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Teva (TEVA) Q2 Earnings, Sales Top Estimates, CFO Steps Down

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Teva Pharmaceutical Industries Limited (TEVA - Free Report) reported second-quarter 2019 earnings of 60 cents per share, which beat the Zacks Consensus Estimate of 58 cents. Earnings per share however declined 23% year over year due to lower sales and operating income.

Adjusted earnings exclude provision for legal settlements mainly related to Teva’s opoid litigation, impairment of intangible assets and product rights and amortization charges.

Revenues came in at $4.34 billion, which beat the consensus estimate of $4.26 billion. Sales declined 8% (down 5% in constant currency terms) year over year.

Sales were hurt by rapid erosion in sales of Teva’s key multiple sclerosis injection, Copaxone, lower sales of other branded drugs, Bendeka/Treanda, and soft performance of markets like Europe and Japan. Also, negative currency impact due to the strengthening of the dollar hurt sales by $125 million and operating profits by $47 million in the quarter.

Segment Discussion

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 $2.07 billion, down 8% year over year due to lower sales of Copaxone as well as Bendeka/Treanda. In the United States, revenues declined 10% year over year to $1.93 billion.

Copaxone posted sales of $274 million in North America, down 41% year over year due to generic erosion. In 2019, Teva expects Copaxone U.S. revenues to be $800 million.

Combined sales of Bendeka and Treanda declined 28% to $115 million.

Qvar sales surged 103% to $60 million in the quarter. ProAir sales declined 44% year over year to $65 million due to the launch of generic version of the drug. Teva launched its own ProAir HFA authorized generic for select customers in January 2019 and these sales were included in Generics revenues.

Austedo, a new drug approved to treat chorea associated with Huntington’s disease and tardive dyskinesia, recorded sales of $96 million in the quarter in North America compared with $72 million in the previous quarter. Teva expects Austedo to record $350 million in revenues in 2019. Teva expects to achieve sales slightly above the guided range.

Teva’s newest drug is its anti-calcitonin gene-related peptide (“CGRP”) injection, Ajovy (fremanezumab), as a preventive treatment for migraine.

Ajovy recorded sales of $23 million in the quarter compared with $20 million in the first quarter. Teva said that Ajovy has captured about 20% share of total prescription in the United States. However, it saw a decline in new prescription share, which management said was due to preference of patients for auto injectors while Ajovy is available as a subcutaneous injection. On the call, the company said that it might fall slightly short of Ajovy’s sales outlook of $150 million in U.S. sales in 2019. Ajovy was approved in Europe in April this year and Teva said it has begun the launches in Europe.

Ajovy faces fierce competition from similar drugs, Amgen (AMGN - Free Report) and Lilly’s (LLY - Free Report) CGRPs, Aimovig and Emgality, respectively, which were also launched last year.

Generic products revenues were flat at $946 million in the quarter as additional sales from the launch of generic products made up for price erosion in the U.S business.

On the call, the company said that like the first quarter it is seeing stabilization of U.S. generics business helped by ongoing launches, portfolio optimization and strong key products.

Distribution revenues, which are generated by Anda, acquired from Allergan (AGN - Free Report) in 2016, rose 10% in the quarter to $351 million.

The Europe segment recorded revenues of $1.18 billion, down 11% (down 5% in constant currency terms) year over year due to lower sales of generics including OTC products and lower Copaxone revenues, which offset the positive impact of generic launches.

Generic products revenues in Europe declined 7% (down 1% on a constant currency basis) to $844 million due to loss of revenues as a result of the termination of partnership with P&G — PGT Healthcare — in July last year and lower volumes, partially offset by generic product launches. Volumes declined in Europe due to unfavorable market condition in various European countries.

Copaxone sales declined 19% on a constant currency basis to $107 million due to price reductions, following the entry of generics.

Respiratory products sales in Europe segment declined 11% on a constant currency basis to $89 million mainly due to lower sales in the United Kingdom.

In the International Markets segment, sales declined 6% (down 2% in constant currency terms) to $741 million due to lower sales in Japan, which were partially offset by higher sales in Russia. However, international market revenues were up 11% sequentially due to stronger performance of generics and a seasonal impact

Generic products revenues declined 4% in constant currency terms to $489 million. Copaxone sales declined 28% to $13 million. Distribution revenues increased 7% in constant currency terms to $164 million in the quarter

The Other segment (API manufacturing business and certain contract manufacturing services) recorded revenues of $342 million, up 10% year over year, in constant currency terms.

Profits Decline

Adjusted gross margin rose 80 basis points (bps) to 50.5% in the quarter. Adjusted research & development expenses declined 3.6% from the year-ago period to $271 million due to pipeline optimization and resultant workforce reductions. Selling and marketing (S&M) expenditure declined 2% from the year-ago level to $621 million due to cost cutting and re-structuring activities. General and administrative (G&A) expenses declined 2% year over year to $286 million. Adjusted operating income declined 18% in the quarter to $1.01 billion due to lower profits in North America segment as well as lack of other income.

2019 Outlook Maintained

Teva re-affirmed its previously issued guidance for sales and earnings in 2019. The company expects revenues to be in the range of $17 - $17.4 billion. Earnings are expected in the band of $2.20-2.50 per share. The earnings and sales guidance indicates a decline from 2018 levels.

Adjusted operating income is expected to be between $3.8 billion and $4.2 billion in 2019. Guidance for free cash flow was $1.6-$2.0 billion.

CFO Steps Down

Along with the earnings release, Teva announced that its executive vice president and chief financial officer (CFO), Michael (Mike) McClellan has decided to resign due to personal reasons, which require him to locate near his family. Teva has begun the search for its next CFO and McClellan is expected to remain with Teva till third-quarter results are announced to ensure a smooth transition.

Our Take

Teva’s second-quarter results were better-than-expected as it beat estimates for both earnings and sales, pushing the stock up almost 3.2% on Wednesday. Teva’s shares have fallen 52.7% this year so far compared with the industry’s decrease of 7.6%. Following a decent performance in the first half, the company retained its financial expectations for the year.

 

 

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.

However, Teva is progressing well on its restructuring plan to revive growth and is on track to meet its goal to save $3 billion by the end of 2019 from these initiatives with $2.7 billion already achieved since initiation of the restructuring plan in 2018. Its newest drugs, Austedo and Ajovy could emerge as significant contributors to long-term sales growth. Importantly, portfolio optimization and new launches have stabilized its North American generics business. It also has a more stable financial position than before. In July, Teva paid a debt of $1.6 billion.

However, we believe this is not enough and the company has a long way to go before it gains stability. Resumption of organic growth seems unlikely until 2020. Meanwhile, the opioid litigation and investigations for price fixing are overhangs on the stock.

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

Teva Pharmaceutical Industries Ltd. Price and Consensus

 

Teva Pharmaceutical Industries Ltd. Price and Consensus

Teva Pharmaceutical Industries Ltd. price-consensus-chart | Teva Pharmaceutical Industries Ltd. Quote

 

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