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Teva Pharmaceutical Industries Ltd. (TEVA - Analyst Report) reported fourth quarter earnings of $1.42 per American Depositary Share (ADS), a couple of cents above the Zacks Consensus Estimate and 7.6% above the year-ago earnings.

Fourth quarter revenues grew 3.4% to $5.430 billion, beating the Zacks Consensus Estimate of $5.237 billion. Revenue growth reflected higher generic sales in the U.S., higher global specialty and OTC sales. This was partially offset by lower global API sales to third parties and lower generic sales in ex-U.S. markets, specially Japan.

Teva’s full year earnings came in at $5.01 per ADS, down 6.4% but above the Zacks Consensus Estimate of $4.98. Earnings were affected by the loss/decline of several highly profitable products that were sold in the previous year as well as an increase in selling and marketing and R&D spend.

Total revenues remained flat at $20.3 billion, slightly above the Zacks Consensus Estimate of $20.0 billion.

Quarter in Detail

Teva reported revenue growth in the U.S. (up 6%) and Europe (up 3%) in the fourth quarter. Revenues, however, declined in RoW (down 2%). Currency fluctuations negatively impacted total revenue by $49 million.

Revenues in the U.S. increased 6% to $2.8 billion in the reported quarter, mainly due to the generic and specialty medicines segments.

The U.S. generic business posted revenues of $1.2 billion, up 14%. Sales benefited from the exclusive launches of generic versions of Niaspan ER and Temodar as well as the launches of the generic versions of Cymbalta and Tobi. Teva also recorded higher sales on its generic version of Pulmicort.

Teva has about 133 ANDAs pending FDA approval including 51 first-to-file opportunities (worth branded sales of $40 billion).

Specialty product revenues increased 5% to $2.2 billion in the fourth quarter of 2013. Higher revenues were attributable to the performance of Treanda ($177 million, up 10%), Azilect ($98 million, up 14%) and Copaxone. Nuvigil sales ($76 million, down 3%) continued to decline.

Worldwide Copaxone revenues grew 8% to $1.14 billion. While sales in the U.S. slipped 2% to $805 million mainly due to competition from oral multiple sclerosis (MS) products, ex-U.S. sales grew 42% to $337 million mainly due to the timing of tenders in Russia and higher sales in Germany. Additional competition has entered the U.S. market in the form of Biogen's (BIIB - Analyst Report) Tecfidera.

Teva launched its 40 mg thrice-weekly (3TW - three times a week) formulation of Copaxone in the U.S. Teva is looking to switch 30% - 50% of Copaxone patients to the new formulation by year end.

Meanwhile, respiratory segment revenues declined 7% to $238 million. Revenues were lower in Europe due to pricing pressure. The women’s health business recorded revenues of $127 million, down 4%.

Revenues in Europe grew 3% to $1.6 billion reflecting the strong performance of specialty medicines, especially Copaxone.

European generic revenues of $940 million declined 2% from the year-ago period. The company attributed the decline in revenues to its strategic focus in this region, a contraction in the generics market in France and lower API revenues.

RoW (Rest of the World including Canada, Israel, certain markets in Eastern Europe, Latin America and Asia) revenues slipped 2% during the quarter to $1 billion. Unfavorable currency movement led to the decline in revenues.

API revenues decreased 19% to $163 million. OTC revenues increased 17% to $316 million.

Research & Development expense increased to $409 million from $374 million in the year-ago period. Meanwhile, Selling and Marketing (S&M) expenditures increased to $1.1 billion from $1.0 billion in the year-ago period.

The company did not buy back any shares during the quarter. Teva has $1.3 billion left under its $3 billion share buyback program.

2014 Outlook Maintained

Teva, which could start facing generic competition for its key branded drug, Copaxone, from mid-14, maintained its guidance for the year. The company had provided guidance for both scenarios - Copaxone remaining exclusive and Copaxone going generic. If generics do enter the market then at least two AP-rated generics are expected to launch on Jun 1.

Teva expects total revenues of $19.8 billion - $20.8 billion this year. However, this range would go down by $500 million if Copaxone generics enter the market. The company expects to deliver earnings of $4.80 - $5.10 per ADS assuming Copaxone remains exclusive. However, if generics enter the market, earnings will go down by about 60 cents. According to Teva, each month of delay in the entry of generic versions of Copaxone will add $78 million to revenues and 8 cents to earnings.

The Zacks Consensus Estimate is currently $4.46 per ADS. The Zacks Consensus Estimate for revenues is currently $19.848 billion.

Our Take

Teva’s fourth quarter results were better-than-expected with the company beating on both earnings and revenues. Teva is going through a transition period and 2014 will be a challenging year for the company. Headwinds include new competition for branded products and fewer generic product launches. Moreover, the company could start facing generic competition for Copaxone which would cut 2014 earnings by 60 cents and revenues by $500 million. While the company’s new strategy looks good, execution remains the key.

Teva currently carries a Zacks Rank #3 (Hold). Some better-ranked companies in the generics sector include Dr. Reddy's Laboratories Ltd. (RDY - Analyst Report) and Actavis plc (ACT - Analyst Report). While Dr. Reddy’s is a Zacks Rank #1 (Strong Buy) stock, Actavis is a Zacks Rank #2 (Buy) stock.

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