Teva Pharmaceutical Industries Ltd. (NASDAQ: TEVA) today reported results for the quarter ended September 30, 2011.
Third Quarter Highlights:
- Net sales of $4.34 billion, compared to $4.25 billion in the third quarter of 2010, an increase of 2% and $4.21 billion in the second quarter of 2011, an increase of 3%.
- Non-GAAP net income and non-GAAP EPS of $1,111 million and $1.25, compared to $1,182 million and $1.30, respectively, in the third quarter of 2010, and $984 million and $1.10, respectively, in the second quarter of 2011. Quarterly GAAP net income was $916 million, compared to $1,050 million in the third quarter of 2010 and $576 million in the second quarter of 2011; GAAP EPS totaled $1.03, compared to $1.15 in the third quarter of 2010 and $0.64 in the second quarter of 2011.
- Non-GAAP operating income of $1,316 million, compared to $1,439 million in the third quarter of 2010 and $1,091 million in the second quarter of 2011. Quarterly GAAP operating income of $1,035 million, compared to $1,188 million in the third quarter of 2010 and $597 million in the second quarter of 2011.
- Strong sales growth in Europe of 34% (24% in local currencies) and 56% in EEMA, Latin America and Asia (49% in local currencies).
- Sales growth in all branded franchises - respiratory (15%), Azilect® in-market (20%), Copaxone® in-market (26%), and women's health (6%) - as well as API (15%).
- During the quarter, Teva solidified its leadership position in the Japanese generics market by acquiring Taiyo Pharmaceutical Industry Co. Ltd. and the remaining 50% interest in Teva-Kowa Pharma Co. Ltd. Teva also made an additional investment in CureTech Ltd., bringing its interest in the company to 75%.
- Teva completed the acquisition of Cephalon Inc. for approximately $6.5 billion dollars on October 14, 2011.
"The third quarter produced an overall mixed performance. We had strong European and International generic sales, combined with strong results from our branded units. This helped to offset our U.S. generics business, which lacked any significant new launches," stated Shlomo Yanai, Teva's President and CEO. "We expect a strong fourth quarter including an improved U.S. generics business, led by the exclusive launch of generic Zyprexa®."
Sales in North America in the third quarter were $2,183 million (representing 50% of total sales), a decrease of 20%. Generic and other sales in the U.S. were $845 million in the quarter, down 48%. In contrast to last year, the current quarter lacked significant new launches and sales of key products (most notably the generic equivalent of Effexor XR®, as well as generic equivalents of Cozaar®, Hyzaar®, Lotrel® and Prevacid®), sold in the third quarter of 2010 were absent or substantially diminished in the current quarter.
Sales in Europe in the third quarter of 2011 were $1,344 million, up 34%, accounting for 31% of total sales. In local currencies, sales in Europe grew by 24%. Growth in sales resulted primarily from the inclusion of ratiopharm, mainly in Germany, France, Spain and Italy. Sales in Europe grew organically2 by 9%; in Germany, generic sales grew organically by 8% (in local currencies).
Sales in EEMA, Latin America and Asia (International markets) in the third quarter of 2011 totaled $817 million, up 56%, accounting for 19% of total sales, with sales in EEMA contributing 45% of International sales, Asia 30% and Latin America 25%. In local currencies, sales in EEMA, Latin America and Asia grew by 49%. The growth in sales resulted primarily from the inclusion of Taiyo in Japan, which was acquired in July 2011, and from higher sales in major markets in Latin America (organic growth of 21% in generic sales in local currencies) and Russia (organic growth of 27% in generic sales in local currency).
Global in-market sales of Copaxone®, the leading multiple sclerosis therapy in the U.S. and globally, reached a record $1,021 million in the third quarter of 2011, an increase of 26%. In the U.S., in-market sales increased 28% to $752 million, as a result of both price increase and volume growth. In-market sales outside the U.S. grew 22% to $268 million, 17% in terms of unit growth, in several European and Latin American markets, including Italy, U.K., Germany, Spain and Brazil.
Global respiratory product sales totaled $238 million in the quarter, an increase of 15%, primarily driven by a 30% increase in sales in the U.S., which totaled $164 million. As of September 30, 2011, ProAir™ continued to maintain its leadership position with a 50% market share in the SABA (short acting beta agonist) market in the U.S., while Qvar® further solidified its number two position in the inhaled corticosteroid category (ICS) market with a 23% market share in the U.S.
Global women's health product sales were $123 million in the quarter, up 6%. The increase in sales was driven by the inclusion of sales of Theramex products in Europe, offset by weaker sales in the U.S., where Seasonique® has faced generic competition since July 2011.
Global in-market sales of Azilect® totaled $97 million in the quarter, an increase of 20%, with growth both in Europe and the U.S.
