Teva Pharmaceutical Industries Ltd. (TEVA) will focus drug-development efforts under new Chief Executive Officer Jeremy Levin on respiratory and central nervous system illnesses as the company seeks to replace medicines set to lose patent protection in the next three years.
Teva will end five mid- and late-stage research programs, the company said in a briefing yesterday for investors in New York. The Petach Tikva, Israel-based company, which became the world’s biggest generic-drug maker in the past decade through 25 acquisitions, will cut as much as $2 billion of costs in the next five years, Levin said as he laid out his strategy for the first time. The stock fell the most in two months in Tel Aviv.
“We are interested in building fundamental capabilities because we know where we are going now,” Levin said in an interview in New York after the briefing. “Teva must focus on organic growth. In doing that, our focus has to be on transactions that either extend our geography, extend dramatically our pipeline or, in fact, secure a product or a product line that increases one of our franchises.”
Levin’s strategy marks a shift for Teva from growth through large acquisitions to an increased reliance on developing branded drugs through research and licensing agreements. While the company advances its pipeline, Levin, the former senior vice president for strategy at Bristol-Myers Squibb Co. (BMY:US) who joined Teva in May, is trying to assuage concern about earnings power by promising cost reductions and share buybacks.
“We’ve grown through multiple large acquisitions, leading to complexity,” Levin said at the presentation. “We’ve developed over time an unfocused pipeline. This represents a marvelous opportunity to build, enhance, create value.”
Teva, which in 2011 was the analysts’ highest-rated stock among the world’s 20 biggest drugmakers after years of growth, has lost investors’ confidence. The company’s American depositary receipts have plummeted (TEVA:US) 35 percent from their March 2010 peak, and the ADRs trade at 8 times estimated profit. That’s among the lowest valuations for the 20 drugmakers, which have an average price-earnings ratio of 13.8.
Teva’s ADRs fell 3.7 percent to $40.15 at 10:20 a.m. in New York, adding to yesterday’s 2 percent drop. Before yesterday, the ADRs had gained for seven straight days. In Tel Aviv, the stock declined 3.9 percent to close at 156.70 shekels, the biggest drop since Oct 4.
Investors are skeptical Teva can sustain growth as its best-selling drug, the multiple-sclerosis injection Copaxone, faces competition from newer oral medicines and is set to lose patent protection by 2015.
“We do not see a pipeline drug with enough innovation to replace Copaxone,” Jami Rubin, an analyst at Goldman, Sachs & Co., wrote in a report yesterday after the presentation. “More importantly, we would have liked to see a greater commitment to rewarding investors with additional cash returns.” She has a “neutral” rating on the stock.
Jason Gerberry, an analyst at Leerink Swann & Co., cut the stock to neutral from buy, citing a “challenging revenue outlook” and a lack of near-term catalysts. Ronny Gal of Sanford C. Bernstein & Co. reduced his price estimate to $50 from $55. Teva will go through a “long transition process” and cost cuts won’t have much of an effect until 2014, he said.
Some investors were disappointed with the lack of update on CT-011, an experimental cancer drug, said Douglas Tsao of Barclays Plc.
“We are doing the proper diligence to assess the potential of the drug,” Michael Hayden, the company’s chief scientific officer, said of CT-011 in an interview yesterday. “We haven’t made a decision yet.”
Teva aims to shore up sales of Copaxone, a daily shot, by developing a three-times-a-week version that would have patent protection until 2030, Levin said. Teva also is studying an MS treatment that combines Copaxone with an experimental drug, Laquinimod. Among other central nervous system diseases that Teva plans to target are pain and Huntington’s disease, Hayden said at the briefing yesterday.
Teva announced yesterday that it had licensed a pain drug, XEN402, from Xenon Pharmaceuticals Inc., paying $41 million up front and as much as $335 million more if the medicine meets development, regulatory and sales goals.
Besides central nervous system and respiratory drugs, Teva’s research also will focus on “high-value” generic drugs and new therapeutic entities, or existing medicines that are delivered or formulated in a new way, Teva said.
Besides Copaxone’s looming patent expiration, another branded drug, the chronic lymphocytic leukemia treatment Treanda, faces loss of U.S. exclusivity in 2015. An attempt to introduce a newer treatment for MS was slowed when Laquinimod failed a late-stage trial in 2011 as a standalone medicine.
At the same time, the generic-drug business slowed down. As competition intensified, Teva had to share exclusivity on copies of blockbuster medicines losing patent protection. Newer treatments became more complex, making them more difficult to copy. Teva in May cut its 2012 earnings forecast, blaming slower economic growth and increased competition in generics.
Since taking over as CEO from Shlomo Yanai, Levin has promised to share more information with investors to regain their confidence. On a Nov. 30 conference call in which Teva said 2013 earnings would be below analyst estimates, he said the company provided sales and profit forecasts for separate business units in an effort to be more open.
Teva is ending development of StemEx, a technology that expands umbilical stem cells, enabling them to be used in cord blood transplants to leukemia and lymphoma patients, the company said. Its relationship with its partner, Gamida Cell Ltd., is under review, Teva said. Gamida’s shareholders include Clal Biotechnology Industries Ltd. (CBI) and Teva.
The other mid- and late-stage programs Teva is cutting are Obatoclax for lung cancer, placulumab for sciatica, MultiGeneAngio for peripheral arterial disease and a lower- volume shot of Teva’s Copaxone multiple-sclerosis drug intended to reduce injection discomfort.
Teva also ended a partnership with another unit of Tel Aviv-based Clal for the development of its PolyHeal and NexoBrid wound-care products. Teva is looking for a partner to help advance a Type 1 diabetes treatment it is developing with Clal’s unit Andromeda Biotech Ltd., Hayden said in an interview.
“There are people way better than us that do this,” Hayden said. “In this particular instance what we want to do is find a potential partner that will validate this and really bring their expertise. We haven’t withdrawn our investment but we are looking for a partnership and that’s ongoing.”
Teva will continue to get rid of products that aren’t central to its strategy, Levin said yesterday. The company has $10 billion for acquisitions over the next five years, and will stick to small- and mid-sized purchases and licensing deals. “We’ll do that in a very disciplined fashion,” he said.
Teva will use 20 percent to 25 percent of cash flow from operations to pay dividends, and said it’s “committed to ensure shareholder return” via share buybacks.
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