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Teva Pharmaceutical Industries (TEVA - Analyst Report) reported second quarter earnings of $1.20 per American Depositary Share (ADS), a couple of cents above the Zacks Consensus Estimate but 6.3% below the year-ago earnings.

Second quarter revenues declined 1.4% to $4.924 billion, just shy of the Zacks Consensus Estimate of $4.943 billion. Lower generic sales in the U.S. and Europe along with negative currency movement in ROW markets, especially Japan, led to the decline in revenues despite the strong performance of Copaxone and the OTC segment.

The Quarter in Detail

Teva reported revenue growth only in the U.S. (up 2%) in the reported quarter. Revenues declined in Europe (down 3%) and RoW (down 8%). Currency fluctuations negatively impacted total revenues by $55 million.

Revenues in the U.S. increased 2% to $2.5 billion in the reported quarter, mainly due to higher Copaxone sales that were partially offset by lower generic revenues.

The U.S. generic business posted revenues of $970 million, down 8%. Lower sales of generic Lexapro, no royalties on generic Lipitor and lower sales of generic Avapro led to the decline in revenues. However, Teva reported higher sales of its generic versions of Pulmicort and Adderall IR. Moreover, the company launched its generic version of TriCor during the reported quarter. Teva expects the generic business to pick up in the second half of the year – planned launches include that of generic Niacin late in the third quarter.  20-25 generic product launches are slated for 2013.

Specialty product revenues increased 5% to $2.1 billion in the second quarter of 2013. Higher revenues were attributable to the performance of Treanda ($177 million, up 21%), Copaxone ($1.1 billion, up 9%), ProAir ($115 million, up 32%). However, this was partially offset by the negative impact of the genericization of Provigil which posted revenues of $19 million, down 60% from the year-ago quarter. Nuvigil ($74 million, down 19%) and Azilect revenues ($87 million, down 8%) also declined during the reported quarter.

Teva is currently seeking FDA approval of a 40 mg thrice-weekly (3TW - three times a week) formulation of Copaxone; a response should be out in the first quarter of 2014. With the U.S. Federal Court of Appeals delivering unfavorable rulings regarding the validity of certain Copaxone patents (which means generic competition could materialize sooner than expected), Teva intends to launch the 3TW formulation aggressively in the first half of 2014, provided it gains approval.

Meanwhile, respiratory segment revenues grew 8% to $226 million. The women’s health business recorded revenues of $107 million, down 4%.

Revenues in Europe declined 3% to $1.5 billion. Lower generic revenues accounted for the decline.

European generic revenues of $860 million declined 5% from the year-ago period mainly due to lower sales in Italy and Spain as well as macroeconomic conditions and healthcare reforms in certain countries. This was partially offset by higher generic penetration in France. Teva is working on improving its diversity, reach and flexibility in Europe.

RoW (Rest of the World including Canada, Israel, certain markets in Eastern Europe, Latin America and Asia) revenues fell 8% during the quarter to $945 million. Unfavorable currency movement, lower revenues in Russia, Canada and Japan led to the decline in revenues.

API revenues decreased 10% to $181 million. OTC revenues increased 17% to $257 million.

Research & Development expense increased to $336 million from $298 million in the year-ago period. Meanwhile, Selling and Marketing (S&M) expenditures remained flat at $973 million.

The company bought back 7.6 million shares during the quarter for about $297 million. Teva has a $3 billion share buyback program, which was announced in Dec 2011.

2013 Outlook

The company expects to achieve the mid-point of its guidance range of $4.85 - $5.15 per ADS on total net revenues of $19.5 - $20.5 billion. Third quarter results are expected to be similar to second quarter results while the fourth quarter is expected to be the strongest. The 2013 Zacks Consensus Estimate is currently $5.04 per ADS.

Our Take

Teva is going through a transition period. Although the company’s second quarter earnings were above expectations, we remain concerned about the performance of the U.S. and European generics businesses. Moreover, new competition has entered the multiple sclerosis market in the form of Biogen’s (BIIB - Analyst Report) Tecfidera.

Although Teva expects the U.S. generics business to improve in the second half of the year, the entry of additional generic competition for Pulmicort would affect the performance of the U.S. generics business.

The Copaxone situation will also remain an overhang on the shares.

Teva currently carries a Zacks Rank #3 (Hold). At present, companies like Actavis (ACT - Analyst Report) and Simcere Pharmaceutical Group look well-positioned with both carrying a Zacks Rank #2 (Buy).
 

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