Teva Beats Q3 Earnings Expectations, Updates Outlook

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Teva Pharmaceutical Industries Ltd. TEVA reported third quarter 2014 earnings of $1.32 per American Depositary Share ADS, up 4% from the year-ago period and well above the Zacks Consensus Estimate of $1.23.

Third quarter revenues remained flat at $5.058 billion, slightly below the Zacks Consensus Estimate of $5.100 billion. Currency fluctuations had a negative impact of $57 million on total revenues.

Quarter in Detail

The U.S. generics business posted revenues of $1.1 billion, down 1%. Lower sales of its generic version of Adderall and the loss of exclusivity on the generic equivalent of Niaspan led to the decline. This was partially offset by sales of the generic versions of Xeloda and Lovaza as well as the exclusive launch of the generic version of Baraclude. The fourth quarter should be eventful for the company with seven U.S. launches and multiple international launches expected before year end.

Specialty product revenues increased 5% to $2.2 billion in the third quarter of 2014 reflecting higher central nervous system CNS and oncology product sales. Azilect ($103 million, up 11%) performed well in the quarter.

Oncology product sales grew 19% to $299 million in the third quarter of 2014, benefiting from sales of recently launched G-CSF products, Lonquex and Granix. Treanda sales, however, declined 2% to $180 million.

Meanwhile, worldwide Copaxone revenues grew 5% to $1.1 billion. While sales in the U.S. remained flat at $800 million, ex-U.S. sales grew 21% to $307 million reflecting the timing of a tender in Russia.

The new 40 mg thrice-weekly (3TW - three times a week) formulation accounted for 55% of total Copaxone scrips. Teva remains on track to switch 65% of patients to the new formulation by year end.

Respiratory segment revenues declined 7% to $218 million. The women's health business recorded revenues of $137 million, up 2%.

European generic revenues of $757 million declined 3% from the year-ago period.

API revenues increased 9% to $185 million. OTC revenues fell 21.3% to $225 million reflecting the sale of U.S. OTC plants.

Research & Development expense increased to $360 million from $348 million in the year-ago period. Meanwhile, Selling and Marketing (S&M) expenditures declined to $907 million from $961 million in the year-ago period.

The company expects to spend about $1.4 billion on R&D in 2014 (old guidance: $1.3 - $1.45 billion) and $3.7 - $3.8 billion on S&M (old guidance: $4 - $4.1 billion).

2014 Outlook Updated

Teva updated its outlook for 2014. The company now expects earnings of $5.00 - $5.10 per ADS on revenues of $20 billion - $20.3 billion. Earlier, the company had guided towards earnings of $4.80 - $5.10 per share on revenues of $19.9 billion - $20.8 billion. The Zacks Consensus Estimate is currently $4.99 per ADS.

Fourth quarter revenues should be in the range of $5 billion including Copaxone sales of $1 billion. Teva expects currency impact of about $100 million in the fourth quarter.

Teva remains committed to cutting costs – it remains on track to deliver gross savings of $930 million by year end. Teva's Board authorized a $1.7 billion increase in its share repurchase program bringing the total to $3 billion. The company intends to buy back shares promptly.

Our Take

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2014 has been a challenging year for Teva, which is going through a transition period. While the company's new strategy looks good, execution remains the key. Headwinds include new competition for branded products and fewer generic product launches.

Meanwhile, we are encouraged by Teva's efforts to delay the entry of generic Copaxone. The Copaxone appeal hearing in the Supreme Court took place on Oct 15 with a ruling expected late this year or in the first quarter of 2015.  A decision regarding the Citizen's Petition CP should be out by late November. The company estimates that the introduction of AB-rated generic competition to Copaxone could reduce operating income by $40-$50 million per month.

Teva is a Zacks Rank #2 (Buy) stock. Some better-ranked stocks in the health care sector include Mylan MYL and Actavis ACT – both carry a Zacks Rank #1 (Strong Buy). Another well-ranked stock is Impax Laboratories Inc. IPXL which holds a Zacks Rank #2.


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