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Teva (TEVA) Q3 Earnings Beat, 2018 EPS View Up, Shares Rise

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Teva Pharmaceutical Industries Limited (TEVA - Free Report) reported third-quarter 2018 earnings of 68 cents per share, which beat the Zacks Consensus Estimate of 55 cents per share. However, earnings per share declined 32% year over year.

Revenues came in at $4.53 billion, which missed consensus estimates of $4.58 billion. Sales declined 19% (down 18% in constant currency terms) year over year.

Sales continue to be hurt by rapid erosion in sales of Teva’s key multiple sclerosis injection, Copaxone, pricing erosion in the U.S. generics market, divestiture of some non-core assets, and discontinued business activities. Additional competition for Teva’s largest product, Concerta authorized generic also hurt sales in the quarter.

Also, negative currency impact due to the strengthening of the dollar hurt sales and earnings in the quarter.

Segment Discussion

As announced in November last year, Teva no longer reports two separate global groups for its two businesses — generics and specialty medicines. Instead, it reports under new segments based on three regions — North America (United States and Canada), Europe and International Markets.

North America segment sales were $2.27 billion, down 26% year over year due to pricing erosion in U.S. generics market, lower sales of Copaxone as well as some other branded drugs and divestiture of some non-core assets in the Women’s Health business. In the United States, revenues declined 27% to $2.1 billion.

Copaxone posted sales of $463 million in North America, down 43% year over year due to generic competition for the 20 mg as well as the 40 mg formulation. In the United States, Copaxone recorded sales of $446 million.

Sales of other branded products Bendeka, Treanda, ProAir and Qvar all declined in the quarter.

The newest product in Teva’s branded portfolio, Austedo, recorded sales of $62 million in the quarter in North America compared with $44 million in the previous quarter. Teva expects Austedo to record $200 million in revenues in 2018.

In September, Teva gained FDA approval and immediately launched its anti-calcitonin gene-related peptide (“CGRP”) injection, Ajovy (fremanezumab) as a preventive treatment for migraine. Teva said it is seeing signs of a strong launch for Ajovy. An approval in Europe is expected in the first half of 2019.

Please note that Amgen (AMGN - Free Report) and Lilly’s (LLY - Free Report) CGRPs, Aimovig and Emgality were also approved this year.

Generic products revenues declined 25% to $922 million in the quarter due to price erosion in the U.S business and increased competition for Concerta authorized generic.

However, on the call, the company said it is seeing signs of stabilization in U.S. generic drug pricing. The company also said that the rate of sales erosion in the North American Generic business slowed significantly in the third quarter from second-quarter levels due to optimization of its generics product portfolio as well as product launches. Teva, currently, commands 14% share of the U.S. generic market.

Distribution revenues, which are generated by Anda, acquired from Allergan (AGN - Free Report) in 2016, rose 13% in the quarter to $333 million.

The Europe segment recorded revenues of $1.21 billion, down 12% (down 11% in constant currency terms) year over year due to loss of revenues from the closure of a distribution business in Hungary, divestiture of the women’s health business and lower Copaxone revenues, which offset the positive impact of generic launches.

Generic products (including OTC products) revenues in Europe declined 3% (1% on a constant currency basis) to $845 million due to lost revenues as a result of the termination of partnership with P&G - PGT Healthcare- in July and price reductions

Copaxone sales declined 16% on a constant currency basis to $124 million due to price reductions, following the entry of generics.

Respiratory products sales in Europe segment rose 3% (up 4% on a constant currency basis) to $93 million mainly due to the launch of Braltus in 2017.

In the International Markets segment, sales declined 18% year over year to $726 million. However, in constant currency terms, sales declined 12% in this segment due to lower sales in Japan and Russia, the effect of the deconsolidation of subsidiaries in Venezuela and loss of revenues from the sale of the women’s health business in these countries.

Generic products (including OTC) revenues declined 15% in constant currency terms to $498 million. Copaxone sales declined 2% to $14 million. Distribution revenues increased 4% in constant currency terms to $149 million in the quarter

The Other segment (API manufacturing business and certain contract manufacturing services) recorded revenues of $326 million, up 7% year over year, in constant currency terms due to improved API sales to third parties.

Profits Decline

Adjusted gross margin contracted 220 basis points (bps) to 50.9% in the quarter due to price impacts on Copaxone and Generics in the United States. However, gross margins slightly improved on a sequential basis.

Adjusted research & development expenses declined 33.8% from the year-ago period to $243 million due to pipeline optimization, concluded phase III studies and resultant workforce reductions. Selling and marketing (S&M) expenditure declined 14% from the year-ago level to $678 million due to cost cutting and re-structuring activities. Adjusted operating margin declined 180 bps to 24.4% in the quarter despite lower costs.

2018 Earnings Outlook Upped

Teva slightly raised the lower end of its full-year sales guidance. However, it significantly raised its earnings guidance, following solid third-quarter results and accelerated cost savings. The company also upped its free cash flow guidance.

The revenue guidance was tightened from a range of $18.5 - $19.0 billion to $18.6 - $19.0 billion. Meanwhile, the earnings guidance was raised from a band of $2.55-2.80 per share to $2.80-2.95 per share. Free cash flow guidance was raised to $3.6-3.8 billion from $3.2-3.4 billion.

Our Take

Teva’s third-quarter results were mixed as it beat expectations for earnings but missed the same for sales. However, the stock rose more than 15% in pre-market trading on Thursday, as the company raised its earnings guidance significantly, which probably increased investors’ hope of a possible turnaround. Importantly, the world’s largest generic drugmaker’s comments about stabilization of its U.S. generics business was a boost.

Teva’s shares have risen 21.4% this year so far against the industry’s decrease of 11.1%.



Teva is facing significant challenges in the form of accelerated generic competition for Copaxone, new competition for branded products, pricing erosion in the U.S. generics business and a massive debt load stemming from its 2016 acquisition of Allergan’s generics business.

However, Teva has a new organizational structure in place, is closing plants, cutting down its generics portfolio, divesting non-core assets, eliminating low-value R&D projects, and is reducing global workforce to revive growth. Teva is on track to meet its goal to save $3 billion by the end of 2019 from these initiatives with $1.8 billion already achieved in 2018 so far.

Its financial position seems more stable than before as it is regularly paying down debt. Its newest drugs, Austedo and Ajovy, could emerge as significant contributors to long-term sales growth.

Currently, Teva has 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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