Teva (TEVA) Q2 Earnings Top, Stock Up Despite Coronavirus Woes

Teva Pharmaceutical Industries Limited TEVA reported second-quarter 2020 earnings of 55 cents per share, which beat the Zacks Consensus Estimate of 51 cents. Earnings however declined 8.3% year over year due to lower operating profit.

Revenues of the generic drugmaker came in at $3.87 billion, which missed the consensus estimate of $3.92 billion. Sales declined 7% on a reported basis and 5% in constant currency terms year over year due to lower sales of generics, OTC products and Copaxone in all regions.

The coronavirus-related stockpiling benefits, which increased sales of several medicines mainly generics and OTC products in the first quarter due to unusually high demand, reversed in the second quarter and hurt sales, mainly in Europe and International Markets segments.

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 $2.05 billion, down 1% year over year due to lower sales of branded drugs, Copaxone and Bendeka/Treanda and generic products. In the United States, sales were flat at $1.93 billion.

Copaxone posted sales of $238 million in North America, down 13% year over year due to generic erosion. Combined sales of Bendeka and Treanda declined 18% to $103 million due to competitive pressure. The launch of a competing bendamustine solution called Belrapzo by Eagle Pharmaceuticals EGRX in June 2019 has been hurting sales of Bendeka/Treanda.

ProAir sales were flat at $66 million. Qvar sales were $51 million in the quarter, down 15% due to lower volume and increased competition.

Austedo, a new drug approved to treat chorea associated with Huntington’s disease and tardive dyskinesia, recorded sales of $161 million in the quarter in North America compared with $122 million in the previous quarter driven by higher volumes.

Ajovy, Teva’s new migraine treatment, recorded sales of $34 million in the quarter compared with $29 million in the previous quarter. The sales increase was led by higher volumes and the launch of Teva’s auto injector device for Ajovy in April. Teva said that since the launch of the autoinjector, Ajovy’s new prescription share has continued to grow significantly per month and per week. The company now is confident that the autoinjector will boost its total market share to 25%.

Generic products revenues declined 2% at $923 million in the North America segment as higher sales from the launch of generic products including Truxima (Teva’s biosimilar to Roche’s [RHHBY] Rituxan) and ProAir authorized generic were offset by lower volume and lower royalty income. Moreover, sales of Teva’s generic equivalents of Mylan’s MYL EpiPen and EpiPen Jr, launched last year, also supported sales growth of generic products.

Distribution revenues, generated by Anda, rose 7% in the quarter to $374 million as COVID-19 pandemic resulted in higher volumes in the quarter.

The Europe segment recorded revenues of $1.0 billion, down 15% (down 13% in constant currency terms) year over year due to reversal of stockpiling benefits and fewer patient visits to doctors amid the pandemic, which hurt prescription trends. Meanwhile, lower sales of Copaxone and oncology products due to generic competition also hurt sales.

In the International Markets segment, sales declined 16% (down 9% in constant currency terms) to $488 million due to lower sales in Japan and the negative effect of the COVID-19 pandemic., as discussed above. Meanwhile, loss of revenues from the sale of certain assets in the Israeli market also hurt this segment’s sales.

The Other segment (API manufacturing business and certain contract manufacturing services) recorded revenues of $335 million, down 1% year over year, in constant currency terms.

Costs & Profits Decline

Adjusted gross margin declined 40 basis points (bps) to 52% in the quarter. Adjusted research & development expenses declined 14% year over year to $233 million due to pipeline optimization as well as lower costs due to the pandemic. Selling and marketing (S&M) expenditure declined 10% from the year-ago level to $559 million due to cost-cutting activities and lower marketing and travel costs due to COVID-19 related travel restrictions. General and administrative (G&A) expenses rose 14.3% year over year to $245 million. Adjusted operating income declined 3% in the quarter to $979 million. However, adjusted operating margin rose 110 basis points to 25.3% in the quarter due to lower costs.

2020 Guidance

Teva maintained its previously issued guidance for 2020. It expects revenues to be in the range of $16.6-$17.0 billion. Earnings are expected in the band of $2.30-2.55 per share. Free cash flow is expected in the range of $1.8-$2.2 billion.

Our Take

Teva’s second-quarter results were mixed as it beat estimates for earnings but missed the same for sales. Despite the sales miss and uncertainty related to COVID-19, the company maintained its outlook, which probably pushed its stock up more than 7% on Wednesday. Teva chief operating officer said that the company expects strong growth of its new products despite the challenges of COVID-19. Teva’s share price has risen 29.1% this year so far against the industry’s decrease of 3.9%.

 

 

Teva faces challenges in the form of generic erosion of Copaxone, new competition for branded products, pricing erosion in the U.S. generics business, currency headwinds and a massive debt load. Nonetheless, 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.

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, Consensus and EPS Surprise

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

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