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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM
10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

June 30, 2019
OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number
001-16174

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

(Exact name of registrant as specified in its charter)

Israel Not Applicable
Israel
Not Applicable
(State or other jurisdiction of
 incorporation or organization)
 
(IRS Employer
 Identification Number)
5 Basel Street
,
Petach Tikva
, ISRAEL
 
4951033
(Address of principal executive offices)
 
(Zip code)

+972(3)
914-8171

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange
on which registered
American Depositary Shares, each representing one
Ordinary Share
TEVA
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Yes
  ☒    No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Yes
  ☒    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.

Large accelerated filer
  
Accelerated filer
 
Non-accelerated filer ☐  (Do not check if a smaller reporting company) 
Non-accelerated filer
Smaller reporting company
 
Emerging growth company
 
  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Act).    Yes  
No
  ☒

As of AprilJune 30, 2018,2019, the registrant had 1,018,226,803
1,091,906,300
ordinary shares outstanding.


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Table of Contents
TEVA PHARMACEUTICAL INDUSTRIES LIMITED

INTRODUCTION AND USE OF CERTAIN TERMS

Unless otherwise indicated, all references to the “Company,” “we,” “our” and “Teva” refer to Teva Pharmaceutical Industries Limited and its subsidiaries, and references to “revenues” refer to net revenues. References to “U.S. dollars,” “dollars,” “U.S. $” and “$” are to the lawful currency of the United States of America, and references to “NIS” are to new Israeli shekels. References to “ADS(s)” are to Teva’s American Depositary Share(s). References to “MS” are to multiple sclerosis. Market data, including both sales and share data, is based on information provided by IQVIA (formerly IMS Health Inc.), a provider of market research to the pharmaceutical industry (“IQVIA”), unless otherwise stated. References to “Actavis Generics” are to the generic pharmaceuticals business we purchased from Allergan plc (“Allergan”) on August 2, 2016. References to “P&G” are to The Procter & Gamble Company, and references to “PGT” are to PGT Healthcare, the joint venture we formed with P&G. References to “R&D” are to Research and Development, references to “IPR&D” are to
in-process
R&D, references to “S&M” are to Selling and Marketing and references to “G&A” are to General and Administrative.

Some amounts in this report may not add up due to rounding. All percentages have been calculated using unrounded amounts.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form
10-Q,
and the reports and documents incorporated by reference in this Quarterly Report on Form
10-Q,
may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are based on management’s current beliefs and expectations and are subject to substantial risks and uncertainties, both known and unknown, that could cause our future results, performance or achievements to differ significantly from that expressed or implied by such forward-looking statements. You can identify these forward-looking statements by the use of words such as “should,” “expect,” “anticipate,” “estimate,” “target,” “may,” “project,” “guidance,” “intend,” “plan,” “believe” and other words and terms of similar meaning and expression in connection with any discussion of future operating or financial performance. Important factors that could cause or contribute to such differences include risks relating to:

our ability to successfully compete in the marketplace, including: that we are substantially dependent on our generic products; competition for our specialty products, especially COPAXONE®, our leading medicine, which faces competition from existing and potential additional generic versions and orally-administered alternatives; competition from companies with greater resources and capabilities; efforts of pharmaceutical companies to limit the use of generics, including through legislation and regulations; consolidation of our customer base and commercial alliances among our customers; the increase in the number of competitors targeting generic opportunities and seeking U.S. market exclusivity for generic versions of significant products; price erosion relating to our products, both from competing products and increased regulation; delays in launches of new products and our ability to achieve expected results from investments in our product pipeline; our ability to take advantage of high-value opportunities; the difficulty and expense of obtaining licenses to proprietary technologies; and the effectiveness of our patents and other measures to protect our intellectual property rights;

our ability to successfully compete in the marketplace, including: that we are substantially dependent on our generic products; competition for our specialty products, especially COPAXONE
®
, our leading medicine, which faces competition from existing and potential additional generic versions and orally-administered alternatives; the uncertainty of commercial success of AJOVY
®
or AUSTEDO
®
; competition from companies with greater resources and capabilities; efforts of pharmaceutical companies to limit the use of generics, including through legislation and regulations; consolidation of our customer base and commercial alliances among our customers; the increase in the number of competitors targeting generic opportunities and seeking U.S. market exclusivity for generic versions of significant products; price erosion relating to our products, both from competing products and increased indebtednessregulation; delays in launches of new products and significantly decreased cash on hand,our ability to achieve expected results from investments in our product pipeline; our ability to take advantage of high-value opportunities; the difficulty and expense of obtaining licenses to proprietary technologies; and the effectiveness of our patents and other measures to protect our intellectual property rights;
our substantial indebtedness, which may limit our ability to incur additional indebtedness, engage in additional transactions or make new investments, may result in a further downgrade of our credit ratings; and our inability to raise debt or borrow funds in amounts or on terms that are favorable to us;

our business and operations in general, including: failure to effectively execute our restructuring plan announced in December 2017; uncertainties related to, and failure to achieve, the potential benefits and success of our new senior management team and organizational structure; harm to our pipeline of future products due to the ongoing review of our R&D programs; our ability to develop and commercialize additional pharmaceutical products; potential additional adverse consequences following our resolution with the U.S. government of our FCPA investigation; compliance with sanctions and other trade control laws; manufacturing or quality control problems, which may damage our reputation for quality production and require costly remediation; interruptions in our supply chain; disruptions of our or third party information technology systems or breaches of our data security; the failure to recruit or retain key personnel; variations in intellectual property laws that may adversely affect our ability to manufacture our products; challenges associated with conducting business globally, including adverse effects of political or economic instability, major hostilities or terrorism; significant sales to a limited number of customers in our U.S. market; our ability to successfully bid for suitable acquisition targets or licensing opportunities, or to consummate and integrate acquisitions; implementation of a new enterprise resource planning system that, if deficient, could materially and adversely affect our operations and/or the effectiveness of our internal controls; and our prospects and opportunities for growth if we sell assets;

compliance, regulatory and litigation matters, including: costs and delays resulting from the extensive governmental regulation to which we are subject; the effects of reforms in healthcare regulation and reductions in pharmaceutical pricing, reimbursement and coverage; increased legal and regulatory action in connection with public concern over the abuse of opioid medications in the U.S.; governmental investigations into S&M practices; potential liability for patent infringement; product liability claims; increased government scrutiny of our patent settlement agreements; failure to comply with complex Medicare and Medicaid reporting and payment obligations; and environmental risks;

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

3
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other financial and economic risks, including: our exposure to currency fluctuations and restrictions as well as credit risks; potential impairments of our intangible assets; potential significant increases in tax liabilities; and the effect on our overall effective tax rate of the termination or expiration of governmental programs or tax benefits, or of a change in our business;

and other factors discussed in Item 1A tothis Quarterly Report on Form
10-Q
and in our Annual Report on Form
10-K
for the year ended December 31, 2017.2018, including in the sections captioned “Risk Factors.” Forward-looking statements speak only as of the date on which they are made, and we assume no obligation to update or revise any forward-looking statements or other information contained herein, whether as a result of new information, future events or otherwise. You are cautioned not to put undue reliance on these forward-looking statements.

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PART I — FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

CONSOLIDATED BALANCE SHEETS

(U.S. dollars in millions)

millions, except for share data)

(Unaudited)

   March 31,
2018
  December 31,
2017
 

ASSETS

   

Current assets:

   

Cash and cash equivalents

  $1,418  $963 

Trade receivables

   6,289   7,128 

Inventories

   5,113   4,924 

Prepaid expenses

   1,138   1,100 

Other current assets

   712   701 

Assets held for sale

   17   566 
  

 

 

  

 

 

 

Total current assets

   14,687   15,382 

Deferred income taxes

   463   574 

Othernon-current assets

   832   932 

Property, plant and equipment, net

   7,420   7,673 

Identifiable intangible assets, net

   17,314   17,640 

Goodwill

   28,465   28,414 
  

 

 

  

 

 

 

Total assets

  $69,181  $70,615 
  

 

 

  

 

 

 

LIABILITIES AND EQUITY

   

Current liabilities:

   

Short-term debt

  $1,302  $3,646 

Sales reserves and allowances

   7,410   7,881 

Trade payables

   1,929   2,069 

Employee-related obligations

   607   549 

Accrued expenses

   2,632   3,014 

Other current liabilities

   876   724 

Liabilities held for sale

   —     38 
  

 

 

  

 

 

 

Total current liabilities

   14,756   17,921 

Long-term liabilities:

   

Deferred income taxes

   2,998   3,277 

Other taxes and long-term liabilities

   1,875   1,843 

Senior notes and loans

   29,450   28,829 
  

 

 

  

 

 

 

Total long-term liabilities

   34,323   33,949 
  

 

 

  

 

 

 

Commitments and contingencies, see note 16

   

Total liabilities

   49,079   51,870 
  

 

 

  

 

 

 

Equity:

   

Teva shareholders’ equity:

   

Preferred shares of NIS 0.10 par value per mandatory convertible preferred share; March 31, 2018 and December 31, 2017: authorized 5.0 million shares; issued 3.7 million shares

   3,696   3,631 

Ordinary shares of NIS 0.10 par value per share; March 31, 2018 and December 31, 2017: authorized 2,495 million shares; issued 1,124 million shares

   54   54 

Additionalpaid-in capital

   23,443   23,479 

Retained earnings

   (2,688  (3,808

Accumulated other comprehensive loss

   (1,735  (1,848

Treasury shares as of March 31, 2018 and December 31, 2017 —106 million ordinary shares and 107 million ordinary shares, respectively

   (4,149  (4,149
  

 

 

  

 

 

 
   18,621   17,359 
  

 

 

  

 

 

 

Non-controlling interests

   1,481   1,386 
  

 

 

  

 

 

 

Total equity

   20,102   18,745 
  

 

 

  

 

 

 

Total liabilities and equity

  $69,181  $70,615 
  

 

 

  

 

 

 

         
 
June 
30,
  
December 
31,
 
 
2019
  
2018
 
ASSETS
      
Current assets:
      
Cash and cash equivalents
 
$
2,165
  
$
1,782
 
Trade receivables
  
5,260
   
5,822
 
Inventories
  
4,850
   
4,731
 
Prepaid expenses
  
1,069
   
899
 
Other current assets
  
437
   
468
 
Assets held for sale
  
24
   
92
 
Total current assets
  
13,805
   
13,794
 
Deferred income taxes
  
317
   
368
 
Other
non-current
assets
  
721
   
731
 
Property, plant and equipment, net
  
6,732
   
6,868
 
Operating lease
right-of-use
assets
  
500
   
—  
 
Identifiable intangible assets, net
  
12,435
   
14,005
 
Goodwill
  
24,913
   
24,917
 
Total assets
 
$
59,424
  
$
60,683
 
LIABILITIES AND EQUITY
      
Current liabilities:
      
Short-term debt
 
$
2,771
  
$
2,216
 
Sales reserves and allowances
  
6,054
   
6,711
 
Trade payables
  
1,806
   
1,853
 
Employee-related obligations
  
587
   
870
 
Accrued expenses
  
2,335
   
1,868
 
Other current liabilities
  
899
   
804
 
Total current liabilities
  
14,452
   
14,322
 
Long-term liabilities:
      
Deferred income taxes
  
1,698
   
2,140
 
Other taxes and long-term liabilities
  
1,642
   
1,727
 
Senior notes and loans
  
25,955
   
26,700
 
Operating lease liabilities
  
426
   
—  
 
Total long-term liabilities
  
29,721
   
30,567
 
Commitments and contingencies
, see note
16
      
Total liabilities
  
44,173
   
44,889
 
Equity:
      
Teva shareholders’ equity:
      
Ordinary shares of NIS
0.10
par value per share; June 30, 2019 and December 31, 2018: authorized
2,495
 
million shares; issued
1,198
 
million shares and
1,196
 
million shares, respectively
  
56
   
56
 
Additional
paid-in
capital
  
27,258
   
27,210
 
Accumulated deficit
  
(6,752
)
  
(5,958
)
Accumulated other comprehensive loss
  
(2,312
)
  
(2,459
)
Treasury shares as of June 
30, 2019 and December 31, 2018 —
107
 million ordinary shares and
106
 million ordinary shares, respectively
  
(4,128
)
  
(4,142
)
  
14,122
   
14,707
 
Non-controlling
interests
  
1,128
   
1,087
 
Total equity
  
15,251
   
15,794
 
Total liabilities and equity
 
$
59,424
  
$
60,683
 
Amounts may not add up due to rounding.
The accompanying notes are an integral part of the financial statements.

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TEVA PHARMACEUTICAL INDUSTRIES LIMITED

CONSOLIDATED STATEMENTS OF INCOME

(LOSS)

(U.S. dollars in millions, except share and per share data)

(Unaudited)

   Three months ended
March 31,
 
   2018  2017 

Net revenues

  $5,065  $5,650 

Cost of sales

   2,717   2,811 
  

 

 

  

 

 

 

Gross profit

   2,348   2,839 

Research and development expenses

   317   432 

Selling and marketing expenses

   771   958 

General and administrative expenses

   329   366 

Other asset Impairments, restructuring and other items

   707   240 

Goodwill impairment

   180   —   

Legal settlements and loss contingencies

   (1,278  20 

Other income

   (203  (72
  

 

 

  

 

 

 

Operating income

   1,525   895 

Financial expenses, net

   271   207 
  

 

 

  

 

 

 

Income before income taxes

   1,254   688 

Income taxes

   46   54 

Share in (profits) losses of associated companies, net

   74   (7
  

 

 

  

 

 

 

Net income

   1,134   641 

Net Income (loss) attributable tonon-controlling interests

   14   (4
  

 

 

  

 

 

 

Net income attributable to Teva

   1,120   645 
  

 

 

  

 

 

 

Dividends on preferred shares

   65   65 
  

 

 

  

 

 

 

Net income attributable to ordinary shareholders

  $1,055  $580 
  

 

 

  

 

 

 

Earnings per share attributable to ordinary shareholders:

   

Basic

  $1.04  $0.57 
  

 

 

  

 

 

 

Diluted

  $1.03  $0.57 
  

 

 

  

 

 

 

Weighted average number of shares (in millions):

   

Basic

   1,017   1,016 
  

 

 

  

 

 

 

Diluted

   1,020   1,017 
  

 

 

  

 

 

 

 
Three months ended
June 30,
  
Six months ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
            
Net revenues
 $
4,337
  $
4,701
  $
8,632
  $
9,766
 
Cost of sales
  
2,443
   
2,668
   
4,883
   
5,418
 
                 
Gross profit
  
1,893
   
2,033
   
3,749
   
4,348
 
Research and development expenses
  
276
   
290
   
537
   
607
 
Selling and marketing expenses
  
666
   
682
   
1,313
   
1,420
 
General and administrative expenses
  
296
   
316
   
589
   
645
 
Intangible assets impairment
  
561
   521   
1,030
   
727
 
Goodwill impairment
  
—  
   
120
   
—  
   
300
 
Other assets impairments, restructuring and other items
  
101
   
194
   
103
   
695
 
Legal settlements and loss contingencies
  
646
   
20
   
703
   
(1,258
)
Other income
  
(9
)  
(96
)  
(15
)  
(299
)
                 
Operating income (loss)
  
(644
)  
(14
)  
(510
)  
1,511
 
Financial expenses, net
  
206
   
236
   
425
   
507
 
                 
Income (loss) before income taxes
  
(850
)  
(250
)  
(934
)  
1,004
 
Income taxes
  
(179
)  
(76
)  
(170
)  
(30
)
Share in losses (income) of associated companies, net
  
—  
   
(8
)  
4
   
66
 
                 
Net income (loss)
  
(671
)  
(166
)  
(768
)  
968
 
Net income attributable to
non-controlling
interests
  
18
   
10
   
26
   
24
 
                 
Net income (loss) attributable to Teva
  
(689
)  
(176
)  
(794
)  
944
 
                 
Dividends on preferred shares
  
—  
   
65
   
—  
   
130
 
                 
Net income (loss) attributable to ordinary shareholders
 $
(689
) $
(241
) $
(794
) $
814
 
                 
Earnings (loss) per share attributable to ordinary shareholders:
            
Basic
 $
(0.63
) $
(0.24
) $
(0.73
) $
0.80
 
                 
Diluted
 $
(0.63
) $
(0.24
) $
(0.73
) $
0.80
 
                 
Weighted average number of shares (in millions):
            
Basic
  
1,092
   
1,018
   
1,091
   
1,018
 
                 
Diluted
  
1,092
   
1,018
   
1,091
   
1,020
 
                 
Amounts may not add up due to rounding.
The accompanying notes are an integral part of the financial statements.

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TEVA PHARMACEUTICAL INDUSTRIES LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(LOSS)

(U.S. dollars in millions)

(Unaudited)

   Three months ended
March 31,
 
   2018  2017 

Net income

  $1,134  $641 

Other comprehensive income, net of tax:

   

Currency translation adjustment

   239   466 

Unrealized gain (loss) from derivative financial instruments, net

   (44  8 

Unrealized gain fromavailable-for-sale securities, net

   1   54 

Unrealized loss on defined benefit plans

   —     (13
  

 

 

  

 

 

 

Total other comprehensive income

   196   515 
  

 

 

  

 

 

 

Total comprehensive income

   1,330   1,156 

Comprehensive income attributable tonon-controlling interests

   97   66 
  

 

 

  

 

 

 

Comprehensive income attributable to Teva

  $1,233  $1,090 
  

 

 

  

 

 

 

                 
 
Three months ended
  
Six months ended
 
 
June 30,
  
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
Net income (loss)
 $
(671
) $
(166
) $
(768
) $
968
 
Other comprehensive income (loss), net of tax:
            
Currency translation adjustment
  
86
   
(711
)  
133
   
(472
)
Unrealized gain (loss) from derivative financial instruments
  
(10
)  
100
   
37
   
56
 
Unrealized gain (loss) from
available-for-sale
securities
  
1
   
(1
)  
1
   
(1
)
Unrealized loss on defined benefit plans
  
(1
)  
(2
)  
(1
)  
(1
)
                 
Total other comprehensive income (loss)
  
76
   
(614
)  
170
   
(418
)
                 
Total comprehensive income (loss)
  
(595
)  
(780
)  
(598
)  
550
 
Comprehensive income (loss) attributable to
non-controlling
interests
  
47
   
(51
)  
49
   
46
 
                 
Comprehensive income (loss) attributable to Teva
 $
(642
) $
(729
) $
(647
) $
504
 
                 
Amounts may not add up due to rounding.
The accompanying notes are an integral part of the financial statements.

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TEVA PHARMACEUTICAL INDUSTRIES LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(U.S. dollars in millions)

(Unaudited)

   Three months ended
March 31,
 
   2018  2017 

Operating activities:

   

Net income

  $1,134  $641 

Adjustments to reconcile net income to net cash provided by operations:

   

Net change in operating assets and liabilities

   (592  (797

Impairment of long-lived assets

   432   11 

Depreciation and amortization

   507   480 

Goodwill impairment

   180   —   

Deferred income taxes – net and uncertain tax positions

   (221  (217

Net gain from sale of long-lived assets and investments

   (106  (39

Impairment of equity investment

   94   —   

Research and development in process

   54   —   

Stock-based compensation

   30   40 

Other items

   (16  17 
  

 

 

  

 

 

 

Net cash provided by operating activities

   1,496   136 
  

 

 

  

 

 

 

Investing activities:

   

Proceeds from sales of business, investments and long-lived assets

   824   1,412 

Beneficial interest collected in exchanged for securitized trade receivables

   444   334 

Purchases of property, plant and equipment

   (163  (202

Purchases of investments and other assets

   (56  (6

Other investing activities

   (10  (22
  

 

 

  

 

 

 

Net cash provided by investing activities

   1,039   1,516 
  

 

 

  

 

 

 

Financing activities:

   

Repayment of long-term loans and other long-term liabilities

   (6,243  —   

Proceeds from long-term loans, net of issuance costs

   4,440   —   

Net change in short-term debt

   (261  (1,350

Dividends paid on ordinary shares

   (12  (346

Dividends paid on preferred shares

   (10  (65

Other financing activities

   (5  (7
  

 

 

  

 

 

 

Net cash used in financing activities

   (2,091  (1,768
  

 

 

  

 

 

 

Translation adjustment on cash and cash equivalents

   11   28 
  

 

 

  

 

 

 

Net change in cash and cash equivalents

   455   (88

Balance of cash and cash equivalents at beginning of period

   963   988 
  

 

 

  

 

 

 

Balance of cash and cash equivalents at end of period

  $1,418  $900 
  

 

 

  

 

 

 

Supplemental cash flow information:

   

Non-cash financing and investing activities:

   

Beneficial interest obtained in exchange for securitized trade receivables

  $551  $285 

CHANGES IN EQUITY

                                         
 
Teva shareholders’ equity
     
 
Ordinary shares
                 
 
Number of
shares (in
millions)
  
Stated
value
  
MCPS*
  
Additional
paid-in
 capital
  
Retained
earnings
(accumulated
deficit)
  
Accumulated
other compre-
hensive (loss)
  
Treasury
shares
  
Total Teva
shareholders
equity
  
Non-
controlling
interests
  
Total equity
 
 
(U.S. dollars in millions)
 
Balance at March 31, 2018**
  
1,124
   
54
   
3,696
   
23,443
   
(2,688
)  
(1,735
)  
(4,149
)  
18,621
   
1,481
   
20,102
 
Comprehensive income (loss)
              
(176
)  
(554
)     
(730
)  
(51
)  
(780
)
Stock-based compensation expense
           
47
            
47
      
47
 
Dividends to preferred shareholders
        
65
   
(65
)           
—  
   —     
—  
 
                                         
Balance at June 30, 2018
  
1,124
  $
54
  $
3,760
  $
23,426
  $
(2,864
) $
(2,289
) $
(4,149
) $
17,938
  $
1,430
  $
19,368
 
                                         
*
Mandatory convertible preferred shares.
**
Following the adoption of ASU 2016-01, the Company recorded a $5 million opening balance reclassification from accumulated other comprehensive income to retained earnings. 
 
Teva shareholders’ equity
     
 
Ordinary shares
                 
 
Number of
shares (in
millions)
  
Stated
value
  
MCPS*
  
Additional
paid-in
 capital
  
Retained
earnings
(accumulated
deficit)
  
Accumulated
other compre-
hensive (loss)
  
Treasury
shares
  
Total Teva
shareholders’
equity
  
Non-
controlling
interests
  
Total equity
 
 
(U.S. dollars in millions)
 
Balance at March 31, 2019
  
1,198
   
56
   
   
27,234
   
(6,063
)  
(2,359
)  
(4,137
)  
14,732
   
1,089
   
15,821
 
Comprehensive income (loss)
                  
(689
)  
47
       
(642
)  
47
   
(595
)
Issuance of Shares
      **                                 
Issuance of Treasury Shares
              
(6
)          
9
   
3
       
3
 
Stock-based compensation expense
              
32
               
32
       
32
 
Other
              
(2
)              
(2
)      
(2
)
Transactions with non-controlling
interests
                                  (8)  (8)
                                         
Balance at June 30, 2019
  
1,198
  $
56
   
  $
27,258
  $
(6,752
) $
(2,312
) $
(4,128
) $
14,122
  $
1,128
  $
15,251
 
                                         
  
  
*
Mandatory convertible preferred shares.
**
Represents an amount less than 0.5 million.
Amounts may not add up due to rounding.
The accompanying notes are an integral part of the financial statements.

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TEVA PHARMACEUTICAL INDUSTRIES LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
 
Teva shareholders’ equity
     
 
Ordinary shares
                 
 
Number of
shares (in
millions)
  
Stated
value
  
MCPS*
  
Additional
paid-
in
 capital
  
Retained
earnings
(accumulated
deficit)
  
Accumulated
other compre-
hensive (loss)
  
Treasury
shares
  
Total Teva
shareholders’
equity
  
Non-
controlling
interests
  
Total equity
 
 
(U.S. dollars in millions)
 
Balance at December 31, 2017
  
1,124
   
54
   
3,631
   
23,479
   
(3,803
)  
(1,853
)  
(4,149
)  
17,359
   
1,386
   
18,745
 
Cumulative effect of new accounting
standard
              
(5
)  
5
                
Comprehensive income (loss)
               944   (441     503   46   550 
Dividends to preferred shareholders        129
   
(129
)                     
Stock-based compensation expense
           
77
            
77
      
77
 
Transactions with non-controlling interests                            (2)  (2)
                                         
Balance at June 30, 2018
  
1,124
  $
54
  $
3,760
  $
23,426
  $
(2,864
) $
(2,289
) $
(4,149
) $
17,938
  $
1,430
  $
19,368
 
                                         
  
*Mandatory convertible preferred shares.
 
Teva shareholders’ equity
      
 
Ordinary shares
                  
 
Number of
shares (in
millions)
  
Stated
value
  
MCPS*
  
Additional
paid-
in
 capital
  
Retained
earnings
(accumulated
deficit)
  
Accumulated
other compre-
hensive (loss)
  
Treasury
shares
  
Total Teva
shareholders’
equity
  
Non-
controlling
interests
  
Total equity
 
 
(U.S. dollars in millions)
 
Balance at December 31, 2018
  
1,196
   
56
   
—  
   
27,210
   
(5,958
)  
(2,459
)  
(4,142
)  
14,707
   
1,087
   
15,794
 
Comprehensive income (loss)
                  
(794
)  
147
       
(647
)  
49
   
(598
)
Issuance of Shares
  
2
    **                                
Issuance of Treasury Shares
  
 
           
(8
)          
14
   
6
       
6
 
Stock-based compensation expense
              
64
               
64
       
64
 
Transactions with
non-controlling

interests
                                  (8)  (8)
Other
              
(8
)              
(8
)      
(8
)
                                         
Balance at June 30, 2019
  
1,198
  $
56
   
—  
  $
27,258
  $
(6,752
) $
(2,312
) $
(4,128
) $
14,122
  $
1,128
  $
15,251
 
                                         
*
Mandatory convertible preferred shares.
**
Represents an amount less than
0.5
 million.
Amounts may not add up due to rounding.
The accompanying notes are an integral part of the financial statements.
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TEVA PHARMACEUTICAL INDUSTRIES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in millions)
(Unaudited)
         
 
Six months ended
June 30,
 
 
2019
  
2018
 
Operating activities:
      
Net income (loss)
 $
(768
) $
968
 
Adjustments to reconcile net income (loss) to net cash provided by operations:
      
Net change in operating assets and liabilities
  
(1,056
)  
(1,268
)
Impairment of long-lived assets
  
1,097
   
980
 
Depreciation and amortization
  
893
   
986
 
Deferred income taxes – net and uncertain tax positions  
(362
)  
(489
)
Stock-based compensation
  
64
   
77
 
Other items  
11
   
44
 
Net gain from sale of long-lived assets and investments
  
6
   
(88
)
Goodwill impairment
  
—  
   
300
 
Impairment of equity investment
  
—  
   
94
 
In process Research and development  
—  
   
54
 
         
Net cash provided by (used in) operating activities
  
(115
)  
1,658
 
         
Investing activities:
      
Beneficial interest collected in exchange for securitized trade receivables
  
746
   
970
 
Purchases of property, plant and equipment
  
(237
)  
(299
)
Proceeds from sales of business, investments and long-lived assets  
134
   
841
 
Other investing activities  
59
   
(11
)
Purchases of investments and other assets
  
(1
)  
(56
)
         
Net cash provided by investing activities
  
701
   
1,445
 
         
Financing activities:
      
Repayment of senior notes and loans and other long-term liabilities
  
(157
)  
(6,289
)
Tax withholding payments made on shares and dividends
  
(52
)  
(22
)
Other financing activities
  
(13
)  
(10
)
Net change in short-term debt
  
(2
)  
(261
)
Proceeds from senior notes and loans, net of issuance costs
  
—  
   
4,435
 
         
Net cash used in financing activities
  
(224
)  
(2,147
)
         
Translation adjustment on cash and cash equivalents
  
21
   
(58
)
         
Net change in cash and cash equivalents
  
383
   
898
 
Balance of cash and cash equivalents at beginning of period
  
1,782
   
963
 
         
Balance of cash and cash equivalents at end of period
 
$
2,165
 
 
$
1,861
 
         
Non-cash
financing and investing activities:
      
Beneficial interest obtained in exchange for securitized trade receivables
 $
770
  $
968
 
Amounts may not add up due to rounding.
The accompanying notes are an integral part of the financial statements.
10

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TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Basis of presentation:

The accompanying unaudited consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements. In the opinion of management, the financial statements reflect all recurring adjustments necessary to fairly state the financial position and results of operations of Teva. The information included in this Quarterly Report on Form
10-Q
should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Form
10-K
for the year ended December 31, 2017,2018, as filed with the Securities and Exchange Commission (“SEC”). Amounts as of December 31, 20172018 were derived from the audited balance sheet at that date, but not all disclosures required by generally accepted accounting principles in the United States (“U.S. GAAP”) are included. Certain comparative figures have been reclassified to conform to current presentation. The results of operations for the threesix months ended March 31, 2018June 30, 2019 are not necessarily indicative of results that could be expected for the entire fiscal year.

Certain amounts in the consolidated financial statements and associated notes may not add up due to rounding. All percentages have been calculated using unrounded amounts.

Note 2 - Significant accounting policies:

Recently adopted accounting pronouncements

On January 1,

In June 2018, Teva adopted the new accounting standard ASC 606, Revenue from Contracts with Customers, and all the related amendments (“new revenue standard”) to all contracts using the modified retrospective method. The cumulative effect of initially applying the new revenue standard was immaterial. See note 9 for further discussion.

