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Teva Pharmaceutical (TEVA) Beats on Q3 Earnings, Cuts View

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Teva Pharmaceutical Industries Ltd. (TEVA - Free Report) reported third-quarter earnings of $1.28 per share (including equity compensation expenses), which beat the Zacks Consensus Estimate of $1.27. However, revenues of $5.6 billion missed the Zacks Consensus Estimate of $5.90 billion.

On a year-over-year basis, revenues were up 15%, whereas earnings declined 3%. Currency fluctuations had a negative impact of $188 million on total revenue. Excluding currency headwinds, revenues increased 19% due to inclusion of sales from the acquisition of Allergan plc’s (AGN - Free Report) generics segment – Actavis Generics – in August.

The generic drug maker also acquired Allegan’s U.S. generic distribution business Anda, Inc. in October. The Actavis generics business (approximately two months contribution) added $887 million to Teva’s top line in the quarter. No revenues from Anda were included in the third quarter.

TEVA PHARM ADR Price, Consensus and EPS Surprise


TEVA PHARM ADR Price, Consensus and EPS Surprise | TEVA PHARM ADR Quote

Segment Discussion

Generic segment revenues surged 32% to $2.90 billion, mainly due to the inclusion of revenues from the Actavis generics business. Revenues from the U.S. generics business rose 25% to $1.29 billion due to the inclusion of $538 million in revenues from the generic business of Actavis.

Excluding Actavis sales, U.S. legacy generics revenues declined. Lower sales of the generic versions of Pulmicort, Nexium and Xeloda due to loss of exclusivity resulted in the downside.

European generic revenues were $829 million, up 25% from the year-ago period. This was due to the inclusion of $224 million in revenues from the generic business of Actavis. Excluding, Actavis, European generics revenues declined, as has been the trend since the past few quarters.

Rest of the world generic revenues soared 54% (60% in local currency) to $782 million in the quarter.

API revenues declined 7% to $191 million.

Specialty medicines revenues declined 6% from the year-ago period to $2.05 billion. This was due to lower sales across all therapeutic areas. CNS sales declined 5% to $1.30 billion, respiratory products were down 5% to $270 million, oncology product sales declined 17% to $269 million, and women’s health business recorded 5% decrease in revenues to $109 million. Other specialty revenues rose 14% to $98 million.

Worldwide Copaxone revenues declined 2% to $1.06 billion. While sales in the U.S. were flat at $874 million, ex-U.S. sales declined 10% to $187 million due to loss of tender orders in Russia. U.S. sales were hurt by lower volumes, which offset benefits from a 7.9% price increase in Jan 2016.

The 40 mg thrice-weekly (3TW - three times a week) formulation accounted for 83% of the total Copaxone scrips in the U.S. at the end of the reported quarter. We note that Teva is facing patent challenges for the 40 mg formulation. In Jun 2015, Novartis AG’s (NVS - Free Report) generic arm – Sandoz – and partner Momenta Pharmaceuticals, Inc. (MNTA - Free Report) launched Glatopa, its once-daily generic version of Copaxone 20 mg.

Among other products, Azilect sales increased 10% to $101 million. Nuvigil plunged 78% to $21 million, ProAir declined 21% to $118.0 million, while Treanda and Bendeka declined 28% to $149 million. Nonetheless, QVAR rose 4% to $76 million.

Profits Discussion

Adjusted gross margins contracted 80 bps to 61% in the quarter. Research & Development expenses increased 14% from the year-ago period to $406 million. Selling and Marketing (S&M) expenditures grew 16% from the year-ago level to $889 million. Adjusted operating income (excluding equity compensation expense) rose 16% in the quarter to $1.6 billion.

2016 Outlook Lowered

Teva lowered its guidance for 2016. The company now expects revenues in the range of $21.6–$21.9 billion (previous guidance: $22.0–$22.5 billion) and earnings in the range of $5.10–$5.20 (previously: $5.20–$5.40) per share. The Zacks Consensus Estimate for 2016 revenue and earnings are $22.31 billion and $5.17 per share, respectively.

The company expects earnings of $1.34–$1.44 per share on revenues $6.2–$6.5 billion in the fourth quarter. The Zacks Consensus Estimate for fourth-quarter revenues and earnings is $6.58 billion and $1.41per share, respectively.

Our Take

Teva delivered mixed third-quarter results with the company missing on revenue expectations and beating earnings estimates only marginally. Shares declined almost 9% in response to the soft quarterly results and the cut in 2016 guidance.

The specialty business sales were soft in the quarter, while the generics segment gained only due to the inclusion of Actavis revenues. The legacy generics business continued to decline due to lack of notable product launches during the quarter. This in turn was attributable to delays in product approvals and IP decisions as well as quality challenges experienced by third-party suppliers. Management expects these delays to hurt fourth-quarter sales as some of the larger launch opportunities have also been pushed to 2017–2018.

2016 has been a transition year for Teva as it works on the integration of Actavis Generics and progress with its branded pipeline. The Actavis Generics acquisition is expected to contribute significantly to growth of Teva’s generics business. Interestingly, at the conference call, the company said it plans to stay away from significant mergers and acquisitions for some time as it has purchased many assets in 2016.

The company also intends to strengthen its biosimilar pipeline.

Investor focus will remain on the outcome of the Copaxone 40 mg patent infringement litigation.

Zacks Rank

Teva has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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