The Pandora turnaround postponed until 2020?

The jewelry company Pandora has issued a press release regarding their quarterly results with the comments below from the new CEO and the CFO.

Alexander Lacik, CEO:

“I’m very excited to join Pandora. We have some very strong fundamentals in terms of a world-class supply chain, a strong product proposition as well as a deep reaching distribution network that gives consumers all around the globe quality access to Pandora. The brand as well as the company has reached a point of maturity and it is not without some serious challenges. The recently announced transformation programme NOW, which I fully support, is a great transition into the future.“

Anders Boyer, CFO:

“Programme NOW is progressing rapidly and is creating a real transformation of our business, culture and organisation. As expected, the first quarter was characterised by continued weak like-for-like further burdened by our deliberate commercial reset. While the first quarter emphasises the need for our planned brand re-launch, it is encouraging to see that our initial commercial pilots and marketing tests to Reignite a Passion for Pandora show good results.”

A transcript of the earnings call is available from Yahoo Finance.

Below are two slides from the earnings call with the highlights of the quarter and two slides with waterfall charts visualising the organic growth and the EBIT margin for the quarter.

Various financial metrics are summarised below. Revenue is shrinking (-6%), gross profit is decreasing (-6%) despite COGS being reduced (-6%) and operating profit is down (-25% excluding restructuring costs) in part due to SG&A being up (+5%); administrative expenses are down (-8%), but sales and distribution is up (+13%). The gross margin is relatively unchanged at 75.9%, but the EBITDA margin is down from 32.6% to 30.7% and the EBIT margin is down from 28.2% to 22.5% (excluding restructuring costs).

ROIC hit another all time low of 47.6%. Because of a switch from the IAS17 to the IFRS16 accounting standard it was further reduced to 35.2%.

Product segments

Revenue from charms was down from DKK2,854m to DKK2,434m (17.3% YoY). Charms will quite possibly make up less than half of the total revenue at the end of 2019. This diversification of product categories is not necessarily a bad thing, as it can be seen as a natural maturation process of the brand and as a reduction of risk.

Geographic segments

China is still growing double digit in terms of store openings (+29%) and revenue (+15%), whereas other mature markets seem to be saturated. The same-store-sales growth is negative (-10%). All of the main markets are experiencing negative like-for-like growth; including China (-4%).

Cost reductions are progressing as expected with DKK100m realised in the quarter. The CFO had the following comment regarding the cost reduction:

As you know, the cost reduction opportunity is quite big. And we target a run rate saving DKK1.2 billion by the end of next year, by the end of 2020. And for ’19 specifically, we expect to realize cost reductions of around DKK600 million. And that comes, as you know, on top of the DKK350 million cost reductions that was announced back in August last year and in connection with the Q2 announcement.

The CFO had the following comment about the restructuring costs, which will include channel buyback

So that’s — we are keeping the DKK1.5 billion — up to DKK1.5 billion in restructuring cost unchanged for that same reason.

Pandora guides with negative growth of -3% to -7% and a lowered EBIT margin of 26% to 28% excluding restructuring costs.

Despite guiding with a lower EBIT margin of 26% to 28% Pandora still has some of the best margins in the jewelry/luxury industry.

An attempt can be made to estimate the 2019 FY earnings. Pandora is guiding with organic growth in the range -7% to -3% and an EBIT margin in the range 26-28%. Below are some more pessimistic expectations regarding earnings and margins prior to restructuring costs based on the lower and higher end of estimates regarding organic growth and cost savings.

By any measure Pandora currently trades at an attractive price; even when factoring in, that net profit could very well be 30% lower in 2019 compared to 2018. Below various multiples such as trailing annual P/E (5.7) are shown.

