TEVA PHARMACEUTICAL INDUSTRIES LIMITED Business Overview We are a global pharmaceutical company, committed to helping patients around the world to access affordable medicines and benefit from innovations to improve their health. Our mission is to be a global leader in generics, specialty medicines and biopharmaceuticals, improving the lives of patients. We operate worldwide, with headquarters inIsrael and a significant presence inthe United States ,Europe and many other markets around the world. Our key strengths include our world-leading generic medicines expertise and portfolio, focused specialty medicines portfolio and global infrastructure and scale. Teva was incorporated inIsrael onFebruary 13, 1944 and is the successor to a number of Israeli corporations, the oldest of which was established in 1901. Our Business Segments We operate our business through three segments:North America ,Europe and International Markets. Each business segment manages our entire product portfolio in its region, including generics, specialty and OTC products. This structure enables strong alignment and integration between operations, commercial regions, R&D and our global marketing and portfolio function, optimizing our product lifecycle across therapeutic areas. In addition to these three segments, we have other activities, primarily the sale of API to third parties, certain contract manufacturing services and an out-licensing platform offering a portfolio of products to other pharmaceutical companies through our affiliateMedis . The COVID-19 Pandemic As a leading global pharmaceutical company, Teva provides essential medicines to millions of patients around the world every day. Our priorities remain focused on the health and well-being of our employees and on our responsibility to continue to provide our medicines to the nearly 200 million patients who depend on us every day. Our industry plays a critical role, particularly during such challenging times. We are working with governments to do all they can, in partnership with our industry, to maintain the development, production, supply and distribution of high quality medicines for patients worldwide during this unprecedented global health crisis. Business Continuity The supply chain supporting our key products - specialty, generics and API - remains largely uninterrupted, and with adequate product inventory across our network. Additionally, based on analysis of potential scenarios, we currently have inventory and redundancy plans in place to address potential shortfalls, if any. We are closely monitoring the evolving situation in our key manufacturing locations and commercial markets, and are accordingly adapting our business continuity plans. All our facilities that research, manufacture, order, pack, distribute and provide critical customer and patient services are currently functioning to meet demand for essential medicines for patients throughout the world. Teva has worked since the early days of the COVID-19 pandemic to support efforts of governments and health services to curb the impact of the virus. Our global manufacturing network has been tirelessly focused on securing and scaling production of both API and finished doses for potential treatments that may prove essential in treating the condition nearly everywhere Teva does business. Teva will continue to work with governments and international organizations throughout the world to support emerging needs related to this crisis, while doing everything possible to also continue to supply our vast portfolio of medicines to patients. R&D and New Launches We do not expect a material impact on our ongoing clinical research programs and product launches as a result of the COVID-19 pandemic; however, if the pandemic continues for an extended period of time, we may experience delays in clinical trials due to cessation of recruitment for patient studies and suspended regulatory inspections, delays in regulatory approvals of new products due to reduced capacity or re-prioritization of regulatory agencies and delays in pre-commercial launch activities. All of our new product launches have been risk-assessed based on upcoming manufacturing and regulatory inspections. Workforce Policy and Measures Our employees across all aspects of our business are safeguarding the continuity of our activities and we are committed to supporting their efforts and caring for their personal health and safety. We are enacting appropriate measures to ensure the safe supply and transport of our medicines and APIs, and have established measures intended to ensure our sites remain open, allowing us to maintain our business, R&D and manufacturing operations. We have reduced the number of people in our facilities to only those who are essential and may not work remotely. By doing our part to reduce proximity to one another, we hope to better protect our overall workforce, and ultimately, the communities in which we live. 40 -------------------------------------------------------------------------------- Table of Contents As we work through this health crisis, we are starting to plan our strategy for returning to usual operations at all organizational levels, under guiding principles to protect our business, maximize organizational productivity and efficiency while simultaneously ensuring a safe workplace. Trends We have limited insight into the extent to which our business may be impacted by the COVID-19 pandemic and there are many unknowns facing our industry and society at large. At this stage of the pandemic, we are not experiencing material delays in development, production and distribution of medicines or disruptions in our supply chains; however, longer term affects cannot be predicted at this time and would depend on the duration and severity of the pandemic and the restrictive measures put in place to control its impact. We are experiencing increasing demand for certain medicines, as would be expected during a global crisis of this nature, and cannot assess whether such increased demand is the result of stocking by wholesalers or patients. Although no one can predict future demand for pharmaceutical products, market dynamics or the scope or duration of the financial and other challenges arising from the pandemic, it is possible that we will see a compensating effect during the remainder of the year, but we do not currently anticipate a material negative impact on our 2020 financial results due to the evolving global pandemic. Highlights Significant highlights in the first quarter of 2020 included:
• Revenues in the first quarter of 2020 were
5%, in both
quarter of 2019, mainly due to higher revenues from generics and OTC sales
in
®
and Anda in
Markets segment, partially offset by lower revenues from generics in the
U.S. and lower revenues from QVAR
®
and BENDEKA
®
/TREANDA
®
in North America .
• Our
of
compared to the first quarter of 2019, mainly due to an increase in
revenues of AUSTEDO and Anda as well as a milestone payment related to our
anti-CGRP intellectual property, partially offset by lower revenues from
QVAR, BENDEKA/TREANDA, COPAXONE
®and generic products. Profit increased by 10%, mainly due to the changes
in revenues described above.
• Our Europe segment generated revenues of
local currency terms, revenues increased by 13% compared to the first
quarter of 2019, mainly due to higher demand for certain products
resulting from the impact of the
COVID-19pandemic on purchasing patterns as well as continuing growth in generics
and new generic product launches, partially offset by price declines for
oncology products as a result of generic competition and a decline in
COPAXONE revenues due to competing glatiramer acetate products. Profit
increased by 25%, mainly due to higher revenues and lower expenses.
• Our International Markets segment generated revenues of
profit of
8% in
quarter of 2019. The increase in revenues was mainly due to higher sales
in
lower sales in
mainly due to higher sales and the positive impact from hedging activity.
• Impairment of identifiable intangible assets were $649 million in the
first quarter of 2020, compared to
2019. Impairment expenses in the first quarter of 2020 related to IPR&D
assets were $331 million and identifiable product rights were
$318 million .
• No goodwill impairments were recorded in the first quarters of both 2020
and 2019.
• We recorded expenses of $121 million for other asset impairments,restructuring and other items in the first quarter of 2020, compared to
expenses of $1 million in the first quarter of 2019.
• In the first quarter of 2020, we recorded an income of
legal settlements and loss contingencies, compared to an expense of
of 2020 was mainly related to a settlement of an action brought against
the sellers of
• Operating income was $191 million in the first quarter of 2020, compared
to $134 million in the first quarter of 2019. The increase in the first
quarter of 2020 was mainly due to higher profit in our Europe ,
International Markets and North America segments and income from legal
settlements (compared to an expense in the first quarter of 2019),
partially offset by higher intangible asset impairments and higher otherassets impairments, restructuring and other items in the first quarter of
2020.
41--------------------------------------------------------------------------------
Table of Contents
• Financial expenses were
compared to
in the first quarter of 2020 were mainly comprised of interest expenses of
$241 million . Financial expenses in the first quarter of 2019 were mainly comprised of interest expenses of$227 million .
• In the first quarter of 2020, we recognized a tax benefit of
on
pre-tax
loss of $33 million . In the first quarter of 2019, we recognized a tax
expense of $9 million , on
pre-tax
loss of $84 million . Our tax rate for the first quarter of 2020 was mainly
affected by impairments in jurisdictions in which tax rates are higher
than Teva's average tax rate
on
its ongoing business operations
.
• Exchange rate movements between the first quarter of 2020 and the first
quarter of 2019, net of hedging, negatively impacted overall revenues by
$3 million and positively impacted operating income by$27 million . • As ofMarch 31, 2020 , our debt was$26,103 million , compared to
repayment at maturity of our
exchange rate fluctuations.
• Cash flow generated from operating activities during the first quarter of
2020 was
2019. This increase in cash flow in the first quarter of 2020 was mainly
due to higher operating profit in each of our three segments, as well as
lower performance incentive payments to employees paid in the first
quarter of 2020, compared to the amounts paid in the first quarter of
2019.
