TEVA PHARMACEUTICAL INDUSTRIES LTD quarterly report, Q3 FY2020

Business Context and Reporting Period

Teva Pharmaceutical Industries Limited is a global pharmaceutical company focused on generic, specialty and biopharmaceutical products. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the same periods in 2019. Teva reports through North America, Europe and International Markets, plus other activities including API sales, contract manufacturing and out-licensing.

Financial Performance and Position

Metric	Q3 2020	Q3 2019	9M 2020	9M 2019
Net revenues	$3,978 million	$4,093 million	$12,206 million	$12,420 million
Gross profit	$1,852 million	$1,830 million	$5,678 million	$5,579 million
Gross margin	46.6%	44.7%	46.5%	44.9%
Operating income (loss)	$(4,342) million	$(81) million	$(3,978) million	$(591) million
Net loss attributable to Teva	$(4,349) million	$(314) million	$(4,140) million	$(1,108) million
Diluted loss per share	$(3.97)	$(0.29)	$(3.78)	$(1.02)

Q3 revenue declined 3% in both U.S. dollar and local-currency terms. Nine-month revenue declined 2% in U.S. dollars and 1% in local-currency terms.
Q3 gross profit margin expanded 190 basis points, primarily from product mix, operational efficiencies and network optimization. Nine-month gross margin increased 160 basis points.
Q3 operating loss included a $4,628 million North America goodwill impairment and $509 million of intangible-asset impairments. Nine-month impairment charges were $4,628 million for goodwill and $1,278 million for intangible assets.
Financial expenses were $117 million in Q3 and $565 million for nine months. Q3 included $124 million of marketable-securities revaluation gains; nine-month results included a $118 million gain from such revaluations.
Q3 segment revenues and profit were $2,017 million and $560 million in North America, $1,116 million and $312 million in Europe, and $529 million and $125 million in International Markets.
Q3 product trends included higher AUSTEDO revenue of $168 million, up 60%, and AJOVY revenue of $35 million, up 42%, offset by lower COPAXONE revenue of $236 million, down 13%, and lower BENDEKA/TREANDA revenue of $105 million, down 15%.
Company-defined non-GAAP diluted EPS was $0.58 in Q3 and $1.89 for the first nine months, compared with $0.58 and $1.78, respectively, in the comparable 2019 periods. Non-GAAP measures exclude significant items and are not standardized.

Cash Flow, Debt and Liquidity

Cash flow from operating activities was $307 million in Q3 2020 versus $325 million in Q3 2019; nine-month operating cash flow was $885 million versus $210 million.
Company-defined Q3 free cash flow was $506 million versus $551 million in Q3 2019. The calculation included $333 million collected from securitized receivables and $143 million of capital investment, so it is not equivalent to operating cash flow less capital expenditures.
Cash and cash equivalents were $1,827 million at September 30, 2020, compared with $1,975 million at December 31, 2019. Total assets were $49,737 million and total equity was $10,592 million.
Total debt was $25,621 million at September 30, 2020, including $2,106 million of short-term debt and $23,515 million of long-term senior notes and loans. Teva repaid $700 million of senior notes in March and €1,010 million of senior notes in July 2020.
The $2.3 billion unsecured revolving credit facility had €100 million outstanding at September 30, 2020 and €270 million outstanding as of the filing date. The facility includes a net-debt-to-EBITDA covenant of 5.75x for the third and fourth quarters of 2020, becoming more restrictive thereafter.
Management expects sufficient cash resources to meet debt service and other financial obligations for at least one year from issuance of the financial statements and expects to remain within the revolving-credit-facility covenants based on current and forecasted results.
Teva has not paid dividends since December 2017 and cannot currently pay dividends or repurchase shares because of its accumulated deficit.

