Business Context and Reporting Period
Teva Pharmaceutical Industries Limited is a global pharmaceutical company headquartered in Israel, focused on generic medicines, specialty medicines, biopharmaceuticals, over-the-counter products, active pharmaceutical ingredients, contract manufacturing and licensing. The company reports through North America, Europe and International Markets segments, plus other activities. This Form 10-K covers the fiscal year ended December 31, 2021, rather than a standalone fourth quarter. The filing was signed February 9, 2022.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net revenues | $15,878 million | $16,659 million | Down 5% in U.S. dollars; down 6% in local currency |
| Gross profit | $7,594 million | $7,726 million | Down 2% |
| Gross margin | 47.8% | 46.4% | Up 140 basis points |
| Operating income (loss) | $1,716 million | $(3,572) million | Improved from loss |
| Operating margin | 10.8% | (21.4%) | Improved materially |
| Income before taxes | $658 million | $(4,406) million | Returned to pretax profit |
| Net income attributable to Teva | $417 million | $(3,990) million | Returned to profitability |
| Diluted EPS | $0.38 | $(3.64) | Improved |
| Operating cash flow | $798 million | $1,216 million | Down 34% |
| Free cash flow | $2,196 million | $2,110 million | Up modestly; includes securitized receivables and divestiture proceeds |
| Cash and investments | $2,191 million | $2,478 million | Down $287 million |
| Total debt | $23,043 million | $25,919 million | Down $2,876 million |
Net income was affected by $424 million of identifiable intangible-asset impairments, $341 million of other asset impairments, restructuring and other items, and $717 million of legal settlements and loss contingencies. Financial expenses increased to $1,058 million from $834 million, including $891 million of interest expense and bank charges.
Non-GAAP income attributable to Teva was $2,855 million, or diluted EPS of $2.58, compared with non-GAAP income of $2,830 million, or diluted EPS of $2.57, in 2020. These measures exclude, among other items, amortization, impairments, legal settlements, restructuring and equity compensation, and are not standardized measures.
Segment Performance
| Segment | 2021 Revenue | Revenue Change | 2021 Segment Profit | Profit Change |
|---|---|---|---|---|
| North America | $7,809 million | Down 7.5% | $2,224 million | Down 8% |
| Europe | $4,886 million | Up 3% in U.S. dollars; down 2% in local currency | $1,494 million | Up 12% |
| International Markets | $2,032 million | Down 6% in U.S. dollars; down 4% in local currency | $529 million | Up 12% |
| Other activities | $1,151 million | Down 12% | Not separately provided | Not clearly provided |
- Generic medicines generated $8,986 million, or 57% of total revenues.
- North America revenue declines reflected lower COPAXONE, generic-product and Anda revenue. AUSTEDO revenue rose 26% to $802 million and AJOVY revenue rose 31% to $176 million.
- COPAXONE North America revenue fell 35% to $577 million because of generic competition and alternative therapies.
- Europe benefited from network-consolidation efficiencies and higher AJOVY revenue, which increased to $87 million from $31 million.
- International Markets revenue was pressured by the February 2021 divestiture of most generic and operational assets of the Japanese venture.
Material Changes Versus the Prior Comparable Period
- Revenue declined $781 million, primarily from COPAXONE, U.S. generics, Japanese generics following divestiture and Anda; AUSTEDO and AJOVY partially offset the decline.
- Gross margin improved despite lower revenue, supported by product mix, specialty-product growth and manufacturing-network consolidation.
- Operating results improved sharply because 2020 included a $4.628 billion North America goodwill impairment and $1.502 billion of intangible-asset impairments. No goodwill impairment was recorded in 2021.
- Legal settlement and loss-contingency expense increased to $717 million from $60 million, primarily due to updates to opioid-related provisions, carvedilol patent litigation and other matters.
- Debt decreased through repayments, a $4.008 billion tender offer and maturity repayments, partly offset by approximately $4.973 billion of net sustainability-linked debt issuance.
- The company completed the sale of most generic and operational assets of its Japanese venture on February 1, 2021 and recognized $311 million of proceeds from business and asset divestitures during the year.
- Teva did not pay dividends in 2021 and has not paid dividends since December 2017.
Guidance, Outlook, Commentary and Risks
Management did not provide a specific 2022 revenue or earnings guidance figure in the filing. It identified the principal factors expected to affect 2022 results as continued COVID-19-related demand variability, growth of AUSTEDO and AJOVY, approval and commercialization of risperidone LAI, timely generic launches, biosimilar development, continued COPAXONE erosion, generic pricing pressure, higher raw-material, energy, labor and transportation costs, currency movements, debt repayment and further manufacturing-network consolidation.
- Management stated that production and distribution remained largely uninterrupted in 2021 and did not currently anticipate a material impact on 2022 financial results from the pandemic, while noting continuing clinical-trial, regulatory, supply and launch delays.
- Risperidone LAI received FDA acceptance of its NDA in August 2021. Fasinumab development activities and related expenditures were placed on hold because of safety concerns involving arthropathies and joint replacement observations.
- Teva remains highly leveraged, with $23.043 billion of debt, non-investment-grade ratings and revolving-credit-facility covenants that become more restrictive through 2023. Management expected covenant compliance for the following year but acknowledged possible temporary inability to draw under the facility.
- Major contingencies include opioid litigation, U.S. generic price-fixing and market-allocation investigations, a DOJ criminal indictment of Teva USA, patent litigation, product-liability claims, pricing and competition investigations, and tax disputes.
- The provision for legal settlements and loss contingencies was $2.710 billion at December 31, 2021. The ultimate cost of opioid matters remains uncertain, particularly because a nationwide settlement had not been finalized.
- Teva reported $3.594 billion of U.S. sales reserves and allowances for rebates, chargebacks and Medicaid-related items at year-end, making revenue estimates sensitive to customer inventory, pricing and rebate assumptions.
- Manufacturing and regulatory risks remain relevant. The Irvine, California facility received an FDA “official action indicated” classification in December 2021; Teva also continued remediation at its Goa, India facility.
- Goodwill totaled $20.040 billion at year-end. Future impairment risk depends on revenue growth, AUSTEDO performance, COVID-19 recovery, competitive conditions, discount rates and litigation assumptions.
Most Important Facts an Investor Should Verify
- Reconcile GAAP earnings of $417 million with non-GAAP earnings of $2.855 billion and assess the recurring nature of excluded items.
- Review debt maturities, interest costs, covenant thresholds and the company’s ability to generate operating cash flow while continuing debt reduction.
- Assess the durability of AUSTEDO and AJOVY growth against competition and the continuing decline of COPAXONE and generic-product pricing.
- Review the opioid, DOJ price-fixing, antitrust, patent, product-liability and securities litigation provisions and potential unrecorded exposure.
- Evaluate assumptions supporting the $20.040 billion goodwill balance and $7.466 billion of identifiable intangible assets.
- Examine sales reserves and allowances, customer concentration and the dependence on major U.S. wholesalers, including McKesson and AmerisourceBergen, each representing 11% of third-party net sales.
- Monitor FDA remediation at Irvine and operational remediation at Goa, as well as possible supply, recall, compliance and impairment consequences.
- Confirm the timing and conditions of the risperidone LAI review, biosimilar launches and generic pipeline opportunities before assigning growth value.