Teva Failed to Report Key Business Setback Before Its Poor Earnings Report

Negotiations with major wholesaler that resulted in big price cutbacks were completed at least five weeks before drug maker acknowledged

An employee collects pills from a machine at a Teva Pharmaceuticals production plant in Jerusalem, September 19, 2011.
An employee collects pills from a machine at a Teva Pharmaceuticals production plant in Jerusalem, September 19, 2011. Adam Reynolds/Bloomberg

Teva Pharmaceuticals was aware that its U.S. generics business had suffered a significant setback, but kept that information from investors for five weeks, until it released its second-quarter financial statement.

In a conference call with analysts shortly after last Thursday's earnings report, Teva CEO Yitzhak Peterburg acknowledged for the first time that the company had been forced to lower the prices at which it sold drugs to wholesalers Walmart and McKesson at some time during the second quarter, which ended June 30.

A year earlier the two big buyers had connected to form a single joint purchasing venture called ClarusOne and used their immense bargaining power to squeezed Teva on prices.

“This development and other new contracts had a greater-than-expected negative impact on our Q2 results and especially on the outlook for the remainder of the year,” Peterburg told analysts last Thursday.

The setback in the key U.S. generics market was one of three reasons that the company cited for its weak second-quarter results and a giant $6.1 billion write down for goodwill on its U.S. generics business.

The others were political upheaval in Venezuela, which cost $20 million of net profit, and a new program by the U.S. Food and Drug Administration to speed up generic approvals, pushing more products on to the market and heightening competition.

Information on these two developments was publicly available, but the CalrusOne negotiations were not and they were the most important of the three factors weighing on Teva. The surprise disclosure from Teva – confirming its long history of less-than-transparent reporting – was certainly one of the factors behind the mass selloff of Teva shares since last week.

When RBC Capital downgraded Teva from Outperform to Underperform on Friday and slashed its price target to $21 from $37, analyst Randall Stanicky signaled doubts about the company’s transparency, among other things.

“The magnitude of the reduction and low quality results combined with leverage risk and lack of confidence in Teva’s ability to forecast the business make a turnaround within 12-18 months unlikely,” he wrote in a note last Friday. ”Potential for further downside remains.”

On Wednesday Teva ended 1.2% down at 65.67 shekels ($18.26) on the Tel Aviv Stock Exchange. In New York, they it was down a sharper 3.4% at $17.67 in late trading. The decline caps a 43% drop since last Thursday, wiping out some $13 billion in value for shareholders.

Equity analysts have been eager to lower Teva’s target price and share rating, and bond rating agencies have followed suit, lowering Teva debt to near-junk status.

Teva’s second-quarter statement came as a huge surprise to the analysts who had been hearing from management until last Thursday that U.S. generics sales would grow about 5% in the second half of the year. But on Thursday they admitted that U.S. generics sales would decline this year, hold steady in 2018 and 2019, and then show modest 2% annual growth in 2020.

Teva‘s failure to disclose the key contract talks doesn’t create any legal problems because of a legal loophole for shares like Teva that are dual-listed in New York and Tel Aviv.

On the one hand, U.S. securities regulations say those companies must only abide by the disclosure requirements of their home countries; on the other, Israel securities law exempts them from Israeli reporting requirements. That includes Rule 36, which requires immediate disclose of “any event that deviates from the ordinary business of the corporation.”