Teva: Q2 highlights and key takeaways

Teva's Q2 earnings were all about pricing pressure on generics, and conveyed the message that Actavis- now Allergan- got rid of ticking time bomb when Teva bought up its generics business last year. Teva's share price hit 10-year lows as the company outlined slashed dividends, increasing debt, and layoffs and closures as it seeks to right the ship without a permanent CEO at the helm, – See ViewPoints: Allergan putting its money where its mouth is on moving upstream

Going, going, gone…

The company cited pressure on generic pricing- driven by the consolidation of US buyers into group purchasing organisations (GPOs)- for falling profits from its generics business. The company took a $6.1- billion impairment charge for the segment, which Interim CEO Yitzhak Peterburg said "reflects our revised outlook for the business given the trends we are seeing in the market." Peterburg added that the FDA's prioritisation of generic approvals was also bringing in competition, "further increasing price erosion and decreasing volume and negatively impacting our overall business performance and outlook for the remainder of the year." –See ViewPoints: Will the FDA's push to speed through generic applications be enough to keep prices down?

On the investor call, several analysts questioned precisely when Teva might hit the bottom of generics market, and how management was confident the business could remain profitable. Dipankar Bhattacharjee, president of Teva's generics group, cited the complex components of the pipeline it acquired from Actavis, including sterile injectables and hard-to-manufacture products, as the value drivers for its generic business. "We believe that the value that we will see out of these products will be far more durable than some of the blockbusters that we have seen in the past," he said.

Bhattacharjee added we expect an eventual "degree of stabilisation" in pricing, while the price cuts the company accepts from GPOs allow it secure additional business overall.

Analysts also queried management on the potential for breaking up the business, while being simultaneously sceptical of the company's ability to do so while carrying $35.1 billion in debt. Management were evasive on the issue, but chairman Sol Barer noted "we continually evaluate what the best things are for our shareholders," while it is "focusing on our business and financial priorities very aggressively right now."

Guidance cut

Incorporating the poor performance from its generics business, Teva slashed its 2017 guidances, shifting its top end revenues projections down $1 billion to $22.8 billion. Guidance for operating income was lowered by up to $1.2 billion, and the top end estimates for earnings per share (EPS) came down $0.80 to $4.50. In an effort to stem the tide of revenue loss, the company said it will also cut 7 000 jobs- 2 000 more positions than originally planned- close 6 plants, and exit 45 markets globally. It also slashed shareholder dividends, cutting them by 75 percent- or about $260 million per quarter.

Adding fuel to the fire, interim CFO Mike McClellan hinted towards Teva not being able to meet some of its loan obligations, saying that "if we have lower cash flow in the remainder of the year, for example, if we have lower proceeds from the potential divestments or we have a crossover into the early 2018, we may face a risk in breaching these covenants, which will require us to renegotiate and amend the prospective financial covenants with our debtors." The company has $35.1 billion in debt on the balance sheet, up from $34.6 billion last quarter.

Copaxone

Peterburg emphasised on an investor call that non-US generics business was performing well, despite US Copaxone revenue falling 12 percent year-over-year. The company again cited pricing pressure, as well as market entry of generic 20 mg Copaxone as drivers of the loss.

The company's updated revenue guidance hinges on having no generic competition for its protected 40 mg Copaxone formulation before 2018; should there be entrants on the market before then, Peterburg said to expect a further $0.20 to $0.25 impact on EPS.

Help wanted

The huge losses do not bode well for the company's CEO search, which has now stretched into six months. AstraZeneca CEO Pascal Soriot was rumoured last month to be taking the job, but he confirmed last week that he is "committed to continuing our journey" at the pharma, despite uncertainty surrounding its recent MYSTIC miss. According to the Financial Times, Jacqualyn Fouse has also turned down Teva's top spot, fresh off her retirement from Celgene as president and chief operating officer. - See AstraZeneca: Q2 highlights and key takeaways

Management didn't share any new details on the search, saying it "will not compromise on quality and on finding the best individual possible to lead Teva." The extra help will be needed, as Teva ended August 3 with a 24 percent loss.

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