In May 2017, the FASB issued ASU

2018-07
“Improvement to Nonemployee Share-Based Payments Accounting.” This guidance on changessimplifies the accounting for
non-employee
share-based payment transactions. The amendments specify that ASC 718 applies to terms and conditions ofall share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendment provides guidance about which changes to terms or conditions of a share-based payment award require an entity to apply modification accounting. The guidance is effective for the fiscal year beginning on January 1, 2018, including interim periods within that year. Teva adopted the provisions of this update in the first quarteras of 2018. The impact that this new standard has on Teva’s financial statements after adoption will depend on any future modification of share-based compensation.

In February 2017, the FASB issued guidance onde-recognition of nonfinancial assets. The amendments address the recognition of gains and losses on the transfer (i.e., sale) of nonfinancial assets to counterparties other than customers. The guidance conformsde-recognition on nonfinancial assets with the model for transactions in the new revenue standard. Teva adopted the provisions of this update in the first quarter of 2018January 1, 2019 with no material impact on its consolidated financial statements.

In August 2016, the FASB issued guidance on statements of cash flows. The guidance addresses eight specific issues: debt prepayment or debt extinguishment costs; settlement of certain debt instruments; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies; distributions received from equity method investees; beneficial interest in securitization transactions; and separately identifiable cash flows and application of predominance principle. The amendments should be applied retrospectively. Teva adopted the provisions of this update in the first quarter of 2018. This resulted in a reclassification of $444 million and $334 million from operating activities to investing activities in the first quarter of 2018 and 2017, respectively.

In January 2016, the FASB issued guidance which updates certain aspects of recognition, measurement, presentation and disclosure of equity investments. The guidance requires entities to recognize changes in fair value in net income rather than in accumulated other comprehensive income. Teva adopted the provisions of this update in the first quarter of 2018. Following the adoption, the Company recorded a $5 million opening balance reclassification from accumulated other comprehensive loss to retained earnings. See note 10.

Recently issued accounting pronouncements, not yet adopted

In February 2018, the FASB issued guidance on the recognition and measurement of financial assets and financial liabilities. The guidance provides updates which address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The guidance is effective for fiscal years beginning after December 15, 2017; however, public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018 are not required to adopt these amendments until the interim period beginning after June 15, 2018. Teva is currently evaluating the potential effect of the guidance on its consolidated financial statements.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

In February 2018, the FASB issued guidance on the reclassification of certain tax effects from accumulated other comprehensive income. The guidance allows reclassification of stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. This guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. Teva is currently evaluating the potential effect of the guidance on its consolidated financial statements.

In August 2017, the FASB issued guidance on derivativesASU
2017-12
“Derivatives and hedging, whichHedging—Targeted Improvements to Accounting​​​​​​​ for Hedging Activities.” This guidance expands and refines hedge accounting for both
non-financial
and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. Teva adopted the provisions of this update as of January 1, 2019 with no material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU
2016-02
“Leases.” The guidance establishes a
right-of-use
model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The guidance became effective on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application.
Teva adopted the new accounting standard ASC 842 “Leases” and all the related amendments on January 1, 2019 and used the effective date as Teva’s date of initial application. Consequently, financial information was not updated and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019.
The new standard provides a number of optional practical expedients in transition. Teva did not elect the ‘package of practical expedients’, which permits the Company not to reassess its prior conclusions regarding lease identification, lease classification and initial direct costs under the new standard. However, the Company did elect the practical expedient pertaining to the
use-of
hindsight.
The new standard also provides practical expedients for an entity’s ongoing accounting. Teva elected the short-term lease recognition exemption for all leases with a term shorter than 12 months. This means, for those leases, Teva does not recognize ROU assets or lease liabilities, including not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. Teva also elected the practical expedient to not separate lease and
non-lease
components for all of Teva’s leases, other than leases of real estate.
Additionally, following the adoption of the new Lease Standard and in subsequent measurements, Teva applies the portfolio approach to account for the operating lease ROU assets and liabilities for certain car leases and incremental borrowing rates.
The adoption of this standard has a material effect on Teva’s financial statements. The most significant impact is reflected in: (i) the recognition of approximately $553 million ROU assets and $561 million lease liabilities on Teva’s balance sheet for its operating leases of real estate, vehicles and equipment (the difference between the additional lease assets and lease liabilities did not
have material impact on
the retained earnings), and (ii) the requirement to provide significant new disclosures regarding Teva’s leasing activities and to enable users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. However, the adoption of this standard does not have a material impact on Teva’s consolidated statements of income and consolidated statements of cash flows. Also, the Company’s accounting for finance leases remained substantially unchanged. See note 20 for further discussion.
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TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
Recently issued accounting pronouncements, not yet adopted
In April 2019, the FASB issued ASU 2019-04 “Codification Improvements to Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 825).
This ASU provides clarifications for three topics related to financial instruments accounting. The guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (early adoption is permitted for any interim and annual financial statements that have not yet been issued). Teva2019. The Company is currently evaluating this guidance to determine the potential effect of the guidanceimpact it may have on its consolidated financial statements.

In November 2018, the FASB issued ASU
2018-18 
“Collaborative Arrangements (Topic 808)—Clarifying the interaction between Topic 808 and Topic 606.” The amendments provide guidance on whether certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606. It also specifically (i) addresses when the participant should be considered a customer in the context of a unit of account, (ii) adds
unit-of-account
guidance in ASC 808 to align with guidance in ASC 606 and (iii) precludes presenting revenue from a collaborative arrangement together with revenue recognized under ASC 606 if the collaborative arrangement participant is not a customer. The guidance will be effective for fiscal years beginning after December 15, 2019. Early adoption is permitted and should be applied retrospectively. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In August 2018, the FASB issued ASU
2018-15
“Intangibles—Goodwill and
other—Internal-use
software (Subtopic
350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use
software. The guidance will be effective for fiscal years beginning after December 15, 2019, although early adoption is permitted. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In August 2018, the FASB issued ASU
2018-13
“Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” This guidance removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Certain disclosures required by this guidance must be applied on a retrospective basis and others on a prospective basis. The guidance will be effective for fiscal years beginning after December 15, 2019, although early adoption is permitted. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In June 2016, the FASB issued guidanceASU
2016-13
“Financial Instruments—Credit Losses—Measurement of Credit Losses on financial instruments. TheFinancial Instruments.” This guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance will be effective for the fiscal year beginning on January 1, 2020, including interim periods within that year. Teva is currently evaluating the potential effect of the guidance on its consolidated financial statements.

In February 2016,

Reclassifications of prior periods
During the FASB issued guidance on leases. The guidance requires entities to record lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. In September 2017, the FASB issued additional amendments providing clarification and implementation guidance. The guidance will become effective for interim and annual periods beginning on January 1, 2019 (early adoption is permitted) and is required to be adopted at the earliest period presented using a modified retrospective approach. In Januaryfourth quarter of 2018, the FASB issued an updateCompany changed its accounting policy for the presentation of royalty payments to third parties that permits an entity to elect an optional transition practical expedient toare not evaluate land easements that existed or expired beforeinvolved in the entity’s adoptionproduction of the new standard and that were notproducts. Teva previously accounted for royalty payments to such third parties as leases. AlthoughS&M expenses. Royalties paid to a party that is involved in the production process are classified as cost of sales. The Company believes this change in accounting policy is preferable in order to be aligned with industry practice of classifying all royalty payments related to currently marketed products in cost of sales. The Company now reports all royalty payments as cost of sales. The Company has not finalized its process of evaluatingretrospectively adjusted prior periods to reflect this change and the impact of adoptionthe change for the first and second quarters of the ASU on its consolidated financial statements, the Company expects there will be2018 was an increase in cost of sales of $33 million and $28 million, respectively, with a material increase to assets and liabilities related to the recognition of newright-of-use assets and lease liabilities on the Company’s balance sheet for leases currently classified as operating leases.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

corresponding decrease in S&M expenses.

NOTE 3 – Certain transactions:

Business acquisitions:

Actavis Generics and Anda acquisitions

On August 2, 2016, Teva consummated itscompleted the acquisition of AllerganAllergan​​​​​​​ plc’s (“Allergan”) worldwide generic pharmaceuticals business (“Actavis Generics”). At closing, Teva transferred to Allergan consideration of approximately $33.4 billion in cash and approximately 100.3 million Teva shares.

On October 3, 2016, Teva consummatedcompleted the acquisition of Anda Inc. (“Anda”), the fourth largest distributor of generic pharmaceuticalsa medicines​​​​​​​ distribution business in the United States, from Allergan, for cash consideration of $500 million. The purchase is aThis transaction was related to the Actavis Generics acquisition and, as such, the purchase price accounting and related disclosures were treated on a combined basis.

The final cash consideration for the Actavis Generics acquisition was subject to certain net working capital adjustments. Following the terms of the agreement, Teva submitted an adjustment for $1.4 billion with regards to a working capital true up as well as potential recoveries of purchase price related to certain tax items. On January 31, 2018, Teva and Allergan entered into a settlement agreement and mutual releases providing thatfor which Allergan will makemade aone-time payment of $703 million to Teva which was paid during the first quarter of 2018. The Agreement also provides that Teva and Allergan will jointly dismissto settle the working capital dispute arbitration, as well as actual or potential claimsadjustments under the Master Purchase Agreement, dated July 26, 2015, by and between Teva and Allergan, for breach of any representation, warranty or covenant (other than any breach of a post-closing covenant not known as of the date of the settlement agreement).2015. As the measurement period has ended, this amount has beenwas recorded as a gain under legal settlements and loss contingencies.

contingencies in the first quarter of 2018.

12

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TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
Rimsa

On March 3, 2016, Teva completed the acquisition of Representaciones e InvestigacionesInvestigaciones​​​​​​​ Médicas, S.A. de C.V. (“Rimsa”), a pharmaceutical manufacturing and distribution company in Mexico, for $2.3 billion, in a cash free, debt free set of transactions. Teva financed the transaction using cash on hand.

Following the closing of the acquisition, Teva identified issues concerning Rimsa’s
pre-acquisition
quality, manufacturing and other practices, at which point Teva began an assessment of the extent and cost of remediation required to return its products to the market. In September 2016, two lawsuits were filed: a
pre-emptive
suit by the Rimsa sellers against Teva and Teva’s lawsuit alleging fraud and breach of contract against the Rimsa sellers. The Rimsa sellers subsequently dismissed their lawsuit and the dismissal was approved by court order on December 20, 2016.

On February 15, 2018, Teva and the Rimsa sellers entered into a settlement agreement and mutual releases on thewith respect to Teva’s breach of contract claim, providing thatpursuant to which the Rimsa sellers will makemade a
one-time
payment to Teva, whichTeva. Teva’s breach of contract claim was paid duringsubsequently dismissed by the first quarter of 2018 andcourt. As the measurement period has ended, this payment was recorded as a gain under legal settlements and loss contingencies. This settlement was approved bycontingencies in the court and Teva’s breachfirst quarter of contract claim was subsequently dismissed.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

2018. 

Assets and Liabilities Held For Sale:

Certain Women’s Health and Other Specialty Products

On September 17, 2017, Teva entered into a definitive agreement under which CVC Capital Partners Fund VI will acquire a portfolio of products for $703 million in cash. The portfolio of products, which is marketed and sold outside of the United States, includes the women’s health products OVALEAP®, ZOELY®, SEASONIQUE®, COLPOTROPHINE® and other specialty products such as ACTONEL®.

As of December 31, 2017, the Company accounted for this transaction as assets and liabilities held for sale and determined that the fair value less cost to sell exceeded the carrying value of the business. The Company disposed of $329 million of goodwill associated with the divested business.

On January 31, 2018, Teva completed the sale of the portfolio of products to CVC Capital Partners Fund VI. As a result of these transactions, the Company recognized a net gain on sale of approximately $93 million in the first quarter of 2018 within other income in the consolidated statement of income. The transaction expenses for these divestitures of approximately $2 million were recognized concurrently and included as a reduction to the net gain on sale.

The Company determined that the sale of its global women’s health business did not constitute a strategic shift and that it did not, and will not, have a major effect on its operations and financial results. Accordingly, the operations associated with the transactions are not reported as discontinued operations.

The table below summarizes the major classes of assets and liabilities included as held for sale as of March 31, 2018June 30, 2019 and December 31, 2017:

   March 31, 2018   December 31, 2017 
   (U.S. $ in millions) 

Inventories

   —      39 

Property, plant and equipment, net

   17    16 

Identifiable intangible assets, net

   —      236 

Goodwill

   —      275 
  

 

 

   

 

 

 

Total assets of the disposal group classified as held for sale in the consolidated balance sheets

  $17   $566 
  

 

 

   

 

 

 

Other taxes and long-term liabilities

   —      38 
  

 

 

   

 

 

 

Total liabilities of the disposal group classified as held for sale in the consolidated balance sheets

  $—     $38 
  

 

 

   

 

 

 

2018:

 
June 30, 
2019
  
December 31, 
2018
 
 
(U.S. $ in millions)
 
Property, plant and equipment, net
 $
30
  $
92
 
Goodwill
  
   
51
 
Adjustments of assets held for sale to fair value
  
(6
)  
(51
)
         
Total assets of the disposal group classified as held for sale in the consolidated balance sheets
 $         
24
  $                 
92
 
         
Other significant agreements:

The Company has entered into alliances and other arrangements with third parties to acquire rights to products it does not have, to access markets it does not operate in and to otherwise share development costs or business risks. The Company’s most significant agreements of this nature are summarized below.

PGT Healthcare Partnership

Eli Lilly and Alder BioPharmaceuticals
In AprilDecember 2018, Teva signed a separationentered into an agreement with Eli Lilly, resolving the Procter & Gamble Company (“P&G”)European Patent Office opposition they had filed against Teva’s AJOVY
®
patents. The settlement agreement with Lilly also resolved Lilly’s action to terminaterevoke the PGT Healthcare partnership thatpatent protecting AJOVY in the two companies established in 2011 to marketover-the-counter (“OTC”) medicines. Teva will continue to maintain its OTC business on an independent basis.

The separation is planned to become effective July 1, 2018, subject to receipt of applicable regulatory approvals. As part of the separation, Teva will transfer shares it holds in New Chapter Inc. and ownership rights in an OTC plant located in India to P&G. Teva will continue to provide certain services to P&G after the separation for a transition period.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

During the first quarter of 2018, Teva recorded an impairment of $56 million related to the plant in India and an impairment of $94 million related to the investment in New Chapter Inc. which was recorded within share in loss (profits) of associated companies.

Alder BioPharmaceuticals®

United Kingdom.

On January 8, 2018, Teva signed a global license agreement with Alder BioPharmaceuticals (“Alder”). The agreement validates Teva’s IP and resolves Alder’s opposition to Teva’s European patent with respect to anti-calcitonin gene-related peptide (CGRP) antibodies, including the withdrawal of Alder’s appeal before the European Patent Office. Under the terms of the agreement, Alder will receive anon-exclusive license to Teva’s anti-CGRP antibodies patent portfolio to develop, manufacture and commercialize eptinezumab in the U.S.United States and worldwide, excluding Japan and Korea. Teva received a $25 million upfront payment that was recognized as revenue during the first quarter of 2018, which was recognized as revenue.2018. The agreement stipulates additional milestone payments to Teva of up to $175 million, as well as future royalties.

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TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
PGT Healthcare Partnership
In July 2018, Teva terminated its joint venture with the Procter & Gamble Company (“P&G”), PGT Healthcare partnership (“PGT”), which the two companies established in 2011 to market
over-the-counter
(“OTC”) medicines. Teva will continue to maintain its OTC business on an independent basis.
As part of the separation, Teva transferred to P&G the shares it held in New Chapter Inc. and ownership rights in an OTC plant located in India. Teva provides certain services to P&G after the separation for a transition period.
During the first quarter of 2018, Teva classified the plant in India as an asset held for sale and recorded an impairment of $64 million under other assets impairments, restructuring and other items. In addition, Teva recorded a write-down of $94 million of its investment in New Chapter Inc. under share in losses of associated companies.
During September 2018, Teva and P&G completed the final net asset distribution as part of the dissolution and Teva recorded a gain of $50 million to reflect the cash payment received from P&G under the dissolution agreement.
AUSTEDO
®

On September, 19, 2017, Teva entered into a partnership agreement with Nuvelution Pharma, Inc. (“Nuvelution”) for development of AUSTEDO for the treatment of Tourette syndrome in pediatric patients in the United States. Nuvelution will fund and manage clinical development, driving all operational aspects of the phase 3 program, and Teva will lead the regulatory process and be responsible for commercialization. Upon FDAand subject to U.S. Food and Drug Administration (“FDA”) approval of AUSTEDO for the treatment of Tourette syndrome, Teva will pay Nuvelution a
pre-agreed
amount as compensation for their contribution to the partnership.

Otsuka

On May 12, 2017, Teva entered into a license and collaboration agreement with Otsuka Pharmaceutical Co. Ltd. (“Otsuka”), providing Otsuka with an exclusive license to conduct phase 2 and 3 clinical trials for fremanezumabAJOVY in Japan and, if approved, to commercialize the product in Japan. Otsuka paid Teva an upfront payment of $50 million in consideration for the transaction. Teva may receive additional milestone payments upon filing with Japanese regulatory authorities, receipt of regulatory approval and achievement of certain revenue targets. Otsuka will also pay Teva royalties on fremanezumabAJOVY sales in Japan.

Attenukine
TM

In December 2016, Teva entered into a license agreement for research, development, manufacture and commercializing of AttenukineTM technology with a subsidiary of Takeda Pharmaceutical Company Ltd. (“Takeda”). Teva received a $30 million upfront payment. The agreement stipulates additional milestone payments to Teva of up to $280 million, as well as future royalties.

Ninlaro®

In November 2016, Teva entered into an agreement to sell its royalties and other rights in Ninlaro® (ixazomib) to a subsidiary of Takeda, for a $150 million upfront payment to Teva and an additional $150 million payment based on sales during 2017. Teva was entitled to these royalties pursuant to an agreement from 2014 assigning the Ninlaro® patents to an affiliate of Takeda in consideration of milestone payments and sales royalties. In the first six months of 2017, Teva received payments in the amount of $150 million, which were recognized as revenue for the period.

Celltrion

In October 2016, Teva and Celltrion, Inc. (“Celltrion”) entered into a collaborative agreement to commercialize Truxima
®
and Herzuma
®
, two of Celltrion’s biosimilar products in development for the U.S. and Canadian markets. Teva paid Celltrion $160 million, of which up to $60 million is refundable or creditable under certain circumstances. Teva and Celltrion will share the profit from the commercialization of these products.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

Regeneron

In September 2016, Teva and Regeneron Pharmaceuticals, Inc. (“Regeneron”) entered into a collaborative agreement to develop and commercialize Regeneron’s pain medication product, fasinumab. Teva and Regeneron share equally in the global commercial rights to this product, as well as ongoing associated R&D costs of approximately $1 billion. Teva made an upfront payment of $250 million to Regeneron in the third quarter of 2016 as part of the agreement and additional milestoneagreement. Milestone payments of $25 million, and $35 million and $60 million were paid in the second quarter of 2017, and in the first quarter of 2018 respectively.

and the fourth quarter of 2018, respectively​​​​​​​.

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TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 4 – Inventories:

Inventories, net of reserves, consisted of the following:

   March 31,
2018
   December 31,
2017
 
   (U.S. $ in millions) 

Finished products

  $2,772   $2,689 

Raw and packaging materials

   1,483    1,454 

Products in process

   646    597 

Materials in transit and payments on account

   212    184 
  

 

 

   

 

 

 
  $5,113   $4,924 
  

 

 

   

 

 

 

 
June 30,
  
December 31,
 
 
2019
  
2018
 
 
(U.S. $ in millions)
 
Finished products
 $
2,643
  $
2,665
 
Raw and packaging materials
  
1,393
   
1,328
 
Products in process
  
638
   
590
 
Materials in transit and payments on account
  
176
   
148
 
         
Total
 $
4,850
  $
4,731
 
         
NOTE 5 - Property, plant and equipment, net:

equipment:

Property, plant and equipment, net, consisted of the following:

   March 31,   December 31, 
   2018   2017 
   (U.S. $ in millions) 

Machinery and equipment

  $5,759   $5,809 

Buildings

   3,307    3,329 

Computer equipment and other assets

   2,055    2,016 

Payments on account

   615    634 

Land(1)

   358    390 
  

 

 

   

 

 

 
   12,094    12,178 

Less—accumulated depreciation

   4,674    4,505 
  

 

 

   

 

 

 
  $7,420   $7,673 
  

 

 

   

 

 

 

(1)Land includes long-term leasehold rights in various locations, with useful lives between 30 and 99 years.

 
June 30,
  
December 31,
 
 
2019
  
2018
 
 
(U.S. $ in millions)
 
Machinery and equipment
 $
5,713
  $
5,691
 
Buildings
  
3,092
   
3,143
 
Computer equipment and other assets
  
2,129
   
2,097
 
Payments on account
  
526
   
514
 
Land
  
370
   
351
 
         
  
11,830
   
11,796
 
Less—accumulated depreciation
  
(5,099
)  
(4,928
)
         
Total $
6,732
  $
6,868
 
         
NOTE 6 - Identifiable intangible assets:

Identifiable intangible assets consisted of the following:

   Gross carrying amount net
of impairment
   Accumulated amortization   Net carrying amount 
   March 31,   December 31,   March 31,   December 31,   March 31,   December 31, 
   2018   2017   2018   2017   2018   2017 
   (U.S. $ in millions) 

Product rights

  $21,395   $21,011   $8,728   $8,276   $12,667   $12,735 

Trade names

   618    617    64    55    554    562 

Research and development in process

   4,093    4,343    —      —      4,093    4,343 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $26,106   $25,971   $8,792   $8,331   $17,314   $17,640 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

 
Gross carrying amount 
net of impairment
  
Accumulated amortization
  
Net carrying amount
 
 
June 30,
  
December 31,
  
June 30,
  
December 31,
  
June 30,
  
December 31,
 
 
2019
  
2018
  
2019
  
2018
  
2019
  
2018
 
 
(U.S. $ in millions)
 
Product rights
 $
19,995
  $
20,361
  $
10,043
  $
9,565
  $
9,952
  $
10,796
 
Trade names
  
604
   
606
   
109
   
91
   
496
   
515
 
In process research and development
  
1,988
   
2,694
   
   
   
1,988
   
2,694
 
                         
Total
 
$
22,587
 
 
$
23,661
 
 
$
10,152
 
 
$
9,656
 
 
$
12,435
 
 
$
14,005
 
                         
Product rights and trade names
Product rights and trade names are assets presented at amortized cost. These assetsProduct rights and trade names represent a portfolio of pharmaceuticalpharmaceutical​​​​​​​ products from various categories with a weighted average amortization life of approximately 1112 years.
Amortization of intangible assets was $310amounted to $285 million for the three months ended March 31, 2018 and is recorded in earnings, as relevant, under cost of sales and S&M expenses, depending on the nature of the asset.

Whenever impairment indicators are identified for definite life intangible assets, Teva reconsiders the asset’s estimated life, calculates the undiscounted value of the asset’s or asset group’s cash flows by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams and compares such value against the asset’s or asset group’s carrying amount. If the carrying amount is greater, Teva records an impairment loss for the excess of book value over fair value based on the discounted cash flows.

The more significant estimates and assumptions inherent in the estimate of the fair value of identifiable intangible assets include all assumptions associated with forecasting product profitability, including sales and cost to sell projections, R&D expenditure for ongoing support of product rights or continued development of IPR&D, estimated useful lives and IPR&D expected launch dates. Additionally, for IPR&D assets the risk of failure has been factored into the fair value measure.

Impairment of identifiable intangible assets was $206$302 million in the three months ended March 31,June 30, 2019 and 2018, respectively.

Amortization of intangible assets amounted to $568 million and $612 million in the six months ended June 30, 2019 and 2018, respectively.
IPR&D
Teva’s IPR&D are assets that have not yet been approved in major markets. Teva​​​​​​​’s IPR&D is recordedcomprised mainly of the following acquisitions and related assets: various generic products (Actavis Generics) – $1,730 million; various generic products (Rimsa) – $47 million; and AUSTEDO – $211 million. IPR&D carries intrinsic risks that the asset might not succeed in earnings under other asset impairments, restructuringadvanced phases and other items. See note 14.

Additional reductions to Rmay be impaired in future periods.

In the three months ended June 
30
,
2019
, Teva reclassified $19 million of products from IPR&D intangibles relate to reclassification to product rights following regulatory approvals of generic products and impairments of assets due to development status, changes in projected launch date or changes in commercial projections related to products under development.

approval.

In the first quartersix months of 2018, $103 2019, Teva reclassified 
$
256
million was reclassifiedof products from IPR&D to product rights following regulatory approval,
mainly $
174
million in connection with mesalamine following regulatory approvalmethylphenidate ER.
Intangible assets impairment
Impairments of long-lived intangible assets for this product.

the three months ended on June 

30, 
2019 and
2018 were $561 million and $521 million, respectively. Impairments in the
second
quarter of
2019 consisted of:
a) 
Identifiable product rights of $365 million, mainly due to updated market assumptions regarding price and volume of products acquired from Actavis Generics and primarily marketed in the United States.
15
TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

b)
IPR&D assets of $196 million, mainly due to: (i) $137 million of generic pipeline products acquired from Actavis Generics due to development progress and changes in other key valuation indications (e.g., market size, competition assumptions, legal landscape, launch date or discount rate) in the United States and (ii)
$59 
million related to a change in the assumption of the future market share of few products within Teva’s Actavis Generics related pipeline in Europe.
Impairments of long-lived intangible assets for the six months ended on June 
30
,
2019
and
2018
were $1,030 million and $727 million, respectively. Impairments in the first six months of
2019
consisted of:
a)    
Identifiable product rights of $569 million, mainly due to updated market assumptions regarding price and volume of products acquired from Actavis Generics and primarily marketed in the United States.
b) 
IPR&D assets of $461 million, due to: (i) $277 million of
generic
pipeline products acquired from Actavis Generics due to development progress and changes in other key valuation indications (e.g., market size, competition assumptions, legal landscape, launch date or discount rate) in the United States and (ii) $125 million related to lenalidomide (generic equivalent of Revlimid
®
) due to modified competition assumptions as a result of settlements between the innovator and other generic filers (iii) $59 million related to a change in
the
assumption of the future market share of few products within Teva’s Actavis
Generics related pipeline in Europe.
NOTE 7 - Goodwill:

The changes in the carrying amount of goodwill for the period ended March 31, 2018June 30, 2019 were as follows:

  Generics  Specialty  Other  Total  North
America
  Europe  Growth
Market
  Other  Total 
  (U.S. $ in millions)  (U.S. $ in millions)    

Balance as of December 31, 2017(3)

 $18,864  $8,464  $1,086  $28,414  $—    $—    $—    $—    $—   

Relative fair value allocation

  (18,864  (8,464  (1,086  (28,414  11,144   9,001   5,404   2,865   28,414 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance as of January 1, 2018

  —     —     —     —     11,144   9,001   5,404   2,865   28,414 

Changes during the period:

         

Goodwill impairment(1)

        (180   (180

Goodwill disposal(2)

       (54    (54

Translation differences

      (13  269   28   1   285 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance as of March 31, 2018(3)

 $—    $—    $—    $—    $11,131  $9,216  $5,252  $2,866  $28,465 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 
North

America
  
Europe
  
International

Markets
  
Other
  
Total
 
 
(U.S. $ in millions)
    
Balance as of January 1, 2019 
(1)
 $
11,098
  $
8,653
  $
2,479
  $
2,687
  $
24,917
 
                     
Changes during the period:
               
Goodwill disposal
  
(23
)  
(5
)  
   
   
(28
)
Goodwill adjustments
 
 
(13
)
 
 
 
 
 
 
 
 
 
 
 
(13
)
Translation differences
  
16
   
(32
)  
53
   
   
37
 
                     
Balance as of June 30, 2019 
(1)
 $
11,078
  $
8,616
  $
2,532
  $
2,687
  $
24,913
 
                     
(1)Due to the goodwill impairment related to Rimsa.
(2)Due to the divestment of the women’s health business.
(3)Accumulated goodwill impairment as of March 31, 2018June 30, 2019 and December 31, 2017January 1, 2019 was approximately $18.2 billion and $18.0 billion, respectively.$21.0 billion.

In November 2017,

Teva announced a new organizational structure and leadership changes to enable strategic alignment across its portfolios, regions and functions. Teva now operates its business through three segments: North America, Europe and GrowthInternational Markets. The purpose of the new structure is to enable stronger alignment and integration between operations, commercial regions, R&D and Teva’s global marketing and portfolio function, in order to optimizeTeva began reporting its product lifecycle across the therapeutic areas. Teva’s financial results forunder this structure in the first quarter of
2018 are being reported under this new structure for the first time.

. In addition to these three segments, Teva has other activities,sources of revenues, primarily the active pharmaceutical ingredient (“API”) manufacturing business andsale of APIs to third parties, certain contract manufacturing services.services and an
out-licensing
platform offering a portfolio of products to other pharmaceutical companies through its affiliate Medis. See note 17.

Following the announcement of its new organizational structure and leadership changes in November 2017, Teva conducted an analysis of its business segments, which led to changes in Teva’s identified reporting units, operating and reporting segments. As a result, on January 1, 2018, Teva reallocated its goodwill to the adjusted reporting units using a relative fair value allocation. In conjunction with the goodwill reallocation, Teva performed a goodwill impairment test for the balances in its adjusted reporting units, utilizing the same annual operating plan (“AOP”) and long range plan model that were used in its 2017 annual impairment test; The Company concluded that the fair value of each reporting unit was in excess of its carrying value.

During the first quarter of 2018, Teva identified an increase in certain components of the weighted average cost of capital (“WACC”), such as an increase in the risk free interest and the unlevered beta. The Company addressed these changes in rates as an indication for impairment and performed an additional impairment test as of March 31, 2018.

Based on its revised analysis, Teva recorded a goodwill impairment of $180 million related to its Rimsa reporting unit in the first quarter of 2018. The remaining goodwill allocated to this reporting unit is $706 million as of March 31, 2018. This impairment was driven by the change in fair value, including the discount rate updated for the WACC change noted above, and the change in allocated net assets to the reporting unit. See note 3.

