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Teva (TEVA) Q3 Earnings Miss, Stock Up on Guidance Increase

Zacks

Teva Pharmaceutical Industries Limited TEVA reported third-quarter 2019 earnings of 58 cents per share, which missed the Zacks Consensus Estimate of 60 cents. Earnings per share also declined 14.7% year over year due to lower sales and operating profit and higher taxes.

Adjusted earnings excluded a $468 provision for legal settlements and loss contingencies mainly related to Teva’s opoid litigation, impairment of intangible assets and product rights and amortization and restructuring charges.

Revenues came in at $4.26 billion, which beat the consensus estimate of $4.24 billion. Sales however declined 6% (down 5% in constant currency terms) year over year.

On a year-over-year basis, generic erosion in sales of Teva’s key multiple sclerosis injection, Copaxone, lower sales of other branded drugs, Bendeka/Treanda, and soft performance of markets like Russia and Japan hurt the top line.


Also, negative currency impact due to the strengthening of the dollar hurt sales by $55 million and operating profits by $19 million in the quarter.

Segment Discussion

Teva reports under segments based on three regions — North America (United States and Canada), Europe and International Markets.

North America segment sales were $2.05 billion, down 9% year over year due to lower sales of Copaxone as well as Bendeka/Treanda. In the United States, revenues declined 10% year over year to $1.91 billion.

Copaxone posted sales of $271 million in North America, down 41% year over year due to generic erosion. Copaxone revenues in the United States were $257 million.

Combined sales of Bendeka and Treanda declined 23% to $124 million.

Qvar sales surged 68% to $60 million in the quarter. ProAir sales declined 34% year over year to $71 million due to lower volumes and price. Teva launched its own ProAir HFA authorized generic for select customers in January 2019, following launch of generic versions of Glaxo’s GSK albuterol inhaler Ventolin HFA. Sales of the authorized generic are included in Teva’s Generics revenues.

Austedo, a new drug approved to treat chorea associated with Huntington’s disease and tardive dyskinesia, recorded sales of $105 million in the quarter in North America compared with $96 million in the previous quarter. Teva’s newest drug is its anti-calcitonin gene-related peptide (“CGRP”) injection, Ajovy (fremanezumab), approved as a preventive treatment for migraine.

Ajovy recorded sales of $25 million in the quarter compared with $23 million in the previous quarter. Teva said that Ajovy captured about 19% share of total prescription in the United States. However, it saw a decline in new prescription share, which management said was due to preference of patients for auto injectors while Ajovy is available as a subcutaneous injection.

Generic products revenues were almost flat at $914 million in the quarter as additional sales from the launch of generic products were offset by price erosion in the U.S business and unfavorable product mix.

Teva has launched 39 new generic products this year so far including generic version of Mylan’s MYL popular EpiPen Jr auto-injector (0.15 mg) allergy treatment

On the call, the company reiterated seeing stabilization of the generic pricing environment in the United States as well as Europe, which coupled with new generic launches, is strengthening these businesses.

Distribution revenues, generated by Anda, acquired from Allergan AGN in 2016, rose 5% in the quarter to $351 million.

The Europe segment recorded revenues of $1.16 billion, down 4% (flat in constant currency terms) year over year as higher sales of generic products were offset by lower Copaxone revenues.

Generic products revenues in Europe declined 1% to $836 million due to currency headwinds. Excluding the impact of currency, sales rose 4% due to higher sales of OTC products and new generic launches

Copaxone sales declined 10% on a constant currency basis to $106 million due to price reductions, following the entry of generics.

Respiratory products sales in Europe segment declined 2% on a constant currency basis to $87 million mainly due to lower sales in the United Kingdom.

In the International Markets segment, sales rose 1% (same in constant currency terms) to $736 million as lower sales in Japan and Russia were offset by higher distribution activities in Israel.

Generic products revenues declined 5% in constant currency terms to $474 million. Copaxone sales declined 46% to $20 million. Distribution revenues increased 15% in constant currency terms to $176 million in the quarter

The Other segment (API manufacturing business and certain contract manufacturing services) recorded revenues of $314 million, down 2% year over year, in constant currency terms.

Profits Decline

Adjusted gross margin declined 60 basis points (bps) to 49.3% in the quarter. Adjusted research & development expenses were flat year over year at $242 million as pipeline optimization and project terminations and resultant workforce reductions were offset by increased investment in early stage pipeline projects. Selling and marketing (S&M) expenditure declined 13.1% from the year-ago level to $551 million due to cost cutting and re-structuring activities. General and administrative (G&A) expenses declined 4.9% year over year to $270 million. Adjusted operating income declined 5% in the quarter to $1.05 billion due to lower profits in North America segment.

Lower End of 2019 View Raised

Teva raised the lower end of previously issued guidance for sales and earnings in 2019. The company expects revenues to be in the range of $17.2 – $17.4 billion compared with $17 – $17.4 billion expected previously. Earnings are expected in the band of $2.30-2.50 per share versus $2.20-2.50 per share expected previously. The earnings and sales guidance, however, indicates a decline from 2018 levels.

Adjusted operating income is expected to be between $4.0 billion and $4.2 billion in 2019 (previously $3.8 billion and $4.2 billion). Free cash flow was guided in the range of $1.7-$2.0 billion (previously $1.6-$2.0 billion).

New CFO

Teva also named Eli Kalif as its new executive vice president and chief financial officer effective Dec 22. Eli Kalif, who previously served at Flex, a technology design and manufacturing company, will replace Michael (Mike) McClellan who resigned in August due to personal reasons.

Update on Opioid Litigation

Teva faces several lawsuits, which claim that it is one of the several companies whose opioid-based drugs were responsible for fueling nationwide opioid epidemic. In May, Teva agreed to pay $85 million to the state of Oklahoma’s in this regard. Last month, it settled with two counties of Ohio, Cuyahoga and Summit, thereby resolving the counties’ opioid claims, which removed Teva from the Track 1 opioid litigation.

Importantly, Teva has entered into a proposed nationwide settlement with attorneys general of the four states, which requires it to supply $23 billion worth of generic Suboxone and pay $250 million in cash over 10 years. On the third-quarter conference call, Teva said that even if it has to pay for these settlements, it will not affect its ability to cut down debt.

Our Take

Teva’s third-quarter results were mixed as it missed earnings estimates but beat the same for sales. However, despite the earnings miss, the generic drugmaker raised the bottom end of its 2019 sales and earnings guidance, which led to a 5% increase in share price on Thursday. Teva’s shares have declined 45.1% this year so far compared with the industry’s decrease of 3.2%.

Teva is facing significant challenges in the form of accelerated generic competition for Copaxone, new competition for branded products, pricing erosion in the U.S. generics business and a massive debt load.

However, Teva is progressing well on its restructuring plan to revive growth and is on track to meet its goal to save $3 billion by the end of 2019 from these initiatives with $2.9 billion already achieved since initiation of the restructuring plan in 2018. Its newest drugs, Austedo and Ajovy could emerge as significant contributors to long-term sales growth. Importantly, portfolio optimization and new launches have steadied its North American and European generics business. It also has a more stable financial position than before.

However, resumption of organic growth seems unlikely until 2020. Meanwhile, the opioid litigation and investigations for price fixing are overhangs on the stock.

Currently, Teva has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Teva Pharmaceutical Industries Ltd. Price and Consensus

Teva Pharmaceutical Industries Ltd. Price and Consensus

Teva Pharmaceutical Industries Ltd. price-consensus-chart | Teva Pharmaceutical Industries Ltd. Quote

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