Price-fixing lawsuit deals another blow to already fragile Teva, experts say

Price-fixing lawsuit deals another blow to already fragile Teva, experts say

The drugmaker, struggling to cut costs in order to meet debt repayments, may face billions of dollars in fines

A general view of TEVA Pharmaceutical Industries in Jerusalem, Israel, October 11, 2013. (Yonatan Sindel/Flash90)
A general view of TEVA Pharmaceutical Industries in Jerusalem, Israel, October 11, 2013. (Yonatan Sindel/Flash90)

News of an anti-trust lawsuit brought by over 40 US states alleging a price-fixing effort among drug manufacturers — and putting Teva Phamaceutical Industries Ltd. at the heart of the conspiracy — deals an added blow to the Israeli firm which is already struggling with massive debt, price cuts in its key activities, and declining sales of a flagship drug.

“Teva has already been battered and is not in a condition to get additional blows,” said Yaniv Pagot, an economist and head of strategy at the Ayalon Group, an institutional investor.

The firm, a leader in the generic drug market, has been grappling with declining prices for generic drugs, its core business, and the entry of copycat generic versions to its branded Copaxone drug for multiple sclerosis. The firm is also struggling to cut costs by closing manufacturing facilities and cutting its workforce globally in order to repay a massive $29 billion debt it accumulated due to a series of missteps, which saw the firm pay a high price for acquisitions that went sour.

Teva was named Friday in an anti-trust lawsuit brought by over 40 US states alleging a price-fixing conspiracy among drug manufacturers, with the Israeli company said to have raised the costs of some medications by over 1,000 percent.
“Teva is a consistent participant in the conspiracies identified in this complaint, but the conduct is pervasive and industry-wide,” stated the complaint, according to Bloomberg.

Teva CEO Kare Schultz at a press conference in Tel Aviv; Feb. 19, 2019 (Shoshanna Solomon/Times of Israel)

The lawsuit “puts Teva at the center of the conspiracy,” colluding with other drugmakers to artificially raise prices, Bloomberg reported.

The suit is being led by Connecticut Attorney General William Tong.

“That the biggest generic drug manufacturer in the world is one of the leaders of this marketwide collusion is beyond disappointing, and in some ways dispiriting,” Tong told the Washington Post, referring to Teva.

During a 19-month period from 2013 to 2015, Teva is said to have significantly raised prices on around 112 generic drugs and colluded on at least 86 other drugs, the states said in the suit, according to the report. Some of the increases were more than 1,000%.

“We have hard evidence that shows the generic drug industry perpetrated a multi-billion dollar fraud on the American people,” Tong said in a statement. “We all wonder why our health care, and specifically the prices for generic prescription drugs, are so expensive in this country — this is a big reason why.”

The suit does not specify the amount of damages or any penalties being sought.

Teva’s chief financial officer Mike McClellan said on Sunday that the company has not done anything wrong, that the suit is an amended one and not new, and that it is a civil and not criminal suit, Reuters reported.

“There have been no developments in this area,” he said at a conference in Tel Aviv, Reuters reported. “We take these accusations seriously and we are going to defend ourselves.”

Copaxone, the only non-interferon multiple sclerosis treatment, was developed by Teva Pharmaceuticals in the mid-1990s. (Weizmann Institute of Science/JTA)

The firm’s Tel Aviv listed shares closed 11% lower in Tel Aviv in Sunday trading, bringing the company’s 12-month decline to 33% and its market value to NIS 54 billion ($15.2 billion).

Teva, one of the nation’s largest employers and a source of national pride, makes up 5% of the TA-125 index, the stock market index of the most highly capitalized companies listed on the exchange. This means that it is a fixture of local investment plans, with all Israelis, directly or indirectly, having a vested interest in the firm.

“The court case will renew intense political pressure on generic companies to lower prices for customers, and the sale of generic drugs in the US are the core business of Teva,” said Pagot. “A renewed process of declines in generic prices, even before it gets hit by the fines (from the case), could be a dangerous development for the firm, which is looking to raise its cash flow to repay debt.”

The shares of Teva fell as much as 6.4 percent in New York on May 2, after the company’s first quarter 2019 results showed that sales of Copaxone, its flagship branded multiple sclerosis drug, had declined faster than expected, disappointing analyst expectations, Bloomberg reported. Sales of generic drugs in North America, which make up around a quarter of company revenue, fell 11 percent in the quarter.

The company’s debt as of March 31, 2019, was $28.6 billion compared to $28.9 billion as of December 31, 2018.

And though the firm is hoping its new drug for migraine headaches, Ajovy, and for Huntington’s disease, Austedo, will help make up some of the lost revenue from declining Copaxone sales, the picture remains shaky.

Sabina Levy, head of research at Leader Capital Markets, a Tel Aviv based brokerage (Courtesy)

“This is a perfect storm for Teva,” said Sabina Levy, head of research at Leader Capital Markets, a Tel Aviv-based brokerage. “The company is going through a challenging period because it is facing generic competition for Copaxone, it has very high leverage and there is also a opioids scandal brewing, which also exposes the company for potentially added fines. The current leverage of the company is high and a major focus of its efforts is how to create higher cash flows to serve its debt.

“There are two angles here, the economic one and one of Teva’s reputation,” she added. “At this point it is difficult to foresee the financial exposure of Teva to the case, but taking into consideration the scope of the lawsuit, it may be very significant. If the companies are guilty, as claimed, then it is likely they will be fined, possibly with a very high fine that could reach billions of dollars.”

In March, Purdue Pharma, a leading US maker of opioid drugs, reached a $270 million out-of-court settlement with the state of Oklahoma related to addiction and deaths sparked by prescription opioids, the Washington Post reported. Teva is also a defendant in that case, and 35 other states have sued drug companies in their own court systems, the report said.

“Teva and all the other pharma guys are very well versed in dealing with court cases, and they often take calculated risks,” said Ayalon’s Pagot. “But the Teva of today is not the Teva of the past; this is a weakened version, with a crazy amount of leverage. So, any added adversity could send the firm spiraling toward financial catastrophe. If the firm won’t be able to refinance its debt and lower its leverage to normal levels, then a debt settlement is not an imaginary scenario.”

A spokeswoman for Teva in Israel dismissed the price-fixing lawsuit as mere “claims.”

“Teva will continue to examine the issue internally and has not conducted itself in any way that may lead to civilian or criminal accountability,” she said in an emailed statement to The Times of Israel on Sunday. The firm, she added, “is committed to comply with all laws and regulations. We will continue to defend the company with determination.”

Illustrative photo of pills in the Teva Medical Factory in Har Hotzvim, Jerusalem, March 15, 2010. (Nati Shohat/Flash90)

Steven Tepper, a pharma analyst at IBI Investment House, said that a “gross estimate” he has made puts the damage to Teva from the price-fixing lawsuit at as much as $2 billion, taking into account added revenue the firm made in the period from the higher prices it charged, plus fines.

“It is difficult to say what fines they will face,” he said. “But they can’t be too high because the 44 states have to make sure that the generics industry doesn’t fall apart” as a result of the suits. “They have to pursue a delicate balance of punishing the companies for their misconduct, but they don’t want them to go out of business, because that would mean less competition.”

Teva’s new CEO, Kare Schultz, appointed in September 2017, is “doing a good job” in restructuring the firm, he said, but 2019 will still be a “difficult year” for the company, with its high debt and competition for Copaxone. The lawsuit comes at “not a good time for Teva,” he added.

Even so, Tepper said, the suits will not spell the end of Teva. “I believe they will work it out.”

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