Teva Pharmaceutical Industries Ltd. — Q1 2022 Form 10-Q Summary
Business context and reporting period
Teva is a global pharmaceutical company focused on generic, specialty and biopharmaceutical products. The unaudited Form 10-Q covers the three months ended March 31, 2022, compared primarily with the three months ended March 31, 2021. Reportable segments are North America, Europe and International Markets.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net revenues | $3,661 million | $3,982 million | Down 8%; down 5% in local currency |
| Gross profit | $1,740 million | $1,878 million | Down 7% |
| Gross margin | 47.5% | 47.2% | Up 0.3 percentage points |
| Operating income (loss) | $(713) million | $434 million | Declined materially |
| Operating margin | (19.5%) | 10.9% | Down 30.4 percentage points |
| Net income (loss) attributable to Teva | $(955) million | $77 million | Shifted to loss |
| Diluted EPS | $(0.86) | $0.07 | Declined |
| Cash flow from operating activities | $(49) million | $(405) million | Lower use of cash |
| Company-defined free cash flow | $117 million | $59 million | Increased |
Q1 2022 operating results included $1,124 million of legal settlements and loss-contingency expense, primarily related to an updated provision for remaining opioid litigation. Additional unusual charges included $149 million of intangible-asset impairments and $128 million of other asset impairments, restructuring and other items. Financial expenses were $258 million, including approximately $238 million of interest expense. Income-tax expense was $2 million on a $971 million pretax loss.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $2,175 million at March 31, 2022, compared with $2,165 million at December 31, 2021. Cash, investments and restricted cash totaled approximately $2,250 million.
- Total debt was $22,917 million, compared with $23,043 million at year-end 2021. Approximately 9% of debt was classified as short-term, and financial leverage was 69%.
- Total assets were $47,059 million and total equity was $10,260 million at March 31, 2022.
- Teva reported no borrowings under its revolving credit facility and stated that it expected sufficient cash resources to meet debt-service and other obligations for at least one year.
- On April 29, 2022, after quarter-end, Teva replaced its $2.3 billion revolving facility with a $1.8 billion sustainability-linked facility maturing in April 2026, subject to extension options and financial covenants.
Material changes versus the prior comparable period
- North America revenue declined 13% to $1,737 million and segment profit declined 30% to $402 million. Generic-product revenue fell 15%, COPAXONE revenue fell 48%, while Anda revenue increased 18%, AUSTEDO increased 6% and AJOVY increased 16%.
- Europe revenue declined 5% in U.S. dollars to $1,156 million but increased 3% in local currency. Segment profit increased 13% to $381 million, supported by improved gross margin and lower operating expenses.
- International Markets revenue was essentially flat at $492 million in U.S. dollars and increased 8% in local currency. Segment profit increased 47% to $179 million, helped by higher gross profit and $40 million of other income, mainly settlement proceeds.
- Currency movements, including hedging effects, reduced revenue by $133 million and operating income by $56 million compared with Q1 2021.
- R&D expense declined 11% to $225 million, while selling and marketing expense was broadly flat at $584 million and G&A expense increased 2% to $296 million.
- Operating cash use improved primarily because lower revenue reduced accounts receivable balances and related working-capital requirements. Free cash flow also included $305 million collected in connection with securitized receivables and $25 million of divestiture proceeds, partially offset by $157 million of capital expenditures.
Guidance, outlook, commentary and risks
- Management expected Teva’s 2022 non-GAAP tax rate to be 18% to 19%, compared with 16.4% in 2021.
- Management did not anticipate a material impact on 2022 financial results from COVID-19, although the filing cites clinical-trial, regulatory, supply-chain and pre-commercial launch delays.
- The Russia-Ukraine conflict had an immaterial Q1 impact, but could affect currency exposure, inflation, supply chains, operating costs and commercial activity.
- Teva launched generic lenalidomide capsules, the generic version of Revlimid, in the United States in March 2022. It also launched generic versions of Advair Diskus and Zipsor during the quarter.
- The U.S. generic pipeline included 189 pending applications, including 67 tentative approvals. Management noted that launch timing, competition, patent outcomes and authorized generics could materially affect the value of these opportunities.
- In April 2022, the FDA issued a Complete Response Letter for the risperidone LAI NDA. Teva was reviewing next steps with the FDA.
- Teva permanently ceased manufacturing at its Irvine, California facility and recorded $54 million of related costs through March 31, 2022. Further costs, lost revenue, inventory write-offs, customer penalties, remediation expenses or regulatory actions remain possible.
- Major ongoing exposures include opioid litigation, U.S. and international generic-drug antitrust and pricing investigations, patent litigation, product-liability matters, tax disputes and environmental claims. The opioid provision was $3,762 million at March 31, 2022.
- Teva’s accumulated deficit prevents dividends and share repurchases. No dividends have been paid since December 2017.
Most important facts for an investor to verify
- Whether the updated opioid provision adequately reflects the ultimate cost of remaining settlements, including potential indemnification claims from Allergan.
- The timing and terms of major debt maturities, compliance with the new revolving facility’s leverage and interest-coverage covenants, and refinancing capacity.
- Whether North American generic and COPAXONE declines continue, and whether AUSTEDO, AJOVY, Anda and new generic launches offset those declines.
- The financial and regulatory consequences of the Irvine closure and any additional manufacturing or quality-control actions.
- Progress and approval prospects for the biosimilar, specialty and generic pipeline, including the Humira biosimilar opportunity targeted for U.S. sales beginning July 1, 2023, subject to regulatory approval.
- Potential cash costs from U.S. antitrust, opioid, securities, product-liability and tax proceedings not fully reflected in current provisions.
- The sustainability and quality of the reported $117 million free cash flow, particularly the contribution from securitized receivables and divestiture proceeds.