Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Teva's deal-driven scale is supposed to help it thrive in the struggling and price-pressured generic drug business. It's not happening yet.

Just as investors were worrying about competition for the company's best-selling drug -- the MS treatment Copaxone -- Teva Pharmaceutical Industries Ltd. on Tuesday cut its 2016 cash-flow guidance by a billion dollars, revealed shakiness in its legacy generic business, and said it intended to avoid big M&A for the "foreseeable future" due to its bulging debt load. Shares fell more than 7 percent.

Teva has completed 12 acquisitions worth $46 billion in the past four years, promising this approach will pay off in the long run. But with its big deals done and its biggest product at the mercy of a patent court, Teva needs to stop promising things will get better in the future and start delivering in the present. 

A guidance cut sent Teva's shares tumbling
Source: Bloomberg
Intraday times are displayed in ET.

Teva might get more leeway from investors if 19 percent of its sales, in the form of Copaxone, weren't teetering on the edge of a cliff. 

The question is not if the drug's sales will die off, but when. Teva has lost several patent challenges in the U.S. and may face generic competition for the most popular dose as early as next year, putting more than $4 billion in sales at risk. 

Even without a generic competitor, sales declined 2.2 percent year-over-year in the third quarter. Comparing gross to net sales data suggests the company is already being forced to offer bigger and bigger discounts to maintain market share in the U.S.

Teva may be paying higher rebates in order to secure market share for Copaxone
Source: Bloomberg Intelligence/Symphony
Actual acquisition cost of projected total prescriptions dispensed by retail.

On the generics side, revenue grew 32 percent year-over-year. But that headline growth is deceiving, flattered by the addition of $887 million in sales that came with the $40 billion purchase of Allergan's generics unit, Actavis. Teva's pre-deal generics business actually saw sales decline by about $30 million from a year earlier, due largely to price erosion and a lack of new drug launches. Combined with Copaxone concerns, it's not the best look for a company trying to grow organically. 

Without a two month Actavis sales boost, Teva's generics business does not look quite as healthy
Source: Bloomberg

Teva claims its generics business is set to grow for the long term and that the generic pricing environment hasn't changed fundamentally. But drug distributors and others in the business are more pessimistic about the outlook for generic prices than the 5 percent-ish decline Teva predicts for the rest of the year. Rival Perrigo, for example, expects 9 to 10 percent price erosion for the rest of this year.

Teva and Actavis have been subpoenaed as part of a federal antitrust investigation into possible collusion on generic drug pricing. The company said it is not aware of any exposure, but the probe may have a substantial price-cooling effect. 

Teva's scale does not seem to be protecting it from price pressure at the moment. Nor are new drug launches: Teva launched 11 products in the third quarter, none of which were big. And the company now expects major launches to be pushed back into 2017 or 2018.

The company has more than 300 products awaiting approval at the FDA. But if the drugs keep getting delayed or launch into a weakened market, then they won't do much good. 

It's early enough in the Actavis transition that Teva should get some benefit of the doubt. But it hasn't given itself much margin for error; it will need to generate an additional $6 billion in revenue annually by 2019 to meet the long-term guidance it set this summer -- more if Copaxone sales go down the tubes.

Investors are right to doubt new launches will magically save the day when none of note have yet materialized. Unless things start to improve substantially, Teva's latest guidance cut won't be the last. 

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

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Max Nisen in New York at

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