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Morningstar | Teva's cost savings efforts complicated by industry competition, generic Copaxone, and high debt.

Fewer drug patent expirations, increased competitive pressure in the generics market, expected generic competition on Copaxone, and high financial leverage create big hurdles for Teva. While cost-cutting efforts, limited generic Copaxone competition, and a modest drug pipeline should partially offset these earnings headwinds, the firm's high financial leverage and eroding revenue raise serious financial health concerns. Although generics segment growth has slowed as drug launch opportunities decline and pricing pressure intensifies, Teva's generics business should eventually stabilize as new products and cost savings help support earnings. Despite the expensive price tag and decline in returns on capital, Allergan’s generics unit significantly boosted Teva's generic drug pipeline. Expansion into emerging markets should also help overall performance, but we think Teva's prospects in biosimilars appear weak against more astute competition. Generic competition on Copaxone should erode Teva’s near-term earnings, but the drug's difficult manufacturing and approval process has limited generic competition and preserved a portion of the drug's profits. Copaxone became the world's leading MS treatment, with annual sales over $4 billion, and contributed to over one third of consolidated operating profit before generic competitors emerged. Following the approval of Momenta's generic Copaxone approval on the older 20 mg formulation in June 2015, Teva now faces further competition from the launches of Mylan's generic 20 mg and 40 mg versions approved in October 2017 as well as Momenta's 40 mg approval in February 2018. In addition to Copaxone's limited competition, we think management's cost-saving plans, as well as the remaining $3.5 billion branded drug portfolio and pipeline, should help support the firm's profitability. Besides selling its women's health business and facing upcoming generic competition on products like ProAir, Teva has some innovative drug products in development--including its anti-CGRP for chronic migraine, fremanezumab, and the recently launched Austedo for Huntington's disease and tardive dyskinesia--that should lower Teva's dependence on Copaxone.