Business Context and Reporting Period
Teva Pharmaceutical Industries Limited is a global pharmaceutical company focused on generic, specialty and biopharmaceutical products. It reports through North America, Europe and International Markets, with additional API, contract manufacturing and out-licensing activities. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Amounts are in U.S. dollars unless otherwise stated.
Financial Performance and Position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net revenues | $3,887 million | $3,978 million | $11,778 million | $12,206 million |
| Gross profit | $1,794 million | $1,852 million | $5,544 million | $5,678 million |
| Gross margin | 46.2% | 46.6% | 47.1% | 46.5% |
| Operating income (loss) | $623 million | $(4,342) million | $1,638 million | $(3,978) million |
| Net income (loss) attributable to Teva | $292 million | $(4,349) million | $576 million | $(4,140) million |
| Diluted EPS | $0.26 | $(3.97) | $0.52 | $(3.78) |
| Operating cash flow | $529 million | $307 million | $342 million | $885 million |
Q3 segment revenue and profit were $1,875 million and $458 million in North America, $1,220 million and $394 million in Europe, and $530 million and $152 million in International Markets. North America was pressured by lower COPAXONE and generic-product revenue, while Europe benefited from higher generic, OTC and AJOVY revenue. International Markets profit benefited from the $35 million Otsuka milestone tied to the AJOVY launch in Japan.
As of September 30, 2021, cash and cash equivalents were $2,045 million, compared with $2,177 million at December 31, 2020. Total assets were $47,851 million and total equity was $11,451 million. Total debt was $23,746 million, including $2,709 million of short-term debt and $21,037 million of long-term senior notes and loans. Teva’s reported financial leverage was 67%, and approximately 11% of total debt was classified as short-term.
Nine-month investing cash flow was $1,277 million, including $1,278 million of beneficial interest collected from securitized accounts receivable. Financing cash flow was $(1,671) million, primarily reflecting debt repayments, including the $1,475 million repayment of senior notes at maturity and a $491 million redemption of convertible senior notes. Management reported Q3 free cash flow of $795 million, defined as operating cash flow, beneficial interest collected from securitized receivables and divestiture proceeds, less capital investment.
Material Changes Versus the Prior Comparable Period
- Q3 revenue declined 2% in U.S. dollars and 3% in local currency; nine-month revenue declined 4% in U.S. dollars and 6% in local currency.
- Q3 gross margin declined 40 basis points, primarily because lower sales of higher-margin specialty products, especially COPAXONE, changed the product mix. Nine-month gross margin increased 60 basis points, primarily because of improved generic-product profitability.
- Q3 North America revenue decreased 7% and segment profit decreased 18%. COPAXONE revenue fell 44% to $133 million; AUSTEDO revenue increased 19% to $201 million and AJOVY revenue increased 31% to $46 million.
- Q3 Europe revenue increased 9% and segment profit increased 26%. International Markets revenue was essentially flat and segment profit increased 22%.
- Q3 operating results improved substantially because 2020 included a $4,628 million goodwill impairment and $509 million of intangible-asset impairments. Q3 2021 included $21 million of intangible impairments and no goodwill impairment.
- Nine-month net income improved to $576 million from a $4,140 million loss, but operating cash flow declined to $342 million from $885 million, largely because of working-capital changes and the absence of comparable 2020 effects.
- Debt declined from $25,132 million at June 30, 2021 to $23,746 million at September 30, 2021. The revolving credit facility had $300 million outstanding at quarter-end; Teva stated that it had no amount outstanding as of the filing date.
Guidance, Outlook, Risks and Unusual Items
- Management expected its 2021 non-GAAP tax rate to be approximately 17% to 18%. The filing does not provide clear full-year revenue or earnings guidance.
- Management stated that COVID-19 had not materially disrupted production, distribution or supply chains in Q3, but reported variable demand, customer stocking effects, minimal clinical-trial and regulatory delays, and continuing uncertainty.
- Teva expects sufficient cash resources to meet debt service and other obligations for at least one year and expects to remain within its revolving-credit financial covenants. The net-debt-to-EBITDA covenant was 5.00x for Q3 and Q4 2021 and becomes more restrictive thereafter.
- Material legal exposures include opioid litigation and potential nationwide settlement negotiations, DOJ criminal antitrust charges against Teva USA, generic-drug price-fixing and market-allocation claims, patent litigation, product-liability claims, and securities litigation. The company states that it cannot estimate a reasonable upper end of potential opioid losses if a comprehensive settlement is not finalized.
- Legal settlements and loss-contingency expense was $113 million for the first nine months of 2021, compared with $10 million in 2020. The provision for legal settlements and loss contingencies was $2,009 million at September 30, 2021.
- The Federal Circuit reinstated a $235.5 million carvedilol patent-infringement verdict; Teva petitioned for en banc review. The company had recorded a provision based on an offer to settle.
- Manufacturing and regulatory matters remain relevant. FDA closed out the prior warning letter for the Davie, Florida facility, while the Irvine, California facility remained subject to manufacturing remediation, product holds and potential consequences, including lost revenue, inventory write-offs, penalties or further enforcement.
- Teva recorded $227 million of other asset impairments, restructuring and other items in the first nine months, including $96 million of restructuring expense. Identifiable intangible-asset impairments were $295 million, primarily related to generic-product rights and pipeline assets.
- Teva has not paid dividends since December 2017 and stated that it cannot currently pay dividends or repurchase shares because of its accumulated deficit.
Important Facts for Investors to Verify
- Whether revenue stabilization and specialty-product growth in AUSTEDO and AJOVY can offset continuing COPAXONE erosion, generic pricing pressure and North American volume declines.
- Debt repayment capacity, upcoming maturities, covenant headroom and the effect of the revolving-credit facility’s progressively tighter net-debt-to-EBITDA limits.
- The ultimate cost and timing of opioid, antitrust, patent, product-liability and securities litigation, including potential indemnification obligations related to the Actavis Generics acquisition.
- Whether Irvine manufacturing remediation, supply interruptions or additional FDA actions produce material revenue losses, penalties, inventory write-offs or impairments.
- The sustainability of Q3 free cash flow, including the contribution from securitized receivables and divestiture proceeds, versus recurring operating cash generation.
- Future impairment risk for goodwill and intangible assets, particularly given sensitivity to COVID-19 recovery assumptions, AUSTEDO forecasts, competition, pricing and product-launch timing.