• During the first quarter of 2020, we generated free cash flow of
generated from operating activities,
collected in exchange for securitized accounts receivables and
in proceeds from sale of property, plant and equipment and intangible
assets, partially offset by
investment. This increase compared to the first quarter of 2019, resulted
mainly from higher cash flow generated from operating activities,
including significant consumption of inventories.
Results of Operations
Comparison of Three Months Ended March 31, 2020 to Three Months Ended March 31,
2019
The following table sets forth, for the periods indicated, certain financial
data derived from our financial statements, presented according to generally
accepted accounting principles in the United States ("U.S. GAAP"), presented as
percentages of net revenues, and the percentage change for each item as compared
to the previous year:
Percentage of Net Revenues
Three Months Ended Percentage
March 31, Change
2020 2019 2020 - 2019
% % %
Net revenues 100 100 5
Gross profit 47 45 11
Research and development expenses 5 6 (15 )
Selling and marketing expenses 14 16 (5 )
General and administrative expenses 7 7.0 4
Intangible assets impairments 15 11 38
Other assets impairments, restructuring
and other items 3 § NA
Legal settlements and loss
contingencies (1 ) 1 NA
Other income (loss) § § 115
Operating income 4 3 43
Financial expenses, net 5 5 3
Income (loss) before income taxes (1 ) (2 ) (61 )
Income taxes (benefit) (1 ) § -
Share in losses (profits)
of associated companies, net § § NA
Net income attributable to
non-controlling
interests (1 ) § NA
Net income (loss) attributable to Teva 2 (3 ) -
Net income (loss) attributable to
ordinary shareholders 2 (3 ) -
§ Represents an amount less than 0.5%.
42
--------------------------------------------------------------------------------
Table of Contents
Segment Information
North America Segment
The following table presents revenues, expenses and profit for our North America
segment for the three months ended March 31, 2020 and 2019:
Three months ended March 31,
2020 2019
(U.S. $ in millions / % of Segment Revenues)
Revenues $ 2,082 100 % $ 2,047 100.0 %
Gross profit 1,062 51.0 % 1,039 50.8 %
R&D expenses 146 7.0 % 165 8.1 %
S&M expenses 251 12.1 % 268 13.1 %
G&A expenses 118 5.6 % 112 5.5 %
Other (income) expense (2 ) § (4 ) §
Segment profit* $ 550 26.4 % $ 498 24.3 %
* Segment profit does not include amortization and certain other items.
§ Represents an amount less than 0.5%.
North America Revenues OurNorth America segment includesthe United States andCanada . Revenues from ourNorth America segment in the first quarter of 2020 were$2,082 million , an increase of$36 million , or 2%, compared to the first quarter of 2019, mainly due to an increase in revenues of AUSTEDO and Anda as well as a milestone payment related to our anti-CGRP intellectual property (see note 2 to our consolidated financial statements), partially offset by lower revenues from QVAR, BENDEKA/TREANDA, COPAXONE and generic products. Revenues by Major Products and Activities The following table presents revenues for ourNorth America segment by major products and activities for the three months endedMarch 31, 2020 and 2019: Three months ended Percentage March 31, Change 2020 2019 2019-2020 (U.S. $ in millions) Generic products$ 952 $ 966 (1 %) AJOVY 29 20 44 % AUSTEDO 122 74 64 % BENDEKA/TREANDA 105 122 (14 %) COPAXONE 198 208 (5 %) ProAir* 59 59 1 % QVAR 45 64 (29 %) Anda 426 379 13 % Other 146 155 (6 %) Total$ 2,082 $ 2,047 2 %
* Does not include revenues from the ProAir authorized generic, which are
included under generic products.
Generic products revenues in ourNorth America segment (including biosimilars) in the first quarter of 2020 were$952 million , a decrease of 1% compared to the first quarter of 2019. This decrease was mainly due to price erosion in our product portfolio and lower royalty income, offset by an increase in revenues from launches of new products, including TRUXIMA and from our ProAir ® authorized generic due to higher demand related to the COVID-19 pandemic. 43 -------------------------------------------------------------------------------- Table of Contents Among the most significant generic products we sold inNorth America in the first quarter of 2020 were albuterol sulfate inhalation aerosol (ProAir HFA authorized generic of our specialty product), epinephrine injectable solution (the generic equivalent of EpiPen ® and EpiPen Jr. ® ), TRUXIMA (the biosimilar to Rituxan ® ), lidocaine transdermal patch (the generic equivalent of Lidoderm Patch ® ) and amphetamine salt tablets (the generic equivalent of Adderall IR ® ). We launched HERZUMA for Injection (the biosomilar to Herceptin ® ) inthe United States inMarch 2020 . HERZUMA and TRUXIMA were also launched inCanada inJanuary 2020 andFebruary 2020 , respectively. OnMay 4, 2020 , TRUXIMA became available in theU.S. for the treatment of rheumatoid arthritis, granulomatosis with polyangiitis (Wegener's Granulomatosis) and microscopic polyangiitis. In the first quarter of 2020, we led theU.S. generics market in total prescriptions and new prescriptions, with approximately 389 million total prescriptions (based on trailing twelve months), representing 10.4% of totalU.S. generic prescriptions according to IQVIA data. AJOVY ® revenues in ourNorth America segment in the first quarter of 2020 were$29 million , an increase of$9 million , or 44% compared to the first quarter of 2019, mainly due to growth in volume in the first quarter of 2020. AJOVY was approved by the FDA and launched inthe United States inSeptember 2018 for the preventive treatment of migraine in adults. OnJanuary 27, 2020 , the FDA approved an auto-injector device for AJOVY in theU.S. , which became commercially available inApril 2020 . In addition, AJOVY was approved inCanada onApril 14, 2020 . OnMay 12, 2017 , we entered into a license and collaboration agreement withOtsuka Pharmaceutical Co., Ltd. ("Otsuka") providing Otsuka with an exclusive license to conduct phase 2 and 3 clinical trials for AJOVY inJapan and, once approved, to commercialize the product inJapan . Results for these trials were received inJanuary 2020 indicating that primary and secondary endpoints were achieved and that no clinically significant adverse events were observed in subjects. AJOVY is also in clinical development to evaluate safety and efficacy in the treatment of post traumatic headache and fibromyalgia. AJOVY is protected by patents expiring in 2026 inEurope and in 2027 inthe United States . Applications for patent term extensions have been submitted in various markets around the world. An additional patent relating to the use of AJOVY in the treatment of migraine is issued inthe United States and will expire in 2035. This patent is also pending in other countries. AJOVY will also be protected by regulatory exclusivity for 12 years from marketing approval inthe United States and 10 years from marketing approval inEurope . We have filed a lawsuit in theU.S. District Court for the District of Massachusetts alleging that Eli Lilly & Co.'s ("Lilly") marketing and sale of its galcanezumab product for the treatment of migraine infringes nine Teva patents. Lilly has also submitted IPR (inter partes review) petitions to the Patent Trial and Appeal Board, challenging the validity of the nine patents asserted against it in the litigation. The litigation in the district court was stayed pending resolution of the IPR petitions. OnFebruary 18, 2020 , the Patent Trial and Appeal Board issued decisions on the first six IPRs, finding the six patents invalid as being obvious. OnApril 21, 2020 , we filed notices of appeal in connection with these decisions. OnMarch 31, 2020 the Patent Trial and Appeal Board issued a decision upholding the 3 method of treatment patents. The litigation stay ended following the issuance of the most recent IPR decisions, and the parties are proceeding with the litigation. In addition, we have entered into separate agreements withAlder Biopharmaceuticals, Inc. and Lilly, resolving theEuropean Patent Office oppositions that they filed against our AJOVY patents. The settlement agreement with Lilly also resolved Lilly's action to revoke the patent protecting AJOVY in theUnited Kingdom . AUSTEDO revenues in ourNorth America segment in the first quarter of 2020 increased by 64%, to$122 million , compared to$74 million in the first quarter of 2019. This increase was mainly due to growth in volume in the first quarter of 2020. InApril 2017 , AUSTEDO was approved by the FDA and launched inthe United States for the treatment of chorea associated withHuntington disease. InAugust 2017 , the FDA approved AUSTEDO for the treatment of tardive dyskinesia. We do not have further plans for the development of AUSTEDO for the treatment of Tourette syndrome in pediatric patients inthe United States , which was being developed under a partnership agreement withNuvelution Pharma, Inc. ("Nuvelution"), following clinical trial results received inFebruary 2020 , which failed to meet their primary endpoints. AUSTEDO is protected inthe United States by five Orange Book patents expiring between 2031 and 2033 and inEurope by two patents expiring in 2029. BENDEKA and TREANDA combined revenues in ourNorth America segment in the first quarter of 2020 decreased by 14% to$105 million , compared to the first quarter of 2019, mainly due to the emergence of alternative novel therapies and continued competition from Belrapzo ® (a ready-to-dilute bendamustine hydrochloride product from Eagle Pharmaceuticals, Inc. ("Eagle")). 