Teva Pharmaceutical Industries Ltd. — FY2016 Form 20-F Summary
Business context and reporting period
Teva is an Israel-based global pharmaceutical company focused on generic medicines, specialty medicines, over-the-counter products, active pharmaceutical ingredients and distribution. The filing is an audited annual report on Form 20-F for the year ended December 31, 2016, prepared under U.S. GAAP. The source does not provide a separate Q4 2016 income statement; the requested period is therefore summarized using full-year 2016 results.
- Generic medicines represented 55% of 2016 revenue; specialty medicines represented 40%.
- The August 2016 acquisition of Allergan’s Actavis Generics business contributed approximately five months of results and materially increased Teva’s scale, debt and goodwill.
Key financial metrics
| U.S. dollars in millions, except per-share data | 2016 | 2015 | Change |
|---|---|---|---|
| Net revenues | 21,903 | 19,652 | +11% |
| Gross profit | 11,859 | 11,356 | +4% |
| Gross margin | 54.1% | 57.8% | Down 3.7 points |
| Operating income | 2,154 | 3,352 | -36% |
| Operating margin | 9.8% | 17.0% | Down 7.2 points |
| Net income attributable to Teva | 329 | 1,588 | -79% |
| Net income attributable to ordinary shareholders | 68 | 1,573 | -96% |
| Diluted EPS | $0.07 | $1.82 | Down $1.75 |
| Cash flow from operating activities | 5,225 | 5,542 | -6% |
Generic medicines revenue was $11.99 billion, up 14%, with segment profit of $3.31 billion and a 27.6% segment profit margin. Specialty medicines revenue was $8.67 billion, up 4%, with segment profit of $4.66 billion and a 53.7% segment profit margin. Copaxone revenue was $4.22 billion, or approximately 19% of consolidated revenue.
- Cash flow from operations, net of capital expenditures, was $4.4 billion versus $4.9 billion in 2015.
- Capital expenditures were $901 million; inventory increased to $4.95 billion from $3.97 billion, primarily due to Actavis Generics.
- Cash and cash equivalents were $988 million at year-end, compared with $6.95 billion in 2015. Cash, cash equivalents and investments totaled approximately $1.9 billion.
- Total debt was $35.8 billion, including $3.3 billion of short-term debt and $32.5 billion of long-term debt, versus $9.9 billion in 2015.
- Shareholders’ equity was $35.0 billion; financial leverage increased to 51% from 25%.
- Teva had a $4.5 billion revolving credit facility, of which $1.2 billion was utilized at year-end, and reported compliance with applicable financial covenants.
Material changes versus the prior comparable period
- Actavis Generics and Anda were acquired for total consideration of approximately $39.3 billion, including $33.9 billion of cash and approximately $5.1 billion of Teva shares. Acquired businesses contributed approximately $2.4 billion of revenue from closing through year-end.
- Revenue growth was offset by substantially higher amortization, acquisition-related costs, purchase of in-process research and development, inventory step-up costs, financing expenses and legal charges.
- Gross margin fell primarily because of acquisition-related inventory step-up, Venezuelan inventory adjustments, regulatory remediation costs, higher amortization and lower profitability of other activities.
- Generic U.S. revenue declined 5% despite approximately $1.2 billion of five-month Actavis contribution, reflecting loss of exclusivity and increased competition on products including Nexium, Abilify and Pulmicort.
- Specialty segment profit increased 7%, helped by higher Copaxone pricing and lower selling and marketing expense. Nuvigil revenue fell 46% following generic competition, while Treanda/Bendeka revenue declined 11%.
- Operating results included a $900 million goodwill impairment related to Rimsa, $746 million of Venezuelan devaluation charges, $899 million of legal settlements and loss contingencies, and $699 million of impairments, restructuring and other expenses.
- Debt increased by approximately $25.9 billion, primarily to fund Actavis Generics. Interest expense increased by $276 million.
Guidance, outlook, management commentary and risks
Management’s stated priorities were to integrate Actavis Generics, realize synergies, improve generic profitability, generate cash and repay debt. The filing does not provide specific 2017 revenue or earnings guidance. Management expected 2017 to reflect a full year of Actavis Generics, integration and restructuring costs, higher amortization and financing expense, continued generic price erosion, and lower Copaxone sales following adverse patent developments.
- In January 2017, a U.S. court invalidated asserted claims of four patents covering Copaxone 40 mg/mL. Teva appealed, but competitors could launch before the appeal is resolved.
- Copaxone 40 mg/mL represented more than 84% of U.S. Copaxone prescriptions and remained a major source of profit and cash flow.
- Management changes included the February 2017 appointment of Yitzhak Peterburg as interim CEO, replacing Erez Vigodman. The filing highlights uncertainty regarding strategy, execution and leadership continuity.
- Teva expected continued generic price erosion, government and payer pricing pressure, intense competition, patent litigation, regulatory delays and manufacturing-quality risks.
- The Godollo, Hungary facility was subject to an FDA import alert and warning letter. Operations were voluntarily discontinued or reduced while remediation proceeded. Rimsa’s Mexican operations also required remediation after quality and manufacturing issues were identified.
- Teva recorded a $519 million FCPA settlement provision relating to conduct in Russia, Mexico and Ukraine, entered into a three-year deferred prosecution agreement and agreed to an independent compliance monitor. Israeli authorities also opened an investigation.
- Venezuela remained exposed to hyperinflation and further currency devaluation. Teva used a blended exchange rate and recorded $746 million of monetary devaluation charges plus $133 million of inventory-related expenses.
- Contractual obligations included approximately $40.1 billion of long-term debt obligations including estimated interest, $729 million of operating leases and $2.03 billion of purchase obligations. Potential milestone payments could reach approximately $1.1 billion.
- The company reported effective disclosure controls and effective internal control over financial reporting; however, the 2016 acquisitions and the Teva-Takeda venture were excluded from management’s internal-control assessment and the auditor’s internal-control audit.
Most important facts for an investor to verify
- Progress of Copaxone 40 mg/mL patent appeals, timing of competing generic launches and the resulting effect on revenue, margins and cash flow.
- Debt repayment capacity, refinancing requirements beginning in 2017-2020, interest-rate exposure and credit-rating outlook.
- Realized Actavis Generics synergies, integration costs, product price erosion and final purchase-price accounting adjustments.
- Rimsa remediation progress and whether additional impairment charges could arise.
- Status and potential financial exposure from generic-price investigations, antitrust litigation, product-liability claims, FCPA-related matters and other legal contingencies.
- Regulatory remediation at Godollo and other manufacturing sites, including potential supply interruptions and additional compliance costs.
- Cash generation after preferred-share dividends, ordinary-share dividends, capital expenditures and required debt service.
- Whether 2017 results confirm management’s expectations for a full-year Actavis contribution and lower specialty-product sales.