Teva (TEVA) Stock Dips Despite Q1 Earnings & Sales Beat

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Teva Pharmaceutical Industries Limited TEVA reported first-quarter 2018 earnings of 94 cents per share, which beat the Zacks Consensus Estimate of 68 cents per share. However, earnings per share declined 11.3% year over year.

Revenues came in at $5.1 billion, which also beat the consensus estimate of $4.8 billion. However, sales declined 10% year over year (down 15% excluding impact of currency).

Sales were hurt by increased pricing erosion in the U.S. generics market and rapid erosion in sales of Teva's key multiple sclerosis injection, Copaxone and divesture of some non-core assets. 

Segment Discussion

As announced in November last year, Teva no longer reports two separate global groups for its two businesses - generics and specialty medicines. Instead, it reports under new segments based on three regions - North America, Europe and Growth Markets.

North America segment sales were $2.5 billion, down 22% year over year due to pricing erosion in U.S. generics market, lower sales of Copaxone and divestiture of some non-core assets in the Women's Health business. In the United States, revenues declined 23% to $2.4 billion.

Lead branded product, Copaxone, posted sales of $476 million in North America, down 40% year over year due to generic competition for the 20 mg as well as the 40 mg formulation.

Glatopa, a generic version of Copaxone 20 mg, is being marketed by Momenta and Sandoz - Novartis' NVS generic arm - since 2015 while Mylan MYL launched its version of the 20 mg formulation in October 2017. In the same month, in a major blow to Teva, Mylan launched (at-risk) its generic version of the 40 mg thrice-weekly formulation, much earlier than expected.

With the entry of the generic version of the 40 mg formulation and the entry of a second generic version of the 20 mg formulation, there has been rapid erosion in sales of Copaxone. Moreover, a second generic version of the 40 mg formulation (Glatopa) was launched by Sandoz in February this year, much earlier than its scheduled launch in April.

On the call, Teva said that despite Mylan's introduction of a 40 mg generic, Copaxone still commands around 85% of volumes in the 40 mg market. However, Teva had to decrease the price of Copaxone by increasing rebates in connection with the generic competition.  The lower pricing helped it maintain its volume share. However, Teva expects tougher competition as the year progresses, which could exert some further pressure on pricing.

Sales of other branded products Bendeka, Treanda, ProAir and Qvar increased in the quarter.

The newest product in Teva's branded portfolio, Austedo, recorded sales of $30 million in North America.

Austedo (SD-809) was approved and launched in April 2017 for the treatment of chorea associated with Huntington's disease and for the second indication, tardive dyskinesia, in the United States in August.

Generic products revenues declined 23% to $1.1 billion in the quarter due to lower volumes and price erosion. Significant competitive and pricing pressure is hurting the U.S. generics industry. The consolidation of customers in the industry has increased the ability to negotiate lower prices for generic drugs. Teva launched 10 generic products in the first quarter

Distribution revenues, which are generated by Anda, rose 12% in the quarter to $331 million.

In August 2016, Teva acquired Allergan's AGN generics business - Actavis Generics - and Allergan's Anda Inc., the fourth largest distributor of generic pharmaceuticals, in October 2016.

The Europe segment recorded revenues of $1.44 billion, up 8% year over year. However, in constant currency terms, sales declined 6% due to loss of revenues from the closure of a distribution business in Hungary and divestiture of the women's health business.

Generic products (including OTC products) revenues in Europe rose 2% on a constant currency basis to $997 million due to new product launches and volume growth in OTC, partially offset by price decline. Copaxone sales declined 13% on a constant currency basis to $153 million due to price reductions following the entry of generics.

In the Growth Markets , sales rose 4%. However, in constant currency terms, sales were flat in this segment as higher sales in Israel, Japan and Russia were partially offset by the effect of the deconsolidation of subsidiaries in Venezuela and loss of revenues from the sale of the women's health business in these countries. While Generic products (including OTC) revenues declined 3% in constant currency terms to $488 million, Copaxone sales declined 24% to $16 million.

The Other segment (API manufacturing business and certain contract manufacturing services) recorded revenues of $342 million, down 8% year over year due to lower API sales to third parties.

Profits Decline

Adjusted gross margin contracted 460 basis points (bps) to 52.3% in the quarter due to lower profitability in the North America segment. Adjusted research & development expenses declined 31% from the year-ago period to $289 million due to pipeline optimization. Selling and marketing (S&M) expenditure declined 20% from the year-ago level to $715 million due to cost cutting and re-structuring activities. Adjusted operating margin declined 40 bps to 28.3% in the quarter despite lower costs.

2018 Outlook Upped

Teva raised its 2018 sales and earnings guidance following the first-quarter beat. The revenue outlook was raised from a range of $18.3 - $18.8 billion to a range of $18.5 - $19.0 billion. The earnings guidance was raised from a band of $2.25-$2.50 per share to $2.40-2.65 per share.

U.S. Generics sales are expected to decline roughly 20% from 2017 levels to approximately $4 billion in 2018 hurt by ongoing price erosion.

Costs are expected to decline $1.5 billion in 2018 as a result of the company's cost-savings initiatives.

Free cash flow guidance was raised to $3.0-3.2 billion from $2.6-2.8 billion.

Delay in FDA Approval of Migraine Candidate

Along with the earnings release, the company said it does not expect to get FDA approval for its pipeline candidate, fremanezumab for the prevention of chronic/episodic migraine on its PDUFA date in June. It said it expects a pre-approval inspection to take place soon. Teva expects fremanezumab to be approved and launched before the end of this year.

We remind investors that in January, Teva's partner Celltrion received an FDA warning letter for a facility in South Korea, following an inspection of the fill/finish side of the facility. This facility manufactures API for fremanezumab. In EU, a regulatory application for fremanezumab is under review.

Please note that Lilly and Amgen are also on track to launch a new migraine treatment this year.

Our Take

Teva beat expectations for both earnings and sales in the first quarter and also raised its full-year outlook for both the metrics. However, Teva's stock declined more than 4% since the earnings release.

Teva's shares have declined 5.9% this year so far compared with the industry 's decline of 12.4%.

The Israel-based generic drug maker had a tough 2017 as it faced significant challenges in the form of accelerated generic competition for Copaxone, new competition for branded products, pricing erosion in the U.S. generics business, lower-than-expected contribution from generic launches and a massive debt load of more than $30 billion.  Mylan's earlier-than-expected launch of the first generic version of the 40-mg strength of Copaxone was a major setback for Teva.

Teva divested some non-core assets last year (mainly in the Women's Health business) to cut its significant debt load. The company also has a new organizational structure in place, is closing plants, cutting down its generics portfolio, eliminating low-value R&D projects, and aims to cut its global workforce by more than 25% over the next two years as part of a restructuring plan it revealed in December last year. Teva is progressing well on these re-structuring activities and still expects to save almost $3 billion by the end of 2019 from these initiatives. Despite the progress on the restructuring activities and the fact that its financial position seems more stable than before, we believe Teva has a long way to go before gaining stability.

Teva Pharmaceutical Industries Ltd. Price, Consensus and EPS Surprise

Teva Pharmaceutical Industries Ltd. Price, Consensus and EPS Surprise | Teva Pharmaceutical Industries Ltd. Quote

Teva carries a Zacks Rank #4 (Sell).

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Earnings , Stocks
Referenced Symbols: AGN , NVS , TEVA , MYL

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