API sales to third parties totaled $183 million in the third quarter of 2011, up 15%, with higher sales mostly in International markets and North America.
Exchange rate differences between this quarter and the comparable quarter in 2010 contributed approximately $148 million to sales, while having a minor impact on operating income. The impact on sales resulted primarily from the strengthening of certain currencies (primarily the euro) relative to the U.S. dollar.
Non-GAAP net income and non-GAAP EPS for the third quarter of 2011 are adjusted to exclude certain items totaling an aggregate of $281 million and a related tax effect of $86 million. Teva believes that excluding such items facilitates investors' understanding of the Company's business. See the attached tables for a reconciliation of U.S. GAAP reported results to the adjusted non-GAAP figures for the current quarter as well as the comparable quarter of 2010.
Non-GAAP gross profit margin was 56.4% in the third quarter of 2011, compared to 62.5%. The decrease reflects a change in product mix in the U.S. - a decrease in the contribution from certain high margin generic products, primarily generic Effexor XR®, partially offset by an increase in the contribution from branded products. GAAP gross profit margin was 51.7% in the third quarter of 2011, compared to 58.0%. The decrease primarily reflects changes in product mix mentioned above, as well as amortization of purchased intangible assets related to the ratiopharm acquisition and costs related to regulatory actions taken in facilities recorded in the current quarter.
Net Research & Development (R&D) expenditures in the third quarter of 2011 totaled $227 million, or 5.2% of sales, compared to $239 million, or 5.6% of sales. The decline in R&D spending reflects lower legal expenses related to generic R&D and timing of spending. Gross R&D in the third quarter of 2011, before reimbursement from third parties for certain R&D expenses, totaled approximately $248 million, or 5.7% of sales.
Selling and Marketing expenditures (excluding amortization of purchased intangible assets) were $796 million, or 18.3% of sales, for the third quarter of 2011, compared to $742 million, or 17.5% of sales. The increase was primarily due to the inclusion of ratiopharm, Taiyo and Theramex.
General and Administrative (G&A) expenditures totaled $112 million, or 2.6% of sales, compared with $236 million, or 5.5% of sales. The decline is attributable primarily to gains recorded in connection with the acquisition of additional ownership interests in CureTech Ltd. and Teva-Kowa Pharma, totaling $135 million.
Non-GAAP net financial expense in the third quarter of 2011 totaled $67 million, compared with $48 million.
The non-GAAP tax provision for the third quarter was $119 million of pre-tax non-GAAP income of $1,249 million. Teva's current estimate of the annual tax rate of non-GAAP income for 2011 is 10%, compared to 13% of pre-tax non-GAAP income for 2010. The current estimate for the 2011 non-GAAP tax rate is based on a mix of products manufactured in jurisdictions where Teva benefits from tax incentives. The product mix in future years is expected to be different, resulting in a higher tax rate. On a GAAP basis, the annual projected tax rate for 2011 is 4%.
Cash flow from operations during the third quarter of 2011 was $482 million, compared to $1,194 million. Free cash flow - excluding net capital expenditures (of $276 million) and dividends (of $204 million) - was $2 million. The current quarter's cash flow is not indicative of the Teva's typical cash flow run rate and was affected by the exceptionally strong generation in the previous quarter, actual payments of legal settlement expenses and restructuring expenses and a major capital investment. Fourth quarter cash generation is expected to recover strongly to typical levels. Cash and marketable securities on September 30, 2011 amounted to $1.3 billion.
During the quarter, share repurchases totaled approximately 6.1 million shares for an aggregate purchase price of approximately $254 million. Since the beginning of December 2010, when a $1 billion share repurchase plan was authorized, Teva has repurchased 17.9 million shares for approximately $848 million. As a result of these share repurchases and the redemption of certain convertible debentures in the first quarter of 2011, the fully diluted share count has been reduced by approximately 31 million shares from December 2010 to September 2011.
Total equity at September 30, 2011 was $22.9 billion, an increase of $937 million, compared to $22.0 billion at December 31, 2010. The increase in total equity is attributable primarily to the GAAP net income of $2,253 million, offset primarily by repurchases of Teva shares and dividends paid to shareholders.
For the third quarter of 2011, the weighted average share count for the fully diluted earnings per share calculation was 890 million on both a GAAP and non-GAAP basis. At September 30, 2011, the share count for calculating Teva's market capitalization was approximately 886 million.
The Board of Directors, at its meeting on October 31, 2011, declared a cash dividend for the third quarter of 2011 of NIS 0.80 (approximately 21.9 cents according to the rate of exchange on November 1, 2011) per share.
The record date will be November 14, 2011, and the payment date will be November 30, 2011. Tax will be withheld at a rate of 20%.