Teva Pharmaceutical Industries Ltd. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Teva is a global pharmaceutical company focused on generic medicines, specialty 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 filing covers the three months ended March 31, 2021, compared primarily with the three months ended March 31, 2020. Amounts are in U.S. dollars unless otherwise stated.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net revenues | $3,982 million | $4,357 million | Down 9% |
| Gross profit | $1,878 million | $2,063 million | Down 9% |
| Gross margin | 47.2% | 47.3% | Down 0.1 percentage points |
| Operating income | $434 million | $191 million | Up $243 million |
| Operating margin | 10.9% | 4.4% | Up 6.5 percentage points |
| Income before taxes | $144 million | $(33) million | Improved |
| Net income attributable to Teva | $77 million | $69 million | Up 12% |
| Diluted EPS | $0.07 | $0.06 | Up $0.01 |
| Cash flow from operations | $(405) million | $305 million | Declined $710 million |
| Free cash flow, as defined by Teva | $59 million | $551 million | Down $492 million |
Operating performance benefited materially from lower intangible-asset impairments: $79 million in Q1 2021 versus $649 million in Q1 2020. Financial expenses increased to $290 million from $224 million, including $239 million of interest expense and a $64 million loss on revaluation of marketable securities. The tax expense was $62 million on pretax income of $144 million.
At March 31, 2021, cash and cash equivalents were $1,743 million, compared with $2,177 million at December 31, 2020. Cash and short-term and long-term investments totaled $1,933 million, compared with $2,478 million at year-end. Working capital was $1,179 million, compared with $662 million at December 31, 2020.
Total debt was $24,986 million at March 31, 2021, down from $25,919 million at December 31, 2020, primarily due to the $491 million redemption of convertible senior debentures and currency movements. Debt was effectively denominated 65% in U.S. dollars, 32% in euros and 3% in Swiss francs. The $2.3 billion revolving credit facility was undrawn, and management expects to remain within its financial covenants and to have sufficient cash resources for obligations over the following year.
Material changes versus the prior comparable period
- Revenue declined 9%, or 10% in local-currency terms, driven by lower Europe sales, lower Anda, COPAXONE and BENDEKA/TREANDA sales in North America, and the Japanese divestiture, price reductions and generic competition in International Markets.
- North America revenue fell 5% to $1,989 million, while segment profit increased 5% to $577 million. Generic-product revenue rose 11% and AUSTEDO revenue rose 20% to $146 million; Anda revenue fell 32% and COPAXONE revenue fell 17%.
- Europe revenue fell 13% to $1,214 million and segment profit fell 33% to $338 million, principally reflecting customer stocking in Q1 2020, lower prescription activity during the pandemic, generic competition and price declines.
- International Markets revenue fell 13% to $490 million and segment profit fell 22% to $122 million, primarily because of the Japan divestiture, Japanese price reductions and competition.
- Research and development expense increased 15% to $254 million, particularly for respiratory and biosimilar projects. Selling and marketing expense decreased 5% to $585 million, while general and administrative expense decreased 5% to $290 million.
- Legal settlements and loss-contingency expense changed from $25 million of income in Q1 2020 to $104 million of expense in Q1 2021, mainly due to a provision related to carvedilol patent litigation.
- Operating cash flow changed from $305 million provided to $405 million used, reflecting working-capital changes, lower sales-reserve balances, higher inventory and weaker Europe performance.
- Teva completed the sale of the majority of the generic and operational assets of its Japanese business venture on February 1, 2021.
Guidance, outlook, commentary and risks
Teva did not provide clear revenue or earnings guidance in the filing. Management expects the 2021 non-GAAP tax rate to be approximately 17% to 18%, consistent with 2020. Management stated that it does not currently anticipate a material negative impact on 2021 financial results from COVID-19, although demand variability, clinical-trial delays, regulatory delays, raw-material issues and pre-commercial launch delays remain possible.
COVID-19 did not materially disrupt production, distribution or key supply chains in Q1 2021. However, reduced physician and hospital activity affected prescriptions and promotion of certain specialty products. Teva also reported labor-related delays at its Goa, India facilities, although the Q1 financial impact was immaterial.
Material contingencies include opioid litigation and settlement negotiations, the DOJ criminal antitrust case against Teva USA, federal and state investigations concerning generic pricing and patient-assistance donations, product-liability litigation involving nitrosamine impurities, competition and patent litigation, and a European Commission investigation concerning COPAXONE competition. The DOJ criminal case could result in monetary penalties and debarment from federally funded healthcare programs; the filing states that a loss range cannot currently be estimated.
Teva recorded a $1,730 million provision for legal settlements and loss contingencies at March 31, 2021. Opioid settlement negotiations remain unresolved, and the company states that an upper end of a reasonable loss range cannot be determined if a nationwide settlement is not finalized. The company also faces potential future impairments, particularly in North America, where the reporting unit's carrying value equaled fair value after a 2020 goodwill impairment.
Additional commitments include up to $450 million of development and commercial milestone payments under the Alvotech biosimilar partnership and up to $2,230 million of potential development and commercial milestone payments under the fasinumab collaboration with Regeneron, in addition to royalties and other obligations.
Most important facts for investors to verify
- Whether the substantial decline in operating cash flow and free cash flow is temporary or reflects continuing working-capital and profitability pressure.
- Teva's ability to reduce approximately $25 billion of debt while meeting progressively tighter revolving-credit-facility leverage covenants.
- The potential financial and operational impact of opioid litigation, generic-pricing investigations, DOJ criminal charges and other antitrust matters.
- Progress and remediation status at the FDA-designated official-action-indicated manufacturing facility in Davie, Florida, including possible approval delays and lost revenue.
- The sustainability of North America's improved profitability and the recovery prospects for Europe and International Markets.
- Future competitive erosion of COPAXONE, BENDEKA/TREANDA, generic products and other mature products, as well as the timing and commercial value of pipeline launches.
- Potential impairment exposure for goodwill, intangible assets and in-process research and development.
- The status and economics of the Japanese divestiture, the Alvotech biosimilar program and the fasinumab program, which has placed non-essential activities on hold.