Teva Beats on Earnings - Analyst Blog

Teva Pharmaceutical Industries' (TEVA) third quarter earnings of $1.30 per American Depository Share (ADS) were above the Zacks Consensus Estimate of $1.27 and the year-ago earnings of 89 cents.

Teva's top-line performance remained strong with revenues increasing 19.7% to $4.3 billion, in-line with the Zacks Consensus Estimate. Contribution from the ratiopharm acquisition, strong sales of Copaxone and generics boosted revenues and helped offset the negative impact of currency fluctuations that hit revenues by $122 million.

The Quarter in Detail

Revenue performance across key business segments was strong. While Pharmaceutical segment revenues were driven by strong performances in the North American, European and international segments, the Active Pharmaceutical Ingredients (API) segment posted sales of $159 million, up 17%.

Pharmaceutical segment revenues were driven by strong performances in the North American, European and international segments. The launch of a generic version of Effexor and continued strong sales from existing products such as generic versions of Adderall XR, Pulmicort Respules, Hyzaar, Cozaar and Yaz helped North American revenues grow 22% to $2,724 million. So far in 2010, Teva has launched 17 new products.

Meanwhile, key branded product, Copaxone, posted global in-market sales of $808 million, up 4%. While US in-market sales increased 9% to $558 million, ex-US in-market sales declined 6% to $220 million. Although the company reported sales growth in Europe and Latin America, Teva said that the timing of tenders, foreign exchange fluctuation, and cost cutting in countries such as Germany and France impacted growth in a few international markets.

Unfortunately, Mylan (MYL) is looking to launch a generic version of Copaxone. Teva is currently seeking approval for a new formulation of Copaxone. With Teva having to submit additional data on the candidate, we expect the US Food and Drug Administration (FDA) action date to be pushed out by a few months to mid-2011.

Other products/segments that contributed to growth were Azilect at $81 million, up 28%, and the women's health business which recorded 13% growth with sales coming in at $116 million. Strong sales of Seasonique and ParaGard helped drive growth in the women's health business. In order to expand its women's health business, Teva recently announced its intention to acquire Theramex. Theramex is a Europe-based women's health business with a presence in several countries.  

The global respiratory business, however, recorded a 15% decline in sales which came in at $207 million. Year-over-year comparisons were tough as the year-ago quarter benefited from earlier and greater sales thanks to the severity of H1N1 and seasonal flu viruses. In addition to the tough year-over-year comparison, global respiratory sales were also impacted by increased competition in the short acting beta agonist (SABA) market.

We expect the North American pharmaceutical segment to continue posting strong revenues going forward. The recent launch of generic versions of Effexor XR should boost Pharmaceutical segment sales.

Moreover, Teva has a strong pipeline of products and as of October 26, 2010, had 203 abbreviated new drug applications (ANDAs) awaiting FDA approval, representing more than $118 billion in branded sales. About 134 of these ANDAs are paragraph IV challenges including approximately 83 first to file opportunities representing more than $55 billion in branded sales.

Pharmaceutical revenues in Europe increased 21% to $1,001 million, mainly due to strong generic sales in Italy, Spain, Germany and France. Results benefited from the inclusion of ratiopharm's business.

International pharmaceutical revenues grew 7% during the quarter with sales coming in at $525 million. Increased sales in Russia, Latin America and Israel helped boost revenues. Results also benefited from the inclusion of ratiopharm's business

Teva's acquisition of ratiopharm should help the company strengthen its position in key European markets, especially in Germany, the second largest generic market in the world, which is valued at approximately $8.8 billion. Teva should also gain a strong foothold in rapidly growing generic markets such as Spain, Italy and France.

Research & Development expense increased 22.6% to $239 million. Meanwhile, Selling and Marketing (S&M) expenditures (excluding amortization of purchased intangible assets) increased 12.1% to $742 million. General and Administrative expenditures also increased from the year-ago quarter to $236 million, or 5.5% of revenues.

EPS Guidance Maintained

On the third quarter call, Teva maintained its earnings guidance of $4.50 to $4.60 despite taking into consideration a 3 cent dilutive impact from the ratiopharm acquisition. The acquisition is expected to add to earnings from the first quarter of 2011. Revenues are expected in the range of $16.4 billion. The 2010 Zacks Consensus Estimate currently stands at $4.57, towards the higher end of the guidance range provided by the company.

Neutral on Teva

We currently have a Neutral recommendation on Teva, which is supported by a Zacks #3 Rank (short-term "Hold" rating). While we expect Teva to continue performing well, thanks to new product launches, both generic and branded, we remain concerned about the intense competition and pricing pressure in the generics market. Moreover, the Copaxone patent challenge remains a matter of concern. We are also concerned about the price cuts in Europe which could impact the performance of the European segment.