Teva Pharmaceutical Industries Ltd. — Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2014, filed February 9, 2015. The filing is an annual Form 20-F prepared under U.S. GAAP; the provided text does not provide a clear standalone fourth-quarter income statement or cash-flow statement.
Business context
Teva is a global pharmaceutical company operating primarily through generic medicines and specialty medicines, with additional OTC, distribution and medical-device activities. Generic medicines represented approximately 48% of 2014 revenue and specialty medicines approximately 42%. The company generated approximately 52% of consolidated revenue in the United States, with most remaining revenue from Europe and other international markets.
Key strategic priorities were improving profitable and sustainable growth, emphasizing complex generics, focusing on selected growth markets, protecting and extending Copaxone and other specialty franchises, concentrating specialty R&D on CNS and respiratory therapies, pursuing business development, and executing a company-wide cost-reduction program.
Financial performance and key metrics
| U.S. dollars in millions, except per-share data | 2014 | 2013 | Change |
|---|---|---|---|
| Net revenues | $20,272 | $20,314 | Flat; approximately 2% growth excluding divestiture and foreign-exchange effects |
| Gross profit | $11,056 | $10,707 | +3% |
| Gross margin | 54.5% | 52.7% | +1.8 percentage points |
| Operating income | $3,951 | $1,649 | +140% |
| Operating margin | 19.5% | 8.1% | +11.4 percentage points |
| Net income attributable to Teva | $3,055 | $1,269 | +141% |
| Diluted EPS | $3.56 | $1.49 | +139% |
| Cash flow from operations | $5,127 | $3,237 | +$1,890 |
| Capital expenditures | $929 | $1,031 | -$102 |
| Operating cash flow less capital expenditures | $4,300 | $2,300 | +$2,000 |
Reported profitability benefited materially from lower legal-settlement costs, higher segment profit, lower amortization, and lower restructuring and impairment charges. Non-GAAP 2014 operating income was $5,732 million, or 28% of revenue, and non-GAAP diluted EPS was $5.07; these measures exclude significant items and should not replace GAAP results.
Segment performance
| U.S. dollars in millions | 2014 revenue | 2013 revenue | 2014 segment profit | 2014 profit margin |
|---|---|---|---|---|
| Generic medicines | $9,814 | $9,902 | $2,148 | 21.9% |
| Specialty medicines | $8,560 | $8,388 | $4,575 | 53.4% |
| Other activities | $1,898 | $2,024 | $226 | Not clearly provided |
- Generics: Revenue declined 1%, but segment profit increased 29%. U.S. generic revenue rose 6% to $4.4 billion, while European revenue declined 6% and Rest-of-World revenue declined 5%. Margin improved to 43.3% from 41.2%, primarily from higher U.S. and Canadian gross profit and lower selling and marketing expenses.
- Specialty medicines: Revenue increased 2% and profit increased 1%. Copaxone revenue declined 2% to $4.237 billion, including $3.1 billion in the United States. Growth in Azilect, Nuvigil, Treanda and newer oncology products partly offset Copaxone and QVAR declines.
- OTC and other activities: OTC revenue declined 15% to $996 million, mainly after the sale of Teva’s U.S. OTC plants back to P&G in July 2014. PGT revenue was $897 million, down 1% reported but up 5% in local currencies.
Liquidity, debt and balance sheet
| U.S. dollars in millions | December 31, 2014 | December 31, 2013 |
|---|---|---|
| Cash, cash equivalents and marketable securities | $2,601 | $1,245 |
| Cash and cash equivalents | $2,226 | $1,038 |
| Total assets | $46,420 | $47,508 |
| Working capital | $1,642 | $2,493 |
| Total debt | $10,327 | $12,191 |
| Total equity | $23,355 | $22,636 |
Debt declined by $1.9 billion, primarily from repayments. Financial leverage decreased to 31% from 35%, and average debt maturity increased to 6.4 years from 6 years. The $3 billion syndicated revolving credit facility was undrawn at year-end. Approximately 17% of debt was classified as short term, including a $1.0 billion senior note maturing in June 2015. Teva stated that it was in compliance with applicable financial covenants.
