Teva Reports Second Quarter 2017 Financial Results

Teva Pharmaceutical reported results for the quarter ended June 30, 2017.

“Second quarter results were lower than we anticipated due to the performance of U.S. Generics business and the continued deterioration in Venezuela. These factors also led to a lowering of outlook for the remainder of the year. All of us at Teva understand the frustration and disappointment of shareholders in light of these results.” Yitzhak Peterburg, Interim President and CEO said. “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.”

Revenues in the second quarter of 2017 were $5.7 billion, up 13 percent 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 percent.

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 percent compared to the second quarter of 2016. GAAP gross profit margin was 49.6 percent in the second quarter of 2017, compared to 57.1 percent in the second quarter of 2016. Non-GAAP gross profit was $3.2 billion in the second quarter of 2017, up 2 percent from the second quarter of 2016. Non-GAAP gross profit margin was 56.8 percent in the second quarter of 2017, compared to 62.5 percent 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 generic medicines business, as well as higher amortization expenses which impacted GAAP results only.

Research and Development (R&D) expenses for the second quarter of 2017 amounted to $486 million, up 30 percent 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 percent of quarterly revenues, compared to $370 million, or 7.3 percent, in the second quarter of 2016. R&D expenses related to generic medicines segment were $200 million, an increase of 49 percent 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 specialty medicines segment were $250 million, an increase of 6 percent 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 percent 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 percent of revenues, in the second quarter of 2017, compared to $898 million, or 17.8 percent of revenues, in the second quarter of 2016. S&M expenses related to generic medicines segment were $425 million, an increase of 4 percent 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 specialty medicines segment were $439 million, down 8 percent compared to $478 million in the second quarter of 2016, mainly due to cost reduction and efficiency measures in commercial operations, aligning with the life cycle of the 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 percent of quarterly revenues, compared to $299 million, or 5.9 percent 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 percent compared to the second quarter of 2016. Non-GAAP operating margin was 28.1 percent in the second quarter of 2017 compared to 31.4 percent 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 percent 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 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 percent 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 percent. 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 percent.

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, 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 revolving credit facility and other short term loans. The portion of total debt classified as short-term at June 30, 2017 was 4 percent.

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.

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

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

Generic medicines revenues in the second quarter of 2017 were $3.1 billion, an increase of 20 percent compared to the second quarter of 2016, reflecting the inclusion of the Actavis Generics business.

Generic revenues consisted of:

• U.S. revenues of $1.3 billion, an increase of 45 percent compared to the second quarter of 2016, mainly due to the inclusion of Actavis Generics.
• European revenues of $957 million, an increase of 24percent, or 28percent in local currency terms, compared to the second quarter of 2016, mainly due to the inclusion of Actavis Generics.
• ROW revenues of $831 million, a decrease of 7 percent compared to the second quarter of 2016. In local currency terms, revenues increased 13percent, mainly due to the inclusion of Actavis Generics.
• OTC revenues (which are included in the market revenues above) were $283 million, up 6 percent compared to $266 million in the second quarter of 2016, mainly due to the inclusion of Actavis Generics, partially offset by lower revenues in Venezuela. In local currency terms, revenues increased 40 percent. PGT’s in-market sales were $301 million in the second quarter of 2017, down 20 percent compared to results in the second quarter of 2016.
• API sales to third parties (which are included in the market revenues above) were $204 million, down 1 percent compared to the second quarter of 2016.

Generic medicines revenues comprised 54 percent of total revenues in the quarter, compared to 51 percent in the second quarter of 2016.

Gross profit of generic medicines segment in the second quarter of 2017 was $1.3 billion, an increase of 15 percent compared to the second quarter of 2016. The higher gross profit was mainly a result of the inclusion of Actavis Generics.

Gross profit margin for generic medicines segment in the second quarter of 2017 decreased to 42.8 percent from 44.9 percent in the second quarter of 2016. The decrease in gross profit margin was due to lower profitability in U.S. and ROW markets, partially offset by improved profitability of European markets.

Generic medicines segment generated profit of $691 million in the second quarter of 2017, an increase of 14 percent compared to the second quarter of 2016. Generic medicines profitability as a percentage of generic medicines revenues was 22.4 percent in the second quarter of 2017, down from 23.6percent in the second quarter of 2016.

Specialty medicines revenues in the second quarter of 2017 were $2.1 billion, down 9percent compared to the second quarter of 2016. U.S. specialty medicines revenues were $1.5 billion, down 13percent compared to the second quarter of 2016. European specialty medicines revenues were $419 million, an increase of 1percent, or 5percent in local currency terms, compared to the second quarter of 2016. ROW specialty revenues were $110 million, up 29 percent, or 33percent in local currency terms, compared to the second quarter of 2016.

