Teva Reports Second Quarter 2017 Financial Results

Published: Aug 03, 2017

JERUSALEM--(BUSINESS WIRE)--Teva Pharmaceutical Industries Ltd. (NYSE: TEVA, TASE: TEVA) today reported results for the quarter ended June 30, 2017.

“Second quarter results were lower than we anticipated due to the performance of our U.S. Generics business and the continued deterioration in Venezuela. These factors also led to a lowering of our outlook for the remainder of the year. All of us at Teva understand the frustration and disappointment of our shareholders in light of these results,” stated Dr. Yitzhak Peterburg, Interim President and CEO. “In our U.S. Generics business, we experienced accelerated price erosion and decreased volume mainly due to customer consolidation, greater competition as a result of an increase in generic drug approvals by the U.S. FDA, and some new product launches that were either delayed or subjected to more competition.”

Dr. Peterburg continued, “Given the current environment, we have had to take swift and decisive actions. We are focused on executing meaningful cost reductions, rationalizing our assets and maximizing their value, actively pursuing divestiture opportunities and strengthening our balance sheet. We will continue to take action to aggressively confront our challenges.”

Dr. Peterburg concluded, “The other parts of our business are performing well and in line with our expectations. In our Specialty business, we have achieved several very significant milestones, including the positive phase III results for our anti-CGRP asset fremanuzemab in both chronic and episodic migraine, and the approval and subsequent launch of Austedo™ in Huntington Disease and its pending approval in Tardive Dyskinesia. The FDA has also accepted the Biologics License Applications that Teva has submitted for review with its partner, Celltrion, Inc., for biosimilar versions of both Rituxan® and Herceptin®. In our Generics business, our deep R&D capabilities and strong pipeline of new products in the U.S. where we have more than 300 ANDAs under review at the FDA, of which more than 100 are first-to-file, and our broad geographical footprint, will help us weather the current conditions in the U.S. market.”

Second Quarter 2017 Results

Revenues in the second quarter of 2017 were $5.7 billion, up 13% compared to the second quarter of 2016, primarily due to the inclusion of the Actavis Generics business, following the closing of the acquisition on August 2, 2016. Excluding the impact of foreign exchange fluctuations, revenues increased 17%.

Exchange rate differences between the second quarter of 2017 and the second quarter of 2016 reduced revenues by $218 million, GAAP operating income by $62 million and non-GAAP operating income by $56 million.

Adjustments of the exchange rates used for the Venezuelan bolivar resulted in a decrease of $183 million in revenues, a decrease of $47 million in GAAP operating income and a decrease of $38 million in non-GAAP operating income, compared to results in the second quarter of 2016. In light of the political and economic conditions in Venezuela, the changes in revenues and operating profit in Venezuela have been excluded from any discussion of currency effects.

GAAP gross profit was $2.8 billion in the second quarter of 2017, down 2% compared to the second quarter of 2016. GAAP gross profit margin was 49.6% in the second quarter of 2017, compared to 57.1% in the second quarter of 2016. Non-GAAP gross profit was $3.2 billion in the second quarter of 2017, up 2% from the second quarter of 2016. Non-GAAP gross profit margin was 56.8% in the second quarter of 2017, compared to 62.5% in the second quarter of 2016. The decrease in gross profit margin, on both a GAAP and a non-GAAP basis, was the result of the addition of the low-margin Anda distribution business, as well as lower margins in our generic medicines business, as well as higher amortization expenses which impacted our GAAP results only.

Research and Development (R&D) expenses for the second quarter of 2017 amounted to $486 million, up 30% compared to the second quarter of 2016, mainly due to the inclusion of R&D expenses for the Actavis Generics business. R&D expenses excluding equity compensation expenses and purchase of in-process R&D in the second quarter of 2017 were $450 million, or 7.9% of quarterly revenues, compared to $370 million, or 7.3%, in the second quarter of 2016. R&D expenses related to our generic medicines segment were $200 million, an increase of 49% compared to $134 million in the second quarter of 2016, mainly due to the inclusion of R&D expenses for the Actavis Generics business. R&D expenses related to our specialty medicines segment were $250 million, an increase of 6% compared to $235 million in the second quarter of 2016, mainly due to increased expenses for the development of late-stage migraine (fremanezumab) and pain (fasinumab) products.

