TEVA PHARMACEUTICAL INDUSTRIES LTD quarterly report, Q2 FY2021

Teva Pharmaceutical Industries Limited — Q2 2021 Form 10-Q Summary

Business context and reporting period

Teva is a global pharmaceutical company focused on generic medicines, specialty medicines and biopharmaceuticals, operating through North America, Europe and International Markets segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2021. Amounts are in U.S. dollars unless otherwise stated and are presented in millions, except per-share data.

Financial performance and position

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Net revenues	$3,910	$3,870	$7,892	$8,227
Gross profit	$1,873	$1,763	$3,750	$3,826
Gross margin	47.9%	45.5%	47.5%	46.5%
Operating income	$582	$173	$1,015	$364
Operating margin	14.9%	4.5%	12.9%	4.4%
Net income attributable to Teva	$207	$140	$284	$209
Diluted EPS	$0.19	$0.13	$0.26	$0.19

• Q2 revenue increased 1% in reported dollars but declined 2% in local currency; first-half revenue declined 4% in reported dollars and 7% in local currency.
• Q2 operating income rose primarily because other asset impairments, restructuring and other charges fell to $28 million from $381 million, while Europe segment profit increased. These benefits were partly offset by higher intangible-asset impairments of $195 million versus $120 million.
• Q2 financial expenses increased to $274 million from $223 million, including $240 million of interest expense and a $34 million loss on marketable-security revaluations. First-half financial expenses were $564 million, including $479 million of interest expense.
• Cash flow from operating activities was $218 million in Q2, compared with $273 million in the prior-year quarter. Management-defined free cash flow was $625 million versus $582 million, supported by $115 million of divestiture proceeds and $405 million collected from securitized receivables.
• For the six months, operating cash flow was negative $187 million versus positive $578 million in 2020, primarily because of unfavorable changes in operating assets and liabilities.
• Cash and cash equivalents were $2,436 million at June 30, 2021, up from $2,177 million at December 31, 2020. Cash, short-term and long-term investments totaled $2,479 million at June 30.
• Debt was $25,132 million at June 30, 2021, including $3,530 million of short-term debt and $21,602 million of long-term senior notes and loans. Total equity was $11,311 million.
• Teva had no borrowings under its $2.3 billion revolving credit facility at June 30. It drew $500 million during July 2021 and repaid $1,475 million of 2.2% senior notes at maturity in July.

Material changes versus the prior comparable period

• North America Q2 revenue declined 5% to $1,943 million and segment profit declined 9% to $521 million. COPAXONE revenue fell 36% to $152 million and Anda revenue fell 16% to $316 million, partly offset by growth in generic products, AUSTEDO and AJOVY.
• Europe Q2 revenue increased 18% to $1,184 million and segment profit increased 41% to $343 million, reflecting easier comparisons against COVID-19-related buying patterns and lower physician and hospital activity in Q2 2020.
• International Markets Q2 revenue declined 1% to $485 million, while segment profit increased 27% to $123 million, principally due to the divestment of most Japanese generic and operational assets and product-mix changes.
• First-half revenue reductions reflected lower North America sales, lower International Markets sales and unfavorable currency effects. Reported revenue benefited from currency movements by $135 million in Q2, but currency movements reduced first-half revenue by $209 million relative to 2020.
• Research and development expense increased 10% in Q2 and 12% for the first half, while selling and marketing expense increased 3% in Q2 and declined 1% for the first half.
• First-half legal settlements and loss-contingency expense was $110 million, compared with income of $12 million in 2020, primarily due to a provision related to carvedilol patent litigation.

Guidance, outlook, commentary and unusual items

• Management stated that COVID-19 had not materially disrupted production, distribution or supply chains in Q2. It reported minimal clinical-trial, regulatory and pre-commercial delays but warned that prolonged pandemic effects could cause further delays and variable demand.
• Teva did not anticipate a material negative impact from COVID-19 on 2021 financial results as of the filing date.
• Management expects its 2021 non-GAAP tax rate to be 17% to 18%.
• Management expects sufficient cash resources to support debt service and other obligations for at least one year from issuance of the financial statements and expects to remain within revolving-credit covenant thresholds. The net-debt-to-EBITDA covenant limit was 5.50x through June 30, 2021 and becomes progressively more restrictive.
• Q2 intangible-asset impairments included $30 million related to lenalidomide and $138 million primarily related to revised market assumptions for Actavis Generics products. No goodwill impairment was recorded, but future changes in COVID-19 assumptions or AUSTEDO forecasts could result in impairment.
• Teva completed the sale of most Japanese venture generic and operational assets on February 1, 2021 and sold certain OTC assets during Q2.
• Teva entered into an Alvotech biosimilar partnership and may owe up to $450 million of additional development and commercial milestone payments, plus royalties. Alvotech is subject to litigation and patent disputes involving Humira-related technology.
• Major contingencies include opioid litigation and investigations, DOJ criminal antitrust charges against Teva USA, generic-drug pricing and market-allocation litigation, COPAXONE-related investigations and litigation, patent litigation, product-liability claims and securities litigation. Teva stated that it cannot estimate a loss range for the DOJ criminal charges and cannot predict whether a nationwide opioid settlement will be finalized.
• Manufacturing and regulatory risks remain, including FDA concerns at the Davie, Florida facility and an FDA inspection following a temporary pause in manufacturing at the Irvine, California facility. Potential effects include delayed approvals, lost revenue, inventory write-offs, remediation costs and enforcement actions.
• Teva has not paid dividends since December 2017 and stated that it currently cannot pay dividends or repurchase shares because of its accumulated deficit.

Investor verification points

• Assess the sustainability of cash generation, particularly the negative first-half operating cash flow and reliance on securitized receivables and divestiture proceeds in reported free cash flow.
• Review upcoming debt maturities, covenant headroom and the effect of the July 2021 note repayment and revolving-credit draw.
• Track further erosion of COPAXONE and Anda revenue, generic pricing pressure and the performance of AUSTEDO, AJOVY and new generic launches.
• Evaluate the sensitivity of intangible assets and goodwill to competition, pricing, launch timing, COVID-19 recovery and AUSTEDO forecasts.
• Monitor opioid, antitrust, patent, COPAXONE, product-liability and securities matters, including potential settlements, penalties, debarment or indemnification obligations.
• Verify remediation progress and FDA outcomes for the Davie and Irvine facilities, as well as supply and regulatory risks at other manufacturing sites.
• Reconcile management’s non-GAAP measures with GAAP results; Q2 non-GAAP net income attributable to Teva was reported as $651 million versus GAAP net income attributable to Teva of $207 million.