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Teva (TEVA) Q4 Earnings Miss,'19 View Weak, Shares Down

Zacks Equity Research

Teva Pharmaceutical Industries Limited TEVA reported fourth-quarter 2018 earnings of 53 cents per share, which missed the Zacks Consensus Estimate of 56 cents per share. Earnings per share declined 43% year over year.

Revenues came in at $4.56 billion, marginally beating the consensus estimate of $4.55 billion. Sales declined 16% (down 14% in constant currency terms) year over year.

Sales were hurt by rapid erosion in sales of Teva’s key multiple sclerosis injection, Copaxone, pricing pressure in the U.S. generics market, divestiture of some non-core assets, and discontinued business activities.

Also, negative currency impact due to the strengthening of the dollar hurt sales and earnings 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 $2.23 billion, down 17% year over year due to pricing erosion in U.S. generics market, lower sales of Copaxone, ProAir and QVAR, and loss of sales from the discontinued Women’s Health business. In the United States, revenues also declined 17% to $2.1 billion.

Copaxone posted sales of $356 million in North America, down 44% year over year due to generic competition in the United States. Copaxone recorded sales of $341 million in the United States.

Sales of other branded products Bendeka, Treanda, ProAir and Qvar declined in the quarter. The company expects significant decline in ProAir sales in 2019 due to the launch of generic version of the drug.

A new product in Teva’s branded portfolio, Austedo, recorded sales of $68 million in the quarter in North America compared with $62 million in the previous quarter. Teva expects Austedo to record $350 million in revenues in 2019.

In September, Teva launched a new branded drug, its anti-calcitonin gene-related peptide (“CGRP”) injection, Ajovy (fremanezumab), as a preventive treatment for migraine. Teva said it expects to generate $150 million in U.S. sales in 2019. An approval in Europe is expected in the first half of 2019.

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

Generic products revenues declined 10% to $1.1 billion in the quarter due to price erosion in the U.S business and increased competition for Concerta authorized generic. This decline was partially offset by additional sales from the launch of generic products.

However, on the call, the company said it is seeing signs of stabilization in U.S. generic drug pricing. The company also said that the rate of sales erosion in the North American Generic business slowed significantly in the third and the fourth quarters of 2018.

Distribution revenues, which are generated by Anda, acquired from Allergan AGN in 2016, rose 26% in the quarter to $363 million.

The Europe segment recorded revenues of $1.2 billion, down 17% (down 14% in constant currency terms) year over year due to loss of revenues from the closure of a distribution business in Hungary, divestiture of the women’s health business and lower Copaxone revenues, which offset the positive impact of generic launches.

Generic products (including OTC products) revenues in Europe declined 9% (6% on a constant currency basis) to $844 million due to lost revenues as a result of the termination of partnership with P&G - PGT Healthcare- in July and price reductions

Copaxone sales declined 21% on a constant currency basis to $118 million due to price reductions, following the entry of generics.

Respiratory products sales in Europe segment rose 18% (up 15% on a constant currency basis) to $90 million mainly due to lower sales in the United Kingdom.

In the International Markets segment, sales declined 19% year over year to $740 million. However, in constant currency terms, sales declined 13% 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.

Generic products (including OTC) revenues declined 18% in constant currency terms to $499 million. Copaxone sales declined 6% to $20 million. Distribution revenues increased 6% in constant currency terms to $146 million in the quarter

The Other segment (API manufacturing business and certain contract manufacturing services) recorded revenues of $377 million, up 9% year over year, in constant currency terms on the back of improved API sales to third parties.

Profits Decline

Adjusted gross margin increased 20 basis points (bps) to 51.1% in the quarter on the back of improved margins in Europe.

Adjusted research & development expenses declined 2% from the year-ago period to $289 million due to pipeline optimization, concluded phase III studies and resultant workforce reductions. Selling and marketing (S&M) expenditure was up 2.5% from the year-ago level to $768 million due to higher promotional cost related to the launch of Ajovy, partially offset by cost cutting and re-structuring activities. General and administrative (G&A) expenses declined 1.5% year over year to $330 million. Adjusted operating margin declined 490 bps to 20.8% in the quarter.

Full Year Results

Teva reported total revenues of $18.9 billion for 2018, down 16% from year-ago period. Adjusted earnings per share declined 27.2% to $2.92 for the full year.

2019 Outlook Weak

Teva provided its full-year sales and earnings guidance for 2019. Revenues are expected in the range of $17 - $17.4 billion while earnings per share are expected between $2.20 and $2.50 per share. The guided ranges are lower than the current Zacks Consensus Estimate.  The disappointing guidance probably pulled down the company’s shares.

Guidance for free cash flow was $1.6-2 billion. The mid-point of the guided range is almost half of $3.7 billion in free cash flow in 2018.

The company expects global sales of Copaxone to be approximately $1.5 billion in 2019, a decline of 37.5% from 2018.

Our Take

Teva’s fourth-quarter results were mixed as it beat expectations for sales but missed the same for earnings. The company’s guidance for 2019 was lower than market expectations, which pulled the stock down nearly 7.8% on Feb 13.

The world’s largest generic drugmaker’s comments about stabilization of its U.S. generics business are encouraging. The company expects sales from the North American generics segment to stabilize around $1 billion per quarter. Meanwhile, the company hinted that it will not be looking for mergers and acquisitions in near future and focus on optimizing its current business.

Teva’s shares have fallen 21.6% in the past six months compared with the industry’s decrease of 19.7%.

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 stemming from its 2016 acquisition of Allergan’s generics business. The company expects business to be weaker and sales of its branded drugs, Copaxone and ProAir to be lower.

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 projects, 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 $2.2 billion already achieved in 2018.

Its financial position seems more encouraging than before as it is regularly paying down debt. Its newest drugs, Austedo and Ajovy could emerge as significant contributors to long-term sales growth.

Currently, Teva has a Zacks Rank #3 (Hold). 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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