TEVA

Business Context and Reporting Period

Company: Teva Pharmaceutical Industries Ltd.
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2009
Accounting Basis: U.S. GAAP

Teva is a global pharmaceutical company and the leading generic drug manufacturer in the world and the United States. The company operates in North America, Europe, and International markets, offering generic drugs, innovative products (notably Copaxone and Azilect), respiratory products, women's health products, and active pharmaceutical ingredients (API). In 2009, Teva reorganized its operating segments into a single "One Teva" segment following the acquisition of Barr Pharmaceuticals in late 2008.

Key Financial Metrics

Margins: Gross margin was 53.0% in 2009 (down from 53.8% in 2008). Operating margin was 17.3% in 2009 (up from 10.3% in 2008).
Liquidity: Cash flow from operations was $3.37 billion. The financial debt-to-equity leverage ratio improved to 23% from 34% in 2008.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 25% to $13.9 billion, driven by the first-time inclusion of Barr Pharmaceuticals' sales, strong generic launches in the U.S., and continued growth in Copaxone sales.
• Profitability Surge: Net income attributable to Teva more than tripled to $2.0 billion. This was significantly aided by the absence of the $1.4 billion in-process R&D write-off recorded in 2008 related to the Barr, Bentley, and CoGenesys acquisitions.
• Debt Reduction: Total debt decreased by approximately $2.8 billion due to the repayment of a $1.75 billion bridge loan used for the Barr acquisition and the conversion of $965 million in convertible senior debentures.
• Acquisition Integration: The Barr acquisition contributed significantly to sales volume and market share, particularly in the U.S. generic market and women's health sector.

Guidance, Outlook, and Risks

Strategic Goals: In January 2010, management announced revised strategic goals to generate $31 billion in revenues and $6.8 billion in non-GAAP net income by 2015.

2010 Outlook:

• Financial expenses expected to decline to $150-$170 million.
• Net R&D expenses expected to range between 6% and 6.5% of net sales.
• Selling and marketing expenses expected to range between 16% and 18% of sales.
• Cessation of 25% royalty payments to sanofi-aventis on North American Copaxone sales starting April 1, 2010.

Key Risks and Contingencies:

• Patent Litigation: Significant ongoing litigation regarding generic versions of Neurontin, Protonix, and Copaxone. Adverse rulings could result in substantial damages or injunctions.
• Regulatory Scrutiny: Increased scrutiny of settlement agreements with brand companies by the FTC and EU Commission regarding antitrust practices.
• Animal Health: FDA consent decree in July 2009 resulted in a recall of all Teva Animal Health products and a facility shutdown, leading to an $82 million write-off.
• Drug Pricing Litigation: Ongoing lawsuits regarding Medicaid reimbursement and drug price reporting. A settlement in principle was reached in late 2009 for approximately $315 million.
• Currency Fluctuations: A 4% negative impact on sales due to the strengthening of the U.S. dollar against major currencies.

Investor Verification Checklist

• Copaxone Patent Defense: Verify the status of the Sandoz and Mylan patent infringement lawsuits regarding Copaxone, as this product contributes disproportionately to profits.
• Drug Pricing Settlements: Confirm the final terms and approval status of the drug pricing litigation settlements (Ven-A-Care and state Medicaid cases) to assess remaining liability.
• Animal Health Recovery: Monitor the timeline for FDA re-approval of Teva Animal Health facilities and the potential for resuming sales.
• Barr Integration Synergies: Assess whether the projected cost synergies and revenue growth from the Barr acquisition are being realized as planned.
• Generic Pipeline: Review the status of the 216 product registrations awaiting FDA approval, particularly the 140 "Paragraph IV" applications challenging brand patents.