Based on current macro-economic developments and capital markets anticipation, a possible increase in the risk free interest rate of 0.5% may result in an increase to Teva’s WACC by approximately the same amount and consequently in an additional impairment of $70 million and $100 million with respect to Rimsa and the Growth Markets reporting units, respectively.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

For Teva’s remaining reporting units, the percentage difference between estimated fair value and estimated carrying value in the first quarter of 2018 was 6%, 10%, 21% and 49% for Teva’s Growth Markets, Europe, North America and other reporting units, respectively.

17
.
Teva determines the fair value of its reporting units using a weighting of fair values derived from the income approach. The income approach is a forward-looking approach for estimating fair value and utilizes the 2018 remaining year forecast, projections for growth off that base with an associated price erosion, as well as terminal growth rate.value. Within the income approach, the method that was used is the discounted cash flow method. Teva startedstarts with a forecast of all the expected net cash flows associated with the reporting unit, which includes the application of a terminal value, and then appliedapplies a discount rate to arrive at a net present value amount. Cash flow projections are based on Teva’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the WACC, adjusted for the relevant risk associated with country-specific and business-specific characteristics. If any of these expectations were to vary materially from Teva’s assumptions, Teva could face impairment of goodwill allocated to these reporting units in the future.

During the first quarter of 2019, management assessed developments during the quarter to determine if it was more likely than not that the fair value of any of its reporting units was below its carrying amount. This includes the International Markets, Medis and Europe reporting units, which had headroom
��
of 6% or less as of December 31, 2018.
As part of this assessment, the Company also considered the sensitivity of its conclusions as they relate to changes in the estimates and assumptions used in the latest forecast available for each period. In addition, Teva analyzed the aggregate fair value of its reporting units, calculated as part of the annual goodwill impairment test performed in the fourth quarter of 2018, compared to its market capitalization. Despite the decrease in share price during the first quarter of 2019 compared to the average share price used to assess the reasonableness of the results of the cash flow projections used for the goodwill impairment analysis in the fourth quarter of 2018, management believed that its fair value assessment was reasonably supported by Teva’s market capitalization. Based on this assessment, management concluded that it was not more likely than not that the fair value of any of the reporting units was below its carrying value as of March 31, 2019 and, therefore, no quantitative assessments were performed.
16
TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

In the second quarter of 2019, the Company completed its long-range planning (“LRP”) process. The LRP is part of Teva’s internal financial planning and budgeting processes and is discussed and reviewed by Teva’s management and its board of directors. Certain events and changes in circumstances, reflected in the LRP, indicated that it was more likely than not that the carrying value of certain reporting units may exceed their fair value. The following analysis was performed based upon the June 30, 2019 assessment:
International Markets
Management noted a further decrease in the profitability projections in the Japanese market related to new price regulation and further generic competition. Consequently, management conducted a quantitative​​​​​​​ analysis to its International Markets reporting unit, which resulted in no impairment.
The percentage difference between estimated fair value and estimated carrying value for the International Markets reporting unit is 4%.
The Company used a terminal growth rate of 2.3% and a discount rate of 10.74%. If Teva holds all other assumptions constant, a reduction in the terminal value growth rate of 0.4% or an increase in discount rate of 0.3% would result in an impairment related to its International Markets reporting unit.
North America
Management believes that the sharp decline in the Company’s share price, which commenced
May 2019
, was mainly a result of events related to increased publicity surrounding certain litigations in the United States. Management considered the sharp decline in share price as an indication that it was more likely than not that the carrying value of its North America reporting unit exceeded its fair value.
Consequently, management conducted a quantitative analysis to its North America reporting unit, which resulted in no impairment.
The percentage difference between estimated fair value and estimated carrying value for the North America reporting unit is 9%.
The Company used a terminal growth rate of 2.0% and a discount rate of 10.0
%.
If Teva holds all other assumptions constant, a reduction in the terminal value growth rate
of
0.9% or an increase in discount rate
of
0.6% would result in an impairment related to its North America reporting unit.
Remaining reporting units
After assessing the totality of relevant events and circumstances, Teva determined that it is not more likely than not that the fair value of its remaining reporting units is less than their carrying amount.
The percentage difference between estimated fair value and estimated carrying value for the Europe, Medis and TAPI reporting units is 22%, 45% and 15%, respectively.
Market Capitalization
Teva analyzed the aggregate fair value of its reporting units as compared to its market capitalization in order to assess the reasonableness of the results of its cash flow projections used for its goodwill impairment analysis.
During the second quarter of 2019, Teva noted its market capitalization was significantly below management’s assessment of the aggregate fair value of its reporting units. Management analyzed the difference and the underlying factors:
Based on research analysts’ reports reviewed by management and responses from certain analysts to Teva’s inquiries, management noted a gap in the sales projections of AJOVY in the Europe and International Markets reporting units. Management concluded that the majority of analysts do not focus on these markets in preparing their financial models and, as a result, have not attributed value to the launch potential in these reporting units. Management believes that its fair value assessment relies on more accurate information and therefore no adjustment was incorporated to the fair value.
Management also noted a difference with regard to sales projections of AUSTEDO in North America resulting in higher fair value as analyzed by management compared to Teva’s market capitalization. Management believes that it has more accurate information based on its knowledge of the market and its growth through the remainder of 2019 and therefore no adjustment was incorporated to the fair value.
Management believes that the remaining difference in fair value is attributable to market concerns regarding certain litigation risks, namely from the opioid and price fixing litigations, and concern surrounding the company’s cash flow and overall liquidity. Management believes that these concerns led to an acute reaction, which resulted in further decline in the share price. Although ultimately the outcome of the relevant cases will not be known in the near term, developments in these cases, likely to occur through the end of 2019, are expected to clarify the outlook with regards to the opioid litigation, which may result in a share price recovery. Consequently, management believes that this disparity results from a market value not reflective of the underlying fair value of its reporting units and therefore it would be inappropriate to record an impairment charge in the second quarter of 2019 related thereto.
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TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
Management will continue to monitor business conditions and potential events or circumstances that could have a negative effect on the estimated fair value of the Company.
Based on assumptions in place at this time, if Teva’s share price does not recover in the near term, this may lead to a goodwill impairment charge of up to an aggregated amount of approximately $5,000 million in its North America and International Markets​​​​​​​ reporting units. Future impairment charges, if any, reflecting conditions at that time may be materially different.
NOTE 8 – Earnings (Loss) per share:

Basic earnings and loss per share are computed by dividing net results attributable to Teva’s ordinary shareholders by the weighted average number of ordinary shares outstanding (including fully vested restricted share units (“RSUs”)) during the period, net of treasury shares.

In computing the diluted earningsloss per share for the three months ended March 31,June 30, 2019 and 2018, and 2017, basic earnings per shareno account was adjusted to take into accounttaken of the potential dilution that could occur uponof the assumed exercise of employee stock options andnon-vested RSUs granted under employee stock compensation plans, usingand convertible senior debentures, since they had an anti-dilutive effect on loss per share.
Additionally, in the treasury stock method.

Additionally,three months ended June 30, 2018, no account was taken of the potential dilution by the mandatory convertible preferred shares, amounting to 6463 million shares (including shares that may bewere issued due to unpaid dividends tountil that date) for the three months ended March 31, 2018 and 59 million for the three months ended March 31, 2017, as well as for the convertible senior debentures for the respective periods,, since boththey had an anti-dilutive effect on loss per share.

On December 17, 2018, the mandatory convertible preferred shares automatically converted into ADSs and all of the accumulated and unpaid dividends on the mandatory convertible preferred shares were paid in ADSs. As a result of this conversion, Teva issued 70.6 million ADSs in December 2018.
In computing the diluted loss per share for the six months ended June 30, 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. Diluted earnings per share for the six months ended June 30, 2018 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.
Additionally, in the six months ended June 30, 2018, no account was taken of the potential dilution by the mandatory convertible preferred shares, amounting to 65 million shares (including shares that were issued due to unpaid dividends until that date), since they had an anti-dilutive effect on loss per share.

18
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TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 9 – Revenue from contracts with customers:

On January 1, 2018, Teva adopted the new accounting standard ASC 606, Revenue from Contracts with Customers, and all the related amendments (“new revenue standard”) to all contracts using the modified retrospective method. The cumulative effect of initially applying the new revenue standard was immaterial.

Revenue recognition prior to the adoption of the new revenue standard

Please refer to note 1 to the consolidated financial statements and critical accounting policies included in our Annual Report on Form10-K for the year ended December 31, 2017 for a summary of our significant accounting policies

Revenue recognition following the adoption of the new revenue standard

A contract with a customer exists only when: the parties to the contract have approved it and are committed to perform their respective obligations, the Company can identify each party’s rights regarding the distinct goods or services to be transferred (“performance obligations”), the Company can determine the transaction price for the goods or services to be transferred, the contract has commercial substance and it is probable that the Company will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

Revenues are recorded in the amount of consideration to which the Company expects to be entitled in exchange for performance obligations upon transfer of control to the customer, excluding amounts collected on behalf of other third parties and sales taxes.

The amount of consideration to which Teva expects to be entitled varies as a result of rebates, chargebacks, returns and other sales reserve and allowances (“SR&A”) the Company offers its customers and their customers, as well as the occurrence or nonoccurrence of future events, including milestone events. A minimum amount of variable consideration is recorded concurrently with the satisfaction of performance obligations to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Estimates of variable consideration are based on historical experience and the specific terms in the individual agreements (which the Company believes approximates expected value). Rebates and chargebacks are the largest components of SR&A. For further description of SR&A components and how they are estimated, see “Variable consideration” below.

Shipping and handling costs after control over a product has transferred to a customer are accounted for as a fulfillment cost and are recorded under S&M expenses.

Teva does not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between the time of transfer of the promised goods or services to the customer and the time the customer pays for these goods or services to be generally one year or less. The Company’s credit terms to customers are in average between thirty and ninety days.

The Company generally recognizes the incremental costs of obtaining contracts as an expense since the amortization period of the assets that the Company otherwise would have recognized is one year or less. The costs are recorded under S&M expenses. Similarly, Teva does not disclose the value of unsatisfied performance obligations for contracts with original expected duration of one year or less.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

Disaggregation of revenue

The following table disaggregates Teva’s revenues by major revenue streams. For additional information on disaggregation of revenues, see note 17.

   March 31, 2018 
   North America   Europe   Growth Markets   Other activities   Total 
   (U.S. dollars in millions) 

Sale of goods

   2,168    1,429    519    177    4,293 

Licensing arrangements

   32    10    20    2    64 

Distribution

   331    3    153    —      487 

Other

   —      —      58    163    221 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $2,531   $1,442   $750   $342   $5,065 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   March 31, 2017 
   North America   Europe   Growth Markets   Other activities   Total 
   (U.S. dollars in millions) 

Sale of goods

   2,824    1,287    529    196    4,836 

Licensing arrangements

   121    1    1    1    124 

Distribution

   295    53    125    —      473 

Other

   —      —      63    154    217 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $3,240   $1,341   $718   $351   $5,650 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nature

 
Three months ended June 30, 2019
 
 
North America
  
Europe
  
International
Markets
  
Other 
activities
  
Total
 
 
(U.S. $ in millions)
 
Sale of goods
  
1,686
   
1,173
   
526
   
204
   
3,588
 
Licensing arrangements
  
35
   
10
   
2
   
1
   
48
 
Distribution
  
351
   
§
   
164
   
—  
   
515
 
Other
  
—  
   
§
   
49
   
137
   
186
 
                     
 $
2,071
  $
1,183
  $
741
  $
342
   
4,337
 
                     
§ Represents an amount less than $1 million.
 
Three months ended June 30, 2018
 
 
North America
  
Europe
  
International
Markets
  
Other
activities
  
Total
 
 
(U.S. $ in millions)
 
Sale of goods  1,913   1,317   573   186   3,989 
Licensing arrangements  30   8   1   2   41 
Distribution  320   3   154   —     477 
Other  —     —     61   133   194 
                     
 $2,263  $1,328  $789  $321  $4,701 
 
Six months ended June 30, 2019
 
 
North America
  
Europe
  
International
Markets
  
Other 
activities
  
Total
 
 
(U.S. $ in millions)
 
Sale of goods
  
3,324
   
2,433
   
994
   
390
   
7,141
 
Licensing arrangements
  
65
   
15
   
2
   
3
   
85
 
Distribution
  
729
   
§
   
315
   
—  
   
1,044
 
Other
  
—  
   §   97   
264
   
362
 
                     
 $
4,118
  $
2,448
  $
1,409
  $
657
  $
8,632
 
                     
§ Represents an amount less​​​​​​​ than $1 million.
 
Six months ended June 30, 2018
 
 
North 
America
  
Europe
  
International
Markets
  
Other activities
  
Total
 
 
(U.S. $ in millions)
 
Sale of goods
  
4,081
   
2,746
   
1,092
   
365
   
8,284
 
Licensing arrangements
  
62
   
18
   
21
   
4
   
105
 
Distribution
  
651
   
6
   
307
   
—  
   
964
 
Other
  
—  
   
—  
   
119
   
294
   
413
 
                     
 $
4,794
  $
2,770
  $
1,539
  $
663
  $
9,766
 
                     
19
Table of revenue streams

Revenue from sales of goods, including sales to distributors is recognized when the customer obtains control of the product. This generally occurs when products are shipped once the Company has a present right to payment, legal title, and risk and rewards of ownership are obtained by the customer.

Licensing arrangements performance obligations generally include intellectual property (“IP”) rights, certain R&D and contract manufacturing services. The Company accounts for IP rights and services separately if they are distinct – i.e. if they are separately identifiable from other items in the arrangement and if the customer can benefit from them on their own or with other resources that are readily available to the customer. The consideration is allocated between IP rights and services based on their relative stand-alone selling prices.

Revenue for distinct IP rights is accounted for based on the nature of the promise to grant the license. In determining whether the Company’s promise is to provide a right to access its IP or a right to use its IP, the Company considers the nature of the IP to which the customer will have rights. IP is either functional IP which has significant standalone functionality or symbolic IP which does not have significant standalone functionality. Revenue from functional IP is recognized at the point in time when control of the distinct license is transferred to the customer, when the Company has a present right to payment and risks and rewards of ownership are transferred to the customer. Revenue from symbolic IP is recognized over the access period to the Company’s IP.

Revenue from sales based milestones and royalties promised in exchange for a license of IP is recognized only when, or as, the later of subsequent sale or the performance obligation to which some or all of the sales-based royalty has been allocated, has been satisfied. Revenues from licensing arrangements included royalty income of $21 million and $105 million for the three months ended March 31, 2018 and 2017, respectively. The amount recognized in 2017 includes royalty income resulting from the Ninlaro® transaction.

Distribution revenues are derived from sales of third-party products for which the Company acts as distributor, mostly in the United States via Anda and in Israel. The Company is the principal in these arrangements and therefore records revenue on a gross basis as it controls the promised goods before transferring these goods to the customer. Revenue is recognized when the customer obtains control of the products. This generally occurs when products are shipped once the Company has a present right to payment and legal title, and risk and rewards of ownership are obtained by the customer.

Contents

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

Other revenues are primarily comprised of contract manufacturing services, sales of medical devices, and other miscellaneous items. The Company is generally the principal in these arrangements and therefore records revenue on a gross basis as it controls the promised goods before transferring these goods to the customer. Revenue is recognized when the customer obtains control of the products. This generally occurs when products are shipped once the Company has a present right to payment, legal title, and risk and rewards of ownership are obtained by the customer.

Contract assets and liabilities

Contract assets are mainly comprised of trade receivables net of allowance for doubtful debts, which includes amounts billed and currently due from customers.

Contract liabilities are mainly comprised of deferred revenues, which were immaterial as of March 31, 2018 and December 31, 2017, respectively.

Variable consideration

Variable consideration mainly includes sales reserves and allowances (“SR&A,&A”), comprised of rebates (including Medicaid and other governmental program discounts), chargebacks, returns and other promotional (including shelf stock adjustments) items. Provisions for prompt payment discounts are netted against trade receivables.

The Company recognizes these provisions at the time of sale and adjusts them if the actual amounts differ from the estimated provisions. The following briefly describes the nature of each deduction and how provisions are estimated:

Rebates

Rebates are primarily related to volume incentives and are offered to key customers to promote loyalty. These rebate programs provide that, upon the attainment ofpre-established volumes or the attainment of revenue milestones for a specified period, the customer receives a rebate. Since rebates are contractually agreed upon, they are estimated based on the specific terms in each agreement based on historical trends and expected sales. Externally obtained inventory levels are evaluated in relation to estimates made for rebates payable to indirect customers.

Medicaid and Other Governmental Rebates

Pharmaceutical manufacturers whose products are covered by the Medicaid program are required to rebate to each state a percentage of their average manufacturer’s price for the products dispensed. Many states have also implemented supplemental rebate programs that obligate manufacturers to pay rebates in excess of those required under federal law. The Company estimates these rebates based on historical trends of rebates paid, as well as on changes in wholesaler inventory levels and increases or decreases in sales.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

Chargebacks

The Company has arrangements with various third parties, such as managed care organizations and drug store chains, establishing prices for certain of Teva’s products. While these arrangements are made between the Company and the customers, the customers independently select a wholesaler from which they purchase the products. Alternatively, certain wholesalers may enter into agreements with the customers, with Teva’s concurrence, which establish the pricing for certain products which the wholesalers provide. Under either arrangement, Teva will issue a credit (referred to as a “chargeback”) to the wholesaler for the difference between the invoice price to the wholesaler and the customer’s contract price. Provisions for chargebacks involve estimates of contract prices of over 2,000 products and multiple contracts with multiple wholesalers. The provision for chargebacks varies in relation to changes in product mix, pricing and the level of inventory at the wholesalers and therefore will not necessarily fluctuate in proportion to an increase or decrease in sales. Provisions for estimating chargebacks are calculated using historical chargeback experience and/or expected chargeback levels for new products and anticipated pricing changes. Teva considers current and expected price competition when evaluating the provision for chargebacks. Chargeback provisions are compared to externally obtained distribution channel reports for reasonableness. The Company regularly monitors the provision for chargebacks and makes adjustments when the Company believes that actual chargebacks may differ from estimated provisions.

Other Promotional Arrangements

Other promotional or incentive arrangements are periodically offered to customers, specifically related to the launch of products or other targeted promotions. Provisions are made in the period for which the Company can estimate the incentive earned by the customer, in accordance with the contractual terms. The Company regularly monitors the provision for other promotional arrangements and makes adjustments when Teva believes that the actual provision may differ from the estimated provisions.

Shelf Stock Adjustments

The custom in the pharmaceutical industry is generally to grant customers a shelf stock adjustment based on the customers’ existing inventory contemporaneously with decreases in the market price of the related product. The most significant of these relate to products for which an exclusive or semi-exclusive period exists. Provisions for price reductions depend on future events, including price competition, new competitive launches and the level of customer inventories at the time of the price decline. Teva regularly monitors the competitive factors that influence the pricing of its products and customer inventory levels and adjust these estimates where appropriate.

Returns

Returns primarily relate to customer returns of expired products which, the customer has the right to return up to one year following the expiration date. Such returned products are destroyed and credits and/or refunds are issued to the customer for the value of the returns. Accordingly, no returned assets are recoded in connection with those products. The returns provision is estimated by applying a historical return rate to the amounts of revenue estimated to be subject to returns. Revenue subject to returns is estimated based on the lag time from time of sale to date of return. The estimated lag time is developed by analyzing historical experience. Additionally, The Company considers specific factors, such as levels of inventory in the distribution channel, product dating and expiration, size and maturity of launch, entrance of new competitors, changes in formularies or packaging and any changes to customer terms, for determining the overall expected levels of returns.

Prompt Pay Discounts

Prompt pay discounts are offered to most customers to encourage timely payment. Discounts are estimated at the time of invoice based on historical discounts in relation to sales. Prompt pay discounts are almost always utilized by customers. As a result, the actual discounts do not vary significantly from the estimated amount.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

SR&A to U.S. customers comprised approximately 86%83% of the Company’s total SR&A as of March 31, 2018,June 30, 2019, with the remaining balance primarily in Canada and Germany.
The changes in SR&A for third-party sales for the periodsix months ended March 31, 2018June 30, 2019 were as follows:

   Sales Reserves and Allowances    
   Reserves
included in
Accounts
Receivable,
net
  Rebates  Medicaid and
other
governmental
allowances
  Chargebacks  Returns  Other  Total reserves
included in
Sales Reserves
and Allowances
  Total 
   (U.S. dollars in millions) 

Balance at December 31, 2017

  $196  $3,077  $1,908  $1,849  $780  $267  $7,881  $8,077 

Provisions related to sales made in current year period

   136   1,865   357   2,711   70   103   5,106   5,242 

Provisions related to sales made in prior periods

   2   (19  3   (1  21   (8  (4  (2

Credits and payments

   (157  (2,051  (349  (2,927  (119  (139  (5,585  (5,742

Translation differences

   1   9   2   1   1   (1  12   13 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at March 31, 2018

  $178   2,881  $1,921  $1,633  $753  $222  $7,410  $7,588 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 
Sales Reserves and Allowances
   
 
Reserves
included in
Accounts
Receivable, 
net
  
Rebates
  
Medicaid and
other
governmental
allowances
  
Chargebacks
  
Returns
  
Other
  
Total reserves
included in 
SR&A
  
Total
 
 
(U.S.$ in millions)
 
Balance at December 31, 2018 $175  $3,006  $1,361  $1,530  $638  $176  $6,711  $6,886 
Provisions related to sales made in current year period  229   2,651   548   4,822   148   213   8,427   8,656 
Provisions related to sales made in prior periods  —     7   —     (5)  3   (4)  1   1 
Credits and payments  (242)  (2,975)  (739)  (4,936)  (196)  (206)  (9,052)  (9,294)
Translation differences  —     4   —     2   2   4   12   12 
                                 
Balance at June 30, 2019 $162  $2,693  $1,170  $1,413  $595  $183  $6,054  $6,261 
                                 
NOTE 10 – Accumulated other comprehensive loss:

The components of, and changes within, accumulated other comprehensive losses attributable to Teva are presented in the table below:

   Net Unrealized Gains/(Losses)  Benefit Plans    
   Foreign
currency
translation
adjustments
  Available-for-
sale securities
   Derivative
financial
instruments
  Actuarial
gains/(losses)
and prior
service
(costs)/credits
  Total 

Balance as of December 31, 2017*

  $(1,316 $1   $(442 $(91 $(1,848
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Other comprehensive income (loss) before reclassifications

   156   1    (51  —     106 

Amounts reclassified to the statements of income

   —     —      7   —     7 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Net other comprehensive income (loss) before tax

   156   1    (44  —     113 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Net other comprehensive income (loss) after tax**

   156   1    (44  —     113 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

Balance as of March 31, 2018

  $(1,160 $2   $(486 $(91 $(1,735
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

 

 
Net Unrealized Gains (Losses)
  
Benefit Plans
    
 
Foreign
currency
translation
adjustments
  
Available-for-
sale securities
  
Derivative
financial
instruments
  
Actuarial
gains (losses)
and prior
service
(costs) credits
  
Total
 
 
(U.S. $ in millions)
 
Balance as of December 31, 2017*
 $
(1,316
) $
1
  $
(442
) $
(91
) $
(1,848
)
Other comprehensive income (loss) before reclassifications
  
(495
)  —     
42
   
—  
   
(453
)
Amounts reclassified to the statements of income
  
—  
   (1  
14
   1   
14
 
                     
Net other comprehensive income (loss) before tax
  
(495
)  
(1
)  
56
   
1
   
(439
)
Corresponding income tax  —     —     —     (2)  (2)
Net other comprehensive income (loss) after tax**
  
(495
)  
(1
)  
56
   
  (1
  
(441
)
                     
Balance as of June 30, 2018
 $
(1,811
) $
—  
  $
(386
) $
(92
) $
(2,289
)
                     
*Following the adoption of ASU
2016-01,
the Company recorded a $5 $
million opening balance reclassification from accumulated other comprehensive income to retained earnings.
**Amounts do not include a $
23
 million gain from foreign currency translation adjustments attributable to
non-controlling interests of a $83 million gain.
interests.

20

Table of Contents
TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

   Net Unrealized Gains/(Losses)  Benefit Plans    
   Foreign
currency
translation
adjustments
  Available-for-
sale securities
  Derivative
financial
instruments
  Actuarial
gains/(losses)
and prior
service
(costs)/credits
  Total 

Balance, December 31, 2016

  $(2,769 $(7 $(302 $(81 $(3,159
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Other comprehensive income/(loss) before reclassifications

   448   90   2   (9  531 

Amounts reclassified to the statements of income

   (52  (35  6   1   (80
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net other comprehensive income/(loss) before tax

   396   55   8   (8  451 

Corresponding income tax

   —     (1  —     (5  (6
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net other comprehensive income/(loss) after tax*

   396   54   8   (13  445 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, March 31, 2017

  $(2,373 $47  $(294 $(94 $(2,714
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 
Net Unrealized Gains (Losses)
  
Benefit Plans
    
 
Foreign
currency
translation
adjustments
  
Available-for-
sale securities
  
Derivative
financial
instruments
  
Actuarial
gains (losses)
and prior
service
(costs) credits
  
Total
 
 
(U.S. $ in millions)
 
Balance as of December 31, 2018
 $
(2,055
) $
1
  $
(327
) $
(78
) $
(2,459
)
                     
Other comprehensive income (loss) before reclassifications
  
111
   
—  
   
22
   
—  
   
133
 
Amounts reclassified to the statements of income
  
—  
   
—  
   
15
   
—  
   
15
 
                     
Net other comprehensive income (loss) before tax
  
111
   
—  
   
37
   
—  
   
148
 
Corresponding income tax  —     —     —     (1)  (1)
                     
Net other comprehensive income (loss) after tax*
  
111
   
—  
   
37
   
(1
)  
147
 
                     
Balance as of June 30, 2019
 $
(1,944
) $
1
  $
(290
) $
(79
) $
(2,312
)
                     
*Amounts do not include a $
24
 million gain from foreign currency translation adjustments attributable to
non-controlling interests of a $70 million gain.
interests.

NOTE 11 – Debt obligations:

a. Short-term debt:

   Weighted average interest
rate as of March 31, 2018
 Maturity   March 31,
2018
   December 31,
2017
 
         (U.S. $ in millions) 

Term loan JPY 28.3 billion(5)

  JPY LIBOR+0.25%  2018   $—     $251 

Convertible debentures

  0.25%  2026   514    514 

Other

  11.68%  2018    2    1 

Current maturities of long-term liabilities

 

   786    2,880 
  

 

 

   

 

 

 

Total short term debt

 

  $1,302   $3,646 
  

 

 

   

 

 

 

*Net-share settlement feature exercisable at any time.

