King of Generics Pushes Into Biotech Drugs

By Denise Roland

The world's largest maker of generic drugs is looking for growth in an unlikely place: high-price biotech medicines.

Teva Pharmaceutical Industries Ltd., which makes more than one in 10 drugs taken in the U.S., has been battered in recent years by slumping generics prices, while grappling with heavy debts. That has forced it to cut thousands of jobs and shut research facilities. Now it is turning to biotech drugs to revive its fortunes.

"We figured out a strategy where we'd continue to be leaders in generics but really focus our R&D on innovative biologics and biosimilars," new Chief Executive Kåre Schultz said in an interview. "That's what we're working hard on right now."

Teva's full-year results Wednesday underscore the scale of the challenge he faces. The company reported a 16% slide in revenue to $18.9 billion for 2018, with adjusted earnings per share -- which strips out one-time items -- down 27% at $2.92. Teva said it expected revenue to decline further this year, forecasting sales of $17 billion to $17.4 billion.

The lower-than-expected guidance and weak sales for one of its newer drugs sent shares down more than 12% on the Tel Aviv Stock Exchange.

Biotech, or biologic, drugs are made using living cells in a process that resembles brewing. They are much more complex than pill-form medicines and typically command higher prices because they target specialty diseases like cancer and rheumatological conditions.

The Israel-based company already sells some biologic drugs, but they make up a small portion of revenue. Mr. Schultz's ambition is for around half of the company's sales to come from biologics in the long run.

Teva doesn't have the financial firepower to buy new drug prospects and has had to cut its research budget. So Mr. Schultz has halved the size of Teva's research pipeline to focus purely on biologic drugs. It now has 25 drugs in development, mostly at an early stage.

The 57-year-old industry veteran zeroed in on biologics after discovering that Teva already had pockets of expertise in the area but without focus. "The R&D strategy was really all over the place," said Mr. Schultz, who joined Teva just over a year ago from Denmark's Lundbeck A/S.

In doing so, he is tapping into a broader trend. Between 2006 and 2016, biologics' share of the pharmaceutical market rose from 16% to 25%, according to IQVIA, a health-care data company.

With its push into biologics, Teva is doubling down on what has long been a lucrative sideline for the company: original, branded drugs. For years, Teva counted on multiple sclerosis drug Copaxone to boost profits, but sales are now dropping sharply as it faces competition from cheaper copies.

That sideline started as a lucky break. In 1987, then-CEO Eli Hurvitz agreed to help out a friend who was working on a new drug at Israel's Weizmann Institute by bankrolling the clinical trials needed to win regulatory approval. In return, Teva got the rights to sell the drug. According to company lore, Mr. Hurvitz justified the risky investment by carrying around a piece of paper promising to resign if the drug failed.

Copaxone was launched 10 years later and has since generated nearly $50 billion for Teva. At its peak in 2013, it accounted for a fifth of Teva's sales.

Teva continued to develop innovative drugs, but its efforts didn't yield enough to replace the revenue lost when cheaper copies of the blockbuster emerged in late 2017.

Copaxone's decline compounded an already-dire situation for Teva. The company was grappling with a huge debt pile and a price war in the U.S. generic-drug market, sparked by wave of consolidation among pharmacy chains and a sudden influx of new competitors. Mr. Schultz's predecessor, Erez Vigodman, departed in February 2017 and the company didn't have a permanent chief executive for nearly nine months.

Weeks after joining the company, Mr. Schultz launched a cost-cutting plan that involved axing a quarter of Teva's staff, around 14,000 people, shutting around 20 of the company's roughly 80 factories and several research centers.

Mr. Schultz says the turnaround is making progress. Cost cuts are ahead of schedule, debt has been narrowed and he expects revenue to start edging up in 2020 as the generics business starts to grow again. Some newer branded drugs, like migraine-prevention treatment Ajovy and Austedo for Huntington's and other movement disorders, could also start to gain momentum.

Despite his focus on biologics, Mr. Schultz wants Teva to remain a dominant player in generic drugs, too. He believes the price decline, which has halved the value of the U.S. generics market over the past five years, is bottoming out.

And the new push may also help boost Teva in the area it is best known for: Some of the research projects are biosimilars, essentially generics for biologic drugs.

Write to Denise Roland at Denise.Roland@wsj.com

(END) Dow Jones Newswires

February 13, 2019 08:39 ET (13:39 GMT)

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