Business Context and Reporting Period
Teva Pharmaceutical Industries Limited filed this Form 10-K for the fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter data. Teva is a global pharmaceutical company focused on generic medicines, specialty medicines, biopharmaceuticals, over-the-counter products, API sales and distribution. Its reportable segments are North America, Europe and International Markets.
All amounts below are in U.S. dollars unless otherwise stated. The filing was signed February 19, 2019. Teva’s financial statements were prepared under U.S. GAAP, and the auditor reported effective internal control over financial reporting as of December 31, 2018.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net revenues | $18,854 million | $22,385 million | Down 16% |
| Gross profit | $8,296 million | $10,615 million | Down 22% |
| Gross margin | 44.0% | 47.4% | Down 3.4 points |
| Operating income (loss) | $(1,637) million | $(17,484) million | Improved primarily from lower impairments |
| Operating margin | (8.7%) | (78.1%) | Improved |
| Net income (loss) | $(2,472) million | $(16,449) million | Improved |
| Net loss attributable to Teva | $(2,150) million | $(16,265) million | Improved |
| Loss per ordinary share, diluted | $(2.35) | $(16.26) | Improved |
| Cash flow from operating activities | $2,446 million | $2,225 million | Up 10% |
| Capital expenditures | $651 million | $874 million | Down 26% |
| Total debt | $28,916 million | $32,475 million | Down $3,559 million |
| Cash and cash equivalents | $1,782 million | $963 million | Up $819 million |
Fourth-quarter 2018 net revenues were $4,559 million, gross profit was $1,971 million, and net loss attributable to ordinary shareholders was $2,940 million, or $2.85 per diluted share. The fourth-quarter loss primarily reflected a $2.5 billion goodwill impairment related to International Markets and a $170 million impairment related to Medis.
Segment Performance
| Segment | 2018 Revenue | Revenue Change | 2018 Segment Profit | Profit Change |
|---|---|---|---|---|
| North America | $9,297 million | Down 23% | $2,837 million | Down 39% |
| Europe | $5,186 million | Down 5% | $1,273 million | Up 24% |
| International Markets | $3,005 million | Down 11% | $498 million | Up 17% |
North America remained the largest segment but was pressured by generic competition to COPAXONE, U.S. generic price erosion and lower ProAir and QVAR sales. Europe and International Markets improved segment profitability mainly through restructuring-related cost reductions and efficiency measures.
Material Changes Versus the Prior Comparable Period
- Revenue declined $3.5 billion, primarily from generic competition to COPAXONE, weaker U.S. generics performance, and divestitures or discontinued activities.
- Global COPAXONE revenue declined to $2,365 million from $3,801 million. North America COPAXONE revenue fell 44% to $1,759 million.
- Gross margin fell to 44.0% from 47.4%, mainly because of lower North American profitability and the reduced contribution from COPAXONE.
- Goodwill impairment declined to $3,027 million from $17.1 billion in 2017, while identifiable intangible-asset impairment declined to $1,991 million from $3,238 million.
- 2018 included $1,208 million of income from legal settlements and loss contingencies, compared with a $500 million expense in 2017. The 2018 amount primarily included the Allergan working-capital settlement, the Rimsa settlement and reversal of a prior carvedilol litigation reserve.
- Restructuring expenses were $488 million. Since the December 2017 restructuring announcement, Teva had reduced global headcount by approximately 10,300 full-time-equivalent employees, to 42,535 at year-end.
- Debt declined through repayments and prepayments funded by operating cash flow and asset-sale proceeds. Teva issued approximately $4.4 billion of senior notes in March 2018 and prepaid approximately $2.3 billion of term loans during the first quarter.
- Cash flow from operations increased despite lower earnings, supported by the Allergan working-capital adjustment and Rimsa settlement. Teva also collected $1,735 million of beneficial interest from securitized trade receivables.
- Teva changed the presentation of royalty payments during the fourth quarter, reporting all royalties related to marketed products in cost of sales. Prior periods were retrospectively adjusted; the change did not affect total operating income.
