We're in the thick of earnings season, which means some of the most prominent industry leaders are set to report their quarterly results. Tomorrow morning, Israel-based drug developer Teva Pharmaceutical Industries (NYSE:TEVA) is set to join the crowd and release its first-quarter financial results.
Teva's had a bumpy ride
Teva, which offers both brand-name and generic drugs, is the largest generic-drug manufacturer in the world, following its acquisition of Actavis from Allergan for $40.5 billion in cash and stock. Generally speaking, market leaders don't get knocked around like ragdolls often, but Teva isn't like most market leaders. It's seen a major upheaval among its executives, faced allegations of bribery, and even lowered its financial outlook. Its shares have fallen by more than 50% since the beginning of 2016.
Tomorrow morning, Wall Street will be looking for the company to report $5.69 billion in sales, an 18.2% increase from the prior-year period (and inclusive of its acquisition of Actavis), and $1.03 in earnings per share. This would represent a 14% year-over-year reduction from the $1.20 in EPS it reported in first-quarter 2016. Though past performance is no guarantee of future results, Teva has topped the Street's EPS consensus in 10 of the past 11 quarters.
Four questions we want answered
While a lot of eyes will rightfully be on Teva's headline results, this isn't what its shareholders (including yours truly) or Wall Street will be keying in on. Instead, the company has four pressing questions it's going to need to answer if there's any hope for its share price to get out of its current funk.
1. Can it successfully protect its Copaxone patents from generic competition?
Arguably the most pressing issue for Teva Pharmaceutical is what's to become of Copaxone, its blockbuster injectable multiple sclerosis drug. In 2016, Copaxone accounted for $4.22 billion in sales, a 5% increase year over year despite generic versions of the drug knocking on the door. This represents 19.3% of Teva's total sales, but it's an even larger portion of its net profits given that branded therapies have higher margins than generic drugs.
Here's the issue: Copaxone has essentially run its course as a branded therapy. Teva Pharmaceutical has turned to the legal system to drag out the potential launch of generic versions of Copaxone for as long as possible. During this process, it reformulated Copaxone from a once-daily injectable into an extended-release injectable that need only be administered three times weekly. That's a nice quality of life improvement for the patient, but it doesn't help Teva much if its reformulated patent doesn't protect its drug from generic competition. Therein lies the dilemma. A recent patent court loss suggests Copaxone may still be subject to generic competition, even with this reformulation.
As a counter to this pessimism, the company may have hope of keeping a good number of patients on Copaxone, even when generic competition hits pharmacy shelves. Copaxone is a trusted multiple sclerosis medicine, and changing the perceptions of physicians and consumers is tough, even for markedly cheaper generics.
Finding out what's going on with Copaxone is a biggie.
2. Are asset sales on the table because of its high debt load?
The second question we want answered is what Teva plans to do with its $35.8 billion in total debt. Some of its debt came via the Actavis acquisition, and while it's generating in the neighborhood of $5 billion annually in operating cash flow, there could be pressure internally, from activist shareholders or its lenders, to reduce its debt.
In April, we heard of two potential sales rumors that included its women's health operating segment and its oncology division. Selling its oncology division would, in my mind, make a lot of sense given the strong pricing power behind specialty therapeutics. What we don't know is if these rumors are actually true and, if so, what Teva is looking to be paid for both segments.
What we know from previous conference calls is that Teva is done on the mergers and acquisitions front for the time being. The next step is whether its debt will be reduced organically or with the aid of asset sales. We should have our answer tomorrow morning.
3. Are the Actavis synergies moving along as planned?
Another very important question shareholders will want insight into is whether Teva's combination with generic drugmaker Actavis is proceeding as planned. Even though the transaction closed last August, Teva has a lot of operating redundancies to eliminate, and these cost savings aren't expected to be recognized overnight.
According to the press release describing the combination, Teva anticipates claiming $1.4 billion in cost synergies by 2019, and projected launching around 1,500 generic products globally in 2017. Given the changes we've seen with the CEO and now CFO, I'm curious as a shareholder to see how closely the company has come to staying on track and meeting these figures. Are we witnessing an improvement in generic drug pricing and margins now that Teva has a clear market share advantage? How much will Teva recognize in cost synergies of the expected $1.4 billion this year? Can these synergies help reduce its debt load?
Big, big questions to be answered.
4. Will the litigation ever stop?
Finally, it has to be asked if the allegations and lawsuits of wrongdoing are going to stop.
For those who may not recall, Teva settled with U.S. authorities for $519 million in December after admitting that paid millions in bribes to government officials in Mexico, Russia, and Ukraine to boost the sale of certain key products. On top of this, U.S. regulators have named Teva and a cadre of other generic drug developers in an ongoing price collusion probe that has Wall Street wondering when the PR damage is going to stop. It certainly doesn't help with Teva's CEO and CFO exiting the picture.
There should be some expected commentary on the legal issues Teva is facing, and we'll hopefully get some perspective on whether there's light at the end of the tunnel.
I remain optimistic for Teva. I do expect bumps in the road, but believe cost-cutting along with higher generic-drug use and margins should improve the company's long-term outlook. Even with debt concerns and legal overhang, Teva's forward P/E, which is nearing just six, looks to be a bargain. We'll know a whole lot more tomorrow morning, but I expect to see reasons for hope in the upcoming report.