44 -------------------------------------------------------------------------------- Table of Contents InJuly 2018 , Eagle prevailed in its suit against the FDA to obtain seven years of orphan drug exclusivity inthe United States for BENDEKA. OnMarch 13, 2020 , this decision was upheld in the appellate court. As a result, drug applications referencing BENDEKA, TREANDA or any other bendamustine product will not be approved by the FDA until the orphan drug exclusivity expires inDecember 2022 . It is unclear whether the FDA or the intervening generic defendants will further appeal this ruling. InApril 2019 , we signed an amendment to the license agreement with Eagle extending the royalty term applicable tothe United States to the full period for which we sell BENDEKA and increasing the royalty rate. In consideration, Eagle agreed to assume a portion of BENDEKA-related patent litigation expenses. InSeptember 2019 , a patent infringement action against four of the five ANDA filers for generic versions of BENDEKA was tried in theUnited States District Court for the District of Delaware . OnApril 27, 2020 , the District Court upheld the validity of all of the asserted patents and found that all four ANDA filers infringe these patents. As a result, the ANDA filers should be enjoined until these patents expire in 2031. Additionally, inJuly 2018 , Teva and Eagle filed suit againstHospira, Inc. ("Hospira") related to its 505(b)(2) new drug application ("NDA") referencing BENDEKA in theU.S. District Court for the District of Delaware . Hospira's 30-month stay expires inDecember 2020 . OnDecember 16, 2019 , theDelaware District Court dismissed the case against Hospira on all but one of the asserted patents, which expires in 2031. Trial against Hospira on that patent is scheduled to begin onNovember 15, 2021 . We haveU.S. Orange Book patents for TREANDA expiring between 2026 and 2031. One 505(b)(2) NDA was filed for a liquid version of bendamustine and 21 ANDAs were filed for generic versions of the lyophilized form of TREANDA. We have reached final settlements with all 22 filers, providing for the launch of generic versions of TREANDA prior to patent expiration. COPAXONE revenues in ourNorth America segment in the first quarter of 2020 decreased by 5% to$198 million , compared to the first quarter of 2019, mainly due to generic competition inthe United States . The market for MS treatments continues to develop, particularly with the approvals of generic versions of COPAXONE discussed above, as well as additional generic versions expected to be approved in the future. Oral treatments for MS, such as Tecfidera ® , Gilenya ® and Aubagio ® , continue to present significant and increasing competition. COPAXONE also continues to face competition from existing injectable products, as well as from monoclonal antibodies, such as Ocrevus ® . ProAir revenues in ourNorth America segment in the first quarter of 2020 were$59 million , flat compared to the first quarter of 2019. InJanuary 2019 , we launched our own ProAir authorized generic inthe United States following the launch of a generic version of Ventolin ® HFA, another albuterol inhaler. Revenues from our ProAir HFA authorized generic are included in "generic products" above. ProAir is the fourth-largest short-acting beta-agonist in the market, with an exit market share of 15.5% (37.5% including our ProAir HFA authorized generic, making our overall albuterol product the largest in the market) in terms of total number of prescriptions for albuterol inhalers during the first quarter of 2020, compared to 27.6% in the first quarter of 2019. InJune 2014 , we settled a patent challenge to ProAir HFA with Perrigo Company plc ("Perrigo"), under which Perrigo is now permitted to launch its generic product. InFebruary 2020 , Perrigo obtained FDA approval of its generic product and announced initial release of limited supplies. InNovember 2017 , we settled another patent challenge to ProAir HFA withLupin Pharmaceuticals, Inc. ("Lupin"), et al. permitting Lupin to launch its generic product onSeptember 23, 2019 , or earlier under certain circumstances. QVAR revenues in ourNorth America segment in the first quarter of 2020 decreased by 29% to$45 million , compared to the first quarter of 2019, mainly due to increased price competition and lower volumes. QVAR maintained its second-place position in the inhaled corticosteroids category inthe United States , with an exit market share of 20.8% in terms of total number of prescriptions during the first quarter of 2020, compared to 21.7% in the first quarter of 2019. Anda revenues in ourNorth America segment in the first quarter of 2020 increased by 13% to$426 million , compared to$379 million in the first quarter of 2019, mainly due to higher volume increases primarily related to the COVID-19 pandemic. Anda, our distribution business inthe United States , distributes generic, specialty and OTC pharmaceutical products from various third party manufacturers to independent retail pharmacies, pharmacy retail chains, hospitals and physician offices inthe United States . Anda is able to compete in the secondary distribution market by maintaining high inventory levels for a broad offering of products, competitive pricing and offering next day delivery throughoutthe United States . 45 -------------------------------------------------------------------------------- Table of Contents Product Launches and Pipeline In the first quarter of 2020, we launched the generic version of the following branded products inNorth America : Total Annual U.S. Branded Sales at Time of Launch (U.S. $ in millions Launch (IQVIA)) Product Name Brand Name Date * Doxepin tablets, 3 mg & 6 mg Silenor ® January $ 50 HERZUMA ® (trastuzumab-pkrb) for injection, 150 mg/vial & 420 mg/vial Herceptin ®** March $ 3,042
* The figures presented are for the twelve months ended in the calendar
quarter immediately prior to our launch or
re-launch
** Biosimilar.
Our generic products pipeline in the United States includes, as of March 31,
2020 , 242 product applications awaiting FDA approval, including 79 tentative
approvals. This total reflects all pending ANDAs, supplements for product line
extensions and tentatively approved applications and includes some instances
where more than one application was submitted for the same reference product.
Excluding overlaps, the branded products underlying these pending applications
had U.S. sales for the twelve months ended March 31, 2020 exceeding
$119 billion , according to IQVIA. Approximately 70% of pending applications
include a paragraph IV patent challenge, and we believe we are first to file
with respect to 90 of these products, or 112 products including final approvals
where launch is pending a settlement agreement or court decision. Collectively,
these first to file opportunities represent over $77 billion in U.S. brand sales
for the twelve months ended March 31, 2020 , according to IQVIA.
IQVIA reported brand sales are one of the many indicators of future potential
value of a launch, but equally important are the mix and timing of competition,
as well as cost effectiveness. The potential advantages of being the first filer
with respect to some of these products may be subject to forfeiture, shared
exclusivity or competition from
so-called
"authorized generics," which may ultimately affect the value derived.
In the first quarter of 2020, we did not receive any tentative approvals for
generic equivalents. A "tentative approval" indicates that the FDA has
substantially completed its review of an application and final approval is
expected once the relevant patent expires, a court decision is reached, a
30-month
regulatory stay lapses or a
180-day
exclusivity period awarded to another manufacturer either expires or is
forfeited.
Below is a description of key products in our specialty pipeline as of March 31,
2020 :
Potential Route of Development Phase
Product Indication(s) Administration (date entered phase 3) Comments
CNS, Neurology and
Neuropsychiatry
AUSTEDO (deutetrabenazine) Tourette syndrome Oral No further plans
in this
indication.
Dyskinesia in Oral 3 (September 2019)
cerebral palsy
TV-46000 Schizophrenia Subcutaneous 3 (April 2018)
(risperidone LAI)
46--------------------------------------------------------------------------------
Table of Contents
Potential Route of Development Phase
Product Indication(s) Administration (date entered phase 3) Comments
Migraine and Pain
fremanezumab (anti CGRP) Post traumatic Subcutaneous 2
headache
fibromyalgia Subcutaneous 2
fasinumab Osteoarthritis pain Subcutaneous 3 (March 2016) Developed in
collaboration with
Regeneron
Pharmaceuticals,
Inc. ("Regeneron")
Respiratory
ProAir Bronchospasm and Oral inhalation Approved by FDA
e-RespiClick exercise induced (December 2018)
™ bronchitis
AirDuo Treatment of asthma Oral inhalation Approved by FDA (July
® in patients aged 12 2019)
Digihaler years and older
®
ArmonAir Treatment of asthma Oral inhalation Approved by FDA
® in patients aged 12 (February 2020)
DigiHaler years and older
®
GoResp Treatment of asthma Oral inhalation Under regulatory
® in patients aged 12 review
DigiHaler years and older and
® COPD
/ DuoResp
®
DigiHaler
®
North America Gross Profit
Gross profit from our North America segment in the first quarter of 2020 was
$1,062 million , an increase of 2%, compared to $1,039 million in the first
quarter of 2019. This increase was mainly due to the change in mix of revenues,
as discussed above.
