Business context and reporting period
Teva Pharmaceutical Industries Limited filed its Form 20-F for the fiscal year ended December 31, 2013, prepared under U.S. GAAP. The filing is an annual report, not a standalone fourth-quarter filing. Teva operates through generic medicines, specialty medicines and other activities, including its PGT consumer-health joint venture with Procter & Gamble.
Approximately 50% of 2013 revenue came from generics, 40% from specialty medicines and the balance from other activities. Copaxone remained a major earnings and cash-flow contributor.
Financial performance and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net revenues | $20.314 billion | $20.317 billion | Flat |
| Gross profit | $10.707 billion | $10.652 billion | +1% |
| Gross margin | 52.7% | 52.4% | +0.3 points |
| Operating income | $1.649 billion | $2.205 billion | -25% |
| Operating margin | 8.1% | 10.8% | -2.7 points |
| Net income attributable to Teva | $1.269 billion | $1.963 billion | -35% |
| Diluted EPS | $1.49 | $2.25 | -34% |
| Operating cash flow | $3.237 billion | $4.572 billion | -$1.3 billion |
- R&D expense increased 5% to $1.427 billion, or 7.0% of revenue.
- Selling and marketing expense increased 5% to $4.080 billion, or 20.1% of revenue.
- Legal settlements and loss contingencies increased to $1.524 billion from $715 million, primarily reflecting $930 million of additional pantoprazole settlement charges and a $495 million modafinil antitrust provision.
- Impairments, restructuring and other charges declined to $788 million from $1.259 billion. Identifiable intangible-asset impairments were $393 million.
- Cash, cash equivalents and marketable securities totaled approximately $1.2 billion at year-end, down from $3.1 billion.
- Total debt declined to $12.191 billion from $14.718 billion; short-term debt was $1.804 billion and long-term debt was $10.387 billion.
- Teva had $2.8 billion available under its $3.0 billion revolving credit facility at year-end and stated that liquidity was sufficient for ongoing operating needs.
- Capital expenditures were $1.031 billion. Dividends paid were $1.089 billion and share repurchases totaled $497 million.
Segment performance
| Segment | 2013 revenue | 2012 revenue | 2013 profitability | 2012 profitability |
|---|---|---|---|---|
| Generic medicines | $9.906 billion | $10.385 billion | $1.656 billion, 16.7% margin | $2.062 billion, 19.9% margin |
| Specialty medicines | $8.402 billion | $8.150 billion | $4.567 billion, 54.4% margin | $4.694 billion, 57.6% margin |
- Generic revenue declined 5%, with U.S. revenue down 5% to $4.181 billion and rest-of-world revenue down 11% to $2.240 billion. Generic gross margin fell to 41.3% from 43.5%.
- Specialty revenue increased 3%, led by Copaxone revenue of $4.328 billion, up 8%, and Treanda revenue of $709 million, up 17%. Provigil revenue fell 78% to $91 million following generic competition.
- OTC revenue increased 24% to approximately $1.2 billion, including PGT revenue of $910 million.
Material changes versus the prior comparable period
- Revenue was essentially unchanged, but profitability deteriorated because of higher legal charges, increased commercial and R&D spending, foreign-exchange effects and lower generic profitability.
- Operating cash flow decreased by approximately $1.3 billion, primarily because of higher legal-settlement and Israeli tax payments.
- Teva paid approximately $790 million in Israeli taxes related to previously exempt income and tax assessments; total income taxes paid were $1.298 billion.
- Debt decreased by approximately $2.5 billion through repayments, while cash and investments declined by approximately $1.8 billion.
- Working capital declined to $2.493 billion from $3.589 billion, mainly due to lower inventories and payments associated with legal matters.
- Teva accelerated a global cost-reduction program targeting $2 billion of savings by the end of 2017, with half targeted by the end of 2014, and planned workforce reductions of approximately 10%. Restructuring costs were expected to be concentrated in 2014.
Guidance, outlook, management commentary and risks
- Management identified 2014 pressure from potential Copaxone competition, currency fluctuations, significant restructuring and impairment expenses, and higher specialty selling and marketing expenses related to planned launches.
- U.S. Copaxone patents covering the 20 mg product were expected to expire in May 2014. The FDA approved Copaxone 40 mg/mL for three-times-weekly dosing in January 2014; Teva’s strategy depended on migrating existing patients to this formulation.
- Teva entered into an agreement to acquire NuPathe for approximately $144 million at closing, plus up to $130 million in milestones. The transaction was expected to close in late February 2014.
- Key operational risks included generic price erosion, government pricing and tender pressure, manufacturing and quality issues, supply interruptions, regulatory actions, foreign-exchange exposure and dependence on large customers.
- Copaxone represented approximately 21% of consolidated 2013 revenue and a higher proportion of profit and operating cash flow, creating significant concentration risk.
- The company was conducting ongoing SEC and DOJ investigations concerning potential FCPA violations in multiple countries. Teva stated that outcomes could not be predicted and that additional issues could emerge.
- Teva faced extensive patent, antitrust, product-liability, government-investigation and False Claims Act matters. Pantoprazole settlement payments totaled $1.6 billion, with $600 million remaining payable during 2014; insurance recovery of up to approximately $560 million was disputed.
- Contingent milestone payments for Phase II and later-stage compounds could reach approximately $1.3 billion, excluding additional sales-based milestones and royalties.
- Management expected future effective tax rates to be significantly higher than 2013 because of product mix changes and the expiration of Israeli tax incentives.
Most important facts for an investor to verify
- Whether and when generic competition entered the U.S. Copaxone market, and the pace of patient migration to Copaxone 40 mg/mL.
- The final cost, timing and realized savings from the global restructuring program.
- Cash payments and ultimate resolution of pantoprazole, modafinil and other antitrust matters.
- Developments and potential financial consequences of the FCPA, False Claims Act and specialty-product marketing investigations.
- Whether generic pricing pressure, manufacturing remediation and supply issues continue to reduce generic margins, especially in Japan, Canada and Europe.
- Debt maturities, refinancing needs, covenant compliance and available liquidity after 2013 debt repayments and 2014 financing activity.
- The effect of Israeli tax-law changes and the transition to the new incentives regime on future cash taxes and earnings.
- The filing does not provide a clear standalone Q4 2013 income statement or cash-flow statement; quarterly conclusions should be verified against Teva’s contemporaneous Form 6-K disclosures.