Teva Earnings Beat Forecasts but Sales Prove a Rare Disappointment

Exchange-rate differences sting but Ratiopharm purchase pays off.

Teva Pharmaceutical Industries yesterday posted third-quarter profit that sailed past forecasts, but sales fell short of expectations, a rarity for the world's biggest maker of generic drugs.

Non-GAAP net profit hit $1.18 billion, a 47% rise from the same period a year before, or earnings per share of $1.30. Sales reached $4.25 billion, up 20% from $3.55 billion.

According to Bloomberg, analysts' average sales forecast was $4.7 billion, with profits estimated at $1.27 per share.

Exchange-rate differences diminished quarterly sales by about $122 million from a year earlier.

Ratiopharm boosts sales in Europe

Sales in North America reached $2.72 billion, accounting for 64% of the total, up 22% from a year earlier. Of this, U.S. generic sales were $1.63 billion, up 34%.

Europe accounted for 24% of total sales at $1 billion, an increase of 21% in dollar terms, but 33% greater in local-currency terms. Sales growth was due in large part to the recent acquisition of Germany's Ratiopharm.

Cash flow generated from operating activities in the quarter rose 16% to $1.19 billion.

Teva declared a cash dividend for the period of NIS 0.70 per share, payable on December 2.

Adjusted operating income for the quarter reached $1.44 billion, an increase of 44%. On a GAAP basis the figure was $1.19 billion, up 58%. In its reporting on an adjusted basis, Teva excluded amortization of purchased intangible assets ($144 million ), inventory step-up ($54 million ), acquisition & restructuring expenses and impairment of assets ($27 million each ).

Net income for the third quarter on a GAAP basis totaled $1.05 billion, up 62%, while diluted earnings per share were $1.15, up 60%.

Adjustments for calculating the company's non-GAAP net income excluded $45 million in financial income related to hedging activity linked to the Ratiopharm deal and $74 million in tax benefits.

Total equity at September 30 amounted to $21.7 billion, compared with $19.3 billion at the beginning of the year.

"This was another outstanding quarter of profitable growth for Teva, with record-breaking sales across all our geographies and major businesses, leading to record-breaking results across the board," said Shlomo Yanai, the company's President and CEO.

"This was also a quarter of major strategic achievements and operational successes, particularly in the U.S. with high growth rates in our generics business, and in Europe where we closed our acquisition of Ratiopharm and are already making excellent progress on its integration, which we now expect to complete ahead of schedule."

Concerns about Copaxone

Concerns have arisen over the market position of Teva's flagship product Copaxone, especially in light of Novartis' launch of a competitor, Gilenya. Copaxone accounts for about 20% of Teva's sales, and is the world's leading treatment for multiple sclerosis with a 30% global market share. Sales of the product in the third quarter amounted to $808 million, a record for quarterly sales of the product and an increase of 4% over the third quarter of 2009.

U.S. quarterly sales of Copaxone were $588 million, up 9% from a year earlier. Sales outside the U.S. dropped 6%.

Increased Copaxone sales in several countries throughout Europe and Latin America were offset by the negative impact of exchange rates, budget cuts in Europe and the timing of tenders in certain international markets.

The company said that as of last week it had 203 product applications awaiting final approval by the U.S. Food and Drug Administration in markets with total annual sales topping $118 billion. This includes 45 tentative approvals. Of the applications, 134 challenge the patents of branded products.

In Europe, since the beginning of 2010 it has received 1,461 generic approvals relating to 174 compounds in 351 formulations, including five approvals valid throughout the European Union. As of September 30 it also had 3,706 marketing authorization applications pending approval in 30 European countries, relating to 287 compounds in 583 formulations, including nine applications pending with the European Medicines Agency.

Challenges reflected in the share price

Analyst Limor Gruber of Psagot Investment House says that although Teva faces serious challenges, they are more than adequately reflected in its share price. Her target price is $62 for the stock, about 20% higher than its current trading price. She calculates erosion of 54% in Copaxone sales between 2011 and 2015.

"This report is promising, with Teva proving to be a potent force in Europe with the consolidation of Ratiopharm moving ahead according to plan," said IBI analyst Natali Gotlieb. "The company reported record sales for Copaxone and Azilect, partly due to higher prices. The decline in respiratory product sales (a 15% decline due to last year's severity of seasonal flu viruses, according to Teva ) was anticipated." She noted that the company would be holding a conference on this issue tomorrow.

"Sales were slightly lower than expected as a result of non-U.S. sales," said Steven Tepper, an analyst at Harel Finance.

Tepper cited a lack of growth in Copaxone sales aside from a price hike in the United States, and low seasonal sales in respiratory aids.

"The high profitability comes mostly from a marked improvement in gross profit resulting from the launch of new generic products in the U.S. and higher margins for proprietary drugs. Overall it's an impressive report," he said. "There still remain open questions such as what is happening in the European generic market, whether competitive pressure is felt yet in the MS market, and how Teva intends to develop its respiratory product activities."

According to Jonathan Kreizman, an analyst at Clal Finance, "Teva reported a solid quarter, albeit with lower than anticipated sales, but with earnings per share higher than the market forecast."

Kreizman noted the wide margins in the U.S. generics market and Copaxone's growing strength, but expressed disappointment with Ratiopharm's contribution. His rating for the stock remains Outperform, with a 12-month target objective of $61.