Teva Pharmaceutical Industries’ (TEVA) fourth quarter earnings of $1.25 per American Depository Share (ADS) missed the Zacks Consensus Estimate of $1.28. Earnings, however, increased 32.9% from the year-ago period. Full year earnings came in at $4.54, 3 cents below the Zacks Consensus Estimate. Full year earnings increased 34.7% from the year-ago period. Gross margins improved during the reported quarter.
Teva also missed revenue expectations with fourth quarter revenues coming in at $4.4 billion, below the Zacks Consensus Estimate of $4.7 billion. Full year revenues of $16.1 billion also fell short of the Zacks Consensus Estimate of $16.4 billion. Revenues, however, increased from the year-ago period – while fourth quarter revenues increased 16.2%, full year revenues increased 16%.
The Quarter in Detail
Weak US generic sales impacted fourth quarter performance. While sales in North America increased 7% to $2,488 million, US generic sales were down 5% ($1,290 million). The voluntary suspension of production at the Irvine plant affected generic revenues. Teva is looking to resume partial production at the plant in March 2011 with full production expected to resume by year end. Another factor that impacted generic revenues was the company’s failure to receive approval for certain products, including its generic version of Sanofi-Aventis’ (SNY) Lovenox, during the fourth quarter.
Meanwhile, key branded product, Copaxone, posted global in-market sales of $938 million, up 26%. While US in-market sales increased 29% to $655 million, ex-US in-market sales increased 19% to $283 million. Sales were positively affected by a tender in Russia. The company reported that Copaxone’s global market share increased to 30% in 2010. Teva took a price increase for Copaxone in January 2011.
Other products/segments that contributed to growth were Azilect at $89 million, up 27%, and the women’s health business which recorded 26% growth with sales coming in at $96 million. Strong sales of Seasonique and Plan B One-Step helped drive growth in the women’s health business. In order to expand its women’s health business, Teva recently acquired Theramex, a Europe-based women’s health business with a presence in several countries.
The global respiratory business, however, recorded a 10% decline in sales which came in at $254 million. Performance was impacted by lower ProAir sales due to a moderate flu season. Moreover, global respiratory sales were also impacted by increased competition in the short acting beta agonist (SABA) market.
Teva is currently working on strengthening its position in the respiratory market and expects to file for approval of four new products in 2011, including a May 2011 filing for Qnaze for the treatment of perennial allergic rhinitis.
We expect the US generics business to bounce back in 2011. Teva has about 40 potential launches (representing more than $20 billion in branded sales) lined up for 2011. Approval of generic Lovenox would be a major boost for the stock.
Moreover, Teva has a strong pipeline of products and as of Feb 5, 2011, had 206 abbreviated new drug applications (ANDAs) awaiting FDA approval, representing more than $121 billion in branded sales. About 134 of these ANDAs are paragraph IV challenges including approximately 80 first to file opportunities representing more than $55 billion in branded sales.
Pharmaceutical revenues in Europe increased 43% to $1,323 million, mainly due to strong generic sales in Italy, Spain, Germany and the UK. Results 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 Germany.
International pharmaceutical revenues grew 10% during the quarter with sales coming in at $607 million. Increased sales in Russia and Israel helped boost revenues. Teva is working on establishing a strong presence in rapidly growing generic markets where penetration is low. These include Russia, Japan, and Latin America among others.
API sales increased $45 million to $181 million. Currency fluctuations hit total revenues by $140 million.
Research & Development expense increased 23% to $270 million. Meanwhile, Selling and Marketing (S&M) expenditures (excluding amortization of purchased intangible assets) increased 10% to $816 million. General and Administrative expenditures also increased from the year-ago quarter to $258 million, up 18.3%.
2011 Earnings Guidance Falls Short of Expectations
On the fourth quarter call, Teva provided guidance for 2011. The company expects earnings in the range of $4.90 to $5.20 on revenues of $18.5 billion to $19 billion. Performance is expected to be stronger during the second half of the year.
Teva expects gross margin in the range of 57.5% – 59.5% in 2011, lower than the 59.6% gross margin reported in 2010. The company pointed out that 2010 gross margin was boosted by contributions from major generic product launches in the US. While net R&D expenses are expected to be about 6% of net sales, selling and marketing expenses are expected in the range of 18% to 19% of sales. General and administrative expenses are expected to be about 5% of sales.
The company’s earnings outlook was disappointing as it fell short of the current Zacks Consensus Estimate of $5.27. Meanwhile, the Zacks Consensus Revenue Estimate of $18.9 billion is already towards the higher end of the company’s guidance range.
The company reaffirmed its long-term guidance of posting a net income of $6.8 billion on sales of $31 billion by 2015.
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.
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