Ignorance Is Strength

Teva Tries Out 'Alternative Guidance'

Sticking to its optimistic outlook ignores looming problems.
At Closing, April 22nd
6361.00 ILs

Teva Pharmaceutical Industries Ltd. gave investors a nice surprise on its fourth-quarter earnings call Monday by maintaining its 2017 revenue and earnings guidance.

Teva shares jumped about 4 percent on the news. Many investors had assumed Teva's guidance, already cut in January, would have to come down again after a U.S. court knocked out patents on its best-selling drug Copaxone, making generic competition much more likely. The company's CEO stepped down shortly afterwards. 

But investors should not be so thrilled. Teva's ostensibly new leadership is showing some of the same overconfidence that has so disappointed investors over the past few years, just as it desperately needs to regain trust

Slump Bump

Teva shares jumped Monday after the company reaffirmed its 2017 guidance

Source: Bloomberg

Teva is engaging in what I'll call alternative guidance: It has its official "base case" guidance, which it maintained on Monday, but has also outlined a possible downside scenario if Copaxone goes generic this month. In that case, sales of the drug would fall another $1 billion to $1.2 billion.

Keeping the same core guidance ignores the fact that, after the negative court decision, Teva's "base case" may be a mirage. Acknowledging how things have changed would better serve investors than the current hopeful finger-crossing. The rumored sale of the company's branded generics unit or other non-core assets, which it didn't discuss on the call, would also throw this guidance out the window. 

Stepping Down

Generics business struggles, a lost court case and a CEO departure have caused analysts to rethink previous expectations about Teva's revenue-generating potential

Source: Bloomberg

Even Teva's downside guidance may be too optimistic. The company has projected as much as an $800 million hit to cash flow from Copaxone generics. But Sanford Bernstein analyst Ronny Gal noted on the earnings call that if Copaxone suffers a 20 percent drop in volume and a 25 percent hit on price -- not unusual for a drug with as many as two generic competitors -- the cash-flow impact could be substantially larger.

Teva believes payers will be reluctant to switch patients from its version of Copaxone. But it would not be the first company to believe its drug is a special flower uniquely robust to generic competition, only to get a rude wakeup call. 

Teva's $35 billion debt load becomes more burdensome if Copaxone goes generic. Yet the company seems somewhat unwilling to take assertive action, though it is reported to be considering those aforementioned asset sales. On the call, Teva's chairman said there were no plans to reduce its substantial dividend, which would be a way to rapidly ensure more financial wiggle room. 

Taking Time

Teva paid down about $1 billion in debt in the fourth quarter. It needs to accelerate that pace in order to get back to dealmaking

Source: Bloomberg

Teva's earnings guidance is also weighted toward the back half of the year, with 60 percent of EPS seen coming in the second half. Hitting the mark depends on Teva being able to launch its own U.S. generic drugs more quickly while also cutting costs. 

But hiccups in its generic launches and the integration of its $40 billion acquisition of Allergan PLC's legacy generics business have contributed to recent guidance cuts and may do so again. The departure of Teva's longtime generics business head, and a possibly lengthy search for a permanent leader, will complicate these efforts. 

Monday's reaffirmation was an attempt to project optimism. But considering it came after the company's new CEO and chairman had just one week to grapple with the full extent of Teva's problems, it may just be a case of postponing the inevitable. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Max Nisen in New York at mnisen@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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