Teva Pharmaceutical (TEVA - Free Report) reported another disappointing quarter last week. Its fourth-quarter earnings declined 32% year over year, while sales were down 16%.
The Israel-based company’s product sales in 2017 were hurt by increased pricing erosion, volume declines in the U.S. Generics unit and rapid erosion in sales of Copaxone -- Teva’s blockbuster multiple sclerosis injection -- in the Specialty segment. Mylan’s (MYL - Free Report) earlier-than-expected launch of the first generic version of the 40-mg strength of Copaxone was a major setback for Teva. The company is also bogged down by new competition for branded products and huge debt burden of over $32 billion.
On the fourth-quarter call, Teva provided a weak guidance for 2018 wherein it expects sales and profits to decline further this year.
Teva expects revenues in the range of $18.3 - $18.8 billion while earnings are expected in the band of $2.25–$2.50 per share in 2018. The numbers fell below investors’ expectations.
However, Teva has undertaken strategic restructuring efforts including the divestiture of some non-core assets,closure of plants, trimming of its generics portfolio, termination of low-value R&D projects, and plans to reduce its workforce by more than a quarter over the next two years.
Although the company expects to save almost $3 billion by the end of 2019 from these restructuring initiatives, a clear path to growth is not visible as it faces erosion of its largest product, Copaxone. Other than that, loss of sales due to divestures and pricing pressure in the U.S. generic business will continue to hurt the top line in 2018.
In fact, price erosion and several other challenges cast a shadow over the whole generic drug industry.
Generic Drug Industry in Doldrums
Generic Drugs has a Zacks Industry Rank #176 (bottom 34% of the 250 plus Zacks industries). The industry has declined 32.6% in the past year, underperforming an increase of 2.4% for the broader drugs industry and 14.6% for the S&P 500.
The generics industry in the United States faced significant competitive and pricing pressure in 2017 and the trend is expected to continue in 2018. Moreover, customers in the industry are consolidating thereby increasing the scope for negotiating lower prices for generic drugs. This is leading to increasing price erosion and decreasing volume.
A sharp decline in generic drug prices is proving to be a major challenge for generic drugmakers as well as drug distributors. Moreover, the FDA is speeding up the approval of generic drugs, which means more competition, increasing price cuts and decreasing volume.
3 Stocks to Dump
With generic pricing erosion expected to continue this year, we recommend investors to dump three companies in this industry, including Teva.
Teva has a Zacks Rank #4 (Sell).
Following its unimpressive fourth-quarter results and trimmed view for 2018, the Zacks Consensus Estimate for 2018 earnings declined from $2.93 to $2.91 over the last seven days. Teva has lost 43.4% of its value in the past year.
Dr. Reddy's Laboratories (RDY - Free Report)
This India-based generic drugmaker has a Zacks Rank #5 (Strong Sell). Like its larger peers, Dr Reddy’s also suffers from drug price erosion, fierce competitive pressure and lower contribution from product launches in the United States. In addition, the implementation of general sales tax ("GST") in India is also hurting its top line to an extent.
However, the company has launched several generics of various drugs including Sanofi’s billion dollar drug, Renvela. These launches may have a favorable impact as the company’s generics sales have registered sequential growth in the quarter ending December 2017.
Dr Reddy’s earnings estimates for 2018 have declined almost 6.1% over the past 60 days. The stock has declined 22.6% in the past year.
Teligent (TLGT - Free Report)
Teligent is a small pharmaceutical company with 21 generic and four branded products in its portfolio. The company has also suffered due to the generic market headwinds. Moreover, product launches have not been able to make up for the loss due to pricing pressure for the company’s two leading products.
Per the Zacks Consensus Estimate, sales and earnings are expected to decline 24.5% and 1200%, respectively, in the fourth quarter of 2017. Teligent also carries a Zacks Rank #4. Shares of the company have tumbled 58.5% in the past year.
Generic companies at large are seeing declining sales and profits due to price erosion. However, there are a few exceptions, Mylan being one of them. Though Mylan stock declined in the first half of 2017, shares rebounded from August 2017, outperforming the industry. The stock has gained 4.2% since August.
Mylan has a Zacks Rank #3 (Hold). Its earnings estimates for 2018 have risen 1.1% over the past 90 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Mylan’s turnaround was driven by launch of generic versions of several drugs including blockbuster drugs, Novartis’ (NVS - Free Report) Gleevec and Teva’s Copaxone, in the second half of 2017. Moreover, the U.S. Patent and Trademark Appeal Board instituted inter partes review proceedings ontwo patents related to Sanofi’s Lantus. A favorable ruling will boost Mylan’s prospect as Lantus is a blockbuster drug with sales over $4 billion in the first nine months of 2017. The potential launch of a generic version by Mylan will significantly boost its top line.
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