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Mylan/Viatris and Teva at the 38th Annual J.P. Morgan Healthcare Conference

Mylan presented on Viatris at the 38th Annual J.P. Morgan Healthcare Conference. Below are selected slides from the presentations of Mylan and Teva at the conference and figures comparing the existing business entities prior to the merger with Upjohn.

Teva has closed many manufacturing sites, but still have more than Viatris; ~60 and ~50 respectively.

Viatris Synergy Cost Savings

The cost synergies between Mylan and Upjohn are expected to be approximately $1B, whereas Teva has already realized annual cost savings of $3B as part of their restructuring plan.

Teva Restructuring Plan Cost Savings

Whereas Viatris will be paying a dividend from day one (25% of free cash flow), Teva does not currently pay a dividend. This cash flow is spent almost entirely on reduction of debt.

It is not impossible to imagine an expansion of multiples at Teva and Viatris, if legal headwinds disappear.

Enterprise value to EBITDA for Mylan and Teva
Closing price and EBITDA for Mylan
Closing price and EBITDA for Teva

Teva and Upjohn have lost revenue in part because of generic competition to Copaxone® and Lyrica®, respectively.

Revenue
Revenue
Gross profit
Teva gross profit
Mylan gross profit

Teva is the only company that have lowered their SG&A significantly as part of their $3B restructuring plan as a response to the falling generic drug prices in the US.

SG&A
SG&A as a percentage of revenue

The lowered SG&A translates to stabilized operating income.

Operating income

Future growth seems like a possibility for both companies.

2019-11-25 Bloomberg – Teva, Drugmakers in Talks With U.S. to End Generics Probes

2019-11-12 Mylan and Pfizer Announce Viatris as the New Company Name in the Planned Mylan-Upjohn Combination

2019-11-07 Bloomberg – Teva Profit Outlook Edges Up With Cost-Cutting Plan on Track

2019-07-29 Mylan and Upjohn, a Division of Pfizer, to Combine, Creating a New Champion for Global Health Uniquely Positioned to Fulfill the World’s Need for Medicine

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Teva and status on CGRP migraine drugs

Teva Pharmaceuticals issued a press release on their Q2 earnings on August 7th.

Below are excerpts from the earnings call with CEO Kåre Schultz and outgoing CFO Michael McClellan and relevant figures and slides. Further below the CGRP migraine drugs Ajovy® from Teva, Aimovig® from Amgen and Emgality® from Lilly are discussed. The legacy litigations regarding opioids and pricing are not discussed here, but Teva has a $646 million provision for legal settlements following their $85M opioid settlement, which is further described in the earnings transcript and in this Bloomberg article.

Earnings call

If we go to historical development of revenue and profitability, I’d just like to remind you of the situation in late-2017 when I joined, where we saw generic competition coming in on COPAXONE, and we basically knew that revenues were going to fall roughly $4 billion on a yearly basis. That’s also what you see. You see the quarterly revenue coming down from some $5.3 billion to $4.3 billion.

But you also see now the beginning of the trough, as I’ve been calling it, the trough of 2019, which is basically where the revenue stabilises. You also see that the gross margin that was coming down is also stabilising now just above 50%, and the operating margin stabilising now around 23%, which is of course not our long-term target. Our long-term target, as I’ll get back to, is 27%, so we still need to see improvement there.


Talking about the trough, let’s look at the operating profit. If we look at that in the same historical period, then you’ll also see the very big effect of the revenues declining, and us only being able to take down the cost quarter-by-quarter, but still the effect now is that we are stabilising the operating profit at around roughly $1 billion per quarter, and you see that the net income is around $650 million right now. And that results, of course, in the earnings per share stabilising right now around $0.60.

Now this is – as I’ve said before, this is what we expect to be the trough year. It’s not that there will be a dramatic turnaround in the coming years, but the trend lines will slowly change and we’ll start to see a moderate increase in revenues and moderate increases in EPS going forward. But, just to remind everybody, this year will be the lowest year in terms of operating profit and also in terms of average earnings per share

Now, if we look at the business going forward and our financial targets for the business going forward, then I’d just like to repeat these. We have talked about them before, but just so that everybody knows what our long-term plan is. And one key element is, as I said in the beginning, to improve the operating margin. Now, that happens by a lot of elements.

