Teva Pharmaceutical Industries’ (TEVA) second quarter earnings of $1.08 per American Depository Share (ADS) was above the Zacks Consensus Estimate of $1.04 and the year-ago earnings of 83 cents. Teva’s top-line performance remained strong with revenues increasing 11.8% to $3.8 billion, in-line with the Zacks Consensus Estimate. Strong sales of Copaxone and generics helped drive revenues.

Quarterly Details

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 $135 million, up 21%.

Pharmaceutical segment revenues were driven by strong performances in the North American, European and International segments. The launch of generic versions of Hyzaar, Cozaar and Yaz and continued strong sales from existing products like generic versions of Mirapex, Pulmicort Respules, and Eloxatin helped North America revenues grow 17% to $2,467 million.

Key branded product, Copaxone, posted global in-market sales of $773 million, up 13%. While US in-market sales increased 21% to $531 million, ex-US in-market sales remained flat at $243 million. Although the company reported sales growth in Europe and Latin America, Teva said that timing of tenders 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 which could hit the market early next year.

Other products/segments that contributed to growth were Azilect at $70 million, up 29%, and the global respiratory business at $221 million, up 17%. The women’s health business also recorded growth with sales coming in at $82 million, up 3%. Strong sales of Seasonique and ParaGard helped drive growth in the women’s health business.

We expect the North American pharmaceutical segment to continue posting strong revenues going forward. The company has a strong pipeline of products and as of July 16, 2010, had 206 abbreviated new drug applications (ANDAs) awaiting US Food and Drug Administration (FDA) approval, representing more than $107 billion in branded sales. About 134 of these ANDAs are paragraph IV challenges, including approximately 82 first to file opportunities representing more than $48 billion in branded sales.

Pharmaceutical revenues in Europe increased 4% to $811 million, mainly due to increased sales of Copaxone and Azilect and strong generic sales in Italy, Spain and France. International pharmaceutical revenues grew only 1% during the quarter with sales coming in at $522 million. Increased sales in Latin America and Israel were partially offset by the timing of Copaxone sales in government tenders.

Teva’s acquisition of ratiopharm, scheduled to close shortly, 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 like Spain, Italy and France. The company expects this acquisition to increase sales from its European business from $3.3 billion in 2009 to joint pro forma sales of $5.2 billion.

Research & Development expense increased 28.4% to $217 million. Teva expects net R&D spend to range between 6%-6.5% of sales in 2010. Meanwhile, Selling and Marketing (S&M) expenditures (excluding amortization of purchased intangible assets) declined slightly to $636 million. The decline is in-line with expectations as Teva has stopped making royalty payments to Sanofi-Aventis (SNY) on Copaxone sales in North America from Apr 1, 2010. General and Administrative expenditures also declined from the year-ago quarter to $189 million, or 5% of revenues.

While Teva did not provide an update on its previously issued guidance, the company declared a dividend of 18.1 cents per ADS.

Neutral on Teva

We currently have a Neutral recommendation on Teva, which is supported by a Zacks #3 Rank (Hold). While we expect the company 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. With Copaxone contributing more than 20% to total revenues in 2009, the entry of generic versions would result in a major setback for the company.
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