Forget Teva (TEVA), Buy These 4 Drug Stocks Instead

It’s not been a good quarter for Israel-based generic drug maker, Teva Pharmaceutical Industries Limited (NYSE:TEVA) . Teva missed on both second quarter earnings and revenues and lowered its outlook for 2017. The company’s shares are down significantly following the release of disappointing second quarter results. Year-to-date (YTD), Teva has lost 52.6% of its value versus the 17.4% decline of its industry.

What Went Wrong?

A key reason for Teva’s dismal performance was generic pricing erosion. The sharp decline in generic drug prices, while a blessing for patients, is proving to be a major challenge for generic drugmakers as well as drug distributors.

On its second quarter call, Teva said that the ongoing consolidation of customers has led to increasing price erosion and decreasing volume. The consolidation in the industry has increased the ability to negotiate lower prices for generic drugs. Teva said that the finalization of both prices and volumes of its inline products with one of its largest customers, Claris One, and other new contracts had a greater-than-expected negative impact on second quarter results and the outlook for the rest of the year.

Moreover, the FDA is speeding up the approval of generic drugs which means more competition, increasing price cuts and decreasing volume. Teva said that price erosion was around 6% in the second quarter and is expected to increase to high-single digits over the remainder of the year. All these headwinds will persist for the U.S. Generics unit in the near future, resulting in lower revenue and profit in this segment in 2018 and potentially 2019.

Meanwhile, the company said that it does not expect any earnings contribution from its businesses in Venezuela given the significant devaluation of the Venezuelan currency.

Teva also cut its dividend by 75% and could be at risk of breaching its covenants if cash flow is hit by lower-than-expected proceeds from potential divestments or if there is a delay into early 2018 (Also read: Teva Plunges to 10-Year Low, Credit Rating in Jeopardy).

Zacks Rank & Estimate Revisions

Teva is a Zacks Rank #5 (Strong Sell) stock. With the company reporting disappointing results and lowering its outlook, Teva has seen the Zacks Consensus Estimate for current-year earnings being revised 10.3% downward over the last 7 days. The Zacks Consensus Estimate for 2018 earnings was revised 14.9% downward over the last 7 days.

Teva has many challenges ahead – paying down debt, divesting non-core businesses to increase focus on core areas and generate cash, hiring a permanent CEO, delivering on the pipeline and getting the U.S. generics business back on track.

While Teva deals with these challenges, here is a look at 4 drug companies that sport a strong Zacks Rank and look well-positioned.

Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) : New Haven, CT-based Alexion reported a “beat and raise” quarter with flagship product, Soliris (eculizumab) continuing to perform well. Alexion is working on expanding Soliris’ label and has a key catalyst coming up with a decision from the FDA expected by Oct 23, 2017, regarding the approvability of Soliris for refractory generalized myasthenia gravis (gMG). Meanwhile, a decision in the EU, where a positive CHMP opinion was received, is also expected in the third quarter.

Alexion, which had a rough 2016 with shares falling 35.9%, looks set to recover lost ground with shares increasing 8.1% so far in 2017, outperforming the 5.6% rally of the industry it belongs to. The company’s new management team is focusing on Alexion’s expertise area of complement biology and core therapeutic areas of hematology, nephrology, neurology, and metabolic disorders. Alexion will be working on growing its rare disease business. A Zacks Rank #1 (Strong Buy) stock, Alexion has seen the Zacks Consensus Estimate for current-year earnings being revised 4.8% upward over the last 30 days. Estimated earnings growth for the current year is 26.1%.

Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) : Regeneron's key focus areas include eye diseases, heart disease, allergic and inflammatory diseases, pain, cancer, infectious diseases and rare diseases. While eye drug, Eylea, the company’s key growth driver continues to perform well, Regeneron has been working on diversifying its portfolio and gained FDA approval for two drugs this year -- Dupixent (moderate-to-severe atopic dermatitis) and Kevzara (moderately to severely active rheumatoid arthritis). Both drugs have blockbuster potential. The company also has a strong pipeline comprising 17 candidates including for cancer and has key data readouts lined up for the second half of the year. Regeneron has seen the Zacks Consensus Estimate for current-year earnings being revised 31.3% upward over the last 7 days.

Regeneron, a Zacks Rank #1 stock, has gained 25.3% year to date, substantially outperforming the 5.6% rally of the industry it belongs to. Estimated earnings growth for the current year is 67.1%.

Sanofi (NYSE:SNY) : French pharmaceutical giant Sanofi has a strong presence in several markets including diabetes, cardiovascular, rare disorders, vaccines and consumer healthcare. The company raised its 2017 earnings outlook (at constant exchange rates – CER) following the release of second quarter results. Sanofi, which had recorded a decline in share price last year, has gained 17.2% year to date, outperforming the 10.1% rally of the industry it belongs to. Sanofi has seen the Zacks Consensus Estimate for current-year earnings being revised 3.1% upward over the last 30 days. Although the company’s diabetes segment will remain under pressure, new product approvals and sales ramp up of recently launched products should provide some support.

Sanofi is a Zacks Rank #2 (Buy) stock. The company also has a VGM Style Score of B. The VGM style score is a useful tool that allows investors to gain an insight into a stock’s strengths and weaknesses.

Our research shows that stocks with a VGM Style Score of A or B when combined with a Zacks Rank #1 or #2 offer the best upside potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

Gilead Sciences, Inc. (NASDAQ:GILD) : Biotech company Gilead also reported better-than-expected results in the second quarter with its hepatitis C virus (HCV) business doing better than expected in the U.S. The company’s HIV franchise also continues to do well. Gilead raised its outlook for the year. Gilead has seen the Zacks Consensus Estimate for current-year earnings being revised 7.4% upward over the last 30 days. Gilead is a Zacks Rank #2 stock with a VGM style score of B.

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