Business Context and Reporting Period
Teva Pharmaceutical Industries Limited is a global pharmaceutical company focused on generic, specialty and biopharmaceutical products. It reports through North America, Europe and International Markets, plus other activities including APIs, contract manufacturing and licensing. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Amounts are in U.S. dollars unless otherwise stated.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net revenues | $4,264 million | $4,529 million | $12,896 million | $14,295 million |
| Gross profit | $1,830 million | $1,977 million | $5,579 million | $6,325 million |
| Gross margin | 42.9% | 43.7% | 43.3% | 44.2% |
| Operating income (loss) | $(81) million | $16 million | $(591) million | $1,527 million |
| Net income (loss) attributable to Teva | $(314) million | $(208) million | $(1,108) million | $736 million |
| Diluted EPS | $(0.29) | $(0.27) | $(1.02) | $0.53 |
| Operating cash flow | $325 million | $421 million | $210 million | $2,079 million |
- Q3 operating loss margin was approximately 1.9% of revenue; nine-month operating loss margin was approximately 4.6%.
- Q3 financial expenses were $211 million, including approximately $219 million of interest expense. Nine-month financial expenses were $635 million.
- Cash and cash equivalents were $1,241 million at September 30, 2019, down from $1,782 million at December 31, 2018. Total current assets were $12,542 million versus current liabilities of $14,107 million.
- Total debt was $26,942 million at September 30, 2019, including $3,130 million of short-term debt and $23,812 million of senior notes and loans. The company reported financial leverage of 64% and an average debt maturity of approximately 6.4 years.
- Teva had $100 million outstanding under its $2.3 billion revolving credit facility at quarter-end; no amounts were outstanding as of the filing date. Management expected sufficient cash resources for debt service and other obligations over the following year and expected compliance with the facility’s financial covenants.
- Total equity was $14,925 million at September 30, 2019, compared with $15,794 million at December 31, 2018. The company had approximately 1,092 million ordinary shares outstanding.
Material Changes Versus the Prior Comparable Period
- Q3 revenue declined 6%, or 5% in local currency, primarily because of generic competition to COPAXONE and lower BENDEKA/TREANDA and other specialty-product revenue in North America. Currency movements reduced Q3 revenue by approximately $55 million.
- For the first nine months, revenue declined 10%, or 7% in local currency. Currency movements reduced nine-month revenue by approximately $357 million and operating income by approximately $110 million.
- North America Q3 revenue fell 9% to $2,051 million and segment profit fell 13% to $565 million. COPAXONE revenue declined 41% to $271 million, while AUSTEDO revenue increased 71% to $105 million and QVAR revenue increased 68% to $60 million.
- Europe Q3 revenue fell 4% to $1,163 million, but segment profit increased 15% to $341 million; the segment margin improved to 29.3% from 24.5%.
- International Markets Q3 revenue increased 1% to $736 million and segment profit increased 6% to $130 million, supported by higher distribution activity in Israel.
- Q3 R&D, selling and marketing, and G&A expenses declined 23%, 15% and 8%, respectively, reflecting restructuring and efficiency measures.
- Q3 intangible-asset impairment declined to $177 million from $519 million. Nine-month intangible impairments were $1,206 million, principally related to updated market, competition and development assumptions for Actavis Generics assets.
- Legal settlements and loss contingencies were an expense of $468 million in Q3 and $1,171 million for the first nine months, compared with $19 million of expense and $1,239 million of income, respectively, in the prior-year periods. The September 30, 2019 provision for legal settlements and loss contingencies was $1,601 million.
- Teva repaid $1,556 million of 1.7% senior notes at maturity in July 2019. Nine-month operating cash flow fell sharply from $2,079 million to $210 million, despite substantial noncash impairment and amortization adjustments.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management’s restructuring plan targeted a $3 billion reduction in the total cost base by the end of 2019. Teva reported a reduction of 11,554 full-time-equivalent employees since the plan was announced.
- Management expected the 2019 annual non-GAAP tax rate to be approximately 18%, up from 14% in 2018, due principally to legal settlements with limited tax effects, interest-expense disallowance and other tax-position changes.
- Teva recorded no goodwill impairment in 2019, but disclosed that a sustained lack of share-price recovery could result in an aggregate future goodwill impairment of up to approximately $5 billion in the North America and International Markets reporting units.
- Teva accrued additional opioid-related liabilities after reaching an October 2019 settlement with two Ohio counties and agreeing in principle to a broader settlement framework. The proposed framework contemplated up to approximately $23 billion of buprenorphine-naloxone product over ten years and up to $250 million of cash payments; the company stated that finalization was uncertain.
- More than 2,000 opioid-related complaints and approximately 350 complaints involving Anda were disclosed. Additional government subpoenas and investigations remained outstanding.
- The FDA classified the Davie, Florida facility as “official action indicated” and issued a February 2019 warning letter concerning production, quality control and investigations. Teva estimated potential remaining revenue from the site of approximately $63 million in 2019 and $230 million in 2020, assuming no unscheduled slowdown or stoppage.
- Valsartan and related NDMA recalls had an accumulated financial-statement impact of $55 million as of September 30, 2019. Further lost revenue, penalties, impairments and litigation costs remained possible.
- Teva adopted the new lease standard on January 1, 2019, recognizing approximately $553 million of operating lease right-of-use assets and $561 million of lease liabilities at adoption. The adoption did not materially affect income or cash flow.
- Teva had not paid dividends on ordinary shares or ADSs since December 2017 and stated that it could not currently repurchase shares because of its accumulated deficit.
- Management disclosed CFO and other senior-management transitions after quarter-end. The company also completed implementation of a U.S. enterprise resource planning system that materially affected, or was reasonably likely to materially affect, internal controls over financial reporting; disclosure controls were assessed as effective at the reasonable-assurance level.
Important Facts for Investors to Verify
- Whether opioid settlement negotiations are finalized, the ultimate product and cash obligations, and the adequacy of recorded provisions.
- Progress and potential financial consequences of the FDA warning letter and remediation at the Davie facility.
- The sustainability of cash generation relative to approximately $26.9 billion of debt, upcoming maturities and revolving-credit-facility covenants.
- Whether COPAXONE erosion, generic price pressure and specialty-product declines are offset by growth in AUSTEDO, AJOVY, QVAR and new generic launches.
- Potential future impairments of goodwill and intangible assets, particularly given the disclosed sensitivity of North America and International Markets reporting units.
- The status and possible exposure from opioid, generic price-fixing, patent, antitrust, securities and other litigation.
- Progress toward the $3 billion restructuring-cost target and whether reported cost reductions translate into durable operating cash flow improvement.