Teva (TEVA) Q2 Earnings Beat, Revenues Miss, Stock Down

Teva Pharmaceutical Industries LimitedTEVA reported second-quarter 2018 earnings of 78 cents per share, which beat the Zacks Consensus Estimate of 67 cents per share. However, earnings per share declined 23.5% year over year.

Revenues came in at $4.70 billion, which missed the consensus estimate of $4.76 billion. Moreover, sales declined 18% year over year (down 19% excluding impact of currency).

Sales continue to be hurt by increased pricing erosion in the U.S. generics market, rapid erosion in sales of Teva's key multiple sclerosis injection, Copaxone, divesture of some non-core assets, and discontinued business activities. Increased competition for Teva's largest product, Concerta authorized generic, is also hurting sales.

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 (United States and Canada), Europe and International Markets (previously named "Growth Markets" segment).

North America segment sales were $2.26 billion, down 29% year over year due to pricing erosion in the 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 30% to $2.1 billion.

Copaxone posted sales of $464 million in North America, down 46% year over year due to generic competition for the 20 mg as well as the 40 mg formulation. In the United States, Copaxone recorded sales of $448 million.

Glatopa, a generic version of Copaxone 20 mg, is being marketed by Momenta and Sandoz - Novartis' NVS generic arm since 2015 while Mylan launched its version of the 20 mg formulation in October 2017. In the same month, in a major blow to Teva, Mylan MYL 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.

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

The newest product in Teva's branded portfolio, Austedo, recorded sales of $44 million in the quarter in North America compared with $30 million in the previous quarter. Teva expects Austedo to record $200 million in revenues in 2018.

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

Generic products revenues declined 29% to $947 million in the quarter due to price erosion and increased competition for Concerta authorized generic. 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.

Distribution revenues, which are generated by Anda, rose 16% in the quarter to $320 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 $1.33 billion, up 3% year over year. However, in constant currency terms, sales declined 5%due to loss of revenues from the closure of a distribution business in Hungary and divestiture of the women's health business, which offset the positive impact of generic launches.

Generic products (including OTC products) revenues in Europe rose 10% (3% on a constant currency basis) to $907 million on product launches, partially offset by price decline.

Copaxone sales declined 7% on a constant currency basis to $140 million due to price reductions following the entry of generics.

Respiratory products sales in Europe segment rose 26% (up 18% on a constant currency basis) to $106 million mainly due to the launch of Braltus in 2017.

In the International Markets segment, sales declined 11% year over year to $789 million. However, in constant currency terms, sales declined 9% in this segment due to lower sales in Japan and Russia, 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. Sales rose in Israel.

Generic products (including OTC) revenues declined 9% in constant currency terms to $537 million. Copaxone sales declined 4% to $22 million. Distribution revenues increased 14% in constant currency terms to $154 million in the quarter

The Other segment (API manufacturing business and certain contract manufacturing services) recorded revenues of $321 million, down 16% year over year, in constant currency terms due to lower API sales to third parties.

Profits Decline

Adjusted gross margin contracted 660 basis points (bps) to 50.4% in the quarter due to lower profitability in the North America segment. Adjusted research & development expenses declined 35% from the year-ago period to $281 million due to pipeline optimization, concluded phase III studies and resultant workforce reductions. Selling and marketing (S&M) expenditure declined 25.7% from the year-ago level to $662 million due to cost cutting and re-structuring activities. Adjusted operating margin declined 160 bps to 26.3% in the quarter despite lower costs.

2018 Earnings Outlook Upped

Teva maintained its 2018 sales guidance while raising the earnings outlook based on restructuring savings and lower expectation for corporate tax. The revenue outlook was maintained in a range of $18.5 - $19.0 billion. Meanwhile, the earnings guidance was raised from a band of $2.40-2.65 per share to $2.55-2.80 per share.

In 2018, Teva expects Copaxone to generate global sales of $2.1 billion globally (previously $1.8 billion), significantly lower than $3.8 billion in 2017.

In the second half of 2018, Teva expects Copaxone sales to decline more sharply due to additional pricing pressure and expected uptake of the second generic version of the 40 mg formulation.

Our Take

Teva's second-quarter results were mixed as it beat expectations for earnings but missed the same for sales. Teva's stock declined more than 9% in pre-market trading on Thursday, probably because investors had hoped for a better quarterly performance, especially after it picked up pace this year following a tumultuous 2017. The ongoing sales weakness, particularly in Teva's U.S. generics segment, however, is a cause of worry.

Teva's shares have risen 14% this year so far compared with the industry 'sincrease of 3.5%.

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, lower-than-expected contribution from generic launches and a massive debt load.

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. In fact, since the announcement of the restructuring plan, Teva has cut its workforce by approximately 8,300 employees.

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, including $1.5 billion in 2018. 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.

Importantly, on the call, the company said that it will neither buy any late-stage pipeline candidates, nor will it acquire any company. It will spend the cash to reduce its debt and to improve the generics business.

Teva currently carries 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, Consensus and EPS Surprise

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

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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.

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

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