Teva Pharmaceutical Industries Ltd. — FY2020 Form 10-K Summary
Business context and reporting period
Teva is a global pharmaceutical company focused on generic medicines, specialty medicines, biosimilars, over-the-counter products, active pharmaceutical ingredients and distribution. It reports through North America, Europe and International Markets segments, plus other activities. This filing covers the fiscal year ended December 31, 2020; selected fourth-quarter 2020 data are also disclosed. The financial statements were prepared under U.S. GAAP and received an unqualified audit opinion. Internal control over financial reporting was reported effective.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net revenues | $16,659 million | $16,887 million | Down 1% |
| Gross profit | $7,726 million | $7,537 million | Up 3% |
| Gross margin | 46.4% | 44.6% | Up 180 bps |
| Operating income (loss) | $(3,572) million | $(443) million | Increased loss |
| Operating margin | (21.4)% | (2.6)% | Down materially |
| Net income (loss) attributable to Teva | $(3,990) million | $(999) million | Increased loss |
| Diluted loss per share | $(3.64) | $(0.91) | Increased loss |
| Cash flow from operations | $1,216 million | $748 million | Up 63% |
| Free cash flow | $2,110 million | $2,053 million | Up 3% |
| Capital expenditures | $578 million | $525 million | Up 10% |
| Total debt | $25,919 million | $26,908 million | Down $989 million |
| Cash, equivalents and investments | $2,478 million | $2,033 million | Up $445 million |
Operating results were heavily affected by a $4,628 million North America goodwill impairment, $1,502 million of identifiable intangible-asset impairments, and $479 million of other asset impairments, restructuring and related items. Interest expense was $963 million, while total financial expenses were $834 million. Teva recorded a $168 million tax benefit on its $4,406 million pretax loss.
At year-end, total assets were $50,640 million, total liabilities were $39,579 million and total equity was $11,061 million. Working capital increased to $662 million from $74 million. The company had $3,188 million of short-term debt and $22,731 million of long-term debt. No amounts were outstanding under its $2.3 billion revolving credit facility at year-end.
Segment performance
| Segment | 2020 revenue | Revenue change | 2020 segment profit | Profit change |
|---|---|---|---|---|
| North America | $8,447 million | Down 1% | $2,421 million | Up 7% |
| Europe | $4,757 million | Down 1% | $1,331 million | Up 1% |
| International Markets | $2,154 million | Down 4% | $474 million | Up 2% |
| Other activities | $1,302 million | Flat | $163 million | Not clearly provided |
- North America benefited from higher AUSTEDO and AJOVY revenue, new generics and improved mix, while COPAXONE, BENDEKA/TREANDA, ProAir and QVAR declined.
- AUSTEDO revenue increased 55% to $637 million and AJOVY revenue increased 45% to $134 million in North America.
- COPAXONE revenue declined 13% in North America, 7% in Europe and 16% in International Markets, primarily due to generic or competing glatiramer acetate products.
- Generic medicines generated $9,316 million, or 55% of total revenue, reinforcing Teva’s exposure to price erosion and competitive launches.
Material changes versus the prior comparable period
- Revenue declined modestly, but gross margin improved because of a more favorable product mix, particularly in North America.
- Operating and net losses widened substantially, primarily because of the North America goodwill impairment and continued intangible-asset impairments.
- Operating cash flow improved by $468 million, although free cash flow included $1,405 million of beneficial interest collected through the trade-receivables securitization program.
- Debt declined through repayment of $700 million of senior notes in March 2020 and €1,010 million of senior notes in July 2020. Financial leverage increased to 70% from 64%, and average debt maturity declined to approximately 5.8 years from 6.4 years.
- Legal settlements and loss-contingency expense fell to $60 million from $1,178 million in 2019, when Teva recorded a substantial opioid-related provision.
- The company completed its two-year restructuring plan, achieving the targeted $3 billion cost-base reduction by the end of 2019, but continued network optimization and recorded $120 million of restructuring expense in 2020.
- Teva entered an agreement with Alvotech to commercialize five U.S. biosimilar candidates. Additional development and commercial milestones of up to $450 million, plus royalties, may become payable.
Guidance, outlook, commentary and risks
Management did not provide a formal numerical 2021 revenue or earnings guidance figure in the supplied filing text. Management stated that it did not currently anticipate a material negative impact on 2021 financial results from the COVID-19 pandemic, but expected variable demand and continued uncertainty.
- 2021 performance is expected to depend on AUSTEDO and AJOVY growth, successful generic and biosimilar launches, fasinumab development, continued COPAXONE erosion, pricing pressure, currency movements, debt repayment and further manufacturing optimization.
- COVID-19 caused lower physician and hospital activity, reduced prescriptions in certain markets, launch and regulatory delays, and fluctuations in customer stocking. Teva reported that its supply chain remained largely uninterrupted at year-end.
- Teva remains subject to substantial opioid litigation and a proposed nationwide settlement framework involving up to approximately $23 billion of buprenorphine-naloxone product at wholesale acquisition cost and up to $250 million of cash over ten years. The framework had not been finalized, and management stated that an upper end of potential loss could not be determined if it was not finalized for all cases.
- Teva USA faces a DOJ criminal indictment alleging Sherman Act violations involving generic drug pricing and market allocation. A conviction could result in monetary penalties, debarment from federally funded healthcare programs and reputational damage.
- The company faces additional antitrust, False Claims Act, Anti-Kickback Statute, product-liability, patent, securities and environmental proceedings. The provision for legal settlements and loss contingencies was $1,625 million at December 31, 2020.
- Teva’s North America reporting unit had a carrying value equal to fair value after the 2020 goodwill impairment, leaving it sensitive to adverse changes in operating assumptions, litigation outcomes, competition or market capitalization.
- The FDA continued to classify Teva’s Davie, Florida facility as “official action indicated” after a January 2020 follow-up inspection. Teva expected approximately $190 million of 2021 revenue from the site, subject to remediation and potential regulatory action.
- The company had $32,187 million of long-term debt obligations including estimated interest and $1,766 million of purchase obligations. It also disclosed potential milestone payments of up to $509 million for qualifying development programs.
- Teva has not paid dividends on its ordinary shares or ADSs since December 2017.
Most important facts for an investor to verify
- Whether cash generation remains sufficient to meet substantial debt maturities, interest expense and tightening revolving-credit-facility covenants.
- The final scope, timing and cost of opioid, generic price-fixing, Anti-Kickback Statute and False Claims Act matters.
- Whether North America operating performance improves enough to avoid additional goodwill or intangible-asset impairments.
- The durability of AUSTEDO and AJOVY growth against competition and the pace of COPAXONE, respiratory and oncology product declines.
- The timing, probability and economics of generic, biosimilar and specialty pipeline launches, including the Alvotech milestone obligations.
- Progress in remediating the Davie facility and any resulting product approval delays, supply disruptions, penalties or impairment charges.
- The quality of free cash flow, including the recurring availability and economic cost of receivables securitization proceeds.
- Changes in pricing regulation, reimbursement, customer concentration, foreign-exchange exposure and COVID-19-related demand.