Gross profit margin for our North America segment in the first quarter of 2020
increased to 51.0%, compared to 50.8% in the first quarter of 2019.
North America R&D Expenses
R&D expenses relating to our North America segment in the first quarter of 2020
were $146 million , a decrease of 12%, compared to $165 million in the first
quarter of 2019.
For a description of our R&D expenses in the first quarter of 2020, see "-Teva
Consolidated Results-Research and Development (R&D) Expenses" below.
North America S&M Expenses
S&M expenses relating to our North America segment in the first quarter of 2020
were $251 million , a decrease of 6%, compared to $268 million in the first
quarter of 2019. This decrease was mainly due to cost reductions and efficiency
measures.
North America G&A Expenses
G&A expenses relating to our North America segment in the first quarter of 2020
were $118 million , an increase of 5%, compared to $112 million in the first
quarter of 2019.
North America Other Income (Expense)
Other income from our North America segment in the first quarter of 2020 was
$2 million , compared to other income of $4 million in the first quarter of 2019.
North America Profit
Profit from our North America segment consists of gross profit less R&D
expenses, S&M expenses, G&A expenses and any other income related to this
segment. Segment profit does not include amortization and certain other items.
47
--------------------------------------------------------------------------------
Table of Contents
Profit from our North America segment in the first quarter of 2020 was
$550 million , an increase of 10%, compared to $498 million in the first quarter
of 2019. This increase was due to higher revenues and lower expenses as
discussed above.
Europe Segment
The following table presents revenues, expenses and profit for our Europe
segment for the three months ended March 31, 2020 and 2019:
Three months ended March 31,
2020 2019
(U.S. $ in millions / % of Segment Revenues)
Revenues $ 1,402 100 % $ 1,264 100 %
Gross profit 823 58.7 % 730 57.8 %
R&D expenses 55 3.9 % 66 5.2 %
S&M expenses 202 14.4 % 215 17.0 %
G&A expenses 66 4.7 % 48 3.8 %
Other (income) expense (1 ) § (1 ) §
Segment profit* $ 502 35.8 % $ 403 31.9 %
* Segment profit does not include amortization and certain other items.
§ Represents an amount less than 0.5%.
Europe Revenues OurEurope segment includes theEuropean Union and certain other European countries. Revenues from ourEurope segment in the first quarter of 2020 were$1,402 million , an increase of 11% or$138 million , compared to the first quarter of 2019. In local currency terms, revenues increased by 13%, mainly due to higher demand for certain products resulting from the impact of the COVID-19 pandemic on purchasing patterns as well as continuing growth in generics and new generic product launches, partially offset by price declines for oncology products as a result of generic competition and a decline in COPAXONE revenues due to competing glatiramer acetate products. Revenues by Major Products and Activities The following table presents revenues for ourEurope segment by major products and activities for the three months endedMarch 31, 2020 and 2019: Three months ended Percentage March 31, Change 2020 2019 2019-2020 (U.S. $ in millions) Generic products$ 1,032 $ 919 12 % COPAXONE 109 114 (4 %) Respiratory products 106 91 16 % AJOVY 4 - NA Other 151 140 7 % Total$ 1,402 $ 1,264 11 % Generic products revenues in ourEurope segment in the first quarter of 2020, including OTC products, increased by 12% to$1,032 million , compared to the first quarter of 2019. In local currency terms, revenues increased by 16% compared to the first quarter of 2019, mainly due to higher demand for certain products resulting from the impact of the COVID-19 pandemic on purchasing patterns as well as continuing growth in generics and new generic product launches. We estimate that the impact of the COVID-19 pandemic on advanced purchasing patterns was approximately$100 million . COPAXONE revenues in ourEurope segment in the first quarter of 2020 decreased by 4% to$109 million , compared to the first quarter of 2019. In local currency terms, revenues decreased by 1%, mainly due to price reductions and a decline in volume resulting from competing glatiramer acetate products, partially offset by higher demand due to the impact of the COVID-19 pandemic on purchasing patterns. COPAXONE 40 mg/mL is protected by one European patent expiring in 2030. This patent is being challenged in various European jurisdictions. InOctober 2017 , theU.K. High Court found this patent invalid and our application for permission to appeal this decision was rejected. The patent was upheld by theOpposition Division of the European Patent Office inApril 2019 . A hearing for an appeal in this case has been set forJune 2020 . 48 -------------------------------------------------------------------------------- Table of Contents Respiratory products revenues in ourEurope segment in the first quarter of 2020 increased by 16% to$106 million , compared to the first quarter of 2019. In local currency terms, revenues increased by 20%, mainly due to higher demand attributed to the impact of the COVID-19 pandemic. AJOVY revenues in ourEurope segment in the first quarter of 2020 were$4 million . AJOVY was granted a Marketing Authorization in theEuropean Union by theEuropean Medicines Agency ("EMA") in a centralized process inApril 2019 . We commenced launching AJOVY in certain European markets inMay 2019 and are moving forward with plans to launch in other European countries. InOctober 2019 , we received approval from the EMA for AJOVY's auto-injector submission in theEuropean Union and we commenced launch inMarch 2020 . For information about AJOVY patent protection, see "-North America Revenues-Revenues by Major Product" above. Product Launches and Pipeline As ofMarch 31, 2020 , our generic products pipeline inEurope included 88 generic approvals relating to 27 compounds in 49 formulations, no EMA approvals received. In addition, approximately 1,115 marketing authorization applications pending approval in 37 European countries, relating to 119 compounds in 236 formulations. No applications are pending with the EMA. For information regarding our specialty pipeline and launches in the first quarter of 2020, see "-North America Segment -Product Launches and Pipeline" above. Europe Gross Profit Gross profit from ourEurope segment in the first quarter of 2020 was$823 million , an increase of 13% compared to$730 million in the first quarter of 2019. This increase was mainly due to higher revenues, as discussed above. Gross profit margin for ourEurope segment in the first quarter of 2020 increased to 58.7%, compared to 57.8% in the first quarter of 2019. This increase was mainly due to a favorable mix of generic products and lower inventory write-offs. Europe R&D Expenses R&D expenses relating to ourEurope segment in the first quarter of 2020 were$55 million , a decrease of 17% compared to$66 million in the first quarter of 2019. For a description of our R&D expenses in the first quarter of 2020, see "-Teva Consolidated Results-Research and Development (R&D) Expenses" below. Europe S&M Expenses S&M expenses relating to ourEurope segment in the first quarter of 2020 were$202 million , a decrease of 6% compared to$215 million in the first quarter of 2019. This decrease was mainly due to lower marketing and travel costs attributed to travel restrictions related to the COVID-19 pandemic. Europe G&A Expenses G&A expenses relating to ourEurope segment in the first quarter of 2020 were$66 million , an increase of 37% compared to$48 million in the first quarter of 2019. Europe Profit Profit of ourEurope segment consists of gross profit less R&D expenses, S&M expenses, G&A expenses and any other income related to this segment. Segment profit does not include amortization and certain other items. Profit from ourEurope segment in the first quarter of 2020 was$502 million , an increase of 25%, compared to$403 million in the first quarter of 2019. This increase was mainly due to higher revenues and lower expenses as discussed above. 49 -------------------------------------------------------------------------------- Table of Contents International Markets Segment The following table presents revenues, expenses and profit for our International Markets segment for the three months endedMarch 31, 2020 and 2019: Three months ended March 31, 2020 2019 (U.S. $ in millions / % of Segment Revenues) Revenues$ 565 100 %$ 521 100 % Gross profit 305 54.0 % 269 51.7 % R&D expenses 15 2.7 % 22 4.2 % S&M expenses 106 18.8 % 115 22.0 % G&A expenses 34 6.0 % 36 6.8 % Other (income) expense (6 ) (1.1 %) - § Segment profit*$ 156 27.6 %$ 97 18.6 %
* Segment profit does not include amortization and certain other items.
