Teva Pharmaceutical Industries Ltd. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Teva is a global pharmaceutical company focused on generic medicines, innovative medicines and biopharmaceuticals. It reports through North America, Europe and International Markets, with additional activities including active pharmaceutical ingredients, contract manufacturing and out-licensing. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022. Amounts are in U.S. dollars unless otherwise stated.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net revenues | $3,661 million | $3,661 million | Flat; up 4% in local currencies |
| Gross profit | $1,582 million | $1,740 million | Down 9% |
| Gross margin | 43.2% | 47.5% | Down 4.3 percentage points |
| Operating income (loss) | $2 million | $(713) million | Improved |
| Net loss attributable to Teva | $(205) million | $(955) million | Improved |
| Diluted loss per share | $(0.18) | $(0.86) | Improved |
| Cash flow from operations | $(145) million | $(49) million | More cash used |
| Free cash flow | $41 million | $117 million | Down 65% |
- Segment revenues were $1,766 million in North America, $1,184 million in Europe and $492 million in International Markets. Other activities generated $219 million, down 20% year over year.
- Segment profit declined to $332 million in North America, $345 million in Europe and $114 million in International Markets, reflecting lower gross margins, inflationary costs, pricing pressure and unfavorable product mix.
- Growth products included AUSTEDO revenue of $170 million, up 10%, and AJOVY revenue of $95 million across reported regions, while North American generic products declined 8%, COPAXONE declined 12% and BENDEKA and TREANDA declined 23%.
- Research and development expense increased 4% to $234 million. Selling and marketing expense declined 6% to $546 million, while general and administrative expense was unchanged at $296 million.
- Cash and cash equivalents were $2,143 million at March 31, 2023, compared with $2,801 million at December 31, 2022. Cash, cash equivalents and restricted cash totaled $2,176 million.
- Total debt was $20,691 million, compared with $21,212 million at year-end 2022. Debt represented 71% of total debt plus equity; 5% was classified as short-term.
- Teva had no borrowings under its $1.8 billion revolving credit facility and stated that it expected to remain in compliance with its financial covenants and have sufficient resources for obligations over the following year.
Material changes versus the prior comparable period
- Revenue was unchanged in U.S. dollars but increased in local currencies; foreign exchange movements, including hedging effects, reduced revenue by $128 million and operating income by $32 million.
- Gross margin fell primarily because of inflationary and other macroeconomic cost pressures, lower-margin Anda distribution revenue, product mix and pricing or competition affecting COPAXONE and BENDEKA and TREANDA.
- Legal settlements and loss-contingency expense decreased substantially to $233 million from $1,124 million, driving the improvement from an operating loss to approximately break-even operating income.
- Intangible-asset impairment expense increased to $178 million from $149 million, including $112 million related mainly to regulatory pricing reductions in Japan, $47 million from revised market assumptions and $19 million related to generic pipeline assets.
- Teva issued $2.445 billion of sustainability-linked senior notes, net of issuance costs, repaid $646 million of notes at maturity and repurchased $2.506 billion of debt through a cash tender offer.
- Operating cash flow was pressured by lower profit and working-capital changes, including higher accounts receivable net of sales reserves and allowances. Free cash flow also benefited from $323 million collected through the EU receivables securitization program.
Outlook, commentary, risks and unusual items
- The filing does not provide a clear full-year revenue, earnings or cash-flow guidance figure. Management is reviewing strategy and organizational structure, and any changes could affect segment reporting and goodwill allocation.
- Management cited inflation, higher energy and manufacturing costs, supply-chain disruption, foreign-exchange volatility and the Russia-Ukraine conflict as continuing risks. The conflict’s direct impact on Q1 results was described as immaterial, but future effects remain uncertain.
- Teva remains highly dependent on generic products and faces pricing pressure, customer concentration, increased competition, patent litigation and delays or failures in product launches. Goodwill and other intangible assets remain exposed to future impairment if operating assumptions deteriorate.
- The company recorded $4.299 billion of provisions for legal settlements and loss contingencies at March 31, 2023. Major matters include opioid litigation, DOJ patient-assistance-program litigation, generic-drug antitrust matters, HIV-medicine reverse-payment litigation and other competition claims.
- Teva’s proposed nationwide opioid settlement could require payments of up to $4.25 billion over 13 years, including previously settled cases and potential product contributions. Completion depended on participation by subdivisions and other conditions; Teva had until June 8, 2023 to determine whether to proceed. If not finalized, additional trials were expected.
- Teva USA faces criminal Sherman Act charges brought by the DOJ, with a trial scheduled for May 2024. The filing states that a conviction could materially adversely affect the business, including through monetary penalties and possible debarment from federally funded healthcare programs.
- Alvotech received additional FDA complete response letters regarding its proposed Humira biosimilar, citing manufacturing-facility deficiencies, creating uncertainty around the expected U.S. launch timing.
- AUSTEDO XR was approved by the FDA in February 2023, and UZEDY was approved on April 28, 2023, after the quarter ended. UZEDY was expected to become available in the United States in the following weeks.
- Teva has not paid dividends since December 2017 and stated that it currently cannot repurchase shares or pay dividends because of its accumulated deficit.
Most important facts for investors to verify
- Whether revenue growth in local currencies and growth in AUSTEDO, AJOVY and new generic launches can offset generic price erosion, COPAXONE declines and BENDEKA and TREANDA competition.
- Whether gross-margin pressure from inflation, product mix, pricing and foreign exchange moderates.
- Debt maturities, refinancing needs, interest costs and compliance with the revolving-credit facility’s leverage covenants.
- Actual cash generation excluding the $323 million receivables-securitization collection and the sustainability of working-capital benefits.
- Final terms, participation and cash or product obligations under the proposed nationwide opioid settlement.
- Developments in DOJ antitrust, patient-assistance-program, generic-pricing, HIV reverse-payment and other litigation, including whether existing provisions are sufficient.
- Regulatory and commercial progress for UZEDY, AUSTEDO XR and biosimilar programs, particularly the Alvotech Humira and Stelara candidates.
- Potential future impairments to goodwill and intangible assets, especially in Europe, International Markets and Teva API reporting units.