Generic drugmakers Mylan (NASDAQ:MYL) and Teva Pharmaceutical (NYSE:TEVA) usually deal blows to brand-name drug manufacturers, not each other, but that changed last week when the Food and Drug Administration approved Mylan's generic version of Teva Pharmaceutical's Copaxone, a best-selling drug with $4 billion in annual sales. Here's what this news means to investors in these companies.
Big-time brand name
Teva Pharmaceutical is best known for making generic drugs, but it generates about 20% of its top-line sales from Copaxone. The latter's sales of $1.02 billion in the second quarter accounted for only a little less than half of Teva Pharmaceutical's specialty drug segment sales.
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With $4 billion in annual multiple sclerosis revenue, Copaxone is the top-selling MS drug on the market, and according to IMS Health data, Copaxone's U.S. market share for both new patients and total prescriptions clocks in at an enviable 26.5% and 28.8%, respectively.
Undeniably, Copaxone is a Goliath in the indication and an important driver of Teva Pharmaceutical's success.
End of the line
Copaxone's market-leading position funneled billions of dollars into Teva Pharmaceutical's coffers over the years, and some of that money went to the development of a long-lasting formulation of Copaxone that management hoped would keep generic interlopers at bay.
That strategy worked, until now.
Originally, Copaxone was formulated as a 20 mg dose that's taken daily. However, facing patent expiration on that daily dose, Teva Pharmaceutical successfully developed a larger 40 mg dose that can be taken every three days instead.
Since the two drugs deliver the same efficacy but the 40 mg dose requires far fewer monthly shots, convincing patients to switch to the long-lasting Copaxone wasn't very hard. As of the second quarter, management reports that about 85% of Copaxone scripts filled were for the 40 mg product.
Teva Pharmaceutical's switching strategy successfully kept a lid on demand for the 20 mg generic alternative, Glatopa, from Momenta Pharmaceuticals (NASDAQ:MNTA) and Novartis(NYSE:NVS). Last quarter, Glatopa brought in just $19.1 million in sales -- a far cry south of Copaxone's haul.
Angry over Teva Pharmaceutical's strategy, generic drugmakers began asking for patent reviews and filing lawsuits to invalidate patents protecting the 40 mg dose. Their attempts have been largely effective so far, but the matter of patent protection on the 40 mg formulation is pending an appeal by Teva Pharmaceutical.
Despite the patent uncertainty, Mylan was among the first drugmakers to develop and file for FDA approval of a 40 mg version of Copaxone and last week, Mylan secured the FDA OK on both its 40 mg and 20 mg formulations.
Following the approval, Teva Pharmaceutical said Mylan's 40 mg launch is at risk, which means that if Teva Pharmaceutical wins its appeal, then Mylan could have to pay it stiff damages on sales. Mylan doesn't seem worried, though. Management told investors last Thursday that it's already shipping the 40 mg formulation.
Mylan's approval puts Teva Pharmaceutical in a tough spot.
The company's already on shaky financial ground because of its $40 billion acquisition of Allergan's (NYSE:AGN) generic drug business last year. The deal saddled Teva Pharmaceutical with debt and caused its interest expense to balloon. At the same time, its sales and profit have been hamstrung by price compression and a backlog for generic drug approvals at the FDA.
These factors already have Teva Pharmaceutical selling assets to shore up its balance sheet, and now that it has to compete with Mylan, the pressure on it only increases. According to management, Mylan's launch could shave $0.25 off its full-year EPS guidance this year.
It's anyone's guess how much Copaxone market share Mylan can capture, but given the size of the market, even a small victory could add hundreds of millions of dollars in sales. That's particularly good news for Mylan investors because Mylan removed any benefit from its generic Copaxone from its guidance earlier this year. The approval, therefore, puts Mylan in a better position to offset headwinds associated with the fallout from its EpiPen debacle.
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