Floundering Teva grabbed Allergan generics as a lifeline. It didn't work

Teva
Teva's sales and earnings both missed Wall Street's expectations for the second quarter.

Back in January, when troubled Teva walked back its guidance by $1 billion-plus, some analysts worried the new numbers might still be too high.

They were right.

Thursday, the Israeli drugmaker lopped another billion-plus off its forecast, taking its expected revenue range down to $22.8 billion to $23.2 billion from bookends of $23.8 billion to $24.5 billion. The revision came largely as a result of generics industry-wide price erosion that hit Teva, the world’s generics leader, hard, forcing it to slash its dividend by 75%.

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And that’s not all. Teva also said on Thursday that it would lay off 7,000 total workers, close 15 plants over this year and next, and exit 45 markets by the end of this year. The major cuts follow Teva's $40.5 billion buyout of Allergan's generics portfolio.

On the company’s Q2 conference call, generics chief Dipankar Bhattacharjee worked to reassure investors that the more complex generics in Teva’s pipeline will bear value that’s “far more durable” than some of its past products and that the rate of price erosion will eventually “see stability.” Some analysts, though, had trouble finding reason to believe that Teva could stop the bleeding.

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“Why should we think this is a one-year phenomenon rather that something we’re going to see year after year given the power the pricing groups have?” Wells Fargo’s David Maris asked management.

“If we imagine they’re like bullies,” the options are to “punch them in the face,” “keep getting beaten up,” or “move,” he added. “You can’t really move out of the neighborhood, and this quarter kind of shows you don’t have the ability to stop the beating.”

Other analysts, who in the past had been excited about the company’s split-up prospects, wondered aloud whether a break would still be possible, given Teva’s $35 billion in debt.

On that front, interim CEO Yitzhak Peterburg could say only that “we evaluate all the time the situation, and I think we are doing the right thing now.” He added that the company still plans to gin up debt-repayment money through sales of its women’s health business, its European oncology and pain business and others, and that Teva expects those sales to amount to $2 billion.

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Of course, Teva's right-the-ship strategy could change once the company brings on a new CEO, which—despite recent rumors that it had successfully poached AstraZeneca’s Pascal Soriot—it doesn’t seem to have done that yet.

“This a process we are not going to rush, and we will not compromise on quality and on finding the best CEO possible to lead Teva,” interim chairman and Celgene vet Sol Barer told investors.

For now, Teva’s current leadership has the “support of our entire board” to do whatever it takes to get on course, he said, adding that “we will continue to make the tough decisions when necessary.”

Overall for the quarter, Teva’s sales reached $5.69 billion, falling just shy of the $5.72 billion consensus mark. EPS checked in at $1.02, also missing Wall Street’s $1.06 forecast.

"This is a very tough quarter for Teva," Evercore ISI analyst Umer Raffat wrote to clients.