can challenge the MS behemoth,” as Credit Suisse analyst Vamil Divan put it in a note to clients.

Teva CEO Erez Vigodman, for his part, said in a statement that his company “would move forward with an immediate appeal,” and Divan expects the company to request a preliminary injunction preventing any generics from launching until the legal process surrounding all of Teva’s Copaxone IP has completely run its course.

Teva has sued its jealous rivals on a fifth and sixth patent, too, and an inter partes review appeal is underway at the Patent and Trademark Office, says FiercePharma. And of course, if knockoffs are to roll out, they’ll first need to win the FDA’s thumbs-up first.

Still, Divan doesn’t think it’ll be long before generics strike. He expects a Novartis/Momenta Pharmaceuticals partnership “and potentially one other competitor to launch later this year and further heighten pricing pressure on the brand,” the analyst noted.

Teva’s market cap is now about $33 billion, or less than the nearly $40 billion it paid last year to buy Allergan’s generics business. Also larger is Teva’s debt load–$36.8 billion, or 5.43 net debt to adjusted Ebitda, one of the highest ratios in the industry–making this news especially chilling, says Bloomberg.

And after repeated disappointments, investors are left with no choice but to question management’s ability to give accurate guidance and deliver on a promised makeover.

It’s a recurring nightmare for Teva. Back in 2013, a court upturned its patents on the original, 20mg formulation of its legacy product, but Teva managed to convert most of its patients to the new-and-improved version before generics struck.

This chapter, however, there is no fallback medicine if Teva’s last stand is shot down.

With sales already flagging, generics sure don’t pose a happy prospect. Last month, Teva dialed down its 2017 guidance by more than $1 billion after new 2016 launches failed to live up to expectations. It now predicts gross sales of between $23.8 billion and $24.5 billion for the year, but some analysts–including Bernstein’s Ronny Gal–have found that figure preposterous if not implausible.

It’s “a tough picture,” Gal wrote in early January. Yes, tell that to Teva shareholders, who saw their stock reach its lowest level since 2007.

If you’ve got bad news to deliver, it’s always better to do it all at once, rather than parcel it out.

Earlier this year, for example, Teva Pharmaceutical Industries Ltd. cut its 2017 revenue guidance by $1.5 billion due to underperformance of its flagship generics business. That guidance, however, did not include generic competition for the most important form of its best-selling multiple sclerosis drug Copaxone.

So investors were not fully prepared when, late Monday, a US court invalidated four Copaxone patents, possibly putting more than $1 billion in US sales at risk this year.

Copaxone’s original patent has already expired, but Teva has preserved sales by switching patients to a more-convenient larger dose. The drug’s longevity has made for a steady stream of high-margin revenue. Copaxone contributed about 20% of Teva’s revenue in the latest quarter, and an estimated 42% of its profit in 2016.

Losing a big piece of Copaxone sales would put a significant hole in Teva’s revenue going forward.

Teva’s purchase of Allergan’s generics business was meant to help end its dependence on Copaxone. Investors are still waiting to see a transformative effect. The generics unit — projected to be about 58% of Teva’s 2017 revenue and 49% of profit — has struggled due to price competition and a failure to launch new products in the US as quickly as it has in the past.

Teva’s debt load means it lacks the flexibility to do other deals to help replace Copaxone. Teva had hoped to cut its debt ratio to 3.5 times Ebitda by the first quarter of 2018 and pledged no major business development until then. The loss of expected revenue from Copaxone may push that timeline out significantly and force Teva to dip into its $1.5 billion cash pile to make debt payments, particularly if its generics struggles continue.

Prices on some of the company’s bonds, already down substantially for the year, fell further on Monday’s news.

Teva’s debt has lost value as the company faces generic competition for its best-selling drug and struggles to launch new generics of its own.

Oppenheimer analysts issued an intraday note responding to a district court’s ruling Teva Pharmaceutical Industries Ltd (ADR) Copaxone 40mg patents “invalid based on obviousness.” The court ruling likely paves the way for generics to enter the market for the multiple sclerosis drug. Shares of Teva were down nearly 5% on Tuesday.

“We believe the sell-off has priced in a worst-case scenario when there is a possibility we may see only one generic 40mg approval,” said Oppenheimer.

Momenta Pharmaceuticals, Inc. as the most likely generic to receive approval, as the only pharmaceutical company to successfully develop a Copaxone 20mg generic, expected to be approved in mid-2017. Shares of Momenta were up over 25% on Tuesday (January 31, 2017).

“We expect investors to focus on how TEVA plans to mitigate the loss in EPS due to the high likelihood of a generic Copaxone 40mg launch.”

Analysts are expecting an approximate 10% reduction in EPS due to the court ruling.

Oppenheimer expects shares to remain volatile in the near term but still likes TEVA for the long term and maintain an Outperform rating.

This isn’t the first time investors have been blindsided by Teva’s over-optimism. The company cut its revenue, EPS, and cash-flow guidance last year, just four months after releasing it. It also initially expected to close the Allergan deal in the first quarter of 2016 and kept investors in limbo until August.

Steve's Take: @TevaPharm management continues to over-promise and under-deliver Click To Tweet

When the going gets tough…instead of continuing to over-promise and under-deliver, Teva’s leaders need to own up to the problems and misteps and map out a realistic path to, what…stability? Hear that shareholders?

In this age of disinformation and double speak, management should say what its next move is and implement it. Otherwise you’ll just risk disappointing your board and your shareholders again.

Remember, you ultimately serve at the board’s discretion.

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