Teva Fights Back at the Haters

It says pricing's not a problem; it needs to be right.

It's not a good time to be generic. Firms such as Endo International have reported a worsening generic-drug pricing environment in the U.S., blaming it for softness in their business. 

Teva, the world's biggest generic-drug maker, said on its first-quarter earnings call on Monday that the wave of price erosion its competitors cite is not all that bad. The company -- which is trying to close a $40.5 billion deal for Allergan's generics business in June -- said its generic prices fell by 4 percent in the U.S. last year, and it expects another 4 percent decline this year.

In contrast, AmerisourceBergen said on a call last week it expects its generic drug-price deflation to reach the "high single digits" this year alone. 

Teva's explanation of how it is avoiding worse pricing pressure is pretty simple: It says it is bigger and better at the generic game than its rivals and is about to get bigger and better-er. Its outlook boosted shares by 3.8 percent. But as it begins to digest its massive Allergan meal, the company needs to be right about pricing to justify an expensive deal that basically doubles it down on generics.

What Erosion?

Teva is doubling down on generics as competitors say price deflation is killing their business.

Source: Bloomberg

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Teva's generics business head Sigurdur Olafsson said on the call that the biggest gripers about price deterioration have been firms with older drug portfolios, those that are narrowly focused on a certain type of drug or disease, and those that aren't launching many new drugs.  That's a problem with individual companies' drugs and business models, not the whole sector, he argued. 

Teva's generics business model, in contrast, is to grow by launching new products -- a lot of them. The company had 450 generic drug launches in 2015. It expects more than 1,000 on a pro-forma basis this year after it completes the Allergan deal and 1,500 next year. That's tough for smaller firms to match.  

Olafsson has a point. Take Endo: That company's revenue-forecast cut last week was driven partly by deteriorating generic prices. But the piece of its business feeling price pressure is its older generics unit, which is concentrated in pain medications that have taken a particularly hard pricing hit.

Other companies have blamed price weakness on consolidation of drug customers such as insurers, hospitals and pharmacy benefit managers. As these firms buy each other up, they're better able to use size to demand price concessions. Teva's gaining scale of its own, which may help combat this. Regardless of who has it right, the market has its doubts about the drug knockoff business.


Companies that make cheaper copies of medicines have underperformed the rest of health care lately; some say due to increasing price pressure. Percent appreciation.

Source: Bloomberg

The Allergan deal firmly recommits Teva to generics, which will rise from 45 percent of Teva's revenue in 2015 to something closer to 60 percent. The deal gives Teva more scale, but at a high price -- around 17 times the Ebitda of Allergan's generics unit as of last summer when the deal was announced, according to a note from BTIG analyst Tim Chiang. July 2015 was a long-ago, more-peaceful time, when companies weren't sending up so many red pricing flags. If there's a real decline in generic pricing power, then the price Teva paid will not age well.  

Rhetoric aside, Teva's generics business has lagged the rest of the company. Sales at the generics unit declined 17 percent year-over-year. The specialty drugs business grew sales 10 percent over the same period. 

Starting in June, when Teva expects the Allergan deal to close, its bigger-is-better philosophy will be under even more pressure. 

Update: An earlier version of this story misspelled Sigurdur Olafsson's name. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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