Selling and Marketing (S&M) expenses in the second quarter of 2017 amounted to $960 million, an increase of 1% compared to the second quarter of 2016. S&M expenses excluding amortization of purchased intangible assets and equity compensation expenses were $906 million, or 15.9% of revenues, in the second quarter of 2017, compared to $898 million, or 17.8% of revenues, in the second quarter of 2016. S&M expenses related to our generic medicines segment were $425 million, an increase of 4% compared to $410 million in the second quarter of 2016, mainly due to the inclusion of the S&M expenses of the Actavis Generics business, partially offset by cost reduction and efficiency measures, as well as a decrease of expenses in Venezuela due to exchange rate adjustments. S&M expenses related to our specialty medicines segment were $439 million, down 8% compared to $478 million in the second quarter of 2016, mainly due to cost reduction and efficiency measures in our commercial operations, aligning with the life cycle of our product portfolio.

General and Administrative (G&A) expenses in the second quarter of 2017 amounted to $272 million, compared to $311 million in the second quarter of 2016. The lower G&A expenses in the second quarter of 2017 were mainly due to income from an upfront payment from Otsuka related to the out-license of fremanezumab in Japan, income related to divestiture of products and income from legal settlements, partially offset by the increased expenses related to the Actavis Generics acquisition. G&A expenses excluding equity compensation expenses and income from certain divestments were $274 million in the second quarter of 2017, or 4.8% of quarterly revenues, compared to $299 million, or 5.9% in the second quarter of 2016.

During the second quarter of 2017, Teva identified certain developments in the U.S. market that caused it to revisit management’s assumptions regarding the market dynamics of the U.S. generics unit. Based on the revised discounted cash flows analysis, the Company recorded a goodwill impairment charge of $6.1 billion related to the U.S. generics reporting unit in the second quarter of 2017.

GAAP operating loss in the second quarter of 2017 was $5.7 billion, compared to operating income of $0.4 billion in the second quarter of 2016. Non-GAAP operating income in the second quarter of 2017 was $1.6 billion, up 1% compared to the second quarter of 2016. Non-GAAP operating margin was 28.1% in the second quarter of 2017 compared to 31.4% in the second quarter of 2016.

EBITDA (non-GAAP operating income - which excludes amortization and certain other items - as well as excluding depreciation expenses) was $1.75 billion in the second quarter of 2017, up 3% compared to $1.7 billion in the second quarter of 2016.

GAAP financial expenses for the second quarter of 2017 were $238 million, compared to $105 million in the second quarter of 2016. Non-GAAP financial expenses were $235 million in the second quarter of 2017, compared to $6 million in the second quarter of 2016. The increase in our financial expenses is due mainly to interest expenses related to the debt raised to finance the acquisition of Actavis Generics, which increased by $151 million in the second quarter of 2017, compared to the second quarter of 2016.

GAAP income taxes for the second quarter of 2017 amounted to a benefit of $22 million. In the second quarter of 2016, income taxes amounted to $29 million, or 11% on pre-tax income of $256 million. Non-GAAP income taxes for the second quarter of 2017 amounted to $230 million on pre-tax non-GAAP income of $1.4 billion, for a quarterly tax rate of 17%. Non-GAAP income taxes in the second quarter of 2016 amounted to $333 million on pre-tax non-GAAP income of $1.6 billion, for a quarterly tax rate of 21%.

