Teva Pharmaceuticals CEO Kare Schultz said frequently in the past year that 2019 would mark the low point for the company in terms of revenues. His remarks were greeted with a lot of skepticism by Wall Street, given the Israeli company’s poor track record of meeting forecasts before he came aboard at the end of 2017.
But Teva’s first-quarter results released on Thursday provide the first sign that the company may just be climbing out of the hole it dug for itself. Revenues grew 5% and operating profit jumped 22%. Non-GAAP net profit was 76 cents a share, 18 cents more than the average estimate by Wall Street analysts.
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Free cash flow grew sharply to $550 million and its weighty debt burden was reduced by $600 million to $24.3 billion. Teva’s net debt to earnings before interest, taxes, depreciation and amortization, or Ebitda, fell to 4.95, the first time since third-quarter 2018 that it was below five.
Teva shares rose more than 10% on the earnings report in New York, although it posted a retreated 2.25% the next day to end at $11.29. Unlike other big pharma companies, Teva said it was keeping to its forecast for all of 2020.
The reason why the strong first quarter won’t lift Teva results for all of 2020 is the coronavirus pandemic. “The impact of the COVID-19 pandemic will likely be felt the most in our second quarter results offsetting the first-quarter out-performance,” Chief Financial Officer Eli Kalif said, according to a transcript of a conference call Thursday with equity analysts.
Taking the longer view, Schultz won the confidence of the market due to his full-throated implementation of a recovery program for Teva in 2018-19 after the company fell on hard times due to its misguided acquisition of Actavis Generics, and the expiry of exclusivity for its best-selling Copaxone multiple sclerosis drug. The recovery plan earned Schutz enough credit that the market has been willing to overlook that part of the company’s first-quarter success as due to temporary factors, but will suffice for Teva to meet its full-year targets, even if some of their underlying assumptions are ambitious.
In fact, a major factor behind Teva’s first-quarter results was the coronavirus, which led to stronger demand for its products, mainly in March, and one-time capital gains. So while overall sales grew 5% in the quarter to $4.36 billion, in Europe they climbed 11% to $1.4 billion, much of that due to sales of respiratory drugs. Doctors were writing prescriptions in many cases to cover three months of usage rather than the usual one month to minimize the number of visits patients would need to make.
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In the United States, Teva enjoyed a 12% sales increase through its Anda distribution subsidiary, again thanks to the outbreak of the pandemic. Apart from coronavirus, Teva also benefited from a 64% jump in sales of its new Austedo treatment for Huntington’s disease and tardive dyskinesia.
There were also two one-time factors responsible for the profit boost – a $55 million gain on the hedging transaction against future cash flow from foreign currencies like the Russian ruble and the Argentinian peso. There was another $25 million in gains from a deal with Alder BioPharmaceuticals, giving the latter the right to use patents related to Teva’s Ajovy migraine treatment.
Overall, Teva sales in North America were up just 2%, thanks to Austedo and Anda. Sales of generic drugs in North America dropped 1% from a year ago and 16% from fourth-quarter 2019 due to the absence of any new products and the loss of generic exclusivity for Rituxan.
Much of last week’s conference with analysts was devoted to the question of why Teva expects to meet its 2020 targets despite middling performance by its two growth drugs – Austedo and Anjovy.
The answer, explained Shultz, was that, “We believe we’ve come to the point now where the growth in Austedo and Ajovy this year will be higher than the decline in Copaxone and that dynamic will continue in the coming years. So if you believe in that, then you could say then the rest of the business, which is all the generics and the over the counter, basically has to be flat in order to secure growth.”
He warned, however, “That’s not the same as saying that we will see dramatic increases in revenue. I never said that, but we will see single-digit increases in revenue.”
Schultz attributed a 10% decline in Austedo sales in the first quarter to $122 million to changes in inventories, and noted that the number of prescriptions for it had grown in the quarter. Teva remains confident that full-year sales will reach $650 million this year.
The bigger challenge, it seems, concerns Ajovy, which the company forecasts will have sales of $250 million in 2020. Schultz said the debut of a self-injecting version of the treatment in the U.S. last month would more than double Ajovy’s market share to 25% by the end of the year.
As for Copaxone, Schultz sees sales falling $300 million to $1.2 billion this year, as U.S. sales have stabilized while in Europe Teva still enjoys patent protection until 2030. Teva’s forecast assumes sales per quarter of $200 million in the U.S. and $100 million in Europe, which it met in the first quarter because patients stocked up on supplies due to the coronavirus lockdown. In the next quarters, however, it is likely sales will fall.
As for Europe, Teva may lose its patent protection there as early as next month if an appeal against it succeeds.