One element is, of course, that you optimise your product portfolio, the gross margin on the products you’re selling. You optimise the manufacturing cost of the products you sell. And you make sure that you have a good and strong overall market development. As I showed you earlier, we are at the level of 23% right now, and we want to improve that up to the level of 27%.

The cash-to-earnings is quite simple because we need the cash in order to reduce our debt. And of course, we have a long-term plan to keep on reducing our debt. The simple math is that, right now, we probably have a net earnings of some $650 million per quarter. That’s 2.6 billion a year. 80% of that, that’s roughly just around $2 billion. So, as you see, we’re also guiding $1.6 billion to $2 billion on the cash flow, so we’re really aiming at getting to that level where we, on a consistent basis, generate most of the result as cash.

There will always be quarterly fluctuations with a big balance sheet as ours. Of course, there are quarterly
fluctuations. But, on a yearly basis, it’s very important that we meet this target of the 80% cash-to-earnings. And that is important because we need to reduce the debt.

As you know, our net debt-to-EBITDA ratio right now is about 5x, and we really want to get it below 3x, and the only way to do that is to generate cash and pay back the debt. So we will continue to use all our cash flows to really pay down debt. And as I stated many times, we do not plan to raise equity. We plan to continue to use cash to reduce the outstanding debt, and we think that’s the best way to create value for our long-term shareholders.

We ended the second quarter with a net debt of $26.6 billion and a net debt-to-EBITDA ratio of 5.72x. As you may recall, during April, we also entered into a $2.3 billion unsecured syndicated revolving credit facility, which replaced the previous $3 billion revolving credit facility that we had. This new RCF can be used for general corporate purposes, including repaying existing debt. As of June 30, 2019, no amounts were outstanding under the RCF. And as of today, we have $500 million outstanding under the RCF.

Today, we are reaffirming all aspects of our annual guidance that were first presented in February and reaffirmed in May, including earnings per share in the range of $2.20 to $2.50 and free cash flow from $1.6 billion to $2 billion for the year. Where we end up in the ranges of the full year will depend on the performance of the branded products, especially COPAXONE and AJOVY, the timing of generic launches, foreign exchange rates, especially the euro, and our expense management.

Spend base

Spend base

Debt Structure

CGRP migraine drugs

The quarterly sale of CGRP migraine drugs were:

  • $23M Teva Ajovy® (Fremanezumab)

AJOVY revenues in our North America segment in the second quarter of 2019 were $23 million. AJOVY was approved by the FDA and launched in the United States in September 2018 for the preventive treatment of migraine in adults.

  • $34M Lilly Emgality® (Galcanezumab)

For the second quarter of 2019, Emgality generated worldwide revenue of $34.3 million, an increase of $20.1 million compared with the first quarter of 2019. U.S. revenue was $33.8 million, an increase of $21.7
million compared with the first quarter of 2019. Emgality launched in certain international markets in the first quarter of 2019 and generated revenue outside of the U.S. of $0.5 million in the second quarter of 2019.

$83M Amgen Aimovig® (Erenumab)

Aimovig was launched in the U.S. in the second quarter of 2018 and generated $83 million in sales in the second quarter of 2019.

Below are important announcements regarding clinical studies and links to these studies.

On August 21st Teva announced that Fremanezumab data in The Lancet demonstrate clinically meaningful reduction in monthly migraine days versus placebo for patients with difficult-to-treat migraine.

On August 5th Lilly announced positive results for Emgality® (galcanezumab) from the CONQUER study in patients who failed previous migraine preventive treatments.

On May 2nd Amgen announced it would highlight extensive long-term safety and efficacy data of Aimovig® (erenumab) across the spectrum of migraine at the American Academy of Neurology annual meeting.

Below are slides and excerpts from earnings call transcripts.

We are very happy about the strong launch we’ve had of AJOVY. We still have above 20% TRx share in U.S., and we have just started the launches in Europe. We’ve seen a moderate decline in the NBRx share. We think it’s related to a couple of factors. One being the fact that we’ve stopped the full pay-down on all scripts, which means that some scripts where we are not covered actually do get declined at the pharmacy level. And we also see that, in some cases, the patients do prefer an auto-injector, and therefore, of course, we are very eagerly awaiting the approval and the launch of our own auto-injector for AJOVY.

