Microsoft word - 09015aec80286f94.doc

Global Equity Research
UBS Investment Research
12-month rating
Teva Pharmaceuticals
Unchanged
12m price target
US$64.00
Unchanged
US$48.84
„ What we learned from the conference call
(1) Mgt. attributed the US generic miss to Irvine (~$53M impact), a Jerusalem 11 May 2011
slowdown (~$55M) and headwinds from high 1Q10 sales of Mirapex, Protonix, Lotrel, Eloxatin, Adderall XR (see Table 4); (2) US ProAir sales were impacted by Trading data
some destocking and Qvar by managed market claims which rolled over from 52-wk range US$58.67-45.01
4Q10; (3) Mgt. expects 2Q11 to be slightly seq. better than 1Q11; (4) $500M Market cap. US$45.3bn
(~10M shares at $49) remains on the buyback program and mgt. expects the avg.
Shares o/s 929m
share count to be ~897-895M in 2Q11; (5) German sales declined in the low teens. Free float 84%
Avg. daily volume ('000) 6,303
Our takeaway: Quarterly progression makes sense to us
Avg. daily value (m) US$305.3
The weaker-than-normal performance in the US business is a reminder of how tough the generics business is overall and how dependent the business model is on Balance sheet data 12/11E
manufacturing execution and new product launches. With key launches from 1Q10 Shareholders' equity US$24.2bn
a ~$400M headwind and Irvine/Jerusalem an additional ~$100M headwind, its not P/BV (UBS) 1.8x
surprising that mgt. couldn’t make up the difference given it had no sig. launches.
We look for the US generics biz to continue to face headwinds in 2Q and return to Net Cash (debt) (US$7.46bn)
growth in 2H and the EU biz to follow the same path as pricing cuts annualize. Forecast returns
„ Thoughts on the stock: TEVA should come back as yr progresses
Forecast price appreciation +31.0%
It finally feels like a bottom is building in TEVA as mgt. has increased disclosure Forecast dividend yield 4.4%
around the headwinds it is facing and the 2Q directional guidance should help keep Forecast stock return +35.4%
consensus reasonable. We continue to like the risk/reward in TEVA. Market return assumption 5.5%
Forecast excess return +29.9%
„ Valuation: We maintain our Buy rating and PT of $64
Our PT is based on a P/E multiple of 11x our 2012 cash EPS estimate of $5.75. EPS (UBS, US$)
Highlights (US$m)
Revenues 13,899
12/11E 5.12
EBIT (UBS) 3,853
12/12E 5.75
Net Income (UBS) 3,084
EPS (UBS, US$) 3.38
Performance (US$)
Net DPS (UBS, US$) 0.58
Profitability & Valuation
5-yr hist av.
EBIT margin % -
ROIC (EBIT) % -
EV/EBITDA (core) x -
PE (UBS) x -
Net dividend yield % -
Source: Company accounts, Thomson Reuters, UBS estimates. (UBS) valuations are stated before goodwill, exceptionals and other special items. Valuations: based on an average share price that year, (E): based on a share price of US$48.84 on 11 May 2011 20:34 EDT Marc Goodman
This report has been prepared by UBS Securities LLC
ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 15.
UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Teva Pharmaceuticals 11 May 2011
Investment Thesis Our Thesis Is Five-Fold (1) We like the generics sector as the macro tailwinds are still positive and Teva is well positioned to increase its market share in the global generics marketplace. (2) Teva has a very strong late-stage P-IV pipeline with multiple large visible opportunities that could drive strong earnings growth in 2011 and beyond. (3) We have unusually good visibility for solid 10-15% EPS growth for the (4) Teva already has a strong presence in several markets outside the US and is well positioned to capture growth in Europe and emerging markets. (5) Teva’s investment in longer duration assets like branded products (women’s health, respiratory and innovative medicines) and biosimilars will position it for growth in the longer term. Table 1: Teva Pharmaceuticals -- 2011 Guidance
2011 Guidance
Comments
Includes higher quality costs, excludes $600M of Amort.
