Teva: Partners With Sanofi to Codevelop Bowel Treatment Focusing on Innovative Target

No-moat Teva TEVA announced today that it has agreed to collaborate with Sanofi to codevelop and cocommercialize TEV’574. As part of the agreement, Teva will receive an upfront payment of $500 million and up to $1 billion in milestone payments. The two firms will equally share development costs as well as profits and losses in major markets with Teva leading commercialization in Europe and Israel and Sanofi in North America, Japan, and other Asian markets. TEV’574 is an inflammatory bowel disease, or IBD, a treatment that is currently in Phase 2b for ulcerative colitis, or UC, and Crohn’s disease, or CD. It is part of an anti-TL1A class of therapies that has recently drawn a lot of attention as two other major pharmaceutical companies, Pfizer and Merck, pursued their ways and have shown promising results. Pfizer partnered up with Roivant to develop RVT-3101 and Merck purchased Prometheus Biosciences in June 2023 for $10.8 billion and brought in MK-7240 (previously called PRA023). RVT-3101 is preparing for phase III development in UC and is in phase II for CD. MK-7240 is estimated to start its phase III study for UC by year-end. While TEV’574 lags the two drugs in terms of clinical trial timing—it started phase II for UC and CD in August 2022 and is currently in phase IIb—we still think it can be a good growth driver for Teva. Management estimates roughly 10 million people worldwide live with IBD and this largely underserved market is expected to be worth over $28 billion by 2028. We are raising our fair value estimate to $11.50 from $11.00 to reflect the time value of money as well as a more favorable outlook for the drug.

From a pricing perspective, we think Sanofi got the better end of the deal. Even after considering the total potential milestone payments, $1.5 billion to acquire half of sales seems modest given that the drug will be in a large market with strong upside potential and a limited number of pure-play competitors.