Who’s losing on Aurobindo’s Novartis generics deal? Teva and Mylan, says analyst

Drugs and money
Due in part to increased pricing pressure on the generics industry, Novartis’ U.S. Sandoz business has been suffering. (Getty/Ligorko)

Novartis breathed a sigh of relief after announcing Thursday it finally got rid of some troubled U.S. generic assets. Buyer Aurobindo Pharma cheered as it ascended to the second-largest U.S. generics spot by prescriptions. But investors in two other companies weren’t so keen about the deal.

Generic majors Teva and Mylan saw their shares slip at the news on Thursday. The reason? The $900 million upfront payment reached by Novartis and Aurobindo was less than the 2017 annual revenue the portfolio sold, noted Wells Fargo analyst David Maris in a memo.

“Although clearly Teva and Mylan have very different businesses than the largely commodity and dermatology portfolio Sandoz is selling, we believe some investors are looking at this as a proxy for what the commodity portions of Teva’s U.S. and Mylan’s U.S. businesses might be worth,” said Maris.

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The acquisition included about 300 products from the Sandoz U.S. dermatology business and some generic oral solids in autoimmune, antineoplastic and hormonal agents among others. Three manufacturing plants and around 750 employees were lumped into the deal.

According to Aurobindo, the acquired portfolio raked in sales of about $1.2 billion for 2017, higher than the $1 billion the deal could eventually be worth if performance-related payments are added. But ODDO BHF analyst Pierre Corby reminded investors in a Thursday note that “the assets sold are on a steady downtrend” of about 10% to 20% each quarter. So, for Novartis, it was better to sell as soon as possible rather than shopping around for a better price.

RELATED: Novartis finally unloads 300 troubled U.S. generics to India’s Aurobindo for $1B

Indeed, due at least in part to increased pricing pressure that has wreaked havoc across the entire U.S. generics industry, Novartis’ U.S. Sandoz business has been suffering. In 2017, sales from the sector declined 12% at constant exchange rate, a trend that continued with a further 17% decrease in the first half of 2018, to $1.4 billion.

Offloading some generics allows Novartis to focus on differentiated, difficult-to-make generics and biosimilars—translation, less competition—as well as markets outside of the U.S.

Even Aurobindo recognizes the bumpy road ahead, expecting sales from the franchise for the first 12 months after deal closing at $900 million, on par with the immediate cash payment.

Mylan and Teva of course faces the same U.S. pricing pressure as Novartis. Mylan, for example, reported price erosion of its U.S. generics products in the high-single-digits in 2017.

RELATED: Turnaround believer Buffett's big Teva investment sends shares soaring

Teva, the world’s largest generic player, has also witnessed continuous sales decline, but it has what Goldman Sachs’ Jami Rubin called an “action-oriented” leader in new CEO Kåre Schultz to right the ship. And the company has shown “a rapid and clear path to recovery” on the $3 billion restructuring plan championed by Schultz.

The early signs of recovery at the Israeli drugmaker was at least encouraging in the eyes of Warren Buffett, who through his holding company Berkshire Hathaway upped the stake in the company by another 43.2 million shares in the second quarter. That was despite a nearly 29% decline in Teva’s North America generics segment in the quarter. Right now, according to Evercore ISI analyst Umer Raffat in a note on Aug. 21, the segment’s run rate is about $4 billion, while the U.S. takes up about $3.5 billion.

Moving forward, Wells Fargo’s Maris said it’s still early to call the bottom of the negative impact from pricing pressure in the U.S., and that the Sandoz sale is but “another indication that the environment remains challenging.”