Teva Hit by Increased Competition in U.S. Generics -- 3rd Update

By Denise Roland in London and Rory Jones in Tel Aviv Features Dow Jones Newswires

Investor concerns about Teva Pharmaceutical Industries Ltd., which is grappling with a leadership vacuum and industry headwinds, mounted on Thursday when the world's biggest seller of generic drugs offered a bleak financial update that sent shares reeling.

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The drugmaker, which is Israel's largest company by market capitalization, posted disappointing second-quarter results, cut its full-year outlook and slashed its dividend, blaming the rapid deterioration of its all-important U.S. generic-drug business.

Teva is confronting multiple problems without a permanent chief executive after the abrupt February departure of former boss Erez Vigodman. Like other generic drugmakers, Teva faces a tough pricing environment and increasing competition that is squeezing its already-tight margins. It is also saddled with about $35 billion in debt and a sprawling supply chain accumulated through acquisitions.

Adding to the company's woes, Teva's biggest shareholder said it was dumping its shares. Allergan PLC, which acquired a 9.9% stake in the company when it sold its generics business to Teva for $40.5 billion in 2016, announced on its own conference call Thursday that it "will not be a long-term shareholder in Teva," adding that it plans to sell its stock over the next few months.

Shares of Teva were down 23% at $23.91 in New York trading on Thursday afternoon.

A yearslong deal-making streak has transformed Teva, founded before the state of Israel to ship drugs by camel across Ottoman-controlled Palestine, from an obscure player in generic drugs to the industry's most important. One in every seven prescriptions in the U.S. is for a Teva drug.

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But last year's acquisition of Allergan's generics unit -- Teva's biggest-ever deal -- saddled the company with a huge debt pile that it is struggling to pay down amid an industrywide slowdown.

Many investors have said they believe Teva paid too high a price for that business, given the subsequent deceleration in generic-drug sales. On Thursday, Teva said it had taken a $6.1 billion write-down on its U.S. generics unit to reflect dimming prospects.

Another recent deal, the $2.3 billion acquisition of Mexican generic drugmaker Rimsa, has also created problems. Teva is locked in a legal battle with the Rimsa's former owners over alleged breach of contract.

These concerns were already weighing on Teva's shares before Thursday. The stock had more than 50% since the beginning of 2016 before the latest selloff.

Teva said it now expects adjusted earnings per share of $4.30 to $4.50 for 2017, versus earlier guidance of $4.90 to $5.30. It cut its full-year revenue expectations to $22.8 billion-$23.2 billion, from $23.8 billion-$24.5 billion. The company also warned that it expected full-year cash flow of $4.4 billion to $4.6 billion, versus an earlier forecast of $5.7 to $6.1 billion.

Its adjusted EPS for the quarter, at $1.02, and revenue of $5.69 billion both fell short of analyst expectations of $1.06 and $5.72 billion, respectively. The company also slashed its dividend in the second quarter to 8.5 cents, from 34 cents for the first three months of the year.

Interim President and CEO Yitzhak Peterburg said he understood "the frustration and disappointment of our shareholders" and promised to "aggressively confront our challenges" by cutting costs, selling off parts of the business and paying down debt.

But Teva is in a tough spot. Mike McClellan, interim chief financial officer, told analysts on Thursday that the company risked breaching its debt covenants this year should its potential divestments generate lower proceeds than hoped.

In June, Teva nominated four new directors in an effort to address investor concerns that its board lacked international pharmaceutical experience. But without a permanent CEO, investors are skeptical of the company's ability to get a turnaround under way.

"It's a rudderless ship until Teva gets a real CEO," said Benny Landa, an activist investor in the firm. "The most important thing is getting leadership on the board and a CEO with global experience."

Mr. Landa and some other shareholders have advocated for the company to be split into different divisions, one focused on generic drugs and the other on specialty medicine. Some investors argue the two businesses should be run by different management or separated entirely.

Teva Chairman Sol Barer said in June that the company was interviewing candidates for the top job, and the choice would likely be someone with global drug-industry experience, from outside Israel but willing to live in the country.

AstraZeneca PLC CEO Pascal Soriot was last month linked to the job, but neither company has commented on what both described as "market rumors."

Teva has been trying for several years to make progress on an overhaul. In 2012, it hired Jeremy Levin from Bristol-Myers Squibb Co. to take the helm, but he was forced out the next year during a dispute with the board over the company's direction.

His replacement, Mr. Vigodman, an Israeli who was familiar with the company from his time serving on its board but lacked a drug-industry background, left the company in February amid investor criticism over the Allergan generics deal and a deep fall in Teva's share price.

Mr. Vigodman has declined to comment on the reasons for his departure. Longtime CFO Eyal Desheh left Teva on June 30.

Underscoring the challenge a new chief faces in making wholesale changes, Teva last month said it would cut roughly 350 jobs in Israel at two factories, causing uproar among the firm's unionized employees.

An Israeli parliamentary committee last week examined the issue and called on Teva to negotiate with union employees or risk losing tax breaks.

"The committee will take off its gloves" if Teva doesn't negotiate, lawmaker Micky Rosenthal told Israeli media.

He said the firm had received 18 billion Israeli shekels, or $5 billion, over the past decade in tax benefits, calling that an "inconceivable amount."

Write to Denise Roland at Denise.Roland@wsj.com and Rory Jones at rory.jones@wsj.com

(END) Dow Jones Newswires

August 03, 2017 15:54 ET (19:54 GMT)