A Supreme Court (SCOTUS) decision that a federals appeals court wrongly overturned Teva Pharmaceutical's (Teva) Copaxone patent is a positive credit development for the drug maker, according to Fitch Ratings.
The SCOTUS decision will allow additional time to convert patients to the 40mg version and protects a sizable portion of profits from generic competition through September of this year. Fitch notes that its most recent base case forecast assumptions and the 'BBB+' ratings incorporate such a scenario.
On Tuesday Jan. 20, SCOTUS ruled 7-2 in favor of sending the case back to the court of appeals for further review. In essence, the latest decision extends market exclusivity for Copaxone 20mg. Pharmacies, payors, and patients will have to continue to wait for a generic version until September. Notably, the U.S. Food and Drug Administration (FDA) has not yet approved any submitted generic versions, even though market exclusivity under the original appeals court ruling expired in May 2014.
In the meantime, Teva can keep working to convert patients to its less frequently administered 40mg formulation. Teva exceeded initial expectations in 2014 as it reported converting 65% of patients by year end. But Fitch does not anticipate this figure will rise significantly higher before September. This assumption is supported by ongoing competition from newer oral therapies and the expectation that many of the doctors and patients who have not converted to the 40mg version already will continue to wait for what now appears to be a more date-certain generic launch.
Fitch estimates that Teva could lose approximately 10% of total operating profits (before general and administrative expenses) to a generic launch. But several factors that will affect the pace and severity of potential profit losses are yet unknown -- namely, FDA approval and physician acceptance of potential generic versions. Teva's Copaxone franchise, including global sales and both formulations, currently accounts for roughly 20% of revenues and 50% of operating profits.
We expect Teva will prioritize the use of cash flows from remaining Copaxone exclusivity for shareholder-friendly activities and M&A. Additional debt paydown is possible but unlikely. In December 2014, management outlined shareholder payouts in 2015 of up to $2.3 billion. Acquisition activity in 2015-2016, although potentially a credit negative in the near term will be important for Teva to fill its medium-term growth gaps and to build out its central nervous system/pain and respiratory portfolios. Fitch notes that, in addition to Copaxone 20mg, most of Teva's key specialty products are set to face generic competition over the next few years. The firm's ramping cost-reduction program will offset some but not all of the profits lost to generic competition to Copaxone over the next few years.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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