What's In The Cards For Teva (TEVA) This Earnings Season?

Teva Pharmaceutical Industries Ltd. (NYSE:TEVA) will report fourth-quarter and full-year 2017 earnings on Feb 8, before the market opens. Last quarter, the company delivered a negative earnings surprise of 4.76%.

This generic drug maker’s shares have lost 40.1% in the past year, while the industry witnessed a decrease of 27.7%.

Teva’s earnings have surpassed expectations in only one of the last four quarters, met the same in one and missed expectations in the remaining two, resulting in an average negative surprise of 2.66%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Increased pricing erosion and volume declines in Teva’s U.S. Generics unit, ongoing political turmoil in Venezuela and loss of exclusivity in the Specialty segment are hurting the company’s top line. We do not expect any improving trend in the fourth quarter.

The U.S. generics industry is witnessing significant competitive and pricing pressure, thereby affecting the company’s top-line performance. An increase in FDA generic drug approvals and ongoing customer consolidation are resulting in additional competitive pressure in the industry. Drug price erosion was 10% in the third quarter and management had warned on the call that the erosion will accelerate in the fourth quarter and beyond. Moreover, accelerated FDA approvals of additional generic versions of competing off-patent medicines, lower-than-expected contribution of new generic launches and increased competition for its largest product - Concerta authorized generic – will also continue to hurt sales in the Generics unit.

Meanwhile, in the Specialty segment, loss of exclusivity of key drugs like Copaxone, Azilect and Nuvigil will hurt sales.

Sales of Teva’s blockbuster multiple sclerosis (MS) treatment Copaxone should continue to erode due to generic competition. Glatopa, a generic version of Copaxone 20 mg, has been on the market since June 2015. In October, in a major blow to Teva, Mylan (NASDAQ:MYL) launched (at-risk) its generic version of the 40 mg formulation, much earlier than expected. Mylan also launched its version of the 20 mg formulation in October. With the entry of the generic version of the 40 mg formulation and the entry of a second generic version of the 20 mg formulation, Copaxone sales are expected to erode rapidly. Teva had previously estimated a negative impact of at least 30 cents per share on fourth-quarter earnings.

Meanwhile, a generic version of Azilect was launched in the United States in January 2017 and sales have started to decline sharply. ProAir also lost exclusivity in the United States in 2017 and its fourth-quarter sales are likely to be lower.

To combat the rapid decline in sales, last month, Teva announced a restructuring plan that will see more than 25% of the company’s global workforce being laid off over the next two years with the majority expected in 2018. Though management then provided quite a few details on how the plan will be executed, we expect an update on the upcoming conference call. Also, in November, Teva had announced a new organizational and leadership structure to save costs and increase productivity that included the departure of heads of three divisions. The company had also said then that it will no longer have two separate global groups for its two businesses – generics and specialty medicines. Instead, Teva will now operate through three regions —North America, Europe and Growth Markets — which will include generics, specialty, and over-the-counter (OTC) medicines. An update on the progress made on the new strategy so far is expected on the call.

Earnings Whispers

Our proven model does not conclusively show that Teva is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: Its Earnings ESP is -3.10% as the Most Accurate estimate stands at 78 cents per share while the Zacks Consensus Estimate is pegged higher at 81 cents per share. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Teva has a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 or #5 (Strong Sell) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some other drug/biotech stocks that have the right combination of elements to beat on earnings this time around:

Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) with an Earnings ESP of +8.92% and a Zacks Rank #3. The company is scheduled to release results on Feb 8.

Puma Biotechnology, Inc. (NASDAQ:PBYI) , with an Earnings ESP of +2.02% and a Zacks Rank #3. The company is expected to release results later this month. You can see the complete list of today’s Zacks #1 Rank stocks here.

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