Teva Pharmaceutical Industries Limited — Q1 2020 Form 10-Q Summary
Business context and reporting period
Teva is a global pharmaceutical company focused on generic, specialty and biopharmaceutical medicines, operating through North America, Europe and International Markets. This unaudited Form 10-Q covers the three months ended March 31, 2020, with comparisons to the three months ended March 31, 2019. The filing was signed on May 7, 2020.
Management reported that manufacturing, distribution, research and development and supply chains remained largely operational despite COVID-19. The company served nearly 200 million patients and maintained inventory and redundancy plans, but stated that the longer-term effects of the pandemic remained uncertain.
Financial performance and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net revenues | $4,357 million | $4,149 million | +5% |
| Gross profit | $2,063 million | $1,856 million | +11% |
| Gross margin | 47.3% | 44.7% | +260 basis points |
| Operating income | $191 million | $134 million | +43% |
| Operating margin | 4.4% | 3.2% | +120 basis points |
| Income before taxes | $(33) million | $(84) million | Improved |
| Net income attributable to Teva | $69 million | $(105) million | Improved |
| Diluted EPS | $0.06 | $(0.10) | Improved |
| Cash flow from operations | $305 million | $112 million | +172% |
| Free cash flow | $551 million | $360 million | +53% |
Reported operating results included $649 million of intangible-asset impairments, $121 million of other asset impairments, restructuring and other items, and $25 million of income from legal settlements and loss contingencies. Financial expenses were $224 million, including approximately $241 million of interest expense. Teva recognized a $59 million tax benefit on the pretax loss, compared with a $9 million tax expense in Q1 2019.
Segment revenues and profit were: North America $2,082 million and $550 million, Europe $1,402 million and $502 million, and International Markets $565 million and $156 million. Segment profit increased 10%, 25% and 61%, respectively. Europe benefited from higher generic demand and COVID-19-related advance purchasing; International Markets included a $35 million positive hedging impact.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $1,804 million at March 31, 2020, compared with $1,975 million at December 31, 2019.
- Total assets were $55,330 million and total equity was $14,588 million, compared with $57,470 million and $15,063 million, respectively, at year-end 2019.
- Total debt was $26,103 million, down from $26,908 million at December 31, 2019, primarily following repayment of $700 million of 2.25% senior notes at maturity and currency movements.
- Short-term debt was $1,630 million; senior notes and loans classified as long-term were $24,473 million.
- No amounts were outstanding under Teva’s $2.3 billion unsecured revolving credit facility. The facility includes a net-debt-to-EBITDA covenant of 6.0x for the first two quarters of 2020, declining to 5.75x in the third and fourth quarters.
- Management expected sufficient cash resources to meet debt service and other financial obligations for at least one year and expected to remain within the facility’s covenant thresholds.
- Teva has not paid dividends since December 2017 and stated that it currently cannot pay dividends or repurchase shares because of its accumulated deficit.
Material changes versus the prior comparable period
- Revenue increased 5%, driven principally by higher European generic and OTC sales, increased AUSTEDO and Anda revenue in North America, and growth in International Markets.
- AUSTEDO revenue increased 64% to $122 million; AJOVY revenue increased 44% to $29 million; Anda revenue increased 13% to $426 million.
- North American generic revenue declined 1% to $952 million, while COPAXONE declined 5% to $198 million, BENDEKA/TREANDA declined 14% to $105 million and QVAR declined 29% to $45 million.
- Operating income improved despite higher impairment charges because of stronger segment performance, lower R&D and selling and marketing costs, and favorable legal settlement income.
- Intangible-asset impairments increased to $649 million from $469 million, including $331 million related to in-process R&D and $318 million related to product rights.
- The company recorded $121 million of other asset impairments, restructuring and other items versus $1 million in Q1 2019, including $75 million of tangible-asset impairments and $39 million of restructuring expenses.
- Cash flow from operations and free cash flow increased substantially, partly reflecting lower employee incentive payments and significant inventory consumption.
- The comparative Q1 2019 revenue and cost-of-sales figures were revised to present an Israeli distribution business on a net, rather than gross, basis. The revision did not affect gross profit, operating income, EPS, cash flow or the balance sheet.
Guidance, outlook, risks and unusual items
- Management did not anticipate a material negative impact on 2020 financial results from COVID-19 at the filing date, but cautioned that duration, severity, demand patterns, supply-chain conditions, clinical trials and regulatory processes could change materially.
- Management expected the 2020 annual non-GAAP tax rate to be approximately 17%–18%, compared with 18% in 2019. This is a non-GAAP measure and is not a forecast of GAAP earnings.
- AUSTEDO development for pediatric Tourette syndrome was discontinued after trials failed to meet primary endpoints, resulting in a $211 million impairment of related in-process R&D.
- No goodwill impairment was recorded, but management stated that changes in COVID-19 effects, market capitalization, operating forecasts or other assumptions could result in future impairment.
- The Davie, Florida manufacturing site remained classified by the FDA as “official action indicated” after a January 2020 follow-up inspection. Teva estimated approximately $230 million of 2020 revenue from the site, subject to remediation or enforcement risks.
- Teva faces extensive opioid, generic-pricing, antitrust, patent, product-liability, regulatory and shareholder litigation. The opioid nationwide settlement framework contemplated up to approximately $23 billion of buprenorphine-naloxone product and up to $250 million of cash over ten years, but the company stated that it could not predict whether the framework would be finalized. No change was made to the opioid liability estimate in Q1 2020.
- Teva expects additional expenses, lost revenue and litigation costs related to valsartan and other sartan recalls and associated product-liability claims.
- An Indian tax litigation matter could result in a $136 million impairment if the final decision is adverse to Teva.
Facts investors should verify
- Whether COVID-19-related advance purchasing in Europe and higher demand for selected products reverses in subsequent quarters.
- Progress in remediating the Davie, Florida facility and any resulting FDA restrictions, product delays, inventory write-offs or lost revenue.
- Future impairment risk for product rights, in-process R&D and goodwill, particularly after the AUSTEDO and generic-pipeline write-downs.
- Cash generation, inventory normalization, debt maturities and compliance with the revolving credit facility’s progressively tighter covenants.
- Developments in opioid litigation and the proposed nationwide settlement framework, as well as generic pricing and antitrust investigations.
- Sustainability of growth in AUSTEDO, AJOVY, biosimilars and European generics against ongoing price erosion and competition affecting COPAXONE, QVAR and BENDEKA/TREANDA.