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Teva (TEVA) Q1 Earnings Beat, Copaxone Drags Sales Down

Zacks Equity Research

Teva Pharmaceutical Industries Limited TEVA reported first-quarter 2019 earnings of 60 cents per share, which beat the Zacks Consensus Estimate of 58 cents. Earnings per share declined 36% year over year due to lower sales and operating income.

Revenues came in at $4.3 billion, which missed the consensus estimate of $4.41 billion. Sales declined 15% (down 12% in constant currency terms) year over year.

Sales were hurt by rapid erosion in sales of Teva’s key multiple sclerosis injection, Copaxone, lower sales of the branded respiratory and oncology drugs and pricing pressure in the U.S. generics market. Also, negative currency impact due to the strengthening of the dollar hurt sales by $177 million and operating profits by $58 million in the quarter.

Segment Discussion

As announced in November 2017, 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.

North America segment sales were $2.05 billion, down 19% year over year due to pricing erosion in U.S. generics market, lower sales of Copaxone as well as other branded drugs, Bendeka/Treanda and QVAR. In the United States, revenues declined 20%year over year to $1.91 billion.

Copaxone posted sales of $208 million in North America, down 56% year over year due to generic competition in the United States. Copaxone recorded sales of $194 million in the United States. In 2019, Teva expects $800 million in U.S. revenues for Copaxone versus the previous estimate of approximately $1 billion.

Sales of other branded products Bendeka, Treanda and Qvar declined in the quarter. ProAir sales declined 55% year over year to $59 million due to the launch of generic version of the drug. Teva launched its own ProAir HFA authorized generic to select customers in January 2019 and these sales were included in the Generics revenues.

Austedo, a new drug approved to treat chorea associated with Huntington’s disease and tardive dyskinesia, recorded sales of $72 million in the quarter in North America compared with $68 million in the previous quarter. Teva expects Austedo to record $350 million in revenues in 2019.

In September, Teva gained approval and launched a new branded drug, its anti-calcitonin gene-related peptide (“CGRP”) injection, Ajovy (fremanezumab), as a preventive treatment for migraine. Ajovy recorded sales of $20 million in the quarter. Teva said it expects $150 million in Ajovy U.S. sales in 2019. Ajovy was approved in Europe in April this year.

Ajovy will face fierce competition from similar drugs, Amgen AMGN and Lilly’s LLY CGRPs, Aimovig and Emgality, respectively, which were also launched last year.

Generic products revenues declined 11% to $966 million in the quarter due to price erosion in the U.S business. This decline was partially offset by additional sales from the launch of generic products.

On the call, the company said it is seeing stabilization of US generics and European generics business helped by ongoing launches and strong key products

Distribution revenues, which are generated by Anda, acquired from Allergan AGN in 2016, rose 14% in the quarter to $379 million.

The Europe segment recorded revenues of $1.26 billion, down 12% (down 5% in constant currency terms) year over year due to divestiture of the women’s health business and lower Copaxone revenues, which offset the positive impact of generic launches.

Generic products revenues in Europe declined 9% (flat on a constant currency basis) to $919 million due to lost revenues as a result of the termination of partnership with P&G - PGT Healthcare- in July last year, partially offset by generic product launches.

Copaxone sales declined 20% on a constant currency basis to $114 million due to price reductions, following the entry of generics.

Respiratory products sales in Europe segment declined 13% on a constant currency basis to $91 million mainly due to lower sales in the United Kingdom.

In the International Markets segment, sales declined 11% (down 3% in constant currency terms) to $668 million due to lower sales in Japan, which were partially offset by higher sales in Russia.

Generic products revenues declined 10% in constant currency terms to $441 million. Copaxone sales declined 18% to $13 million. Distribution revenues increased 1% in constant currency terms to $151 million in the quarter

The Other segment (API manufacturing business and certain contract manufacturing services) recorded revenues of $317 million, down 5% year over year, in constant currency terms.

Profits Decline

Adjusted gross margin declined 160 basis points (bps) to 50.1% in the quarter due lower profits in the North America segment.

Adjusted research & development expenses declined 11.8% from the year-ago period to $255 million due to pipeline optimization, concluded phase III studies and resultant workforce reductions. Selling and marketing (S&M) expenditure declined 11.7% from the year-ago level to $602 million due to cost cutting and re-structuring activities. General and administrative (G&A) expenses declined 13% year over year to $280 million. Adjusted operating income declined 29% in the quarter to $1.02 billion due to lower profits in North America segment attributable to the decline in Copaxone and other specialty brands.

2019 Outlook Maintained

Teva re-affirmed its previously issued guidance for sales and earnings in 2019. The company expects revenues to be in the range of $17 - $17.4 billion. Earnings are expected in the band of $2.20-2.50 per share.

Our Take

Teva’s first-quarter results were mixed as it beat expectations for earnings but missed the same for sales, leading the stock to decline 2.1% on Thursday. Teva’s shares have fallen 3.4% this year so far against the industry’s increase of 5.8%.

 

 

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. Teva expects 2019 to be a tough year followed by return to growth in 2020 based on launches.

However, Teva has a new organizational structure in place, is closing plants, cutting down its generics portfolio, divesting non-core assets, eliminating low-value R&D project, and is reducing global workforce to revive growth. Teva is on track to meet its goal to save $3 billion by the end of 2019 from these initiatives with $2.5 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.

However, despite impressive progress on restructuring activities, signs of stabilization in U.S. generic business and a more stable financial position than before, we believe the company has a long way to go before it gains stability. Resumption of organic growth seems unlikely until 2020.

Teva Pharmaceutical Industries Ltd. Price, Consensus and EPS Surprise

 

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

Currently, Teva has 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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