And of course, we’re anxiously awaiting the approval of our auto-injection device and the launch of that device which we expect in the next six months. That will be a second stimulus, really, a second phase of our launch, and we expect a significant boost to our new-to-brand and our TRx share as a result of that.

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Teva still suffers from negative revenue growth and return to growth is still distant

Teva reported on their first quarter results and issued the following press release with the following headlines and statements from the CEO:

– Revenues of $4.3 billion
– GAAP diluted loss per share of $0.10
– Non-GAAP diluted EPS of $0.60
– Free cash flow of $360 million
– Spend base reduction of $2.5 billion since initiation of the – restructuring plan in 2018; on-track to achieve $3.0 billion by the end of 2019
– Full year 2019 revenues and EPS guidance reaffirmed

Mr. Kåre Schultz, Teva’s President and CEO, said, “The second year of our two-year restructuring program got off to a promising start. We are on track to reduce our total cost base by $3 billion by the end of 2019 and we have achieved a reduction of $2.5 billion to date, while continuing to lower our debt. “

Mr. Schultz continued: “We faced the expected loss of exclusivities of key products COPAXONE® and ProAir® to generic competition. Our focus is on stabilizing our global generics business and ensuring the success of our long-term organic growth drivers, especially AJOVY® and AUSTEDO®. Both products continue to gain momentum since their initial launches and we are making the necessary investments to be able to bring them to markets outside of the U.S. as well as explore additional indications.”

Below the revenue is shown for each geographic segment, the multiple sclerosis drug Copaxone® and generic drugs. The operating expenses are also shown.

Copaxone® revenue has been further reduced following the introduction of generic versions from Mylan and Momenta at lower prices. Revenue from generic drugs in the US seems to have stabilised. The company is on track to achieve the goal of reducing expenses by $3B annually and $750M quarterly. The migraine drug Ajovy® does not yet contribute significantly to the overall revenue. Annual peak sales have been estimated to be greater than $500M. Ajovy® received EU approval in April 2019.

The slide below is a summary of the quarterly highlights not already mentioned above.

The slide below shows the NBRx market share of the migraine drug Ajovy®.

The current competition is Aimovig® from Amgen and Emgality® from Lilly.

Alder BioPharmaceuticals also has a CGRP migraine drug (eptinezumab) in phase 3.

The slides below are summaries of Austedo®, Copaxone® and Ajovy®

The slides below are summaries of GAAP and non-GAAP metrics and a summary of the items causing the difference; e.g. $348M of impairment charges to intangible assets and amortisation of $283M.

The slides below summarises the free cash flow and the long term debt.

The slide below summarises the non-GAAP outlook.

The final slide below shows the debt maturity. The CEO has said the company will not need to raise equity, but given the reduced revenue, profit and cash flow the company will definitely have to refinance. Currently the credit rating is BB with S&P and Ba2 with Moody’s.

I do think Teva could trade close to $30 within the next 2-5 years, but it’s not a business I would own long term, so I choose not to buy at $14-16 despite the lowest EPS forecast for 2020 currently being $2.28 and the remainder of the market (i.e. S&P500) being somewhat overpriced.

During the call the CEO didn’t reveal much about the long term targets and long term strategy:

Yeah, of course, we have the aim to become as effective as any of our competitors, which means that longer-term we need to improve our margins which is why we have a long-term financial target of an operating margin of 27%, which is higher than where we are right now. So, of course, in order to achieve that, we need to set plans in place so that this happens. Our plan right now is to communicate more broadly on this once we finish this year. So once we finish the restructuring of ’18 and ’19, we will communicate to you what is our strategy for manufacturing and for that part of the cost base.

You can see that, we have a long-term target of the operating profit of 27%, that’s higher than where we are now. Part of that improvement of course has to come from the COGS, because if we don’t improve the gross margin, then it’s going to be very difficult to get a significant improvement of the total margin. So yes, we will be targeting something like that. We will give you some more details on what we are planning to do once we finish the restructuring, that means once we report on the full year of 2019. Next February, we’ll give you an outline of how we see the ongoing optimization of our manufacturing system.

