Teva Q3 Results Better Than Expected

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Teva

Teva Pharmaceutical Industries Ltd reported third-quarter results that were better than expected by analysts. It also appointed Eli Kalif as Executive Vice President and Chief Financial Officer.

Revenues in the third quarter of 2019 were $4,264 million, a decrease of 6%, or 5% in local currency terms, compared to the third quarter of 2018, mainly due to generic competition to COPAXONE ® , a decline in revenues from BENDEKA ® / TREANDA ® and certain other specialty products in the United States , as well as a decline in revenues in Russia and Japan , partially offset by higher revenues from AUSTEDO ® , AJOVY ® and QVAR ® in the United States .

Exchange rate differences between the third quarter of 2019 and the third quarter of 2018 negatively impacted our revenues and GAAP operating income by $55 million and $19 million , respectively. Our non-GAAP operating income was negatively impacted by $22 million .

GAAP gross profit was $1,830 million in the third quarter of 2019, a decrease of 7% compared to the third quarter of 2018. GAAP gross profit margin was 42.9% in the third quarter of 2019, compared to 43.7% in the third quarter of 2018. Non-GAAP gross profit was $2,103 million in the third quarter of 2019, a decline of 7% compared to the third quarter of 2018. Non-GAAP gross profit margin was 49.3% in the third quarter of 2019, compared to 49.9% in the third quarter of 2018. The decrease in gross profit as a percentage of revenues was mainly due to lower profitability in North America , resulting mainly from a decline in COPAXONE revenues due to generic competition, partially offset by higher profitability in Europe , resulting mainly from lower cost of goods sold related to network optimization.

GAAP Research and Development (R&D) expenses in the third quarter of 2019 were $240 million , a decrease of 23% compared to the third quarter of 2018. Non-GAAP R&D expenses were $242 million , or 5.7% of quarterly revenues, in the third quarter of 2019, compared to $243 million , or 5.4%, in the third quarter of 2018. The decrease in R&D expenses resulted from cost of labor reductions, pipeline optimization and project terminations, partially offset by increased investment in early stage projects.

GAAP Selling and Marketing (S&M) expenses in the third quarter of 2019 were $595 million , a decrease of 15% compared to the third quarter of 2018. Non-GAAP S&M expenses were $551 million , or 12.9% of quarterly revenues, in the third quarter of 2019, compared to $634 million , or 14.0%, in the third quarter of 2018. The decrease was mainly due to cost reduction and efficiency measures as part of the restructuring plan.

GAAP General and Administrative (G&A) expenses in the third quarter of 2019 were $285 million , a decrease of 8% compared to the third quarter of 2018. Non-GAAP G&A expenses were $270 million , or 6.3% of quarterly revenues, in the third quarter of 2019, compared to $284 million , or 6.3%, in the third quarter of 2018. The decrease was mainly due to cost reduction and efficiency measures as part of the restructuring plan.

GAAP other income in the third quarter of 2019 was $14 million , compared to $35 million in the third quarter of 2018. Non-GAAP other income in the third quarter of 2019 was $11 million , compared to $4 million in the third quarter of 2018.

GAAP operating loss in the third quarter of 2019 was $81 million , compared to GAAP operating income of $16 million in the third quarter of 2018. Non-GAAP operating income in the third quarter of 2019 was $1,051 million , a decrease of 5% compared to $1,104 million in the third quarter of 2018. The decrease in non-GAAP operating income was mainly due to lower profits in North America , mainly resulting from a decline in COPAXONE revenues due to generic competition and lower revenues from certain other specialty products in North America , partially offset by cost reductions and efficiency measures as part of the restructuring plan and higher revenues from AUSTEDO.

EBITDA (non-GAAP operating income, which excludes amortization and certain other items, as well as depreciation expenses) was $1,183 million in the third quarter of 2019, a decrease of 6% compared to $1,254 million in the third quarter of 2018.

GAAP financial expenses were $211 million in the third quarter of 2019, compared to $229 million in the third quarter of 2018.

Non-GAAP financial expenses were $208 million in the third quarter of 2019, compared to $236 million in the third quarter of 2018. The decrease in non-GAAP financial expenses was mainly due to lower interest expenses resulting from debt prepayments during the period, as well as gains on our hedging and derivatives activities.

In the third quarter of 2019, we recognized a tax expense of $11 million , on pre-tax loss of $292 million . In the third quarter of 2018, we recognized a tax benefit of $26 million , or 12%, on pre-tax loss of $213 million . Our tax rate for the third quarter of 2019 was mainly affected by impairments, amortization, legal settlements with low corresponding tax effect and interest disallowance in connection with the U.S. Tax Cuts and Jobs Act. Non-GAAP income taxes for the third quarter of 2019 were $183 million , or 22%, on pre-tax non-GAAP income of $843 million . Non-GAAP income taxes in the third quarter of 2018 were $85 million , or 10%, on pre-tax non-GAAP income of $868 million . Our non-GAAP tax rate for the third quarter of 2019 was mainly affected by legal settlements with low corresponding tax effect, interest expense disallowance and other changes to tax positions and deductions.