§ Represents an amount less than 0.5%.
** The data presented for prior periods have been revised to reflect a revision
in the presentation of net revenues and cost of sales in the consolidated
financial statements. See note 1c to our consolidated financial statements
for additional information.
International Markets Revenues Our International Markets segment includes all countries in which we operate other than those in ourNorth America andEurope segments. The International Markets segment includes more than 35 countries, covering a substantial portion of the global pharmaceutical market. Our key international markets areJapan ,Russia andIsrael . The countries in our International Markets segment include highly regulated, pure generic markets, such asIsrael , branded generics oriented markets, such asRussia and certainLatin America markets and hybrid markets such asJapan . Revenues from our International Markets segment in the first quarter of 2020 were$565 million , an increase of$44 million , or 8%, compared to the first quarter of 2019. In local currency terms, revenues increased by 5% compared to the first quarter of 2019, mainly due to higher sales inLatin America ,Asia-Pacific ,Ukraine andRussia , partially offset by lower sales inJapan . The revenues in the first quarter of 2020 included$35 million from a positive hedging impact, which are included in "Other" in the table below. See note 8d to our consolidated financial statements. The data presented for prior periods have been revised to reflect a revision in the presentation of net revenues and cost of sales in the consolidated financial statements. See note 1c to our consolidated financial statements for additional information. Revenues by Major Products and Activities The following table presents revenues for our International Markets segment by major products and activities for the three months endedMarch 31, 2020 and 2019: Three months ended Percentage March 31, Change 2020 2019 2019-2020 (U.S. $ in millions) Generic products$ 449 $ 441 2 % COPAXONE 12 13 (11 %) Other 104 67 57 % Total$ 565 $ 521 8 %
* The data presented for prior periods have been revised to reflect a revision in
the presentation of net revenues and cost of sales in the consolidated
financial statements. See note 1c to our consolidated financial statements for
additional information.
50-------------------------------------------------------------------------------- Table of Contents Generic products revenues in our International Markets segment in the first quarter of 2020, which include OTC products, increased by 2% to$449 million , compared to the first quarter of 2019. In local currency terms, revenues increased by 6%, mainly due to higher sales inLatin America ,Asia-Pacific ,Ukraine andRussia , partially offset by lower sales inJapan resulting from generic competition to off-patented products. COPAXONE revenues in our International Markets segment in the first quarter of 2020 decreased by 11% to$12 million , compared to$13 million in the first quarter of 2019. In local currency terms, revenues decreased by 1%. International Markets Gross Profit Gross profit from our International Markets segment in the first quarter of 2020 was$305 million , an increase of 13% compared to$269 million in the first quarter of 2019. Gross profit margin for our International Markets segment in the first quarter of 2020 increased to 54.0%, compared to 51.7% in the first quarter of 2019. This increase was mainly due to higher sales and the positive impact from the hedging activity discussed above. International Markets R&D Expenses R&D expenses relating to our International Markets segment in the first quarter of 2020 were$15 million , a decrease of 31% compared to$22 million in the first quarter of 2019. For a description of our R&D expenses in the first quarter of 2020, see "-Teva Consolidated Results-Research and Development (R&D) Expenses" below. International Markets S&M Expenses S&M expenses relating to our International Markets segment in the first quarter of 2020 were$106 million , a decrease of 8% compared to$115 million in the first quarter of 2019. This decrease was mainly due to a decline in distribution fees paid inJapan . International Markets G&A Expenses G&A expenses relating to our International Markets segment in the first quarter of 2020 were$34 million , a decrease of 5% compared to$36 million in the first quarter of 2019. International Markets Profit Profit of our International Markets segment consists of gross profit less R&D expenses, S&M expenses, G&A expenses and any other income related to this segment. Segment profit does not include amortization and certain other items. Profit from our International Markets segment in the first quarter of 2020 was$156 million , an increase of 61%, compared to$97 million in the first quarter of 2019. This increase was mainly due to higher sales and the positive impact from the hedging activity discussed above. Other Activities We have other sources of revenues, primarily the sale of APIs to third parties, certain contract manufacturing services and an out-licensing platform offering a portfolio of products to other pharmaceutical companies through our affiliateMedis . Our other activities are not included in ourNorth America ,Europe or International Markets segments described above. Our revenues from other activities in the first quarter of 2020 were$307 million , a decrease of 3% compared to the first quarter of 2019. In local currency terms, revenues decreased by 2%. API sales to third parties in the first quarter of 2020 were$177 million , a decrease of 5%, in bothU.S. dollar and local currency terms, compared to the first quarter of 2019. This decrease was mainly due to timing of certain orders and divestment of certain activities. Teva Consolidated Results The data presented with respect to revenues, gross profit, R&D expenses, S&M expenses, G&A expenses and operating income (loss) for prior periods have been revised to reflect a revision in the presentation of net revenues and cost of sales in the consolidated financial statements. See note 1c to our consolidated financial statements for additional information. Revenues Revenues in the first quarter of 2020 were$4,357 million , an increase of 5% in bothU.S. dollar and local currency terms, compared to the first quarter of 2019. This increase was mainly due to higher revenues from generics and OTC sales inEurope , higher revenues from AUSTEDO and Anda inNorth America and higher revenues from our International Markets segment, partially offset by lower revenues from generics in theU.S. and lower revenues from QVAR and BENDEKA/TREANDA inNorth America . See "-North America Revenues," "-Europe Revenues," "-International Markets Revenues" and "-Other Activities" above. Exchange rate movements during the first quarter of 2020, net of hedging, negatively impacted revenues by$3 million compared to the first quarter of 2019. See note 8d to our consolidated financial statements. 51 -------------------------------------------------------------------------------- Table of Contents Gross Profit Gross profit in the first quarter of 2020 was$2,063 million , an increase of 11% compared to the first quarter of 2019. This increase was mainly a result of the factors discussed above under "-North America Gross Profit," "-Europe Gross Profit" and "-International Markets Gross Profit." Gross profit as a percentage of revenues was 47.3% in the first quarter of 2020, compared to 44.7% in the first quarter of 2019. The increase in gross profit as a percentage of revenues was mainly due to higher profitability in each of our three segments, primarily higher revenues from AUSTEDO, a favorable mix of generic products inNorth America , a favorable mix of generic products inEurope and International Markets and a positive impact from our hedging activity, partially offset by higher revenues from Anda, which has lower profitability. Research and Development (R&D) Expenses Net R&D expenses in the first quarter of 2020 were$221 million , a decrease of 15% compared to the first quarter of 2019. Our R&D activities for generic products in each of our segments include both (i) direct expenses relating to product formulation, analytical method development, stability testing, management of bioequivalence and other clinical studies and regulatory filings; and (ii) indirect expenses, such as costs of internal administration, infrastructure and personnel. Our R&D activities for specialty products in each of our segments include costs of discovery research, preclinical development, early- and late-clinical development and drug formulation, clinical trials and product registration costs. These expenditures are reported net of contributions received from collaboration partners. Our spending takes place throughout the development process, including (i) early-stage projects in both discovery and preclinical phases; (ii) middle-stage projects in clinical programs up to phase 3; (iii) late-stage projects in phase 3 programs, including where a new drug application is currently pending approval; (iv) life cycle management and post-approval studies for marketed products; and (v) indirect expenses that support our overall specialty R&D efforts but are not allocated by product or to specific R&D projects, such as the costs of internal administration, infrastructure and personnel. In the first quarter of 2020, our R&D expenses related primarily to specialty product candidates in the pain, migraine, headache and respiratory therapeutic areas, with additional activities in selected other areas and generic products. Our lower R&D expenses in the first quarter of 2020, compared to the first quarter of 2019, resulted primarily from the life cycle and stage of various projects. R&D expenses as a percentage of revenues were 5.1% in the first quarter of 2020, compared to 6.3% in the first quarter of 2019. Selling and Marketing (S&M) Expenses S&M expenses in the first quarter of 2020 were$613 million , a decrease of 5% compared to the first quarter of 2019. Our S&M expenses were primarily the result of the factors discussed above under "-North America Segment- S&M Expenses," "-Europe Segment- S&M Expenses" and "-International Markets Segment- S&M Expenses." S&M expenses as a percentage of revenues were 14.1% in the first quarter of 2020, compared to 15.6% in the first quarter of 2019. General and Administrative (G&A) Expenses G&A expenses in the first quarter of 2020 were$304 million , an increase of 4% compared to the first quarter of 2019. G&A expenses as a percentage of revenues were 7.0% in the first quarter of 2020, flat compared to the first quarter of 2019. Intangible Asset Impairments We recorded expenses of$649 million for identifiable intangible asset impairments in the first quarter of 2020, compared to expenses of$469 million in the first quarter of 2019. See note 5 to our consolidated financial statements. Goodwill Impairment No goodwill impairments were recorded in the first quarters of both 2020 and 2019. See note 6 to our consolidated financial statements. 