Teva Pharmaceutical Industries Ltd. — 2012 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2012, filed February 12, 2013. The filing is an annual Form 20-F, not a standalone fourth-quarter filing; Q4 2012 information is included only where specifically disclosed. Financial statements are prepared under U.S. GAAP in U.S. dollars.
Business context
Teva is a global pharmaceutical company focused on generic medicines, specialty pharmaceuticals, active pharmaceutical ingredients, over-the-counter products and distribution. Approximately 51% of 2012 revenue came from the United States, 28% from Europe and 21% from rest-of-world markets. Generic medicines represented approximately 51% of revenue and specialty medicines approximately 40%.
Major specialty products included Copaxone, Azilect, Provigil, Nuvigil, Treanda, ProAir and Qvar. Teva completed the transition of Copaxone marketing and distribution responsibilities from Sanofi in Europe during 2012 and operated with a new chief executive officer and substantially refreshed senior management team.
Key financial metrics
| U.S. dollars in millions, except per-share data | 2012 | 2011 | Change |
|---|---|---|---|
| Net revenues | $20,317 | $18,312 | 11% |
| Gross profit | $10,652 | $9,515 | 12% |
| Gross margin | 52.4% | 52.0% | +0.4 pts |
| Operating income | $2,205 | $3,109 | (29%) |
| Operating margin | 10.8% | 17.0% | (6.2 pts) |
| Net income attributable to Teva | $1,963 | $2,759 | (29%) |
| Diluted EPS | $2.25 | $3.09 | (27%) |
| Net cash from operating activities | $4,572 | $4,134 | 11% |
| Capital expenditures | $1,104 | $1,053 | 5% |
Net income was affected by substantial nonrecurring and acquisition-related items. Management’s 2012 non-GAAP figures, excluding selected amortization, impairments, legal provisions, restructuring, regulatory and other items, were operating income of $5,715 million and net income attributable to Teva of $4,671 million, or diluted EPS of $5.35. These measures are not substitutes for GAAP results.
Revenue and operating developments
- Specialty medicines revenue increased 26% to $8.15 billion, primarily from a full year of Cephalon revenue, higher Copaxone and Azilect sales, and growth in oncology products.
- Generic medicines revenue increased 2% to $10.39 billion. U.S. generic revenue increased 11% to $4.38 billion, while European generic revenue declined 11% to $3.39 billion.
- Copaxone revenue increased 12% to approximately $4.0 billion. U.S. revenue increased 4% to $2.9 billion, largely from price increases, while volume was affected by distribution agreement changes.
- Provigil faced U.S. generic competition beginning in March 2012, resulting in a substantial sales decline. Provigil revenue was $417 million for 2012.
- Oncology revenue increased to $860 million from $268 million, including $608 million from Treanda and the November 2012 launch of Synribo in the United States.
- Respiratory revenue declined 3% to $856 million, mainly because of U.S. distribution agreement changes and higher Medicaid rebates.
- United States revenue increased 19% to $10.44 billion; Europe was essentially flat at $5.67 billion; rest-of-world revenue increased 9% to $4.21 billion.
Cash flow, liquidity and capital structure
| Balance-sheet metric | December 31, 2012 | December 31, 2011 |
|---|---|---|
| Cash, cash equivalents and marketable securities | $3,089 million | $1,748 million |
| Total assets | $50,609 million | $50,142 million |
| Working capital | $3,589 million | $3,937 million |
| Total debt | $14,718 million | $14,516 million |
| Short-term debt and current maturities | $3,006 million | $4,280 million |
| Long-term debt | $11,712 million | $10,236 million |
| Total equity | $22,867 million | $22,343 million |
- Operating cash flow increased by approximately $438 million, supported by improved collections and inventory controls, partly offset by legal settlement payments.
- Cash flow after capital investments and dividends was approximately $2.74 billion.
- Teva refinanced approximately $5 billion of debt during 2012, extending average debt maturity to approximately six years and reducing the proportion of debt classified as short term to 20% from 29%.