2019Q1 Diabetes

Diabetes developments in the first quarter of 2019

Press releases regarding first quarter results have been issued from diabetes competitors Novo Nordisk, Eli Lilly, Sanofi and others. Four of the main antidiabetic drug types manufactured by these pharmaceutical companies are insulin, GLP-1 receptor agonists, SGLT2 inhibitors (gliflozins) and DPP4 inhibitors (gliptins). The development in each of the four drug categories is covered in separate sections belows. Revenue market share is shifting from insulin to GLP1 and it is happening faster in the US than the rest of the world.

GLP-1 receptor agonists

Victoza® (daily injection GLP1R agonist liraglutide) from Novo (-18% YoY in the US) is competing with the weekly injection GLP1R agonists Trulicity® from Lilly (+26% YoY and -9% QoQ in the US) and in particular Ozempic® from Novo itself (+41% QoQ in the US).

It is not unreasonable to expect GLP1 to further gain value share of the total diabetes market going forward given the expected approval of oral semaglutide following the PIONEER studies and the expiration of patents on insulins Lantus®, Levemir® and Humalog®.

The dual agonist Tirzepatide (LY3298176) for the treatment of diabetes has progressed to phase 3 and Lilly is currently recruiting for the clinical trials SURPASS-3 (versus insulin degludec – Tresiba®) and SURPASS-4 (versus insulin glargine – Lantus®).

Saxenda® (liraglutide) from Novo has quickly become the best selling anti obesity drug in the world (+47% YoY).


Lantus® (insulin glargine) from Sanofi (-37% YoY in the US) is competing with the biosimilar Basaglar® (+56% YoY in the US) from Lilly.

Humalog® from Lilly (-11% YoY in the US) will be competing with the biosimilar Admelog® from Sanofi (+18% QoQ in the US) and the recently launched generically labeled insulin lispro at half price from Lilly itself.

Despite the price pressure on insulin, Tresiba® from Novo displayed positive growth (+21% YoY and +5% YoY in the US). The ultralong-acting daily injected Tresiba® (insulin degludec) reduces the risk of hypoglycaemia.

But despite the growth from Tresiba® Novo experienced negative growth in the insuling segment because of NovoMix® (-20% YoY), NovoRapid® (-6% YoY), Levemir® (-8% YoY) and human insulin (-17% YoY). Furthermore Levemir® faces patent expiration in 2019. Sanofi experienced negative growth because of Lantus® (-37% YoY in the US), whereas Lilly experienced positive growth because of their biosimilar Basaglar® (+56% YoY in the US).

SGLT2 ihbitors (gliflozins)

The SGLT2 inhibitors however have side effects that oral semaglutide does not have. But Farxiga from Astra and Jardiance® experiences growth (+17% and +35% YoY respectively) while FDA approval of oral semaglutide is pending.

DPP4 inhibitors (gliptins)

Boehringer Ingelheim and Lillyannounced in February, that the CAROLINA cardiovascular outcome trial of Trajenta® met its primary endpoint of non-inferiority compared with glimepiride.

Merck wrote in their earnings press release, that sales of Januvia®/Janumet® “declined slightly due to continuing pricing pressure in the United States, which more than offset strong demand from international markets.”

Below are headlines from the press following the earnings releases:
Bloomberg: Eli Lilly CEO on 1Q Results, Drug Pricing, Pharma Margins
Reuters: Eli Lilly misses estimates for top-selling diabetes drug Trulicity, shares slip
Reuters: Novo Nordisk profit tops forecast as new diabetes drug shines


Teva still suffers from negative revenue growth and return to growth is still distant

Teva reported on their first quarter results and issued the following press release with the following headlines and statements from the CEO:

– Revenues of $4.3 billion
– GAAP diluted loss per share of $0.10
– Non-GAAP diluted EPS of $0.60
– Free cash flow of $360 million
– Spend base reduction of $2.5 billion since initiation of the – restructuring plan in 2018; on-track to achieve $3.0 billion by the end of 2019
– Full year 2019 revenues and EPS guidance reaffirmed

Mr. Kåre Schultz, Teva’s President and CEO, said, “The second year of our two-year restructuring program got off to a promising start. We are on track to reduce our total cost base by $3 billion by the end of 2019 and we have achieved a reduction of $2.5 billion to date, while continuing to lower our debt. “

Mr. Schultz continued: “We faced the expected loss of exclusivities of key products COPAXONE® and ProAir® to generic competition. Our focus is on stabilizing our global generics business and ensuring the success of our long-term organic growth drivers, especially AJOVY® and AUSTEDO®. Both products continue to gain momentum since their initial launches and we are making the necessary investments to be able to bring them to markets outside of the U.S. as well as explore additional indications.”

