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Teva (TEVA) Q4 Earnings In Line, Stock Up as Sales Stabilize

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Teva Pharmaceutical Industries Limited (TEVA - Free Report) reported fourth-quarter 2019 earnings of 62 cents per share, which came in line with the Zacks Consensus Estimate. Earnings per share rose 18% year over year due to higher operating profit, partially offset by higher tax.

Revenues came in at $4.47 billion, which beat the consensus estimate of $4.37 billion. Sales rose 1% (up 2% in constant currency terms) year over year as higher sales of respiratory products and new drug Austedo offset lower sales of Teva’s key multiple sclerosis injection, Copaxone due to generic erosion and sales decline in some international markets.

Segment Discussion

Teva reports through the following segments based on three regions — North America (United States and Canada), Europe and International Markets.

North America segment sales were $2.37 billion, up 6% year over year due to launch of Truxima, Teva’s biosimilar version of Roche’s (RHHBY - Free Report) Rituxan, in November 2019 and higher sales of Qvar and Austedo, which offset the impact of generic erosion of Copaxone.

Copaxone posted sales of $264 million in North America, down 26% year over year due to generic erosion.

Combined sales of Bendeka and Treanda declined 11% to $125 million due to lower volumes and price. The launch of a competing bendamustine solution by Eagle Pharmaceuticals (EGRX - Free Report) in June 2019 hurt volumes of Bendeka/Treanda.

ProAir sales rose 77% to $80 million due to higher sales reserves recorded in the year-ago quarter. Qvar sales were $67 million in the quarter, rising massively year over year due to higher price and volume.

Austedo, a new drug approved to treat chorea associated with Huntington’s disease and tardive dyskinesia, recorded sales of $136 million in the quarter in North America compared with $105 million in the previous quarter.

Ajovy, Teva’s new migraine treatment, recorded sales of $25 million in the quarter, same as the previous quarter. Teva said that Ajovy captured about 17% share of total prescription in the United States, less than 19% in the previous quarter. Management, in the past, had attributed the lower market share to preference of patients for auto injectors while Ajovy is available as a subcutaneous injection. Importantly, Teva’s auto injector device for Ajovy is now approved in the United States and EU and will be launched soon, which could re-ignite growth in 2020.

Generic products revenues rose 3% at $1.14 billion in the North America segment as additional sales from the launch of generic products including Truxima were offset by price and volume erosion due to competitive pressure.

Teva saw stabilization of the generic pricing environment in the United States as well as Europe, in 2019. In 2020, it expects both North America and Europe generics to be relatively stable compared to 2019, benefiting from generic launches.

Distribution revenues, generated by Anda, acquired from Allergan in 2016, rose 13% in the quarter to $412 million.

The Europe segment recorded revenues of $1.18 billion, down 2% year over year as higher sales due to generic launches were offset by lower Copaxone revenues. However, on a constant currency basis, sales rose 2%.

In the International Markets segment, sales declined 3% (same in constant currency terms) to $578 million due to lower sales in Japan and Israel. Sales, however, rose in Russia.

The Other segment (API manufacturing business and certain contract manufacturing services) recorded revenues of $332 million, down 11% year over year, in constant currency terms.

Costs Decline

Adjusted gross margin declined 210 basis points (bps) to 50.6% in the quarter. Adjusted research & development expenses declined 18% year over year to $237 million due to pipeline optimization. Selling and marketing (S&M) expenditure declined 13.4% from the year-ago level to $665 million due to cost cutting and re-structuring activities. General and administrative (G&A) expenses declined 6.4% year over year to $309 million. Adjusted operating income rose 12% in the quarter to $1.06 billion due to lower costs.

Full Year 2019 Results

In 2019, revenues were $16.9 billion, down 8% (down 5% in constant currency terms). Adjusted earnings were $2.40 per share, down 17.8%, year over year.

2020 Guidance

Teva expects revenues to be in the range of $16.6 - $17.0 billion. The Zacks Consensus Estimate stands at $17.11 billion. Earnings are expected in the band of $2.30-2.55 per share. The Zacks Consensus Estimate is pegged at $2.51 per share

In 2020, Teva expects global Copaxone sales of approximately $1.2 billion, $300 million lower than in 2019. While Austedo is expected to record sales of $650 million, Ajovy is expected to bring in $250 million in global sales.

Adjusted operating income is expected to be between $4.0 billion and $4.4 billion in 2020. Free cash flow was guided in the range of $1.8-$2.2 billion.

Our Take

Though Teva’s fourth-quarter earnings were in line, sales beat expectations. Teva’s revenues seem to have stabilized after declining for the past few quarters which probably led to a 9% increase in share price on Wednesday. Also, its sales guidance for 2020 was slightly better than expected

However, in the past year, Teva’s shares have declined 23.8% against the industry’s increase of 2.7%.

Teva faces challenges in the form of generic erosion of Copaxone, new competition for branded products, pricing erosion in the U.S. generics business and a massive debt load. Nonetheless, its two-year restructuring plan was successful, leading to $3 billion in cost savings by 2019.

Its newest drugs Austedo and Ajovy could emerge as significant drivers of long-term sales growth. With encouraging progress on restructuring activities, stabilization in U.S. and European generics business and improvement in financials, we believe the company may return to growth in 2020

Teva, however, is involved in an opioid litigation and faces DOJ investigations on allocations of price fixing, which are overhangs on its stock. Teva faces several lawsuits, which claim that it is one of the several companies whose opioid-based drugs were responsible for fueling nationwide opioid epidemic.

There is uncertainty related to the ultimate liability Teva could face in these litigations/investigations. The company may have to pay huge amounts to settle the opoid litigations. However, its chief executive officer, Kåre Schultz, said on the conference call that he is “cautiously optimistic” about the opioid litigation ending in a firm settlement.

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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