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Morningstar | Teva and Mylan Are Adapting to the Challenging Generic Industry Dynamics

We took a fresh deep dive into our analysis for Teva and Mylan and continue to view the companies with no moats. The two controversial healthcare names have been battered by generic drug pricing pressure, confluence of legal matters, and concern over high debt loads. The market backdrop has made it critical to focus on rapidly replenishing their generic and specialty pipelines, aggressively right size their infrastructures, and flex their scale to fend off international competitors with significantly lower cost structures. Despite the commodity nature of generics, there is a need for regulatory compliant cost-effective drugs. Overall, we expect these companies will trade based on pipeline progress, opioid litigation (especially in Ohio), and ability to deleverage capital structure.

Teva has been more transparent with its activity to differentiate by focusing on specialty drugs and relatively more complex to manufacture generics. Fiscal 2019 will likely be a trough year for Teva until revenue from new specialty drugs (Ajovy & Austedo) offset declines in the blockbuster specialty drug Copaxone. Although the company’s cost savings initiatives and continual launches are tracking well, we are tweaking our fair value estimate to $15 from $16 to reflect a slight shift in cash flow timing. We have also included $350 million in litigation settlements for Teva in fiscal 2019 and expect total opioid litigation to hover around $1 billion. These estimated levels are manageable and should allow the company to generate operating cash flows and pay down maturing debt.

Mylan will likely benefit in the near term with the pending launch of Wixela (generic Advair) and generic Copaxone. However, we are not confident in its ability to introduce complex (new) therapies to replenish the pipeline beyond anticipated fiscal 2019 launches, which we think will weigh on margins more than previously expected. As a result, we have lowered our fair value estimate for Mylan to $20 from $33.