- In December 2012, Teva issued approximately $2.0 billion of senior notes and entered into a new $3.0 billion five-year unsecured revolving credit facility. It redeemed approximately $1.0 billion of 1.7% senior notes in January 2013.
- Teva repurchased approximately 28.1 million shares for $1.2 billion during 2012. Dividends paid were approximately $855 million, and the fourth-quarter 2012 dividend was declared at NIS 1.15 per share.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by a full year of Cephalon and Taiyo results, rather than solely by organic growth.
- Operating income and GAAP EPS declined materially despite revenue and gross-profit growth because impairments, legal provisions, amortization, restructuring and operating expenses increased.
- Impairments, loss contingencies, restructuring and other charges increased to $1.97 billion from $901 million. The 2012 total included $1.07 billion of long-lived-asset impairments and a $670 million provision for pantoprazole patent litigation.
- Research and development expense increased 24% to $1.36 billion, with approximately 64% directed to specialty programs.
- Net financial expense increased to $386 million from $153 million, primarily because of a full year of Cephalon-related financing and higher interest expense.
- Identifiable intangible assets declined to $7.75 billion from $10.32 billion after amortization and impairments, while goodwill increased to $18.86 billion.
Guidance, outlook, risks and unusual items
Management expected 2013 to include a small decline in Copaxone sales from changing competition, continued and material Provigil declines from U.S. generic competition, higher specialty sales and marketing expenses, substantial amortization, currency effects, and significant restructuring and impairment expenses. Management also expected future effective tax rates to be significantly higher than the unusually low 2012 rate.
- Copaxone concentration and patent risk: Copaxone generated nearly $4.0 billion of revenue and was a major contributor to profits and operating cash flow. U.S. Orange Book patents were scheduled to expire in May 2014, with another process patent expiring in September 2015; patent litigation was ongoing.
- Pantoprazole litigation: Teva accrued $670 million and disclosed that the ultimate loss could be up to $1.4 billion in excess of the accrued amount.
- Regulatory and manufacturing risk: The Irvine, California facility incurred approximately $88 million of 2012 production, consulting and inventory costs, plus approximately $65 million of property, plant and equipment impairments and $33 million of intangible-asset impairments.
- Leverage and refinancing: Total debt was $14.7 billion, with significant maturities and estimated interest obligations. Teva stated that it complied with financial covenants and believed available liquidity was sufficient for ongoing needs.
- Tax contingencies: Unrecognized tax benefits were $903 million. Israeli tax authorities had issued assessments totaling approximately $903 million for 2005–2007, which Teva intended to contest. Teva was also evaluating a tax-law election that could require a one-time payment of up to approximately $700 million.
- Government investigations: Teva disclosed SEC and Department of Justice subpoenas and requests concerning potential Foreign Corrupt Practices Act issues. The matters were at an early stage and no outcome could be determined.
- Other litigation and contingencies: The filing describes product-liability, antitrust, drug-pricing, patent, environmental and regulatory proceedings. The filing text does not provide a clear aggregate maximum exposure for all matters.
- Currency exposure: Currency movements reduced 2012 revenue by approximately $572 million, although they had a net positive effect on operating income. Approximately 57% of operating costs were incurred in currencies other than the U.S. dollar.
Most important facts for investors to verify
- Reconcile GAAP performance with management’s non-GAAP measures, particularly the $1.07 billion impairment charge and $670 million pantoprazole provision.
- Assess the timing and commercial impact of generic competition to Copaxone, Provigil and other specialty products.
- Review debt maturities, interest-rate swaps, refinancing requirements and available revolving-credit capacity.
- Track the pantoprazole damages trial, Copaxone patent appeals, other patent challenges and related litigation reserves.
- Monitor the SEC and DOJ FCPA inquiries and any resulting compliance costs, penalties or settlements.
- Evaluate the sustainability of 2012 cash flow and the effect of higher restructuring, amortization, tax and specialty-commercialization expenses in 2013.
- Review exposure to major customers, government pricing and reimbursement reforms, foreign exchange movements, manufacturing remediation and supply-chain interruptions.