52 -------------------------------------------------------------------------------- Table of Contents Other Asset Impairments, Restructuring and Other Items We recorded expenses of$121 million for other asset impairments, restructuring and other items in the first quarter of 2020, compared to expenses of$1 million in the first quarter of 2019. See note 12 to our consolidated financial statements. Significant regulatory events InJuly 2018 , the FDA completed an inspection of our manufacturing plant inDavie, Florida inthe United States , and issued a Form FDA-483 to the site. InOctober 2018 , the FDA notified us that the inspection of the site is classified as "official action indicated" (OAI). OnFebruary 5, 2019 , we received a warning letter from the FDA that contained four additional enumerated concerns related to production, quality control and investigations at this site. We have been working diligently to address theFDA's concerns in a manner consistent with current good manufacturing practice (cGMP) requirements as quickly and as thoroughly as possible. An FDA follow up inspection occurred inJanuary 2020 , resulting in some follow up findings, and we received a letter from the FDA datedApril 24, 2020 notifying us that the site continues to be classified as OAI. If we are unable to remediate the findings to theFDA's satisfaction, we may face additional consequences. These would potentially include delays in FDA approval for future products from the site, financial implications due to loss of revenues, impairments, inventory write offs, customer penalties, idle capacity charges, costs of additional remediation and possible FDA enforcement action. We expect to generate approximately$230 million in revenues from this site in 2020, assuming remediation or enforcement does not cause any unscheduled slowdown or stoppage at the facility, however delays in FDA approvals of future products from the site may occur. InJuly 2018 , we announced the voluntary recall of valsartan and certain combination valsartan medicines in various countries due to the detection of trace amounts of a previously unknown nitrosamine impurity called NDMA found in valsartan API supplied to us byZhejiang Huahai Pharmaceuticals Co. Ltd. ("Huahai"). SinceJuly 2018 , we have been actively engaged with regulatory agency requests around the world in reviewing our sartan and other products to determine whether NDMA and/or other related nitrosamine impurities are present in specific products. Where necessary, we have initiated additional voluntary recalls. The aggregate direct impact of the sartan recalls on our 2018 and 2019 financial statements was$54 million , primarily related to inventory write-downs and returns. As a result of this loss, we initiated negotiations with Huahai and inDecember 2019 , we reached a settlement with Huahai resolving our claims related to certain sartan API supplied by Huahai to Teva. Under the settlement agreement, Huahai agreed to compensate Teva for some of the direct losses suffered by Teva and provide Teva prospective cost reductions for API. The settlement does not release Huahai from liability for any losses we may incur as a result of third party personal injury or product liability claims relating to the sartan API at issue. In addition, multiple lawsuits have been filed in connection with this matter, which may lead to additional customer penalties, impairments and litigation costs. We expect additional expenses and loss of revenues and profits in connection with this matter going forward. Restructuring In the first quarter of 2020, we recorded$39 million of restructuring expenses, compared to$32 million in the first quarter of 2019. The expenses in the first quarter of 2020 were primarily related to residual expenses of the restructuring plan announced in 2017. Legal Settlements and Loss Contingencies In the first quarter of 2020, we recorded an income of$25 million in legal settlements and loss contingencies, compared to an expense of$57 million in the first quarter of 2019. The income in the first quarter of 2020 was mainly due to a settlement of an action brought against the sellers ofAuden McKenzie (an acquisition made by Actavis Generics). Other Income Other income in the first quarter of 2020 was$13 million , compared to$6 million in the first quarter of 2019. Operating Income (Loss) Operating income was$191 million in the first quarter of 2020, compared to operating income of$134 million in the first quarter of 2019. Operating income as a percentage of revenues was 4.4% in the first quarter of 2020, compared to 3.2% in the first quarter of 2019. This increase was mainly due to higher profit in ourEurope , International Markets andNorth America segments and income from legal settlements (compared to an expense in the first quarter of 2019), partially offset by higher intangible asset impairments and higher other assets impairments, restructuring and other items in the first quarter of 2020. Financial Expenses, Net Financial expenses were$224 million in the first quarter of 2020, compared to$218 million in the first quarter of 2019. Financial expenses in the first quarter of 2020 and 2019 were mainly comprised of interest expenses of$241 million and$227 million , respectively. 53 -------------------------------------------------------------------------------- Table of Contents The following table presents a reconciliation of our segment profits to our consolidated operating income (loss) and to consolidated income (loss) before income taxes for the three months endedMarch 31, 2020 and 2019: Three months ended March 31, 2020 2019 (U.S. $ in millions) North America profit$ 550 $ 498 Europe profit 502 403 International Markets profit 156 97 Total reportable segments profit 1,208 998 Profit of other activities 36 21 Total segments profit 1,244 1,019 Amounts not allocated to segments: Amortization 258
283
Other assets impairments, restructuring and other items 121
1
Intangible asset impairments 649
469
Legal settlements and loss contingencies (25 )
57
Other unallocated amounts 49
75
Consolidated operating income (loss) 191 134 Financial expenses, net 224 218 Consolidated income (loss) before income taxes$ (33 ) $ (84 ) Tax Rate In the first quarter of 2020, we recognized a tax benefit of$59 million , on pre-tax loss of$33 million . In the first quarter of 2019, we recognized a tax expense of$9 million , on pre-tax loss of$84 million . Our tax rate for the first quarter of 2020 was mainly affected by impairments in jurisdictions in which tax rates are higher than Teva's average tax rate on its ongoing business operations. The statutory Israeli corporate tax rate is 23% in 2020. Our tax rate differs from the Israeli statutory tax rate, mainly due to generation of profits in various jurisdictions in which tax rates are different than the Israeli tax rate, tax benefits inIsrael and other countries, as well as infrequent or nonrecurring items. Share In Losses (Income) of Associated Companies, Net Share in losses of associated companies, net in the first quarter of 2020 was$1 million , compared to$4 million in the first quarter of 2019. Net Income (Loss) Attributable toTeva Net income attributable to Teva and net income attributable to ordinary shareholders were$69 million in the first quarter of 2020, compared to net loss of$105 million in the first quarter of 2019. Diluted Shares Outstanding and Earnings (Loss) per Share The weighted average diluted shares outstanding used for the fully diluted share calculation for the three months endedMarch 31, 2020 and 2019 were 1,096 million and 1,090 million shares, respectively. In computing diluted earnings per share for the three months endedMarch 31, 2020 , basic earnings per share were adjusted to take into account the potential dilution that could occur upon the exercise of options and non-vested RSUs granted under employee stock compensation plans, using the treasury stock method. No account was taken of the potential dilution by the convertible senior debentures, since they had an anti-dilutive effect on earnings per share. In computing diluted loss per share for the three months endedMarch 31, 2019 , no account was taken of the potential dilution by the assumed exercise of employee stock options and non-vested RSUs granted under employee stock compensation plans, and convertible senior debentures, since they had an anti-dilutive effect on loss per share. 54 -------------------------------------------------------------------------------- Table of Contents Diluted earnings per share were$0.06 in the first quarter of 2020, compared to diluted loss per share of$0.10 in the first quarter of 2019. Share Count for Market Capitalization We calculate share amounts using the outstanding number of shares (i.e., excluding treasury shares) plus shares that would be outstanding upon the exercise of options and vesting of RSUs and performance share units ("PSUs") and the conversion of our convertible senior debentures, in each case, at period end. As ofMarch 31, 2020 and 2019, the fully diluted share count for purposes of calculating our market capitalization was approximately 1,118 million and 1,107 million, respectively. Impact of Currency Fluctuations on Results of Operations In the first quarter of 2020, approximately 50% of our revenues were denominated in currencies other than theU.S. dollar. Because our results are reported inU.S. dollars, we are subject to significant foreign currency risks. Accordingly, changes in the rate of exchange between theU.S. dollar and the local currencies in the markets in which we operate (primarily the euro, British pound, Japanese yen, new Israeli shekel, Canadian dollar and Russian ruble) impact our results. During the first quarter of 2020, the following main currencies relevant to our operations decreased in value against theU.S. dollar (each on a quarterly average compared to quarterly average basis): Argentinian peso by 37%, euro by 3% and British pound by 2%. The following main currencies relevant to our operations increased in value against theU.S. dollar: new Israeli shekel by 4% and Japanese yen by 1%. As a result, exchange rate movements during the first quarter of 2020, net of hedging, negatively impacted overall revenues by$3 million and positively impacted our operating income by$27 million , in comparison with the first quarter of 2019. In the first quarter of 2020, the positive hedging impact recognized under revenues was$60 million , partially offset by a$5 million negative impact recognized under cost of sales. Hedging transactions against future projected revenues and expenses are recognized on the balance sheet at their fair value on a quarterly basis, while the foreign exchange impact on the underlying revenues and expenses may occur in subsequent quarters. See note 8d to our consolidated financial statements. Commencing in the third quarter of 2018, the cumulative inflation inArgentina exceeded 100% or more over