Why are Teva shares surging and how does it plan to keep it up
Why are Teva shares surging and how does it plan to keep it up
Since the beginning of the year, Teva's shares have risen by about 36%, and are among the best performing stocks on the Tel Aviv Stock Exchange. Why is this happening and how is the company's CEO planning to build on the momentum?
In May 2023, Teva's CEO, Richard Francis, presented his strategic plan for the company. One of the main things emphasized was how Teva will focus on innovative drugs while maintaining its profitability in the generic drugs sector, without expanding investments in research and development in this area. The goals included increasing sales of drug Austedo to $2.5 billion annually, focusing on original drugs currently being developed, expanding the portfolio of drugs in development, and increasing operational profit margins to 30%, all by 2027.
In 2023, Teva made progress in implementing the plan. Austedo sales increased by 27% to $1.22 billion. Sales of all branded drugs relative to the previous year grew significantly, for the first time in many years. They collaborated with Sanofi to develop Anti-TL1A-based drugs for inflammatory bowel disease, which brought in $500 million to the company in the fourth quarter of 2023. At the same time, Teva launched the drug UZEDY for schizophrenia in May, offsetting the income received from Sanofi, leading to a decline in both gross and operational profits compared to the previous year.
Despite low numbers in 2023, the stock market is optimistic about Teva's expected growth, with the stock rising by about 36% since the beginning of the year, ranking it among the best-performing stocks on the Tel Aviv Stock Exchange. What are the expected challenges for the company in achieving its goals set for 2027?
1. A $500 million deal
In October 2023, Teva signed a partnership agreement with Sanofi to promote the Anti-TL1A drug for inflammatory bowel disease. Under the agreement, Sanofi paid Teva $500 million in the fourth quarter of 2023, and the companies will share development costs and profits generated from the drug sales if it reaches the market. Teva is currently conducting a Phase 2 trial for the drug. Interim results from the trial are expected to be published in the second half of 2024.
Teva could receive an additional amount of up to $1 billion from Sanofi, depending on if it meets the drug development goals and approval for marketing in various countries. Teva reported a non-GAAP revenue of $500 million and an operational profit of about $430 million from this agreement.
The pharmaceutical giant has been suffering from a continuous decline in sales in its legacy branded drugs in recent years due to generic competition. This decline is particularly evident in Copaxone sales: $4 billion annually at its peak, which has since dropped to $590 million in 2023 and is expected to continue declining to $400 million this year. The decline is also seen in respiratory products, mainly in the U.S., and in the decline of Bendeka/Treanda sales. On the other hand, Teva’s new branded drugs are growth drivers. Sales of Austedo and Ajovy have been growing steadily since their launch. The company estimates an additional $80 million in revenue this year from sales of the new schizophrenia treatment drug, UZEDY.
2022 was a low year for Teva's branded drug sales. The company reported only $2.62 billion in sales of branded drugs compared to over $7 billion in the previous decade. That is, until 2022, the growth in sales of new branded drugs partially offset the decline in sales of legacy branded drugs. 2023 was a turning point, with branded drug sales rising to $2.75 billion. These sales are expected to continue growing in the coming years, mainly due to the expected growth in Austedo sales.
2. Austedo sales will continue to rise
Teva's leading branded drug is Austedo, which was approved for the U.S. for the treatment of tardive dyskinesia or Huntington's disease. In recent years, the drug has also been approved for markets in China, Brazil, and Israel.
Austedo is one of two drugs for dyskinesia treatment that are based on blocking the activity of the VMAT2 protein. The other drug is Ingrezza, manufactured by Neurocrine Biosciences. While Austedo acts by reducing dopamine activity, Ingrezza acts as a selective inhibitor of the same activity. The trial results of the two drugs were similar in terms of efficacy and side effects. In 2023, Teva launched an extended-release version of the drug, Austedo XR, which is taken once a day instead of twice a day - similar to the competing drug, Ingrezza.
Tardive dyskinesia is common mainly among those who currently or have previously taken psychiatric medications. Major challenges for Teva and Neurocrine Biosciences include a low diagnosis rate and the high dropout rate of patients from diagnosis to treatment. There is high growth potential for sales for the two drugs, but significant investment is required to raise awareness. Austedo sales are particularly strong seasonally, with high sales in the fourth quarter, as customers stock up on the drug. In contrast, sales were very low in the first quarter.
