Teva dominates with three generic blockbusters
Israeli drugmaker launches generic versions of Zocor, Zoloft and Pravachol, all in 2006
NEW YORK (CNNMoney.com) -- This is a good year for Teva Pharmaceuticals. The world's biggest maker of generic drugs is launching nonbranded versions of three major blockbusters: Zocor, Zoloft and Pravachol.
Teva has secured the first rights to produce generic versions of these former blockbusters, and the efforts are paying off, for now, with sales and earnings that are skyrocketing this year. But 2006 will be a hard act to follow, and it sets the stage for an earnings slump in 2007.
The Jerusalem-based Teva (down $0.23 to $34.72, Charts) raised eyebrows - and its stock price - when it announced on Aug. 8 a 77 percent surge in second-quarter sales, to $2.2 billion. Adjusted, fully diluted earnings per share surged 83 percent to 66 cents. Shares rose 3 percent after that earnings report and are up 17 percent since the company's late June launch of simvastatin, the generic version of Merck's cholesterol-cutting blockbuster Zocor.
Teva, whose American depositary receipts are traded on the Nasdaq, attributed part of its second-quarter sales and earnings jump to last year's acquisition of the generic drugmaker Ivax. But chief executive Israel Makov said in its earnings release that simvastatin also played a big role: "The highlight was our extremely successful launch of simvastatin, the largest in the history of the generics industry."
Merck's (down $0.13 to $41.33, Charts) patent on Zocor expired on June 23, dealing a major blow to the New Jersey-based drug giant, since the blockbuster drug totaled $4.4 billion in 2005 sales. Merck is now producing its own generic form of Zocor - in conjunction with India-based generic drug maker Dr. Reddy's Labs (up $0.29 to $31.09, Charts) - but sales are expected to plunge compared to branded Zocor.
Teva managed to secure the rights to produce simvastatin with only limited competition for 180 days. During that time, it will compete with the Merck-Dr. Reddy's generic and with a generic from another Indian drugmaker, Ranbaxy Labs. While Teva is approved to produce simvastatin in three of the drug's most popular dosages, Ranbaxy produces only one.
Teva told CNNMoney that it does not break out sales figures for specific generic drugs. But analysts believe that Teva could bring in more than $300 million in sales from simvastatin over the 180-day period beginning June 23. That pales in comparison to the Zocor's branded sales, but it's a lot for a generic drug.
Pushing generic blockbusters
To make the most of that 180-day period, Teva wasted no time in shipping its Zocor generic immediately after the Zocor patent ran out on June 23.
"They had multiple 18-wheelers loaded and ready to go [for shipment,]" said Robert Uhl, analyst for Friedman, Billings, Ramsey. "I think some of it was Fedexed to customers as well. The wanted to try and satisfy as many customers as they could."
"They shipped a ton [of simvastatin] in the second quarter, and they shipped a ton of it on the first day," said Aaron Gal, analyst for Sanford Bernstein.
Time is money. When a brand-name drug goes generic its price plunges. And after the 180-day window that limits production to only a select few companies, the generic price drops again when production opens up to all drugmakers. At that point the drug's total generic sales will plunge to about 20 percent of their branded drug's sales levels.
In addition to simvastatin, Teva has been producing pravastatin, the generic version of the cholesterol-cutting drug Pravachol from Bristol-Myers Squibb (down $0.29 to $20.83, Charts). Teva has 180-day exclusivity on this drug as well and has been producing it since Bristol's patent ran out in April. Pravachol sales totaled $2.3 billion for Bristol in 2005, while Teva is expected to sell more than $200 million of the generic version this year.
Just a few days after the Zocor patent expired, Pfizer's (down $0.18 to $25.97, Charts) patent ran out on the antidepressant Zoloft, which totaled $3.3 billion in 2005 sales. Teva also has exclusive rights to make the generic form of this blockbuster - called sertraline - which is expected to bring in hundreds of millions of dollars in revenue this year. Sertraline's release date has not yet been set.
"They could expect to do a big launch that will make a lot of people happy," said Uhl, the analyst for Friedman, Billings, Ramsey.
Bad news in 2007
But here's the bad news for Teva: Its 2006 sales and earnings will be a hard act to follow. The company will likely struggle to produce significant growth after enjoying a year with exclusivity on three former blockbusters.
This is why Raymond James analyst Michael Krensavage rates Teva an "underperform." In a published note, Krensavage said he based his rating on "our belief that a large windfall from the launch of two generic cholesterol drugs in the second quarter will quickly evaporate."
Krensavage said that simvastatin could boost Teva's EPS by 20 to 25 cents in 2006 but added, "contribution from the drug likely will collapse when other generics arrive in December," when Teva's exclusive right to the generic ends.
Will Sawyer, analyst for Leerink Swann, said, "That's the concern on Wall Street: that after a solid 2006, growth in 2007 is going to be minimal."
But after the slump, sales could pick up again. In its earnings release Teva said it has 148 more applications for generic drugs filed with the Food and Drug Administration and that their brand-name equivalents represent $84 billion in U.S. sales. Teva has first-to-file status with 46 of those applications, which means that the company could win exclusivity for the generic version of those drugs, which totaled $35 billion in U.S. brand-name sales.
Sawyer of Leerink Swann projects 2 percent growth in 2007. But he said growth will pick up again in 2008, as more drugs go off patent and pave the way for a "more robust" generic market.
The analysts interviewed here do not own Teva stock, but Raymond James and Leerink Swann make a market in Teva shares.