What happened

Shares of Teva Pharmaceutical Industries (TEVA -0.64%), a generic-drug-making giant, tumbled 10.9% as of 3:06 p.m. EDT on Tuesday. The company is scheduled to report second-quarter earnings results tomorrow, and investors are even more apprehensive than usual.

So what

Increasing generic competition for Copaxone and disappearing profit margins in the generic-drug business have exacted a heavier toll on Teva's top and bottom lines than expected. Over the past 12 months, the stock has tumbled 68%, and today's thumping dragged it to a price that investors haven't seen since 1999.

Downward-sloping chart.

Image source: Getty Images.

Consensus estimates suggest top-line sales fell 10% compared to the previous-year period, to $4.25 billion. The big concern is the company's sagging bottom line. Despite efforts to cut costs, consensus estimates suggest second-quarter earnings fell 27% to just $0.57 per share.

Now what

It's hard to say when profits will stop plunging, but we can be reasonably sure that Teva's legal expenses are on the rise. In May, Teva was named in a lawsuit filed by 44 states that allege the world's leading seller of generic prescription drugs conspired with Pfizer (PFE 1.59%), Mylan (MYL), and Novartis (NVS 0.01%) to inflate the prices of more than 100 generic drugs, including cancer drugs, antibiotics, and even generic Adderall. More recently, Teva agreed to pay the State of California a $69 million pay-for-delay settlement.

To make matters worse, Teva's size advantage is about to evaporate. That's because Upjohn, Pfizer's segment of post-market-exclusivity drugs, is merging with Mylan to become even larger than Teva.

If you're thinking about trying to catch this falling knife, you should know there was $27.5 billion in long-term debt on the company's balance sheet at the end of March, and servicing that debt turned an operating profit into a net loss in the first quarter. Even if the company manages to beat expectations tomorrow, there are no guarantees that it will be able to meet all of its financial obligations in the quarters ahead.