Forget Teva, Buy These 4 Drug Stocks Instead

It’s not been a good quarter for Israel-based generic drug maker, Teva Pharmaceutical Industries Limited (TEVA - Free Report). Teva missed on both second quarter earnings and revenues and lowered its outlook for 2017. The company’s shares are down significantly following the release of disappointing second quarter results. Year-to-date (YTD), Teva has lost 52.6% of its value versus the 17.4% decline of its industry.


What Went Wrong?

A key reason for Teva’s dismal performance was generic pricing erosion. The sharp decline in generic drug prices, while a blessing for patients, is proving to be a major challenge for generic drugmakers as well as drug distributors.

On its second quarter call, Teva said that the ongoing consolidation of customers has led to increasing price erosion and decreasing volume. The consolidation in the industry has increased the ability to negotiate lower prices for generic drugs. Teva said that the finalization of both prices and volumes of its inline products with one of its largest customers, Claris One, and other new contracts had a greater-than-expected negative impact on second quarter results and the outlook for the rest of the year.

Moreover, the FDA is speeding up the approval of generic drugs which means more competition, increasing price cuts and decreasing volume. Teva said that price erosion was around 6% in the second quarter and is expected to increase to high-single digits over the remainder of the year. All these headwinds will persist for the U.S. Generics unit in the near future, resulting in lower revenue and profit in this segment in 2018 and potentially 2019.

Meanwhile, the company said that it does not expect any earnings contribution from its businesses in Venezuela given the significant devaluation of the Venezuelan currency.

Teva also cut its dividend by 75% and could be at risk of breaching its covenants if cash flow is hit by lower-than-expected proceeds from potential divestments or if there is a delay into early 2018.

Zacks Rank & Estimate Revisions

Teva is a Zacks Rank #5 (Strong Sell) stock. With the company reporting disappointing results and lowering its outlook, Teva has seen the Zacks Consensus Estimate for current-year earnings being revised 10.3% downward over the last 7 days. The Zacks Consensus Estimate for 2018 earnings was revised 14.9% downward over the last 7 days.  

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Disclosure: contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any ...

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