 
Weighted average interest rate as of
June 30, 2019
  
Maturity
  
June 30,
2019
  
December 31,
2018
 
     
(U.S. $ in millions)
 
Bank and financial institutions
  
4.25
%    $
1
  $
2
 
Convertible debentures
  
0.25
%  
2026
   
514
   
514
 
Current maturities of long-term liabilities
  
2,256
   
1,700
  
          
Total short-term debt
 $
2,771
  $
2,216
  
          
21

Table of Contents
TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

Long-term debt includes the following:

   Weighted average interest
rate as of March 31, 2018
 Maturity  March 31, 2018   December 31,
2017
 
       
   %    (U.S. $ in millions) 

Senior notes EUR 1,750 million

  0.38% 2020  $2,152   $2,095 

Senior notes EUR 1,500 million

  1.13% 2024   1,837    1,788 

Senior notes EUR 1,300 million

  1.25% 2023   1,593    1,550 

Senior notes EUR 1,000 million(3)

  2.88% 2019   —      1,199 

Senior notes EUR 900 million(1)

  4.50% 2025   1,109    —   

Senior notes EUR 750 million

  1.63% 2028   915    891 

Senior notes EUR 700 million(1)

  3.25% 2022   863    —   

Senior notes EUR 700 million

  1.88% 2027   859    837 

Senior notes USD 3,500 million

  3.15% 2026   3,492    3,492 

Senior notes USD 3,000 million

  2.20% 2021   2,997    2,996 

Senior notes USD 3,000 million

  2.80% 2023   2,992    2,992 

Senior notes USD 2,000 million

  1.70% 2019   2,000    2,000 

Senior notes USD 2,000 million

  4.10% 2046   1,984    1,984 

Senior notes USD 1,500 million(3)

  1.40% 2018   —      1,500 

Senior notes USD 1250 million(2)

  6.00% 2024   1,250    —   

Senior notes USD 1250 million(2)

  6.75% 2028   1,250    —   

Senior notes USD 844 million

  2.95% 2022   863    864 

Senior notes USD 789 million

  6.15% 2036   781    781 

Senior notes USD 700 million

  2.25% 2020   700    700 

Senior notes USD 613 million

  3.65% 2021   623    624 

Senior notes USD 588 million

  3.65% 2021   587    587 

Senior notes CHF 450 million

  1.50% 2018   472    461 

Senior notes CHF 350 million

  0.50% 2022   367    360 

Senior notes CHF 350 million

  1.00% 2025   368    360 

Senior notes CHF 300 million

  0.13% 2018   314    308 

Fair value hedge accounting adjustments

   (16   (2
     

 

 

   

 

 

 

Total senior notes

   30,352    28,367 

Term loan USD 2.5 billion(4)

  LIBOR +1.1375% 2018   —      285 

Term loan USD 2.5 billion(4)

  LIBOR +1.50% 2017-2020   —      2,000 

Term loan JPY 58.5 billion(5)

  JPY LIBOR +0.55% 2022   —      519 

Term loan JPY 35 billion(6)

  1.42% 2019   —      311 

Term loan JPY 35 billion(6)

  JPY LIBOR +0.3% 2018   —      311 
     

 

 

   

 

 

 

Total loans

   —      3,426 

Debentures USD 15 million(7)

  7.20% 2018   —      15 

Other

  7.31% 2026   5    5 
  

 

 

   

 

 

 

Total debentures and others

   5    20 
     

 

 

   

 

 

 

Less current maturities

   (786   (2,880

Derivative instruments

   16    2 

Less debt issuance costs

   (137   (106
  

 

 

   

 

 

 

Total long-term debt

  $29,450   $28,829 
  

 

 

   

 

 

 

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

Debt development

debt:
                 
 
Weighted average interest
rate as of June 30, 2019
  
Maturity
  
June 30,
2019
  
December 31,
2018
 
      
(U.S. $ in millions)
 
Senior notes EUR 1,660 million
  
0.38%
   
2020
  $
1,886
  $
1,897
 
Senior notes EUR 1,500 million
  
1.13%
   
2024
   
1,697
   
1,707
 
Senior notes EUR 1,300 million
  
1.25%
   
2023
   
1,472
   
1,480
 
Senior notes EUR 900 million
  
4.50%
   
2025
   
1,023
   
1,029
 
Senior notes EUR 750 million
  
1.63%
   
2028
   
846
   
850
 
Senior notes EUR 700 million
  
3.25%
   
2022
   
796
   
801
 
Senior notes EUR 700 million
  
1.88%
   
2027
   
794
   
798
 
Senior notes USD 3,500 million
  
3.15%
   
2026
   
3,493
   
3,493
 
Senior notes USD 3,000 million
  
2.20%
   
2021
   
2,998
   
2,997
 
Senior notes USD 3,000 million
  
2.80%
   
2023
   
2,994
   
2,993
 
Senior notes USD 1,556 million (1)
  
1.70%
   
2019
   
1,556
   
1,700
 
Senior notes USD 2,000 million
  
4.10%
   
2046
   
1,985
   
1,985
 
Senior notes USD 1,250 million
  
6.00%
   
2024
   
1,250
   
1,250
 
Senior notes USD 1,250 million
  
6.75%
   
2028
   
1,250
   
1,250
 
Senior notes USD 844 million
  
2.95%
   
2022
   
858
   
860
 
Senior notes USD 789 million
  
6.15%
   
2036
   
782
   
782
 
Senior notes USD 700 million
  
2.25%
   
2020
   
700
   
700
 
Senior notes USD 613 million
  
3.65%
   
2021
   
619
   
621
 
Senior notes USD 588 million
  
3.65%
   
2021
   
587
   
587
 
Senior notes CHF 350 million
  
0.50%
   
2022
   
359
   
356
 
Senior notes CHF 350 million
  
1.00%
   
2025
   
359
   
356
 
Fair value hedge accounting adjustments
          
9
   
(9
)
                 
Total senior notes
  
28,313
   
28,483
  
Other long-term debt
  
1.15%
   
2026
   
1
   
12
 
Less current maturities
  
(2,256
)  
(1,700
) 
Derivative instruments
  
(9
)  
9
  
Less debt issuance costs
  
(94
)  
(104
) 
                 
Total senior notes and loans
 $
25,955
  $
26,700
  
          
(1)In March 2018,During the first six months of 2019, Teva Pharmaceutical Finance Netherlands II B.V., a Teva finance subsidiary, issued senior notes in an aggregaterepurchased and canceled approximately $144 million principal amount of €1.6 billion.

(2)In March 2018, Teva Pharmaceutical Finance Netherlands III B.V., a Teva finance subsidiary, issued senior notes in an aggregate principal amount of $2.5 billion.

(3)In March 2018, Teva redeemed in full its $1.5 billion 1.4%$1,700 million 1.7% senior notes due in July 2018 and its €1.0 billion 2.88% senior notes due in April 2019.

(4)During the first quarter of 2018, In July 2019, Teva prepaid approximately $2.3 billion principal amount of the remaining term loan facilities.

(5)During the first quarter of 2018, Teva prepaid in full JPY 86.8 billion principal amount of the outstanding term loan facilities of which JPY 28.3 billion were in short-term debt as of December 31, 2017.

(6)During the first quarter of 2018, Teva prepaid in full JPY 70 billion of its 1.42% and JPY LIBOR+0.3% outstanding term loans.

(7)During the first quarter of 2018, Teva prepaid in full $15repaid at maturity $1,556 million of its outstanding debentures.1.7% senior notes.

Long term

Long-term debt was issued by several indirect wholly-owned subsidiaries of the Company and is fully and unconditionally guaranteed by the Company as to payment of all principal, interest, discount and additional amounts, (as defined), if any.

Long term

Long-term debt as of March 31, 2018June 30, 2019 is effectively denominated (taking into consideration cross currency swap agreements) in the following currencies: U.S. dollar 64%62%, euro 34%35% and Swiss franc 2%3%.

Teva’s principal sources of short-term liquidity are its cash on hand, existing cash investments, liquid securities and available credit facilities, primarily its $3$2.3 billion syndicated revolving credit facility (“RCF”), which was not utilized as of March 31, 2018, as well as internally generated funds. .
In connection with the requirements of the RCF,April 2019, the Company entered into negative pledge agreements witha $2.3 
billion unsecured syndicated RCF, which replaced the previous
$3 
billion revolving credit facility. The RCF contains certain bankscovenants, including certain limitations on incurring liens and institutional investors. Under the agreements, the Companyindebtedness and its subsidiaries have undertaken not to register floating charges on assets in favormaintenance of any third parties without the prior consent of the banks, to maintain certain financial ratios, including the requirement to maintain compliance with a net debt to EBITDA ratio, which becomes more restrictive over time, and to fulfill other restrictions, as stipulated by the agreements. As of March 31, 2018, the Company did not have any outstanding debt under the RCF, which is our only debt subject to thetime. The net debt to EBITDA covenant Assuming utilizationratio limit is 6.25x through December 31, 2019, gradually 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 of June 30, 2019, no amounts were outstanding under the RCF. As of the date of this report, $500 million was outstanding under the RCF. Based on current and underforecasted results, the Company expects that it will not exceed the financial covenant thresholds set forth in the RCF within one year from the date that these financial statements are issued.
22
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TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
Under specified circumstances, includingnon-compliance with suchany of the covenants described above and the unavailability of any waiver, amendment or other modification thereto, and the expiration of any applicable grace period thereto, substantially allCompany 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 the Company’s debt could be negatively impacted bynon-compliance with such covenants. The Company hassenior notes due to cross acceleration provisions.
Teva expects that it will continue to have sufficient cash resources to meetsupport its debt service payments and all other financial obligations in the ordinary course of business for at least twelve monthswithin one year from the date of the release of this Quarterly Report.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

that these financial statements are issued.

NOTE 12 – Fair value measurement:

Teva’s financial instruments consist mainly of cash and cash equivalents, investment in securities, current andnon-current receivables, short-term debt, current andnon-current payables, contingent consideration, senior notes and loans, convertible senior debentures and derivatives.

The fair value of the financial instruments included in working capital andnon-current receivables and payables approximates their carrying value. The fair value of term loans and bank facilities mostly approximates their carrying value, since they bear interest at rates close to the prevailing market rates.

Financial instruments measured at fair value

The Company measures fair value and discloses fair value measurements for financial assets and liabilities. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The accounting standard establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2: Observable inputs that are based on inputs not quoted on active markets, but corroborated by market data.

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs, to the extent possible, and considers counterparty credit risk in its assessment of fair value.

There were no transfers between Level 1, Level 2 and Level 3 during the first quartersix months of 2018.

2019.

23

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TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
Financial items carried at fair value as of March 31, 2018June 30, 2019 and December 31, 20172018 are classified in the tables below in one of the three categories described above:

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

   March 31, 2018 
   Level 1   Level 2   Level 3   Total 
   (U.S. $ in millions) 

Cash and cash equivalents:

        

Money markets

  $6   $—     $—     $6 

Cash, deposits and other

   1,412    —      —      1,412 

Investment in securities:

        

Equity securities

   58    —      —      58 

Other, mainly debt securities

   13    —      19    32 

Derivatives:

        

Asset derivatives - options and forward contracts

   —      15    —      15 

Asset derivatives - cross currency swaps

   —      4    —      4 

Liabilities derivatives - options and forward contracts

   —      (18   —      (18

Liabilities derivatives - interest rate and cross-currency swaps

   —      (141   —      (141

Contingent consideration*

   —      —      (708   (708
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $1,489   $(140  $(689  $660 
  

 

 

   

 

 

   

 

 

   

 

 

 
   December 31, 2017 
   Level 1 �� Level 2   Level 3   Total 
   (U.S. $ in millions) 

Cash and cash equivalents:

        

Money markets

  $5   $—     $—     $5 

Cash, deposits and other

   958    —      —      958 

Investment in securities:

        

Equity securities

   65    —      —      65 

Structured investment vehicles

   —      —      —      —   

Other, mainly debt securities

   14    —      18    32 

Derivatives:

        

Asset derivatives - options and forward contracts

   —      17    —      17 

Asset derivatives - cross-currency swaps

   —      25    —      25 

Liability derivatives - options and forward contracts

   —      (15   —      (15

Liabilities derivatives - interest rate and cross-currency swaps

   —      (98   —      (98

Contingent consideration*

   —      —      (735   (735
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $1,042   $(71  $(717  $254 
  

 

 

   

 

 

   

 

 

   

 

 

 

 
June 30, 2019
 
 
Level 1
  
Level 2
  
Level 3
  
Total
 
 
(U.S. $ in millions)
 
Cash and cash equivalents:
            
Money markets
 $
401
  $
—  
  $
—  
  $
401
 
Cash, deposits and other
  
1,764
   
—  
   
—  
   
1,764
 
Investment in securities:
            
Equity securities
  
48
   
—  
   
—  
   
48
 
Other, mainly debt securities
  
5
   
—  
   
13
   
18
 
Derivatives:
            
Asset derivatives—options and forward contracts
  
—  
   
14
   
—  
   
14
 
Asset derivatives
—interest rate and
 cross-currency swaps
  
   
   
85
   
—  
   
85
 
Liability derivatives—options and forward contracts  
—  
   
(55
)  
—  
   
(55
)
Liability derivatives—interest rate and cross-currency swaps  
—  
   
(37
)  
—  
   
(37
)
Contingent consideration*
  
—  
   
—  
   
(403
)  
(403
)
                 
Total
 $
2,218
  $
7
  $
(390
) $
1,835
 
                 
 
December 31, 2018
 
 
Level 1
  
Level 2
  
Level 3
  
Total
 
 
(U.S. $ in millions)
 
Cash and cash equivalents:
            
Money markets
 $
203
  $
—  
  $
—  
  $
203
 
Cash, deposits and other
  
1,579
   
—  
   
—  
   
1,579
 
Investment in securities:
            
Equity securities
  
51
   
—  
   
—  
   
51
 
Other, mainly debt securities
  
2
   
—  
   
10
   
12
 
Derivatives:
            
Asset derivatives
options and forward contracts
  
—  
   
18
   
—  
   
18
 
Asset derivatives—interest rate and cross-currency swaps  
—  
   
58
   
—  
   
58
 
Liability derivatives—options and forward contracts  
—  
   
(26
)  
—  
   
(26
)
Liability derivatives—interest rate and cross-currency swaps  
—  
   
(50
)  
—  
   
(50
)
Contingent consideration*
  
—  
   
—  
   
(507
)  
(507
)
                 
Total
 $
1,835
  $
—  
  $
(497
) $
1,338
 
                 
*Contingent consideration represents liabilities recorded at fair value in connection with acquisitions.

Teva determined the fair value of the liability for the contingent consideration based on a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent consideration is based on several factors, such as: the cash flows projected from the success of unapproved product candidates; the probability of success of product candidates, including risks associated with uncertainty regarding achievement and payment of milestone events; the time and resources needed to complete the development and approval of product candidates; the life of the potential commercialized products and associated risks of obtaining regulatory approvals in the U.S.
United States
and Europe, and the risk adjusted discount rate for fair value measurement.

The contingent consideration is evaluated quarterly, or more frequently, if circumstances dictate. Changes in the fair value of contingent consideration are recorded in earnings.

Significant changes in unobservable inputs, mainly the probability of success and cash flows projected, could result in material changes to the contingent consideration liability.

24

Table of Contents
TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

The following table summarizes the activity for those financial assets and liabilities where fair value measurements are estimated utilizing Level 3 inputs:

   Three months ended
March 31, 2018
 
  
   (U.S. $ in millions) 

Fair value at the beginning of the period

  $(717

Revaluation of debt securities

   1 

Adjustments to provisions for contingent consideration:

  

Actavis Generics transaction

   (6

Labrys transaction

   (1

Eagle transaction

   (1

Settlement of contingent consideration:

  

Eagle transaction

   35 
  

 

 

 

Fair value at the end of the period

  $(689
  

 

 

 

 
Six months ended
June 30, 2019
 
 
(U.S. $ in millions)
 
Fair value at the beginning of the period
 $
(497
)
Revaluation of debt securities
  
3
 
Adjustments to provisions for contingent consideration:
   
Actavis Generics transaction
  
101
 
Eagle transaction
  
(54
)
Settlement of contingent consideration:
   
Eagle transaction
  
57
 
     
Fair value at the end of the period
 $
(390
)
     
Financial instruments not measured at fair value

Financial instruments measured on a basis other than fair value mostly consist of senior notes and convertible senior debentures and are presented in the table below in terms of fair value:

   Estimated fair value* 
   March 31,
2018
   December 31,
2017
 
   (U.S. $ in millions) 

Senior notes included under senior notes and loans

  $26,365   $23,459 

Senior notes and convertible debentures included under short-term debt

   1,242    2,713 
  

 

 

   

 

 

 

Total

  $27,607   $26,172 
  

 

 

   

 

 

 

 
Fair value*
 
 
June 30,
2019
  
December 31,
2018
 
      
 
(U.S. $ in millions)
 
Senior notes included under senior notes and loans
 $
22,770
  $
23,560
 
Senior notes and convertible senior debentures included under short-term debt
  
2,719
   
2,140
 
         
Total
 $
25,489
  $
25,700
 
         
*The fair value was estimated based on quoted market prices, where available.price.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 13 – Derivative instruments and hedging activities:

a.
Foreign exchange risk management:
In the first six months of 2019, approximately 49% of Teva’s revenues were denominated in currencies other than the U.S. dollar. As a result, Teva is subject to significant foreign currency risks.
The Company enters into forward exchange contracts, purchases and writes options in order to hedge the currency exposure on balance sheet items. In addition, the Company takes measures to reduce exposure by using natural hedging. The Company also acts to offset risks in opposite directions among the companies in the Group. The currency hedged items are usually denominated in the following main currencies: the new Israeli shekel (NIS), the euro (EUR), the Swiss franc (CHF), the Japanese yen (JPY), the British pound (GBP), the Canadian dollar (CAD), the Polish zloty (PLN), the Indian rupee (INR) and other European and Latin American currencies.
Depending on market conditions, foreign currency risk is also managed through the use of foreign currency debt.
The Company hedges against possible fluctuations in foreign subsidiaries net assets (“net investment hedge”) and entered into cross-currency swaps and forward contracts in order to hedge such an exposure.
Most of the counterparties to the derivatives are major banks and the Company is monitoring the associated inherent credit risks. The Company does not enter into derivative transactions for trading purposes.
25

Table of Contents
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
b.Interest risk management:
The Company raises capital through various debt instruments, including straight notes that bear a fixed or variable interest rate, bank loans, securitizations and convertible debentures. In some cases, the Company has swapped from a fixed to a floating interest rate (“fair value hedge”) and from a fixed to a fixed interest rate with an exchange from a currency other than the functional currency (“cash flow hedge”), thereby reducing overall interest expenses or hedging risks associated with interest rate fluctuations.
c.
Derivative instruments notional amounts
The following table summarizes the notional amounts for hedged items, when transactions are designated as hedge accounting:

   March 31,
2018
   December 31,
2017
 
   (U.S. $ in millions) 

Cross-currency swap – cash flow hedge

  $588   $588 

Cross-currency swap – net investment hedge

   1,000    1,000 

Interest rate swap – fair value hedge

   500    500 

         
 
June 30,
2019
  
December 31,
2018
 
 
(U.S. $ in millions)
 
Cross-currency swap—cash flow hedge
 $
588
  $
588
 
Cross-currency swap—net investment hedge
  
1,000
   
1,000
 
Interest rate swap—fair value hedge
  
500
   
500
 
         
 $
2,088
  $
2,088
 
         
d.
Derivative instrument outstanding:
The following table summarizes the classification and fair values of derivative instruments:

   Fair value 
   Designated as hedging
instruments
   Not designated as hedging
instruments
 
   March 31,
2018
   December 31,
2017
   March 31,
2018
   December 31,
2017
 

Reported under

  (U.S. $ in millions) 

Asset derivatives:

        

Other current assets:

        

Option and forward contracts

  $—     $—     $15   $17 

Othernon-current assets:

        

Cross-currency swaps – cash flow hedge

   4    25    —      —   

Liability derivatives:

        

Other current liabilities:

        

Option and forward contracts

   —      —      (18   (15

Other taxes and long-term liabilities:

        

Cross-currency swaps – net investment hedge

   (125   (96   —      —   

Senior notes and loans:

        

Interest rate swaps – fair value hedge

   (16   (2   —      —   

Derivatives on foreign exchange contracts mainly hedge Teva’s balance sheet items

                 
 
Fair value
 
 
Designated as hedging
instruments
  
Not designated as hedging
instruments
 
 
June 30,
2019
  
December 31,
2018
  
June 30,
2019
  
December 31,
2018
 
Reported under
 
(U.S. $ in millions)
 
Asset derivatives:
            
Other current assets:
            
Option and forward contracts
 $
—  
  $        
—  
  $  
14
  $        
18
 
Other
non-current
assets:
            
Cross-currency swaps—cash flow hedge
  
76
   
58
   —     
—  
 
Senior notes and loans:
                
Interest rate swaps—fair value hedge  9   —     —     —   
                 
Liability derivatives:
            
Other current liabilities:
            
Option and forward contracts
  
   
—  
   
(55
)  
(26
)
Cross-currency swaps—net investment hedge
  
(37
)  
—  
   —     —   
Other taxes and long-term liabilities:
            
Cross-currency swaps—net investment hedge
  
   
(41
)  
—  
   
—  
 
Senior notes and loans:
            
Interest rate swaps—fair value hedge
  
   
(9
)  
—  
   
—  
 
The table below provides information regarding the location and amount of pre-tax (gains) losses from currency exposure butderivatives designated in fair value or cash flow hedging relationships:
                 
 
Financial expenses, net
  
Other comprehensive income
 
 
Three month ended,
  
Three month ended,
 
 
June 30,
2019
  
June 30,
2018**
  
June 30,
2019
  
June 30,
2018**
 
Reported under
 
(U.S. $ in millions)
 
Line items in which effects of hedges are recorded
 $206  $236  $(76) $614 
Cross-currency swaps—cash flow hedge (1)  (1)  *   4   (28)
Cross-currency swaps—net investment hedge (2)  (7)  (9)  14   (59)
Interest rate swaps—fair value hedge (3)  1   *   —     —   
*Represents an amount less than $0.5 million.
**Comparative figures are based on prior hedge accounting standard.
26
Table of Contents
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
                 
 
Financial expenses, net
  
Other comprehensive income
 
 
Six month ended,
  
Six month ended,
 
 
June 30,
2019
  
June 30,
2018**
  
June 30,
2019
  
June 30,
2018**
 
Reported under
 
(U.S. $ in millions)
 
Line items in which effects of hedges are recorded
 $
425
  $
507
  $
(170
) $
418
 
Cross-currency swaps—cash flow hedge (1)
  
(1
)  (1  
(15
)  
(11
)
Cross-currency swaps—net investment hedge (2)
  
(15
)  
(16
)  
(6
)  
(29
)
Interest rate swaps—fair value hedge (3)
  
1
   
*
   
—  
   
—   
 
*Represents an amount less than $0.5 million.
**Comparative figures are based on prior hedge accounting standard.
The table below provides information regarding the location and amount of pre-tax (gains) losses from derivatives not designated as hedging instruments for accounting purposes. With respect to such derivatives, losses of $19 million and $47 million were recognized under financial expenses, net for the three months ended March 31, 2018 and 2017, respectively. Such losses and gains offset the revaluation of the balance sheet items which is also recorded under financial expenses, net.

With respect to the interest rate and cross-currency swap agreements, gains of $0.5 million and $1 million were recognized under financial expenses, net for the three months ended March 31, 2018 and 2017, respectively. Such gains mainly reflect the differences between the fixed interest rate and the floating interest rate.

instruments:

                 
 
Financial expenses, net
  
Net revenues
 
 
Three month ended,
  
Three month ended,
 
 
June 30,
2019
  
June 30,
2018
  
June 30,
2019
  
June 30,
2018
 
Reported under
 
(U.S. $ in millions)
 
Line items in which effects of hedges are recorded
 $
206
  $
236
  $
(4,337
) $
(4,701
)
Option and forward contracts (4)
  
34
   
(24
)  
—  
   
—   
 
Option and forward contracts Economic hedge     —     4
 
 
 
(1
)
    
 
Financial expenses, net
  
Net revenues
 
 
Six month ended,
  
Six month ended,
 
 
June 30, 
2019
  
June 30, 2018
  
June 30,
2019
  
June 30,
2018
 
Reported under
 
(U.S. $ in millions)
 
Line items in which effects of hedges are recorded
 $
425
  $
507 
  $
(8,632
) $
(9,766
)
Option and forward contracts (4)
  
(7
)  
(5
)  
—  
   
—   
 
Option and forward contracts Economic hedge  —     —     4
 
 
 
(1
)
(1)
With respect to cross-currency swap agreements, Teva recognized gains which mainly reflect the differences between the fixed interest rate and the floating interest rate.
(2)In each of the first and second quarters of 2017, Teva entered into a cross currency swap agreement with a notional amount of $500 million maturing in 2020. These cross currency swaps were designated as a net investment hedge of Teva’s foreign subsidiaries euro denominated net assets, in order to reduce the risk of adverse exchange rate fluctuations. With respect to these cross currency swap agreements, Teva recognized gains which mainly reflect the differences between the
float-for-float
interest rates paid and received. No amounts were reclassified from accumulated other comprehensive income into income related to the sale of a subsidiary.
(3)In the fourth quarter of 2016, Teva entered into an interest rate swap agreement designated as fair value hedge relating to its 2.8% senior notes due 2023 with respect to $500 million notional amount of outstanding debt. With respect to this interest rate swap agreement, Teva recognized a loss which mainly reflects the differences between the fixed interest rate and the floating interest rate.
(4)Teva uses foreign exchange contracts (mainly option and forward contracts) to hedge balance sheet items from currency exposure. These foreign exchange contracts are not designated as hedging instruments for accounting purposes. In connection with these foreign exchange contracts, Teva recognizes gains or losses that offset the revaluation of the balance sheet items also recorded under financial expenses—net.
e.
Matured forward starting interest rate swaps and treasury lock agreements:
Commencing in the third quarter of 2015, Teva entered into forward starting interest rate swap and treasury lock agreements designated as cash flow hedges of the U.S. dollar debt issuance in July 2016, with respect to $3.75 billion and $1.5 billion notional amounts, respectively. These agreements hedged the variability in anticipated future interest payments due to possible changes in the benchmark interest rate between the date the agreements were entered into and the actual date of the U.S. dollar debt issuance in July 2016 (in connection with the closing of the Actavis Generics acquisition).

27
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TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

Certain of the forward starting interest rate swaps and treasury lock agreements matured during the first half of 2016. In July 2016, in connection with the debt issuances, Teva terminated the remaining forward starting interest rate swaps and treasury lock agreements. The termination of these transactions resulted in a loss position of $493 million, of which $242 million were settled on October 7, 2016 and the remaining amount was settled in January 2017. The change in fair value of these instruments recorded as part ofin other comprehensive income (loss) will be amortized under financial expenses, net
expenses-net
over the life of the debt. Such losses mainly reflect the changes in the benchmark interest rate between the date the agreements were entered into and the actual date of the U.S. debt issuance in July 2016.

With respect to the forward starting interest rate swaps and treasury lock agreements,
losses of $7 million were recognized under financial expenses, net for the three months ended March 31,June 30, 2019 and 2018, and 2017.

losses of $15 million and $14 million were recognized under financial expenses, net for the six months ended June 30, 2019 and 2018.

In the third quarter of 2016, Teva terminated interest rate swap agreements designated as fair value hedge relating to certainits 2.95% senior notes.notes due 2022 with respect to $844 million notional amount and its 3.65% senior notes due 2021 with respect to $450 million notional amount. Settlement of these transactions resulted in a gain position of $41 million. The fair value hedge accounting adjustments of these instruments, which are recorded under senior notes and loans, will beare amortized under financial expenses, net
expenses-net
over the life of the debt. debt as additional interest expense.
With respect to these terminatedthe interest rate swap agreements, gains of $2$
2 million were recognized under financial expenses, net for the three months ended March 31,June 30, 2019 and 2018, and 2017.

In the fourth quarter of 2016, Teva entered into an interest rate swap agreement designated as fair value hedge relating to its 2.8% senior notes due 2023, with respect to $500 million notional amount of outstanding debt.

In each of the first and second quarters of 2017, Teva entered into a cross currency swap agreement maturing in 2020 with a notional amount of $500 million. These cross currency swaps were designated as a net investment hedge of Teva’s euro denominated net assets, in order to reduce the risk of adverse exchange rate fluctuations. The effective portion of the hedge will be determined by looking into changes in spot exchange rate. The change in fair value of the cross currency swap attributable to changes other than those due to fluctuations in the spot exchange rates are excluded from the assessment of hedge effectiveness and are reported directly in the statement of income.

With respect to these cross currency swap agreements, gains of $7$3 million were recognized under financial expenses, net for the threesix months ended March 31,June 30, 2019 and 2018. The amount recorded in the statement of income in the first quarter of 2017 was not material.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 14 – Other assets impairments, restructuring and other items:

Other impairments, restructuring

 
Three months ended
June 30,
  
Six months ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(U.S. $ in millions)
 
Impairments of long-lived tangible assets (1) $48  $27  $68  $253 
Contingent consideration  24   47   (47)  55 
Restructuring  47   107   79   354 
Other  (18)  13   3   33 
                 
Total $101  $194  $103  $695 
(1)Including impairments related to exit and disposal activities
Impairments
Impairments of property, plant and other items consisted of the following:

   Three months ended
March 31,
 
   2018   2017 
   (U.S. $ in millions) 

Restructuring expenses

  $247   $130 

Integration expenses

   —      23 

Contingent consideration

   8    21 

Impairments of long-lived assets

   432    11 

Other

   20    55 
  

 

 

   

 

 

 

Total

  $707   $240 
  

 

 

   

 

 

 

In determining the estimated fair value of long-lived assets, Teva utilized a discounted cash flow model. The key assumptions within the model related to forecasting future revenue and operating income, an appropriate WACC and an appropriate terminal value based on the nature of the long-lived asset. The Company’s updated forecasts of net cash flowsequipment for the impaired assets reflect, among others,three months ended on June 30, 2019 and 2018 were 

$
48
million and $27 million, respectively.
Impairments of property, plant and equipment for the following: (i) for IPR&D assets, the impact of changes to the development programs, the projected developmentsix months ended on June 30, 2019 and regulatory timeframes2018 were $68 million and the risks associated with these assets; and (ii) for product rights, pricing and volume projections, as well as patent life and any significant changes to the competitive environment.

$253 million, respectively.

As a result of Teva’s plant rationalization acceleration followingin connection with the two yeartwo-year restructuring plan that was announced in December 2017, to the extent the Company will changechanges its plans on any given asset and/or the assumptions underlying such plan,plans, there couldmay be additional impairments in the future.

Impairments

Impairments
Contingent consideration
In the three months ended June 30, 2019, Teva recorded
an expense of long-lived intangible assets
$24 million for contingent consideration, compared to an expense of $47 
million in the three months ended June 30, 2018. The expenses in the second quarter of 2019 mainly related to an increase in the expected future royalty payments to Eagle Pharmaceuticals, Inc. due to the orphan drug status granted to BENDEKA and the expected royalty payments in connection with lenalidomide (generic equivalent of Revlimid
®
) which was part of the Actavis acquisition.
In the six months ended June 30, 2019, Teva recorded $47 million of contingent consideration income, compared to $55 million expense in the six months ended June 30, 2018. The income in the first quartersix months of 2018 were $206 million, mainly consisting of:

Identifiable IPR&D of $117 million2019 mainly related to revaluation of generic products acquired from Actavis Generics due to development progress and changes in other key valuation indications (market size, legal landscape, launch date or discount rate).

Identifiable product rights of $76 million due to revaluation of Actavis Generics product rightsthe decrease in the United States.

Impairments of property, plant and equipment in the first quarter of 2018 were $226 million, mainly consisting of:

$147 million related to restructuring costs, including:

$113 million related to site closures in Israel; and

$34 million related to headquarters and distribution sites consolidation in the United States;

Other impairment costs, mainly $56 million related to a plant located India,expected royalty payments in connection with lenalidomide (generic equivalent of Revlimid
®
) which was part of the P&G separation agreement.Actavis acquisition.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

Restructuring

In the first quarter of 2018,three months ended June 30, 2019, Teva recorded $247$47 million of restructuring expenses, compared to $130$107 million in the first quarterthree months ended June 30, 2018.
28
Table of 2017. TheContents
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
In the six months ended June 30, 2019, Teva recorded $79 million of restructuring expenses, compared to $354 million in the first quarter of 2018 were primarily related to headcount reductions across all functions.

six months ended June 30, 2018.

Since Teva’sthe announcement of its restructuring plan, the CompanyTeva reduced its global headcount by approximately 6,20011,145 full-time-equivalent employees.

