One of the world’s biggest generic drug makers is coming to New Jersey thanks to the potential of $40 million in tax breaks.
It lines your medicine chest with inexpensive versions of Lipitor for cholesterol, Valium for nerves, Adderall for attention deficit to name a few, and it is coming to New Jersey with a brand new headquarters, thanks to $40 million in potential tax breaks.
But when Teva Pharmaceuticals Inc. arrives, it will be dealing with an ailment of its own: Those cheap generic prices that are benefiting you are hurting Teva’s bottom line.
“As least when you discuss drug pricing now you can’t say that U.S. generics are more expensive than elsewhere in the world,” Kare Schultz, Teva’s chief executive officer, told Wall Street analysts last week, perhaps looking at the bright side of things.
Teva, the world’s biggest generic drug maker, said it is planning to move its U.S. headquarters to Parsippany, Morris County, creating hundreds of six-figure jobs and giving New Jersey’s economy another pharmaceutical giant to join its huge life sciences industry.
While New Jersey leaders celebrate, though, the 117-year-old drugmaker is stumbling.
Its wholesale customers are consolidating and driving hard bargains. It is fending off low-cost challengers. It is hamstrung by billions of debt. And Schultz, its sixth CEO since 2012, is eight months into a restructuring plan that includes axing thousands of employees and consolidating operations worldwide. See the video above for a summary.
Teva last year had a net loss of $16.4 billion. The company returned to profitability the first six months of this year, it reported last week. But its revenue still was down 14 percent from a year ago.
For New Jersey taxpayers to get their biggest return, they need Teva to find a new formula to grow.
The tax breaks look reasonable, given the spending power that the company’s employees could bring, economist Joel Naroff said, “assuming, of course, Teva survives.”
Teva is based in Israel with its current U.S. headquarters in North Wales, Pennsylvania. The company manufactures its drugs at about 80 plants worldwide.
Teva is Hebrew for nature, and while it might not have the name recognition of, say, Johnson & Johnson or Merck, it is a powerhouse with annual revenue of $22.4 billion and more than 50,000 employees worldwide.
The company is such a source of national pride in Israel that when it announced its plan to cut 14,000 jobs and half of its manufacturing sites worldwide, the public-sector union in Israel went on strike for half a day.
Teva is best known as the world’s biggest generic drug maker, making copies of brand-name drugs that lose their patents, typically 20 years after it is filed.
Generic drugs are viewed as the best way to slow down the rising cost of pharmaceuticals. They account for almost 90 percent of prescriptions, but just about a quarter of total spending. Their average cost is $26 compared with the average cost of brand-name drugs of $308, according to the USC-Brookings Schaeffer Initiative for Health Policy.
The result: Pharmacists say insurers are steering their customers to generics, leaving the pharmacies to shop for the lowest price.
“You have to find the least-expensive generic,” said Margaret Jodelka, a pharmacist at Oakhurst Pharmacy in Ocean Township. “The more you pay for a generic the less your profit is.”
Teva seemed poised to take advantage of the industry’s trends. Two years ago, it bought Actavas, the generic drug business of Allergan, for $40 billion.
Allergan, based in Dublin, Ireland, has its U.S. headquarters in Parsippany. Its brand-name drugs include Botox, mostly used to reduce wrinkles. And the deal gave Teva hundreds more generic drugs that were nearing FDA approval.
Investors cheered, sending Teva’s stock up 16 percent the day the deal was announced.
“The acquisition of Actavas Generics comes at a time when Teva is stronger than ever — in both our generics and specialty business,” then CEO Erez Vigodman said when the merger closed in 2016.
In hindsight, analysts said, the timing of its merger was bad.
Generic drug industry’s cliff
1. Teva’s customers are consolidating.
The drug industry is a rare business in which the consumers are largely left out of the purchasing process. Simply put, drug companies sell to wholesalers. Wholesalers sell to retail pharmacies. Retail pharmacies sell to consumers. Consumers, with a prescription from their doctor, pay a predetermined price set by their private health insurers or Medicare.
Teva’s customers are getting bigger. CVS, Walgreens and Walmart, for example, have partnered with wholesalers and now account for 90 percent of generic drug purchasing, according to Drug Channels Institute, a research firm. It means Teva’s customers have more negotiating power.
Teva expects more competition soon. But those competitors, such as a bid by Amazon Inc., Berkshire Hathaway Inc. and JPMorgan Chase & Co. to form a health care company, would focus on making drug prices cheaper. That would help those employers save money, but would hurt Teva.
