Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) stockholders desperately needed good news heading into Thursday’s first-quarter earnings report. After all, TEVA stock has been in an almost uninterrupted decline since mid-2015.
Concerns about political pressure, a lack of growth, and management questions have weighed on shares, which are down by more than half from their peak of less than two years ago.
Q1 earnings from Teva Pharmaceutical might not be the catalyst that reverses the decline on their own, but they could at least be good for a relief rally in TEVA stock. Fourth-quarter earnings in February were similarly solid and led the stock to a 10% rally before retreating. This quarter, full-year guidance was reaffirmed, and there is some good news below a headline earnings beat.
Teva Pharmaceutical isn’t out of the woods yet, by any stretch. But a respectable quarter, maintained guidance and a dirt-cheap stock price imply a bottom in Teva might finally be forming.
Teva Pharmaceutical Earnings Were Good Enough
For Q1, Teva’s revenues grew 17% to $5.6 rev 5.6 billion, which fell short of analyst estimates. However, the top line, while off by 12% to $1.06 per share, was enough to be expectations by 3 cents.
The first-quarter numbers show in part why TEVA stock has struggled of late. That growth in revenues came solely due to Teva’s acquisition of Allergan plc’s (NYSE:AGN) generics business.
The specific challenges facing Teva Pharmaceutical are evidenced throughout the report.
Unrest in Venezuela, which has collapsed the bolivar, had a significant impact, taking 4% off non-GAAP operating income. Non-GAAP gross margin declined 600 bps, highlighting pricing pressures in the U.S. and Europe (along with the purchase of a distribution business from Allergan).
But there was some good news in the numbers — and even signs of relative stability. Non-GAAP EBITDA increased 9% year-over-year. Generic Medicines segment revenue increased 24% year-over-year, again due to the acquisition, and segment profit margins declined just 90 bps. In Specialty Medicines, gross margin held steady near 87%. Copaxone revenue — facing a “patent cliff” — declined just 4%.
With TEVA stock trading at just 6x the midpoint of 2017 EPS guidance, the quarter didn’t need to be perfect to improve sentiment.
And it wasn’t perfect … but it does look like enough for a short-term pop in TEVA stock.
Room for Optimism
There was good news beyond earnings, too.
Teva paid down $1.2 billion in debt in the quarter, a step in the right direction. Teva Pharmaceutical isn’t quite Valeant Pharmaceuticals Intl Inc (NYSE:VRX) in terms of its balance sheet, but debt has been a concern since the Allergan acquisition. Teva raised its projections of 2017 synergy capture by $200 million, which should add 2 to 3 points to adjusted operating income growth.
Simply reaffirming guidance will help TEVA stock, given that the stock price and analyst commentary showed a clear lack of confidence in that guidance. Street consensus estimates for 2017 were at $4.81 heading into the report — below the company’s range of $4.90-$5.30.
Again, none of these developments fix all of Teva’s problems. But they give some hope that a bottom might be coming in.
TEVA Stock Looks Attractive
Overall, the quarter seems to support the bull case. Teva Pharmaceutical has deal with a lot of bad news of late. Both its CEO and CFO are leaving. A DOJ search at fellow generic manufacturer Perrigo Company plc (NYSE:PRGO) brought down TEVA shares earlier this month. And a focus on possible competition to Copaxone has overshadowed the rest of Teva’s portfolio.
In that context, even a decent earnings report looks like a win. And it supports the bull case I’ve offered for several months now.
The quarter isn’t perfect, and TEVA stock isn’t perfect. But at 6x earnings, and with operations perhaps finally starting to normalize, both look good enough.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
