Congressional hearings underway are creating plenty of unnecessary uncertainties for life sciences stocks in the generic drug space. Government oversight over how drugs are priced could put even more pressure on generics and hurt life sciences stocks.
With no exclusivity and more reasons for firms to battle each other on the lowest price, investors are selling companies facing generic drug competition now and asking questions later. That reaction is irrational: governments may end up doing nothing to change the drug sales model that is vital to life sciences stocks.
Here are the three life sciences stocks whose shares took a tumble very recently.
Life Sciences Stocks: Teva Pharmaceuticals (TEVA)
Teva Pharmaceuticals (NYSE:TEVA) reported respectable 2018 revenue of $18.9 billion and free cash flow of $3.7 billion. Its acquisition of Actavis Generics significantly strained its balance sheet but the company still managed to reduce net debt by 14% to $27.1 billion. Teva launched Ajovy, an injectable prescription drug that is used to prevent migraine headaches in adults. Austedo, which treats tardive dyskinesia and Huntington’s disease, is growing rapidly.
Copaxone maintained its market share in the U.S. with $1.697 billion in net sales in 2018. The prescription or TRx share was around 21.8%. In the 40mg space, Copaxone took 74.7% share of the 40mg glatiramer acetate market (as of December 2018).
Markets are not so optimistic about the generic competition for Copaxone. It reacted by selling the stock when it reached $20, pushing it down to around $17 a share after the Q4 earnings report.
Teva is prepared for the pricing pressure it faces for Copaxone, where generic competition will hurt most in the U.S. Outside of this region, the situation is more stable. Astute investors will watch the sales growth for Audtedo and Ajovy, whose revenue needs to offset the sales declines in Copaxone.
Mylan N.V. (MYL)
Mylan N.V. (NASDAQ:MYL) is Teva’s competitor because it recently launched a generic to Copaxone. Unfortunately, the downward trend in the stock in the last year capitulated with the stock falling even further, from around $32 to $26, after the fourth-quarter earnings report. Mylan reported the uptake of its generic Copaxone was slower than management expected. Cutting prices by over 60% did not help sales.
Slow uptake for its generic Copaxone and delayed approval of its generic Advair hurt fourth-quarter results and the 2019 outlook. Despite those issues, Mylan reported a healthy $11.4 billion in total revenue in 2018 and $2.7 billion in adjusted free cash flow. It paid back more than $630 million in debt.
For the Morgantown plant issue, in which it received a warning letter regarding previously disclosed observations. Mylan took a $258 million restructuring and remediation expense. Investors might assume the problems at this location will get resolved, but for now, markets may continue to punish the stock for its less than perfect operating record.
At a free cash flow forecast of $1.9 billion-$2.1 billion in 2019, management could do two things to enhance shareholder buyback. First, buying back stock would help EPS for the year. Second, initiating a dividend would reward investors who are patiently holding the stock.
Even though GlaxoSmithKline’s (NYSE:GSK) Advair faces competition from Mylan’s generic to the drug, the stock is performing relatively well. Not only are valuations still reasonable at a 20.8 times P/E and 13.6 times forward P/E according to Morningstar, but GlaxoSmithKline’s stock pays a dividend yielding 5.1% over the past year.
On Feb. 12, Mylan launched Wixela Inhub, at a list price that is 70% below that of Advair Diskus and 67% below GSK’s authorized generic version. Even before the launch, U.S. Advair sales fell 30%. With the competition modeled in its outlook, GlaxoSmithKline still expects a significant decline in Advair this year. So, why are markets not worried about this news? Markets rewarded the stock after the company posted fourth-quarter results.
GSK posted revenue growth of 7.3%, to £8.2B billion. 2019 will be another strong year, with the HIV business being led with two drug regimens. This will follow the 2018’s 16% growth of dolutegravir. Looking ahead, approval of its dolutegravir and lamivudine combination in its second quarter will help GSK maintain its 27% market share in the U.S.
GSK’s balance sheet is solid. Free cash flow grew by £2.2 billion to £5.7 billion last year. This will ensure the company continues to pay a dividend at the same amount as last year. Its debt increased, driven primarily by its buy-in of Novartis’ consumer stake. It’s a standout among life sciences stocks.