Teva Pharmaceutical Industries Ltd. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Teva is a global pharmaceutical company focused on generic medicines, specialty medicines and biopharmaceuticals. It reports through North America, Europe and International Markets, with additional activities including active pharmaceutical ingredients, contract manufacturing and licensing. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared primarily with the corresponding 2021 periods.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Net revenues | $3,786 million | $3,910 million | Down 3%; up 1% in local currencies |
| Gross profit | $1,794 million | $1,873 million | Down 4% |
| Gross margin | 47.4% | 47.9% | Down 50 basis points |
| Operating income (loss) | $(949) million | $582 million | Turned to loss |
| Operating margin | (25.1%) | 14.9% | Material deterioration |
| Net income (loss) attributable to Teva | $(232) million | $207 million | Turned to loss |
| Diluted EPS | $(0.21) | $0.19 | Turned to loss |
| Operating cash flow | $123 million | $218 million | Down $95 million |
| Free cash flow, as defined by Teva | $301 million | $625 million | Down $324 million |
For the six months ended June 30, 2022, revenues were $7,447 million, down 6% from $7,892 million; gross profit was $3,534 million, with a 47.5% margin; operating loss was $1,662 million versus operating income of $1,015 million; net loss attributable to Teva was $1,187 million versus net income of $284 million; and diluted loss per share was $1.07 versus earnings per share of $0.26. Six-month operating cash flow was $74 million, compared with cash used in operations of $187 million in 2021.
- Revenue drivers: North America revenue was $1,904 million, Europe $1,171 million and International Markets $454 million. Other activities contributed $257 million.
- Product trends: Q2 North America revenue increased for generic products by 8% and AUSTEDO by 17%, but declined for COPAXONE by 38% and BENDEKA/TREANDA by 22%. Europe benefited from generic and OTC demand and higher AJOVY revenue, while COPAXONE and respiratory products declined. International Markets revenue declined 6% in U.S. dollars but increased 3% in local currencies.
- Segment profit: Q2 North America segment profit was $481 million, down 8%; Europe was $389 million, up 13%; and International Markets was $95 million, down 23%.
- Cash and liquidity: Cash and cash equivalents were $2,058 million at June 30, 2022. Cash, cash equivalents and restricted cash totaled $2,091 million. Teva had no borrowings under its $1.8 billion revolving credit facility, which matures in April 2026 and includes leverage and other covenants.
- Debt: Total debt was $22,082 million, compared with $23,043 million at December 31, 2021. Approximately 8% was classified as short-term. Debt was effectively 63% U.S. dollar, 34% euro and 3% Swiss franc denominated. Financial leverage was 69%.
- Balance sheet: Total assets were $45,932 million and total equity was $9,828 million at June 30, 2022. Goodwill was $18,837 million and identifiable intangible assets were $6,700 million.
Material changes and unusual items
- Teva recorded a $745 million goodwill impairment charge, comprising $479 million for International Markets and $266 million for the API reporting unit. The charges were primarily driven by higher discount rates and, for the API unit, updated revenue and margin assumptions.
- Legal settlements and loss contingencies expense was $729 million in Q2 and $1,854 million for the first six months, compared with $6 million and $110 million, respectively, in the comparable 2021 periods. The expense principally reflected an updated provision for remaining opioid litigation.
- The provision for legal settlements and loss contingencies was $3,928 million at June 30, 2022, compared with $2,710 million at year-end 2021.
- Teva recognized a $900 million Q2 tax benefit and an $899 million six-month tax benefit. A U.S. subsidiary was determined to be insolvent for tax purposes, supporting an expected approximately $4.2 billion worthless-stock deduction and related tax benefit of approximately $850 million.
- Other asset impairments, restructuring and other items were $118 million in Q2 and $246 million year to date. Teva recorded $73 million of costs during the first six months related to the permanent closure and product transfers from its Irvine, California manufacturing facility.
- Foreign exchange movements, net of hedging, reduced Q2 revenue by $162 million and six-month revenue by $295 million compared with the prior-year periods.
- Teva has not paid dividends since December 2017 and stated that it currently cannot pay dividends or repurchase shares because of its accumulated deficit.
Guidance, outlook, commentary and risks
Teva did not provide clear revenue or earnings guidance in the filing excerpt. Management expects the 2022 annual non-GAAP tax rate to be approximately 13% to 14%, compared with 16.4% in 2021. Management stated that it expects sufficient cash resources to support debt service and other financial obligations for at least one year after issuance of the financial statements and expects to remain within the revolving credit facility’s financial covenant thresholds.
- Opioid settlement: In July 2022, Teva reached an agreement in principle on proposed nationwide opioid settlement terms requiring payments of up to $4.25 billion, including previously settled cases, plus approximately $100 million for tribes, over 13 years. The terms include up to $1.2 billion of generic Narcan product, or $240 million in cash in lieu of product. Final documentation, participation thresholds, and an agreement with Allergan remain conditions. If the nationwide settlement is not finalized, the filing states that a reasonable upper end of potential loss cannot be determined.
- Other litigation: Teva faces extensive opioid, antitrust, pricing, product liability, patent, securities and regulatory litigation. The DOJ criminal Sherman Act case against Teva USA remains pending, with no estimated loss range; a conviction could result in material penalties and possible debarment from federally funded healthcare programs.
- Product and regulatory pipeline: The FDA issued a Complete Response Letter for risperidone LAI in April 2022; Teva is addressing the issues with a view to resubmission. Teva’s fasinumab program remains largely on hold because of safety concerns and the need for further FDA discussions.
- Market and operating risks: Teva remains exposed to generic price competition, loss of exclusivity, declining COPAXONE sales, customer concentration, supply-chain and manufacturing issues, foreign exchange volatility, COVID-19-related clinical and regulatory delays, the Russia-Ukraine conflict and substantial indebtedness.
- Russia and Ukraine: Management considered the direct operating impact immaterial through June 30, 2022, but noted potential future effects from currency devaluation, liquidity constraints, customer solvency, supply-chain disruption and geopolitical developments. Certain ruble hedges could not be renewed.
- Controls: Management concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Final terms, participation thresholds and accounting and cash-flow consequences of the proposed nationwide opioid settlement.
- Potential additional opioid, antitrust and DOJ liabilities beyond the $3.928 billion recorded provision.
- Debt maturities, refinancing needs, covenant headroom and the availability of the $1.8 billion revolving credit facility.
- The sustainability of generic-product and AUSTEDO growth against continued COPAXONE, BENDEKA/TREANDA and price erosion.
- Whether additional goodwill or intangible-asset impairments are required, particularly for Europe, International Markets and API reporting units.
- The timing and cost of the Irvine facility closure, product transfers and any additional FDA remediation or enforcement actions.
- Regulatory progress for risperidone LAI, biosimilars and other pipeline products, including the proposed Humira biosimilar.
- The extent to which the large Q2 tax benefit is recurring versus dependent on the U.S. subsidiary’s tax treatment and other unusual items.