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Teva (TEVA) to Report Q4 Earnings: What's in the Cards?

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Teva Pharmaceutical Industries Ltd. (TEVA - Free Report) will report fourth quarter and full year earnings on Feb 13, before market open. In the last reported quarter, the company delivered a positive earnings surprise of 23.64%.

This generic drugmaker’s shares have declined 1.4% this year so far compared with the industry’s decline of 14.2%.

 

Teva’s earnings surpassed expectations in all the last four quarters, with the average positive surprise being 23.28%.

 

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

Factors to Consider

Teva reports under two segments — North America (United States and Canada), Europe and International Markets.

Pricing erosion in U.S. generics market, lower sales of key multiple sclerosis drug, Copaxone and divestiture of some non-core assets in the Women’s Health business are expected to hurt North America segment sales in the fourth quarter. On the third-quarter call, management had said that despite generic competition for the 20 mg as well as the 40 mg formulation, Copaxone maintained its market share in the United States. Copaxone sales in the quarter were better than management expectations as pricing pressure on the 40 mg dose was less than forecast. It remains to be seen if the positive trend continues in the fourth quarter.

Importantly, sales of all other branded products Bendeka, Treanda, ProAir and Qvar declined in the past two quarters. The chances of sales trends improving in the fourth quarter are minimal.

Meanwhile, additional competition for Teva’s largest product, Concerta authorized generic, will also hurt generics sales in the quarter. Importantly, on the third quarter 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. The positive trend is expected to continue in the fourth quarter. Important generic launches in the third quarter were that of Mylan’s (MYL - Free Report) EpiPen (epinephrine) auto-injector for severe allergy treatment and Lilly’s (LLY - Free Report) erectile dysfunction drug Cialis.

Importantly, on the call, investors will be keen to know the initial launch update of Teva’s newly launched anti-calcitonin gene-related peptide (“CGRP”) drug, Ajovy (fremanezumab) injection, as a preventive treatment for migraine. Investors will also be interested to know how management plans to capture market share for Ajovy against Amgen and Lilly’s CGRPs, which were also launched last year.

Meanwhile, in Europe as well as International Markets, loss of revenues from the divestiture of the women’s health business and discontinued business activities are likely to hurt sales. The decline in sales of generic medicines and Copaxone is expected to continue, which can offset the positive impact of generic launches. The currency tailwind that this segment enjoyed in the first half reversed in the third quarter, which hurt revenues. Currency is expected to remain a headwind in the fourth quarter as well.

Cost savings from Teva’s aggressive restructuring initiatives are likely to provide some support to the bottom line. 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 significantly cutting its global workforce. Teva expects to save almost $3 billion by the end of 2019 from these initiatives. 

However, marketing costs are expected to be higher in the fourth quarter due to investments to support Ajovy’s launch.

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.

Earnings ESP: Its Earnings ESP is -0.45%. The Zacks Consensus Estimate is pegged at 56 cents per share. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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

We caution against stocks with a Zacks Rank #4 (Sell) or #5 (Strong Sell) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

A generic drugmaker, which has the right combination of elements to beat on earnings this time around is Mallinckrodt Public Ltd. Company (MNK - Free Report) . Mallinckrodt is slated to announce financial figures on Feb 26. The company has an Earnings ESP of +2.25% and is a Zacks #2 Ranked stock. You can see the complete list of today’s Zacks #1 Rank stocks here.

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