Teva Pharmaceutical Industries Ltd. Slashes Full-Year Outlook After Disappointing Second Quarter

8/4/17

By Keith Speights, MotleyFool

Buying the Actavis Generics business from Allergan (NYSE:AGN) made the difference for Teva Pharmaceutical Industries Ltd. (NYSE:TEVA) when it reported first-quarter results in May. That deal boosted Teva's revenue and earnings.

Teva announced its second-quarter results before the market opened on Thursday. This time around, however, the carryover effect from the Actavis Generics acquisition wasn't enough to give investors what they wanted. Here are the highlights from Teva's quarterly update.

Dollar symbol made up of different kinds of pills

IMAGE SOURCE: GETTY IMAGES.

Teva results: The raw numbers

Metric

Q2 2017

Q2 2016

Year-Over-Year Change

Sales $5.7 billion $5 billion12.8%
Net income from continuing operations ($6 billion) $188 millionN/A
Adjusted EPS $1.02 $1.25(18.4%)

DATA SOURCE: TEVA.

What happened with Teva this quarter?

Teva's revenue was in the ballpark of what investors expected. However, that increase was nearly all due to the addition of the Actavis Generics business. Without that deal, Teva's revenue would have dropped significantly in the second quarter.

Two factors particularly hurt Teva in the second quarter. The first was weakness with its U.S. generics business. Teva faces considerable price erosion and decreased volume for many of its generic products due in large part to consolidation of major customers, more competition, and delays for some new product launches.

The second big issue for Teva is deterioriation in the Venezuelan market. The South American country is in the midst of a major crisis with political instability in the midst of a severe economic recession.

Teva's specialty business also encountered some headwinds in the second quarter. Revenue from the specialty segment fell 9% year over year to $2.1 billion. Sales for multiple sclerosis drug Copaxone, Teva's top-selling product, dropped 10% from the prior-year period to just over $1 billion. That decline came despite Teva hiking prices for the drug by nearly 8% earlier this year.

Most of Teva's other major specialty drugs also saw year-over-year sales declines. There were a few bright spots, though, including the launches of new respiratory drugs Braltus and Cinqair/Cinqaero.

All of these problems contributed to Teva's cash flow in the second quarter falling to $741 million versus $963 million in the prior-year period. The company's debt also rose to $35.1 billion from $34.6 billion at the end of the first quarter.

What management had to say

Teva interim president and CEO Yitzhak Peterburg acknowledged the disappointing second-quarter results in his comments. Peterburg said, "All of us at Teva understand the frustration and disappointment of our shareholders in light of these results."

He added, "Given the current environment, we have had to take swift and decisive actions. We are focused on executing meaningful cost reductions, rationalizing our assets and maximizing their value, actively pursuing divestiture opportunities and strengthening our balance sheet. We will continue to take action to aggressively confront our challenges."

Looking forward

The laundry list of challenges for Teva led the company to lower its outlook for full-year 2017. Teva now projects revenue between $22.8 billion and $23.2 billion, down from the previous guidance range of $23.8 billion to $24.5 billion.The company expects full-year earnings per share between $4.30 and $4.50. Teva previously projected 2017 earnings per share of $4.90 to $5.30.

Is there any good news for investors? Yes. Teva had positive late-stage results from a clinical study of experimental migraine drug fremanuzemab. The company launched Austedo in treating Huntington disease and hopes to win approval for another indication with tardive dyskinesia. Teva also awaits FDA approval of its biosimilars to blockbuster cancer drugs Rituxan and Herceptin.

Still, the hurdles for the company remain high. A turnaround for Copaxone doesn't appear to be in sight. The situation in Venezuela isn't getting better so far. And the dynamics causing problems for Teva in the U.S. generics market won't change anytime soon.

Teva's cash flow remains significant even with the year-over-year decline. This should keep the dividends flowing and give the company some breathing room to turn things around. However, investors shouldn't expect that turnaround to happen quickly.

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