During the three months ended June 
30
,
2019
and
2018
, Teva also recorded a $226 million impairmentimpairments of property, plant and equipment related to restructuring costs as detailed in “— Impairments” above.

of $21 million and $8 million, respectively.

During the six months ended June 
30
,
2019
and
2018
, Teva recorded
impairments
of property, plant and equipment related to restructuring costs of $21 million and $155 million, respectively.
The following table providestables provide the components of costs associated with Teva’s restructuring​​​​​​​ plan, including other costs associated with Teva’s restructuring plan including costs related to exit and disposal activities:

   Three months ended March 31, 
   2018   2017 
   (U.S. $ in millions) 

Restructuring

    

Employee termination

  $228   $95 

Other

   19    35 
  

 

 

   

 

 

 

Total

  $247   $130 
  

 

 

   

 

 

 

recorded under different items:

 
Three months ended June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions)
 
Restructuring
      
Employee termination
 $
36
  $
90
 
Other
  
11
   
17
 
         
Total
 $
47
  $
107
 
         
    
 
Six months ended June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions)
 
Restructuring
      
Employee termination
 $
56
  $
318
 
Other
  
23
   
36
 
         
Total
 $
79
  $
354
 
         
The following table provides the components of and changes in the Company’s restructuring accruals:

   Employee termination
costs
   Other   Total 
   (U.S. $ in millions ) 

Balance as of January 1, 2018

  $(294  $(17  $(311

Provision

   (228   (19   (247

Utilization and other*

   129    7    136 
  

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2018

  $(393  $(29  $(422
  

 

 

   

 

 

   

 

 

 
 
Employee
termination costs
  
Other
  
Total
 
 
(U.S. $ in millions )
 
Balance as of January 1, 2019
 $
(204
) $
(29
) $
(233
)
Provision
  
(56
)  
(23
)  
(79
)
Utilization and other*
  
67
   
45
   
112
 
             
Balance as of June 30, 2019
 $
(193
) $
(7
) $
(200
)
             
*Includes adjustments for foreign currency translation.

Significant regulatory events
In July 2018, the FDA completed an inspection of Teva’s manufacturing plant in Davie, Florida in the United States, and issued a Form
FDA-483
to the site. In October 2018, the FDA notified Teva that the inspection of the site is classified as “official action indicated” (OAI). On February 5, 2019, Teva received a warning letter from the FDA that contains four enumerated concerns related to production, quality control, and investigations at this site. Teva is working diligently to remediate the FDA’s concerns in a manner consistent with current good manufacturing practice (CGMP) requirements, and to address those concerns as quickly and as thoroughly as possible. If Teva is unable to remediate the warning letter findings to the FDA’s satisfaction, it may face additional consequences, including 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. Teva expects to generate approximately $142 million in revenues from this site for the remainder of 2019, assuming remediation or enforcement does not cause any unscheduled slowdown or stoppage at the facility.
In July 2018, Teva 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 impurity called NDMA found in valsartan API supplied to Teva by Zhejiang Huahai Pharmaceutical. Since July 2018, Teva has been actively engaged with regulatory agencies around the world in reviewing its valsartan and other sartan products for NDMA and other related impurities and, where necessary, has initiated additional voluntary recalls. The impact of this recall
as of June 30, 2019
on Teva’s financial statements was $55 million, primarily related to inventory reserves
 and returns
. Teva expects to continue to experience loss of revenues and profits in connection with this matter. In addition, multiple lawsuits have been filed in connection with this matter, for which litigation costs are currently being incurred. Teva may also incur additional customer penalties, impairments and litigation costs going forward. 
29

Table of Contents
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 15 – Legal settlements and loss contingencies:

Legal

In the second quarter of 2019, Teva recorded an expense of $646 million in legal
 settlements and loss contingencies for the three months ended March 31, 2018 resulted in income of $1.3 billion
, compared to expenses of $20 million for the three months ended March 31, 2017. The income in the first quarter of 2018 consisted primarily of the working capital adjustment with Allergan, the Rimsa settlement and a reversal of the reserve recorded in the second quarter of 2017 with respect2018. The expense in the second quarter of 2019 was mainly related to the carvedilol patent$85 million settlement paid in the opioid litigation followingbrought by the reversalOklahoma Attorney General and an estimated provision made
for
certain other opioid cases.
In 
the first six months of 2019
, Teva recorded
an expense of $703 million
 in legal settlements and loss contingencies
, compared to income of $1,258 million in the verdict grantingfirst six months of 2018. The expense in the awardfirst six months of 2019
was mainly
related to GSK. the
$85 million settlement paid in the opioid litigation brought by the Oklahoma Attorney General and an estimated provision made for certain other opioid cases
.
As of March 31, 2018June 30, 2019 and December 31, 2017, an accrued amount2018, Teva’s provision for legal settlements and loss contingencies of $872recorded under accrued expenses was $1,149 million and $1.2 billion, respectively, was recorded in accrued expenses.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

$562 million, respectively. 

NOTE 16 – Commitments and Contingencies:

contingencies:

General

From time to time, Teva and/or its subsidiaries are subject to claims for damages and/or equitable relief arising in the ordinary course of business. In addition, as described below, in large part as a result of the nature of its business, Teva is frequently subject to litigation. Teva generally believes that it has meritorious defenses to the actions brought against it and vigorously pursues the defense or settlement of each such action. Except as described below, Teva does not currently have a reasonable basis to estimate the loss, or range of loss, that is reasonably possible with respect to matters disclosed in this note.

Teva records a provision in its financial statements to the extent that it concludes that a contingent liability is probable and the amount thereof is estimable. Based upon the status of the cases described below, management’s assessments of the likelihood of damages, and the advice of counsel, no provisions have been made regarding the matters disclosed in this note, except as noted below. Litigation outcomes and contingencies are unpredictable, and excessive verdicts can occur. Accordingly, management’s assessments involve complex judgments about future events and often rely heavily on estimates and assumptions. Teva continuously reviews the matters described below and may, from time to time, remove previously disclosed matters that the Company has determined no longer meet the materiality threshold for disclosure.

If one or more of such proceedings described below were to result in final judgments against Teva, such judgments could be material to its results of operations and cash flows in a given period. In addition, Teva incurs significant legal fees and related expenses in the course of defending its positions even if the facts and circumstances of a particular litigation do not give rise to a provision in the financial statements.

In connection with third-party agreements, Teva may under certain circumstances be required to indemnify, and may be indemnified by, in unspecified amounts, the parties to such agreements against third-party claims. Among other things, Teva’s agreements with third parties may require Teva to indemnify them, or require them to indemnify Teva, for the costs and damages incurred in connection with product liability claims, in specified or unspecified amounts.

Except as otherwise noted, all of the litigation matters disclosed below involve claims arising in the United States. Except as otherwise noted, all third party sales figures given below are based on IQVIA (formerly IMS Health Inc.) data.

For income tax contingencies, see note 15 to Teva’s Annual Report on Form
10-K
for the year ended December 31, 2018.
Intellectual Property Litigation

From time to time, Teva seeks to develop generic versions of patent-protectedpatent-protected​​​​​​​ pharmaceuticals for sale prior to patent expiration in various markets. In the United States, to obtain approval for most generics prior to the expiration of the originator’s patents, Teva must challenge the patents under the procedures set forth in the Hatch-Waxman Act of 1984, as amended. To the extent that Teva seeks to utilize such patent challenge procedures, Teva is and expects to be involved in patent litigation regarding the validity, enforceability or infringement of the originator’s patents. Teva may also be involved in patent litigation involving the extent to which its product or manufacturing process techniques may infringe other originator or third-party patents.

Additionally, depending upon a complex analysis of a variety of legal and commercial factors, Teva may, in certain circumstances, elect to market a generic version even though litigation is still pending. To the extent Teva elects to proceed in this manner, it could face substantial liability for patent infringement if the final court decision is adverse to Teva, which could be material to its results of operations and cash flows in a given period.

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TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
The general rule for damages in patent infringement cases in the United States is that the patentee should be compensated by no less than a reasonable royalty and it may also be able, in certain circumstances, to be compensated for its lost profits. The amount of a reasonable royalty award would generally be calculated based on the sales of Teva’s product. The amount of lost profits would generally be based on the lost sales of the patentee’s product. In addition, the patentee may seek consequential damages as well as enhanced damages of up to three times the profits lost by the patent holder for willful infringement, although courts have typically awarded much lower multiples.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

Teva is also involved in litigation regarding patents in other countries where it does business, particularly in Europe, where Teva has in recent years increased the number of launches of its generic versions of branded pharmaceuticals prior to the expiration of the innovator’s patents.Europe. The laws concerning generic pharmaceuticals and patents differ from country to country. Damages for patent infringement in Europe may include lost profits or a reasonable royalty, but enhanced damages for willful infringement are generally not available.

In July 2014, GlaxoSmithKline (“GSK”) sued Teva in Delaware federal court for infringement of a patent expiring in June 2015 directed to using carvedilol in a specified manner to decrease the risk of mortality in patients with congestive heart failure. Teva and eight other generic producers began selling their carvedilol tablets (the generic version of GSK’s Coreg
®
) in September 2007. Teva vigorously disputed GSK’s claims on the merits and also disputed the amount and nature of GSK’s alleged damages. A jury trial was held and the jury returned a verdict in GSK’s favor finding Teva liable for induced infringement, including willful infringement, and assessing damages of $235.5 million, not including
pre-
or post-judgment interest. Teva filedFollowing post-trial motions for judgment as a matter of law askingfiled by the court to overturn the jury verdictparties, on inducement, invalidity, and the award of lost profits damages, and GSK filed post-trial motions asking the court to increase the damages amount in light of the willful infringement finding and to set the interest rate(s) to be applied to the total damages amount. On March 28, 2018, the District Courtdistrict court issued an opinion overturning the jury verdict and instead found no induced infringement by Teva, thereby finding that Teva did not owe any damages. The District Courtdamages; the district court also denied Teva’s motion seeking to overturn the jury verdict with respect to invalidity and denied GSK’s motion seeking to increase the damages award. GSK can appeal this decision.invalidity. On May 25, 2018, both parties filed an appeal. A hearing is scheduled for September 4, 2019. If the appeal of the District Court’sdistrict court’s decision is decided against Teva, the case would be remanded to the District Courtdistrict court for it to consider Teva’s other legal and equitable defenses that have not yet been considered by the District Court.district court. The provision that was included in the financial statements for this matter has beenwas reversed as the exposure is no longer considered probable.

In 2014, Teva Canada succeeded in its challenge of the bortezomib (the generic equivalent of Velcade
®
) product and mannitol ester patents under the Patented Medicines (Notice Of Compliance) Regulations (“PM(NOC)”). Teva commenced sales in the first quarter of 2015. At the time of Teva’s launch in 2015, annual sales of Velcade were approximately 94 million Canadian dollars. Additionally, Teva commenced an action under Section 8 of PM(NOC) to recover damages for being kept off of the market during the PM(NOC) proceedings. Janssen and Millennium filed a counterclaim for infringement of the same two patents as well as a patent covering a process to prepare bortezomib. The product patent expired in October 2015; the other patents expire in January 2022 and March 2025. On December 20,In 2017, Teva entered into an agreement with Janssen and MilleniumMillennium which limits the damages payable by either party depending on the outcome of the infringement/impeachment action. As a result, the most Janssen and MilleniumMillennium could recover is 200 million Canadian dollars (approximately $159 million) plus post-judgment interest. The trial, whichIn June 2018, the court ruled that Janssen and Millennium pay Teva 5 million Canadian dollars in Section 8 damages. Janssen and Millennium filed an
appeal, and oral argument in that
 appeal is limited toscheduled for September 
9
,
2019
. If the issue of patent validity and infringement, begandecision is overturned on January 29, 2018 and concluded on March 8, 2018. The court has not yet issued any decision.appeal, Teva could owe the capped damages set forth above. In addition to the potential damages that could be awarded, if Janssen and Millenium ultimately were successful in their allegations of patent infringement, Teva could be enjoined from furtherordered to cease sales of its bortezomib product.

On July 8, 2011, Helsinn sued Teva over its filing of an ANDA to market a generic version of palonosetron IV solution (the generic equivalent of Aloxi
®
) and in November 2015, the
U.S. 
District Court
for the District
of New Jersey ruled against Teva. Teva appealed this decision and, in May 2017, the Federal Circuit Court of Appeals reversed the district court’s ruling and found the asserted patents invalid. In January 2018, full appellate review of that decision was denied. Helsinn filed an appeal with the
U.S.
Supreme Court, which was granted. On January 22, 2019, the Supreme Court affirmed the appellate court’s decision finding the asserted patent invalid. Helsinn has no further opportunity to appeal this patent decision. Separately, in October 2014, Helsinn filed an additional claim on later-acquired patents. On January 30, 2018, the
district court
denied Helsinn’s request for a preliminary injunction based on these later acquired patents. Teva launched its generic palonosetron IV solution after obtaining final regulatory approval on March 23, 2018. If Teva ultimately loses the case on the later-acquired patents discussed above, Teva may be ordered to cease sales of its generic product and/or pay damages to Helsinn. Aloxi
®
annual U.S. sales as of November 2017 were $459
 million.
In July 2015, Janssen sued Actavis and Teva (along with 10 other filers) over their filing of an ANDA to market their abiraterone acetate tablets, 250mg (generic versions of Zytiga
®
). In August 2017, Janssen sued Teva over its ANDA filing to market a 500mg generic version of Zytiga. In both cases, Janssen asserted a method of treatment patent. In January 2018, following a petition for
inter partes
review, the Patent Trials and Appeals Board (“PTAB”) found the patent to be invalid. In October 2018, the District Court for the District of New Jersey also found the patent to be invalid. Teva launched its generic 250mg product in November 2018.  On May 14, 2019, the U.S. Court of Appeals affirmed that Janssen’s patent is invalid. That decision became final on June 20, 2019. Janssen may seek U.S. Supreme Court review of this decision. If Teva ultimately loses this case, Teva may be ordered by the court to cease sales of its generic product and/or pay damages to Janssen. Annual U.S. sales of Zytiga at the time of generic entry were about $
1.3
 billion.
31

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TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
Product Liability Litigation

Teva’s business inherently exposes it to potential product liability claims. Teva maintains a program of insurance, which may include commercial insurance, self-insurance (including direct risk retention), or a combination of both approaches, in amounts and on terms that it believes are reasonable and prudent in light of its business and related risks. However, Teva sells, and will continue to sell, pharmaceuticals that are not covered by its product liability insurance; in addition, it may be subject to claims for which insurance coverage is denied as well as claims that exceed its policy limits. Product liability coverage for pharmaceutical companies is becoming more expensive and increasingly difficult to obtain. As a result, Teva may not be able to obtain the type and amount of commercial insurance it desires, or any commercial insurance on reasonable terms, in all of its markets.

Competition Matters

As part of its generic pharmaceuticals business, Teva has challenged a number of patents covering branded pharmaceuticals, some of which are among the most widely-prescribed and well-known drugs on the market. Many of Teva’s patent challenges have resulted in litigation relating to Teva’s attempts to market generic versions of such pharmaceuticals under the federal Hatch-Waxman Act. Some of this litigation has been resolved through settlement agreements in which Teva obtained a license to market a generic version of the drug, often years before the patents expire.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

Teva and its subsidiaries have increasingly been named as defendants in cases that allege antitrust violations arising from such settlement agreements. The plaintiffs in these cases, which are usually direct and indirect purchasers of pharmaceutical products, and often assert claims on behalf of classes of all direct and indirect purchasers, typically allege that (1) Teva received something of value from the innovator in exchange for an agreement to delay generic entry, and (2) significant savings could have been realized if there had been no settlement agreement and generic competition had commenced earlier. These class action cases seek various forms of injunctive and monetary relief, including damages based on the difference between the brand price and what the generic price allegedly would have been and disgorgement of profits, which are automatically trebledtripled under the relevant statutes, plus attorneys’ fees and costs. The alleged damages generally depend on the size of the branded market and the length of the alleged delay, and can be substantial – substantial—potentially measured in multiples of the annual brand sales – sales—particularly where the alleged delays are lengthy or branded drugs with annual sales in the billions of dollars are involved.

Teva believes that its settlement agreements are lawful and serve to increase competition, and has defended them vigorously. In Teva’s experience to date, these cases have typically settled for a fraction of the high end of the damages sought, although there can be no assurance that such outcomes will continue.

In June 2013, the United States
U.S.
Supreme Court held, in Federal Trade Commission v. Actavis, Inc. (the “AndroGel case”), that a rule of reason test should be applied in analyzing whether such settlements potentially violate the federal antitrust laws. The Supreme Court held that a trial court must analyze each agreement in its entirety in order to determine whether it violates the antitrust laws. This new test has resulted in increased scrutiny of Teva’s patent settlements, additional action by the FTC and state and local authorities, and an increased risk of liability in Teva’s currently pending antitrust litigations.

In April 2006, certain subsidiaries of Teva were named in a class action lawsuit filed in the U.S. District Court for the Eastern District of Pennsylvania. The case alleges that the settlement agreements entered into between Cephalon, Inc., now a Teva subsidiary (“Cephalon”), and various generic pharmaceutical companies in late 2005 and early 2006 to resolve patent litigation involving certain finished modafinil products (marketed as PROVIGIL
®
) were unlawful because they had the effect of excluding generic competition. The case also alleges that Cephalon improperly asserted its PROVIGIL patent against the generic pharmaceutical companies. The first lawsuit was broughtfiled by King Drug Company of Florence, Inc. on behalf of itself and as a proposed class action on behalf of any other person or entity that purchased PROVIGIL directly from Cephalon (the “Direct Purchaser Class”). Similar allegations were made in other complaints, including those filed on behalf of a proposedpurported class of end payersdirect purchasers. Similar complaints were also filed by a purported class of PROVIGIL (the “End Payer Class”), byindirect purchasers, certain individual end payers, by certain retail chain pharmacies and by Apotex, Inc. (collectively, these cases are referred to as the “Philadelphia Modafinil Action”). Separately, Apotex challenged Cephalon’s PROVIGIL patent and, in October 2011, the Courtcourt found the patent to be invalid and unenforceable based on inequitable conduct. This decision was affirmed on appeal in April 2013. Teva has either settled or reached agreements in principle to settle with all of the plaintiffs in the Philadelphia Modafinil Action. However, one of the end payers, United Healthcare Services, took the position that it is not bound by the settlement that was agreed to on its behalf and brought a separate action in Minnesota federal court, which has been transferred to the U.S. District Court for the Eastern District of Pennsylvania, where Teva has also filed suit to enforce the settlement. A bench trial in the suit to enforce the settlement commenced on April 23, 2018 and concluded on April 27, 2018. The court ordered post-trial briefing to be submitted within 45 days and has not yet issued any decision.

Additionally, Cephalon and Teva have reached a settlement with 48 state attorneys general, which was approved by the court on November 7, 2016. Certain other claimants, including2016, and on July 23, 2019, reached a settlement with the State of California, have given noticeswhich is pending court approval.

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Table of potential claims relatedContents
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to these settlement agreements. Teva has produced documents and information in response to discovery requests issued by the California Attorney General’s office as part of its ongoing investigation of generic competition to PROVIGIL.

Consolidated Financial Statements

(Unaudited)
In May 2015
, Cephalon entered into a consent decree with the FTC (the “Modafinil Consent Decree”) under which the FTC dismissed its claims against Cephalon in the FTC Modafinil Action in exchange for payment of $1.2 billion (lessset-offs for
prior settlements) by Cephalon and Teva into a settlement fund. The settlement fund does not cover any judgments or settlements outside the United States. Under the consent decree,Modafi
n
i
l Consent Decree, Teva also agreed to certain injunctive relief with respect to the types of settlement agreements Teva may enter into to resolve patent litigation in the United States for a period of ten years. TheIn
February 2019
, in connection with the settlement fund does not cover any judgments or settlements outsideof other unrelated
FTC 
a
ntitrust lawsuits, as described below, Teva and the United States.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

NotesFTC agreed to Consolidated Financial Statements

(Unaudited)

Followingamend certain provisions of the Modafinil Consent Decree and to restart its ten-year term.

Additionally, following an investigation initiated by the European Commission in April 2011 regarding
reg
arding a modafinil patent settlement in Europe, the European Commission issued a Statement of Objections in July 2017 against both Cephalon and Teva alleging that the 2005 settlement agreement between the parties had the object and effect of hindering the entry of generic modafinil. Teva submitted its defense in writing and an oral hearing was held. No final decision regarding infringement has yet been taken by Thethe European Commission. The sales of modafinil in the European Economic Area during the last full year of the alleged infringement amounted to EUR 46.5
 million.

In January 2009, the FTC and the State of California filed a complaint for injunctive relief in California federal court alleging that a September 2006 patent lawsuit settlement between Watson Pharmaceuticals, Inc. (“Watson”), now a Teva subsidiary, and Solvay Pharmaceuticals, Inc. (“Solvay”) relating to AndroGel
®
1% (testosterone gel) violated the antitrust laws. Additional lawsuits alleging similar claims were later filed by private plaintiffs (including plaintiffs purporting to represent classes of similarly situated claimants as well as direct purchaserretailer plaintiffs filing separately), and the various actions were consolidated in a multidistrict litigation in Georgia federal court. The defendants filed various summary judgment motions on September 29, 2017, andOn July 16, 2018, the direct-purchaser plaintiffs moveddirect purchaser plaintiffs’ motion for class certification was denied. As a result, the three direct purchasers that had sought class certification can proceed as individual plaintiffs, but any other member of the proposed direct purchaser class will need to file a separate, individual lawsuit if it wishes to participate in the litigation. On February 22, 2019, the FTC stipulated to the dismissal of its claims against Watson, in exchange for Teva’s agreement to amend the Modafinil Consent Decree, as described above. Teva settled with most of the retailer plaintiffs in April 2019. Trial on the remaining private plaintiffs’ claims has been scheduled to begin in February 9, 2018. Both sets of motions remain pending.2020. Annual sales of AndroGel
®
1% were approximately 
$
350
 million at the time of the settlement wereand approximately $350$
140
 million and annual sales of the AndroGel franchise (AndroGel® 1% and AndroGel® 1.62%) were approximately $140 million and $1.05 billion, respectively, at the time Actavis launched its generic version of AndroGel
®
1% in November 2015.

A provision for this case was included in the financial statements.

In December 2011, three groups of plaintiffs sued Wyeth and Teva for alleged violations of the antitrust laws in connection with their settlement of patent litigation involving extended release venlafaxine (generic Effexor XR
® XR)
) entered into in November 2005. The cases were filed by a purported class of direct purchasers, by a purported class of indirect purchasers and by certain chain pharmacies in the United StatesU.S. District Court for the District of New Jersey. The plaintiffs claim that the settlement agreement between Wyeth and Teva unlawfully delayed generic entry. In October 2014, the court granted Teva’s motion to dismiss in the direct purchaser cases, after which the parties agreed that the court’s reasoning applied equally to the indirect purchaser cases. Plaintiffs appealed and, onin August 21, 2017, the Third Circuit reversed the district court’s decision and remanded for further proceedings. On November 20, 2017, Teva and Wyeth filed a petition for a writ of certiorari in the United States Supreme Court. That petition was denied on February 20, 2018, and litigation has resumed before the district court. Annual sales of Effexor XR
® XR
were
approximately $2.6 billion at the time of settlement and at the time Teva launched its generic versions were launched version of Effexor XR
®
in July 2010.

In February 2012, two purported classes of direct-purchaser plaintiffs sued GSK and Teva in New Jersey federal court for alleged violations of the antitrust laws in connection with their settlement of patent litigation involving lamotrigine (generic Lamictal
®
) entered into in February 2005. The plaintiffs claim that the settlement agreement unlawfully delayed generic entry and seek unspecified damages. In December 2012, the court dismissed the case. In January 2014,case, but in June 2015, the court denied the direct purchaser plaintiffs’ motionU.S. Court of Appeals for reconsideration and affirmed its original dismissal. In June 2015, the Third Circuit reversed and remanded for further proceedings. In December 2018, the court granted the direct-purchaser plaintiffs’ motion for class certification. On February 19, 2016, Teva and GSK filed aMarch 18, 2019, the appeals court granted the defendants’ petition for a writ of certiorari in the United States Supreme Court, which was denied on November 7, 2016. In the meantime, litigation has resumed beforeimmediate appellate review and the district court.court has stayed the litigation pending the outcome of the appeal. Annual sales of Lamictal
®
were
approximately $950 million at the time of the settlement and approximately $2.3 billion at the time Teva launched its generic competition commenced version of Lamictal
®
in July 2008.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

In April 2013, purported classes of direct purchasers of, and end payers for, Niaspan
® (extended
(extended release niacin) sued Teva and Abbott for violating the antitrust laws by entering into a settlement agreement in April 2005 to resolve patent litigation over the product. A multidistrict litigation has been established in the U.S. District Court for the Eastern District of Pennsylvania. Throughout 2015 and in January 2016, several individual direct purchaseropt-out plaintiffs filed complaints with allegations nearly identical to those of the direct purchaser class.class and, in December 2018, both the direct-purchaser class plaintiffs and indirect-purchaser class plaintiffs filed motions for class certification, which remain pending. In October 2016, the District Attorney for Orange County, California, filed a similar complaint, which has since been amended, in California state court, alleging violations of state law. Further proceedings in the California action have been stayed pending resolution of Defendants’ petition for writ of mandate or prohibition filed with the Court of Appeal, Fourth Appellate District, which seeks an order vacating the Superior Court’s denial of Defendants’ motionDefendants moved to strike allthe District Attorney’s claims for restitution and civil penalties to the extent they are not limited to alleged activity occurring in Orange County. The Superior Court denied that motion. The Court of Appeal subsequently reversed the decision and review of the Appellate Court decision is now pending before the California Supreme Court. Annual sales of Niaspan
®
were approximately $416 million at the time of the settlement and approximately $1.1 billion at the time Teva launched its generic competition commenced version of Niaspan
®
in September 2013.

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TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
In November 2013, a putative class action was filed in Pennsylvania federal court against Actavis, Inc. and certain of its affiliates, alleging that Watson’s 2012 patent lawsuit settlement with Endo Pharmaceuticals Inc. relating to Lidoderm
® (lidocaine
(lidocaine transdermal patches) violated the antitrust laws. Additional lawsuits containing similar allegations followed on behalf of other classes of putative direct purchaser andend-payer plaintiffs, as well as retailers acting in their individual capacities, and those cases were consolidated as a multidistrict litigation in federal court in California. On February 21, 2017, the court granted both the indirect purchaser plaintiffs’ and the direct purchaser plaintiffs’ motions for class certification. We reached an agreement to settleTeva settled the multidistrict litigation with the various plaintiff groups in the first quarter of 2018. A2018 and a provision for these settlements has beenwas included in the financial statements, and on March 20, 2018, the direct purchaser andend-payor plaintiffs moved the court to preliminarily approve their respective settlements.statements. The FTC has also filed suit to challenge the Lidoderm
®
settlement, initially bringing antitrust claims against Watson, Endo and Allergan in Pennsylvania federal court in March 2016, and then2016. The FTC later voluntarily dismissingdismissed those claims andre-filing refiled them along(along with a stipulated order for permanent injunction to settle its claims against EndoEndo) in the same California federal court in which the private multidistrict litigation referenced above was pending. On February 3, 2017, the State of California filed aits own complaint against Allergan and Watson, and that complaint was also assigned to the California federal court presiding over the multidistrict litigation. AfterOn February 22, 2019, the FTC dismissed its claims in Pennsylvania, but before itre-filed them in California, Watsonagainst Actavis and Allergan, filed suit againstin exchange for Teva’s agreement to amend the FTC in the same Pennsylvania federal court where the agency had initially brought its lawsuit, seeking a declaratory judgment that the FTC’s claims are not authorized by statute, or, in the alternative, that the FTC does not have statutory authority to pursue a disgorgement remedy. That declaratory judgment action remains pending, and the court in California has stayed both the FTC’s claimsModafinil Consent Decree, as described above. On July 23, 2019 Teva and the State of California’s claims against Allergan and Watson, pending the outcome of the declaratory judgment action in Pennsylvania. Annual sales of Lidoderm® at the time of theCalifornia reached a settlement were approximately $1.2 billion, and were approximately $1.4 billion at the time Actavis launched its generic version in September 2013.

agreement.

Since November 2013, numerous lawsuits have been filed in various federal courts by purported classes of end payers for, and direct purchasers of, Aggrenox
® (dipyridamole/
(dipyridamole/aspirin tablets) against Boehringer Ingelheim (“BI”), the innovator, and several Teva subsidiaries. The lawsuits allege, among other things, that the settlement agreement between BI and Barr entered into in August 2008 violated the antitrust laws. A multidistrict litigation has been established in the U.S. District Court for the District of Connecticut. Teva and BI’s motion to dismiss was denied in March 2015. On April 11, 2017, the Orange County District Attorney filed a complaint for violations of California’s Unfair Competition Law based on the Aggrenox
®
patent litigation settlement. Teva has settled with the putative classes of direct purchasers and end payers, as well as with the
opt-out
direct purchaser plaintiffs, and with two of the
opt-out
end payer plaintiffs. A provision with respect to the settlements was included in the financial statements. The district court overruled certain objections to the end payer settlement, including objections made by the Orange County District Attorney, and approved the settlement. The District Attorney subsequently appealed the court’s approval to the Second Circuit.
Opt-outs
from the end payer class have also appealed certain aspects of the court’s approval order to the U.S. Court of Appeals for the Second Circuit. Those appeals remain pending. Annual sales of Aggrenox
®
were approximately $340 million at the time of the settlement and approximately $455 million at the time Teva launched its authorized generic competition began version of Aggrenox
®
in July 2015. Teva has settled with the putative class of direct purchasers and theopt-out direct purchaser plaintiffs. Additionally, on January 8, 2018, Teva reached an agreement to settle with the end payer class plaintiffs, and subsequently settled with two of theopt-out end payer plaintiffs, Humana and Blue Cross/Blue Shield of Louisiana. The settlement with the end payer class was preliminarily approved by the court on March 6, 2018. A provision has been included in the financial statements for this matter.

