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Morningstar | Teva Mostly Meets Our 2018 Forecast, but Previews Weaker-Than-Expected 2019

Teva wrapped up 2018 with fourth-quarter performance that broadly matched our expectations. However, management’s 2019 guidance for $17 billion to $17.4 billion in revenue, $2.20 to $2.50 in adjusted EPS, and $1.6 billion to $2 billion in free cash flow fall below our forecast. We don’t anticipate a dramatic change in our fair value estimate as we anticipated some of these headwinds further out in our model, especially for the respiratory business. Although Teva’s recently launched Ajovy and Austedo have posted results consistent with our forecasts, the company’s challenges on the generics business, key products like Copaxone, and the high debt load keep our no-moat rating and extreme uncertainty ratings unchanged. Teva’s current net debt/EBITDA ratio is approximately 5.1, by our math.

Teva faces a number of ongoing challenges this year but should be able to return to growth in 2020. A portion of the poor 2019 outlook stems from an earlier-than-expected decline in respiratory segment sales, spurred by the launch of an authorized generic of ProAir as well as potential additional competition on this product in 2019. The remainder of the disappointing outlook for 2019 versus our expectations comes from weakness in the generics business. While we still anticipate some ongoing pressure in the U.S. generics operations, management continued to note signs of stability in the market. International generic sales will face declines from a number of factors, including currency headwinds, the terminated joint venture with Procter & Gamble, and the ongoing fallout of the Venezuela operations. During the quarter, generic sales were down 10%, 6%, and 18% on a constant currency basis in North America, Europe, and rest of world, respectively.

Management’s estimate of nearly $1.5 billion in Copaxone sales for 2019 falls close to our current $1.4 billion forecast. Copaxone sales were down 44% in North America during the quarter, and we expect similar pace of decline for 2019.