Teva reports 4Q earnings surprise; but 2017 guidance seen “through a glass darkly.”

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The News:

Teva Pharmaceutical Industries Ltd. (Petach Tikva ISR) reported Monday (February 13, 2017) that fourth-quarter sales surged 33% year-over-year to $6.5 billion, topping analysts’ estimates of $6.3 billion. The company noted that revenue was boosted by the purchase in August of the Actavis PLC (Dublin) generics business, which added $1.1 billion to sales in the three-month period.

@TevaPharm reports 4th-quarter sales surged 33% year-over-year to $6.5 billion Click To Tweet

Meanwhile, Teva posted a loss of $973 million in the quarter, down from a profit of $500 million in the same period of 2015, which the drugmaker explained was primarily due to an impairment of goodwill of $900 million related to the acquisition of Mexican drugmaker Rimsa.

According to FirstWord Pharma, interim CEO Yitzhak Peterburg remarked,

“2016 was a transitional year for Teva–one that included significant achievements, as well as challenges,”

Peterburg, who assumed the role of chief executive last week following the departure of Erez Vigodman, added

“with the entire Teva team, I am conducting a thorough review of the business to find additional opportunities to enhance value.”

In the fourth quarter, generics revenue for Teva surged 44% versus the year-ago period to $3.7 billion, which the drugmaker attributed in part to the Actavis transaction. Meanwhile, sales for the company’s specialty segment rose by 4% to $2.2 billion, boosted by higher revenue for certain specialty drugs and women’s health.

In the three-month period, revenue from the multiple sclerosis drug Copaxone improved by 6% to $1 billion. Last month, a US court invalidated a number of patents covering Teva’s thrice-weekly version of the therapy, which was cleared by the FDA in January 2014, based on obviousness. Teva noted that the thrice-weekly formulation accounted for over 84% of all Copaxone prescriptions in the US.

For the full year, Teva generated $21.9 billion in sales, an increase of 11% compared to 2015, while net income reached $329 million, down from $1.6 billion in the preceding year. For 2017, the drugmaker reaffirmed prior guidance that sales are expected to be between $23.8 billion and $24.5 billion, with earnings per share in the range of $4.90 to $5.30.

“In 2017, our main focus will be extracting synergies related to the Actavis generics transaction, driving additional efficiencies throughout the organization, supporting cash generation and paying down our debt to maintain a strong balance sheet and delivering on the promise of the specialty pipeline and key generic launches,” Peterburg stated, continuing “this is a critical time for Teva, and we are here to fix what is not working.”

Separately, according to people familiar with the matter, Teva is currently considering a sale of its branded generics drugs business as it works to reduce debt, Bloomberg reported.

Steve’s Take:

It’s all about the guidance. Is it too optimistic, or too dark?

On the brighter side, Teva said its strong increase in revenue the fourth quarter resulted largely from the acquisition of Actavis Generics from Allergan, completed in August. The acquisition drove the company’s generics revenue up an eye-popping 44% year-over-year to $3.7 billion.

On the other hand, sales for the company’s specialty and branded business grew far slower. Fourth-quarter revenue reached $2.2 billion–a 4% increase over the prior-year. Teva’s top-selling MS drug, Copaxone, rose a mere 6% year-over-year to $1 billion.

The Israeli Pharma powerhouse believes it will grow many OTC products in the Actavis Generics unit by a factor of two or three times in three years. Such unit targets over 80 opportunities. In 2017 alone, Teva will launch between 40-50 products. Management forecasts no delays in any of the planned launches.

No delays? Not even one out of 50? Come on.

So what did management have to say? Dr.Yitzhak Peterburg, interim president and CEO, said,

“2016 was a transitional year for Teva–one that included significant achievements, as well as challenges.” He added, “while we continue to manage through a turbulent and constantly evolving industry, we are committed to execute against our strategy with more diversified revenue sources and profit streams, all backed by strong product development engines in both generics and specialty.”

What about the future?

Teva reaffirmed its 2017 guidance. The company still expects revenue to be between $23.8 billion and $24.5 billion. Teva projected that adjusted earnings per share for 2017 will come in between $4.90 and $5.30.

The company continues to wobble from the aftermath of the abrupt resignation a week ago of CEO Erez Vigodman. His resignation followed another key departure in December of Siggi Olafsson, head of Teva’s global generic-medicine group.