On the R&D side, we spent roughly $1 billion on R&D, and you could see the — a big chunk of that is for innovative specialty products. We have about 30 development projects ongoing, about two-thirds of those are biopharmaceuticals. And we don’t really want to share that with anybody right now. The reason is that, we are in the restructuring right now this year and last year, but our plan is to share more with you once we finish this year. So once we get to February of next year, we will share a bit more with you on what is our pipeline, what are the different projects we have.

Globes, May 2nd: Teva Q1 revenue down but profit beats analysts

Bloomberg, May 2nd: Teva Falls as Sales of Copaxone Decline Faster Than Expected

Reuters, May 2nd: Teva’s new migraine drug helps to contain profit fall

Globes, May 3rd: Teva CEO unsure about 2020 growth

CNBC, May 5th: Migraine drugs cause pain for investors

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Teva and the approval of the migraine drug Ajovy®

Teva announced the FDA approval of their migraine drug Ajovy® (Fremanezumab) – a mAB CGRP inhibitor – in a press release on September 21st.

I felt it would be a good time to revisit Teva and migraine drugs, since a lot of things have happened, since their largest ever acquisition of Actavis Generics from Allergan for $40B – announced in July 2015 and closed in July 2016 – and the arrival of their new CEO (Mr. Kåre Schultz) in November 2017; the day before their Q3 results were presented.

Ajovy® and other migraine drugs

Amgen got a headstart with their migraine drug Aimovig® (Erenumab). An advantage of Aimovig® is that it comes with an auto-injector pen, whereas Ajovy® currently doesn’t. An advantage of Ajovy® is that it only requires a quarterly injection, whereas Aimovig® requires a monthly injection. Both will be priced at a monthly cost of $575. Aimovig® binds to the CGRP receptor itself, whereas Ajovy® binds to the CGRPs, but both seem to significantly reduce the number of migraine days according to a 2018 meta-analysis. Lots of other mAB migraine drugs are in late stage development and some of them are listed below.

Amgen presented a few slides on May 18th regarding the potential of anti migraine drugs and on September 14th they presented prescription numbers.

Here are comments from Teva CEO Kåre Schultz on Ajovy® from the Q2 earnings transcript.

And we think that that’s a fantastic market. The migraine market is very, very promising. We think there’s enormous unmet need. So with a good launch of Ajovy®, their sales will start to accumulate in 2019 and will be meaningful in 2020.

Aimovig® and other migraine drugs were discussed on the Q2 earnings call of Amgen.
Click for excerpts from the Amgen Q2 transcript

  • – Let me give you a few examples of some of the newer medicines that we’re seeing driving our growth. In the second quarter, we launched Aimovig in the U.S., where it is the first and only CGRP inhibitor approved for migraine prevention. Aimovig also marks Amgen’s first entry into a new therapeutic area for us, which is neuroscience. We’ve been very encouraged by the enthusiastic reception for Aimovig from physicians and especially from migraine patients who have waited a long time for a new treatment option like this.
  • – Also, in migraine, we expect the data from our proof-of-concept in dose-finding Phase 2 study of our PAC1 antibody for migraine prevention, AMG 301, to be available by the end of the year and presentation at a medical meeting in 2019. There have been a number of recent developments in Alzheimer’s disease clinical programs in our industry, so I thought it would be useful to highlight our partnership’s ongoing beta secretase inhibitor program and why we have such confidence in our approach.
  • – Now on to Aimovig, the first and only therapy specifically designed to prevent migraine by targeting and blocking the CGRP receptor. Patients and physicians share our excitement for this new therapy. And, as you know, we set up a hub to assist patients to gain early access to the product while we complete negotiations with payers. This program provides a free two-month trial of Aimovig. We have, in fact, received a large bolus of requests from the Headache Centers of Excellence reflecting the pent-up demand for this innovative new therapy. We’re busy working through these requests and expect to see the prescriptions coming through over the coming weeks. Should a patient not be approved by the insurance during this two-month period, we have a bridging program during their negotiations to ensure that patients are not denied drug. Negotiations with payers are progressing well and we have successfully completed contracts to attain coverage for just under 30% of lives already.

