Teva Issues 2012 Outlook

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Teva Pharmaceutical Industries Ltd. (TEVA) finally provided much-awaited guidance for 2012. Teva, which saw a change in leadership recently, is guiding towards earnings of $5.30 - $5.40 per share on total net sales of $20 - $21 billion in 2012. This represents a cut from the outlook provided by the company in late 2011 when it had guided towards earnings of $5.48 - $5.68 per share on total net sales of about $22 billion. Performance in the E.U. will continue to be weak throughout the year.

Teva expects to generate $10.5 billion sales in the U.S. with the E.U. and Rest of the World (RoW) generating sales of $5.8 billion and $4.2 billion, respectively. The major chunk of revenues ($10.7 billion) will be provided by the generics business (including API sales).

Teva’s U.S. generics business, which had been performing below expectations for a major part of 2011, is expected to deliver sales of $4.6 billion in 2012. U.S. generic sales will be impacted by about $400 million due to strategic and proactive changes in the commercial model, which will result in a reduction in wholesale inventories. This amount includes $150 million of delayed product launches like generic versions of Eli Lilly’s (LLY) Zyprexa (olanzapine) and AstraZeneca’s (AZN) Entecort (budesonide) among others. Moreover, the company has products that are not launching including generic versions of GlaxoSmithKline’s (GSK) Avandia (rosiglitazone) and Pfizer’s (PFE) Lipitor (atorvastatin).

Performance in the E.U. will continue to be affected by macro-economic conditions, currency fluctuations and healthcare reforms. While the impact of negative currency movement is estimated to be $600 million, the ongoing macroeconomic conditions and healthcare reforms in key European markets are expected to impact revenues by about $400 million. Teva said that the tough conditions have resulted in distributors reducing their inventory levels. The E.U. generics business is expected to deliver revenues of about $3.4 billion. RoW generic product sales are expected to be about $2.7 billion.

Meanwhile, branded products are expected to contribute $8.0 billion to the top line with multiple sclerosis drug, Copaxone, contributing $3.8 billion. Copaxone sales are expected to peak in 2012 and decline through 2015 with the entry of new competitors. Oncology product, Treanda (a part of Cephalon’s portfolio), is expected to generate sales of $580 million. Sleep disorder drugs, Provigil and Nuvigil, are expected to generate sales of $420 million and $300 million, respectively.

While Women’s Health products are expected to contribute $500 million to revenues, ProAir HFA is expected to generate revenues of $430 million. QVAR and Azilect are slated to post revenues of $350 million and $340 million, respectively. Finally, OTC sales are expected to be about $1 billion. Other net sales are also expected to be about $800 million.

Teva expects to spend between 6.8% to $7.2% of net sales on R&D. With the Cephalon acquisition, Teva now has 30 late stage clinical programs.

Selling & marketing expenses (including royalties of about $400 million) are expected to range between 18% and 20% of net sales. General and administrative expenses are expected in the range of 5.4% - 6.0% of net sales.

Our Take

Teva’s new guidance for 2012 was well short of expectations with the Zacks Consensus Estimate standing at $5.58. However, the guidance cut was largely expected as the new CEO had refrained from reaffirming the company’s previously issued guidance.

We currently have a Neutral recommendation on Teva, which carries a Zacks #3 Rank (short-term ‘Hold’ rating).

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