Teva Pharmaceutical Industries Limited — Q1 2019 Form 10-Q Summary
Business context and reporting period
Teva is a global pharmaceutical company focused on generic medicines, specialty medicines and biopharmaceuticals, operating through North America, Europe and International Markets. This unaudited report covers the three months ended March 31, 2019, with comparisons to the three months ended March 31, 2018. Amounts are in U.S. dollars unless otherwise indicated.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net revenues | $4,295 million | $5,065 million | Down 15%; down 12% in local currency |
| Gross profit | $1,856 million | $2,315 million | Down 20% |
| Gross margin | 43.2% | 45.7% | Down 250 basis points |
| Operating income | $134 million | $1,525 million | Down 91% |
| Operating margin | 3.1% | 30.1% | Down 27.0 percentage points |
| Net income attributable to Teva | $(105) million | $1,120 million | Turned to loss |
| Net loss attributable to ordinary shareholders | $(105) million | $1,055 million | Turned to loss |
| Diluted EPS | $(0.10) | $1.03 | Turned to loss |
| Operating cash flow | $112 million | $1,496 million | Down $1,384 million |
| Capital expenditures | $125 million | $163 million | Down $38 million |
Cash and cash equivalents were $1,973 million at March 31, 2019, compared with $1,782 million at December 31, 2018. Cash and cash equivalents plus short- and long-term investments totaled $2,040 million. Working capital was $59 million, compared with negative $186 million at year-end 2018.
Total debt was $28,624 million at March 31, 2019, compared with $28,916 million at December 31, 2018. Approximately 10% of debt was classified as short-term. Debt was effectively denominated 66% in U.S. dollars, 31% in euros and 3% in Swiss francs. Financial leverage was 64%, compared with 65% at year-end 2018.
Teva had no outstanding borrowings under its revolving credit facility at March 31, 2019 and stated that it met all applicable covenants. In April 2019, it entered into a new $2.3 billion unsecured syndicated revolving credit facility, replacing the prior $3.0 billion facility.
Material changes versus the prior comparable period
- North America revenue fell 19% to $2,047 million and segment profit fell 46% to $498 million. COPAXONE revenue declined 56% to $208 million because of U.S. generic competition. Generic products, BENDEKA/TREANDA, ProAir and QVAR also declined, while AUSTEDO, AJOVY and Anda increased.
- Europe revenue declined 12% to $1,264 million, but segment profit increased 7% to $403 million. Cost reductions, efficiency measures and the termination of the PGT joint venture improved profitability.
- International Markets revenue decreased 11% to $668 million and segment profit decreased 20% to $97 million, primarily reflecting lower Japanese sales from regulatory price reductions and generic competition.
- Revenue declines were partly offset by growth in AUSTEDO, AJOVY and Anda and by new generic launches. Currency movements reduced reported revenue by approximately $177 million and operating income by approximately $49 million.
- Identifiable intangible-asset impairments increased to $469 million from $206 million, including $265 million of in-process research and development impairments and $204 million of product-right impairments. No goodwill impairment was recorded in Q1 2019, compared with $180 million in Q1 2018.
- Legal settlements and loss contingencies were a $57 million expense, compared with $1.278 billion of income in Q1 2018, which included the Allergan working-capital settlement, the Rimsa settlement and reversal of a carvedilol-related reserve.
- Restructuring expense declined to $32 million from $247 million. Teva reported approximately 10,400 full-time-equivalent employees removed since the restructuring plan was announced.
- Interest and other financial expenses declined to $218 million from $271 million, largely because Q1 2018 included approximately $67 million of early debt-redemption costs.
Guidance, outlook, management commentary and risks
Teva’s restructuring plan targets a $3 billion reduction in its total cost base by the end of 2019. The filing does not provide clear consolidated revenue or earnings guidance for 2019. Management expects sufficient cash resources to support debt service and other financial obligations for at least twelve months from the filing date.
Management identified continued pressure from generic competition, particularly to COPAXONE, price erosion in U.S. generics, regulatory pricing reductions, currency volatility, substantial indebtedness and dependence on a limited number of customers and products.
The FDA issued a February 2019 warning letter concerning Teva’s Davie, Florida manufacturing site after an inspection was classified as “official action indicated.” Teva estimated approximately $240 million of revenue from the site for the remainder of 2019, assuming no unscheduled slowdown or stoppage. Potential consequences include approval delays, lost revenue, inventory write-offs, customer penalties, remediation costs and FDA enforcement.
Teva continued to incur effects from voluntary valsartan and other sartan recalls related to NDMA contamination. The 2018 financial-statement impact was $51 million, and the company expects further revenue and profit losses, customer penalties, impairments and litigation costs.
Material contingencies include opioid litigation and investigations, generic-drug pricing and antitrust matters, patent litigation, False Claims Act and marketing investigations, product-liability claims, environmental matters and shareholder litigation. The filing states that outcomes are unpredictable and that adverse outcomes could materially affect results and cash flows.
Teva adopted the new lease accounting standard on January 1, 2019, recognizing approximately $553 million of operating lease right-of-use assets and $561 million of lease liabilities at adoption. Management stated that the adoption did not materially affect income or cash flows and did not affect revolving-credit covenant compliance.
Most important facts for investors to verify
- Whether COPAXONE erosion, U.S. generic price pressure and respiratory-product declines stabilize or continue.
- Progress in remediating the Davie, Florida FDA warning-letter findings and any resulting production, approval or financial impact.
- Cash generation relative to the company’s approximately $28.6 billion debt burden and upcoming maturities.
- Execution of the restructuring plan and achievement of the targeted $3 billion cost-base reduction by year-end 2019.
- Potential additional intangible-asset impairments, particularly for generic pipeline assets and product rights.
- Developments in opioid, generic-price-fixing, antitrust, patent, product-liability and other legal proceedings, including amounts that may ultimately become payable.
- Revenue and adoption trends for growth products such as AUSTEDO, AJOVY, Truxima and Herzuma.
- Impact of currency movements, pricing regulation, recalls and continued generic competition on reported results and margins.