Since January 2014, numerous lawsuits have been filed in the U.S. District Court for the Southern District of New York by purported classes of end payers for, and direct purchasers of, Actos
®
and Acto plusActoplus Met® (pioglitazone and pioglitazone plus metformin) against Takeda, the innovator, and several generic manufacturers, including Teva, Actavis and Watson.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

The lawsuits allege, among other things, that the settlement agreements between Takeda and the generic manufacturers (including Takeda’s December 2010 settlement agreement with Teva) violated the antitrust laws. The Courtcourt dismissed the end payer lawsuits against all defendants in September 2015. In October 2015, the end payers appealed that ruling, and on March 22, 2016, a stipulation was filed dismissing Teva and the other generic defendants from the appeal. On February 8, 2017, the Court of Appeals for the Second Circuit affirmed the dismissal in part and vacated and remanded the dismissal in part with respect to the claims against Takeda. The direct purchasers’ case had been stayed pending resolution of the appeal in the end payer matter and the direct purchasers amended their complaint for a second time afterfollowing the Second Circuit’s decision. Defendants had moved to dismiss the direct purchasers’ original complaint, and supplemental briefing on that motion based on the new allegations in the amended complaint was completed on June 29, 2017. The court has not yet issued its decision.remains pending. At the time of the settlement, annual sales of Actos

®
and Actoplus
Met were approximately $3.7 billion and annual sales of ACTO plus Met® were approximately $500 million.million, respectively. At the time Teva launched its authorized generic competition commencedversion of Actos
®
and Actoplus Met in August 2012, annual sales of Actos
®
and Actoplus Met were approximately $2.8
 billion and annual sales of ACTO plus Met® were approximately $430 million.

In June 2014, two groups of end payers sued AstraZeneca and Teva, as well as Ranbaxy and Dr. Reddy’s, in the Philadelphia Court of Common Pleas for violating the antitrust laws by entering into settlement agreements to resolve the esomeprazole (generic Nexium®) patent litigation (the “Philadelphia Esomeprazole Actions”). These end payers had opted out of a class action that was filed in the Massachusetts federal court in September 2012 and resulted in a jury verdict in December 2014 in favor of AstraZeneca and Ranbaxy (the “Massachusetts Action”). Prior to the jury verdict, Teva settled with all plaintiffs in the Massachusetts Action for $24 million. The allegations in the Philadelphia Esomeprazole Actions are nearly identical to those in the Massachusetts Action. The Philadelphia Esomeprazole Actions were stayed pending resolution of the Massachusetts Action, which was on appeal to the First Circuit with respect to the claims against thenon-settling defendants AstraZeneca and Ranbaxy. On November 21, 2016, the First Circuit affirmed the district court’s judgment in favor of AstraZeneca and Ranbaxy, and the plaintiffs’ petitions for rehearing and rehearing en banc were denied on January 10, 2017.

million, respectively.

In September 2014, the FTC sued AbbVie Inc. and certain of its affiliates (“AbbVie”) andas well as Teva in the U.S. District Court for the Eastern District of Pennsylvania alleging that they violated the antitrust laws when they entered into a settlement agreement to resolve the AndroGel
®
patent litigation and a supply agreement under which AbbVie wouldagreed to supply Teva with an authorized generic product forversion of TriCor
® to Teva.
. The FTC alleges that Teva agreed to delay the entry of its generic testosterone gel product in exchange for entering into the TriCor supply agreement. In May 2015, the court granted Teva’s motion to dismissdismissed the FTC’s claim concerning the settlement and supply agreements, and thus dismissed Teva from the case entirely. The FTC proceeded with a separate claim against AbbVie alone and in June 2018, following a bench trial, the court held that AbbVie had violated the antitrust laws by filing sham patent infringement lawsuits against both Teva and Perrigo in the underlying AndroGel patent litigation. The court ordered AbbVie to pay $448
 million in disgorgement but declined to award injunctive relief. The FTC filed a notice of appeal as to, Teva. Theamong other things, the district court’s May 2015 dismissal of the FTC’s motions for reconsideration and for entry of partial final judgment to permit an immediate appeal were denied, soclaim against Teva, but in February 2019, the FTC cannotstipulated to dismiss Teva from its appeal, in exchange for Teva’s agreement to amend the dismissal until its claims against AbbVie are resolved. The Court granted the FTC’s summary judgment motion that AbbVie’s patent infringement lawsuit against Teva in the AndroGel patent litigation was objectively baseless. A bench trial for the FTC’s case against AbbVie began in February 2018 and concluded in April 2018. The court has not yet issued its decision.

SinceModafinil Consent Decree, as described above.

34

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TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
In May 2015, two lawsuits have been filed in the U.S. District Court for the Southern District of New York by a purported class of direct purchasers of, and a purported class of end payers for Namenda IR
® (memantine
(memantine hydrochloride) filed a lawsuit against Forest Laboratories, LLC (“Forest”) and Actavis PLC,, the innovator, and several generic manufacturers, including Teva. Teva is only a defendant in the end payer case and defendants moved to dismiss the claims made by the end payers. The lawsuits allege,lawsuit alleges, among other things, that the settlement agreements between Forest and the generic manufacturers (including Forest’s November 2009 settlement agreement with Teva) to resolve patent litigation over Namenda IR
®
violated the antitrust laws. On September 13, 2016, the court denied defendants’ motions to dismiss, but stayed the cases with respect to the claims brought under state law, which are the only claims asserted against Teva. Annual sales of Namenda IR
®
at the time of the settlement were approximately $1.1 billion and are currently approximately $1.4 billion.

$550 million at the time other manufacturers first launched generic versions of Namenda IR

®
in July 2015.
On March 8,December 16, 2016, and April 11, 2016, certain Actavis subsidiaries in the United Kingdom, including Auden Mckenzie Holdings Limited, received notices from the U.K. Competition and Markets Authority (“CMA”) that it had launched formal investigations under Section 25 of the Competition Act of 1998 (“Competition Act”) into suspected breaches of competition law in connection with the supply of 10mg and 20mg hydrocortisone tablets. On December 16, 2016, the CMA issued a statement of objections (a provisional finding of infringement of the Competition Act) in respect of certain allegations against Allergan, Actavis UK and Allergan, which was later reissued to include certain Auden Mckenzie entities.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

A response was submittedentities alleging competition law breaches in connection with the supply of 10mg and an oral hearing was held.20mg hydrocortisone tablets in the U.K. On December 18, 2017, the CMA issued a Statement of Draft Penalty Calculation. A response was submitted and an oral hearing was held. No final decision regarding infringement of competition law has yet been issued by the CMA.issued. On March 3, 2017, the CMA issued a second statement of objectionobjections in respect of certain additional allegations (relating to the same products and covering part of the same time period as forin the first statement of objections) against Actavis UK, Allergan and a number of other companies, which was later reissued to include certain Auden Mckenzie entities. A response was submittedOn February 28, 2019, the CMA issued a third statement of objections with allegations of additional infringements relating to the supply of 10mg and an oral hearing was held.20mg hydrocortisone tablets in the U.K against certain Auden Mckenzie entities and others. On January 9, 2017

, Teva completed the sale of Actavis UK to Accord Healthcare Limited, pursuant to which Teva will indemnify Accord Healthcare for potential fines imposed by the CMA and/or damages awarded by a court onagainst Actavis UK as a resultin relation to the December 
18
,
2017
and March 
3
,
2017
statements of the investigations in respect ofobjections, and resulting from conduct prior to the closing date of the sale. In addition, Teva agreed to indemnify Allergan against losses arising from this matter, pursuant to the agreement the parties entered into on January 
31
,
2018
. See note
3
. In the event of any such fines or damages, Teva expects to assert claims, including claims for breach of warranty, against the sellers of Auden Mckenzie. The terms of the purchase agreement may preclude a full recovery by Teva. A liability for this matter has been recorded in purchase accounting related to the acquisition of Actavis Generics. Further to our Master Purchase Agreement with Allergan whereby Teva agreed to indemnify Allergan for liabilities related to acquired assets, Teva agreed with Allergan to settle and release Teva’s indemnity claim and Allergan’s potential losses arising from the CMA in connection with this matter, pursuant to the agreement the parties entered into on January 31, 2018. See note 3.

In

Since November 2016, threeseveral putative indirect purchaser and direct purchaser class actions were filed in federal courts in Wisconsin, Massachusetts and Florida against Shire U.S., Inc. and Shire LLC (collectively, “Shire”), Actavis and Actavis,Teva, alleging that Shire’s 2013 patent litigation settlement with Actavis related to the ADHD drug Intuniv
®
(guanfacine) violated various state consumer protection and antitrust laws. On December 30, 2016 and January 11, 2017, two additional similar actions were filed, also in Massachusetts federal court, against Shire and Actavis or Teva (as successor to Actavis) by putative classes of direct purchaser plaintiffs. All five cases are now in Massachusetts federal court, and on March 10, 2017, both the indirect purchaser plaintiffs and the direct purchaser plaintiffs filed consolidated amended complaints.court. Annual sales of Intuniv
®
were approximately $335
$
335
 million at the time of the settlement and approximately $327$
327
 million at the time Actavis launched its generic competition began version of Intuniv
®
in 2014.

In January 2019, generic manufacturer Cipla Limited filed a lawsuit against Amgen in Delaware federal court, alleging, among other things, that a January 2, 2019 settlement agreement between Amgen and Teva, resolving patent litigation over cinacalcet (generic Sensipar
®
), violated the antitrust laws. In March 2019, Cipla Limited amended its complaint to name Teva as an additional defendant, and putative classes of direct-purchaser and end-payer plaintiffs have also filed antitrust lawsuits in U.S. federal district court against Amgen and Teva related to the January 2, 2019 settlement. Both Cipla Limited and the putative class plaintiffs seek damages and injunctive relief. Annual sales of Sensipar
®
in the United States were approximately $1.4 billion at the time Teva launched its generic version of Sensipar
®
 in December 2018, and at the time of the January 2, 2019 settlement.
Government Investigations and Litigation Relating to Pricing and Marketing

Teva is involved in government investigations and litigation arising from the marketing and promotion of its pharmaceutical products in the United States. Many of these investigations originate through what are known as
qui tam
complaints, in which the government reviews a complaint filed under seal by a whistleblower (a “relator”) that alleges violations of the federal False Claims Act. The government considers whether to investigate the allegations and will, in many cases, issue subpoenas requesting documents and other information, including conducting witness interviews. The government must decide whether to intervene and pursue theclaimsthe claims as the plaintiff. Once a decision is made by the government, the complaint is unsealed. If the government decides not to intervene, then the relator may decide to pursue the lawsuit on his own without the active participation of the government.

A number of state attorneys general have filed various actions against Teva and/or certain of its subsidiaries, including certain Actavis subsidiaries relating to reimbursements or drug price reporting under Medicaid or other programs. Such price reporting is alleged to have caused governmentsstates and others to pay inflated reimbursements for covered drugs. Teva and its subsidiaries have reached settlements in most of these cases,cases. On October 4, 2018, Teva settled longstanding litigation filed by the State of Illinois against subsidiaries of Teva and remain partiesWatson for a total settlement amount of $135 million, the majority of which was paid in December 2018. Teva accepted the settlement while denying any liability with respect to activethe claims made by the state. Pending the final settlement payment, the Illinois litigation is stayed. In August 2013, judgment was entered in Illinois.a separate case brought by the State of Mississippi against Watson, pursuant to which Watson was ordered to pay compensatory damages amounting to $12.4 million. In March 2014, the Mississippi court amended the judgment to also include punitive damages in the amount of $17.9 million. The judgment was affirmed in all respects by the Mississippi Supreme Court in January 2018 and has since been satisfied in full. Certain Actavis subsidiaries remain partieswere dismissed by the trial court in an action brought by the State of Utah. That dismissal was affirmed by the Utah Court of Appeals on February 28, 2019. The State’s time to active litigation in Illinoisseek further appellate review has expired and Utah.the matter is now concluded. A provision for thethese cases has beenwas included in the financial statements. Trial in the Illinois case against Teva concluded in the fourth quarter of 2013, and post-trial briefing was submitted. On June 28, 2017, after several years, the court issued a Memorandum Order After Trial finding liability against Teva, but reserved its decision on damages. Teva denies any liability and sought reconsideration of the order, which was denied. A hearing on damages is scheduled for August 8, 2018. The State of Illinois is seeking approximately $90 million in compensatory damages. Any such damages ultimately awarded by the court are subject to automatic trebling. In addition, the state is seeking statutory penalties ranging from $362 million to approximately $1.2 billion. Teva will continue to argue that any damages and penalties should be significantly less than the amount sought by the state. In August 2013, in the Mississippi case against Watson, the court ruled in favor of the state, awarding $12.4 million in compensatory damages and civil penalties. In March 2014, the court awarded the state an additional $17.9 million in punitive damages. A provision for these amounts has been included in the financial statements. Watson appealed both the original and the punitive damage awards. On January 11, 2018, the Mississippi Supreme Court affirmed the judgment in favor of the State of Mississippi and against Watson in all respects.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

On February 9, 2018, the judgment was fully satisfied and on February 16, 2018, the trial court discharged the appeal bond fully concluding this matter. In Utah, claims against Watson that were dismissed in their entirety by the trial court are now on appeal.

Several
qui tam
complaints have been unsealed in recent years as a result of government decisions not to participate in the cases. The following is a summary of certain government investigations,
qui tam
actions and related matters.

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TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
In January 2014, Teva received a civil investigative demand from the U.S. Attorney for the Southern District of New York seeking documents and information from January 1, 2006 related to sales, marketing and promotion of COPAXONE
®
and AZILECT
®
, focusing on educational and speaker programs. The demand states that the government is investigating possible civil violations of the federal False Claims Act. In March 2015, the docket in this matter and a False Claims Act civil
qui tam
complaint concerning this matter were unsealed by the court which revealed thatafter the U.S. Attorney had notified the court in November 2014 that it hadgovernment declined to intervene in and proceed with the lawsuit. The qui tam relators, however, are moving forward with the lawsuit. In June 2015, Teva filed motions to dismiss the complaint.intervene. In February 2016, the court stayed its decision on the relators’ claims based on state and local laws, denied Teva’s motions to dismiss the False Claims Act claims and instructed the relators to amend their complaint with additional information. In March 2016, the relators filed an amended complaint. Teva’s motion for summary judgment on all claims was denied on February 27, 2019. Trial is scheduled to commence on August 19, 2019 and a provision was included in the financial statements.
In January 2014, a
qui tam
complaint whichwas filed in Rhode Island federal court alleging that Teva answeredand several other defendants, including manufacturers of MS drugs and pharmacy benefit managers, violated the False Claims Act. The
qui tam
action was unsealed on April 4, 2018 after the government declined to intervene. The relator alleges that Teva and the other defendants induced fraudulent overpayments for illegitimate “Bona Fide Service Fees” in April 2016.excess of fair market value to inflate prices for the Medicare Part D program. Teva moved to dismiss the complaint. The partiesDOJ also moved to dismiss the complaint, arguing that it lacked merit and was not in the government’s interest to continue. Both motions are currently engagedpending.
In May 2017, a
qui tam
action was filed against a number of Teva subsidiaries. The
qui tam
action was unsealed on June 13, 2018 after the government declined to intervene. The relator in discovery.

Beginningthe case alleges that Teva violated the False Claims Act by devising and engaging in promotional schemes that violate the Anti-Kickback Statute (“AKS”), resulting in false certifications of compliance with the AKS. Specifically, the relator alleges that Teva paid in-kind remuneration to physicians through reimbursement support and nursing services in order to increase the number of COPAXONE prescriptions. An amended complaint was filed on October 15, 2018. Teva and the DOJ moved to dismiss the case. These motions are pending.

Since May 2014, variousapproximately 2,000 complaints have been filed with respect to opioid sales and distribution against various Teva affiliates, along with several other pharmaceutical companies, by a number of cities, counties, states, other governmental agencies and agencies across the country. There areprivate plaintiffs (including various putative class actions currently pending against Teva and its affiliates that have been brought by various states, subdivisions and state agenciesof individuals) in both Statestate and Federal Courts.federal courts. Most of the Federalfederal cases have been consolidated into a multidistrict litigation in the Northern District of Ohio. In addition toOhio (“MDL Opioid Proceeding”) and many of the complaintscases filed by states,in state agencies and political subdivisions, private class action lawsuitscourt have been filed in Arkansas, Massachusetts, Ohioremoved to federal court and Pennsylvania. Several counties in various states andconsolidated into the State of Delaware have commenced an action against Anda, Inc. (and other distributor and manufacturer defendants) alleging that Anda, Inc. failed to develop and implement systems sufficient to identify suspicious orders of opioid products and prevent the diversion of such products to individuals who used them for other than legitimate medical purposes. The complaints,MDL Opioid Proceeding. Complaints asserting claims under similar provisions of different state law, generally contend that the defendants allegedly engaged in improper marketing and distribution of opioids, including ACTIQ
®
and FENTORA
®
. The complaints also assert claims related to Teva’s generic opioid products. In addition, approximately 350 complaints have named Anda, Inc. (and other distributors and manufacturers) alleging that Anda failed to develop and implement systems sufficient to identify suspicious orders of opioid products and prevent the abuse and diversion of such products to individuals who used them for other than legitimate medical purposes. Plaintiffs seek a variety of remedies, including restitution, civil penalties, disgorgement of profits, treble damages, attorneys’ fees and injunctive relief. NoneCertain plaintiffs assert that the measure of damages is the entirety of the complaints specifiescosts associated with addressing the exact amountabuse of damages at issue. Tevaopioids and its affiliates that are defendantsopioid addiction and certain plaintiffs specify multiple billions of dollars in the variousaggregate as alleged damages. In many of these cases, plaintiffs are seeking joint and several damages among all defendants. An adverse resolution of any of these lawsuits or investigations may involve large monetary penalties, damages, and/or other forms of monetary and non-monetary relief and could have a material and adverse effect on Teva’s reputation, business, results of operations and cash flows. On October 5, 2018, the magistrate judge in the MDL Opioid Proceeding issued a Report & Recommendation rejecting the first motion to dismiss, except for the common law public nuisance claim, which was dismissed. On December 19, 2018, the District Court overruled defendants’ objections to the Report & Recommendation. On April 1, 2019, the magistrate judge in the MDL Opioid Proceeding issued two Report & Recommendations in which he recommended that the court grant in part and deny all allegations asserted in these complaints and have filed or will be filingpart pending motions to dismiss where possible.of the manufacturer, distributor, pharmacy, and generic manufacturing defendants. Specifically, the magistrate judge recommended that The Muscogee (Creek) Nation’s Lanham Act claim be dismissed as to all defendants, and that its claims against the generic manufacturers are partially preempted; he recommended that the motions to dismiss be denied as to the remaining claims. The magistrate judge also recommended that the Blackfeet Tribe of the Blackfeet Indian Reservation’s federal common law public nuisance and Montana Unfair Trade Practices and Consumer Protection Act claims be dismissed, and that its claims against the generic manufacturers are partially preempted; he recommended that the motions to dismiss be denied as to the remaining claims. On April 11, 2018,June 13, 2019, the judgeDistrict Court adopted the two Report & Recommendations in all respects except those regarding the plaintiffs’ negligence per se claims, for which the District Court overruled the Report & Recommendation and held that Plaintiffs cannot state a claim for negligence per se pursuant to the statutes that the plaintiffs identified. Motions to dismiss in additional similar cases remain pending. Discovery in the multidistrict litigation issued a case management order settingMDL Opioid Proceeding for the first trialtrack of cases is closed and motions for Marchsummary judgment were filed in June 2019. Trial is scheduled for October 2019. Other cases remain pending in various states. In some jurisdictions, such as Illinois, New York, Pennsylvania, South Carolina, Texas and Utah, certain state court cases have been transferred to a single court within their respective state court systems for coordinated pretrial proceedings. Trials are expected to proceed in several states in 2020.
In May 2019, Teva settled the Oklahoma litigation brought by the Oklahoma Attorney General (State of Oklahoma, ex. rel. Mike Hunter, Attorney General of Oklahoma vs. Purdue Pharma L.P., et. al.) for $
85
million. The settlement did not include any admission of violation of law for any of the claims or allegations made. Management believes that the Oklahoma settlement amount is not likely indicative of the settlement of the other opioid-related litigation due to a variety of distinguishing factors. There is a wide range of potential outcomes given the state governments, subdivisions and other private party suits have made claims for large recoveries, the breadth of the litigation, novel legal theories and numerous defenses raised versus Teva’s willingness to potentially settle for a small fraction of such claimed amounts. As the Company demonstrated a willingness to settle part of the litigation, for accounting purposes, management considered a portion of opioid-related cases as probable and, as such, recorded an estimated provision. Given the relatively early status of the cases, management viewed no amount within the range to be the most likely outcome. Therefore, management recorded a provision for the reasonably estimable minimum amount in the assessed range for such opioid-related cases in accordance with Accounting
Standards Codification 450 “Accounting for Contingencies.”
On April 27, 2018, Teva received subpoena requests from the DOJ seeking documents relating to the manufacture, marketing and sale of opioids. Teva intends to complyis complying with this subpoena. In addition, a number
of
36
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
state attorneys general, including a coordinated multistate effort, have initiated investigations into sales and marketing practices of Teva and its affiliates with respect to opioids. Other states are conducting their own investigations outside of the multistate group. Teva is cooperating with these ongoing investigations which are ongoing, and cannot predict the outcome at this timetime.
In addition, several jurisdictions in Canada have initiated litigation regarding opioids alleging similar claims as those in the outcome.

United States. The cases in Canada are likely to be consolidated and are in their early stages.

On June 21
,
2016
, Teva USA received a subpoena from the DOJ Antitrust Division of the DOJ seeking documents and other information relating to the marketing and pricing of certain of Teva USA’sUSA generic products and communications with competitors about such products. Actavis received a similar subpoena in
June 2015.2015
. Teva and Actavis are cooperating with the DOJ subpoena requests. On July 
12
,
2016
, Teva USA received a subpoena from the Connecticut Attorney General seeking documents and other information relating to potential state antitrust law violations. In
2015, Actavis has also received a similar subpoena from the Connecticut Attorney General. Teva and Actavis are cooperating fully with these subpoenas.

On December 15, 2016, a civil action was brought by the attorneys general of twenty states against Teva USA and several other companies asserting claims under federal antitrust law (specifically, section 1 of the Sherman Act) alleging price fixing of generic products in the United States. AnThat complaint was later amended to add new states as named plaintiffs, as well as new allegations and new state law claims, and on June 18, 2018, the attorneys general of 49 states plus Puerto Rico and the District of Columbia filed a consolidated amended complaint against Actavis and Teva, as well as other companies and individuals. On May 10, 2019, most (though not all) of these same attorneys general filed yet another antitrust complaint against Actavis and Teva, plus other companies and individuals, alleging price-fixing and market allocation as concerns additional generic products. The complaint alleges that Teva was filed on March 1, 2017 adding twentyat the center of a conspiracy in the generic pharmaceutical industry, and asserts that Teva and others fixed prices, rigged bids, and allocated customers and market share with respect to certain additional states toproducts, many of which were not previously at issue in the named plaintiffs and adding supplemental state law claims.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

ThePennsylvania MDL. In the various complaints described above, the states seek a finding that the defendants’ actions violated federal antitrust law and state antitrust and consumer protection laws, as well as injunctive relief, disgorgement, damages on behalf of various state and governmental entities and consumers, civil penalties and costs. On August 3, 2017, the Judicial Panel on Multidistrict Litigation (“JPML”) transferred this action to the generic drug multidistrict litigation pending in federal court in Pennsylvania, which is discussed in greater detail below. On July 17, 2017, a new complaint was filed in the District Court of Connecticut on behalf of four additional states – Arkansas, Missouri, New Mexico and West Virginia, as well as the District of Columbia. These plaintiffs were not previously party to the State Attorney General action that commenced in December 2016. This complaint, which the JPML has alsoAll such complaints have been transferred to the generic drug multidistrict litigation discussed below, makes the same factual allegations and claims that are at issue in the earlier State Attorneys General complaint. On October 31, 2017 the attorneys general of 45 states plus Puerto Rico and theEastern District of Columbia filed a motion for leave to file an amended complaint in this action. The proposed amended complaint names Actavis as a defendant as well as Teva, and adds new allegations and claims to those appearing in the prior complaints. Defendants have opposed the motion.

Pennsylvania (“Pennsylvania MDL”).

Beginning on March 
2
,
2016
, numerous complaints have been filed in the United States on behalf of putative classes of direct and indirect purchasers of several generic drug products, as well as several individual direct purchaser
opt-out
plaintiffs. These complaints, whichwhi
ch allege that the defendants engaged in conspiracies to fix increase, maintainprices and/or stabilize the pricesallocate market share of the generic drug products named, have been brought against various manufacturer defendants, including among others, Teva USA, Actavis Holdco U.S., Inc., Actavis Elizabeth and Pliva, Inc.Actavis. The plaintiffs generally seek injunctive relief and damages under federal antitrust law, and damages under various state laws. On April 
6
,
2017
, these cases were transferred to the Judicial Panel on Multidistrict Litigation (JPML) entered an order transferringPennsylvania MDL. Additional cases brought by classes of direct or indirect purchasers and alleging claims of generic price-fixing for coordination or consolidation with the multidistrict litigation currently pending in the Eastern District of Pennsylvania; the panel subsequentlywere transferred further cases to that court and the plaintiffs filed consolidated amended complaints on August 
15 2017. Defendants moved
,
2017
. On October 
16
,
2018
, the court denied certain of the defendants’ motions to dismiss as to certain of those consolidated amended complaintsfederal claims, and on October 6, 2017. In February 2018,
15
,
2019
, the court overseeing the multidistrict litigation lifted the stay of discovery on a limited basisgranted in part and denied in part defendants’ motions to allow for document discoverydismiss as to certain state law claims. Teva andnon-merits based depositions. Teva denies Actavis deny having engaged in any conduct that would give rise to liability with respect to the above-mentioned subpoenascomplaints.
In
May 2018
, Teva received a civil investigative demand from the DOJ Civil Division, pursuant to the federal False Claims Act, seeking documents and civil suits.

information produced since January 

1,
2009 relevant to the Civil Division’s investigation concerning allegations that generic pharmaceutical manufacturers, including Teva, engaged in market allocation and price-fixing agreements, paid illegal remuneration, and caused false claims to be submitted in violation of the False Claims Act. Teva is cooperating with this subpoena.
On March
21, 2017, Teva received a subpoena from the U.S. Attorney’s office in Boston, Massachusetts requesting documents related to Teva’s donations to patient assistance programs. Teva is cooperating fully in responding to the subpoena.

For several years,

In December 2016, Teva had conducted a voluntary worldwide investigation into business practices that may have implicationsresolved certain claims under the U.S. Foreign Corrupt Practices Act (“FCPA”), following the receipt, beginning in 2012, of subpoenas and informal document requests from with the SEC and the DOJ with respect to compliance with the FCPA in certain countries. In December 2016, Teva reached a resolution with the SEC and DOJ to fully resolve these FCPA matters.DOJ. The resolution, which relates to conduct in Russia, Mexico and Ukraine from 2007 to 2013, provides for penalties of approximately $519 million (reserved in the financial statements in the third quarter of 2016), which includessettlement included a fine, disgorgement and prejudgment interest; a three-year deferred prosecution agreement (“DPA”) for Teva; a guilty plea by Teva’s Russian subsidiary to criminal charges of violations of the anti-bribery provisions of the FCPA; consent to entry of a final judgment against Teva settling civil claims of violations of the anti-bribery, internal controls and books and records provisions of the FCPA; and the retention of an independent compliance monitor for a period of three years. The SEC civil consentIf, during the term of the DPA (approximately three years unless extended), the DOJ determines that Teva has committed a felony under federal law, provided deliberately false or misleading information or otherwise breached the DPA, Teva could be subject to prosecution and DOJadditional fines or penalties, including the deferred prosecution agreement have each obtained court approval.

charges. Following the above resolution with the SEC and DOJ, Teva has had requests for documents and information from various Russian government entities. In December 2016, Teva was informed by Israeli authorities that they had initiated an investigation into the conduct that was the subject of the FCPA investigation and which resulted in the above-mentioned resolution with the SEC and DOJ. Onaddition, on January 14, 2018, Teva and the Government of Israel entered into an arrangement for the Contingent Cessation of Proceedings pursuant to the Israeli Securities Law with the Government of Israel that endsended the investigation of the Israeli government into suchthe conduct againstthat was subject to the CompanyFCPA investigation, and provides forprovided a payment of 75 million New Israeli Shekels (approximatelyapproximately $22 million).

million.

37
TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

Shareholder Litigation

On November 6
,
2016
and December 
27
,
2016
, two putative securities class actions were filed in the U.S. District Court for the Central District of CaliforniaC
alifornia against Teva and certain of its current and former officers.officers and directors. After those two lawsuits were consolidated and transferred to the U.S. District Court for the District of Connecticut, the court appointed the Ontario Teachers’ Pension Plan Board as lead plaintiff.plaintiff (the “Ontario Teachers Securities Litigation”). The lead plaintiff then filed a consolidated amended complaint. On April 
3
,
2018
, the court dismissed the case without prejudice.
The lead
plaintiff filed a second amended complaint on June 
22
,
2018
, purportedly on behalf of purchasers of Teva’s securities between February 
6
,
2014
and August 
3 2017.
,
2017
. The consolidatedsecond complaint seeks unspecified damages, legal fees, interest, and costs, and it asserts that Teva and certain of its current and former officers and directors violated the federal securities laws and Israeli securities laws in connection with Teva’s alleged failure to disclose Teva’s participation in an alleged anticompetitive scheme to fix prices and allocate marketspricing strategies for genericvarious drugs in its generic drug portfolio and by making allegedly false or misleading statements in certain offering materials issued during the United States. On December 1, 2017,class period. The second complaint seeks unspecified damages, legal fees, interest,
and costs. Teva and the current and former officer and director defendants filed motions to dismiss the consolidated amendedsecond complaint with prejudice. On April 3, 2017,on September 
14
,
2018. Those motions are pending before the Court granted the motions to dismiss without prejudice. A second amended complaint is expected with renewed dismissal briefing.

court.