GAAP net loss attributable to ordinary shareholders and GAAP diluted EPS loss were $6.0 billion and $5.94, respectively, in the second quarter of 2017, compared to net income attributable to ordinary shareholders of $188 million and diluted EPS of $0.20, in the second quarter of 2016. Non-GAAP net income attributable to ordinary shareholders for calculating diluted EPS and non-GAAP diluted EPS were $1.0 billion and $1.02, respectively, in the second quarter of 2017, compared to $1.2 billion and $1.25 in the second quarter of 2016.

For the second quarter of 2017, the weighted average outstanding shares for the fully diluted earnings per share calculation on both a GAAP and a non-GAAP basis was 1,017 million. For the second quarter of 2016, this was 920 million shares on a GAAP basis, and 979 million shares on a non-GAAP basis. For the three months ended June 30, 2017, no account was taken of the potential dilution resulting from the conversion of the mandatory convertible preferred shares amounting to 59.4 million weighted average shares, since they had an anti-dilutive effect on earnings per share.

As of June 30, 2017, the fully diluted share count for calculating Teva's market capitalization was approximately 1,082 million shares.

Non-GAAP information: Net non-GAAP adjustments in the second quarter of 2017 were $7.1 billion. Non-GAAP net income and non-GAAP EPS for the quarter were adjusted to exclude the following items:

  • A goodwill impairment charge of $6.1 billion related to the U.S. generics reporting unit;
  • Amortization of purchased intangible assets totaling $411 million, of which $367 million is included in cost of goods sold and the remaining $44 million in selling and marketing expenses;
  • Legal settlements and loss contingencies of $324 million;
  • Contingent consideration of $140 million mainly related to Bendeka® royalties;
  • Impairment of long-lived assets of $145 million;
  • Restructuring expenses of $98 million, mainly related to the integration of Actavis Generics and other efficiency measures;
  • Equity compensation expenses of $35 million;
  • Acquisition, integration and related expenses of $33 million;
  • Purchase of in-process R&D of $26 million;
  • Costs related to regulatory actions taken in facilities of $15 million;
  • Other non-GAAP items of $15 million;
  • Minority interest adjustment of negative $20 million; and
  • Corresponding tax benefit of $252 million.

Teva believes that excluding such items facilitates investors' understanding of its business. See the attached tables for a reconciliation of the GAAP results to the adjusted non-GAAP figures. Investors should consider non-GAAP financial measures in addition to, and not as replacement for, or superior to, measures of financial performance prepared in accordance with GAAP.

Cash flow from operations generated during the second quarter of 2017 was $741 million, compared to $963 million in the second quarter of 2016. The decrease was mainly due to a payment of $113 million, made during the quarter, related to the ciprofloxacin settlement, as well as the effect of an $88 million positive impact of inventory balances in the second quarter of 2016, which did not recur in the second quarter of 2017.

Free cash flow, excluding net capital expenditures, was $567 million, compared to $796 million in the second quarter of 2016.

Total balance sheet assets amounted to $86.4 billion as of June 30, 2017, compared to $91.3 billion as of March 31, 2017. The decrease was mainly due to the goodwill impairment charge booked during the quarter.

As of June 30, 2017, our debt was $35.1 billion, compared to $34.6 billion at March 31, 2017. The increase was mainly due to foreign exchange fluctuations of $0.6 billion, partially offset by a repayment in the amount of $0.3 billion of our revolving credit facility and other short term loans. The portion of total debt classified as short-term at June 30, 2017 was 4%.

Total shareholders’ equity was $29.6 billion as of June 30, 2017, compared to $35.7 billion as of March 31, 2017. The decrease was mainly due to $6.0 billion of net loss during the quarter.

Segment Results for the Second Quarter 2017

Beginning in the fourth quarter of 2016, our OTC business, conducted primarily through PGT, is included in our generic medicines segment. This segment also includes chemical and therapeutic equivalents of originator medicines in a variety of dosage forms and our API manufacturing business.

All data presented has been conformed to the new segment structure.

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