TEVA PHARMACEUTICAL INDUSTRIES LTD quarterly report, Q3 FY2023

Business Context and Reporting Period

Teva Pharmaceutical Industries Limited filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. Teva is a global pharmaceutical company operating through North America, Europe and International Markets, with businesses spanning generic medicines, innovative medicines, biosimilars, APIs, distribution and licensing. In May 2023, management launched its “Pivot to Growth” strategy, focused on AUSTEDO, AJOVY, UZEDY, biosimilars, innovation, generics and portfolio optimization.

Key Financial Metrics

U.S. dollars in millions, except per-share data	Q3 2023	Q3 2022	9M 2023	9M 2022
Net revenues	$3,850	$3,595	$11,389	$11,041
Gross profit	$1,851	$1,669	$5,230	$5,203
Gross margin	48.1%	46.4%	45.9%	47.1%
Operating income (loss)	$355	$419	$(289)	$(1,244)
Net income (loss) attributable to Teva	$80	$56	$(988)	$(1,132)
Diluted EPS	$0.07	$0.05	$(0.88)	$(1.02)
Net cash from operating activities	$5	$543	$184	$617

Q3 revenue increased 7% in both U.S. dollars and local-currency terms. Growth was led by generic products, AUSTEDO and AJOVY.
Q3 gross profit increased 11%, and gross margin expanded 170 basis points, primarily from product mix and higher AUSTEDO revenue. Nine-month gross margin declined 120 basis points because of inflationary costs, lower COPAXONE revenue and increased lower-margin Anda revenue.
Q3 operating income declined despite higher gross profit, mainly because of increased R&D, selling and marketing expenses, and legal settlements and loss contingencies.
Q3 legal settlements and loss contingencies were $314 million, compared with $195 million in the prior-year quarter. Nine-month expense was $1,009 million, compared with $2,048 million.
Q3 financial expenses were $280 million, including approximately $247 million of net interest expense. Nine-month financial expenses were $808 million, including approximately $723 million of net interest expense.
Q3 free cash flow was $229 million, down from $685 million. Teva defines free cash flow to include operating cash flow, proceeds or collections related to securitized receivables and divestitures, less capital investment.

Liquidity, Debt and Balance Sheet

Cash and cash equivalents were $2.249 billion at September 30, 2023, compared with $2.801 billion at December 31, 2022.
Total debt was $19.974 billion, compared with $21.212 billion at year-end 2022. Debt was 62% U.S. dollar-denominated, 36% euro-denominated and 2% Swiss franc-denominated.
Short-term debt was $1.479 billion and long-term senior notes and loans were $18.495 billion. The $1.8 billion revolving credit facility had $500 million outstanding at September 30, 2023.
Teva repaid $1.646 billion of senior notes at maturity, repurchased $2.506 billion of notes in a first-quarter tender offer and issued approximately $2.445 billion of sustainability-linked notes net of issuance costs.
Management expects to remain within the revolving credit facility’s financial covenants and expects sufficient cash resources to fund debt service and other obligations for at least one year from issuance of the financial statements.
Working capital was negative $779 million, compared with negative $119 million at December 31, 2022, primarily because of increased accounts payable, more favorable vendor terms, higher inventory purchases and increased legal provisions.
Total equity declined to $7.512 billion from $8.691 billion, principally because of the nine-month net loss, foreign-currency translation losses and a $67 million dividend declared to non-controlling interests.
Teva has not paid dividends on ordinary shares or ADSs since December 2017 and cannot currently pay dividends or repurchase shares because of its accumulated deficit.

