Teva Pharmaceutical Industries Limited — Form 10-Q Summary
Business context and reporting period
Teva is a global pharmaceutical company focused on generic medicines, specialty products, distribution and active pharmaceutical ingredients. The unaudited report covers the three and nine months ended September 30, 2018, with comparisons to the corresponding 2017 periods. Teva reports through North America, Europe and International Markets, plus other activities. Prior-period segment information was recast to conform to the 2018 structure.
Financial performance and position
| U.S. dollars in millions, except per-share data | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net revenues | $4,529 | $5,617 | $14,295 | $16,987 |
| Gross profit | $2,021 | $2,650 | $6,430 | $8,344 |
| Gross margin | 44.6% | 47.2% | 45.0% | 49.1% |
| Operating income (loss) | $16 | $378 | $1,527 | $(4,467) |
| Net income (loss) attributable to Teva | $(208) | $595 | $736 | $(4,730) |
| Net income (loss) attributable to ordinary shareholders | $(273) | $530 | $541 | $(4,925) |
| Diluted EPS | $(0.27) | $0.52 | $0.53 | $(4.85) |
Q3 operating margin was approximately 0.4%, versus 6.7% in Q3 2017. Nine-month operating margin was approximately 10.7%, versus negative 26.2% in 2017. Q3 results were reduced by lower revenues, gross-margin pressure and $658 million of impairment, restructuring and other charges, including $521 million of long-lived-asset impairments and $88 million of restructuring costs.
- Segment performance: Q3 North America revenue declined 26% to $2,265 million and segment profit declined 43% to $649 million. Europe revenue declined 12% to $1,212 million while segment profit increased 23% to $297 million. International Markets revenue declined 18% to $726 million while segment profit increased 12% to $123 million.
- Key products: Q3 North America COPAXONE revenue declined 43% to $463 million, generic-product revenue declined 25% to $922 million, and AUSTEDO revenue increased to $62 million from $6 million. AJOVY was approved and launched in the United States in September 2018.
- Cash flow: Q3 operating cash flow was $421 million, versus $795 million in Q3 2017. Nine-month operating cash flow was $2,079 million, versus $1,366 million in 2017. Nine-month investing cash flow was $1,792 million, while financing activities used $2,852 million.
- Liquidity: Cash and cash equivalents were $1,875 million at September 30, 2018, versus $963 million at December 31, 2017. Cash, short-term and long-term investments totaled $1,948 million. The $3 billion revolving credit facility was undrawn.
- Debt: Debt was $29,489 million at September 30, 2018, compared with $30,237 million at June 30, 2018. Balance-sheet debt consisted of $2,673 million of short-term debt and $26,816 million of long-term senior notes and loans. Teva reported 61% financial leverage and approximately 6.9 years of average debt maturity.
- Balance sheet: Total assets were $65,061 million and total equity was $19,134 million at September 30, 2018. Trade receivables were $5,665 million, inventories were $4,866 million and sales reserves and allowances were $6,701 million.
Material changes versus the prior comparable period
- Q3 revenue decreased 19%, or 18% in local-currency terms. Declines reflected generic competition to COPAXONE, U.S. generic price erosion, product divestitures and discontinued activities. Currency movements reduced Q3 revenue by $80 million and operating income by $34 million.
- Gross margin declined 2.6 percentage points in Q3, primarily because of lower North America profitability. Europe and International Markets reported improved segment margins and profits due largely to restructuring-related cost reductions.
- Q3 net income attributable to Teva changed from $595 million of income to a $208 million loss. Nine-month net income attributable to Teva improved from a $4.73 billion loss to $736 million of income, largely because 2017 included a $6.1 billion goodwill impairment and 2018 included $1.239 billion of legal-settlement income.
- Nine-month 2018 included $300 million of goodwill impairment and $2.080 billion of other impairments, restructuring and other charges. Long-lived-asset impairments totaled $1.501 billion, including $1.246 billion related to intangible assets.
- Teva reduced debt through term-loan repayments, note maturities and a $405 million September tender offer, while issuing approximately $4.4 billion of senior notes in March 2018.
- Ordinary-share dividends remained suspended. Dividends on mandatory convertible preferred shares were also suspended in Q3 2018 due to the accumulated deficit.
Guidance, outlook, commentary and risks
- Management expects a 2018 non-GAAP tax rate of approximately 14%, lower than the previous projection, primarily because of the expected geographic mix of income. The filing does not provide clear full-year revenue or earnings guidance in the supplied text.
- The two-year restructuring plan announced in 2017 targets $3 billion of annualized cost-base reduction by the end of 2019. Teva reported approximately 9,100 full-time-equivalent headcount reductions since the plan began.
- Management states that available liquidity and internally generated funds are sufficient to meet ordinary-course financial obligations for at least twelve months from the report release date, subject to debt covenants and operating performance.
- COPAXONE faces existing and potential additional generic and oral MS-treatment competition. The Federal Circuit found certain COPAXONE 40 mg/mL patent claims invalid in October 2018, and Teva was evaluating further appeals.
- The Davie, Florida manufacturing facility received an FDA “official action indicated” classification after a July inspection. The Q3 financial impact was immaterial, but unresolved findings could cause approval delays, lost revenue, impairments, inventory write-offs, penalties and remediation costs.
- Teva recorded $46 million of first-nine-month impact from the valsartan recall related to an impurity in a third-party API. Further regulatory actions, supply interruptions, litigation or customer penalties could increase the impact.
- Significant pending or potential legal and regulatory exposures include opioid litigation, generic-drug pricing and antitrust investigations, patent litigation, government investigations, product-liability claims, securities litigation and the $135 million Illinois settlement payable through January 2020. The filing states that many litigation outcomes are unpredictable and that material losses could occur in a given period.
- Internal controls: management identified a material weakness in internal control over financial reporting involving validation of business allocation between the International Markets and Rimsa reporting units for interim goodwill impairment testing. Remediation controls were implemented during Q3 and are to be tested during annual impairment testing.
Most important facts for investors to verify
- Whether COPAXONE erosion, U.S. generic price competition and product losses continue to pressure revenue and gross margin.
- Progress toward the $3 billion restructuring cost-base reduction target and the cash costs required to achieve it.
- Debt maturities, refinancing capacity, covenant compliance and the sustainability of operating cash flow relative to interest obligations.
- Potential additional impairments, particularly for goodwill and acquired intangible assets, given narrow valuation cushions in International Markets and Europe.
- Resolution and financial exposure from opioid, generic-pricing, antitrust, patent, product-liability and securities litigation.
- Remediation of the Davie FDA findings and the valsartan recall’s continuing effects on supply, revenue, reserves and litigation.
- Remediation and testing of the material weakness in goodwill-impairment controls.
- Commercial traction for AJOVY and AUSTEDO and the timing and probability of approvals for biosimilars and other pipeline products.