Levin brings promising results in his third quarter as Teva CEO
Generic sales climb as new boss sweeps house of old charges.
A new CEO can't do much about his company's financial results in his first two quarters, especially when the company is as large as Teva. For the most part, what he must do is deal with the existing situation, and explain the results as his predecessor's legacy.
So it is that Jeremy Levin, Teva's new CEO, was faced with two problems remaining from Shlomo Yanai's stewardship - problems costing $1.1 billion in provisions for the quarter which just ended, and leading to a quarterly net loss of $79 million. The first was a $670 million contingency for patent litigation against Pfizer over the acid reflux drug Protonix, and the other a $481 million write-down on the $6.5 billion acquisition of Cephalon in October of last year.
Notwithstanding these one-time charges, Teva exhibited promising results in the third quarter, with its adjusted net income of $1.28 per share easily exceeding - partially thanks to tax benefits - analyst forecasts of $1.25, and a cash flow surplus of $1 billion from ongoing activities.
Sales revenues, however, while increasing 14% compared to last year's third quarter to $5 billion, mainly as a result of consolidating revenues attributed to Cephalon, fell slightly short of analyst expectations. Sales of generic products edged up 1% for the quarter against the same period last year to $2.5 billion, while Cephalon boosted revenues from proprietary and brand-name products by 38% over the same quarter in 2011 to $2 billion.
Organic sales were up just 1.3%, mainly due to the U.S. dollar strengthening against the euro, shekel, ruble and Hungarian forint, which cut revenues by $202 million.
The results underscored continuing improvement in the U.S. generics market and the strength of Copaxone, Teva's blockbuster proprietary treatment for multiple sclerosis, despite encroaching competition from a new generation of drugs. They also reflected tight control of expenses despite the assimilation of Cephalon. On the other hand, the company performed terribly in the Canadian market and not too well in the generic markets of Europe, Japan and Latin America.
24% growth in U.S. generics
Teva registered $1.1 billion in generic sales to the United States, 24% higher than in last year's equivalent quarter, with sales of $253 million from 20 new generic products launched since the beginning of the year in markets that had totaled $23 billion for the original versions. These included the exclusive launch of a generic version of the antidepressant Lexapro and a generic version of the diabetes treatment Actos.
Sales of Teva's older generic products slipped about 5%. However, production was no longer curtailed by warnings from the U.S. Food and Drug Administration that had cut into capacity in 2010 and 2011, as well as the company's ability to fill orders.
Sales of non-generic products in the United States totaled $1.1 billion for the quarter, up 35% from the previous year. Most of the increase came from drugs acquired in the Cephalon deal, including Treanda, an injection for treating certain cancers, as well as Provigil and Nuvigil for treating sleep disorders.
Revenues from Copaxone rose 3% to $775 million following a 15% price hike last January that was offset by a drop in the number of prescriptions. But a year after the launch of Gilenya, the first orally administered MS drug, Copaxone has somewhat surprisingly succeeded in maintaining its market share of 40.4% of overall prescriptions, along with 38.4% of new prescriptions.
The growth in sales from Copaxone and the Cephalon products overcame a 22% drop in revenues from feminine hygiene products due to fierce generic competition from Watson Pharmaceuticals, particularly from its morning-after pill. Teva's respiratory product revenues were down 4% despite higher market shares.
Weak results in non-U.S. markets
Government-led price squeezes for drugs in countries including Germany, Italy and Spain led to another lackluster quarter for Teva in Europe, with revenues edging up 1% to $1.4 billion. Proprietary and branded product revenues rose 55% to $376 million with the inclusion of Cephalon product sales and completion of the transfer for Copaxone marketing rights to Teva last February.
In contrast, European sales of generics fell 13% - all but 3% due to the strengthened U.S. dollar - to $800 million. Teva's results in Europe were weaker than those of its major competitors, Sandoz of the Novartis group, Mylan, and Watson, with the company losing market share in England to Watson and, in Italy, apparently to Mylan.
Watson, with its recent acquisition of Actavis making it now the world's third largest generics manufacturer, is expected to pose a major threat to Teva in Europe. In reaction to European market conditions, Teva has begun reducing its marketing network there. In the conference with analysts following the release of Teva's quarterly results, Levin said the company will now shift its focus in Europe from market share to generating profits, and will refrain from participating in unprofitable tenders.
Generic sales in the rest of the world fell 11% to $620 million, mainly due to a 33% collapse in sales to the Canadian market where the provinces have been restricting prices, and competitors, especially Watson, are gaining ground. This is a particular sore point for Teva, Canada being one of its five largest generics markets, with Teva ranked second there.
The company's sales for the quarter in Japan were flat and rose a disappointing 6% in Latin America.
Non-GAAP gross income increased 19% to $2.9 billion for a 58.6% gross margin, against a 56.4% gross margin in the same period last year. Non-GAAP operating profits rose 6% to $1.4 billion.