a three-year period. Although this triggered highly inflationary accounting treatment, it did not have a material impact on our results of operations. Liquidity and Capital Resources Total balance sheet assets were$55,330 million as ofMarch 31, 2020 , compared to$57,470 million as ofDecember 31, 2019 . Our working capital balance, which includes accounts receivables net of SR&A, inventories, prepaid expenses and other current assets, accounts payables, employee-related obligations, accrued expenses and other current liabilities, was$302 million as ofMarch 31, 2020 , compared to$74 million as ofDecember 31, 2019 . Employee-related obligations, as ofMarch 31, 2020 , were$540 million , compared to$693 million as ofDecember 31, 2019 . The decrease in the first quarter of 2020 was mainly due to performance incentive payments to employees for 2019. Cash investment in property, plant and equipment in the first quarter of 2020 was approximately$128 million , compared to$119 million in the fourth quarter of 2019. Depreciation in the first quarter of 2020 was$141 million , compared to$153 million in the fourth quarter of 2019. Cash and cash equivalents and short-term and long-term investments as ofMarch 31, 2020 were$1,850 million , compared to$2,033 million as ofDecember 31, 2019 . The decrease in the first quarter of 2020 was mainly due to repayment at maturity of our$700 million 2.25% senior note inMarch 2020 , partially offset by cash generated during the quarter. Our cash on hand that is not used for ongoing operations is generally invested in bank deposits as well as liquid securities that bear fixed and floating rates. Our principal sources of short-term liquidity are our cash on hand, existing cash investments, liquid securities and available credit facilities, primarily our$2.3 billion unsecured syndicated revolving credit facility entered into inApril 2019 ("RCF"). The RCF agreement provides for two separate tranches, a$1.15 billion tranche A and a$1.15 billion tranche B. Loans and letters of credit will be available from time to time under each tranche for Teva's general corporate purposes. Tranche A has a maturity date ofApril 8, 2022 , with two one-year extension options, of which$1.0 billion were extended toApril 8, 2023 . Tranche B has a maturity date ofApril 8, 2024 . 55 -------------------------------------------------------------------------------- Table of Contents The RCF contains certain covenants, including certain limitations on incurring liens and indebtedness and maintenance of certain financial ratios, including the requirement to maintain compliance with a net debt to EBITDA ratio, which becomes more restrictive over time. The net debt to EBITDA ratio limit is 6.0x in the first and second quarters of 2020 and declines to 5.75x in the third and fourth quarters of 2020, and continues to gradually decline over the remaining term of the RCF. The RCF can be used for general corporate purposes, including repaying existing debt. As ofMarch 31, 2020 , no amounts were outstanding under the RCF. Based on current and forecasted results, we expect that we will not exceed the financial covenant thresholds set forth in the RCF within one year from the date the financial statements are issued. Under specified circumstances, including non-compliance with any of the covenants described above and the unavailability of any waiver, amendment or other modification thereto, we will not be able to borrow under the RCF. Additionally, violations of the covenants, under the above-mentioned circumstances, would result in an event of default in all borrowings under the RCF and, when greater than a specified threshold amount as set forth in each series of senior notes is outstanding, could lead to an event of default under our senior notes due to cross acceleration provisions. We expect that we will continue to have sufficient cash resources to support our debt service payments and all other financial obligations within one year from the date that the financial statements are issued. Debt Balance and Movements As ofMarch 31, 2020 , our debt was$26,103 million , compared to$26,908 million as ofDecember 31, 2019 . This decrease was mainly due to repayment at maturity of our$700 million 2.25% senior notes, as well as exchange rate fluctuations. InMarch 2020 , we repaid at maturity our$700 million 2.25% senior notes. Our debt as ofMarch 31, 2020 was effectively denominated in the following currencies: 64% inU.S. dollars, 33% in euros and 3% in Swiss francs. The portion of total debt classified as short-term as ofMarch 31, 2020 was 6%, compared to 9% as ofDecember 31, 2019 . Our financial leverage was 64% as ofMarch 31, 2020 , similar to the financial leverage as ofDecember 31, 2019 . Our average debt maturity was approximately 6.6 years as ofMarch 31, 2020 , compared to 6.4 years as ofDecember 31, 2019 . Total Equity Total equity was$14,588 million as ofMarch 31, 2020 , compared to$15,063 million as ofDecember 31, 2019 . This decrease was mainly due to a negative impact of$560 million from exchange rate fluctuations. Exchange rate fluctuations affected our balance sheet, as approximately 36% of our net assets in the first quarter of 2020 (including both non-monetary and monetary assets) were in currencies other than theU.S. dollar. When compared toDecember 31, 2019 , changes in currency rates had a negative impact of$560 million on our equity as ofMarch 31, 2020 , mainly due to the changes in value against theU.S. dollar of: the Mexican peso by 26%, the Russian ruble by 28%, the Canadian dollar by 8%, the Polish zloty by 8%, the British pound by 6%, Indian rupee by 6%, the Chilean peso by 4%, Croatian kuna by 4% and the euro by 2%. All comparisons are on a quarter-end to quarter-end basis. Cash Flow Cash flow generated from operating activities during the first quarter of 2020 was$305 million , compared to$112 million in the first quarter of 2019. The increase in the first quarter of 2020 was mainly due to higher operating profit in each of our three segments, as well as lower performance incentive payments to employees paid in the first quarter of 2020 compared to the amounts paid in the first quarter of 2019. During the first quarter of 2020, we generated free cash flow of$551 million , which we define as comprising$305 million in cash flow generated from operating activities,$368 million in beneficial interest collected in exchange for securitized accounts receivables and$6 million in proceeds from sale of property, plant and equipment and intangible assets, partially offset by$128 million in cash used for capital investment. During the first quarter of 2019, we generated free cash flow of$360 million , comprising$112 million in cash flow generated from operating activities,$362 million in beneficial interest collected in exchange for securitized accounts receivables and$11 million in proceeds from sale of property, plant and equipment and intangible assets, partially offset by$125 million in cash used for capital investment. The increase in the first quarter of 2020 resulted mainly from higher cash flow generated from operating activities, including significant consumption of inventories. Dividends We have not paid dividends on our ordinary shares or ADSs sinceDecember 2017 . 56 -------------------------------------------------------------------------------- Table of Contents Commitments In addition to financing obligations under short-term debt and long-term senior notes and loans, debentures and convertible debentures, our major contractual obligations and commercial commitments include leases, royalty payments, contingent payments pursuant to acquisition agreements and participation in joint ventures associated with R&D activities. InSeptember 2016 , we entered into an agreement to develop and commercialize Regeneron's pain medication product, fasinumab. We paid Regeneron$250 million upfront and will share equally with Regeneron in the global commercial benefits of this product, as well as ongoing associated R&D costs of approximately$1.0 billion . The agreement stipulates additional development milestone payments to Regeneron, as well as future royalties. InOctober 2016 , we entered into an exclusive partnership with Celltrion to commercialize two of Celltrion's biosimilar products in development for theU.S. and Canadian markets. We paid Celltrion$160 million , of which up to$60 million is refundable or creditable. We will share the profit from the commercialization of these products with Celltrion. These two products, TRUXIMA and HERZUMA, were approved by the FDA in November andDecember 2018 , respectively, and were launched inthe United States inNovember 2019 andMarch 2020 , respectively. InSeptember 2017 , we entered into a partnership agreement with Nuvelution for development of AUSTEDO for the treatment of Tourette syndrome in pediatric patients inthe United States . There are no further plans in this indication following clinical trial results received inFebruary 2020 , which failed to meet their primary endpoints. We are committed to pay royalties to owners of know-how, partners in alliances and certain other arrangements, and to parties that financed R&D at a wide range of rates as a percentage of sales of certain products, as defined in the agreements. In some cases, the royalty period is not defined; in other cases, royalties will be paid over various periods not exceeding 20 years. In connection with certain development, supply and marketing, and research and collaboration or services agreements, we are required to indemnify, in unspecified amounts, the parties to such agreements against third-party claims relating to (i) infringement or violation of intellectual property or other rights of such third party; or (ii) damages to users of the related products. Except as described in our financial statements, we are not aware of any material pending action that may result in the counterparties to these agreements claiming such indemnification. 2020 Aggregated Contractual Obligations There have not been any material changes in our assessment of material contractual obligations and commitments as set forth in Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Supplemental Non-GAAP Income Data We utilize certain non-GAAP financial measures to evaluate performance, in conjunction with other performance metrics. The following are examples of how we utilize the non-GAAP measures:
• our management and Board of Directors use the
non-GAAP
measures to evaluate our operational performance, to compare against work
plans and budgets, and ultimately to evaluate the performance of
management;
• our annual budgets are prepared on a
non-GAAP
basis; and
• senior management's annual compensation is derived, in part, using these
non-GAAP
measures. While qualitative factors and judgment also affect annual
bonuses, the principal quantitative element in the determination of suchbonuses is performance targets tied to the work plan, which is based on
the
non-GAAP
presentation set forth below.