Sales reserves and allowances increased to $5.849 billion from $4.918 billion, largely because of higher customer rebates, managed-care rebates, Medicaid rebates and invoicing lags. The filing identifies this estimate as a significant accounting judgment.
Material changes versus the prior comparable period
- Revenue was essentially unchanged, but gross margin, operating income and net income improved significantly.
- Legal settlements and loss contingencies shifted from a $1.524 billion expense in 2013 to a $111 million gain in 2014, mainly reflecting insurance proceeds related to the pantoprazole settlement.
- Teva paid the remaining $800 million related to the pantoprazole settlement and recovered approximately $200 million from insurers; up to approximately $250 million of additional coverage was being disputed.
- Impairments, restructuring and other charges decreased to $650 million from $788 million. The 2014 total included $387 million of long-lived-asset impairments and $246 million of restructuring expenses.
- Foreign-exchange movements reduced 2014 revenue by approximately $346 million and operating income by approximately $114 million; currency translation reduced equity by approximately $1.4 billion.
- Teva repurchased approximately 8.7 million shares for $500 million and increased its authorized repurchase program to $3 billion, leaving approximately $2.5 billion available at year-end.
- Headcount declined to approximately 43,009 from 44,945 as part of the cost-reduction and organizational restructuring program.
Guidance, outlook, risks and unusual items
- Management expected 2015 results to be affected by currency movements, continued emphasis on profitability, lower Copaxone sales, additional U.S. generic competition for Pulmicort, and substantial restructuring and impairment expenses tied to production-network and supply-chain changes.
- Copaxone 40 mg/mL represented more than 60% of total U.S. Copaxone prescriptions by December 2014. Teva expected launches in selected European and other markets during 2015, but Copaxone remained exposed to oral MS therapies and potential generic competition following U.S. patent expirations.
- Teva’s voluntary worldwide FCPA investigation remained ongoing. The company identified practices in Russia, Eastern Europe, Latin America and other countries that likely violated the FCPA and/or local law. Potential fines, disgorgement, monitors, injunctions and other penalties were not estimable.
- Significant litigation and regulatory exposure included Copaxone, Treanda, modafinil and other patent matters; antitrust cases involving patent settlements; product-liability litigation involving approximately 4,000 metoclopramide lawsuits; government investigations concerning pricing and marketing; and False Claims Act matters.
- Teva reported approximately $2.4 billion of potential future milestone payments for Phase 2 and later-stage compounds if specified regulatory and sales targets are achieved, excluding additional sales-based milestones and royalties.
- Research and development risks remained substantial. The company recorded a $102 million impairment for the MDT-637 program after negative Phase 2 results and reported that adverse results for the Revascor program could cause further impairment of related assets and investments.
- Customer concentration was material: one customer represented 18% of 2014 revenue and another represented 17%; the largest customer accounted for 31% of gross trade receivables at year-end.
- The filing states that management and the independent auditor concluded internal control over financial reporting was effective as of December 31, 2014.
Investor verification priorities
- Verify the absence or availability of standalone Q4 2014 financial statements; this 20-F primarily reports full-year results.
- Assess the sustainability of 2014 earnings growth after excluding the unusually favorable legal-settlement comparison and other nonrecurring items.
- Track Copaxone prescription migration, generic-entry timing and the financial impact of oral MS competition.
- Reconcile the increase in sales reserves and allowances, particularly Medicaid, managed-care and customer rebate assumptions.
- Monitor debt maturities, refinancing needs and the $1.0 billion senior note due in June 2015.
- Follow developments in the FCPA investigation, False Claims Act matters, antitrust litigation, product-liability cases and disputed insurance recoveries.
- Evaluate whether the cost-reduction program achieves its targeted savings without impairing manufacturing capacity, product supply, quality or employee relations.
- Review the effect of currency movements, especially the euro, Russian ruble, Japanese yen, Canadian dollar and Hungarian forint, on revenue, cash flow and equity.