Migraine drugs and other pain relief drugs were also discussed on the Q2 earnings call of Eli Lilly.
Click for excerpts from the Lilly Q2 transcript

  • Q: And then my second question, just on galcanezumab. The feedback from the Amgen launch in the CGRP space seems to be pretty favorable. I’d just be curious to get your evolving thoughts on, do you think payers are going to cover multiple CGRP agents on par or parity or do you think that they will opt for exclusive contracts out of the gate?
  • A: As it relates to the assets in the migraine category, you know it is pretty early days here. I understand mostly payers haven’t listed the new therapy. We’re of course for the guidance in FDA and early conversations with payers about our data and seeking that kind of feedback from them, I could tell you what our strategy is, which is reading broad access to these medications as appropriate and particularly given the population. So, these are mostly commercially insured, working women who are having anywhere between 4 and 20 headaches a month that is our study population, which causes absenteeism, debilitation, lack of ability to predict and schedule and plan, not to mention just the human suffering cost. So, we think employers will be very interested in covering this class. We need to get that message through. It could be a great category for some value and outcomes-based pricing approaches, and we’re optimistic long term that the class will have good coverage.
  • Q: Second question just has to do with the emerging pain, franchise, just to your optimism over that franchise, especially galcanezumab, which seem to have hit some pretty decent data in cluster headache, which is an area where nothing seems to have worked in that area, so just your thoughts on that and lasmiditan, the timing profiling of lasmiditan here in the back half?
  • A: Finally, on pain, you know we’re excited about the pain portfolio, you’re seeing data emerge now from tanezumab, we have the data as you mentioned on galcanezumab’s of all the Phase 3 in-house. And lasmiditan, we do plan to submit before the end of the year as well. Clearly pain is a huge unmet need in this country. I think you’re seeing good interest in the first CGRP antibody launch that we expect that to continue migraines in enormous problem in this country and there are many chronic and episodic sufferers there that we hope to reach with CGRP antibodies, as well as products like lasmiditan, which can relieve acute suffering. So, we’re bullish on that category.

Copaxone® and Teva going forward

Teva announced Q2 earnings on August 18th. Revenue is still declining due to Copaxone® competition from Mylan and Momenta and due to price pressure on generic drugs in the US.






The Teva CEO during the Q2 earnings call commented that the revenue will probably start growing in 2019.
Click for comments from the Teva CEO

  • – That’s what I tried to explain, that I think that we are probably hitting the bottom of the valley, or the trough, whatever you want to call it, in 2019. And then based on the dynamics that Copaxone® is not dropping so much anymore because a big chunk of it is gone by then, and that Ajovy® is picking up, Austedo® is picking up, then I expect us to see positive momentum on sales from 2020.
  • – So if we think about the margin overall and what can be done, you could say longer term after 2019, then first of all, we have to realize that in 2019 there’s continued pressure on the margin from the fact that Copaxone® is reducing in sales and the fact that we don’t really see meaningful big sales of Ajovy® yet coming in and compensating for that. Of course, longer term there’s a better gross margin on Ajovy® and on Austedo® than there is in on the bulk of our business. So longer term that will affect the margin in a positive way.

Revenue from Copaxone® (Glatiramer acetate) in the US is still declining, but the prescription volume seems stable at 85%. Mylan decided in Q3 to cut the price of their generic version by 60% and their CEO commented on the move during their Q2 earnings call on August 8th.
Click for comments from the Mylan CEO

Market uptake of our Glatiramer Acetate Injection is a prime example of supply chain tactics capping generic utilization at 15% when two substitutable products have been available for nearly a year. Last year we launched our Glatiramer Acetate with a traditional approach. And for nearly nine months we worked within the system to increase access to no avail.

More recently, we’ve taken unconventional steps to increase access. If these steps do not prevail, we will make further moves to do our part where we can to reinstate the necessary balance between innovation and access, as this balance has historically been the one aspect of the pharmaceutical industry to simultaneously drive trillions in savings while ensuring patient access to medicine.

Our experience with Copaxone is representative of the perverse incentives embedded in the current system. Even after substantially lowering the price of our product, the supply chain chooses a higher priced alternative. This provides evidence that the business of healthcare feeds on higher prices, frequently putting system interest ahead of patients.

Rest assured, we will continue to be vocal about measures to improve the current environment.


The price pressure on generic drugs in the US is still ongoing and margins are still somewhat anaemic, but 1) Teva as measured by a P/S multiple is not overpriced historically and relative to its peers, 2) annual cost savings of no less than $3B will have been achieved by the end of 2019 and 3) Teva has economies of scale to achieve the best margins in the industry.