Teva Pharmaceutical Industries Limited (TEVA - Free Report) reported second-quarter 2017 earnings of 99 cents per share (including equity compensation expenses), which missed the Zacks Consensus Estimate of $1.06 per share by 6.6%. The year-ago adjusted earnings were $1.22 per share.

Revenues of $5.69 billion missed the Zacks Consensus Estimate of $5.85 billion by 2.8%. Sales, however, increased 13% year over year (up 17% excluding impact of currency), mainly due to the inclusion of revenues from Allergan plc’s (AGN - Free Report) generics segment, Actavis Generics, including Anda

Teva acquired Actavis Generics in Aug 2016 and also Allegan’s U.S. generic distribution business Anda, Inc. in Oct 2016.

Excluding the benefit from the Actavis generics acquisition, the core sales performance was below expectations. Sales in the quarter were hurt by increased pricing erosion in the U.S. Generics unit, ongoing political turmoil in Venezuela and loss of exclusivity in the Specialty segment in the quarter.

Segment Discussion

Beginning in the fourth quarter of 2016, Teva revised its segment structure following the Actavis acquisition. The Generics segment now includes revenues from the OTC business as well as the API business.

Generic Medicines segment revenues rose 20% to $3.08 billion, mainly attributable to the inclusion of revenues from the Actavis generics business.

Revenues from the U.S. generics business rose 45% to $1.3 billion due to the inclusion of revenues from the generic business of Actavis.

European generic revenues were $957 million, up 24% (28% in local currency) from the year-ago period. This was due to the inclusion of revenues from the generic business of Actavis.

Rest of the world (ROW) generic revenues declined 7% to $831 million in the quarter. On a local currency basis, sales rose 13% mainly due to the inclusion of revenues from Actavis.

API revenues declined 1% to $204 million. OTC revenues rose 6% to $283 million (up 40% in local currency terms).

Excluding the benefit from the Actavis generics acquisition, the core sales performance of the segment was poor due to accelerated U.S. generic drug price erosion and decreased volumes. Meanwhile, delays in the launch of some new generic drugs and increased competition for some others also hurt sales in the segment.

The U.S. generics industry is facing significant competitive and pricing pressure. An increase in FDA generic drug approvals and ongoing customer consolidation is resulting in additional competitive pressure in the generics industry.

The drug price erosion is expected to accelerate in the second half of this year. Teva said that the price erosion in the U.S. generics business is expected to be in the high single digits range in 2017.

Specialty Medicines revenues declined 9% from the year-ago period to $2.1 billion due to lower sales of its central nervous system (CNS) and oncology products. 

Among Teva’s various therapeutic areas, CNS sales declined 18% to $1.16 billion due to lower sales of multiple sclerosis drug, Copaxone, Teva’s lead branded product.

Sales of respiratory products rose 3% to $322 million, oncology product sales declined 16% to $280 million, and women’s health business recorded a 2% decline in revenues to $115 million. Other specialty revenues rose 107% to $190 million.

Worldwide revenues of Copaxone declined 10% to $1 billion. Sales in the U.S. declined 12% to $843 million due to lower volumes of the 20 mg formulation, which is facing generic competition and negative net pricing effects despite the 7.9% price increase taken in January. In Jun 2015, Novartis AG’s (NVS - Free Report) generic arm, Sandoz launched Glatopa, a once-daily generic version of 20 mg formulation of Copaxone.

Ex-U.S. sales of Copaxone declined 3% to $180 million.

The 40 mg thrice-weekly (3TW - three times a week) formulation of Copaxone accounted for more than 85% of total Copaxone scrips in the U.S. at the end of the reported quarter. We note that Teva is facing patent challenges for the 40 mg formulation.

Companies like Mylan N.V. (MYL - Free Report) and Momenta Pharmaceuticals are looking to get approval for their generic versions of the 40-mg thrice-weekly formulation of Copaxone. In late January, Teva suffered a major setback with the U.S. District Court for the District of Delaware invalidating four of the five Orange Book patents protecting Copaxone 40 mg. Teva intends to appeal against the decision. However, generic versions of the 40 mg formulation have not been launched yet. The FDA approval of Momenta’s generic version of Copaxone has been delayed owing to manufacturing issues.

Teva does not expect any generic competition for Copaxone 40 mg this year. However, the company said that in case, a generic version was launched for a full quarter this year, it will hurt earnings by 20 – 25 cents.

Among other products, Azilect sales declined 69% to $34 million as a generic version of the drug was launched in the U.S. ProAir declined 9% to $123 million, combined Treanda and Bendeka revenues declined 21% to $163 million and QVAR declined 8% to $107 million.

The Other segment (distribution and other activities) recorded revenues of $543 million, up 158.6%. The segment mainly gained from the inclusion of distribution revenues from Anda.

Profits Decline

Adjusted gross margin contracted 570 basis points (bps) to 56.8% in the quarter due to the addition of the low-margin Anda distribution business and low margins in the Generic Medicines segment. Gross margin rose in the Specialty segment. Research & development expenses increased 21.6% from the year-ago period to $450 million. Selling and marketing (S&M) expenditure was up 1% from the year-ago level to $906 million. Adjusted operating margin (excluding equity compensation expense) declined 330 bps in the quarter to 28.1%.

2017 Outlook Slashed

Teva slashed its previously issued 2017 sales and earnings guidance. Increased price erosion in the U.S Generics market, delays in generic launches in the U.S.and greater instability in the Venezuela market led to the cut in guidance.

The revenue guidance was cut to a range of $22.8-$23.2 billion from $23.8–$24.5 billion. Earnings are expected in the band of $4.30 - $4.50, much lower than $4.90–$5.30 per share expected previously.

Teva expects continued sales erosion for Copaxone in 2017 due to increased competition.

Management said that the Venezuelan business is not expected to contribute anything to earnings in the last two quarters of 2017.

Dividend Cut

Teva announced a 75% cut in dividend for the second quarter to 8.5 cents per share from 34 cents per share paid in the first quarter.

Our Take

Teva’s second-quarter earnings and sales were dismal as the U.S. generics industry continues to face significant competitive and pricing pressure. The Israel-based generic drug maker also slashed its 2017 earnings and sales outlook to reflect the challenging environment in the U.S. Generics business and Venezuela devaluation. The U.S. generic industry pressure is expected to persist and management expects lower revenue and profits in U.S. Generics in 2018 and potentially 2019.

The major cut in dividend - to help pay down debt and invest in business - was a big disappointment. Also, the company did not provide any update on a new chief executive officer (CEO) saying “this is a process we are not going to rush”.Teva’s CEO, Erez Vigodman, had stepped down in February this year. Teva’s Chief Financial Officer Eyal Desheh, also retired in June.

Shares declined 24% on Thursday, hitting a 52-week low of $23.33 per share. In fact, shares have slumped 34.5% so far this year compared with the industry’s decline of 1.9%.

Teva carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Teva Pharmaceutical Industries Limited Price, Consensus and EPS Surprise

Teva Pharmaceutical Industries Limited Price, Consensus and EPS Surprise | Teva Pharmaceutical Industries Limited Quote