Teva's Weak Forecast Leads to Fair Value Estimate Cut

Teva's (TEVA) management lowered its 2017 outlook from its previous forecast released in July as the firm succumbs to increased competitive pressure, especially in the U.S. generics market, and currency headwinds, partially tied to Venezuela. We had viewed management’s previous outlook as too optimistic, but management’s new projections, which still do not include generic competition on Copaxone in 2017, show greater weakness beyond our original expectations, stemming almost entirely from the generics segment. Excluding Copaxone, our forecast for Teva’s branded products remains roughly in line with management’s forecast. We already incorporate a potential generic Copaxone launch in our model this year, and we plan to significantly lower our fair value estimate as we cut our generic business-related assumptions. Our revenue and earnings forecasts will therefore be below management’s updated 2017 outlook for nearly $24 billion in revenue and non-GAAP earnings per share of $4.90-$5.30.

Even though not included in its guidance numbers, management anticipates that two generic Copaxone competitors could further reduce results by approximately $1.1 billion in revenue and $0.65-$0.80 in EPS, which we originally anticipated could be partially offset by earnings and synergies from the generics business. New generic drug launches don't look sufficient to offset recent increased competition in the generics industry along with new competitors on high-margin products like generic Concerta. Teva’s large first-to-file pipeline and anti-CGRP drug candidate for chronic migraine in phase 3 trials represent positives, but we plan to review our moat rating as headwinds in the volatile generics industry and the recent Actavis purchase put greater pressure on returns on capital.

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