Lonza JV Income; ~$80M of R&D planned for JV Includes convert buyout and share buyback Sequential quarterly improvement; 2H>1H and 2Q>1Q
Teva Pharmaceuticals 11 May 2011
Table 2: Teva Pharmaceuticals -- Milestones
Indication
Milestone/Event
2011
May 2011
Table 3: Teva Pharmaceuticals -- Variance Analysis ($ in Millions)
Variance Comments
Total Sales
-112.5 Consensus: $4.27B, +17% YoY
Operating EPS
$0.02 Consensus: $1.04
Margin Analysis
Operating Margin
Source: Company reports, UBS estimates and FactSet
Teva Pharmaceuticals 11 May 2011
What we learned on the conference call Overall Q 2011 quarterly progression: Management reaffirmed its EPS guidance
range of $4.90-5.20 and indicated that there should be a slight sequential improve in 2Q over 1Q (i.e., a few pennies or ~$1.05-1.08 vs the $1.04 in 1Q). Q Tax rate: Management lowered its tax rate guidance to 11% from 13% to
the year due to an improving mix and larger percentage of exUS sales. However, management continued to indicate that the tax rate will rise in 2012 as Irvine comes back on line, Lovenox is approved and the mix shifts back to the US. Q Share buyback: Management bought back 7.9M shares during the quarter
(average price of $54.41 for a cost of $400M) and have bought back 9.8M shares since the program started in December. Management expects the share count to be ~897M in 2Q11 and has ~$500M more left on the buyback program. Q North America: Sales declined -11% Y/Y
— Generics: US generic sales were $952, down -32% Y/Y while Canadian
sales were ~$155M, up +54% Y/Y (included ~$50-70M of Ratiopharm) for total North American generics of ~$1.1B, down -25% Y/Y. — ~$500M of headwinds in 1Q11: Specifically, lower sales of Mirapex,
Protonix, Lotrel, Eloxatin, Adderall XR, plus the impact of Irvine and Jerusalem manufacturing issues were headwinds in 1Q11. Additionally, the switch of Allegra from Rx to OTC will impact 2Q11-4Q11 with 2010 sales of ~$80M and 1Q11 sales of ~$15M with the rest of the year zero. Table 4: 1Q11 vs 1Q10 Sales Delta
($ in millions)
Protonix 93
Eloxatin 44
Adderall XR
Irvine 53
Jerusalem
— Management launched three new products in 1Q11: generic Phentermine,
— Teva has 197 ANDAs pending at the FDA, 46 of which have tentative
approval. 130 are P-IV applications with 80 (branded sales of $52B) that are first to file.
Teva Pharmaceuticals 11 May 2011
— Management indicated that there have been no settlement discussions
with Momenta/Sandoz which makes sense to us. We don’t see a settlement anytime soon if at all. — Key launches in 2H include Levaquin, Aricept, Nasacort and Zyprexa.
— Management indicated that Irvine should reach a ~$100M run rate by
Q Europe: Sales grew 3% Y/Y organically (+7% excluding Germany, 33% of
— Management has cut the delta between it and the number one European
player in terms of market share from 10% to 4% since 1Q10. — Sales in Germany declined in the low teens due to price reforms.
However, management expects Germany to rebound in 2H as the reforms annualize and return to growth. Management also pointed to tender progress with it realizing ~20%+ share of the most recent AOK tender. — During 1Q11 Teva received approval for 79 new compounds in 162
formulations and had 286 compounds pending marketing authorization. — Management believes a LT organic growth rate of 7-9% is still a good
— Importantly, management indicated that profits quadrupled in Europe.
Q Emerging Markets: Sales grew 26% Y/Y (23% CC) with 31% of sales
coming from Russia/Eastern EU, 27% from Latin America, 23% from Israel and 19% from Asia. — Y/Y growth for key markets was: Russia (+25%), Mexico (+20%),
Argentina (+29%), Japan (+29%), Israel (+6%). Overall Latin America grew 16% (9% CC). Additionally, Japan sales are now consolidated (~50% of the JV) and accounted for an incremental ~$30M of sales. — Management still believes a double digit organic growth rate is a good
Q Copaxone: Total end-market sales were $907M (+14% Y/Y) with $624M in
the US (+22% Y/Y) and $283M ROW (flat Y/Y). Copaxone continued to outpace the market growing 14% vs 9% for the market. — As Copaxone is returned to Teva from Sanofi, management indicated that
the full year sales impact will be ~$150M of additional sales (this would be for 2013) with a 50% operating margin and Teva would be required to pay a 6% royalty back to Sanofi for two years following the return of Copaxone. The UK, the Czech Republic and Poland have already been returned, Germany will be returned in 4Q11 and then Spain, France and Italy will be returned over the course of 2012. — Generics Limited (UK) filed a revocation against a UK Copaxone patent
on March 1, 2011. A case management conference was held on May 6, 2011 and no trial date has been set.
