TEVA: Is 2019 the Trough, or Will 2020 Continue to See Pressure?

- After showing several years of resilience, competition is finally starting to eat away at Teva’s Copaxone and ProAir revenue

- Investors and management expect Ajovy and Austedo to make up much of the loss in revenue in 2019 and 2020

- Beyond those two components, the generic environment, management’s ongoing cost cutting efforts, and the pipeline could determine whether 2019 will ultimately be the trough year or if declines will continue.

The key debate for Teva among institutional investors is whether EBITDA will trough in 2019, or if it will continue to decline in 2020. The company recently reported 4Q results in which management noted their continued expectation that 2019 will be the trough, and that 2020 will see the company return to growth. However, based on management’s guidance, investors realized that the trough was actually deeper by several hundred million in EBITDA than they expected.

The key components on whether 2020 will return to growth include 1) eroding copaxone revenue, 2) growth in recently-launched products (primarily Ajovy and Austedo), and 3) other sources of growth/erosion, including a stabilizing generic environment, ongoing cost cutting efforts, and fasinumab.

After Showing Several Years of Resilience, Competition Catching Up to Copaxone and ProAir

Copaxone had shown multiple quarters of resilience despite the entrance of generic competition in 2017. Recall that Copaxone is Teva’s largest branded drug, generating almost $4 billion in sales in 2017. As I detailed in my last article on Teva, generic drugs from Mylan and Momenta/Sandoz entered the market in late 2017, and they quickly jumped out to a quick start, capturing roughly 10% of market share shortly after launch. But in the following quarters, generic share gains slowed, and Teva managed to hold on to roughly 85% of the market through aggressive rebating and hesitation from physicians to switch well-controlled patients onto a generic.

However, 4Q was the first sign that the competition is finally having a serious impact on revenue. Global Copaxone revenue in 4Q18 was $494 million, below consensus of $502 million and representing the first miss in several years. Furthermore, management guided 2019 global Copaxone revenue to $1.5 billion, a 38% decline from 2018. Management and investors expect the erosion to continue next year as competition grows. The company noted that the drug was losing 20% on scripts and 25% on pricing in the US, and that they expect similar dynamics to occur next year.

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Looking out to 2020, there is a risk that additional generics enter the market and further pressure revenue. Consensus currently sits at $1.2 billion, leaving a $350 million revenue gap that will need to be offset in order for Teva to return to revenue growth.

Similar dynamics are occurring as well with ProAir, Teva’s branded albuterol inhaler. Teva’s drug outperformed as competitors struggled to launch generic versions of the drug (for a more detailed history, see my prior post on Teva). However, Prasco recently was able to launch an authorized generic, and Teva has also released their own authorized generic in response. The two generics have quickly captured >20% of scripts, and management expects significant 2019 erosion from the $397 million generated in 2018. Consensus now calls for $170 million in ProAir revenue in 2019 and $102 million in 2020. This, on top of the Copaxone revenue gap of $350 million highlighted above, leaves about a $400 million gap that would need to be made up in order for Teva to return to growth in 2020.

Ajovy and Austedo are the Keys to Generating Growth in 2020

The key to making up this gap lies in recently-launched products - primarily Ajovy and Austedo. The bulls believe this gap can be primarily met while the bears see these two making up some, but not all of the gap.

Let’s start first with Ajovy. Ajovy is a recently-launched prophylactic anti-CGRP migraine drug (previously described as fremanezumab). The anti-CGRP class as a whole is a new set of drugs that aim to prevent migraine headaches, and has received considerable investor attention. There are about 4-5 million migraine sufferers in the US that could be eligible for prophylactic treatment.

Within the CGRP class, Ajovy has two other competitors - Amgen/Novartis’s Aimovig, and Eli Lilly’s Emgality. Aimovig was the first mover and therefore has had a headstart in the market. Ajovy received approval in September last year and launched that same month, and Emgality received approval afterwards.

Ajovy’s key advantage over its competitors is its once-per-quarter dosing versus its competitors’ once-per-month dosing (while maintaining similar efficacy compared to its competitors). The drug also has several drawbacks. First, Ajovy requires self-injections, making the delivery more complicated. Ajovy’s competitors are delivered through auto-injectors. Second, Ajovy has a higher rate of adverse injection site reactions. While these drawbacks are notable, investors believe the one-per-quarter dosing is enough to capture significant market share within a fast growing market.

