Business context and reporting period
Teva Pharmaceutical Industries Limited is a global pharmaceutical company focused on generic medicines, specialty medicines and biopharmaceuticals. It reports through North America, Europe and International Markets, with additional activities including active pharmaceutical ingredient sales, contract manufacturing and licensing. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared primarily with the corresponding 2021 periods. Amounts are in U.S. dollars unless otherwise stated.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net revenues | $3,595 million | $3,887 million | $11,041 million | $11,778 million |
| Gross profit | $1,669 million | $1,794 million | $5,203 million | $5,544 million |
| Gross margin | 46.4% | 46.2% | 47.1% | 47.1% |
| Operating income (loss) | $419 million | $623 million | $(1,244) million | $1,638 million |
| Net income (loss) attributable to Teva | $56 million | $292 million | $(1,132) million | $576 million |
| Diluted EPS | $0.05 | $0.26 | $(1.02) | $0.52 |
| Operating cash flow | $543 million | $529 million | $617 million | $342 million |
| Free cash flow | $685 million | $795 million | The filing does not provide a comparable 9M value | The filing does not provide a comparable 9M value |
- Q3 operating margin was 11.6%, compared with 16.0% in Q3 2021. Nine-month operating margin was negative 11.3%, compared with positive 13.9% in the prior-year period.
- Q3 R&D expense declined 21% to $175 million; selling and marketing expense declined 10% to $539 million; and G&A expense declined 3% to $283 million. Nine-month R&D declined 13% to $628 million, while G&A increased 8% to $892 million.
- Cash and cash equivalents were $2,225 million at September 30, 2022, compared with $2,165 million at December 31, 2021. Cash, cash equivalents and restricted cash totaled $2,258 million.
- Total debt was $21,266 million, compared with $23,043 million at year-end 2021. Short-term debt was $2,769 million, and long-term senior notes and loans were $18,497 million. Debt was 65% U.S. dollar, 33% euro and 2% Swiss franc denominated.
- The $1.8 billion unsecured sustainability-linked revolving credit facility entered into in April 2022 had no outstanding borrowings at September 30, 2022. Management expects sufficient cash resources to meet debt service and other obligations for at least one year and expects to remain within applicable financial covenants.
- Total equity declined to $9,519 million from $11,244 million at year-end, primarily due to the nine-month net loss and a $684 million negative currency translation effect. Teva has not paid dividends since December 2017 and cannot currently pay dividends or repurchase shares because of its accumulated deficit.
Material changes versus the prior comparable period
- Q3 revenue declined 8% in U.S. dollars and 2% in local currency. The nine-month decline was 6% in U.S. dollars and 2% in local currency. Foreign exchange movements, net of hedging, reduced Q3 revenue by $215 million and nine-month revenue by $510 million.
- Q3 revenue weakness reflected lower generic product sales in North America, lower COPAXONE sales in North America and Europe, and lower BENDEKA/TREANDA sales in North America. AUSTEDO growth partially offset these declines.
- Q3 segment revenue and profit were $1,809 million and $477 million in North America, $1,069 million and $360 million in Europe, and $475 million and $112 million in International Markets. North America profit increased 4%, while Europe profit declined 8% and International Markets profit declined 27%.
- Key Q3 product movements included AUSTEDO revenue growth of 30% to $260 million and AJOVY growth of 23% to $57 million in North America; COPAXONE declined 21% to $105 million; and BENDEKA/TREANDA declined 20% to $77 million.
- Nine-month results were significantly affected by $2,048 million of legal settlements and loss-contingency expense, compared with $113 million in 2021, and a $745 million goodwill impairment charge, compared with none in 2021. Identifiable intangible-asset impairments were $223 million.
- Teva recorded a tax benefit of $792 million for the first nine months, primarily associated with the expected tax effect of a worthless stock deduction of approximately $4.2 billion for a U.S. subsidiary, as well as impairments, legal settlements and valuation allowance changes.
Guidance, outlook, commentary and risks
The filing text does not provide a clear quantitative full-year 2022 revenue, earnings or cash-flow guidance. Management expects sufficient liquidity for at least one year and states that it is evaluating price adjustments and other measures to mitigate inflation, energy costs, supply-chain disruption and currency pressure.
- Teva is exposed to substantial generic competition, pricing and reimbursement pressure, patent challenges, customer concentration, product-launch delays and competition against specialty products including AUSTEDO, AJOVY and COPAXONE.
- The proposed nationwide opioid settlement would require payments of up to $4.25 billion, including previously settled cases, plus approximately $100 million for tribes, over 13 years. The proposal includes up to $1.2 billion of Narcan product, or cash of approximately $240 million in lieu of product. Final documentation, sufficient participation by states and subdivisions, and an Allergan settlement remain conditions to effectiveness.
- Legal settlements and loss-contingency provisions totaled $4,077 million at September 30, 2022. Teva also faces generic-drug antitrust litigation, DOJ criminal Sherman Act charges, False Claims Act matters, COPAXONE-related litigation, opioid claims, patent litigation and other proceedings whose outcomes may be material.
- The European Commission issued a Statement of Objections in October 2022 concerning alleged anti-competitive practices relating to COPAXONE. Teva has an opportunity to respond.
- Alvotech received an FDA Complete Response Letter for its proposed Humira biosimilar, potentially affecting the planned U.S. launch opportunity. Teva resubmitted the risperidone LAI NDA in October 2022 following an earlier FDA Complete Response Letter. Development of fasinumab for osteoarthritic pain was discontinued in October 2022.
- Teva permanently ceased manufacturing at its Irvine, California facility and recorded $90 million of related costs in the first nine months. Further costs, lost revenue, inventory write-offs, customer penalties or regulatory actions remain possible.
- Russia-Ukraine operating effects were described as immaterial through September 30, 2022, but management noted risks from currency volatility, inflation, devaluation, supply-chain disruption and the inability to renew certain Russian-ruble hedges.
Important facts for investors to verify
- Confirm the final terms, participation levels and cash-versus-product economics of the proposed nationwide opioid settlement.
- Assess debt maturities, refinancing requirements, leverage-covenant headroom and the ability to sustain debt service while legal payments continue.
- Evaluate whether AUSTEDO and AJOVY growth can offset continuing declines in generic products, COPAXONE and BENDEKA/TREANDA.
- Monitor further goodwill or intangible-asset impairments, particularly for International Markets, API and Europe reporting units.
- Track the DOJ criminal antitrust case, generic-drug antitrust proceedings, COPAXONE investigations and other material litigation for potential additional cash exposure.
- Reconcile reported cash generation with securitized receivables, working-capital movements and the company’s non-GAAP free-cash-flow definition.
- Verify regulatory outcomes for risperidone LAI, the Alvotech biosimilar portfolio and other pipeline assets, as well as the financial impact of the Irvine facility closure.