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Teva Pharmaceutical Industries Ltd. (TEVA - Analyst Report) reported third quarter earnings of $1.27 per American Depositary Share (ADS), a penny above the Zacks Consensus Estimate but 0.8% below the year-ago earnings.

Third quarter revenues grew 2% to $5.059 billion, beating the Zacks Consensus Estimate of $4.996 billion. Revenue growth reflected higher generic sales in the U.S. and higher global specialty and OTC sales. This was partially offset by lower global API sales to third parties.

Quarter in Detail

Teva reported revenue growth in the U.S. (up 4%) and Europe (up 4%) in the third quarter. Revenues, however, declined in RoW (down 8%). Currency fluctuations negatively impacted total revenue by $24 million.

Revenues in the U.S. increased 4% to $2.7 billion in the reported quarter, mainly due to the generic and specialty medicines segments.

The U.S. generic business posted revenues of $1.1 billion, up 6%. Sales benefited from six new product launches including the exclusive launches of generic versions of Niaspan ER and Temodar. Teva also recorded higher sales on its generic versions of Adderall IR and TriCor.

Going forward, Teva should benefit from a recent court ruling regarding a patent protecting AstraZeneca’s (AZN - Analyst Report) Pulmicort Respules in the U.S. The United States Court of Appeals for the Federal Circuit upheld a trial court’s decision that the patent is invalid. Based on this ruling, Teva expects to enjoy another 3-12 months of exclusivity on its generic version of the product and believes the same could extend through 2019.

Specialty product revenues increased 3% to $2.1 billion in the third quarter of 2013. Higher revenues were attributable to the performance of Treanda ($184 million, up 15%), Azilect ($93 million, up 21%) and ProAir ($112 million, up 3%). However, this was partially offset by the negative impact of the genericization of Provigil which posted revenues of $22 million, down 58% from the year-ago quarter. Nuvigil ($87 million, down 7%) also declined during the reported quarter.

Worldwide Copaxone revenues grew merely 1% to $1.05 billion. While sales in the U.S. grew 3% to $798 million mainly due to price increases, ex-U.S. sales declined 6% to $254 million. The decline was mainly due to the timing of tenders in Russia, which was partially offset by higher sales in Europe. Additional competition has entered the U.S. market in the form of Biogen's (BIIB - Analyst Report) Tecfidera.

Teva is currently seeking FDA approval for 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 10% to $222 million. The women’s health business recorded revenues of $126 million, up 31%.

Revenues in Europe grew 4% to $1.4 billion reflecting the strong performance of specialty medicines.

European generic revenues of $812 million declined 1% from the year-ago period. The company attributed the decline in revenues to its strategic focus in this region and lower API revenues.

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 $910 million. Unfavorable currency movement led to the decline in revenues.

API revenues decreased 17% to $162 million. OTC revenues increased 13% to $286 million.

Research & Development expense increased to $348 million from $319 million in the year-ago period. Meanwhile, Selling and Marketing (S&M) expenditures increased to $961 million from $903 million in the year-ago period.

The company did not purchase any shares during the quarter. Teva has a $3 billion share buyback program, which was announced in Dec 2011.

2013 Outlook Narrowed

Earlier this week, Teva had narrowed its 2013 outlook and now expects earnings of $4.95 to $5.05 per ADS on revenues of $19.7 billion – $20.3 billion. The company was previously expecting 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. The Zacks Consensus Estimate for revenues and earnings is currently $20.0 billion and $4.99, respectively.

Teva said that it remains committed to its strategy which includes the reduction of assets that are no longer fitting into the core business or are not critical to its future, scaling down of oversized parts of the company while the company will keep focusing on growing its generics business and core R&D programs. Focus areas remain high-value complex generics, expansion in emerging markets and broadening of the specialty medicines and OTC business portfolio.

The company is also seeking to cut costs and expects to reduce year-over-year costs by $1 billion. Last month, Teva had said that it will reduce its workforce by about 5,000 employees or 10%. A major part of the reduction will be completed by the end of next year.

The company has approved 13 new therapeutic entities (NTEs) for development so far.

Our Take

Teva’s third quarter results were better-than-expected with the company beating on both earnings and revenues. As expected, the U.S. generics business improved this quarter. However, the company’s earnings results were overshadowed by the recent announcement regarding the departure of the Chief Executive Officer (CEO).

Currently, concerns remain about finding a new CEO who will be willing to take on the post especially considering the rumors regarding rifts between the previous CEO and the Board.

Teva carries a Zacks Rank #3 (Hold). Investor focus will remain on the search for a new CEO as well as guidance for 2014 which will be provided in the second week of December.

At present, companies that look more attractive include Akorn, Inc. (AKRX - Snapshot Report), a Zacks Rank #2 (Buy) stock.

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