FRX Forest Road Acquisition Corp

Teva Pharmaceutical Industries’ (TEVA) fourth quarter earnings of $1.59 per American Depository Share (ADS) were a penny above the Zacks Consensus Estimate and 27.2% above the year-ago earnings.

Fourth quarter revenues increased 28.5% to $5.7 billion, just above the Zacks Consensus Estimate of $5.6 billion.

Full year earnings increased 9.5% to $4.97 per share, in line with the Zacks Consensus Estimate. Revenues increased 13.6% to $18.3 billion, in line with the Zacks Consensus Estimate.

The Quarter in Detail

The company reported sales growth in RoW (44%), the US (32%) and Europe (13%). Currency fluctuations negatively impacted total revenues by $29 million.

Sales in the US grew 32% to $3 billion in the reported quarter, boosted by the inclusion of Cephalon and the strong performance of branded products.

Although US generic sales declined 5% to $1.2 billion, it showed signs of reviving during the quarter with sales benefiting from the exclusive generic launch of Eli Lilly’s (LLY) Zyprexa. Teva has partnered with Dr. Reddy’s Laboratories (RDY) for Zyprexa. Another important product launch was that of a generic version of Pfizer’s (PFE) Lipitor. Teva has an agreement with Ranbaxy regarding generic Lipitor. Teva also launched a generic version of Combivir.

The performance of the US generics segment should continue improving – the company expects $650 million in new launches in 2012 including more than $20 million from the launch of its generic version of Forest Labs’ (FRX) Lexapro. The company is guiding towards US generics segment sales of $5 billion, with sales slated to benefit from patent expirations and product launches. However, competition in the generics market will be tough.

Branded product revenues increased 68% to $2.3 billion in the fourth quarter. Revenues benefited from the inclusion of Cephalon products – Provigil ($350 million), Treanda ($131 million) and Nuvigil ($86 million). Oncology product, Treanda, is expected to generate sales of $550 million in 2012. Sleep disorder drugs Provigil and Nuvigil are expected to generate sales of $375 million and $300 million, respectively, in 2012.

Key branded product Copaxone posted global in-market sales of $1 billion, up 8%. Copaxone sales are slated to exceed $3.8 billion in 2012.

Other products/segments that contributed to growth were Azilect at $109 million, up 22%, and the global respiratory business ($275 million, up 27.3%). The women’s health business, however, recorded a decline with sales coming in at $93 million (down 4.1%).

While Women’s Health products are expected to contribute $525 million to revenues, ProAir HFA is expected to generate revenues of $490 million in 2012. QVAR and Azilect are slated to post revenues of $400 million and $350 million, respectively, in 2012.

Total branded products are expected to contribute $8.2 billion to the top line in 2012.

Revenues in Europe increased 13% to $1.5 billion. Results benefited from the inclusion of ratiopharm’s business. Teva’s acquisition of ratiopharm has helped the company strengthen its position in key European markets, especially Germany. Strong performance especially in Italy and Spain drove revenues.

RoW (Rest of the World including Canada, Israel, certain markets in Eastern Europe, Latin America and Asia) revenues grew 44% during the quarter with sales coming in at $1.1 billion. Increased sales in Russia, Israel and certain parts of Latin America helped boost revenues. Moreover, sales benefited from the July 2011 Taiyo acquisition in Japan.

API sales increased 12% to $197 million. OTC revenues increased 19% to $217 million. OTC sales are expected to be about $1 billion in 2012. Teva has a partnership agreement with Procter & Gamble (PG) targeting the consumer health care market.

Research & Development expense increased to $371 million from $270 million in the year-ago period. The inclusion of Cephalon was the main reason for the increase. Teva expects to spend between 6.9% to $7.3% of net sales on R&D in 2012. With the Cephalon acquisition, Teva now has 40 late stage clinical programs, most of which are in phase III. We expect detailed information on the company’s innovative pipeline in mid-2012.

Meanwhile, Selling and Marketing (S&M) expenditures increased to $1 billion from $816 million mainly due to the inclusion of Cephalon, Taiyo and Theramex. Selling & marketing expenses (including royalties of about $400 million) are expected to range between 18.4% and 20% of net sales in 2012.

The company repurchased 3.7 million shares during the quarter. Teva has a $3 billion share buyback program which was announced in Dec 2011. We are positive on this program which will return value to shareholders. We were also encouraged to hear that Teva increased its annual dividend by 25%.

2012 Guidance Maintained

The company maintained its outlook for 2012 that was provided in Dec 2011. The company expects to earn $5.48 and $5.68 per share on total net sales of about $22 billion.  The Cephalon acquisition is expected to boost 2012 earnings by 20-25 cents. The 2012 Zacks Consensus Estimate currently stands at $5.59 per share.

Our Take

We currently have a Neutral recommendation on Teva, which carries a Zacks #3 Rank (short-term Hold rating). Teva ended 2011 on a strong note with the US generics business showing signs of reviving. The increase in dividend is also encouraging. However, the Copaxone patent case remains an overhang. We believe Teva will pursue small deals and acquisitions to reduce its dependence on Copaxone.

 
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