2. Teva’s competition ramps up.
The FDA, under pressure to rein in the cost of prescription drugs, began to approve generic drugs more quickly — 580 in 2015, 630 in 2016, 843 in 2017, according to the agency.
It has attracted other generic drug manufacturers, including several from India, which can make the products cheaper that Teva can. And China is ramping up its manufacturing plants, too, analysts said.
Sales of its generic drugs alone fell 26 percent in the first half of the year, Teva reported.
“What surprised a lot of people is the generics industry eroded as fast as it did,” said Michael Waterhouse, an analyst at Morningstar in Chicago. “Which really compounded their financial problems a lot more than originally would have been anticipated.”
3. Teva is burdened with debt.
Its merger with Actavas contributed to its debt of about $35 billion. It leaves the company with few options for a jump-start. It can’t, for example, pump more money into research and development, acquire a competitor or borrow money cheaply, analysts said.
“We will not do big-scale things,” Schultz, its CEO, told analysts on Aug. 2. “We will preserve the cash flow for debt reduction.”
There are other clouds hanging over the company.
Copaxone, its blockbuster multiple sclerosis drug, now has competition from generic copies, causing sales to decline from $4.2 billion in 2016 to $3.8 billion in 2017.
And Teva faces lawsuits ranging from its alleged roles in marketing opioids to fixing prices.
Teva declined a request for an interview.
“Teva continues with a significant restructuring plan to restore its financial security and stabilize its business,” it said in a statement to the USA TODAY NETWORK New Jersey.
“A key element of the plan, as communicated in December 2017, was the decision to close or divest a significant number of facilities, headquarters and office locations across geographies,” it said. “Reducing the number of sites supports Teva’s drive to unify and simplify the organization, ensure better integration, improve productivity and efficiencies, and reduce its cost base.”
New Jersey taxpayers to the rescue
Among those rushing to Teva’s aid: New Jersey taxpayers.
Teva said last month that it would move its U.S. headquarters from suburban Philadelphia to its operation in Parsippany. With it, New Jersey will retain 232 jobs and attract 843 with a median wage of $128,073, according to the state Economic Development Authority. Median means half of the salaries will be above that income and half will be below.
Fueling the decision? The EDA approved tax breaks through its Grow New Jersey program of up to $4 million a year for 10 years, or $40 million.
The EDA said New Jersey could have lost those jobs to Pennsylvania or Kansas, which Teva also was considering for a headquarters. Although the New Jersey tax break is for 10 years, the EDA calculated the economic impact to the state — $247.4 million — over 20 years.
Its calculation includes both direct activity like employees’ payroll taxes and indirect activity like employees’ spending, say, at local restaurants and retailers.
The EDA declined an interview request.
“Teva met all of the legislatively established requirements for the Grow New Jersey program at the time of its approval,” the EDA said in a statement, noting that Teva won’t get tax breaks unless it adds the jobs and spends the money that it promised.
Can Teva become a company that, in fact, grows in New Jersey?
Schultz, the CEO, was hired a year ago from the Danish pharmaceutical company Lundbeck A/S, where he was CEO for two years.
While Schultz delivered Teva to New Jersey, he has taken away, too; he was at the helm when Lundbeck closed its research facility in Paramus in 2015, laying off 68 workers, according to the New Jersey Department of Labor and Workforce Development.
Teva Pharmaceutical Industries Ltd names H Lundbeck A/S Chief Executive Kare Schultz as its new CEO and president, as it struggles with heavy debts and fierce competition for its generic drugs in the United States. Amy Pollock reports
Video provided by Reuters
In December, Teva announced a plan to layoff 25 percent of its work force as part of a bid to save $3 billion by 2019. And it began to focus on its most profitable products.
“He’s doing the tough thing that other people have been unable to do,” said Allen Lefkowitz, managing director of Torreya Partners, an investment firm based in New York.
The strategy includes finding generic drugs that require more manufacturing expertise, Lefkowitz said. “Hopefully in those less-competitive markets they can compete with two, three, four people, as opposed to 13 and 14.”
On his call with analysts last week, Schultz was optimistic that the company’s Copaxone drug was holding its own in the face of generic competition.
But any hope of a fast turnaround faded away. He said generic drug prices would likely continue to get squeezed. And 2019 would be another painful year. Teva’s stock fell 5.6 percent the day he spoke to analysts.
“This is not the end of the road,” Schultz said on the call. “We would like to do better. But it’s my policy to set targets and you don’t discuss new targets before you reach them. We will reach these new targets in three to five years. Once we reach them, we will set new targets.”
Michael L. Diamond; @mdiamondapp; 732-643-4038; firstname.lastname@example.org
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