The dive in Teva Pharmaceutical Industries Ltd.'s (NYSE: TEVA; TASE: TEVA) share price after the publication of its two previous financial reports repeated itself after the company last Thursday published its financial statements for the fourth quarter of 2017 and the year as a whole. The results this time were better than the lowered expectations, but another enormous write-down of goodwill for Teva's generics business in the US ($11 billion) and poor guidance for 2018, combined with a report of a possible delay in the launching of an important drug for treating migraine headaches and sharp downturns in the leading Wall Street indices, sent Teva's share price tumbling 10.6%. The share price was mostly unchanged on Friday, accompanied by another debt downgrade for the company. The scoreboard for the last two days of trading: a $2.3 billion loss in market cap for Teva, with its market cap hitting $18.9 billion and its share price down to $18.60, still 67% higher than the low point in November, but 40% short of the company's share price a year ago.
Teva's fourth quarter revenue totaled $5.5 billion, down 15.9%, compared with the corresponding quarter last year, and its 2017 revenue totaled $22.4 billion, up 2.2%, compared with 2016.The $11.5 billion write-down for goodwill in the fourth quarter and the year as a whole caused the company's net loss to balloon to $16.5 billion. Excluding this write-down and various other accounting items, Teva's non-GAAP fourth quarter net profit was $1 billion, $0.93 per share, significantly higher than the analysts' forecasts and the company's guidance of $0.75-0.76 per share. Teva's non-GAAP net profit for 2017 as a whole was $4.3 billion, down 13%, compared with 2016.
Teva EVP and CFO Michael McClellan says, "The key is realizing that Teva is trying to do the right thing to get itself back on track. There is a lot of information to take in - a write-down of goodwill and a better-than-anticipated fourth quarter performance - and we are aware that the guidance for 2018 is a little low. Shareholders should know that Teva's management is doing its best to put the company on solid ground; once the company's cost-cutting plan is fully implemented, better days will lie ahead for Teva."
"Globes": How much of the write-down of goodwill is attributable to the business of Actavis, which you acquired in 2016?
McClellan: "The division making the report, US generic business, is a combination of Teva and Actavis. A large proportion of goodwill was for the acquisition of Actavis, but the business of both Teva and Actavis has been affected by price erosion and the generics launching environment in the US. It's hard to give an exact number, but a lot of the write-down was from Actavis. Excluding Actavis, there would have been less of a write-down in Teva's books."
McClellan mentioned in this context that generics prices in the US had dropped 13% in the fourth quarter, compared with an 11% fall in the third quarter, slightly steeper than Teva had expected. Teva gave no numerical guidance for a decrease in prices in 2018, but does anticipate lower prices, while hoping for some leveling off in the second half of the year. New launchings of generic drugs will compensate somewhat for lower prices, but will not completely offset it.
Teva recently filed a prospectus to enable the company to raise $5 billion in bonds. McClellan says, "We submitted a prospectus that allows us to raise up to $5 billion. That doesn't mean that we will do this, nor does it mean that we will do it soon, but we are definitely watching the market conditions, which can be positive, in which case we will be able to do it in order reduce the pressure on current liabilities. If we have an opportunity to refinance at a reasonable interest rate, we'll seriously consider it." He added, however, that an issue would not necessarily amount to $5 billion; it could be less.
Commenting on Teva's guidance for 2018 of $18.3-18.8 billion in revenue and a non-GAAP net profit of $2.25-2.50 per share, McClellan says the this takes into account the launching of a second generic version of Teva's 40-milligram Copaxone in April. If this launch is delayed, it will be an upside for the company's guidance.
Teva late to market with migraine drug
In a conference call conducted after published of the financial statements, it was learned that another trouble was liable to afflict Teva: a potential delay in obtaining US marketing approval for Fremanezumab for treatment of migraine headaches. Celltrion received a warning letter from the US Food and Drug Administration (FDA) about its production site in South Korea that is liable cause problems for Teva and delay the launching of the drug, which is regarded as one of the company's most important growth engines in the post-Copaxone era. After the drug attained positive results in advanced clinical trials as a treatment for chronic and acute migraine headaches, Teva believed that it would be able to obtain US marketing approval for it in the second half of 2018.
Last Thursday, Teva CEO Kare Schultz said that after Celltrion, Teva's partner, which is producing the drug's active ingredient for Teva, received the FDA warning letter, Teva had been in contact with the FDA in order to ensure that the supply of the active ingredient would not be affected. "We’re optimistic that we'll be able to ensure proper production of the active ingredient, but this is obviously subject to the FDA's decision," he said. In answer to a question from an analyst, Schultz said that the warning letter sent to Celltrion was not directly linked to the part of the plant in which the active ingredients were produced. He added that Teva employees were working with Celltrion, and that external experts had also been sent. The decisive date for FDA approval is in June, and Schultz explained that he hoped there would be no delays. He said that it usually took 6-18 months to solve a problem with a warning letter, but in this case, the warning did not affect the part of the plant in which production for Teva would take place.
Schultz added that Teva was planning to have another manufacturer producing the active ingredient for it, but as of now, had only Celltrion. A year ago, Teva acquired a voucher for $150 million giving it preference and expedited FDA testing.
Credit Suisse analysts wrote that Teva should have marketed the migraine drug a month after competing drugs by Amgen and Novartis reached the market. Now, however, this is less likely, and a delay in launching Teva's drug will be good news for Amgen and Novartis, as well as for Alder and Eli Lilly, which are slated to reach the market later with their own drugs.
Debt rating downgrade and higher expenses
As expected, international rating agency S&P last Frida downgraded Teva's debt rating, a few days after putting it on the watch list with a negative outlook. S&P followed Moody's and Fitch, which previously downgraded Teva to junk bond status. Teva's debt totaled $32.5 billion at the end of 2017, and S&P has now downgraded the company's rating from BBB minus to BB with a stable outlook. S&P economists wrote, "Since acquiring Actavis in 2016, Teva has run into an especially tough and competitive generics market, has launched few generic drugs, and is experiencing earlier-than-expected competition for Copaxone, its extremely profitable product. We believe that Teva's business has become far more volatile and difficult to predict, and are significantly lowering our forecasts for operating results in the next four years, in view of the company's guidance for 2018." At the same time, S&P's economists add that cuts in expenses and stabilization in the generics market will support a gradual reduction in leverage.
Lowering its rating by two levels is increasing Teva's financing costs still further. Under its agreements with the creditor banks (for a debt totaling $3 billion, as of the end of 2017), a downgrade by Moody's or S&P causes a rise of 12.5 base points for every one level of downgrade by any of the agencies. Moody's recently downgraded Teva by two levels, and the increase was therefore 25 base points, and the same will now happen with the downgrade by S&P.
Two other announcements from last weekend related to Teva concern the launching of a generic version of Syprine, a drug used to treat Wilson's disease. Sales of the original drug amount to $155 million annually. The second announcement concerns the holdings of Capital Research, formerly the leading investment institution shareholder in Teva. Capital Research's stake in Teva dropped to 6.5% in the third quarter, but it increased its holdings in the fourth quarter by purchasing 52 million shares, bringing its stake up to 11.9%, with a current market value of nearly $2.3 billion, at the end of the fourth quarter.
Published by Globes [online], Israel Business News - www.globes-online.com - on February 12, 2018
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