Teva Pharmaceutical Industries Ltd. — 2019 Q2 Form 10-Q Summary
Business context and reporting period
Teva is a global pharmaceutical company focused on generic medicines, specialty medicines and biopharmaceuticals. It reports through North America, Europe and International Markets, plus other activities including active pharmaceutical ingredients, contract manufacturing and licensing. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, with comparisons to the corresponding 2018 periods.
Key financial metrics
| U.S. dollars in millions, except per-share data | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenues | $4,337 | $4,701 | $8,632 | $9,766 |
| Gross profit | $1,893 | $2,033 | $3,749 | $4,348 |
| Gross margin | 43.7% | 43.2% | 43.4% | 44.5% |
| Operating income (loss) | $(644) | $(14) | $(510) | $1,511 |
| Net income (loss) attributable to Teva | $(689) | $(176) | $(794) | $944 |
| Diluted EPS | $(0.63) | $(0.24) | $(0.73) | $0.80 |
| Operating cash flow | $(227) | $162 | $(115) | $1,658 |
| Capital expenditures | Not separately provided for Q2 in the statement | Not separately provided for Q2 in the statement | $237 | $299 |
Q2 operating loss included $561 million of intangible-asset impairments, $646 million of legal settlements and loss contingencies, and $101 million of other impairments, restructuring and other items. Net financial expense was $206 million in Q2 and $425 million for the first six months.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $2,165 million at June 30, 2019, compared with $1,782 million at December 31, 2018.
- Total assets were $59,424 million and total equity was $15,251 million at June 30, 2019.
- Debt was $28,726 million at June 30, 2019; approximately 10% was classified as short-term. Senior notes and loans on the balance sheet totaled $25,955 million, with short-term debt of $2,771 million.
- Teva entered into a new $2.3 billion unsecured revolving credit facility in April 2019. No amounts were outstanding at June 30; $500 million was outstanding as of the report date.
- The facility includes a net-debt-to-EBITDA covenant of 6.25x through December 31, 2019, declining over time. Management expected compliance with the covenants and sufficient cash resources to meet debt service and other obligations for at least one year.
- Teva repaid $1,556 million of 1.7% senior notes at maturity in July 2019. No ordinary-share dividends have been paid since December 2017.
Material changes versus the prior comparable period
- Q2 revenue declined 8%, or 5% in local-currency terms. The six-month decline was 12%, or 9% in local-currency terms.
- North America revenue decreased 8% in Q2 and segment profit fell 30%, primarily because of COPAXONE generic competition, lower TREANDA/BENDEKA and ProAir sales, and the absence of prior-year legal recovery income. AUSTEDO, AJOVY, QVAR and Anda partly offset the declines.
- Europe revenue decreased 11% in Q2, while segment profit decreased 9%. COPAXONE competition, currency effects and the termination of the PGT joint venture were partly offset by new generic launches and cost reductions.
- International Markets revenue decreased 6% and segment profit decreased 2%, mainly because of lower Japanese sales from generic competition, partly offset by higher Russian sales.
- COPAXONE North America revenue declined 41% to $274 million in Q2 and 49% to $482 million for the first six months. AUSTEDO North America revenue increased 117% to $96 million in Q2; AJOVY generated $23 million.
- Restructuring expense decreased to $47 million in Q2 from $107 million and to $79 million for the first six months from $354 million. Teva reported a global headcount reduction of approximately 11,145 full-time-equivalent employees since the restructuring plan was announced.
- Intangible-asset impairments increased to $561 million in Q2 and $1,030 million for the first six months, primarily involving Actavis Generics product rights and in-process research and development. No goodwill impairment was recorded in 2019, compared with $120 million in Q2 2018 and $300 million for the first six months of 2018.
- Legal settlements and loss contingencies shifted from $20 million of expense in Q2 2018 and $1,258 million of income for the first six months of 2018 to $646 million and $703 million of expense, respectively, in 2019.
Guidance, outlook, commentary and risks
- Management expected the 2019 non-GAAP tax rate to be approximately 16%, higher than the prior projection because of expected geographic income mix.
- The restructuring plan targets $3 billion of total cost-base reduction by the end of 2019.
- Management stated that continued share-price weakness could lead to aggregate goodwill impairment of up to approximately $5 billion in the North America and International Markets reporting units. At June 30, the estimated fair-value headroom was 9% for North America and 4% for International Markets.
- Teva recorded $646 million of Q2 legal expense, mainly related to the $85 million Oklahoma opioid settlement and a provision for certain other opioid cases. The provision for legal settlements and loss contingencies was $1,149 million at June 30, 2019.
- Approximately 2,000 opioid-related complaints had been filed against Teva affiliates and other parties, with additional state and federal litigation and investigations ongoing. The filing states that adverse outcomes could materially affect reputation, operations, cash flows and financial condition.
- Teva faces extensive generic price competition, particularly for COPAXONE, and relies substantially on generic products and a limited number of significant specialty products. Patent challenges, price erosion, regulatory changes and customer concentration remain material risks.
- The FDA issued a warning letter concerning Teva’s Davie, Florida manufacturing site. Teva estimated approximately $142 million of revenue from the site for the remainder of 2019, assuming no unscheduled slowdown or stoppage. Failure to remediate could result in approval delays, lost revenue, inventory write-offs, penalties, remediation costs or enforcement.
- Valsartan and related sartan recalls associated with NDMA contamination had a $55 million financial-statement impact through June 30, 2019. Further lost revenue, penalties, impairments and litigation costs remained possible.
- Teva adopted the new lease standard on January 1, 2019, recognizing approximately $500 million of operating lease right-of-use assets and $546 million of operating lease liabilities at June 30. Management stated that adoption did not materially affect income or cash flow and did not affect debt-covenant compliance.
Most important facts for investors to verify
- Whether COPAXONE erosion and other specialty-product declines stabilize, and whether AUSTEDO, AJOVY, QVAR and new generic launches offset the losses.
- The timing, size and cash impact of opioid, generic price-fixing, antitrust, product-liability and other litigation outcomes beyond the $1,149 million provision recorded at June 30.
- Teva’s compliance with the revolving-credit-facility covenants after the July 2019 repayment and subsequent $500 million borrowing.
- Progress in remediating the Davie FDA warning letter and the potential effect on product approvals, manufacturing capacity and revenue.
- Whether further intangible or goodwill impairments occur, particularly given the limited valuation headroom in International Markets and North America.
- Operating cash-flow recovery, debt reduction and liquidity after the reported six-month operating cash outflow of $115 million.
- Execution of the restructuring plan and achievement of the targeted $3 billion cost-base reduction by year-end 2019.