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Teva (TEVA) Q1 Earnings In Line, Sales Lag as Copaxone Falls

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Teva Pharmaceutical Industries Ltd. (TEVA - Free Report) reported first-quarter 2017 earnings of $1.03 per share (including equity compensation expenses), which was in line with the Zacks Consensus Estimate. The year-ago adjusted earnings were $1.18 per share.

Revenues of $5.63 billion missed the Zacks Consensus Estimate of $5.80 billion by 3%. Sales, however, increased 17% year over year (up 22% excluding impact of currency), mainly due to the inclusion of revenues of Allergan plc’s (AGN - Free Report) generics segment, Actavis Generics, which was acquired in Aug 2016. While sales in the Generics segment rose, the same declined in the Specialty unit.

The generic drug maker also acquired Allegan’s U.S. generic distribution business Anda, Inc. in Oct 2016.

Segment Discussion

Beginning in the fourth quarter of 2016, Teva revised its segment structure following the Actavis acquisition. The Generics segment now includes revenues from the OTC business.

Generic Medicines segment revenues rose 24% to $3.06 billion, mainly due to the inclusion of revenues from the Actavis generics business.

Revenues from the U.S. generics business rose 41% to $1.4 billion due to the inclusion of revenues from the generic business of Actavis.

European generic revenues were $988 million, up 25% (31% in local currency) from the year-ago period. This was due to the inclusion of revenues from the generic business of Actavis.

Rest of the world (ROW) generic revenues were flat at $689 million in the quarter. On a local currency basis, sales rose 27% boosted by Teva’s new Japanese business venture with Takeda, which began operations in April last year and the inclusion of revenues from Actavis.

API revenues were flat at $197 million. OTC revenues declined 10% to $264 million (up 25% in local currency terms).

At the call, the company said that the U.S. generic industry is facing challenges owing to an increase in generic drug approvals by the FDA resulting in competitive pressure and ongoing consolidation of key customers. The company informed that net price erosion in the U.S. generics business was 7% in the quarter.

Specialty Medicines revenues declined 6% from the year-ago period to $2.02 billion due to lower sales of its central nervous system (CNS) and respiratory products.

Among Teva’s various therapeutic areas, CNS sales declined 14% to $1.14 billion due to lower sales of multiple sclerosis drug Copaxone, Teva’s lead branded product.

Sales of respiratory products declined 17% to $304 million, oncology product sales rose 1% to $270 million, and women’s health business recorded a 13% increase in revenues to $124 million. Other specialty revenues rose 116% to $184 million.

Worldwide revenues of Copaxone declined 4% to $970 million. Sales in the U.S. declined 5% to $782 million as the 7.9% price increase taken in January was offset by lower volumes of the 20 mg formulation, which has started facing generic competition. In Jun 2015, Novartis AG’s (NVS - Free Report) generic arm, Sandoz launched Glatopa, a once-daily generic version of 20 mg formulation of Copaxone.

Ex-U.S. sales of Copaxone rose 2% to $188 million due to higher volumes.

The 40 mg thrice-weekly (3TW - three times a week) formulation of Copaxone accounted for 85% of total Copaxone scrips in the U.S. at the end of the reported quarter, higher than 84% in the previous quarter. We note that Teva is facing patent challenges for the 40 mg formulation.

Companies like Mylan N.V. (MYL - Free Report) and Momenta Pharmaceuticals are looking to get approval for their generic versions of the 40-mg thrice-weekly formulation of Copaxone. In late January, Teva suffered a major setback with the U.S. District Court for the District of Delaware invalidating four of the five Orange Book patents protecting Copaxone 40 mg. Teva intends to appeal against the decision. However, generic versions of the 40 mg formulation have not been launched yet. The FDA approval of Momenta’s generic version of Copaxone has been delayed owing to manufacturing issues.

Among other products, Azilect sales declined 47% to $60 million as a generic version of the drug was launched in the U.S.  in January this year.

Nuvigil plunged 83% to $17 million due to loss of exclusivity. ProAir declined 30% to $121 million, Treanda and Bendeka rose 1% to $157 million and QVAR declined 27% to $98 million.

The Other segment (distribution and other activities) recorded revenues of $552 million, up 176%. The segment mainly gained from the inclusion of distribution revenues from Anda.

Profits Decline

Adjusted gross margin contracted 590 basis points (bps) to 56.8% in the quarter due to the addition of the low-margin Anda distribution business. Gross margin declined in both the Specialty and Generics segments. Research & development expenses increased 17.5% from the year-ago period to $457 million. Selling and marketing (S&M) expenditure was up 10.5% from the year-ago level to $907 million. Adjusted operating margin (excluding equity compensation expense) declined 290 bps in the quarter to 28.8%.

Maintains 2017 Outlook

Teva maintained its 2017 sales and earnings guidance issued previously. Teva expects revenues in the range of $23.8–$24.5 billion and earnings in the band of $4.90–$5.30 per share in 2017.

Teva expects continued sales erosion for Copaxone in 2017 due to increased competition. Challenges in the U.S Generics market and greater instability in the Venezuela market will also put pressure on the top line.

Our Take

Teva’s first-quarter earnings and sales were soft and it reiterated its 2017 guidance.

Once again, sales and profits in the first quarter were driven by inorganic growth related mostly to the Actavis acquisition and the joint venture with Takeda in Japan. The core business fails to witness any real growth as the U.S. generics industry continues to face significant competitive and pricing pressure.

Encouragingly, Teva said it expects to realize cost savings of approximately $1.5 billion by the end of 2017, an increase of $200 million from previous expectations. It paid down debt worth $1.2 billion during the quarter from $35.8 billion at year-end 2016 to $34.6 billion at the end of the first quarter.

Meanwhile, the company also said it will sell certain non-core assets, including the global women’s health business and the European oncology and pain divisions to cut debt. Shares rose more than 2% on Thursday. However, Teva’s shares have lost 11.7% so far this year compared with the Zacks classified Generic Drugs industry’s decline of 4.9%.

Teva continues to progress with its branded and generics drugs pipeline and is looking to strengthen its biosimilar pipeline. We are encouraged by the recent approval and launch of Austedo for the treatment of Huntington's disease.

However, headwinds remain in the form of generic competition for Copaxone, new competition for branded products, generic pricing and competitive pressure, a higher cost base and debt level and the sudden departure of its chief executive officer (CEO).  Teva continues to search for a permanent CEO, which remains the company’s “highest priority”.

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

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