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Teva's flagship product feels sooner-than-expected heat with Mylan approval

Incoming Mylan NV competition for Teva Pharmaceutical Industries Ltd.'s leading branded product, multiple sclerosis treatment Copaxone, has Wall Street seeing a bleaker future for the already struggling Israeli drugmaker.

The U.S Food and Drug Administration's Oct. 3 approval allows Mylan to launch the first 40-milligram per milliliter generic version and the second 20-milligram per milliliter dose version of Copaxone, the drug that brought Teva more than $1 billion in the second quarter of 2017 and more than $4.2 billion over the course of last year. Though a 20-milligram rival had already been approved, the 40-milligram dose represents 85% of the company's U.S. revenue for the drug.

Teva's American depositary receipts had dropped about 14% to $16.18 by 1:21 pm ET on Oct. 4. Bonds backing the company were also struggling after the announcement, reaching their lowest trading point since the company's August warning that it could breach its leverage covenants, according to LCD, an offering of S&P Global Market Intelligence.

Analysts admitted the 40-milligram approval came sooner than expected, with most expecting an early 2018 decision due to previous approval delays.

Teva itself expected no competition when it provided revenue guidance for this year, which interim CEO Yitzhak Peterburg said was "a reasonable assumption based on publicly available information." During the second-quarter earnings call, Peterburg added that if the unlikely did happen, there would be up to a 25-cent erosion on earnings per share in the fourth quarter.

Yet the company has also tried to stall this reality. There are two ongoing cases around Copaxone's patents, one a Teva appeal of a Patent Trial Appeal Board decision and another appeal of a U.S. District Court for the District of Delaware decision declaring four Copaxone patent claims invalid. In a statement, Teva said that if Mylan brings its generic to market with these cases ongoing, Mylan's launch could be considered "at-risk," or open to damages litigation.

It is too soon to officially comment on any change to the full-year business outlook, Peterburg said in the statement. The company promised more details on its third-quarter earnings call Nov. 2.

Profit losses ahead

Copaxone accounted for between 45% and 50% of Teva's operating profits last year, according to Credit Suisse analyst Vamil Divan, who said in an Oct. 4 note that the drug also accounted for 19.3% of Teva's sales.

The near-term impact of 40-milligram competition will depend partially on how much exclusivity Mylan is given before other competitors can enter the ring, analysts predicted.

The phrasing of Mylan's press release seems to suggest this exclusivity would be shared with other companies that file through early April, Evercore ISI analyst Umer Raffat said in a note. Mylan is also coming out of the gate with support programs for transitioning patients that could encourage more switches and bigger losses for Teva.

By consensus expectations, Teva's revenue is estimated to decline 9% in the fourth quarter and 39% over the course of 2018, Raffat said. Depending on how many more competitors enter the market, these losses could rise by $600 million to $800 million annually, he warned.

Divan said that on the bright side, clarity on Copaxone could shift the focus away from it and allow for a cleaner start for new CEO Kåre Schultz, who joins Teva later this year.

Copaxone competition will be just one item on Schultz's agenda. Teva has also struggled with U.S. price erosion in its generics division, the largest in the world, as well as debt pressures and consolidation efforts that have included staff cuts and factory closures.

Teva's 10-year bonds, placed last year to finance the $40.5 billion Actavis Generics acquisition that would definitively make Teva the biggest generics maker in the world, saw trading gaps widen 30 to 40 basis points in the morning. The bonds had been recovering since the August drop as the company announced its new CEO and renegotiated some of its debt terms, LCD noted.

Though the Mylan approval was sooner than many expected, FDA Commissioner Scott Gottlieb recently said in a blog post that the agency wanted to bring more competition for complex generic drugs to market, naming Copaxone specifically as an example.