Material Changes Versus Prior Comparable Period

North America: Q3 revenue increased 11% to $2.002 billion and segment profit increased 21% to $577 million. AUSTEDO revenue rose 30% to $339 million, and generic-product revenue rose 15% to $929 million. BENDEKA and TREANDA revenue declined 26% to $57 million, while COPAXONE declined 2% to $103 million.
Europe: Q3 revenue increased 7% to $1.146 billion in U.S. dollars but was flat in local currency. Segment profit declined 6% to $338 million, and gross margin fell to 56.6% from 59.3%, primarily because of higher costs.
International Markets: Q3 revenue increased 2% to $485 million, or 20% in local currency, but segment profit declined 1% to $111 million. Currency movements reduced revenue by $83 million net of hedging.
Other activities: Q3 revenue declined 10% to $217 million, including a 12% decline in third-party API sales.
R&D expense increased 44% in Q3 to $253 million and 16% for the nine-month period to $726 million, reflecting greater investment in late-stage innovative programs, neuroscience, immunology and immuno-oncology.
Q3 cash from operations fell sharply to $5 million from $543 million, primarily because of working-capital movements, higher inventory, receivables impacts and legal payments.
For the nine-month period, revenue increased 3%, but gross margin declined to 45.9%; operating loss narrowed to $289 million from $1.244 billion, and net loss attributable to Teva narrowed to $988 million from $1.132 billion.

Guidance, Outlook, Commentary and Risks

The filing does not provide a clear quantitative full-year 2023 revenue or earnings guidance figure in the provided text.
Management is prioritizing growth from AUSTEDO, AJOVY, UZEDY and biosimilars while continuing to optimize the generic portfolio, manufacturing footprint and business structure.
Teva entered into an exclusive Sanofi collaboration for TEV-574, an anti-TL1A therapy, after the quarter. The agreement provides for a $500 million upfront payment after closing and up to $1 billion of development and launch milestones, subject to customary conditions.
UZEDY launched in the United States in May 2023, and AUSTEDO XR launched in May 2023. The biosimilar pipeline includes products targeting Stelara, Humira, Prolia, Xolair, Eylea, Simponi and Lucentis; regulatory and manufacturing deficiencies remain relevant to certain Alvotech products.
Teva recorded a $700 million goodwill impairment in the second quarter related to International Markets. That reporting unit was at fair value after the charge, and Teva stated that further impairment could result if assumptions or business conditions deteriorate. Europe had only a 3% estimated fair-value cushion at June 30, 2023.
Teva’s nationwide opioid settlements require payments of up to $4.25 billion over 13 years, including up to $1.2 billion of generic Narcan product or cash in lieu. Estimated cash payments for 2023 through 2027 were $439 million, $418 million, $365 million, $370 million and $370 million, respectively, subject to adjustment.
Teva entered into a three-year DOJ deferred prosecution agreement in August 2023. It agreed to pay a $225 million fine over five years, donate $50 million of certain generic products and divest its U.S. pravastatin business.
The DOJ patient-assistance-program litigation remains material. The DOJ seeks more than $1 billion in damages, potentially trebled, plus statutory penalties. Teva updated its provision in Q3 and is pursuing an appeal.
Other material risks include generic price and volume competition, patent and antitrust litigation, product liability and nitrosamine claims, regulatory compliance, foreign-exchange volatility, inflation, supply-chain disruption, the Russia-Ukraine conflict and the war in Israel. Teva reported that operations in Israel remained largely unaffected as of the filing date but warned that the impact could become material.
Beginning January 1, 2024, Canada will move from the North America segment to International Markets, which will affect segment comparability and reporting.

Important Facts for Investors to Verify

Whether operating cash flow and free cash flow recover after the sharp Q3 working-capital and legal-payment effects.
Teva’s ability to meet debt maturities, maintain revolving-credit covenants and reduce leverage while funding settlements and increased R&D.
The timing and amount of the Sanofi upfront payment and the probability of achieving TEV-574 milestones.
Commercial performance and margin contribution from AUSTEDO, AUSTEDO XR, AJOVY, UZEDY, biosimilars and generic lenalidomide.
Potential additional goodwill or intangible-asset impairments, especially in International Markets and Europe.
Final costs and cash timing for opioid settlements, DOJ patient-assistance litigation, antitrust matters and other legal contingencies.
The operational and financial effects of the Israel war, currency volatility, inflation, supply-chain disruption and the transfer of Canada to International Markets reporting.
The reconciliation and limitations of management’s non-GAAP measures: Q3 2023 non-GAAP net income attributable to Teva was $677 million and non-GAAP diluted EPS was $0.60, versus GAAP net income of $80 million and diluted EPS of $0.07.