We expect our annual non-GAAP tax rate for 2019 to be 18%, which is higher than our previous projections and our non-GAAP tax rate for 2018. This is due to legal settlements with low corresponding tax effect, interest expense disallowance and other changes to tax positions and deductions.

GAAP net loss attributable to ordinary shareholders was $314 million in the third quarter of 2019, compared to net loss of $273 million in the third quarter of 2018. Non-GAAP net income attributable to ordinary shareholders and non-GAAP diluted EPS in the third quarter of 2019 were $637 million and $0.58 , respectively, compared to $694 million and $0.68 in the third quarter of 2018. The decrease in non-GAAP net income and EPS in the third quarter of 2019 is mainly due to higher tax expenses and lower operating profit, partially offset by lower finance expenses.

The weighted average diluted shares outstanding used for the fully diluted share calculation for the three months ended September 30, 2019 and 2018 were 1,092 million and 1,018 million shares, respectively. The weighted average outstanding shares for the fully diluted EPS calculation on a non-GAAP basis for the three months ended September 30, 2019 and 2018 were 1,093 million and 1,022 million shares, respectively. The increase was mainly due to the conversion of the mandatory convertible preferred shares to ordinary shares on December 17, 2018 .

As of September 30, 2019 and 2018, the fully diluted share count for purposes of calculating our market capitalization was approximately 1,107 million and 1,111 million shares, respectively.

Non-GAAP information : Net non-GAAP adjustments in the third quarter of 2019 were $951 million . Non-GAAP net income and non-GAAP EPS for the third quarter of 2019 were adjusted to exclude the following items:

Legal settlements and loss contingencies of $468 million , mainly related to the reserve update in connection with the opioids cases;
Amortization of purchased intangible assets amounting to $255 million , of which $220 million is included in cost of goods sold and the remaining $35 million in S&M expenses;
Impairment of long-lived assets of $204 million , comprised mainly of impairment of intangible assets of product rights and IPR&D assets in connection with the Actavis Generics acquisition;
Restructuring expenses of $61 million ;
Contingent consideration expenses of $51 million , mainly related to bendamustine;
Equity compensation expenses of $35 million ;
Minority income of $12 million ;
Other non-GAAP expenses of $61 million ; and
Income tax of $172 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 generated from operating activities during the third quarter of 2019 was $325 million , compared to $421 million in the third quarter of 2018. The decrease in the third quarter of 2019 was mainly due to lower revenues and a reduction in sales reserves associated with the revenue decline.

Free cash flow (cash flow generated from operating activities, net of cash received for capital investments and beneficial interest collected in exchange for securitized trade receivables) was $551 million in the third quarter of 2019, compared to $704 million in the third quarter of 2018. The decrease in free cash flow was mainly due to the reasons mentioned above, as well as higher capital investments during the third quarter of 2019 compared to the third quarter of 2018.

As of September 30, 2019 , our debt was $26,942 million , compared to $28,726 million as of June 30, 2019 . The decrease was mainly due to repayment at maturity of our $1,556 million 1.7% senior notes and exchange rate fluctuations.

Mr. Kåre Schultz , Teva’s President and CEO, said, “During the third quarter, we continued to make significant progress in achieving our 2019 goals. Free cash flow was especially strong in the quarter, totaling $550 million . Our North American generics business continued its steady trend, achieving sales of $914 million , supported by 39 new product launches in the first nine months of 2019, including generic EpiPen ® Jr. Among our branded products, AUSTEDO ® continues to demonstrate consistent growth, and AJOVY ® maintained its U.S. market share and is being introduced in the EU.”

Mr. Schultz added: “We remain on track to achieve our two-year restructuring target of a $3 billion spend base reduction. Looking ahead, we are committed to driving long-term shareholder value by maximizing profits from existing core businesses, increasing sales of new brands and products, executing our biosimilar/biologics strategy, delivering manufacturing efficiencies, and generating strong free cash flow for debt repayment.”

During the first quarter of 2019, we repurchased and canceled approximately $126 million principal amount of our $1,700 million 1.7% senior notes due July 2019 .

During the second quarter of 2019, we repurchased and canceled approximately $18 million principal amount of our $1,574 million 1.7% senior notes due July 2019 .

In July 2019 , we repaid at maturity our $1,556 million 1.7% senior notes.

During the third quarter of 2019 we borrowed $500 million under the RCF and subsequently repaid $400 million of such borrowings. As of September 30, 2019 , $100 million was outstanding under the RCF. As of the date hereof, no amounts are outstanding under the RCF.

As of September 30, 2019 , the portion of total debt classified as “short-term” was 12%, similar to such portion as of June 30, 2019 .

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