Teva Pharmaceutical Industries Ltd. — 2019 Form 10-K Summary
Business context and reporting period
Teva is a global pharmaceutical company focused on generic medicines, specialty medicines, biopharmaceuticals, over-the-counter products, active pharmaceutical ingredients and distribution. Its reportable segments are North America, Europe and International Markets, with additional API, contract manufacturing and licensing activities.
The filing covers the fiscal year ended December 31, 2019, under U.S. GAAP. The filing was signed on February 21, 2020. The filing also provides unaudited fourth-quarter data.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net revenues | $16,887 million | $18,271 million | Down 8%; down 5% in local currency |
| Gross profit | $7,537 million | $8,296 million | Down 9% |
| Gross margin | 44.6% | 45.4% | Down 80 basis points |
| Operating income/(loss) | $(443) million | $(1,637) million | Improved primarily due to lower 2018 impairment charges |
| Net loss attributable to Teva | $(999) million | $(2,150) million | Improved |
| Diluted loss per share | $(0.91) | $(2.35) | Improved |
| Operating cash flow | $748 million | $2,446 million | Down 69% |
| Reported free cash flow | $2,053 million | $3,679 million | Down 44% |
| Cash and investments | $2,033 million | $1,846 million | Up $187 million |
| Total debt | $26,908 million | $28,916 million | Down $2,008 million |
Reported free cash flow includes $748 million of operating cash flow, $1,487 million of beneficial interest collected from securitized receivables and $343 million of asset-sale proceeds, less $525 million of capital investments. Capital investments declined from $651 million in 2018.
Financial expenses were $822 million, including $881 million of interest expense. Teva recorded a $278 million tax benefit on a $1,265 million pretax loss. Working capital was $74 million, compared with negative $186 million in 2018.
Segment performance
| Segment | 2019 revenue | 2019 segment profit | Year-over-year revenue change |
|---|---|---|---|
| North America | $8,542 million | $2,252 million | Down 8% |
| Europe | $4,795 million | $1,318 million | Down 8%; down 2% in local currency |
| International Markets | $2,246 million | $464 million | Down 7%; down 3% in local currency |
- North America profit declined 21%, reflecting lower COPAXONE and generic-product revenue and the absence of certain 2018 recoveries. North America gross margin declined to 50.9% from 53.6%.
- Europe profit increased 4% despite lower revenue, supported by restructuring-related cost reductions. Gross margin increased to 56.4% from 55.6%.
- International Markets profit declined 7%, primarily due to lower Japanese sales, partly offset by lower selling, marketing and general and administrative expenses.
Material changes versus the prior comparable period
- Global COPAXONE revenue declined to $1,512 million from $2,365 million, primarily because of generic and competing glatiramer acetate products. North America COPAXONE revenue fell 42% to $1,017 million.
- North America AUSTEDO revenue increased 102% to $412 million, while AJOVY revenue increased to $93 million from $3 million. QVAR revenue increased 38% to $250 million.
- BENDEKA/TREANDA revenue declined 23% to $496 million, primarily due to competition from Eagle Pharmaceuticals’ ready-to-dilute bendamustine product.
- Generic-medicine revenue represented $9,325 million, or 55% of total revenue. The filing cites continuing U.S. pricing pressure, faster competitor approvals, product-launch delays and supply discontinuities.
- There was no goodwill impairment in 2019, compared with a $3,027 million charge in 2018. However, Teva recorded $1,639 million of intangible-asset impairments, compared with $1,991 million in 2018.
- Legal settlements and loss contingencies shifted from $1,208 million of income in 2018 to a $1,178 million expense in 2019, mainly reflecting a provision for remaining opioid cases.
- Restructuring expenses declined to $199 million from $488 million. Management stated that the two-year plan achieved its targeted $3 billion cost-base reduction by the end of 2019; headcount had declined by approximately 13,000 full-time-equivalent employees since the plan was announced.
