Teva's Guidance Lags Expectations

Teva Pharmaceutical Industries Ltd. (TEVA - Analyst Report) recently provided guidance for 2013. The company expects to earn $4.85 and $5.15 per share on total net sales of $19.5 - $20.5 billion. Earnings guidance was well below expectations. While the Zacks Consensus Estimate for earnings, prior to the release of guidance, was $5.71, the Zacks Consensus Estimate for revenues was $21 billion.

Teva expects to generate $10.0 - $10.6 billion sales in the US with the EU and Rest of the World (RoW) generating sales of $5.5 - $6.1 billion and $3.7 – $4.3 billion, respectively.

The major chunk of revenues ($10.3 – $10.7 billion) will be provided by the generics business. Teva’s US generics business is expected to deliver sales of $4.3 – $4.7 billion. The EU generics business will remain under pressure with sales expected in the range of $3.3 – $3.7 billion. RoW generic product sales are expected to be $2.4 - $2.8 billion.

Meanwhile, branded product sales are expected to decline $300 million to $7.6 – $8.0 billion due to the genericization of Provigil. Copaxone (multiple sclerosis) sales are also expected to decline. While Copaxone sales are expected to range from $3.7 to $3.9 billion, oncology product, Treanda is expected to generate sales of $600 - $700 million. Sleep disorder drug Nuvigil is expected to generate sales of $280 - $320 million.

While Women’s Health products are expected to contribute $460 - $500 million to revenues, ProAir HFA is expected to generate revenues of $400 - $440 million. QVAR and Azilect are slated to post revenues of $320 - $360 million and $340 - $380 million, respectively. Finally, OTC sales are expected to be $0.9 - $1.1 billion. Teva has a partnership agreement with Procter & Gamble (PG - Analyst Report) targeting the consumer health care market. Other net sales are expected to be $0.7 – $0.9 billion.

Teva expects to spend 6.6% to 6.7% of net sales on R&D. Selling & marketing expenses are expected to range between 19.5% and 21.5% of net sales. General and administrative expenses are expected in the range of 5.8% - 6.2% of net sales.

The company announced a program which is expected to deliver cost savings of about $1.5 - $2 billion over the next five years. We note that the impact of this plan is not reflected in the current guidance.

As far as quarterly performance is concerned, the first quarter is expected to be relatively soft with performance improving in the subsequent quarters.

Our Take

Teva is going through a transition period. The guidance for 2013 was disappointing and we expect significant downward revisions in earnings and revenue estimates.

Headwinds include EU pricing pressure, potential new competition for branded products (especially Copaxone) and fewer generic product launches compared to 2012. With the company not including the impact of the cost-savings plan in its guidance, we believe Teva is leaving some room for delivering above expectations. Share buybacks also leave some room for upside. Additional details on the cost-savings plan, capital allocation, and pipeline should be available on the Dec 11 Investor Day.

We currently have a Neutral recommendation on Teva, which carries a Zacks #3 Rank (Hold). Other generic companies like Watson (WPI) and Mylan (MYL - Analyst Report) currently carry a Zacks #2 Rank (Buy).