CEPH Cephalon (MM)

Teva Pharmaceutical Industries’ (TEVA) second quarter earnings of $1.10 per American Depositary Share (ADS) were a penny above the Zacks Consensus Estimate and 1.9% above the year-ago earnings.

While second quarter revenues increased 11.1% to $4.2 billion, revenues fell short of the Zacks Consensus Estimate of $4.3 billion. The company reported sales growth in Europe (82%), EEMA (22%), Latin America and Asia (15%). However, North America disappointed with sales declining 15%.

The Quarter in Detail

US generic sales remained weak in the second quarter. Sales in North America declined 15% to $2,099 million with US generic and other sales declining 40% to $903 million. The lack of major launches in the second quarter of 2011 and lower sales of key products affected performance.

We expect the US generics business to bounce back in the second half of 2011. Teva has about a dozen launches lined up. Important product launches include the generic version of Zyprexa. Teva has partnered with Dr. Reddy’s Laboratories (RDY) for the exclusive generic launch of Zyprexa in October.

Key branded product Copaxone posted global in-market sales of $957 million, up 24%. While US in-market sales increased 29% to $682 million, ex-US in-market sales grew 13% to $275 million. US sales were driven by price increases and unit growth.

Other products/segments that contributed to growth were Azilect at $97 million, up 38%, and the women’s health business which recorded 45% growth with sales coming in at $119 million. The inclusion of sales of Theramex products helped drive growth in the women’s health business.

The global respiratory business posted sales of $240 million, up 9%. Performance was driven by strong sales in Europe, especially for Qvar. Sales in the US, however, declined 3% to $139 million.

Pharmaceutical revenues in Europe increased 82% to $1,478 million. Results benefited from the inclusion of ratiopharm’s business. Teva’s acquisition of ratiopharm should help the company strengthen its position in key European markets, especially Germany. European sales should continue improving in the coming quarters.

International (EEMA, Latin America and Asia) pharmaceutical revenues grew 22% during the quarter with sales coming in at $635 million. Increased sales in Russia and Latin America helped boost revenues.

API sales increased 12% to $183 million. Currency fluctuations boosted total revenues by $222 million.

Research & Development expense increased to $243 million from $217 million in the year-ago period. Meanwhile, Selling and Marketing (S&M) expenditures increased to $794 million from $636 million. General and Administrative expenditures also increased from the year-ago quarter to $284 million.

Maintains 2011 Guidance

Teva maintained its guidance for 2011. The company expects earnings in the range of $4.90 to $5.20 on revenues of $18.5 billion to $19 billion. The Zacks Consensus Estimate currently stands at $5.04 per share. Performance is expected to be stronger during the second half of the year. The guidance does not include the impact of any acquisitions in 2011.

Earlier in May, Teva announced its intention to acquire Cephalon, Inc. (CEPH) for $6.8 billion The Cephalon deal is in-line with Teva’s long-term strategy of expanding and strengthening its branded and specialty pharma business. Once the acquisition goes through, the combined company’s branded product portfolio will consist of more than 20 products representing sales of about $7 billion.

Teva said that it expects third quarter earnings of $1.22 per share. This was well below expectations.

Neutral on Teva

We currently have a Neutral recommendation on Teva, which carries a Zacks #3 Rank (short-term “Hold’ rating). We remain concerned about the intense competition and pricing pressure in the generics market. However, Teva’s upcoming acquisition of Cephalon should help the company expand and strengthen its branded and specialty pharma business.

 
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