Teva estimates that Austedo sales this year will reach $1.5 billion, an increase of $275 million compared to the previous year. The forecast for Ingrezza sales this year is $2.1-2.2 billion. Ingrezza sales in 2023 were $1.84 billion - an increase of $412 million compared to sales in 2022. The increase in sales growth for Ingrezza is expected to decline to $310 million this year. This is despite approval for the U.S. market received late last year.
There is no doubt that Austedo and Ingrezza sales will continue to grow in the coming years, with the growth rate depending on the extent of investment in marketing and promotion. Investors are concerned that there may be a slowdown in growth in the coming years. If such a slowdown occurs, Teva will struggle to achieve its ambitious sales target of $2.5 billion by 2027.
It should be noted that Teva reached a compromise with two generic companies, allowing them to launch a generic version of Austedo in April 2033. Teva is expected to retain exclusivity over marketing the drug, while facing generic brand competition. Teva also succeeded in delaying the impact of generic competition for Copaxone by several years due to the launch of a new version administered three times a week instead of daily injections.
Teva’s second plant-based medication is Ajovy for migraine prevention. Teva was one of three companies to receive approval to market drugs which reduce the number of daily migraines via monthly injections. In recent years, similar drugs for migraine prevention which are administered orally have been approved for the American market. These drugs quickly gained a significant market share. Ajovy sales in the past year were $434 million. Growth in sales in the United States is slow (5.5% in the past year), with most of the growth due to expanding markets where the drug is sold. Teva provides an optimistic forecast of sales amounting to half a billion dollars for Ajovy this year. Given the competition from orally administered drugs, the sales of the drug are not expected to exceed the estimated amount, but they can maintain this level of sales for several years, thereby making a significant contribution to Teva's profitability.
In addition, Teva launched UZEDY, its brand medication for schizophrenia, released in the United States last year. UZEDY contains the antipsychotic medication risperidone with a delayed release. Teva estimates that it will see $80 million in revenue from UZEDY sales this year, and is aiming to capture $4.5 billion annually for drugs administered by monthly injection or even less frequently for treating schizophrenia.
Teva invests in developing and commercializing biosimilars, primarily through collaboration with companies specializing in developing these drugs. Following a collaboration with Korean company Celltrion, Teva has promoted the biosimilar versions of Rituxan and Herceptin in the United States, launched in 2019 and 2020 respectively. Both companies share profits from sales in the U.S. The biosimilar to Rituxan is sold under the name Truxima. According to estimates, it made around $100 million in sales per quarter at its peak. Teva recently addressed for the first time the decline in Truxima sales due to increasing competition.
Additionally, Teva has a partnership with AlvoTech, which received FDA approval in February to market a biosimilar to Humira in the United States, following long delays. This resulted in several biosimilar versions of Humira on the market, and the competition has made it challenging for Teva to achieve a high market share and profitability. Teva and AlvoTech are also awaiting the FDA's decision regarding approval to market the drug Stelara. If approved, Teva expects to launch the drug in February 2025. If successful, it will be well-positioned to achieve significant sales for this drug.
3. Generic sales in decline
In the fourth quarter of 2023, Teva's generic drug sales in North America plummeted to a record low of $754 million. During this quarter, there were no significant sales of the generic version of the drug Revlimid for blood cancer treatment. According to the agreement between Teva and the original drug manufacturer, BMS, Teva is restricted in its amount of sales of the generic version from 2022 until 2025. This year and next year, Teva will be able to market additional quantities of the generic version of Revlimid, which is expected to make a substantial contribution to Teva's revenues during these years. However, the expiration of the expected competition restrictions starting from 2026 is expected to lead to a collapse in sales. The generic version of Revlimid has a significant impact on sales but less on profitability since Teva collaborates with Indian company Natco, who receive half of the profits. This is because when Natco sold the rights to Teva for Oxtabi, it retained the right to half of the profit from this drug.
Based on the results from the fourth quarter, the sales base of Teva's generic drugs in North America, with no significant launches of new generic versions, dropped to about $3 billion. The actual revenues and profitability of the segment depend on those launches of new generic versions, primarily depending on the sales volume of the original drug and the number of competitors.