Teva Pharmaceuticals 11 May 2011
Q Azilect: Total end-market sales were $90M (+16% Y/Y) primarily due to
Q Respiratory: Total sales were $229M (+19% Y/Y) with US sales of $127M.
US sales were impacted by destocking in ProAir (we estimate ~$10M) and 4Q10 rebates/claims from managed markets spilling into 1Q11 for Qvar (we estimate ~ -$34M impact). Q Women’s Health: Total sales were $103M (+30% Y/Y). We estimate US
sales were up ~5% with the majority of the impact from EU sales due to the additional of Theramex. Q API: Total sales were $184M (+32% Y/Y) with the majority of sales coming

Teva Pharmaceuticals 11 May 2011
Table 5: Teva Pharmaceuticals -- Income Statement and Margin Analysis 2009-2016E - ($ in millions, except EPS)
2010 1Q11A 2Q11E 3Q11E 4Q11E
5,220 18,252 20,501 22,748 25,153 26,397 27,798 $4,270 $4,516 $4,752 $5,136 $18,700 $20,591 $21,792 $22,648 Co. Guidance 18.5-19.0B 21.0-23.2B
3,089 10,678 11,989 13,185 14,239 14,707 15,406 Co. Guidance
1.7-1.9B
2.2-2.4B
Co. Guidance
6.4-7.0B
Co. Guidance
-160-200
Co. Guidance
Co. Guidance
Co. Guidance
4.9-5.5B
Co. Guidance
Co. Adjusted EPS
Co. Guidance
$4.90-5.20 $5.30-5.86
$6.80-7.52
Margin Analysis
2010 1Q11A 2Q11E 3Q11E 4Q11E
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Co. Guidance 57.5-59.5%
Co. Guidance
Co. Guidance
Co. Guidance
Operating Margin
Co. Guidance
5-Yr CAGR
2010 1Q11A 2Q11E 3Q11E 4Q11E
2016E 2009-2013
Operating Income
Operating EPS
Source: Company reports and UBS estimates Table 6: Teva Pharmaceuticals – North America Generics Sales - 2009-2016E ($ in millions)
North America Revenues
Generics Sales
US Generics Sales
US Generics
Total North America Generics
Source: Company reports and UBS estimates Table 7: Teva Pharmaceuticals – North America Other Sales - 2009-2016E ($ in millions)
North America Revenues (Conti)
Innovative
Total Innovative
Respiratory
Total Respiratory
Women's Health
Biosimilars
40.0% 650.0% 650.0% 350.0% 233.3% 385.7% Total North America Revenues
Co. Guidance
Source: Company reports and UBS estimates Table 8: Teva Pharmaceuticals – Europe & International Sales - 2009-2016E ($ in millions)
3Q11E 4Q11E
Europe Revenues
Generics
Innovative 351
Respiratory
Women's Health
Biosimilars
Total Europe Revenues
Co. Guidance
3Q11E 4Q11E
International Revenues
Generics
Innovative 217
Respiratory
omen's Health
Biosimilars
Total International Revenues
Co. Guidance
Source: Company reports and UBS estimates Table 9: Teva Pharmaceuticals – Global Sales - 2009-2016E ($ in millions)
Total Revenues
Generics
Total Generics
Innovative
Copaxone
Total Innovative
Respiratory
Women's Health
Biosimilars
Total Company Revenues
Co. Guidance
Source: Company reports and UBS estimates
Teva Pharmaceuticals 11 May 2011
Table 10: Teva Pharmaceuticals -- Copaxone Income Statement 2009-2016E ($ in millions, except EPS)
2010 1Q11A 2Q11E 3Q11E 4Q11E
Copaxone Revenues
End-Market Sales
US
Total Sales
Impact to Teva's Income Statement
Gross Profit
Operating Income
Net Income
Teva's Total EPS
Copaxone as % of Total Earnings
Source: Company reports and UBS estimates
Teva Pharmaceuticals 11 May 2011
Table 11: Teva Pharmaceuticals -- Balance Sheet 2009-2016E ($ in millions)
Assets
Cash & Cash Equivalents
Total Current Assets
Intangible assets and debt issuance costs Total Assets
Liabilities and Shareholder's Equity
Short-term credit
Total Current Liabilities
Total Liabilities
Total Shareholder's Equity
Total Liabilities and Shareholder's Equity
