Teva (TEVA) Stock Plunges 20% on Q3 Earnings Miss & View Cut

Teva Pharmaceutical Industries Limited TEVA reported third-quarter 2017 earnings of $1.00 per share, which missed the Zacks Consensus Estimate of $1.05 per share by 4.8% and declined 24% year over year.

Revenues of $5.61 billion were in line with the Zacks Consensus Estimate. Sales increased 1% year over year (up 4% excluding impact of currency), mainly due to the inclusion of an extra month of revenues from Actavis acquisition compared with the third quarter of last year.

Teva acquired Allergan’s AGN generics segment, Actavis Generics and also its U.S. generic distribution business, Anda, Inc. last year.

Excluding the benefit from the Actavis generics acquisition, the core sales performance was below expectations. Sales in the quarter were hurt by increased pricing erosion and volume declines in the U.S. Generics unit, ongoing political turmoil in Venezuela and loss of exclusivity in the Specialty segment in the quarter.

Segment Discussion

From the fourth quarter of 2016, Teva revised its segment structure following the Actavis acquisition. The Generics segment now includes revenues from the OTC business as well as the API business.

Generic Medicines segment revenues were $3 billion, down 8% year over year.

Revenues from the U.S. generics business declined 9% to $1.2 billion due to significant competitive and pricing pressure in the generics industry. The ongoing consolidation of customers in the generics industry has led to increasing price erosion and decreasing volume. The consolidation in the industry has increased the ability to negotiate lower prices for generic drugs. Moreover, accelerated FDA approvals of additional generic versions of competing off-patent medicines and increased competition for Concerta authorized generic, also hurt sales.

European generic revenues were $985 million, up 6% (1% in local currency) from the year-ago period. This was due to the inclusion of three months revenues from the generic business of Actavis versus two month in the year-ago quarter.

Rest of the world (ROW) generic revenues declined 18% to $843 million in the quarter. On a local currency basis, sales rose 5% mainly due to the inclusion of revenues from Actavis.

API revenues declined 10% to $171 million. OTC revenues were down 22% to $306 million (up 15% in local currency terms).

Specialty Medicines revenues were $2.03 billion, down 1% from the year-ago period due to lower sales of its central nervous system (CNS) products.

Among Teva’s various therapeutic areas, CNS sales declined 12% to $1.15 billion due to lower sales of multiple sclerosis drug, Copaxone, Teva’s lead branded product.

Sales of respiratory products rose 30% to $351 million, oncology product sales rose 12% to $302 million, and women’s health business recorded a 9% increase in revenues to $119 million. Other specialty revenues rose 18% to $116 million.

Worldwide revenues of Copaxone declined 7% to $987 million mainly due to lower sales in the United States. Sales declined 8% in the United States to $802 million due to lower volumes of the 20 mg formulation and negative net pricing effects despite the 7.9% price increase taken in January.

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 last month. In a major blow to Teva, last month, Mylan also launched its generic version of the 40 mg thrice-weekly (3TW – three times a week) formulation – much earlier than expected. The 40 mg formulation of Copaxone accounted for more than 85% of total Copaxone scrips in the United States at the end of the reported quarter.

Ex-U.S. sales of Copaxone declined 1% to $185 million.

Among other products, Azilect sales declined 64% to $36 million as a generic version of the drug was launched in the United States this year. ProAir rose 31% to $155 million, combined Treanda and Bendeka revenues declined 21% to $181 million and QVAR declined 1% to $95 million.

The Other segment (distribution and other activities) recorded revenues of $569 million, up 122.2% year over year. The segment mainly gained from the inclusion of distribution revenues from Anda.

Profits Decline

Adjusted gross margin contracted 800 basis points (bps) to 53% in the quarter due to the addition of the low-margin Anda distribution business and low margins in both the Generic Medicines and Specialty Medicines segments. Research & development expenses declined 6.2% from the year-ago period to $381 million. Selling and marketing (S&M) expenditure declined 9.4% from the year-ago level to $805 million. Adjusted operating margin declined 600 bps in the quarter to 26.2%, despite lower costs.

2017 Outlook Slashed

Teva lowered its 2017 sales and earnings outlook for the second time this year. Teva now expects revenues in the range of $22.2 – $22.3 billion compared with $22.8 – $23.2 billion expected previously. The company expects earnings in the band of $3.77–$3.88 per share in 2017, significantly lower than $4.30–$4.50 per share expected previously

Increased price erosion and volume declines in the U.S Generics market, lower than expected contribution from new generic launches in the United States and the accelerated erosion in Copaxone sales following the earlier-than-expected launch of the 40 mg generic resulted in the guidance cut.

With the entry of the generic version of the 40 mg formulation and a second generic version of the 20 mg formulation, Teva estimates a negative impact of at least 30 cents per share on fourth-quarter earnings, higher than Teva’s previous assumption of 25 cents.

Meanwhile many other filers, including Momenta are also looking to get approval for their generic versions of the 40-mg formulation, which if approved, will erode sales further.

Teva now expects new product launches to contribute $400 million to revenues compared with $500 million expected previously.

Our Take

Amid already lowered expectations, Teva’s disappointing third-quarter results and the slash in outlook led to a sharp decline in share price.

Shares declined almost 20% on Thursday, hitting a 52-week low of $10.85. In fact, shares have slumped 69% so far this year compared with the industry’s decline of 31.4%.

Teva’s branded drug pipeline is progressing decently and it has also divested some non-core assets, mainly in the Women’s Health business, including Paragard and Plan B One-Step contraceptives, to cut its significant debt load. However, it might not be enough to revive the company’s fortunes during this challenging period, particularly as it faces erosion of its largest product, Copaxone.

It will be interesting to see how its new chief executive officer, Kåre Schultz, guides the Israel-based generic drug maker to post a turnaround.

Teva carries a Zacks Rank #5 (Strong Sell).

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

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