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Teva earnings: Facing down cheaper generic prices, generic competition of its own and a lot of debt

Generic drugmakers have been roiled by cheaper prices for their products — Teva Pharmaceutical Industries Ltd., the world’s biggest generic drugmaker, especially so.

Investors will be especially wary going into third-quarter earnings, which the company is scheduled to report Thursday before the open. The company’s second-quarter profit miss and cuts to full-year outlook sent the stock off a cliff; shares have lost 41.5% since Aug. 3.

Price erosion on already-inexpensive generic drugs, compounded by faster Food and Drug Administration generics approvals, are among the factors that have hurt Teva TEVA, +1.59% and others. Teva has also said that it expects generic price deflation to worsen in the second half of 2017, and other projections expect the trend to continue into fiscal 2018.

Teva is also contending with generic competition for its popular multiple sclerosis drug Copaxone. Mylan NV MYL, +3.19% scored a surprise U.S. approval of both high and low dose levels of the drug and launched both doses earlier this month.

Teva is also ladled down with billions in debt, although the company has made progress in recent months, including debt covenant amendments and sales of assets like its specialty global women’s health business. The company also has a new chief executive officer, Kare Schultz, formerly of Denmark’s H. Lundbeck A/S, who starts at Teva on Wednesday.

The latest quarter “is probably going to be messy from generics,” said EvercoreISI analyst Umer Raffat, noting that Novartis’ Sandoz NVS, +0.23% reported a 13% drop in year-over-year U.S. business.

Here’s what to expect:

Earnings: Analysts expect Teva to report earnings of $1.04 per share, down from $1.31 in the year-earlier period, according to FactSet. Teva has beat the FactSet earnings consensus in all but three quarters over the past five years, including its recent second-quarter miss.

The software platform Estimize, which crowdsources estimates from buy-side and sell-side analysts, hedge funds, academics and others, has the company earning slightly more, or $1.06.

Revenue: Analysts expect Teva to report revenue up $5.63 billion, up from $5.56 billion in the year-earlier period, according to FactSet. Teva has missed the FactSet revenue consensus in three of the last four consecutive quarters.

Estimize has Teva reporting less, or $5.61 billion.

Stock reaction: Teva shares have dropped 57.3% to $13.73 over the last three months and 60% year-to-date, compared with rises of 4.3% and 15.1% respectively in the S&P 500 SPX, +0.16% .

The company’s average analyst rating is hold, with a $20.23 price target, according to FactSet.

What to watch for: Teva is one of the drugmakers being targeted in a heavy-hitting Ohio lawsuit alleging that drug companies helped drive the opioid crisis in that state, and other states have followed in kind.

These lawsuits will likely be tough to win, expensive and could help push the U.S. health system towards opioid alternatives, said Bernstein analyst Ronny Gal, estimating that damages could total more than $10 billion in Ohio alone.

Because of Teva’s debt, “a large fine could become somewhat of a concern if it happens in the next couple of years (before Teva gains material ground),” Gal said.

These risks also could have been avoided, he said, noting that at the time of Teva’s 2011 acquisition of the biotech Cephalon, Cephalon was known “to have engaged in problematic practices. Those business practices risks were largely ignored. However, within 3-5 years, we have seen all these risks materialize.”

Teva has new product launches coming up that are expected to benefit the company, but they’re only scheduled to happen in December, EvercoreISI’s Raffat said.

Also worth paying attention to: Teva’s migraine drug, over which it has sued Eli Lilly & Co. LLY, +1.16% in a patent infringement suit and may sue Amgen Inc. AMGN, +0.11% as well, Raffat said. All three drugmakers are developing migraine drugs in the same class. Teva’s migraine drug could launch towards the end of 2019, Wall Street analyst said.

It’s possible that new CEO Schultz will restructure the company, although “it’s also not clear how much more cost savings opportunity TEVA has,” said RBC Capital Markets analyst Randall Stanicky, adding, “we suspect there are geographic decisions and more aggressive cost containment that could be pursued.”

AmerisourceBergen Corp. ABC, -0.43% shares plummeted 9% in extremely heavy morning trade Thursday after the company reported third-quarter profit beat but revenue miss. Shares of the drug distributor fell alongside other companies affected by generic price deflation on Thursday, after Teva Pharmaceutical Industries Ltd. TEVA, +1.59% reported generics revenue that was below expectations and cut its 2017 adjusted EPS outlook. AmerisourceBergen said on its earnings call that generic deflation is a big headwind, hasn't yet eased from high single digits and that the trend may continue into fiscal 2018. AmerisourceBergen earnings for the latest quarter declined to $50.35 million, or 23 cents per share, from $349.16 million, or $1.55 per share in the year-earlier period. Adjusted earnings-per-share were $1.43, above the FactSet consensus of $1.37. Revenue rose to $38.71 billion from $36.88 billion, below the FactSet consensus of $39.13 billion. The company expects generic drug deflation in the range of -7% to -9%, "but definitely towards the high end of that range," Chief Executive Steven Collis said on the company's earnings call, according to the FactSet transcript. AmerisourceBergen also raised its 2017 adjusted EPS guidance to $5.82 to $5.92 from $5.77 to $5.92. Company shares have risen 6.3% year-to-date, compared with a 10.5% rise in the S&P 500 SPX, +0.16%