Then there’s the recent legal bomb, as a US District Court invalidated several of the company’s key patents for Copaxone. If such ruling stands, Teva’s revenue could take a hit much sooner than expected as generic rivals to its number one drug flood the market. Meanwhile, Teva is appealing the decision.

Quite clearly from management’s remarks, Teva believes (hopes?) Competition for Copaxone will not have a negative impact on cash flow this year. The company plans to maintain its dividend which costs it $1.6 billion annually. The commitment to the dividend should entice at least income investors to continue holding the stock.

Those Teva shareholders who view the glass as half-full can enjoy at least a brief vacation from all the bad news emanating from the company’s fourth-quarter performance. The confirmation of its 2017 guidance might be reassuring to many. And investors will eagerly look forward to Teva’s announcement of a new CEO. Whoever the person is, they’ll have their hands full.

Then there’s the “through a glass darkly” crowd, which includes yours truly.

Many investors had assumed Teva’s guidance, already cut in January, would have to be cut again after the Copaxone patent decision, making generic competition far more likely. Then there’s the sudden departure of its CEO shortly thereafter. Why did he leave, many are asking. Mum’s the word from the company’s board and management. Not good.

The company now expects an earnings hit of between 75 cents and 95 cents per share, versus the 65-cent to 80-cent range it had previously forecast. That’s partially because Teva now thinks it will have to put more resources toward defending its long-acting MS med, not just against knockoffs, but against oral rivals, according to FiercePharma.

If forced to use a generic version of Copaxone 40 mg, the follow-up to Teva’s previous Copaxone formula, about 70% of patients and doctors would switch to an oral therapy instead, Rob Koremans, Teva’s CEO of Global specialty medicines, explained on the company’s fourth-quarter conference call.

If Teva wins its appeal in patent court, the spending will still have to continue. The company needs to “make sure that when successful in an appeal, actually there is a switchback” to its product, says Koremans.

Aspiring generics makers are expected to stage at-risk launches–essentially rollouts that come before patent fights are fully resolved–should they win FDA approval for their Copaxone 40 mg products. If Teva prevails in court, those companies would be liable for damages based on lost sales, and those could be substantial.

On the other hand, Teva clearly would prefer the absence of generics makers altogether. The company thinks the hit from their entry would be between $1 billion and $1.3 billion out of its total sales and they could stymie plans to hit its 3.5x year-end leverage target, RBC Capital Markets analyst Randall Stanicky wrote in a note to clients.

Max Nisen at Bloomberg points out that Teva’s “new” leadership (sans Vigodman) is displaying some of the same overconfidence that has dashed investors’ hopes over the past few years, “just as it desperately needs to regain trust.” Teva is engaging in what Nisen terms “alternative guidance.”

It goes something like this: there’s scenario A, it’s official “base case” guidance, which it issued on Monday (February 13, 2017). Then there’s scenario B, where Copaxone goes generic this month. In that case, sales of the drug would plummet another $1 billion to $1.2 billion.

And what if Teva’s downside guidance is too optimistic? The company has projected as much as an $800 million haircut to cash flow from Copaxone generics. But Sanford Bernstein analyst Ronnie Gal noted that if Copaxone suffers a 20% drop in volume and 25% hit on price–not unusual for a drug with just two generic competitors–the cash-flow impact could be “substantially larger.”

Clearly, this week’s reaffirmation of 2017 guidance was designed to engender optimism among investors. But with the court already having tossed out four patents on Copaxone, “a generic launch is a real risk,” Stanicky said. “An at-risk generics launch “is our current expectation,” Barclays analyst Doug Tsao wrote in his own research note.

The following is my paraphrase from The American Heritage® New Dictionary of Cultural Literacy, Third Edition: “to see ‘through a glass darkly’ is to have an obscure or imperfect vision of reality. The expression comes from the writings of the Apostle Paul; he explains that we do not now see clearly, but at the end of time, we will do so.”

Steve's Take: Is @TevaPharm wearing rose-colored glasses with its 2017 revenue guidance? Yes. Click To Tweet

At least we won’t have to wait quite that long to see if Nisen and I are correct, and Teva’s new CEO and chairman were wearing rose-colored glasses when they issued their latest guidance.