- Teva reduced debt through maturities, repayments and tenders, while issuing $2.1 billion of senior notes in November 2019. The new notes included $1.0 billion of 7.125% notes due 2025 and €1.0 billion of 6.0% notes due 2025.
- Teva adopted the new lease standard in 2019, recognizing approximately $553 million of operating lease right-of-use assets and $561 million of lease liabilities at adoption.
Guidance, outlook, risks and unusual items
The filing does not provide a specific 2020 revenue or earnings guidance range. Management identified AJOVY, AUSTEDO and biosimilar execution, timely generic launches, further operational optimization, debt reduction, COPAXONE erosion, generic pricing pressure and currency movements as major factors affecting 2020 results. Management expects its non-GAAP effective tax rate to remain similar to 2019’s 18% rate.
- Liquidity and leverage: Teva had $26.9 billion of debt, non-investment-grade credit ratings and a $2.3 billion revolving credit facility with no outstanding balance at year-end. The net-debt-to-EBITDA covenant limit was 6.25x through December 31, 2019 and becomes more restrictive over time. Management expected sufficient resources to meet debt service and other obligations for at least one year after issuance of the financial statements.
- Opioid litigation: Teva recorded a $1.178 billion legal-contingency expense. A proposed nationwide framework contemplated up to approximately $23 billion of buprenorphine/naloxone product over ten years and up to $250 million of cash payments, but the filing states that finalization was uncertain.
- Manufacturing and regulatory matters: The FDA classified the Davie, Florida facility as official action indicated and issued a warning letter. A January 2020 follow-up inspection resulted in additional findings. Teva estimated approximately $230 million of 2020 revenue from the site, assuming no production interruption or approval delays.
- Product recalls and litigation: Valsartan and other sartan recalls related to nitrosamine impurities had a cumulative direct impact of $54 million on 2018 and 2019 results. Further product-liability claims, customer penalties, impairments and litigation costs remained possible.
- Pipeline: TRUXIMA launched in the United States in November 2019, and HERZUMA was expected to become available in the United States in the first quarter of 2020. In February 2020, after year-end, AUSTEDO Tourette-syndrome trials failed their primary endpoints, resulting in a disclosed expected $211 million intangible-asset impairment in the first quarter of 2020.
- Competition and intellectual property: COPAXONE, respiratory products, BENDEKA/TREANDA and generic products face continuing competition, price erosion and patent challenges. Teva also faces extensive antitrust, patent, product-liability, securities, government-investigation and environmental proceedings.
- Currency exposure: Approximately 48% of revenue was denominated in currencies other than the U.S. dollar. Currency movements reduced 2019 revenue by $402 million and operating income by $135 million versus 2018.
Most important facts for an investor to verify
- Whether operating cash flow can recover from the 69% decline and whether reported free cash flow remains dependent on receivable securitization and asset-sale proceeds.
- The maturity schedule, refinancing requirements and covenant headroom for $26.9 billion of debt, particularly maturities in 2020–2025.
- The final scope, timing and economic cost of opioid settlements and other generic-price-fixing litigation.
- Remediation progress and commercial impact at the Davie, Florida manufacturing facility, including potential approval delays or production restrictions.
- The sustainability of COPAXONE cash flows and the ability of AJOVY, AUSTEDO, TRUXIMA, HERZUMA and new complex generics to offset product erosion.
- Whether additional intangible-asset or goodwill impairments arise from lower market assumptions, litigation uncertainty or weaker product performance.
- The accuracy and sensitivity of U.S. sales reserves and allowances, which totaled $5.346 billion for rebates, chargebacks and Medicaid-related items at year-end.
- The status of pending patent, antitrust, product-liability, tax and government-investigation matters and the adequacy of recorded provisions.
Audit and controls: The independent auditor issued an unqualified opinion and concluded that Teva maintained effective internal control over financial reporting as of December 31, 2019. Critical audit matters included goodwill impairment, U.S. sales reserves and allowances, and opioid and generic-price-fixing litigation.