So far, it appears that Ajovy is on track to meet or exceed these expectations. In its 4Q18 earnings results, management gave guidance of $150 million in Ajovy revenue for 2019, which was well-above the consensus at the time of $98 million. In 2020, consensus expects $358 million globally, and estimates go as high as $650 million from some brokers. A key determinant of Ajovy’s future success will be payor access as the drug can cost thousands on an annual basis. Additionally, management expects to receive approval in the European market in 1H19, which would drive another source of revenue growth. Furthermore, there has been some rumblings among physicians and investors that Aimovig’s constipation issues have actually been greater than what was listed on the label, which could provide a boost to Ajovy as physician and patient awareness increases.

The second major source of growth is Austedo. Austedo is used to treat movement disorders related to Huntington’s Chorea (HC) or Tardive Dyskinesia (TD). Within HC, investors see Austedo as a superior drug to Xenazine (the current drug primarily used to treat the involuntary movements of HC) with a less frequent dosing regimen (twice daily vs. three times a day) and a safer profile. Despite the improved profile, physicians have been slower to switch patients onto Austedo due to reimbursement issues. Over time though, bullish investors see the potential for the drug to achieve over $400 million for this indication (compared to about $300 million in annual sales for Xenazine) as Austedo should see higher utilization rates than Xenazine.

Within TD, Austedo competes primarily with Ingrezza. Investors initially did not assign much probability that the drug would be able to capture too much share from Ingrezza as physicians largely view Ingrezza as the safer, more efficacious, and more convenient drug, according to Leerink equity research. However, as physicians have become more familiar with Austedo, they have grown to view Austedo as a drug with a similar profile to Ingrezza but with the added benefit of more dosing options. Note that Ingrezza’s initial dose of 40mg has been reported as being too low for some patients, and its second dose of 80mg too high. Austedo is able to offer many more in-between doses, which suit the needs of more patients.

Finally, Teva is also currently in trials to treat Tourette’s with Austedo. Estimates don’t currently bake in any upside from this indication, but it could be a potential source in the future. Note that Ingrezza recently saw disappointing results from its phase 2b study in pediatric patients with Tourette’s, which could be interpreted as negative readthrough for Austedo. Phase 2 results for Teva could come in 1Q19 or 2Q19.

Tacked together, brokers see a significant market for Austedo with longer-term 2023 revenue of about $900 million, according to consensus estimates. Note that Teva reported about $200 million in Austedo revenue in 2018 (its first full year since launch) and guidance calls for $350 million in 2019. Consensus mirrors this for 2019 and calls for $506 million in revenue in 2020.

Note that these two drugs are doing well, but investors will specifically be looking to see if these two drugs (as well as other sources), can more than make up for the sales erosion detailed in the prior section from Copaxone and ProAir.

Generics, Cost-Cutting, and Pipeline Tidbits

Analysts and investors are also discussing other sources of upside or pressure for the stock:

  • Beyond Ajovy and Austedo, bears have expressed concern about the lack of visibility into growth prospects. Even with upside from these two drugs, investors would like to see an additional source of growth to derisk 2020 guidance for growth.

  • After years of hoping that the generic environment would finally stabilize, Teva has finally begun to see the light at the end of the tunnel. Management recently guided to just a slight decline in the generics business for 2019, driven in part by the environment as well as several newer products. These products include a generic EpiPen (where supply is ramping and expected to reach normal levels by 2Q19), Forteo, NuvaRing, and Restasis (which management is hopeful could be launched this year).

  • Management set a cost-cutting target of $3 billion by 2019, and looks to be on track to achieve this. Management noted that they aimed to achieve the target through facility divestments and a 25% global workforce reduction. Cost cuts have run ahead of schedule and could come in above the $3 billion target, providing upside to the EBITDA target.

  • Teva’s prior acquisition of Actavis led to high net debt/EBITDA leverage, and the company is actively delevering with a longer-term target of <3x (vs. 2018 leverage of about 5x). Cost cuts and achieving EBITDA targets would allow Teva more flexibility in making strategic actions to drive growth.

  • Some sell-side analysts (i.e. RBC, Mizuho) have expressed optimism around fasinumab, a non-opioid drug targeting pain caused by osteoarthritis of the knee or hip. The company reported positive phase 3 results and has three additional studies ongoing. Safety will be key as a prior trial showed elevated rates of joint disease at higher doses.