According to Israeli newspaper Haaretz, Teva Pharmaceutical (NAS: TEVA) is considering dropping its entire branded drug segment. Depending on what type of investor you are, that's either the best decision ever or a reason to hit the sell button.
Let's start with why it's a horrible idea, so we can end on a positive note.
Simply put, I see branded drugs as the biggest growth driver for Teva. The company has become such a large generic-drug player that there are limited opportunities to expand further through acquisitions. The company will continue to develop new generic drugs, but it's hard for those to produce exponential growth. There are only so many opportunities for new generics, and as more generics are developed for the same drug, prices are pushed downward, so some of every new drug launch is just replacing lost sales on older generics in the portfolio.
Of course, competition also happens for branded drugs. Copaxone, Teva's best-selling branded drug, has to compete with Biogen Idec and Elan's (NYS: ELN) Tysabri, Merck and Pfizer's (NYS: PFE) Rebif, and other multiple sclerosis drugs. Furthermore, Copaxone will eventually face generic competition. Momenta Pharmaceuticals (NAS: MNTA) and Mylan (NAS: MYL) have already said they're developing generic versions of the drug. Selling branded drugs provides increased growth, but it's also riskier.
Getting rid of the branded drugs would also substantially decrease the amount of money spent on research and development, which will be higher this year after the acquisition of Cephalon. If Teva divests of its branded drugs, that spending can trickle to the bottom line and could be used to boost the dividend that stands at just a 1.8% dividend yield. Capital growth would decrease, but the move would likely attract more dividend investors.
Of course, this might all be a moot point if Teva can't maximize value by selling off the assets. When Mylan bought Merck's generic-drug business it came with branded drugs, which the company wasn't able to find a buyer for.
Teva could just spin off the branded drugs into a new company, which might be the best move since it'll satisfy both growth and dividend investors that can pick and choose whether they'd want to own the generics, the branded side, or both.
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At the time thisarticle was published Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Momenta Pharmaceuticals. Motley Fool newsletter services have recommended buying shares of Teva Pharmaceutical Industries, Momenta Pharmaceuticals, and Pfizer. The Motley Fool has a disclosure policy.
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