Non-GAAP
financial measures have no standardized meaning and accordingly have limitations in their usefulness to investors. We provide such non-GAAP data because management believes that such data provide useful information to investors. However, investors are cautioned that, unlike financial measures prepared in accordance withU.S. GAAP, non-GAAP measures may not be comparable with the calculation of similar measures for other companies. These non-GAAP financial measures are presented solely to permit investors to more fully understand how management assesses our performance. The limitations of using non-GAAP financial measures as performance measures are that they provide a view of our results of operations without including all events during a period and may not provide a comparable view of our performance to other companies in the pharmaceutical industry. Investors should consider non-GAAP financial measures in addition to, and not as replacements for, or superior to, measures of financial performance prepared in accordance with GAAP. In arriving at our non-GAAP presentation, we exclude items that either have a non-recurring impact on the income statement or which, in the judgment of our management, are items that, either as a result of their nature or size, could, were they not singled out, potentially cause investors to extrapolate future performance from an improper base. In addition, we also exclude equity compensation expenses to facilitate a better understanding of our financial results, since we believe that such exclusion is important for understanding the trends in our financial results and that these expenses do not affect our business operations. While not all inclusive, examples of these items include: 57
--------------------------------------------------------------------------------
Table of Contents • amortization of purchased intangible assets;
• legal settlements and/or loss contingencies, due to the difficulty in
predicting their timing and scope;
• impairments of long-lived assets, including intangibles, property, plant
and equipment and goodwill;
• restructuring expenses, including severance, retention costs, contractcancellation costs and certain accelerated depreciation expenses primarily
related to the rationalization of our plants or to certain other strategic
activities, such as the realignment of R&D focus or other similar
activities;
• acquisition- or divestment- related items, including changes in contingent
consideration, integration costs, banker and other professional fees,
inventory
step-up
and
in-process
R&D acquired in development arrangements;
• expenses related to our equity compensation;
• significant
one-time
financing costs and devaluation losses;
• unusual tax items;
• other awards or settlement amounts, either paid or received;
• other exceptional items that we believe are sufficiently large that their
exclusion is important to facilitate an understanding of trends in our
financial results, such as impacts due to changes in accounting,
significant costs for remediation of plants, such as inventory write-offs
or related consulting costs, or other unusual events; and
• corresponding tax effects of the foregoing items.
The following tables present supplemental
non-GAAP
data, in U.S. dollar, which we believe facilitates an understanding of the
factors affecting our business. In these tables, we exclude the following
amounts:
58
--------------------------------------------------------------------------------
Table of Contents
The following table presents the GAAP measures, related
non-GAAP
adjustments and the corresponding
non-GAAP
amounts for the applicable periods:
Three Months Ended March 31, 2020
U.S. $ and shares in millions (except per share amounts)
Excluded for
non-GAAP
measurement
Amortization of Legal Costs related
purchased settlements and Impairment Other to regulatory Other
intangible loss of long lived R&D Restructuring actions taken Equity Contingent non- Other
GAAP assets contingencies assets expenses costs in facilities compensation consideration GAAP items items Non-GAAP
Cost of sales 2,294 223 4 6 15 2,046
R&D expenses 221 (4 ) 5 - 221
S&M expenses 613 35 9 - 570
G&A expenses 304 10 4 290
Other (income) expense (13 ) 0 (13 )
Legal settlements and loss contingencies (25 ) (25 ) -
Other assets impairments, restructuring and other items 121 75 39 6 1 -
Intangible assets impairments 649 649 -
Financial expenses, net 224 11 213
Income taxes (59 ) (234 ) 175
Share in losses of associated companies - net 1 - 1
Net income (loss) attributable to
non-controlling
interests (44 ) (63 ) 20
Total reconciled items 258 (25 ) 724 (4 ) 39 4 30 6 20 (286 )
EPS - Basic 0.06 0.70 0.76
EPS - Diluted 0.06 0.70 0.76
The
non-GAAP
diluted weighted average number of shares was 1,096 million for the three months
ended
59--------------------------------------------------------------------------------
Table of Contents
Three Months Ended March 31, 2019
U.S. $ and shares in millions (except per share amounts)
Excluded for
non-GAAP
measurement
Amortization Legal Acquisition, Other
of purchased settlements Impairment integration Costs related to non-
intangible and loss of long lived and related Restructuring regulatory actions Equity Contingent GAAP Other Corresponding Unusual Non-
GAAP assets contingencies assets expenses costs taken in facilities compensation consideration items items tax effect tax item* GAAP
Cost of sales** 2,293 248 4 7 35 1,999
R&D expenses 261 6 - 255
S&M expenses 648 35 10 602
G&A expenses 292 12 - 280
Other (income) expense (6 ) (6 )
Legal settlements and loss contingencies 57 57 -
Other assets impairments, restructuring and other items 1 20 2 32 (71 ) 19 -
Intangible assets impairments 469 469 -
Financial expenses, net 218 (2 ) 220
Income taxes 9 (177 ) 61 125
Share in losses of associated companies - net 4 - 4
Net income (loss) attributable to
non-controlling
interests 8 (8 ) 16
Total reconciled items 283 57 489 2 32 4 34 (71 ) 54 (10 ) (177 ) 61
EPS - Basic (0.10 ) 0.70 0.60
EPS - Diluted (0.10 ) 0.70 0.60
* Interest disallowance as a result of the
** The data presented for prior periods have been revised to reflect a revision
in the presentation of net revenues and cost of sales in the consolidated
financial statements. See note 1c to our consolidated financial statements for
additional information. The
non-GAAP
diluted weighted average number of shares was 1,093 million for the three months
ended
60--------------------------------------------------------------------------------
Table of Contents Non-GAAP Tax Rate Non-GAAP income taxes for the first quarter of 2020 were$175 million or 17%, on pre-tax non-GAAP income of$1,030 million . Non-GAAP income taxes in the first quarter of 2019 were$125 million , or 16%, on pre-tax non-GAAP income of$799 million . Our non-GAAP tax rate for the first quarter of 2020 was mainly affected by the mix of products we sold and lower interest expense disallowance compared to the first quarter of 2019. We expect our annual non-GAAP tax rate for 2020 to be 17%-18%, slightly lower than our non-GAAP tax rate for 2019, which was 18%. This is due to lower amounts of interest expense disallowance and other changes to tax positions and deductions. Off-Balance Sheet Arrangements Except for securitization transactions, which are disclosed in note 10(f) to our consolidated financial statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , we do not have any material off-balance sheet arrangements. Critical Accounting Policies For a summary of our significant accounting policies, see note 1 to our consolidated financial statements and "Critical Accounting Policies" included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Recently Issued Accounting Pronouncements See note 1 to our consolidated financial statements.
© Edgar Online, source