Source: Company reports and UBS estimates
Teva Pharmaceuticals 11 May 2011
Table 12: Teva Pharmaceuticals -- Cash Flow Statement 2009-2016E ($ in millions)
From Operating Activities
Net Income
Minority Interests in Profits (Losses) of Subsidiaries Net Cash From Operations
From Investing Activities
Capital Expenditures
Acquisition of Product Rights/Patents/Intangible Acquisition of Long Term Investments and Other Assets Net Cash from Investing
-$916 -$5,455 -$1,531 -$1,859 -$2,250 -$5,707 -$2,090 -$1,977
From Financing Activities
Change in Shares (Exercise of Options/Share Repurchas
Proceeds for issurance of shares for acquisition Cost of Acquis./Proceeds from Sale of Shrs. Held by Sub Net Cash from Financing
$573 -$2,875 -$2,870 -$1,016 -$1,918 -$2,777 -$2,038
Translation Differences on Cash Balance of Subs.
Cash/Equiv. Balance (BOY)
Net Cash Flow
Cash/Equiv. Balance (EOY)
$8,342 $12,083
Source: Company reports and UBS estimates Q Teva Pharmaceuticals
Teva is the largest global generics company, with a 24% share of generics and a 16.4% share of the US total market. The company has a branded portfolio focusing on CNS and Respiratory therapeutic areas, with key products Copaxone for Multiple Sclerosis and ProAir albuterol inhaler for asthma and COPD. Teva recently acquired competitor Barr Pharmaceuticals and is in the process of integrating the business while working to develop capabilities in developing biogenerics.
Teva Pharmaceuticals 11 May 2011
Q Statement of Risk
Risks to Teva include 1) competitive pressure on sales of Copaxone; 2) unsuccessful execution on Paragraph IV filings; 3) generic price deterioration for overall basket of products, 4) inability to integrate the recently completed Barr acquisition, 5) inability to execute on biosimilar, and 6) inability to identify and integrate future acquisitions. Q Analyst Certification
Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.
Teva Pharmaceuticals 11 May 2011
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Teva Pharmaceuticals 11 May 2011
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Price date
Teva Pharmaceuticals16
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Teva Pharmaceuticals 11 May 2011
Teva Pharmaceuticals (US$)
Note: On August 4, 2007 UBS revised its rating system. (See 'UBS Investment Research: Global Equity Rating Definitions' table for details). From September 9, 2006 through August 3, 2007 the UBS ratings and their definitions were: Buy 1 = FSR is > 6% above the MRA, higher degree of predictability; Buy 2 = FSR is > 6% above the MRA, lower degree of predictability; Neutral 1 = FSR is between -6% and 6% of the MRA, higher degree of predictability; Neutral 2 = FSR is between -6% and 6% of the MRA, lower degree of predictability; Reduce 1 = FSR is > 6% below the MRA, higher degree of predictability; Reduce 2 = FSR is > 6% below the MRA, lower degree of predictability. The predictability level indicates an analyst's conviction in the FSR. A predictability level of '1' means that the analyst's estimate of FSR is in the middle of a narrower, or smaller, range of possibilities. A predictability level of '2' means that the analyst's estimate of FSR is in the middle of a broader, or larger, range of possibilities. From October 13, 2003 through September 8, 2006 the percentage band criteria used in the rating system was 10%.
Teva Pharmaceuticals 11 May 2011
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