Material Changes Versus the Prior Comparable Period

Revenue declined modestly, while gross margin improved. Segment profit was broadly stable in North America, declined in Europe and declined modestly in International Markets during Q3.
Operating and net losses increased substantially because of the North America goodwill impairment and higher intangible-asset impairments. The impairment reflected lower market capitalization and increased uncertainty regarding opioid litigation, DOJ Sherman Act charges and DOJ Anti-Kickback and False Claims Act litigation.
Legal settlements and loss-contingency expense fell to $21 million in Q3 and $10 million for nine months, from $468 million and $1,171 million, respectively, in 2019. The 2019 expense was primarily related to opioid litigation provisions.
R&D expense rose 7% in Q3 because of an upfront payment, but declined 9% for the first nine months. Selling and marketing expense rose 2% in Q3 but declined 5% for nine months.
Goodwill declined to $20,228 million from $24,846 million at December 31, 2019, primarily because of the $4,628 million North America impairment. Identifiable intangible assets declined to $9,308 million from $11,232 million.
Teva revised prior-period revenue and cost-of-sales presentation for its Israeli distribution business from gross to net reporting. The revision reduced both revenue and cost of sales but did not affect gross profit, operating income, earnings per share, balance sheet or cash flow.

Guidance, Outlook, Commentary and Risks

Management stated that supply chains and critical facilities remained largely operational, with adequate inventory and redundancy plans. It did not anticipate a material negative impact on 2020 financial results from COVID-19, but acknowledged that longer-term effects remain uncertain.
COVID-19 reduced physician and hospital visits, prescriptions and demand for certain products in the second and third quarters. The pandemic also caused immaterial clinical-trial, regulatory-approval and launch delays, with potential for further delays.
Management expects a 2020 non-GAAP tax rate of 17% to 18%, compared with 18% in 2019.
In August 2020, Teva entered an Alvotech partnership covering five U.S. biosimilar candidates. Teva paid an upfront amount and may owe up to $490 million of additional development and commercial milestones, plus royalties.
Teva recorded a $211 million first-nine-month impairment related to AUSTEDO development for pediatric Tourette syndrome after the clinical trial failed its primary endpoints. The company discontinued development for that indication.
Teva’s principal risks include substantial indebtedness, covenant compliance, generic pricing and competition, COPAXONE erosion, product and manufacturing issues, COVID-19 disruption, currency volatility, goodwill and intangible-asset impairments, and extensive litigation.
Material legal exposures include opioid litigation, generic-drug price-fixing and market-allocation matters, the DOJ criminal Sherman Act indictment of Teva USA, the DOJ Anti-Kickback and False Claims Act case, patent and antitrust litigation, product-liability claims and securities litigation. Teva stated that it could not estimate a loss range for the criminal antitrust charges.
The opioid settlement framework remained under negotiation. If finalized in its current form, Teva could provide up to approximately $23 billion of buprenorphine-naloxone at wholesale acquisition cost over ten years and up to $250 million in cash; if not finalized as contemplated, management could not determine a reasonable upper end of potential loss.
The FDA continued to classify Teva’s Davie, Florida facility as “official action indicated.” Teva expects approximately $150 million of 2020 revenue from the site, assuming no unscheduled slowdown or stoppage, but warned of possible approval delays, lost revenue, impairments, inventory write-offs and enforcement actions.

Important Facts for Investors to Verify

Whether additional goodwill or intangible-asset impairments occur, particularly in North America, and the sensitivity of valuations to litigation, competition, pricing and product-launch assumptions.
Progress and potential financial exposure from opioid litigation, the DOJ criminal antitrust indictment, the DOJ Anti-Kickback and False Claims Act case, and related state and private lawsuits.
Compliance with revolving-credit-facility covenants as leverage thresholds become more restrictive and debt maturities approach.
The sustainability and composition of company-defined free cash flow, including securitized-receivable collections and working-capital movements.
COVID-19 effects on demand, physician visits, clinical trials, regulatory approvals, manufacturing and supply chains.
Remediation of the Davie FDA findings and the Goa, India water-supply issue, including any resulting production, approval or revenue impacts.
Commercial performance and pipeline execution for AUSTEDO, AJOVY, biosimilars and generic launches, including the Alvotech partnership and pending U.S. applications.