CEPH Cephalon (MM)

Teva Pharmaceutical Industries’ (TEVA) first quarter earnings of $1.04 per American Depository Share (ADS) were in-line with the Zacks Consensus Estimate. Earnings, however, increased 14.3% from the year-ago period.

While first quarter revenues increased 11.7% to $4.1 billion, revenues fell short of the Zacks Consensus Estimate of $4.3 billion. The company reported sales growth in Europe (66%) and EEMA, Latin America and Asia (26%). However, North America disappointed with sales declining 11%.

The Quarter in Detail

US generic sales remained weak in the first quarter. Sales in North America declined 11% to $2,064 million with US generic and other sales declining 32% to $952 million. The lack of major launches in the first quarter of 2011 affected performance.

Moreover, the voluntary suspension of production at the Irvine plant and the slowdown in the Jerusalem facility due to the receipt of a warning letter from the US Food and Drug Administration (FDA) affected generic revenues. Both these factors impacted revenues by $100 million.

Teva resumed partial production at the Irvine plant in April 2011 with full production expected to resume by year end. The company also submitted a response to the warning letter for the Jerusalem facility and has requested the FDA to re-inspect the facility.

We expect the US generics business to bounce back in the second half of 2011. Teva has about 40 potential launches lined up for 2011. Important product launches include generic versions of Zyprexa, Levaquin, Aricept and Nasacort. Approval of generic Lovenox would be a major boost for the stock.

Key branded product, Copaxone, posted global in-market sales of $907 million, up 14%. While US in-market sales increased 22% to $624 million, ex-US in-market sales remained flat at $283 million. Sales were driven by price increases and unit growth in certain markets which were partially offset by price cuts in Germany and other markets. The company reported that Copaxone’s global market share increased to 31%. Teva took a price increase for Copaxone in January 2011.

Other products/segments that contributed to growth were Azilect at $90 million, up 16%, and the women’s health business which recorded 30% growth with sales coming in at $103 million. The inclusion of sales of Theramex products helped drive growth in the women’s health business.

We were pleased to see a 19% increase in sales from the global respiratory business. Sales came in at $229 million with growth being driven by strong sales in Europe, especially for Qvar.

Teva is 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.

Pharmaceutical revenues in Europe increased 66% to $1,344 million, mainly due to strong generic sales in Italy, Spain, Germany, and France. 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 in Germany. European sales should continue improving in the coming quarters.

International (EEMA, Latin America and Asia) pharmaceutical revenues grew 26% during the quarter with sales coming in at $672 million. Increased sales in Russia and Latin America helped boost revenues. 

API sales increased 32% to $184 million. Currency fluctuations boosted total revenues by $27 million.

Research & Development expense increased 15% to $239 million. Meanwhile, Selling and Marketing (S&M) expenditures (excluding amortization of purchased intangible assets) increased 10.9% to $825 million. General and Administrative expenditures also increased from the year-ago quarter to $221 million, up 21.4%.

Maintains 2011 Guidance

Teva maintained its 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. The guidance does not include the impact of any acquisitions in 2011. The Zacks Consensus Estimate currently points at earnings of $5.08 on revenues of $18.7 billion.

Earlier this month, Teva announced its intention to acquire Cephalon, Inc. (CEPH) for $6.8 billion The Cephalon deal is in-line with Teva’s long-term strategy of expanding and strengthening its branded and specialty pharma business. Once the acquisition goes through, the combined company’s branded product portfolio will consist of more than 20 products representing sales of about $7 billion.

P&G Deal to Make Teva Leader in Consumer Health Care

During the first quarter of 2011, Teva entered into a partnership agreement with Procter & Gamble (PG) that will target the consumer health care market. The partnership will bring together both companies' existing over-the-counter (OTC) medicines and complementary capabilities.

While P&G will bring its strong brand-building, consumer-led innovation and go-to-market capabilities to the partnership, Teva's broad geographic reach, R&D experience, and extensive product portfolio will be used to drive growth. With this deal, Teva is looking to become a leader in the consumer health care market.

 
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