Teva Bets on Reformulating Drugs as Investors Say ‘Show Me’

Teva Pharmaceutical Industries Ltd., which just two years ago was analysts’ highest-rated stock among the world’s 20 biggest drugmakers, is struggling to convince investors that a key part of its strategy will revive growth.

A new focus to reformulate or repurpose existing drugs to tackle unmet needs in areas such as HIV and pain will create a “multibillion-dollar business,” Chief Executive Officer Jeremy Levin said in an interview this month. Investors may be less optimistic. Shares of Petach Tikva, Israel-based Teva had the worst performance this year among the 25 largest drugmakers as analysts seek more details on the strategy and fret over competition to best-selling Copaxone.

“Teva is trying to re-coin an existing strategy,” said Ronny Gal, a New York-based analyst at Sanford C. Bernstein & Co. “Our answer to that is: ‘Sure, let me know what those drugs are and I’ll give you credit for them on a case-by-case scenario.’”

Teva became the biggest generic-drug maker through an acquisitive strategy that led to more than 20 deals in the past decade. Now, with its generic business facing fierce competition in the U.S. and price pressure in austerity-minded Europe, Teva is seeking in-between products -- innovative enough to justify high price tags and well-recognized by regulators so as not to require arduous clinical trials.

Share Performance

Teva dropped 0.1 percent to 146.70 shekels at the close in Tel Aviv. The more actively traded American depositary receipts gained less than 1 percent to $40.21 at the close in New York.

Teva has dropped 3.4 percent including reinvested dividends since the end of May last year, the month when Levin took the helm. That compares with a 38 percent advance for the 66-company Bloomberg World Pharmaceuticals Index, increasing pressure on the company to show drugs under development with blockbuster potential.

Teva’s initiative to tweak old medicines to create what it calls new therapeutic entities, or NTEs, was announced in December and the drugmaker plans to establish itself as a leader in this market, which it said is underserved. Teva plans to provide more details of the plan by the end of the year, Levin said in the interview.

Development Timetable

Teva considered as many as 50 candidates for NTEs this year, said Levin. Each may take as long as five years to develop and some drugs won’t have to go through clinical trials at all, according to Chief Scientific Officer Michael Hayden. The company plans to have 10 to 15 drugs internally approved for development this year and in each subsequent year, Hayden said.

“I like the idea of improving an existing drug and getting branded-type sales for it,” Randall Stanicky, an analyst at Canaccord Genuity Inc. in New York, said by phone. “This type of pipeline can be built up very quickly and Teva is in a unique position to combine their generic experience with their established presence in respiratory and central nervous system. But we really need more details to translate that excitement into numbers on a spreadsheet.”

Levin, 59, became CEO at Teva last year. A Cambridge University-educated physician, he previously worked at New York-based Bristol-Myers Squibb Co. as senior vice president for strategy. At Bristol-Myers, Levin helped oversee the so-called “string of pearls” policy of partnerships and smaller acquisitions to replace revenue lost as blood thinner Plavix faced more generic competition.

License Example

Hayden said an agreement announced by Teva on May 8 to pay an initial $40 million to Alexza Pharmaceuticals Inc. to license U.S.-approved inhalation powder Adasuve for agitation in schizophrenia or bipolar I disorder patients is a sign of things to come. He said each product would cost less than $100 million to develop and estimated the company will have 25 new approved products by 2020.

With NTEs, “it’s a bit like looking at a drug at early Phase III study without the expense of a huge Phase III study,” Hayden said, referring to the final stage of human testing usually required for regulatory approval. “All of these drugs have to reach the market in five years.”

Teva was making NTE-type products before Levin took the helm. A mid-stage trial to improve GlaxoSmithKline Plc’s Advair asthma product by using Teva’s Spiromax device is under way and a late-stage study for a tamper-resistant formulation of Hydrocodone for pain relief is planned for this year. The two products could have as much as $770 million in sales by 2020, Sanford C. Bernstein’s Gal said in April.

Low Risk

Taking known ingredients and repurposing or reformulating them is not new. New Brunswick, New Jersey-based Johnson & Johnson did it by reformulating a narcotic used for anesthesia into its Duragesic slow-releasing patch to treat cancer pain and Copenhagen-based H. Lundbeck A/S used Memantine hydrochloride, originally synthesized in 1963 by Eli Lilly & Co. for diabetes, to treat Alzheimer’s.

Still, Teva said few companies are making a concerted push into this form of development. Under Hayden, Teva brought together its older generic research and development unit with the newer branded-drug R&D team, much of which it got in the $6.5 billion acquisition of Cephalon Inc. in 2011. Teva says the new global R&D group will foster collaboration and synergies.

“This is the first time a company has created an industrial base of such scale for this area of medicine,” Levin said about the NTE business in an April 11 interview at Teva’s headquarters. “This will lead to a substantial pipeline for products with mostly low risk and high reward. We can really change the industry in a highly important area.”

Revenue Decline

Teva is trying to follow in the footsteps of its billionaire chairman Phillip Frost, said Ori Hershkovitz, a partner at Sphera Funds Management Ltd., a Tel Aviv-based health-care hedge fund. Under Frost, Miami-based Ivax Corp. developed a long-acting form of verapamil, a drug used to treat hypertension, helping it to boost sales that led to the $7.4 billion sale to Teva in 2006.

“Traces of Phillip Frost’s fingerprints are all over this new strategy,” said Hershkovitz. “While this may have worked for the likes of Ivax or Forest Laboratories, times are different now and with pressure to reduce health-care expenditures there isn’t much willingness to pay branded prices for generic products, even if we’re talking about less pills or a film instead of a patch.” Forest Laboratories Inc. makes and sells branded drugs.

Sales Decline

Teva’s sales declined 3.9 percent to $4.9 billion in the first quarter as revenue from generic drugs in the U.S. fell 27 percent to $895 million. Competition has also increased as Biogen Idec Inc.’s Tecfidera treatment for multiple sclerosis won U.S. approval on March 28, posing a challenge to Teva’s best-selling Copaxone treatment.

Still, Teva said it is keeping its NTE ideas close to its chest for now.

“I’m from the Midwest and so I know it’s show me,” Jon Congleton, senior vice president at Teva’s Global Medicines Group, said at RBC Capital Markets health conference on Feb. 27 when asked whether Teva expects investors to trust the company as details about the NTE business remain scant. “Until we have some security around the asset that we’re moving into development, we don’t want to play the hand out too quick.”

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