Business Context and Reporting Period
Teva Pharmaceutical Industries Limited filed its Form 20-F for the fiscal year ended December 31, 2010, prepared under U.S. GAAP. Although the request references 2010 Q4, the filing presents full-year results rather than a standalone fourth-quarter income statement. Teva is a global pharmaceutical company focused on generic drugs, with branded, specialty respiratory, women’s health, biosimilar and active pharmaceutical ingredient businesses. Approximately 60% of 2010 sales came from North America, 25% from Europe and 15% from other markets.
The August 2010 acquisition of ratiopharm was consolidated from August 10, 2010 and materially expanded Teva’s European and Canadian operations.
Financial Performance and Liquidity
| U.S. dollars in millions, except per-share data | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $16,121 | $13,899 | 16% |
| Gross profit | $9,065 | $7,367 | 23% |
| Gross margin | 56.2% | 53.0% | +3.2 pts |
| Operating income | $3,871 | $2,405 | 61% |
| Operating margin | 24.0% | 17.3% | +6.7 pts |
| Net income attributable to Teva | $3,331 | $2,000 | 67% |
| Diluted EPS | $3.67 | $2.23 | 65% |
| Operating cash flow | $4,136 | $3,373 | 23% |
- Sales growth reflected higher U.S. generic sales, continued Copaxone performance and the partial-year consolidation of ratiopharm. North America sales increased 16% to $9,988 million; Europe increased 21% to $3,947 million; and international markets increased 7% to $2,186 million.
- Product-line sales included generics and other products of $10,917 million, innovative products of $3,202 million, specialty respiratory products of $875 million, API sales of $641 million, women’s health products of $374 million and biosimilars of $112 million.
- Copaxone represented approximately 18% of consolidated net sales. Global in-market Copaxone sales increased 17% to $3,316 million; Azilect in-market sales increased 31% to $318 million.
- Net R&D expense was $933 million, or 5.8% of sales. Selling and marketing expense was $2,968 million, or 18.4% of sales. General and administrative expense was $865 million, or 5.4% of sales.
- Cash flow after capital expenditures and dividends was $2,845 million. Capital expenditures were $710 million, and dividends paid were $668 million.
- Cash, cash equivalents and investments totaled approximately $1.5 billion at year-end, down from $2.5 billion in 2009, primarily because of the ratiopharm acquisition.
- Total debt was $6,881 million at December 31, 2010, compared with $5,612 million in 2009. Total equity was $22,002 million, compared with $19,259 million.
- Teva reported $38,152 million of total assets and $3,835 million of working capital. Inventory was $3,866 million, with inventory days declining to 180 from 182.
- The effective tax rate was approximately 8%, supported by the geographic and product mix and Israeli tax benefits.
Material Changes Versus the Prior Comparable Period
- Teva acquired ratiopharm for approximately $5.2 billion in cash, financed with internal resources, $2.5 billion of senior notes and bank borrowings. The transaction generated approximately $2.8 billion of goodwill and expanded Teva’s European leadership.
- Gross and operating margins improved materially because of a more profitable product mix, lower inventory step-up charges, higher innovative-product contribution and the end of Teva’s 25% Copaxone distribution payment to Sanofi-Aventis in the U.S. and Canada after March 31, 2010.
- Restructuring, acquisition, legal and impairment expenses declined to $410 million from $638 million. However, 2010 included $260 million of restructuring expense and $124 million of long-lived asset impairment.
- The Irvine, California injectable facility remained subject to FDA remediation. Production was voluntarily halted in the second quarter, reducing 2010 sales by approximately $230 million. Teva recorded $131 million of uncapitalized production, consulting and inventory-related costs and $106 million of restructuring and impairment charges.
- Specialty respiratory sales declined 3% to $875 million, primarily because ProAir sales declined 13%, partly offset by 41% growth in Qvar sales.
- Currency movements reduced reported sales by approximately $216 million and operating income by approximately $50 million.
- Teva repurchased approximately 1.9 million shares for $99 million in December 2010 and had approximately $901 million remaining under its repurchase authorization at year-end.
Guidance, Outlook, Risks and Unusual Items
- For 2011, management expected net sales of $18.5 billion to $19.0 billion and non-GAAP EPS of $4.90 to $5.20. Management expected stronger results in the second half of the year and sequential quarterly improvement.
- Management forecast non-GAAP gross margin of 57.5% to 59.5%, R&D expense of approximately 6% of sales, non-GAAP selling and marketing expense of 18% to 19% of sales, G&A expense of approximately 5% of sales and a non-GAAP tax rate of approximately 13%.
- The extraordinary increase in the U.S. generics business in 2010 was not expected to repeat in 2011. Full-year ratiopharm consolidation was expected to support European sales.
- Key commercial risks include generic price erosion, healthcare cost-containment measures, customer concentration, competition from authorized generics, and dependence on timely regulatory approvals and patent challenges.
- Copaxone, a major contributor to profit and cash flow, faced patent challenges from Sandoz/Momenta and Mylan/Natco. Teva’s Orange Book patents generally expired in 2014, and adverse litigation outcomes could accelerate generic competition.
- Teva launched or continued selling certain generics while patent litigation remained pending, creating potential exposure to lost-profit or royalty damages and possible injunctions. The pantoprazole litigation resulted in an adverse 2010 jury verdict and remained subject to further proceedings and appeal.
- A Nevada propofol product-liability jury verdict awarded more than $500 million against Teva and its distributor. Teva posted a bond of approximately $580 million while appealing and stated that an award of damages was not probable.
- Manufacturing and compliance risks included FDA actions involving the Irvine injectable facility, Teva Animal Health and a January 2011 warning letter concerning the Jerusalem oral-solid-dose facility. The Jerusalem letter did not restrict current production or shipments but could affect pending approvals and exports if deficiencies were not resolved.
- Other significant exposures included approximately $795 million of unrecognized tax benefits, up to approximately $1.1 billion of potential milestone payments, and approximately $204 million of future joint-venture commitments over five years.
- Teva stated that it had no material off-balance-sheet arrangements and was in compliance with applicable debt covenants. A new $1.5 billion unsecured revolving credit facility was entered into in January 2011.
Most Important Facts for Investors to Verify
- Reconcile reported GAAP earnings with management’s non-GAAP results: 2010 GAAP net income attributable to Teva was $3,331 million versus non-GAAP net income of $4,134 million.
- Assess the sustainability of margin expansion after the partial-year ratiopharm contribution, unusually strong U.S. generic launches and the end of the Sanofi-Aventis payment obligation.
- Monitor Copaxone patent litigation, competing oral multiple-sclerosis therapies and the effect of any earlier-than-expected generic entry.
- Track FDA remediation and production recovery at Irvine, ongoing Animal Health remediation and the impact of the Jerusalem warning letter on future approvals and exports.
- Evaluate leverage and refinancing needs, including $2.8 billion of debt obligations due in 2011, the $814 million convertible-debt redemption completed in February 2011 and the reduced cash balance after acquisitions.
- Review legal, product-liability, drug-pricing, antitrust and tax contingencies, including matters for which the filing states that potential losses cannot be reliably estimated.
- Confirm the treatment and integration of subsequent acquisitions of Theramex and Infarmasa, completed in January 2011 and therefore not included in 2010 operating results.