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Arpita Dutt

6 Things You Need to Know about Teva's (TEVA) Q3 Earnings

BAYRY TEVA MYL

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Israel-based Teva Pharmaceutical Industries Limited (TEVA - Free Report) reported third quarter results yesterday. With the company missing revenue estimates and lowering its outlook for the year, shares were down 8.4%.

Here is a look at some key points from the company’s conference call.

Generics Segment Hit by Pricing, Lack of Major Product Launches, Competition: Teva has a strong presence in the generics market with a major part of its revenues being derived from this segment. Although third quarter revenues included $887 million from the Actavis Generics acquisition, the generics segment’s performance fell short of expectations.

The company reported a slight decline in the legacy generics business mainly due to loss of exclusivity and increased competition for the generic versions of Pulmicort, Nexium and Xeloda and lack of significant new product launches. Teva said that new product launches were affected by delays in product approvals, patent-related decisions and quality challenges faced by third-party suppliers.

These factors are likely to continue impacting the fourth quarter as well with major product launches now expected in 2017 and 2018 though fourth quarter sales should benefit from a full quarter’s contribution from the Actavis Generics business.

Meanwhile, the U.S. business witnessed higher-than-expected price erosion (approximately 7%) in the third quarter. The company said that this was due to increased price pressure on certain divested products. Teva said that it continues to expect price erosion in the U.S. in the mid-single-digit range, the same as other companies like Mylan NV (MYL - Free Report) .

Guidance Lowered: Teva lowered its 2016 outlook for both earnings and sales. The company now expects earnings of $5.10 - $5.20 per share on net sales of $21.6 billion - $21.9 billion. At the time of releasing second quarter results, Teva had guided towards earnings of $5.20 - $5.40 per share and revenues of $22.0 billion - $22.5 billion. Teva said that it does not expect any significantly large product launch in the fourth quarter as well.

No Significant Deals for Now: Teva provided some insight into its capital allocation plans on the call. The company, which has been pretty active on the acquisition front, said that it will be focusing on unlocking value from integration, developing internal products, and repaying debt. The company plans to drop all the projects that do not add value or move the needle over time. Where deals are concerned, Teva will be looking at tuck-in deals instead of significant ones.

Thoughts on DoJ Probe on Generic Drugmakers: Generic drugmakers were in the news earlier this month following a Bloomberg article which said that the Department of Justice (DoJ) could file price collusion charges against these companies by year end. According to the article, the DoJ investigation, which started a couple of years back, covers more than 12 companies and about 24 drugs. A grand jury is examining whether some of the executives colluded with each other to raise prices. On the third quarter call, Teva’s CEO said that they are not aware of any fact that will give rise to an exposure to Teva with respect to the investigation.

$520 Million Set Aside for Settlement of FCPA Investigations: Teva is setting aside $520 million related to the settlement of U.S. Foreign Corrupt Practices Act (FCPA) investigations into conduct in three countries, Russia, Mexico and Ukraine, from 2007-2013. The company is in advanced discussions with the DoJ and the SEC to settle the investigations.

Rimsa Issues: Teva is in litigation with the former owners of Rimsa, a Mexico-based pharmaceutical manufacturing and distribution company that was acquired by Teva in Mar 2016. Teva said that it has uncovered evidence of systematic information manipulation regarding brand development and manufacturing and claimed that these violations were concealed during the due diligence process. The company said that it has implemented a full remediation plan to address the identified issues and expects to realize the opportunities presented by the Mexican market over time.

Bottom-Line

With the completion of the Actavis Generics and Anda acquisitions, 2017 will be an important year for Teva. Moreover, there should be more clarity on the Copaxone 40 mg generics situation. As far as the generics business is concerned, the company said that it needs new product launches worth $500 million - $600 million every year to maintain mid-single digit growth in the U.S. business. Teva has more than 300 ANDAs pending at the FDA with the company expecting to launch more than 60 of those in 2017 depending on regulatory approvals, patent infringement decisions, and other factors.

TEVA PHARM ADR Price, Consensus and EPS Surprise

Teva is a Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the healthcare sector include companies like Bayer AG (BAYRY - Free Report) and Mallinckrodt plc . Both companies have positive earnings track records. While the average earnings beat for Bayer over the last four quarters is 2.33%, Mallinckrodt’s average earnings beat over the last four quarters is 11.88%. Bayer and Mallinckrodt are Zacks Rank #2 (Buy) stocks. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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