Teva's non-GAAP reports show that the company's revenues grew from $14.92 billion in 2022 to $15.84 billion in 2023, but most of the increase stems from payments received from the previously mentioned deal with Sanofi.
Teva's non-GAAP gross profit increased from $8.05 billion in 2022 to $8.47 billion in 2023. Without that one-time income, there was a slight decrease in gross profit. Despite the revenue increase, the gross profit margin declined from 54% to 52%. Gross profit margin neutralizing that income dropped from 54% to 52% in 2023. The decrease in the gross profit margin is explained by rising input costs and the impact of changes in exchange rates. The sale of product rights in Europe contributed to the gross profit and gross profit margin in 2023, and without them, the profitability would have been even lower. Teva's management expects the gross profit margin to rise to 53 or 54% in the current year. Non-GAAP operating profit rose from $4.14 billion to $4.36 billion. However, without that one-time income, operating profit would have decreased to $3.93 billion. The rate of operating profit neutralizing the same income dropped from 27.7% in 2022 to 25.6% in 2023. The decrease in the operating profit margin resulted from a combination of a decrease in the gross profit margin and an increase in sales and marketing expenses.
4. Ambitious goals for 2027
Teva's forecast for 2024 is for revenues of $15.7-16.3 billion, representing a growth of 4.2% between the forecast midpoint and revenues in 2023, excluding the one-time income from the Sanofi deal. The forecast for operating income is $4-4.5 billion, an increase of 7.2% relative to operating income neutralized for that one-time income. Teva's forecasted operating income margin for 2023, according to the midpoint of the forecast, is 26.5%. This is a relative increase compared to the neutralized operating income margin in 2023, but still lower than the operating profit rate in 2022.
Generally, Teva's gross and operating margins derived from branded drug sales are higher than average gross and operating margins for the company. Therefore, the decline in revenues from branded drugs until 2022 was expected to impact profitability margins. However, former CEO Kåre Schultz's sharp efficiency plan significantly reduced expenses and managed to increase profitability margins. Teva's non-GAAP gross margin rose from 51.5% in 2019 to 54% in 2022. The non-GAAP operating margin rose from 24.5% in 2019 to 27.7% in 2022. In 2023, Teva took a step back in profitability margins, primarily due to market conditions and its investment in promoting sales of Austedo. The expected continued increase in Austedo sales is anticipated to raise Teva's operating margin in the coming years.
Teva's financial commitments surplus decreased to $16.6 billion by the end of 2023. In addition, Teva has an additional commitment resulting from settlements in the opioid case and is not included in its financial commitments. Under these agreements, Teva will pay most U.S. states and other entities up to $4.25 billion over 13 years starting from 2023. A small portion of the compensation amount may be replaced by providing the drug Narcan at no cost. Additionally, Teva will pay $193 million to the state of Nevada over 20 years.
In its full annual report, Teva publishes its estimated expected payments for the coming years: $424 million was paid in 2023, $418 million will be paid this year, and $364-368 million will be paid each year from 2025 to 2027. Thus, Teva is expected to pay an additional $4 billion due to the opioid case, with most of the payment spread out until 2035. This commitment does not bear interest, so its present value is much lower than $4 billion. In our estimation, a commitment at a 6% annual rate multiplier creates an inflated commitment value of about $2.7 billion. Teva's forecast for the current year includes sales of $1.5 billion for Austedo, sales of half a billion dollars for Ajovy, and sales of $80 million for UZEDY. Investors will focus on Austedo’s sales, Teva's leading asset today, and the sales of UZEDY, which will be an indication of whether Teva succeeds in developing another essential growing source drug.
The operating profit forecast is $4-4.5 billion, a range that includes the actual operating profit from 2019-2023, when in 2023, excluding the income from Sanofi, the operating profit was slightly lower than $4 billion. The expected free cash flow will be $1.7-2 billion, and is expected to continue to reduce Teva's excess financial liabilities.
Investors are focusing on Teva's long-term goals for 2027. These goals are very ambitious. The path to these goals involves a change in direction from focusing on efficiency to focused investment in research and development and sales and marketing to generate sales and profit growth. In recent months, investors have shown confidence in Teva's ability to approach these goals, which is reflected in Teva's surging stock price.
The writer is an economist at a tech company.
