Teva Pharmaceutical Industries Ltd. — FY2015 Form 20-F Summary
Business context and reporting period
Teva is an Israel-based global pharmaceutical company operating in generic medicines, specialty medicines and other activities, including its PGT Healthcare joint venture with Procter & Gamble. The filing is an annual Form 20-F for the fiscal year ended December 31, 2015, prepared under U.S. GAAP. The source does not provide a separate Q4 2015 income statement in the extracted text.
- Generic medicines represented approximately 49% of 2015 revenue; specialty medicines represented approximately 42%.
- Copaxone generated $4.0 billion of revenue, approximately 20% of consolidated revenue.
- Approximately 43% of revenue was generated outside the United States.
Financial performance and key metrics
| U.S. dollars in millions, except per-share data | 2015 | 2014 | Change |
|---|---|---|---|
| Net revenues | $19,652 | $20,272 | Down 3% |
| Gross profit | $11,356 | $11,056 | Up 3% |
| Gross margin | 57.8% | 54.5% | Up 3.3 points |
| Operating income | $3,352 | $3,951 | Down 15% |
| Operating margin | 17.0% | 19.5% | Down 2.5 points |
| Net income attributable to Teva | $1,588 | $3,055 | Down 48% |
| Net income attributable to ordinary shareholders | $1,573 | $3,055 | Down 49% |
| Diluted EPS | $1.82 | $3.56 | Down 49% |
| Cash flow from operating activities | $5,542 | $5,127 | Up $415 million |
| Capital expenditures | $772 | $929 | Down $157 million |
- Generic medicines revenue was $9.546 billion, down 3%, while segment profit rose 24% to $2.682 billion. Segment profit margin increased to 28.1% from 22.1%.
- Specialty medicines revenue was $8.338 billion, down 3%, while segment profit declined 5% to $4.361 billion. Segment profit margin decreased to 52.3% from 53.7%.
- Research and development expense increased 2% to $1.525 billion; selling and marketing expense decreased 10% to $3.478 billion.
- Financial expense increased to $1.0 billion from $313 million, primarily because of losses and impairment related to Mylan shares and costs associated with debt tender and related swaps.
- Free cash flow, defined in the filing as operating cash flow less capital investment, was approximately $4.9 billion, compared with $4.3 billion in 2014.
Liquidity, capital structure and dividends
- Cash and cash equivalents were $6.946 billion at December 31, 2015, compared with $2.226 billion in 2014. Cash, cash equivalents and investments totaled approximately $8.4 billion.
- Total debt was $9.968 billion, including $1.585 billion of short-term debt and $8.383 billion of long-term debt, compared with $10.327 billion at year-end 2014.
- Total equity was $29.927 billion, compared with $23.355 billion in 2014. Working capital declined to $32 million from $1.642 billion, mainly because of higher sales reserves and allowances and accounts payable.
- The $3 billion revolving credit facility was undrawn at year-end. It was expected to increase to $4.5 billion after completion of the Actavis Generics acquisition.
- Teva paid approximately $1.155 billion in ordinary-share dividends in 2015 and declared a fourth-quarter dividend of $0.34 per share. Mandatory convertible preferred shares carry a cumulative 7% annual dividend when declared.
Material changes versus the prior comparable period
- Revenue declined in reported dollars because foreign-exchange movements reduced revenue by approximately $1.3 billion; revenue increased 4% in local-currency terms.
- Generic profitability improved substantially because of U.S. product launches, lower selling and marketing expenses and improved gross margins.
- Specialty profitability weakened because of lower Copaxone revenue, product mix effects and higher specialty R&D spending, partly offset by lower selling and marketing expense.
- Legal settlements and loss contingencies changed from a $111 million benefit in 2014 to a $631 million expense in 2015, mainly because of additional reserves related to the modafinil antitrust settlement.
- Impairment, restructuring and other charges rose to $1.131 billion from $650 million, including $361 million of long-lived asset impairments and $399 million of contingent consideration expense.
- Sales reserves and allowances increased to $6.601 billion from $5.849 billion, primarily because of higher customer and managed-care rebates.
Outlook, transactions, risks and unusual items
- Teva expected a substantial increase in generic revenue following the planned acquisition of Allergan’s Actavis Generics business, together with significant acquisition, integration, amortization and financing expenses.
- The Actavis Generics transaction contemplated $33.75 billion of cash consideration and approximately 100 million Teva shares. Teva had arranged a $22 billion bridge facility and $5 billion of term loans, none of which had been drawn at December 31, 2015. Pro forma consolidated debt was expected to be approximately $37 billion after financing.
- The pending $2.3 billion Rimsa acquisition and the Actavis transaction were included in purchase obligations. Completion of both transactions remained subject to closing conditions and regulatory approvals.
- Credit ratings had been downgraded to BBB+ and Baa1 following the Actavis announcement, with possible further downgrades to BBB and Baa2 upon completion.
- Copaxone faced increasing competition from oral multiple-sclerosis therapies and a U.S. generic version of Copaxone 20 mg/mL launched in June 2015. Teva reported that more than 78% of U.S. Copaxone prescriptions had migrated to the 40 mg/mL formulation.
- Teva recorded $728 million of losses related to its Mylan investment, including $631 million in financial expense and $105 million in impairment and restructuring charges; a $312 million unrealized gain remained in other comprehensive income at year-end.
- Teva was conducting a substantially complete worldwide FCPA investigation involving practices in Russia, Europe, Latin America and other jurisdictions. Potential fines, disgorgement, compliance measures and other sanctions were not estimable.
- Other significant exposures included patent and antitrust litigation, approximately 4,000 product-liability lawsuits related to metoclopramide, regulatory and pricing investigations, manufacturing and quality risks, foreign-exchange exposure and potential Venezuelan devaluation losses on approximately $487 million of net monetary assets.
- Management identified 2016 risks from further Copaxone declines, currency movements, integration execution, increased leverage and generic pricing pressure. No quantitative 2016 revenue or earnings guidance is provided in the extracted filing text.
Most important facts for an investor to verify
- Completion status, financing, purchase price allocation and post-closing leverage of the Actavis Generics and Rimsa acquisitions.
- Actual 2016 and subsequent Copaxone sales, U.S. market share, generic competition and the durability of the 40 mg/mL conversion.
- Final outcomes and cash costs of the FCPA investigation, modafinil and other antitrust matters, product-liability litigation and government pricing investigations.
- Changes in sales reserves and allowances, particularly U.S. rebates, Medicaid rebates, chargebacks and customer inventory.
- Credit-rating actions, refinancing requirements and compliance with debt covenants after acquisition financing.
- Potential impairment of goodwill, acquired product rights and in-process R&D assets, including the $258 million Revascor asset and other pipeline assets.
- Foreign-exchange and repatriation risks, particularly the Venezuelan net monetary asset exposure and the effect of currency movements on reported revenue and earnings.