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Is a Surprise in the Cards for Teva (TEVA) in Q2 Earnings?

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Teva Pharmaceutical Industries Ltd. (TEVA - Free Report) will be reporting second-quarter 2017 earnings on Aug 3, before the market opens. Last quarter, the company delivered in-line earnings.

This generic drug maker’s shares have lost 10.8% so far this year, while the industry witnessed an increase of 0.3%.

Teva’s earnings have surpassed expectations in two of the last four quarters and met the same in the remaining two, delivering an average positive surprise of 2.24%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

We believe that the inclusion of sales from Actavis Generics acquisition may continue to pull up Teva’s sales.

However, its generic segment may continue seeing weakness. The segment will remain under pressure due to pricing erosion as well as competitive pressure.

Meanwhile, in the Specialty segment, loss of exclusivity of key drugs like Copaxone, Azilect and Nuvigil will hurt sales. Sales of blockbuster multiple sclerosis (MS) treatment Copaxone are likely to erode due to increased competition. Glatopa, a generic version of Copaxone 20 mg, entered the market in Jun 2015.

Teva is also facing patent challenges for the 40 mg thrice-weekly formulation of Copaxone. Companies like Mylan N.V. (MYL - Free Report) and Momenta are looking to get approval for their generic versions of the 40-mg thrice-weekly formulation of Copaxone. Teva suffered a major setback in Jan 2017 with the U.S. District Court for the District of Delaware invalidating four out of five Orange Book patents for Copaxone 40 mg. Teva intends to appeal against the decision. There is uncertainty regarding the timing of the generic launch of Copaxone 40mg. It is possible that certain competitors may receive FDA approval and launch before the appeal decision is out.

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.

At the first quarter call, the company had mentioned that earnings growth will be weighted toward the second half as the company expects the majority of the US generic launches to occur only in the second half of 2017. This implies that profits in the second quarter may not improve much from the weakness seen in the first quarter.

Nonetheless, Teva’s focus on its cost reduction program may give its profits a boost.

In April, Teva announced FDA approval of Austedo (SD-809) for the treatment of chorea associated with Huntington disease (HD). We expect management to update on the commercialization plans for the same.

Teva also continues to search for a permanent CEO, which remains the company’s “highest priority”. At the first quarter call, chairman Sol Barer had said that the company is looking for a top-notch CEO with “deep and broad pharmaceutical experience”. We expect an update on the CEO search at the upcoming conference call.

Earnings Whispers

Our proven model does not conclusively show that Teva is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: Its Earnings ESP is 0.00% as both the Most Accurate estimate as well as the Zacks Consensus Estimate stand at $1.06 per share. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Teva’sZacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings beat.

Sell-rated stocks (Zacks Rank #4 or 5), on the other hand, should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Some stocks in the generics drug sector that have both a positive Earnings ESP and a favorable Zacks Rank are:

Mallinckrodt Public Limited Company (MNK - Free Report) is scheduled to release results on Aug 8. The company has an Earnings ESP of +0.58% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Impax Laboratories, Inc. is scheduled to release results on Aug 9. The company has an Earnings ESP of +7.14% and a Zacks Rank #3.

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