Teva Pharmaceutical Industries Limited — Q2 2023 Form 10-Q
Business context and reporting period
Teva is a global pharmaceutical company focused on generic medicines, innovative medicines and biopharmaceuticals, operating through North America, Europe and International Markets segments. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, with comparisons to the corresponding 2022 periods. Amounts are in U.S. dollars unless otherwise stated.
In May 2023, Teva launched its “Pivot to Growth” strategy, emphasizing AUSTEDO, UZEDY and biosimilars; innovation and pipeline development; sustaining its generics business; and portfolio and manufacturing optimization.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net revenues | $3,878 million | $3,786 million | $7,539 million | $7,447 million |
| Gross profit | $1,796 million | $1,794 million | $3,378 million | $3,534 million |
| Gross margin | 46.3% | 47.4% | 44.8% | 47.5% |
| Operating income (loss) | $(646) million | $(949) million | $(644) million | $(1,662) million |
| Net income (loss) attributable to Teva | $(863) million | $(232) million | $(1,068) million | $(1,187) million |
| Diluted loss per share | $(0.77) | $(0.21) | $(0.96) | $(1.07) |
| Operating cash flow | $324 million | $123 million | $179 million | $74 million |
Q2 free cash flow, as defined by Teva, was $632 million, including operating cash flow of $324 million, $371 million collected from securitized receivables and $56 million of divestiture proceeds, less $119 million of capital investment. Cash and cash equivalents were $2,669 million at June 30, 2023, compared with $2,801 million at December 31, 2022.
Total debt was $20,678 million at June 30, 2023, compared with $21,212 million at December 31, 2022. Long-term senior notes and loans were $18,698 million and short-term debt was $1,980 million. Debt was effectively denominated 62% in U.S. dollars, 36% in euros and 2% in Swiss francs. The $1.8 billion revolving credit facility had no borrowings at June 30; Teva subsequently drew $700 million in July 2023 and repaid $1.0 billion of senior notes at maturity.
Working capital was negative $489 million at June 30, 2023, compared with negative $119 million at year-end 2022. Management attributed the change primarily to higher accounts payable, favorable vendor payment terms, higher inventory purchases and increased legal provisions. Teva expects sufficient cash resources to meet debt service and other obligations within one year and expects to remain within its revolving-credit financial covenants.
Material changes versus the prior comparable period
- Q2 revenue increased 2%, or 4% in local currencies. North America revenue rose 5%, Europe declined 1%, International Markets rose 5%, and other activities declined 5%.
- North America segment profit increased 8% to $520 million, supported by AUSTEDO and Anda. AUSTEDO revenue rose 51% to $308 million, while COPAXONE revenue fell 33% to $64 million and generic-product revenue declined 6% to $969 million.
- Europe segment profit decreased 14% to $334 million, principally because gross margin declined to 55.0% from 60.0%. COPAXONE revenue declined 17%, partly offset by 4% growth in generic products and 32% growth in AJOVY.
- International Markets segment profit increased 30% to $124 million, aided by higher other income and gross profit. Local-currency revenue increased 13%.
- Consolidated gross margin declined because of inflationary cost pressures, a higher mix of lower-margin Anda revenue, lower COPAXONE revenue and less favorable hedging effects.
- Q2 legal settlements and loss-contingency expense declined to $462 million from $729 million. The six-month expense declined to $695 million from $1.854 billion.
- Q2 operating loss improved primarily because of lower legal-contingency expense and a lower goodwill impairment charge. Net loss attributable to Teva nevertheless increased because the 2022 period included a substantially larger tax benefit.
- Six-month revenue increased 1%, but gross profit declined 4%, segment profit declined, and currency movements reduced reported revenue by approximately $180 million.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a clear numerical full-year financial guidance range in the supplied text. Management’s outlook centers on executing the Pivot to Growth strategy, expanding AUSTEDO and UZEDY, advancing innovative and biosimilar pipelines, and optimizing the generics and manufacturing footprint.
- Teva recorded a $700 million goodwill impairment for International Markets. That reporting unit’s carrying value equaled fair value at June 30, 2023. The API reporting unit had negligible excess fair value, and Europe had only a 3% fair-value cushion, creating sensitivity to discount rates, terminal growth and operating assumptions.
- Identifiable intangible-asset impairments were $63 million in Q2 and $241 million for the six-month period. Other asset impairments, restructuring and other items were $100 million in Q2 and $195 million year to date.
- Teva recorded provisions related to U.S. DOJ criminal antitrust charges, opioid matters, DOJ patient-assistance-program litigation, HIV-medicine reverse-payment litigation and other legal matters. The legal-settlement provision was $4.704 billion at June 30, 2023.
- Teva finalized nationwide opioid settlements with all 50 states and the Tribes. Payments may total up to $4.25 billion over 13 years, including up to $1.2 billion of generic Narcan supply, and a separate Nevada settlement requires $193 million over 20 years. Estimated 2023 opioid cash payments were $457 million, of which $124 million had been paid by June 30.
- An agreement in principle with acute-care hospitals contemplated up to $126 million in cash and $49 million of generic Narcan over 18 and seven years, respectively, subject to participation conditions.
- Alvotech received additional FDA complete response letters for the proposed Humira biosimilar because of manufacturing-facility deficiencies. The proposed Humira biosimilar could not launch absent regulatory approval. The proposed Stelara biosimilar had a U.S. license entry date no later than February 21, 2025, subject to approval.
- Foreign exchange remains material: approximately 46% of Q2 revenue and 48% of six-month revenue were denominated in currencies other than the U.S. dollar. Currency movements, including hedging effects, reduced Q2 revenue by $51 million and operating income by $38 million.
- Teva identifies risks from generic competition, pricing and reimbursement pressure, customer concentration, supply-chain and manufacturing issues, regulatory actions, intellectual-property litigation, substantial indebtedness, geopolitical conflict, currency volatility, tax disputes and potential future impairments.
- The DOJ patient-assistance-program case presents potential exposure exceeding $1 billion before trebling, plus statutory penalties potentially reaching billions of dollars at the high end; trial was scheduled for September 2023 and the filing states that Teva recorded a provision.
Most important facts for investors to verify
- Whether AUSTEDO and UZEDY growth offsets continued erosion in generic products, COPAXONE and BENDEKA/TREANDA.
- The sustainability of operating cash flow and free cash flow, particularly after excluding receivables securitization proceeds, divestitures and working-capital benefits.
- Debt refinancing, revolving-credit borrowings, covenant compliance and the effect of high-cost sustainability-linked notes on interest expense.
- Future cash payments and final outcomes for opioid, DOJ antitrust, patient-assistance-program, HIV-medicine and other litigation matters.
- Whether additional goodwill or intangible impairments arise, especially in International Markets, API and Europe.
- Regulatory progress and commercial timing for Humira and Stelara biosimilars, the innovative pipeline and Alvotech manufacturing remediation.
- The effect of currency movements, inflation, pricing reductions and supply-chain disruptions on margins and reported revenue.
- Teva’s inability to pay dividends or repurchase shares while it has an accumulated deficit.