- The mandatory convertible preferred shares automatically converted into ordinary shares on December 17, 2018, resulting in issuance of approximately 70.6 million ADSs and payment of accumulated preferred dividends in ADSs.
Guidance, Outlook, Management Commentary, Risks and Unusual Items
Management did not provide a clear numerical 2019 revenue or earnings guidance figure in the provided filing text. Management identified restructuring execution, AJOVY and AUSTEDO growth, timely generic launches, COPAXONE erosion, specialty-product loss of exclusivity, generic pricing pressure, debt levels and currency movements as major factors expected to affect 2019 results.
The restructuring plan targets a $3 billion reduction in the total cost base by the end of 2019. The plan includes workforce reductions, generic portfolio optimization, manufacturing and R&D site closures or divestitures, and pipeline prioritization. Management cautioned that the expected benefits may be delayed or may not be achieved and that additional restructuring charges may occur.
- Liquidity and debt: Teva reported $28.9 billion of debt, approximately $1.8 billion of cash and investments, and no borrowings under its $3 billion revolving credit facility. It was in compliance with applicable financial covenants and stated that it expected sufficient cash resources for at least twelve months without drawing on the facility. However, its debt ratings were non-investment grade, increasing refinancing costs and limiting financial flexibility.
- Manufacturing and regulatory risk: The FDA classified Teva’s Davie, Florida facility as official action indicated and issued a warning letter on February 5, 2019. Teva estimated approximately $255 million of 2019 revenue from the site if remediation or enforcement did not interrupt operations.
- Valsartan recall: The NDMA-related recall of valsartan and certain combination products resulted in a $51 million 2018 impact, primarily inventory reserves. Further revenue losses, customer penalties, impairments and litigation costs were possible.
- Litigation and investigations: Teva faced opioid-related litigation and investigations, generic-drug price-fixing and market-allocation claims, antitrust actions involving patent settlements, government pricing and marketing investigations, product-liability matters and other patent disputes. The filing states that many potential losses could not be reasonably estimated.
- Asset impairment risk: Goodwill, identifiable intangible assets and in-process R&D totaled substantial amounts on the balance sheet. Further impairment could result from additional competition, pricing pressure, currency changes, regulatory developments or weaker product forecasts.
- Concentration: McKesson represented 12% and AmerisourceBergen 14% of 2018 revenue. Approximately 48% of revenue was denominated in currencies other than the U.S. dollar.
- Shareholder returns: Cash dividends on ordinary shares and ADSs remained suspended, and Teva stated that it did not expect to pay dividends in the near future. Share repurchases were also unavailable because of the accumulated deficit.
- Pipeline and products: AJOVY launched in the United States in September 2018, AUSTEDO generated $204 million of U.S. revenue, and biosimilars Truxima and Herzuma received FDA approval in November and December 2018, respectively. Conversely, Teva discontinued or returned rights to several development programs and reported a failed phase 3 respiratory study for CINQAIR/CINQAERO.
Most Important Facts for Investors to Verify
- Whether COPAXONE revenue and cash-flow declines stabilize or continue as additional generic and oral MS competition emerges.
- Progress toward the $3 billion restructuring target, including realized savings, remaining charges, site closures and supply continuity.
- Debt maturities, refinancing needs, credit ratings and compliance with the revolving-credit facility’s net-debt-to-EBITDA covenant.
- Remediation of the Davie, Florida FDA warning letter and any effects on product approvals, production, inventory or revenue.
- Ongoing financial and legal effects of the valsartan recall, opioid litigation, generic-pricing investigations and antitrust proceedings.
- Commercial traction and profitability of AJOVY, AUSTEDO, Truxima, Herzuma and new generic launches.
- Potential additional goodwill and intangible-asset impairments, particularly in International Markets, Europe and Medis.
- The sustainability of operating cash flow after excluding unusual settlement proceeds and other nonrecurring items.