Specialty medicines revenues comprised 36 percent of total revenues in the quarter, compared to 45 percent in the second quarter of 2016.

The decrease in specialty medicines revenues compared to the second quarter of 2016 was primarily due to lower sales of CNS and oncology products, partially offset by a payment of $75 million which we received in connection with agreement to sell royalties and other rights in Ninlaro (ixazomib) to a subsidiary of Takeda.

Global revenues of Copaxone (20 mg/mL and 40 mg/mL), the leading multiple sclerosis therapy in the U.S. and globally, were $1.0 billion, a decrease of 10 percent compared to the second quarter of 2016.

Copaxone revenues in the United States, were $843 million, a decrease of 12 percent compared to the second quarter of 2016, mainly due to lower volumes of Copaxone 20 mg/mL as well as negative net pricing effects despite a price increase of 7.9percent for both Copaxone products in January 2017. At the end of the second quarter of 2017, according to June 2017 IMS data, U.S. market shares for the Copaxone products in terms of new and total prescriptions were 26.5 percent and 28.8 percent, respectively. Copaxone 40 mg/mL accounted for over 85 percent of total Copaxone prescriptions in the U.S.

Copaxone revenues outside the United States were $180 million, down 3 percent, compared to the second quarter of 2016. Over 75 percent of European Copaxone prescriptions are now filled with the 40 mg/mL version.

Global Azilect revenues were $34 million, a decrease of 69 percent compared to the second quarter of 2016 following the introduction of generic competition to Azilect in the United States in 2017.

Revenues of respiratory products were $322 million, up 3percent compared to the second quarter of 2016, mainly due to the launches of Braltus and Cinqair/Cinqaero. ProAir revenues in the second quarter of 2017 were $123 million, down 9percent compared to the second quarter of 2016, mainly due to higher positive net pricing effects in the second quarter of 2016, partially offset by higher volumes. QVAR® global revenues were $107 million in the second quarter of 2017, down 8percent compared to the second quarter of 2016, primarily due to negative net pricing effects, partially offset by higher volumes.

Revenues of oncology products were $280 million in the second quarter of 2017, down 16percent compared to the second quarter of 2016. Combined revenues of Treanda and Bendeka were $163 million, down 21 percent compared to the second quarter of 2016, mainly due to higher volumes sold in the second quarter of 2016 as part of the launch promotion activities for Bendeka.

Gross profit of specialty medicines segment was $1.9 billion, a decrease of $127 million compared to the second quarter of 2016, mainly due to the decrease in revenues of specialty medicines. Gross profit margin for specialty medicines segment in the second quarter of 2017 was 89.6 percent, compared to 87.1 percent in the second quarter of 2016. The improvement in profitability is mainly due to the finalization of an ongoing vendor dispute which reduced cost of goods sold in the quarter.

Specialty medicines segment profit was $1.2 billion in the second quarter of 2017, down 8 percent compared to the second quarter of 2016. Specialty medicines profit as a percentage of segment revenues was 56.3 percent in the second quarter of 2017, compared to 55.7percent in the second quarter of 2016.

Other revenues (primarily sales of third-party products for which we act as distributor, mostly in the United States via Anda, contract manufacturing services related to products divested in connection with the Actavis Generics acquisition and other miscellaneous items) were $543 million in the second quarter of 2017, compared to $210 million, in the second quarter of 2016. The increase was mainly related to the inclusion of Anda's revenues beginning in the fourth quarter of 2016.

Revenues from these other activities comprised 10 percent of total revenues in the quarter, compared to 4percent in the second quarter of 2016.

The revised guidance ranges assume no generic competition to Copaxone 40mg in the United Stated in 2017.

These estimates reflect management's current expectations for Teva's performance in 2017. Actual results may vary, whether as a result of exchange rate differences, market conditions or other factors. In addition, the non-GAAP measures exclude the amortization of purchased intangible assets, costs related to certain regulatory actions, inventory step-up, legal settlements and reserves, impairments and related tax effects.

On July 31, 2017, the Board of Directors declared a cash dividend of $0.085 per ordinary share for the second quarter of 2017. For holders of ordinary shares that are traded on the Tel Aviv Stock Exchange, the dividend will be converted into new Israeli shekels based on the official exchange rate as of August 3, 2017. The record date will be August 29, 2017, and the payment date will be September 14, 2017. Tax will be withheld at a rate of 15percent.

On July 31, 2017, the Board of Directors also declared a cash dividend of $17.50 per Mandatory Convertible Preferred Share for the second quarter of 2017. The record date will be September 1, 2017 and the payment date will be September 15, 2017. Tax will be withheld at a rate of 15 percent.