Health

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.

If you've got bad news to deliver, it's always better to do it all at once, rather than parcel it out.

Earlier this year, for example, Teva Pharmaceutical Industries Ltd. cut its 2017 revenue guidance by $1.5 billion due to underperformance of its flagship generics business. That guidance, however, did not include generic competition for the most important form of its best-selling multiple sclerosis drug Copaxone.

So investors were not fully prepared when, late Monday, a U.S. court invalidated four Copaxone patents, possibly putting more than $1 billion in U.S. sales at risk this year.

Teva pledged to appeal the ruling, but its stock tumbled as much as 6 percent Tuesday morning to its lowest level since 2007. Teva's market cap is now about $33 billion, or less than the nearly $40 billion it paid last year to buy Allergan's generics business. Also larger is Teva's debt load -- $36.8 billion, or 5.43 net debt to adjusted Ebitda, one of the highest ratios in the industry -- making this news especially chilling.

And after repeated disappointments, investors are left with no choice but to question management's ability to give accurate guidance and deliver on a promised transformation. 

The Beatings Will Continue
Teva's already battered shares fell to their lowest level since 2007 after an unfavorable patent ruling
Source: Bloomberg

Copaxone's original patent has already expired, but Teva has preserved sales by switching patients to a more-convenient larger dose. The drug's longevity has made for a steady stream of high-margin revenue. Copaxone contributed about 20 percent of Teva's revenue in the latest quarter, and an estimated 42 percent of its profit in 2016.

A Bit Off the Top
Losing a big chunk of Copaxone sales would put a significant dent in Teva's revenue going forward
Source: Bloomberg

Teva's purchase of Allergan's generics business was meant to help end its dependence on Copaxone. Investors are still waiting to see a transformative effect. The generics unit -- projected to be about 58 percent of Teva's 2017 revenue and 49 percent of profit -- has struggled due to price competition and a failure to launch new products in the U.S. as quickly as it has in the past.

Teva's debt load means it lacks the flexibility to do other deals to help replace Copaxone. Teva had hoped to cut its debt ratio to 3.5 times Ebitda by the first quarter of 2018 and pledged no major business development until then. The loss of expected revenue from Copaxone may push that timeline out significantly and force Teva to dip into its $1.5 billion cash pile to make debt payments, particularly if its generics struggles continue.

Prices on some of the company's bonds, already down substantially for the year, fell further on Monday's news. 

Bailing On Bonds
Teva's debt has lost value as the company faces generic competition for its best-selling drug and struggles to launch new generics of its own
Source: Bloomberg

This isn't the first time investors have been blindsided by Teva's over-optimism. The company cut its revenue, EPS, and cash-flow guidance last year, just four months after releasing it. It also initially expected to close the Allergan deal in the first quarter of 2016 and kept investors in limbo until August.  

Instead of continuing to over-promise and under-deliver, Teva's leaders need to own up to their problems and map out a realistic path to stability. Otherwise they risk disappointing the market again. 

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

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net