Teva Misses, Maintains View


Teva Pharmaceutical Industries’ (TEVA) second quarter earnings of $1.28 per American Depositary Share (ADS) were a penny below the Zacks Consensus Estimate but 16.4% above the year-ago earnings.

Second quarter revenues increased 18.6% to $4.99 billion, shy of the Zacks Consensus Estimate of $5.09 billion.

The Quarter in Detail

Teva reported sales growth in RoW (30%) and the US (28%). Revenues, however, remained flat in Europe. Currency fluctuations negatively impacted total revenues by $236 million. Teva expects foreign currencies to continue to negatively impact 2012 sales.

Sales in the US grew 28% to $2.5 billion in the reported quarter, boosted by the inclusion of Cephalon and the strong performance of branded and generic products. The company launched four new generic products in the second quarter of 2012.

The US generic business continues to show signs of improvement with sales increasing 16% to $1.1 billion. Sales benefited from the launch of four new products and the continuing strong performance of products launched in the first quarter of 2012.

Important launches in the first quarter included the launch of Teva’s generic versions of Provigil, Forest Labs’ (FRX) Lexapro and Eli Lilly’s (LLY) Zyprexa, among others. The performance of the US generics segment should continue improving.

Branded product revenues increased 37% to $1.9 billion in the second quarter of 2012. Revenues benefited from the inclusion of Cephalon products Treanda ($139 million) and Nuvigil ($91 million). However, Provigil sales ($48 million) declined significantly due to generic competition.

Key branded product Copaxone posted global in-market sales of $982 billion, up 12%. Sales benefited from the take back of distribution and marketing rights in Europe from Sanofi (SNY) and stronger sales in RoW.

Other products that contributed to growth were Azilect at $95 million, up 36%.  Meanwhile, respiratory segment sales declined marginally to $209 million and the women’s health business sales declined 6% to $112 million.

Revenues in Europe remained flat at $1.5 billion. Although revenues were positively impacted by the inclusion of Cephalon products and the strong performance of branded products especially Copaxone, generic sales were impacted by the macro-economic conditions and healthcare reforms in key European markets.

Negative currency movement also impacted second quarter 2012 sales. European generic revenues of $884 million, while down 12% from the year-ago period, were up on a sequential basis.

Teva received some good news on the Copaxone patent infringement lawsuit front recently with favorable court rulings in the UK and the US. With these rulings, Copaxone should be protected from generic competition until September 2015.

RoW (Rest of the World including Canada, Israel, certain markets in Eastern Europe, Latin America and Asia) revenues grew 30% during the quarter with sales coming in at $1.1 billion. Increased sales in Russia and other countries in Eastern Europe, Latin America and Israel helped boost revenues. Moreover, sales benefited from the Taiyo and Cephalon acquisitions.

API sales increased 9% to $200 million. OTC revenues increased 21% to $219 million. Teva has a partnership agreement with Procter & Gamble (PG) targeting the consumer health care market.

Research & Development expense increased to $298 million from $243 million in the year-ago period. The inclusion of Cephalon was the main reason for the increase. The company said that it expects R&D expenses to increase in the second half of 2012.

Meanwhile, Selling and Marketing (S&M) expenditures increased to $973 million from $794 million mainly due to the inclusion of Cephalon and Taiyo and the take-back of Copaxone rights in Europe.

The company repurchased 3.5 million shares during the quarter. Teva has a $3 billion share buyback program which was announced in Dec. 2011. We are positive on the company returning value to shareholders.

Maintains 2012 Outlook

Teva expects earnings of $5.30 - $5.40 per ADS on total net sales of $20 - $21 billion in 2012. The Zacks Consensus Estimate currently stands at $5.36 per ADS.

The company expects to generate $10.5 billion sales in the US with the EU 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 US generics business is expected to deliver sales of $4.6 billion in 2012. Performance in the EU will continue to be affected by macro-economic conditions, currency fluctuations and healthcare reforms. The EU 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.

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. 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.

While the third quarter is expected to be lighter on a sequential basis, the company expects to the fourth quarter to be strong. Teva will provide an update on its strategic plan in December.

Neutral on Teva

We currently have a Neutral recommendation on Teva, which carries a Zacks #3 Rank (short-term Hold rating). We expect EU sales to remain weak throughout the year.

Longer-term, the Cephalon acquisition should help Teva expand and strengthen its branded and specialty pharma business. Moreover, the favorable Copaxone ruling is a major win for the company and should do away with any concerns regarding near-term generic competition for the product.

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