On July 17
,
2017
, a lawsuit was filed in the U.S. District Court for the Southern District of Ohio derivatively on behalf of the Teva Employee Stock Purchase Plan, and alternatively as a putative class action lawsuit on behalf of individuals who purchased Teva stock through that plan. That lawsuit seeks unspecified damages, legal fees, interest and costs.
The complaint alleges that Teva failed to maintain adequate financial controls based on the facts underpinning Teva’s FCPA deferred prosecution agreement,DPA and also based on allegations substantially similar to those in the putative class action securities lawsuit pending in U.S. District Court for the District of Connecticut, discussed above.Ontario Teachers Securities Litigation. On November 
29
,
2017
, the Courtcourt granted Teva’s motion to transfer the litigation to the U.S. District Court for the District of Connecticut where the putative class action securities lawsuitOntario Teachers Securities Litigation is pending. On December 29, 2017,February 
12
,
2018, the parties jointly moved to staydistrict court stayed the case pending resolution of the motions to dismiss filed in the consolidated putative securities class actionOntario Teachers Securities Litigation described above.

On August 3
,
2017
, a securities lawsuit was filed in the U.S. District Court for the District of Connecticut by OZ ELS Master Fund, Ltd., OZ Special Funding, L.P, OZ Enhanced Master Fund, Ltd., Gordel Capital Limited, OZ Global Equity Opportunities Master Fund, Ltd., OZ Master Fund, Ltd., and OZ Global Special Investments Master Fund L.P.related entities. The complaint asserts that Teva and certain of its current and former officers violated the federal securities laws in connection with Teva’s alleged failure to disclose Teva’s participation in an alleged anticompetitive scheme to fix prices and allocate markets for generic drugs in the United States. On August 
30
,
2017
, the court entered an order deferring all deadlines pending the resolution of the motions to dismiss filed in the consolidatedOntario Teachers Securities Litigation described above.
On August 
21
and
30
,
2017
, Elliot Grodko and Barry Baker filed putative securities class action described above.

On August 21, 2017, a putative class action securities lawsuit was filed by Elliot Grodkoactions in the U.S. District Court for the Eastern District of Pennsylvania purportedly on behalf of purchasers of Teva’s securities between November 

15
,
2016
and August 
2
,
2017
seeking unspecified damages, legal fees, interest, and costs. The complaint allegedcomplaints allege that Teva and certain of its current and former officers violated the federal securities laws and Israeli securities laws by making false and misleading statements in connection with Teva’s acquisition and integration of Actavis Generics. On November 
1
,
2017
, the court consolidated the Baker and Grodko cases. On April 
10
,
2018
, the Courtcourt granted Teva’s motion to transfer thisthe consolidated action to the District of Connecticut where the Ontario Teachers securities litigationSecurities Litigation is currently pending.

Between August 2018 and June 2019, fourteen complaints were filed against Teva and current and former officer and director defendants seeking unspecified compensatory and rescissory damages, legal fees, costs and expenses. The allegations in these complaints are substantially similar to the allegations in the Ontario Teachers Securities Litigation, but have been brought on behalf of plaintiffs that have “opted out” of the putative class in the Ontario Teachers Securities Litigation. The plaintiffs in these “opt-out” cases filed their complaints in the Court of Common Pleas of Montgomery County, Pennsylvania, the U.S. District Court for the Eastern District of Pennsylvania and the U.S. District Court for the District of Connecticut. Teva and the current and former officer and director defendants filed or will file motions or stipulations to transfer the cases filed in Pennsylvania to the U.S. District Court for the District of Connecticut, where the Ontario Teachers Securities Litigation is pending. The cases filed in, or transferred to, Connecticut have been or will request to be stayed pending resolution of the motions to dismiss filed in the Ontario Teachers Securities Litigation described above. On August 30, 2017,June 21, 2019, the Employees’ Retirement System of the City of St. Petersburg, Florida filed a putative securities class action was filed by Barry Baker in the U.S. District Court for the Eastern District of Pennsylvania purportedly on behalf of purchasers of Teva’s securities between November 15, 2016August 4, 2017 and August 2, 2017May 10, 2019 seeking unspecified damages, legal fees, interest, and costs. The complaint alleges that Teva and certain officers violated the federal securities laws by making false and misleading statements in connection with Teva’s acquisition and integration of Actavis Generics. On November 1, 2017, the Court consolidated the Baker case with the Grodko case, discussed above. On April 10, 2018, the Court granted Teva’s motionsimilar claims to transfer this action to the District of Connecticut where the Ontario Teachers securities litigation is currently pending.

Securities Litigation described above.

Motions to approve derivative actions against certain past and present directors and
officers
have been filed in Israel with respect to allegedalleging negligence and recklessness with respect to the acquisition of the Rimsa business and the acquisition of Actavis Generics. Motions for document disclosure prior to initiating derivativesderivative actions were filed with respect to dividend distributionexecutive compensation, several patent settlement agreements, opioids and executive compensation.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

the U.S. price-fixing investigations. Motions to approve securities class actions against Teva and certain of its current and former directors and officers were filed in Israel withbased on allegations regarding properof improper disclosure of the above-mentioned pricing investigation, as well as lack of disclosure of negative developments in the generic sector, andincluding price erosion of the prices ofwith respect to Teva’s products as were presented in the second quarter financial reporting of Teva.products. Other motions were filed in Israel to approve a derivative action, discovery and a class action related to alleged claims regarding Teva’s above-mentioned FCPA resolution with the SEC and DOJ.

38

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TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
Environmental Matters

Teva or its subsidiaries are party to a number of environmental proceedings, or have received claims, including under the federal Superfund law or other federal, provincial or state and local laws, imposing liability for alleged noncompliance, or for the investigation and remediation of releases of hazardous substances and for natural resource damages. Many of these proceedings and claims seek to require the generators of hazardous wastes disposed of at a third party-owned site, or the party responsible for a release of hazardous substances that impacted a site, to investigate and cleanupclean the site or to pay or reimburse others for such activities, including for oversight by governmental authorities and any related damages to natural resources. Teva or its subsidiaries have received claims, or been made a party to these proceedings, along with others, as an alleged generator of wastes that were disposed of or treated at third-party waste disposal sites, or as a result of an alleged release from one of Teva’s facilities or former facilities.

Although liability among the responsible parties, under certain circumstances, may be joint and several, these proceedings are frequently resolved so that the allocation of cleanupclean-up and other costs among the parties reflects the relative contributions of the parties to the site conditions and takes into account other pertinent factors. Teva’s potential liability varies greatly at each of the sites; for some sites the costs of the investigation, cleanupclean-up and natural resource damages have not yet been determined, and for others Teva’s allocable share of liability has not been determined. At other sites, Teva has taken an active role in identifying those costs, to the extent they are identifiable and estimable, which do not include reductions for potential recoveries of cleanupclean-up costs from insurers, indemnitors, former site owners or operators or other potentially responsible parties. In addition, enforcement proceedings relating to alleged violations of federal, state, commonwealth or local requirements at some of Teva’s facilities may result in the imposition of significant penalties (in amounts not expected to materially adversely affect Teva’s results of operations) and the recovery of certain costs and natural resource damages, and may require that corrective actions and enhanced compliance measures be implemented.

Other Matters

On February 1, 2018, former shareholders of Ception Therapeutics, Inc., a company that was acquired by and merged into Cephalon in 2010, prior to Cephalon’s acquisition by Teva, filed breach of contract and other related claims against the Company, Teva USA and Cephalon in the Delaware Court of Chancery. Among other things, the plaintiffs allege that Cephalon breached the terms of the 2010 Ception-Cephalon merger agreement by failing to exercise commercially reasonable efforts to develop and commercialize CINQAIR
®
(reslizumab) for the treatment of eosinophilic esophagitis (EE)(“EE”). The plaintiffs claim damages of at least $200
 million, an amount they allege is equivalent to the milestones payable to the former shareholders of Ception in the event Cephalon were to obtain regulatory approval for EE in the United States ($150 million) and Europe ($50 million). All defendants haveDefendants moved to dismiss the plaintiffs’ complaint and filed briefson December 28, 2018, the court granted the motion in supportpart and dismissed all of plaintiffs’ claims, except for their motions on April 10, 2018.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

claim against Cephalon for breach of contract.

NOTE 17 – Segments:

In November 2017,

Teva announced a new organizational structure and leadership changes to enable strategic alignment across its portfolios, regions and functions. Teva now operates its business through three segments: North America, Europe and Growth Markets. The purpose of the new structure is to enable stronger alignment and integration between operations, commercial regions, R&D and Teva’s global marketing and portfolio function, in order to optimize its product lifecycle across the therapeutic areas. Teva’s financial results for the first quarter of 2018 are being reported under this new structure for the first time.

In addition to these three segments, Teva has other activities, primarily the API manufacturing business and certain contract manufacturing services.

All the above changes were reflected through retroactive revision of prior period segment information.

Since 2013 and until December 31, 2017, Teva had two reportable segments: generic and specialty medicines. The generic medicines segment included Teva’s OTC and API businesses. Teva’s other activities included distribution activities, sales of medical devices and certain contract manufacturing operation (“CMO”) services.

Teva now operates its business and reports its financial results in three segments:

a) North America segment, which includes the United States and Canada.

b) Europe segment, which includes the European Union and certain other European countries.

c) Growth

(a)North America segment, which includes the United States and Canada.
(b)Europe segment, which includes the European Union and certain other European countries.
(c)International Markets segment, which includes all countries other than those in the North America and Europe segments.
The Company began reporting its financial results under this structure in the North Americafirst quarter of 2018. This change was reflected through retroactive revision of prior period segment information.
In addition to these three segments, Teva has other sources of revenues, primarily the sale of APIs to third parties, certain contract manufacturing services and Europe segments.

an out-licensing platform offering a portfolio of products to other pharmaceutical companies through its affiliate Medis.

Teva’s Chief Executive Officer (“CEO”), who is the chief operating decision maker (“CODM”), reviews financial information prepared on a consolidated basis, accompanied by disaggregated information about revenues and contributed profit by the three identified reportable segments, namely North America, Europe and GrowthInternational Markets, to make decisions about resources to be allocated to the segments and assess their performance.

Segment profit is comprised of gross profit for the segment less R&D expenses, S&M expenses, G&A expenses and other income related to the segment. Segment profit does not include amortization and certain other items.

39

Table of Contents
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
Teva manages its assets on a company basis, not by segments, as many of its assets are shared or commingled. Teva’s CODM does not regularly review asset information by reportable segment and, therefore, Teva does not report asset information by reportable segment.

Teva’s CEO may review its strategy and organizational structure. Any changes in strategy may lead to a reevaluation of the Company’s segments and goodwill allocation to reporting units, as well as fair value attributable to its reporting units. See note 7.

a. Segment information:
             
 
Three months ended June 30, 2019
 
 
North America
  
Europe
  
International Markets
 
 
(U.S. $ in millions)
 
Revenues
 $
2,071
  $
1,183
  $
741
 
Gross profit
  
1,067
   
674
   
312
 
R&D expenses
  
175
   
70
   
24
 
S&M expenses
  
269
   
216
   
119
 
G&A expenses
  
117
   
70
   
34
 
Other (income) expense  
2
   
1
   
(1
)
             
Segment profit
 $
504
  $
316
  $
136
 
             
    
 
Three months ended June 30, 2018
 
 
North America
  
Europe
  
International Markets
 
 
(U.S. $ in millions)
 
Revenues
 $
2,263
  $
1,328
  $
789
 
Gross profit
  
1,179
   
727
   
328
 
R&D expenses
  
182
   
73
   
25
 
S&M expenses
  
272
   
233
   
130
 
G&A expenses
  
103
   
78
   
37
 
Other (income) 
expense
  
(100
)  
(3
)  
(3
)
             
Segment profit
 $722  $
346
  $139 
             
             
 
Six months ended June 30,
 2
019
 
 
North America
  
Europe
  
International Markets
 
 
(U.S. $ in millions)
 
Revenues $4,118  $2,448  $1,409 
Gross profit  2,107   1,404   582 
R&D expenses  340   136   46 
S&M expenses  537   431   234 
G&A expenses  230   119   70 
Other (income) expense  (2)  (1)  (1)
             
Segment profit $1,001  $719  $233 
             
    
 
Six months ended June 30,
 2018
 
 
North America
  
Europe
  
International Markets
 
 
(U.S. $ in millions)
 
Revenues $4,794  $2,770  $1,539 
Gross profit  2,582   1,519   641 
R&D expenses  370   146   49 
S&M expenses  548   483   264 
G&A expenses  229   169   78 
Other (income) expense  (202)  (2)  (11)
             
Segment profit $1,637  $723  $261 
             
40

Table of Contents
TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

a. Segment information:

   North America  Europe   Growth Markets 
   Three months ended
March 31,
  Three months ended
March 31,
   Three months ended
March 31,
 
   2018  2017  2018   2017   2018  2017 
   (U.S. $ in millions)  (U.S. $ in millions)   (U.S. $ in millions) 

Revenues

  $2,531  $3,240  $1,442   $1,341   $750  $718 

Gross profit

   1,432   2,080   797    734    313   292 

R&D expenses

   188   267   73    106    24   47 

S&M expenses

   305   441   255    279    134   158 

G&A expenses

   126   139   91    79    41   48 

Other income

   (102  (73  1    2    (8  (1
  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Segment profit

  $915  $1,306  $377   $268   $122  $40 
  

 

 

  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

   Three months ended
March 31,
 
   2018   2017 
   (U.S.$ in millions) 

North America profit

  $915   $1,306 

Europe profit

   377    268 

Growth Markets profit

   122    40 
  

 

 

   

 

 

 

Total segment profit

   1,414    1,614 

Profit of other activities

   21    7 
  

 

 

   

 

 

 
   1,435    1,621 

Amounts not allocated to segments:

    

Amortization

   310    320 

Other asset impairments, restructuring and other items

   707    240 

Goodwill impairment

   180    —   

Gain on divestitures, net of divestitures related costs

   (93   —   

Inventorystep-up

   —      64 

Other R&D expenses

   22    —   

Costs related to regulatory actions taken in facilities

   1    34 

Legal settlements and loss contingencies

   (1,278   20 

Other unallocated amounts

   61    48 
  

 

 

   

 

 

 

Consolidated operating income

   1,525    895 
  

 

 

   

 

 

 

Financial expenses, net

   271    207 
  

 

 

   

 

 

 

Consolidated income before income taxes

  $1,254   $688 
  

 

 

   

 

 

 

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

 
Three months ended
  
Six months ended
 
 
June 30,
  
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(U.S. $ in millions)
  
(U.S. $ in millions)
 
North America profit $504  $722  $1,001  $1,637 
Europe profit  316   346   719   723 
International Markets profit  136   139   233   261 
                 
Total segment profit  956   1,207   1,954   2,621 
Profit of other activities  55   31   76   52 
                 
  1,011   1,238   2,029   2,673 
Amounts not allocated to segments:            
Amortization  285   302   568   612 
Other assets impairments, restructuring and other items  101   194   103   695 
Goodwill impairment     120      300 
Intangible asset impairments  561   521   1,030   727 
(Gain) loss on divestitures, net of divestitures related costs  (9)  10   (9)  (83)
Other R&D expenses  §   —     §   22 
Costs related to regulatory actions taken in facilities  12   4   16   5 
Legal settlements and loss contingencies  646   20   703   (1,258)
Other unallocated amounts  59   81   129   142 
                 
Consolidated operating income (loss)  (644)  (14)  (510)  1,511 
                 
Financial expenses, net  206   236   425   507 
                 
Consolidated income (loss) before income taxes 
$
(850
)
 
$
(250
)
 
$
(934
)
 
$
1,004 
                 
§Represents an amount less than $1 million​​​​​​​.
b. Segment revenues by major products and activities:

The following tables present revenues by major products and activities for the three months
and the six months ended March 31, 2018June 30, 20
19 and 2017:

   Three months ended
March 31,
 
   2018   2017 
   (U.S.$ in millions) 

North America segment

    

Generic products

  $1,088   $1,415 

COPAXONE

   476    797 

BENDEKA / TREANDA

   181    156 

ProAir

   130    121 

QVAR

   107    84 

AUSTEDO

   30    —   

Distribution

   331    295 
   Three months ended
March 31,
 
   2018   2017 
   (U.S.$ in millions) 

Europe segment

    

Generic products

  $997   $850 

COPAXONE

   153    152 

Respiratory products

   113    84 
   Three months ended
March 31,
 
   2018   2017 
   (U.S.$ in millions) 

Growth Markets segment

 

Generic products

  $488   $486 

COPAXONE

   16    21 

Distribution

   153    125 

2018:

  
Three months ended
June 30,
 
  
2019
  
2018
 
  
(U.S. $ in millions)
 
North America
         
Generic products $946  $ 947 
COPAXONE  274    464 
TREANDA/BENDEKA  115    160 
ProAir*  65    115 
QVAR  60    30 
AJOVY  23    —   
AUSTEDO  96    44 
Anda  351    320 
Other  141    183 
Total $2,071  $ 2,263 
*Does not include sales of ProAir authorized generic, which are included under generics.
   
 
Six months ended
 
 
June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions)
 
North America
        
Generic prod
uct
s
 
$
1,913
  
$
2,035
 
COPAXONE
  
482
   
940
 
TREANDA/BENDEKA
  
229
   
341
 
ProAir*
  
123
   
245
 
QVAR
  
124
   
137
 
AJOVY
  
43
   
—  
 
AUSTEDO
  
171
   
74
 
Anda
  
729
   
651
 
Other
  
305
   
372
 
Total
 
$
4,118
  
$
4,794
 
*Does not include sales of ProAir authorized generic, which are included under generics.
41
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial​​​​​​​ Statements
(Unaudited)
  
Three months ended 
June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions)
 
Europe
        
Generic products
 
$
844
  
$
907
 
COPAXONE
  
107
   
140
 
Respiratory products
  
89
   
106
 
Other
  
143
   
175
 
Total
 
$
1,183
  
$
1,328
 
 
Six months ended
June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions)
  
Europe​​​​​​​
        
Generic products
 $
1,763
  $
1,904
 
COPAXONE
  
221
   
293
 
Respiratory products
  
181
   
219
 
Other  283   354 
Total  $2,448  $2,770 
 
Three months ended
June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions)
 
International markets
        
Generic products
 $
489
  $
537
 
COPAXONE
  
13
   
22
 
Distribution
  
164
   
154
 
Other
  
75
   
76
 
Total
 $
741
  $
789
 
 
Six months ended
June 30,
  
 
2019
  
2018
 
 
(U.S. $ in millions)
  
International markets
        
Generic products
 $
930
  $
1,025
 
COPAXONE
  
27
   
38
 
Distribution
  
315
   
307
 
Other
  
137
   
168
 
Total
 $
1,409
  $
1,539
 
A significant portion of Teva’s revenues, and a higher proportion of the profits, come from the manufacture and sale of patent-protected pharmaceuticals. Many of Teva’s specialty medicines are covered by several patents that expire at different times. Nevertheless, once patent protection has expired or has been lost prior to the expiration date as a result of a legal challenge, Teva no longer has patent exclusivity on these products, and subject to regulatory approval, generic pharmaceutical manufacturers are able to produce and market similar (or purportedly similar) products and sell them for a lower price. The commencementlaunch of generic competition, even in the form ofnon-equivalent products, can result in a substantial decrease in revenues for a particular specialty medicine in a very short time. Any such expiration or loss of IPsuch intellectual property rights could therefore significantly adversely affect Teva’s results of operations and financial condition.

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 18—18 – Other income:

   Three months ended March 31, 
   2018   2017 
   (U.S. $ in millions) 

Gain on divestitures, net of divestitures related costs(1)

  $93    —   

Section 8 and similar payments(2)

   99    75 

Gain on sale of assets

   8    —   

Other, net

   3    (3
  

 

 

   

 

 

 

Total other income

  $203   $72 
  

 

 

   

 

 

 

                 
 
Three months ended June 30,
  Six months ended June 30, 
 
2019
  
2018
  2019   2018 
 
(U.S. $ in millions)
  (U.S. $ in millions) 
Gain (loss) on divestitures, net of divestitures related costs (1)
 $
9
   
(10
) $9   83 
Section 8 and similar payments (2)
  
— 
   
95
   —    194 
Gain (loss) on sale of assets
  
(5
)  
1
   (4  9 
Other, net
  
5
   
10
   11   13 
                 
Total other income
 $
9
  $
96
  $ 15   $299 
(1)GainMainly related to the divestment of the women’s health business and the dissolution of PGT in 2018. See note 3.
(2)Section 8 of the Patented Medicines (Notice of Compliance) RegulationsRegulation relates to recoveries of lost revenue related to patent infringement proceedings in Canada.

42

Table of Contents
TEVA PHARMACEUTICAL INDUSTRIES LIMITED

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 19 – Income Taxes:

taxes:

In the second quarter of
2019
, Teva recognized a tax benefit of $179 million, or 21%, on
pre-tax
loss of $850 million. In the second quarter of
2018
, Teva recognized a tax benefit of $76 million, or 30%, on
pre-tax 
loss of $250 million. Teva’s tax rate for the second quarter of
2019
was mainly affected by impairments, amortization and interest disallowance as a result of the U.S. Tax Cuts and Jobs Act.
In the first quartersix months of 2018, income taxes were $46
2019
, Teva recognized a tax benefit of $170 million, or 4%18%, onpre-tax income loss of $1.3 billion.$934 million. In the first quartersix months of 2017, income taxes were $54
2018
, Teva recognized a tax benefit of $30 million or 8%, onpre-tax income of $688$1,004 million. OurTeva’s tax rate for the first quartersix months of 2018
2019
was mainly affected byone-time legal settlements impairments, amortization and divestments that hadinterest disallowance as a low corresponding tax effect.

The Company recognizedresult of the income tax effects of theU.S. Tax Cuts and Jobs Act (“TCJA”) in its audited consolidated financial statements included in the Company’s Annual Report on Form10-K for the year ended December 31, 2017, in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the TCJA was enacted into law. The guidance also provides for a measurement period of up to one year from the enactment date for the Company to complete the accounting for the U.S. tax law changes. As such, the Company’s financial results for the year ended December 31, 2017, reflected a $112 million provisional estimate for itsone-time deemed repatriation tax liability. No subsequent adjustments have been made to the amounts recorded as of December 31, 2017, which continue to represent a provisional estimate of the impact of the TCJA. The estimated impact of the TCJA is based on certain assumptions and the Company’s current interpretation, and may change as the Company receives additional clarification and implementation guidance and as the interpretation of the TCJA evolves over time.

Act.

The statutory Israeli corporate tax rate is 23% in 2018. Our2019. Teva’s tax rate differs from the Israeli statutory tax rate, mainly due to the mixgeneration of profits generated in various jurisdictions wherein which tax rates are different than the Israeli tax rate, tax benefits in Israel and other countries,countries.
NOTE 20 – Leases:
Leases prior to the adoption of the new Lease Standard
Teva leases real estate, cars and equipment for use in its operations, which are classified as welloperating leases. In addition to rent, the leases may require Teva to pay directly for fees, insurance, maintenance and other operating expenses. Rental expense for the six months ended June 30, 2018 and the 12 months ended December 31, 2018, was $90 million and $175 million, respectively. The Company also has capital leases for properties.
Leases following the adoption of the new Lease Standard
Teva adopted the new accounting standard ASC 842 “Leases” and all the related amendments on January 1, 2019 and used the effective date as infrequentTeva’s date of initial application.
Teva determines if an arrangement is a lease at inception. Lease classification is governed by five criteria in ASC 842-10-25-2. If any of these five criteria is met, Teva classifies the lease as a finance lease. Otherwise, Teva classifies the lease as an operating lease. When determining lease classification, Teva’s approach in assessing two of the mentioned criteria is: (i) generally 75% or nonrecurring items.

more of the remaining economic life of the underlying asset is a major part of the remaining economic life of that underlying asset; and (ii) generally 90% or more of the fair value of the underlying asset comprises substantially all of the fair value of the underlying asset.

Operating leases are included in operating lease
right-of-use
(“ROU”) assets, other current liabilities, and operating lease liabilities in the consolidated balance sheets. Finance leases are included in property, plant and equipment, other current liabilities, and other long-term liabilities in the consolidated balance sheets. Finance leases of land include long-term leasehold rights in various locations, with useful lives between 30 and 99 years.
ROU assets represent Teva’s right to use an underlying asset for the lease term and lease liabilities represent Teva’s obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Teva uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of the lease payments.
For finance leases, Teva recognizes interest on the lease liability separately from amortization of the ROU assets in the statement of comprehensive income. For operating leases, lease expenses are recognized on a straight-line basis over the lease term.
The new standard also provides practical expedients for an entity’s ongoing accounting. Teva elected the short-term lease recognition exemption for all leases with a term shorter than 12 months. This means that for those leases, Teva does not recognize ROU assets or lease liabilities, including not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition, but recognizes lease expenses over the lease term on a straight line basis. Teva also elected the practical expedient to not separate lease and
non-lease
components for all of Teva’s leases, other than leases of real estate.
Lease terms will include options to extend or terminate the lease when it is reasonably certain that Teva will exercise or not exercise the option to renew or terminate the lease.
Teva’s lease agreements have remaining lease terms ranging from 1 year to 80 years. Some of these agreements include options to extend the leases for up to 15 years and some include options to terminate the leases immediately. Certain leases also include options to purchase the leased property.
The depreciable life of leasehold improvements is limited by the expected lease term, unless there is a transfer of title or a purchase option for the leased asset reasonably certain of exercise.
43

Table of Contents
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
Some of
Teva’s
 vehicle lease agreements include rental payments based on the actual usage of the vehicles and other lease agreements include rental payments adjusted periodically for inflation. Teva’s lease agreements do not contain any material residual value guarantees.
Teva does not believe the new Lease Standard will have a notable impact on its liquidity. The new standard will have no impact on Teva’s debt-covenant compliance under its RCF.
Teva rents out or subleases certain real estate to third parties, which has an immaterial impact on Teva’s consolidated financial statements.
The components of  operating lease cost for the three months ended and six months ended June 30, 2019 were as follows:
         
 
Three months ended
 June 30,
  
Six months 
ended 
June 30,
 
  2019 
 
(U.S. $ in millions)
 
Operating lease cost:
      
Fixed payments and variable payments that depend
on an index or rate
 $
36
  $
78
 
Variable lease payments not included in the lease liability
  
2
   
4
 
Short-term lease cost
  
1
   
3
 
         
Total operating lease cost
 $
39
  
$
85
 
         
Supplemental cash flow information related to operating leases was as follows:
     
 
Six months ended 
 
 
June 30, 
2019
 
 
(U.S. $ in millions)
 
Cash paid for amounts included in the measurement of lease liabilities:
   
Operating cash flows from operating leases
 $
79
 
Right-of-use
assets obtained in exchange for lease obligations
(non-
cash):
   
Operating leases
 $
46
 
Supplemental balance sheet information related to operating leases was as follows:
     
 
June 30,
 
2019
 
 
(U.S. $ in millions)
 
Operating leases:
   
Operating lease ROU assets
 $
500
 
Other current liabilities
  
120
 
Operating lease liabilities
  
426
 
     
Total operating lease liabilities
 $
546
 
     
June 30, 
2019
Weighted average remaining lease term
Operating leases
7.7 years
Weighted average discount rate
Operating leases
5.9
%
44
Table of Contents
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
Maturities of operating lease liabilities were as follows:
     
 
June 30, 
2019
 
 
(U.S. $ in millions)
 
2019 (excluding the six months ended June 30, 2019)
 $
87
 
2020
  
124
 
2021
  
100
 
2022
  
78
 
2023
  
58
 
2024 and thereafter
  
266
 
     
Total operating lease payments
 $
713
 
     
Less: imputed interest
  
167
 
     
Present value of lease liabilities
 $
546
 
     
    
 
December 31, 
2018
 
 
(U.S. $ in millions)
 
2019
 $
193
 
2020
  
154
 
2021
  
118
 
2022
  
91
 
2023
  
66
 
2024 and thereafter  
283
 
     
Total lease payments
 $
905
 
     
As of June 30, 2019, Teva has additional operating leases for office space, which have yet to commence, with undiscounted future payments of $94 million. These operating leases will commence during fiscal year 2020 with lease terms of 9 to 12 years.
As of June 30, 2019, Teva’s total finance lease assets and finance lease liabilities are $78 million and $27 million, respectively. The difference between those amounts is mainly due to prepaid payments.
45
Table of Contents
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

We are a global pharmaceutical company, committed to increasing access to high-quality healthcare tohelping patients around the world. 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 in Israel and a significant presence in the United States, Europe and many other markets around the world. Our key strengths include our world-leading genericsgeneric medicines expertise and portfolio, focused specialty medicines portfolio and global infrastructure and scale.

Teva was incorporated in Israel on February 13, 1944 and is the successor to a number of Israeli corporations, the oldest of which was established in 1901.

In November 2017, we announced a new organizational structure and leadership changes to enable strategic alignment across our portfolios, regions and functions.

Our Business Segments
We now operate our business through three segments: North America, Europe and GrowthInternational Markets. The purpose of the newEach business segment manages our entire product portfolio in its region, including generics, specialty medicines and OTC products. This structure is to enable strongerenables strong alignment and integration between operations, commercial regions, R&D and our global marketing and portfolio function, in order to optimizeoptimizing our product lifecycle across therapeutic areas. Our financial results for the first quarter of 2018 are being reported under this new structure for the first time.

