At a conference organized by investment house Oppenheimer in Tel Aviv this morning, Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) CFO Michael (Mike) McClellan commented on the lawsuit in the US alleging that Teva conspired with other companies to raise prices of generic drugs. "An amended lawsuit has been filed, not a new one," McClellan said. "A large number of US states claim that there was a price-fixing cartel. We shall defend ourselves vigorously; there are many accusations, but we'll defend ourselves. It's important for me to stress that this is still a civil case and not criminal. There have been no developments in this area, and we regard it seriously, but at this point I don't have a great deal to say on the matter."
44 US states have filed a lawsuit against twenty pharmaceuticals companies, Teva amongst them, alleging that they conspired to raise the prices of more than 100 generic drugs. The lawsuit was filed in Connecticut, and contains claims of a large number of illegal conspiracies aimed at preventing competition and manipulating prices. The claimants are calling for payment of damages and penalties, and allege that the US public was defrauded of billions of dollars. According to news agency reports, among the companies being sued, besides Teva, are Sandoz, the generic arm of Novartis; Actavis, which Teva bought in 2016; and Israeli company Taro, which is controlled by Sun of India. The lawsuit also names senior executives at the companies, among them former Teva executives Maureen Cavanaugh and David Rekenthaler. According to Bloomberg, the lawsuit alleges that Teva was at the center of the conspiracy, and that in 2013-2015 it raised prices of 112 generic drugs.
at his stage, the extent of Teva's exposure in the lawsuit is unknown.
IBI pharmaceuticals, biotechnology and medical devices analyst Steven Tepper writes today: "We estimate that the legal proceeding will be long and will take years, and at this stage it is hard to estimate the damage that will be caused to Teva from the affair. Nevertheless, from analysis of the company's revenue from generics over the period in question, it can be roughly estimated that the extra revenue of Teva (and Actavis) from the alleged price fixing was not more than $1.5 billion, and with the addition of interest and penalties the damage could amount to $2 billion."
Tepper adds: "The price fixing affair in generic drugs is not new. A similar lawsuit was filed in 2016 concerning a smaller number of drugs, and in late 2018, following the limited lawsuit, it was reported that an investigation was taking place concerning a much larger volume of products.
"The main new aspect this time is the report that Teva was one of the leading players in the affair, with two former company executives being named. Teva continues to claim that the allegations have no basis."
Long-term growth engines
In his presentation at the Oppenheimer conference this morning, McClellan said, "We have made very good progress in reducing our cost base, cutting it by $2.5 billion. The closure of sites already scheduled for closure will bring us to savings of $3 billion, as we said in presentations to the market." McClellan added that the company's headcount had declined by 10,400 since the start of the streamlining program.
McClellan commented on two new original products: migraine treatment Ajovy; and Austedo, for treating tardive dyskinesia, a disorder that results in involuntary, repetitive body movements. Concerning Ajovy, McClellan said, "The product is growing well, in line with our expectations. We will shortly launch in Europe, with initial launches in the next few weeks." On Austedo, he said that it was progressing well in the market, "in line with our projections."
Meanwhile, the erosion of sales of Teva's original multiple sclerosis treatment Copaxone by generic competition has accelerated. "We are losing market share mainly to Mylan, but also to Momenta," McClellan said. "The first quarter was also adversely affected by running down of stocks. The erosion in Europe is less than in the US."
McClellan said that Teva continued to focus on maximizing revenue from Ajovy and Austedo, and also on stabilizing its global generics business. He said the generics business in the US would remain around $1 billion a quarter. "We are managing the loss of exclusivity of Copaxone and ProAir," he said, "and in addition we are continuing to focus on managing our expenses and reducing the debt. We will make no acquisitions, because we're focused on reducing the financial leverage. 2019 will be the low point, and we'll return to growth, even if it's small, in 2020, when the new launches will offset the losses in Copaxone and elsewhere.
"In the longer term there are several growth engines. In generics, continuing stabilization in the US and modest growth in the rest of the world. The ageing of the population and the growth in expenditure on healthcare open up growth opportunities, and we have every capability to continue being a significant player in the market. That's also the case in the biosimilar market (generic versions of biological drugs), which is an excellent opportunity. We have R&D and production capabilities, and we are investing a great deal in expanding production capacity in order to position ourselves in this field. Biological drugs are an additional growth engine."
McClellan said that, in the long term, Teva projects gross profit margins of 27%, which compares with 23% in the first quarter of this year. The company has also set a target cash to earnings ratio of at least 80%.
Published by Globes, Israel business news - en.globes.co.il - on May 12, 2019
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