Below the revenue is shown for each geographic segment, the multiple sclerosis drug Copaxone® and generic drugs. The operating expenses are also shown.

Copaxone® revenue has been further reduced following the introduction of generic versions from Mylan and Momenta at lower prices. Revenue from generic drugs in the US seems to have stabilised. The company is on track to achieve the goal of reducing expenses by $3B annually and $750M quarterly. The migraine drug Ajovy® does not yet contribute significantly to the overall revenue. Annual peak sales have been estimated to be greater than $500M. Ajovy® received EU approval in April 2019.

The slide below is a summary of the quarterly highlights not already mentioned above.

The slide below shows the NBRx market share of the migraine drug Ajovy®.

The current competition is Aimovig® from Amgen and Emgality® from Lilly.

Alder BioPharmaceuticals also has a CGRP migraine drug (eptinezumab) in phase 3.

The slides below are summaries of Austedo®, Copaxone® and Ajovy®

The slides below are summaries of GAAP and non-GAAP metrics and a summary of the items causing the difference; e.g. $348M of impairment charges to intangible assets and amortisation of $283M.

The slides below summarises the free cash flow and the long term debt.

The slide below summarises the non-GAAP outlook.

The final slide below shows the debt maturity. The CEO has said the company will not need to raise equity, but given the reduced revenue, profit and cash flow the company will definitely have to refinance. Currently the credit rating is BB with S&P and Ba2 with Moody’s.

I do think Teva could trade close to $30 within the next 2-5 years, but it’s not a business I would own long term, so I choose not to buy at $14-16 despite the lowest EPS forecast for 2020 currently being $2.28 and the remainder of the market (i.e. S&P500) being somewhat overpriced.

During the call the CEO didn’t reveal much about the long term targets and long term strategy:

Yeah, of course, we have the aim to become as effective as any of our competitors, which means that longer-term we need to improve our margins which is why we have a long-term financial target of an operating margin of 27%, which is higher than where we are right now. So, of course, in order to achieve that, we need to set plans in place so that this happens. Our plan right now is to communicate more broadly on this once we finish this year. So once we finish the restructuring of ’18 and ’19, we will communicate to you what is our strategy for manufacturing and for that part of the cost base.

You can see that, we have a long-term target of the operating profit of 27%, that’s higher than where we are now. Part of that improvement of course has to come from the COGS, because if we don’t improve the gross margin, then it’s going to be very difficult to get a significant improvement of the total margin. So yes, we will be targeting something like that. We will give you some more details on what we are planning to do once we finish the restructuring, that means once we report on the full year of 2019. Next February, we’ll give you an outline of how we see the ongoing optimization of our manufacturing system.

On the R&D side, we spent roughly $1 billion on R&D, and you could see the — a big chunk of that is for innovative specialty products. We have about 30 development projects ongoing, about two-thirds of those are biopharmaceuticals. And we don’t really want to share that with anybody right now. The reason is that, we are in the restructuring right now this year and last year, but our plan is to share more with you once we finish this year. So once we get to February of next year, we will share a bit more with you on what is our pipeline, what are the different projects we have.

Globes, May 2nd: Teva Q1 revenue down but profit beats analysts

Bloomberg, May 2nd: Teva Falls as Sales of Copaxone Decline Faster Than Expected

Reuters, May 2nd: Teva’s new migraine drug helps to contain profit fall

Globes, May 3rd: Teva CEO unsure about 2020 growth

CNBC, May 5th: Migraine drugs cause pain for investors