"The financial numbers in Teva's report aren't terrible," says Excellence Nessuah Brokerage Services senior analyst Gilad Alper, following the release of Teva Pharmaceutical Industries Ltd.'s (NYSE: TEVA; TASE: TEVA) second quarter results today, but adds, "The cut in the company's guidance, on the other hand, is significant, and is the reason for the substantial fall in the share price.
"The first reason for the guidance cut is the political situation in Venezuela, but that is a factor with limited impact, and also not one within the company's control. The second reason is the decline in generic drug prices in the US, which are down by 8-9%. We have seen the effect of this decline in other companies in the sector, but the assumption up to now was that Teva had somehow managed to avoid the negative effect, and this now turns out not to be the case.
"The main cause of the decline in generic drug prices in the US is a process of consolidation among drug buyers, creating large players that can pressure the drug makers and demand discounts. This process links up with a general trend in the US of efforts to bring down prices of drugs and health services, which hit the headlines following statements of the contenders in the 2016 US presidential election campaign, chiefly Hillary Clinton and Bernie Sanders.
"The third reason for the lowering of the company's guidance is delays in drug launches. It would appear that here the main factor is management problems within Teva - besides the vacuum in the CEO position, the manager of the generics division was also dismissed recently, and these things have real effects on the process of drug development at the company."
Although Teva has announced that it intends to hire consultants in order to make management of its product pipeline more efficient, a step meant to reassure investors about these problems, Alper sees things from the opposite angle: "The leading generics company in the US has to hire consultants to teach it how to manage its product pipeline? That's strange."
On the planned layoffs (7,000 are planned in total), Alper says, "In general, companies in the generics market are under pressure from manpower costs. Specifically, Teva's acquisitions policy has burdened it with many costs - pipeline, management, research and development - and also massive manpower costs."
At the opening of trading on Wall Street today, Teva's share price, which had fallen 40% over the previous twelve months, fell another 20%. "The market may have overdone it," Alper says, "The company has genuine assets, and recently succeeded in several trials of new drugs, particularly for treating pain. Ultimately, Teva is a main player in the US generics market, in which prices may be falling, but which is in no danger of disappearing. A far as the share price is concerned, if we're not at the bottom, we're close to it.
"The main factor which could yet hit the share price is generic competition to Copaxone in the near future. The company's guidance assumes that this will not happen in 2017, but only yesterday Momenta claimed otherwise. It could be that investors ought to wait until generic competition for Copaxone arrives, and then we'll be able to say that all the bad news about Teva is already out there."
Can Teva maintain its connection to Israel given its deteriorating financial position?
"The connection to Israel will remain, and the company's next CEO will spend time here, because the company has substantial assets and activity here. But, for example, the demand that Teva's CEO should live in Israel is already dead. They are simply in no position to present demands."
Published by Globes [online], Israel business news - www.globes-online.com - on August 3, 2017
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