Teva Pharmaceutical Industries, the world's biggest generic drugmaker, ended a challenging year on a strong note with fourth-quarter earnings that topped expectations. Investors seem to have agreed: Teva shares were up 4% yesterday on the Nasdaq.
Sales of generic drugs in a key market, the United States, slumped badly last year, but Teva is picking up the slack by increasing sales of generics in emerging markets.
Teva reported a jump in fourth-quarter profits, but analysts say the company has to diversify its income sources and reduce its dependence on certain products and markets. Aside from the sagging U.S. sales, Teva's key multiple sclerosis drug Copaxone faces generic and brand competition. As Teva has only one other brand drug of its own (not bought when acquiring another company ) - Azilect for Parkinson's disease - the company has sought to solve this problem through acquisitions of companies.
Profits came in slightly above expectations. Fourth-quarter earnings excluding one-off items rose to $1.59 per diluted share, compared with $1.25 a share in the same period a year ago.
Fourth-quarter sales rose 28% to $5.7 billion. For the full year, sales reached $18.3 billion. Global sales of Copaxone grew 8% to $1 billion in the quarter as Teva jacked up its price. Analysts suspect sales of the drug will peak this year.
The company also reported strong cash flow of $1.4 billion, which will help reduce its debt. That debt has spiked to $14.5 billion following the acquisition of Cephalon last year.
Reducing dependence on 'any one product'
"Teva's strategy is focused on growth and on reducing dependence on any one particular market or product," CEO Shlomo Yanai said, pointing to the acquisition of Cephalon, Japan's Taiyo and a joint venture with Procter & Gamble. "Our strategic achievements in 2011 provide a strong foundation for Teva's sustainable long-term growth."
Fourth-quarter sales were strongly boosted by three Cephalon products: Provigil and Novigil for narcolepsy and Treanda for chronic lymphocytic leukemia. Those three were responsible for 45% of Teva's revenue growth. The problem is that Provigil's patent expires this April; it alone was responsible for 28% of Teva's revenue growth.
Chief finance officer Eyal Desheh said in a conference call that Cephalon had boosted profits beyond expectations. The brand drugs it brought to Teva reduced Copaxone's contribution to brand sales to 41%, from 61% in the last quarter of 2010. Meanwhile, Copaxone remained the most popular drug to treat multiple sclerosis, with a 31% market share, Desheh said.
Problem in U.S.: Competition
U.S. sales of generics fell 5% in the fourth quarter to $1.2 billion. But that's a big improvement from the second and third quarters, when U.S. sales of generics totaled just $782 million and $903 million respectively.
One reason for the fourth-quarter rally is Teva's alliance with Indian company Ranbaxy in selling generic Lipitor. That product, the world's best-selling drug, lowers cholesterol. Also, Teva launched a generic version of anti-psychotic drug Zyprexa.
But Yanai's comments hint that the company has little expectation of achieving U.S. generic sales greater than $5 billion in 2012. It's counting on growth in emerging markets, where fourth-quarter sales surged 81% to $758 million.
Sabina Podval, pharma analyst at Leader Capital Markets, said Teva's fourth-quarter report came in as expected. Teva had lowered investor's expectations during the year and the trend throughout 2011 continued in the fourth quarter, she wrote. "The report met the consensus and was slightly above my forecast."
Teva managed to claw back somewhat from eroding U.S. sales of generics during the quarter, Podval wrote. Yet for the full year, U.S. sales of generic drugs were down 32% compared with the year before.
On the other hand, generic drug sales in Europe rose 33% for the year. The debt crisis in Europe plays in Teva's favor as cash-strapped governments seek ways to lower health care costs, she says. One way is to replace brand drugs with cheaper generics.
Another area where Teva is making strides is over-the-counter drugs, a fairly new area for it. Fourth-quarter sales of OTC drugs sprang to $217 million, from a pace of $180 million-$185 million in the preceding quarters. Teva aspires to reach OTC sales of a billion dollars in 2012, Podval says.
At the start of the year, Yanai announced his resignation after five years on the job. The new CEO, Jeremy Levin, brings a strategy of making mid-sized deals from his previous employer Bristol-Myers Squibb.
Ruth Schuster, Vadim Sviderski and Eran Azran contributed reporting.
