Teva (TEVA) Tops on Q4 Earnings, Maintains 2017 Guidance

Teva Pharmaceutical Industries Ltd.TEVA reported fourth-quarter 2016 earnings of $1.34 per share (including equity compensation expenses), which beat the Zacks Consensus Estimate of $1.28.

Excluding stock-based compensation expenses, earnings were $1.38 per share, up 7.8% year over year. Earnings were also within the guidance range of $1.34-$1.44 per share.

Revenues of $6.49 billion also beat the Zacks Consensus Estimate of $6.48 billion and increased 33% on a year-over-year basis due to the inclusion of sales from the Aug 2016 acquisition of Allergan plc's AGN generics segment - Actavis Generics.

The generic drug maker also acquired Allegan's U.S. generic distribution business Anda, Inc. in Oct 2016.

Segment Discussion

Beginning in the fourth quarter of 2016, Teva revised its segment structure following the Actavis acquisition. The Generics segment now includes revenues from the OTC business.

Generic Medicines segment revenues surged 44% to $3.7 billion, mainly due to the inclusion of revenues from the Actavis generics business. The legacy generics business however continued to decline.

Revenues from the U.S. generics business rose 40% to $1.4 billion due to the inclusion of $630 million in revenues from the generic business of Actavis.

European generic revenues were $1.1 billion, up 33% (38% in local currency) from the year-ago period. This was due to the inclusion of $360 million in revenues from the generic business of Actavis.

Rest of the world (ROW) generic revenues soared 62% (36% in local currency) to $1.3 billion in the quarter. ROW sales were boosted by Teva's new Japanese business venture with Takeda, which began operations in April last year and the inclusion of $150 million in revenues from Actavis

API revenues declined 10% to $181 million. OTC revenues rose 28% to $412 million.

Specialty Medicines revenues rose 4% from the year-ago period to $2.2 billion due to higher Copaxone sales. Among Teva's various therapeutic areas, CNS sales declined 2% to $1.24 billion; respiratory products were flat at $325 million, oncology product sales declined 16% to $268 million, and women's health business recorded a 14% increase in revenues to $122 million. Other specialty revenues rose 175% to $245 million.

Worldwide revenues of Copaxone, Teva's blockbuster multiple sclerosis drug, rose 6% to $1.01 billion. While sales in the U.S. were up 9% to $829 million backed by a 7.9% price increase taken in January last year, ex-U.S. sales declined 7% to $186 million due to the loss of tender orders in Russia.

The 40 mg thrice-weekly (3TW - three times a week) formulation accounted for 84% of total Copaxone scrips in the U.S. at the end of the reported quarter, higher than 83% in the previous quarter. We note that Teva is facing patent challenges for the 40 mg formulation.

Companies like Mylan N.V. MYL and Momenta Pharmaceuticals are looking to get approval for their generic versions of the 40-mg thrice-weekly formulation of Copaxone. In late January, Teva suffered a major setback with the U.S. District Court for the District of Delaware invalidating four of the five Orange Book patents protecting Copaxone 40 mg. Teva intends to appeal against the decision.

Meanwhile, the 20 mg formulation of Copaxone has already started facing generic competition. In Jun 2015, Novartis AG's NVS generic arm, Sandoz launched Glatopa, a once-daily generic version of 20 mg formulation of Copaxone.

Among other products, Azilect sales increased 10% to $88 million. However, Nuvigil plunged 75% to $25 million, ProAir declined 6% to $139 million, Treanda and Bendeka declined 24% to $150 million and QVAR declined 3% to $116 million.

The Other segment (distribution and other activities) recorded revenues of $573 million, up 195%. The segment mainly includes distribution revenues from Anda.

Profits Discussion

Adjusted gross margin contracted 320 bps to 59.4% in the quarter. Research & development expenses increased 30% from the year-ago period to $514 million. Selling and marketing (S&M) expenditure was up 22.5% from the year-ago level to $1.1 billion. Adjusted operating income (excluding equity compensation expense) rose 31% in the quarter to $1.9 billion.

2016 Results

Full-year sales rose 11% to $21.9 billion. However, sales marginally missed the Zacks Consensus Estimate of $22.04 billion. Revenues matched the higher end of the guided range of $21.6-$21.9 billion.

Adjusted earnings (excluding stock based compensation expenses) came in at $5.14 per share, down 5.2% year over year. However, earnings surpassed the Zacks Consensus Estimate of $5.04. Earnings were within the projected range $5.10-$5.20.

Keeps 2017 Outlook

Teva maintained its 2017 sales and earnings outlook it provided last month. Teva expects revenues in a range of $23.8-$24.5 billion and earnings in a band of $4.90-$5.30 per share in 2017.

Teva expects continued sales erosion for Copaxone in 2017 due to increased competition.

Teva had mentioned in January that the guidance assumes that the 40 mg formulation will not face generic competition in the U.S. in 2017. However, there is uncertainty regarding the timing of the generic launch of Copaxone 40mg. In January, the company said that if two AB-rated generic versions of Copaxone are launched in the U.S. in Feb 2017, it could reduce 2017 revenues by $1.0 billion to $1.2 billion and adjusted earnings per share by 65 cents - 80 cents.

However, at the fourth quarter conference call, management said in case one or two generic versions are launched this month for the 40-mg version in the U.S., it could reduce revenues by $1 billion to $1.3 billion and earnings in a range of 75 cents -95 cents per share. Higher expenses to support the brand, compared to that expected in January, led to the potentially higher EPS headwind.

Our Take

Teva's fourth-quarter earnings and sales were above expectations. Importantly, it re-iterated its 2017 guidance despite the recent Copaxone patent loss. Shares rose almost 6% in response. However, Teva's shares have lost 7.7% so far this year, while the Zacks classified Generic Drugs industry witnessed an increase of 4.1%.

Sales and profits in the fourth quarter were driven by inorganic growth related mostly to the Actavis acquisition and also to the joint venture with Takeda in Japan.

Year 2016 marked a transition for Teva, given the integration of Actavis Generics and progress with its branded pipeline. The Actavis Generics acquisition is expected to contribute significantly to the growth of Teva's generics business. However, Teva is facing significant challenges in the near term as headwinds remain in the form of generic competition for Copaxone, generic pricing pressure and the sudden departure of its chief executive officer (CEO). Earlier this month, Teva's CEO Erez Vigodman stepped down suddenly and was replaced by Dr. Yitzhak Peterburg as Interim President and CEO.

Incidentally, at the call, Peterburg said that a thorough review of the business is being conducted. Teva has also begun a comprehensive search for a new CEO with significant pharmaceutical experience.

Teva Pharmaceutical Industries Limited Price, Consensus and EPS Surprise

Teva Pharmaceutical Industries Limited Price, Consensus and EPS Surprise | Teva Pharmaceutical Industries Limited Quote

Teva carries a Zacks Rank #4 (Sell).

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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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