In addition to these three segments, we have other activities, primarily our active pharmaceutical ingredient (“API”) manufacturing businessthe sale of APIs to third parties and certain contract manufacturing services.

The data presented in this report for prior periods have been conformed

In December 2017, we announced a comprehensive restructuring plan intended to reflectsignificantly reduce our cost base, unify and simplify our organization and improve business performance, profitability, cash flow generation and productivity. This plan is intended to reduce our total cost base by $3 billion by the changes to our segment reporting commencingend of 2019.
Highlights
Significant highlights in the firstsecond quarter of 2018.

Highlights

Significant highlights of the first quarter of 20182019 included:

Revenues in the firstsecond quarter of 20182019 were $5.1 billion,$4,337 million, a decrease of 10%8%, or 15%5% in local currency terms, compared to the firstsecond quarter of 2017.2018, mainly due to generic competition to COPAXONE
®

, as well as declines in revenues from TREANDA
®
/BENDEKA
®
, certain other specialty products in the United States, our Europe segment and Japan, partially offset by higher revenues from AUSTEDO
®
, AJOVY
®
and QVAR
®
in the United States.
Our North America segment generated revenues of $2.5 billion and profit of $915 million in the first quarter of 2018. Revenues decreased by 22%, mainly due to adverse market dynamics in the U.S. generics market, a decrease in COPAXONE® revenues due to generic competition and the loss of revenues from the sale of our women’s health business. Profit decreased by 30% mainly due to lower revenues, partially offset by cost reductions as part of the restructuring plan.

Our Europe segment generated revenues of $1.4 billion$2,071 million and profit of $377 million.$504 million in the second quarter of 2019. Revenues increaseddecreased by 8% butcompared to the second quarter of 2018, mainly due to a decline in revenues from COPAXONE, TREANDA/BENDEKA and certain other specialty products, partially offset by higher revenues from our Anda business, QVAR, AUSTEDO and AJOVY. Profit decreased by 6% in local currency terms,30%, mainly due to the loss ofchanges in revenues from the closure of our distribution business in Hungarydescribed above and the salenon-recurrence of our women’s health business, partially offset by new generic product launches. Profit increased by 41%. The increase was mainly due to higher revenuesother income, as well as cost reductions and efficiency measures as part of the restructuring plan.

Our Growth MarketsEurope segment generated revenues of $750$1,183 million and profit of $122 million.$316 million in the second quarter of 2019. Revenues increaseddecreased by 4%11%, flator 5% in local currency terms. Profit increased by $82 million,terms, compared to the second quarter of 2018, mainly due to highera decline in COPAXONE revenues as well asdue to the entry of competing glatiramer acetate products and the termination of the PGT joint venture, partially offset by new generic product launches. Profit decreased by 9%, mainly due to the changes in revenues and the impact of currency fluctuations, partially offset by cost reductions and efficiency measures as part of the restructuring plan.

Other asset impairments, restructuring
Our International Markets segment generated revenues of $741 million and other items were $707 million, compared to $240profit of $136 million in the firstsecond quarter of 2017,2019. Revenues decreased by 6%, or 2% in local currency terms, and profit decreased by 2% compared to the second quarter of 2018. The decrease in revenues and profit was mainly due to a $432lower sales in Japan resulting from generic competition to off-patent products, partially offset by higher sales in Russia and cost reductions and efficiency measures as part of the restructuring plan.
Intangible asset impairments were $561 million in the second quarter of 2019, compared to $521 million in the second quarter of 2018. The impairment expenses in the second quarter of long-lived2019 were related to identifiable product rights of $365 million and IPR&D assets of $196 million. The impairments were mainly related to products acquired from Actavis Generics.
Operating loss was $644 million in the second quarter of 2019, compared to $14 million in the second quarter of 2018. The increase in operating loss was mainly due to lower profit from our operating segments and $247 million restructuring expenses.

We recorded a goodwill impairment of $180 million, driven by the changean increase in fair value, including the discount rate and the change in allocated net assets, to the Rimsa reporting unit.

We recorded income of $1.3 billion under legal settlements and loss contingencies. The income consisted primarily of the working capital adjustment with Allergan, the Rimsa settlement and a reversal of the reserve recorded with respect to the carvedilol patent litigation verdict reversal.contingencies expenses.

Operating income was $1.5 billion in the first quarter of 2018, compared to $895 million in the first quarter of 2017, mainly due to income in connection with legal settlements, partially offset by other asset impairments, restructuring and other items, a goodwill impairment and lower operating income in our North America segment.

Exchange rate movements between the firstsecond quarter of 2019 and the second quarter of 2018 and the first quarter of 2017 positivelynegatively impacted overall revenues by $240$125 million and operating income by $37$41 million.

Our
46

As of June 30, 2019, our debt decreased by $1.7 billion,was $28,726 million, compared to $28,624 million as of March 31, 2019. The increase was mainly due to $6.5 billionexchange rates fluctuations.
Cash flow used in operating activities during the second quarter of prepayments2019 was $227 million, compared to cash flow generated from operating activities of $162 million in the second quarter of 2018. The decrease in cash flow in the second quarter of 2019 was mainly due to lower revenues, timing of certain term loanscustomer payments and senior notes, partially offset by our March 2018 issuancecredits and payments of $4.4 billion of senior notes as well as foreign exchange fluctuations.U.S. customer rebates paid this quarter, primarily related to managed care and Medicaid.

Cash flow generated from operating activities was $1.5 billion in the firstsecond quarter of 2018,2019, net of cash received for capital investments and beneficial interest collected in exchange for securitized trade receivables, was $168 million, compared to $0.1 billion$559 million in the firstsecond quarter of 2017,2018. The decrease in cash flow was mainly due to proceeds from the working capital adjustment with Allergan and the legal settlement with Rimsa.reasons mentioned above.

Transactions

On January 31, 2018, we completed the sale of a portfolio of products to CVC Capital Partners Fund VI for $703 million in cash. The portfolio of products, which is marketed and sold outside of the United States, includes the women’s health products OVALEAP®, ZOELY®, SEASONIQUE®, COLPOTROPHINE® and other specialty products such as ACTONEL®.

In April 2018, we signed a separation agreement with P&G to terminate the PGT Healthcare partnership that the two companies established in 2011 to market OTC medicines. We will continue to maintain our OTC business on an independent basis. The separation is planned to become effective July 1, 2018, subject to receipt of applicable regulatory approvals. As part of the separation, we will transfer shares we hold in New Chapter Inc. and ownership rights in an OTC plant located in India to P&G. We will continue to provide certain services to P&G after the separation for a transition period.

Results of Operations

Comparison of Three Months Ended March 31, 2018June 30, 2019 to Three Months Ended March 31, 2017

June 30, 2018

The following table sets forth, for the periods indicated, certain financial data derived from our U.S. GAAP financial statements.

   Percentage of Net Revenues   Percentage
Change
2018 - 2017
 
   Three Months Ended
March 31,
   
   2018   2017   
   %   %   % 

Net revenues

   100.0    100.0    (10

Gross profit

   46.4    50.2    (17

Research and development expenses

   6.3    7.6    (27

Selling and marketing expenses

   15.2    17.0    (20

General and administrative expenses

   6.5    6.5    (10

Other asset impairments, restructuring and other items

   14.0    4.2    195 

Goodwill impairment

   3.6    —      § 

Legal settlements and loss contingencies

   (25.2   0.4    —   

Other income

   (4.0   (1.3   182 

Operating income

   30.0    15.8    70 

Financial expenses, net

   5.4    3.7    31 

Income before income taxes

   24.6    12.1    82 

Income taxes (benefit)

   0.9    1.0    (15

Share in (profits) losses of associated companies, net

   1.4    (0.1   —   

Net income attributable tonon-controlling interests

   0.3    (0.1   —   

Net income attributable to Teva

   22.0    11.3    74 

Dividends on preferred shares

   1.3    1.2    § 

Net income attributable to ordinary shareholders

   20.7    10.1    82 

statements:
             
 
Percentage of Net Revenues
Three Months Ended
June 30,
  
Percentage
Change
 
 
2019
  
2018
  
2019
 -
 2018
 
 
%
  
%
  
%
 
Net revenues
  
100
   
100
   
(8
Gross profit
  
44
   
43
   
(7
Research and development expenses
  
6
   
6
   
(5
Selling and marketing expenses
  
15
   
15
   
(2
General and administrative expenses
  
7
   
7
   
(6
Intangible assets impairment
  
13
   
11
   
8
 
Goodwill impairment
  
—  
   
3
   
(100
Other assets impairments, restructuring and other items
  
2
   
4
   
(48
Legal settlements and loss contingencies
  
15
   
§
   
—  
 
Other income
  
§
   
(2
  
—  
 
Operating income
  
(15
  
§
   
—  
 
Financial expenses, net
  
5
   
5
   
(13
Income (loss) before income taxes
  
(20
  
(5
  
240
 
Income taxes
  
(4
  
(2
  
135
 
Share in losses (income) of associated companies, net
  
§
   
§
   
—  
 
Net income attributable to non-controlling interests
  
§
   
§
   
—  
 
Net income (loss) attributable to Teva
  
(16
  
(4
  
292
 
Dividends on preferred shares
  
—  
   
1
   
(100
Net income (loss) attributable to ordinary shareholders
  
(16
  
(5
  
186
 
§Represents an amount less than 0.5%.

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, 2018June 30, 2019 and 2017:

   Three months ended March 31, 
                         2018                                               2017                    
   (U.S.$ in millions / % of Segment Revenues) 

Revenues

  $2,531    100 $3,240    100

Gross profit

   1,432    57  2,080    64

R&D expenses

   188    8  267    8

S&M expenses

   305    12  441    14

G&A expenses

   126    5  139    4

Other income

   (102   (4%)   (73   (2%) 
  

 

 

   

 

 

 

 

 

 

   

 

 

 

Segment profit*

  $915    36 $1,306    40
  

 

 

   

 

 

 

 

 

 

   

 

 

 

2018:
                 
 
Three months ended June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions / % of Segment Revenues)
 
Revenues
 $
2,071
   
100.0
 $
2,263
   
100.0
%
Gross profit
  
1,067
   
51.5
  
1,179
   
52.1
%
R&D expenses
  
175
   
8.5
  
182
   
8.0
%
S&M expenses
  
269
   
13.0
  
272
   
12.0
%
G&A expenses
  
117
   
5.6
  
103
   
4.6
%
Other (income) expense
  
2
   
§
   
(100
  
(4.4
%) 
                 
Segment profit*
 $
504
   
24.3
 $
722
   
31.9
%
                 
*Segment profit does not include amortization and certain other items. The data presented for prior periods have been conformed to reflect the changes to our segment reporting commencing in the first quarter of 2018. See note 17 to our consolidated financial statements and “Teva Consolidated Results—Operating Income” below.

§  Represents an amount less than 0.5%.
47

North America Revenues

Our North America segment includes the United States and Canada. Revenues from our North America segment in the firstsecond quarter of 20182019 were $2.5 billion,$2,071 million, a decrease of $709$192 million, or 22%8%, compared to the firstsecond quarter of 2017,2018, mainly due to adverse market dynamics in the U.S. generics market, a decline in revenues of COPAXONE, revenues due to generic competitionTREANDA/BENDEKA and the loss of revenues from the sale of our women’s health business,certain other specialty products, partially offset by higher revenues from our Anda business, QVAR, AUSTEDO BENDEKA and TREANDA, QVAR and our distribution business.

Revenues in the United States, our largest market, were $2.4 billion in the first quarter of 2018, a decrease of $719 million, or 23%, compared to the first quarter of 2017.

AJOVY.

Revenues by Major Products and Activities

The following table presents revenues for our North America segment by major products and activities for the three months ended March 31, 2018June 30, 2019 and 2017:

   Three months ended
March 31,
   Percentage
Change
 
   2018   2017   2017-2018 
   (U.S.$ in millions)     

Generic products

  $1,088   $1,415    (23%) 

COPAXONE

   476    797    (40%) 

BENDEKA / TREANDA

   181    156    16

ProAir

   130    121    7

QVAR

   107    84    27

AUSTEDO

   30    —      N/A 

Distribution

   331    295    12

2018:

             
 
Three months ended
June 30,
  
Percentage
Change
 
 
2019
  
2018
  
2019-2018
 
 
(U.S. $ in millions)
   
Generic products
 $
946
  $
947
   
§
 
COPAXONE
  
274
   
464
   
(41
%) 
TREANDA/BENDEKA
  
115
   
160
   
(28
%) 
ProAir*
  
65
   
115
   
(44
%) 
QVAR
  
60
   
30
   
103
AJOVY
  
23
   
—  
   
NA
 
AUSTEDO
  
96
   
44
   
117
Anda
  
351
   
320
   
10
Other
  
141
   
183
   
(23
%) 
             
Total
 $
2,071
  $
2,263
   
(8
%) 
             
*Does not include sales of ProAir authorized generic, which are included under generics.
§  Represents an amount less than 0.5%.
Generic products
revenues in our North America segment in the firstsecond quarter of 2019 were $946 million flat compared to the second quarter of 2018, decreased by 23% to $1.1 billion, compared to the first quarter of 2017, mainly due to lower volumesnew generic product launches, offset by market dynamics, including product mix and continued price erosion.

erosion in our U.S. generics business.

Among the most significant generic products we sold in North America in the firstsecond quarter of 20182019 were methylphenidate extended-release tablets (Concertaepinephrine injection (the generic equivalent of EpiPen
® authorized generic)
), sildenafil citratesolifenacin succinate tablets (the generic equivalent of ViagraVesicare
®
), daptomycin injection (thealbuterol sulfate inhalation aerosol (ProAir
®
HFA authorized generic equivalent of Cubicin®)Teva’s specialty product), amphetamine salt tablets (the generic equivalent of Adderall IR
®
), and estradiol vaginal creamlidocaine transdermal patch (the generic equivalent of EstraceLidoderm Patch
®
).

In the firstsecond quarter of 2018,2019, we led the U.S. generics market in total prescriptions and new prescriptions, with approximately 584404 million total prescriptions (based on trailing twelve months), representing 15%11% of total U.S. generic prescriptions according to IQVIA data.

COPAXONE®
revenues in our North America segment in the firstsecond quarter of 20182019 decreased by 40%41% to $476$274 million, compared to the firstsecond quarter of 2017,2018, mainly due to generic competition in the United States.
COPAXONE revenues in the United States were $462$260 million in the firstsecond quarter of 2018.

2019.

Revenues of COPAXONE in our North America segment were 74%69% of global COPAXONE revenues in the firstsecond quarter of 2018,2019, compared to 82%74% in the firstsecond quarter of 2017.

2018.

COPAXONE global sales accounted for approximately 13%9% of our global revenues in the firstsecond quarter of 20182019 and a significantly higher percentage of our profits and cash flow from operations during this period.

The FDA approved generic versions of COPAXONE 40 mg/mL in October 2017 and February 2018 and a second generic version of COPAXONE 20 mg/mL in October 2017.2017 in the United States. Hybrid versions of COPAXONE 20 mg/mL and 40 mg/mL were also approved in the European Union.

COPAXONE 40 mg/mL is protected by five U.S. Orange Book patents that expire in 2030. These patents have been challenged in proceedings in the United States. We are appealing certain adverse U.S. District Court, Patent Trial and Appeal Board decisions to defend these patents in the United States. At least one competitor has fully launched its generic version of COPAXONE 40 mg/mL. This launch, prior to final resolution of the pending patent litigation, should be considered an “at-risk” launch, which means that if the pending litigation is resolved in our favor, the company selling this generic product could face significant damages claims and other potential remedies. COPAXONE 40 mg/mL is also protected by one European patent expiring in 2030. This patent is being challenged in Italy and Norway and has been opposed atvarious jurisdictions. In October 2017, the European Patent Office. The U.K. High Court found this patent invalid and our application for permission to appeal this decision was rejected.

The patent was upheld by the Opposition Division of the European Patent Office in April 2019.

The market for MS treatments continues to develop, particularly with the recent approvals of generic versions of COPAXONE discussed above, as well as additional generic versions expected to be approved in the future. The increasing number of oralOral treatments for MS, such as Tecfidera
®
, Gilenya
®
and Aubagio
®
, continuescontinue to present significant and increasing competition. COPAXONE also continues to face competition from existing injectable products, as well as from monoclonal antibodies.

48

BENDEKA
and
TREANDA
combined revenues in our North America segment in the firstsecond quarter of 2018 increased2019 decreased by 16%28% to $181$115 million, compared to the firstsecond quarter of 2017,2018, mainly due to higherlower volumes and lower pricing, resulting partly from supply stabilization.

the June 2018 launch of a ready-to-dilute bendamustine hydrochloride by Eagle Pharmaceuticals, Inc. (“Eagle”). In July 2018, Eagle, prevailed in its suit in the U.S. district court against the FDA to obtain seven years of orphan drug exclusivity in the United States for BENDEKA. The FDA has appealed the district court’s decision, but barring a reversal by the appellate court, drug applications referencing BENDEKA, TREANDA or any other bendamustine product will not be approved by the FDA until the orphan drug exclusivity expires in December 2022. In April 2019, we signed an amendment to the license agreement with Eagle extending the royalty term applicable to the United States to the full period for which we sell BENDEKA and increasing the royalty rate. In addition, Eagle agreed to assume a portion of BENDEKA-related patent litigation expenses.

ProAir
revenues in our North America segment in the firstsecond quarter of 2018 increased2019 decreased by 7%44% to $130$65 million, compared to the firstsecond quarter of 2017,2018, mainly due to higher volumes.lower volumes as well as lower net pricing. In January 2019, we launched our own ProAir authorized generic in the 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 second-largest short-acting beta-agonist in the market, with an exit market share of 46.1%25.3% (45.8% including our ProAir HFA authorized generic) in terms of total number of prescriptions for albuterol inhalers during the firstsecond quarter of 2018,2019, compared to 47.7%44.4% in the firstsecond quarter of 2017.

2018. In June 2014, we settled a patent challenge to ProAir HFA with Perrigo Pharmaceuticals (“Perrigo”), under which Perrigo is now permitted to launch its generic product. In November 2017, we settled another patent challenge to ProAir HFA with Lupin Pharmaceuticals, Inc. (“Lupin”), et al. permitting Lupin to launch its generic product on September 23, 2019, or earlier under certain circumstances. To date, no generic competition has been launched.

QVAR
revenues in our North America segment in the firstsecond quarter of 20182019 increased by 27%103% to $107$60 million, compared to the first quarter of 2017. We launched QVAR® RediHaler in the first quarter of 2018. The increase in sales in the firstsecond quarter of 2018, which was mainlya transition period due to slightly higher wholesaler stocking for allthe launch of QVAR family products in connection with the launch.
®
RediHaler™. QVAR maintained its second-place position in the inhaled corticosteroids category in the United States, with an exit market share of 29.4%20.2% in terms of total number of prescriptions during the firstsecond quarter of 2018,2019, compared to 38.1%24.2% in the firstsecond quarter of 2017.

AUSTEDO2018.

AJOVY
revenues in our North America segment in the firstsecond quarter of 2019 were $23 million. AJOVY was approved by the FDA and launched in the United States in September 2018 were $30 million. for the preventive treatment of migraine in adults. In April 2019, the European Medicines Agency (“EMA”) granted a Marketing Authorization for AJOVY in the European Union in a centralized process.
On May 12, 2017, we entered into a license and collaboration agreement with Otsuka Pharmaceutical Co., Ltd. (“Otsuka”) providing Otsuka with an exclusive license to conduct phase 2 and 3 clinical trials for AJOVY in Japan and, once approved, to commercialize the product in Japan.
AJOVY is protected by patents expiring in 2026 in Europe and in 2027 in the United States, with possibility for extension in various markets. An additional patent relating to the use of AJOVY in the treatment of migraine is issued in the United States and will expire in 2035. This patent is also pending in other countries. AJOVY is protected by regulatory exclusivity for 12 years from marketing approval in the United States and 10 years from marketing approval in Europe.
We have filed a lawsuit in the U.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, and as a result the litigation in the district court has been stayed pending resolution of the IPRs. In addition, we have entered into separate agreements with Alder Biopharmaceuticals and Lilly, resolving the European 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 the United Kingdom.
AUSTEDO
revenues in our North America segment in the second quarter of 2019 increased by 117%, to $96 million, compared to $44 million in the second quarter of 2018.
AUSTEDO was approved by the FDA and launched in April 2017 in the United States for the treatment of chorea associated with Huntington disease. In August 2017, the FDA approved AUSTEDO for the treatment of tardive dyskinesia.

Distribution

Anda
revenues in our North America segment which are generated by Anda, increased by 12%10% to $331$351 million in the firstsecond quarter of 2019, compared to the second quarter of 2018, compared to the first quarter of 2017, mainly due to the severe cold, cough and influenza seasonhigher volumes. Anda, our distribution business in the first quarter of 2018, which increased demand for certain medicines. Our Anda businessUnited States, distributes generic, specialty and OTC pharmaceutical products from various third party manufacturers to independent retail pharmacies, pharmacy retail chains, hospitals and physician offices in the 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 throughout the United States and competitive pricing.

States.

49

Product Launches and Pipeline

In the firstsecond quarter of 2018,2019, we launched the generic versionsversion of the following branded products in North America (listed by month of launch):

Product Name

  

Brand Name

  

Launch
Date

  Total Annual U.S.
Branded Sales at Time
of Launch
(U.S.$ in millions (IQVIA))*
 

Estradiol Vaginal Cream, USP, 0.01%

  Estrace®  January  $304 

Methylphenidate Hydrochloride Extended-Release Capsules (LA), CII 20 mg, 30 mg & 40 mg

  Ritalin LA® ER  January  $97 

Busulfan Injection 6 mg/mL, 60 mg

  Busulfex®  January  $86 

Trientine Hydrochloride Capsules, USP 250 mg

  Syprine®  February  $147 

Hydrocortisone Butyrate Cream USP, 0.1% (Lipophilic)

  Locoid Lipocream®  February  $6 

Minocycline Hydrochloride Extended-Release Tablets, USP 65 mg & 115 mg

  Solodyn® ER  February  $148 

Lansoprazole Delayed-Release Orally Disintegrating Tablets 15 mg & 30 mg

  Prevacid® SoluTab DR ODT  March  $184 

Tiagabine Hydrochloride Tablets 12 mg & 16 mg **

  Gabitril®  March  $9 

Palonosetron Hydrochloride Injection 0.05 mg/mL, 0.25 mg

  Aloxi®  March  $452 

Mesalamine Delayed-Release Tablets, USP 1.2 g

  Lialda® DR  March  $1,128 

America:
             
Product Name
 
Brand Name
  
Launch
Date
  
Total Annual U.S.
Branded Sales at Time
of Launch
(U.S. $ in millions
(IQVIA))
*
 
Fluoxetine tablets, USP 20 mg
  
—  
   
April
  $
56
 
Testosterone gel, metered 1.62% CIII
  
AndroGel
®  
April
  $
755
 
  
1.62
[CIII]
%
 
      
Solifenacin succinate tablets, 5 mg & 10 mg
  
Vesicare
®  
April
  $
946
 
Ambrisentan tablets, 5 mg & 10 mg
  
Letairis
®  
May
  $
254
 
Erlotinib tablets, 100 mg & 150 mg
  
Tarceva
®  
May
  $
188
 
Mesalamine delayed-release capsules, 400 mg
  
Delzicol
®  
May
  $
130
 
Ranolazine extended-release tablets, 500 mg & 1000 mg
  
Ranexa
®  
May
  $
950
 
Aspirin and extended-release dipyridamole capsules, 25 mg/200 mg **
  
Aggrenox
®  
June
  $
168
 
Desmopressin acetate injection, USP, 4 mcg/mL**
  
DDAVP
®  
June
  $
58
 
Albendazole tablets, USP, 200 mg
  
Albenza
®  
June
  $
85
 
Bosentan tablets, 62.5 mg & 125 mg
  
Tracleer
®  
June
  $
84
 
Doxylamine succinate and pyridoxine hydrochloride delayed-release tablets, 10 mg/10 mg
  
Diclegis
®  
June
  $
151
 
Penicillamine capsules, USP, 250 mg
  
Cuprimine
®  
June
  $
130
 
1% Sodium hyaluronate injection
  
***
   
June
  $
 —  
 
*The figures presented are for the twelve months ended in the calendar quarter immediately prior to our launch orre-launch.
**Authorized generic version ofProduct was re-launched.
***  Approved via 515(d)(1)(B)(ii) regulatory pathway for medical devices; not equivalent to a Teva specialtybrand product.

Our generic products pipeline in the United States includes, as of March 31, 2018, 325June 30, 2019, 256 product applications awaiting FDA approval, including 86 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 DecemberMarch 31, 20172019 exceeding $111 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 110101 of these products, or 129123 products including final approvals where launch is pending a settlement agreement or court decision. Collectively, these first to file opportunities represent over $63$74 billion in U.S. brand sales for the twelve months ended DecemberMarch 31, 2017,2019, 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 fromso-called “authorized generics,” which may ultimately affect the value derived.

In the firstsecond quarter of 2018,2019, we received tentative approvals for generic equivalents of the products listed in the table below, excluding overlapping applications. 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, a30-month regulatory stay lapses or a180-day exclusivity period awarded to another manufacturer either expires or is forfeited.

Generic Name

  Brand Name Total U.S. Annual Branded
Market (U.S. $ in millions (IQVIA))*
 

Eltrombopag tablets, 12.5 mg, 25 mg & 75 mg

  Promacta® $200 

Esomeprazole magnesium delayed-release capsules, 20 mg

  Nexium® DR $85 

Ingenol mebutate gel, 0.05%

  Picato® $17 

Nicotine polacrilex mini mint lozenges, 2 mg & 4 mg

  Nicorette® $68 

Perampanel tablets, 2 mg, 4 mg, 6 mg, 8 mg & 10 mg

  Fycompa® $68 

Rotigotine transdermal system, 1 mg/24 hr, 2 mg/24 hr, 3 mg/24 hr, 4 mg/24 hr, 6 mg/24 hr & 8 mg/24 hr

  Neupro® $143 

Ticagrelor tablets, 60 mg & 90 mg

  Brilinta® $712 

Generic Name
Brand Name
Total U.S. Annual Branded
Market (U.S. $
in millions (IQVIA))*
Icatibant injection, 30 mg/3 mL
Firazyr
®$
318
Sorafenib tablets, 200 mg
Nexavar
®$
55
*For the twelve months ended in the calendar quarter immediately prior to the receipt of tentative approval.

In the first quarter

50

Below is a description of key products in our specialty pipeline in North America consistedas of the following products:

June 30, 2019:
Therapeutic Area Product 

Potential Indication(s)

 Route of
Administration
 

Product
Potential
Indication(s)
Route of
Administration
Development Phase

(date entered phase 3)

neurology and neuropsychiatry AUSTEDO
(deutetrabenazine)
Tourette syndromeOral3 (December 2017)
Comments
LaquinimodRelapsing remitting multiple sclerosisOralDiscontinued
Progressive forms of multiple sclerosisOralDiscontinued
Huntington diseaseOral2
PridopidineHuntington diseaseOralDiscontinued due to pipeline prioritization
TV-46000 (risperidone
LAI)
SchizophreniaLAI3 (April 2018)
Migraine
CNS, Neurology and Pain
Fremanezumab (anti
CGRP)
Chronic and episodic migraineSubcutaneousSubmitted to FDA (October 2017)(1)
Cluster headacheSubcutaneous3 (November 2016)
Post traumatic headacheSubcutaneous2
Fasinumab(2)Osteoarthritis painSubcutaneous3 (March 2016)
Chronic lower back painSubcutaneous2
TV-45070Neuropathic painTopicalPartnership with Xenon terminated by mutual agreement
RespiratoryCINQAIR/
CINQAERO

Severe asthma with

eosinophilia

Subcutaneous3 (August 2015)
ProAire-RespiClickBronchospasm and exercise induced bronchitisOral
inhalation
Submitted to FDA (September 2017)
OncologyCT-P10(3)(biosimilar candidate to Rituxan® US)
Neuropsychiatry
  Submitted to FDA (2017)
CT-P6(3) (biosimilar candidate to Herceptin® US)  Submitted
AUSTEDO (deutetrabenazine)
Tourette syndrome
Oral
3 (December 2017)
Teva and Nuvelution entered into a partnership agreement on September 19, 2017 to FDA (2017)

(1)We do not expect to receive FDA approval on our Biologics License Applications (“BLA”)develop AUSTEDO for fremanezumab on themid-June PDUFA date. We are engaged treatment of tics associated with Tourette syndrome in a constructive dialogue with the FDA in close collaboration with our partner Celltrion, Inc. (“Celltrion”). We expect an FDApre-approval inspection to take placepediatric patients in the coming monthsUnited States. Nuvelution will fund and to receive FDA approvalmanage phase 3 clinical development, leading all operational aspects of the program. Teva will lead the regulatory process and launch before the end of 2018.be responsible for commercialization.
(2)
Dyskinesia in cerebral
palsy
Oral
3 (January 2019)
TV-46000 (risperidone LAI)
Schizophrenia
LAI
3 (April 2018)
Migraine and Pain
fremanezumab (anti CGRP)
Post traumatic
headache
Subcutaneous
2
Fasinumab
Osteoarthritis pain
Subcutaneous
3 (March 2016)
Developed in collaboration with Regeneron Pharmaceuticals, Inc. (“Regeneron”).
In August 2018, Regeneron recently reported that an independent Data Monitoring Committee monitoring the ongoing safety and efficacyTeva announced positive topline phase 3 results in patients with chronic pain from osteoarthritis of the fasinumab clinical trials recommendedknee or hip with the remaining low dose 1mg every month (1mg4W) and 1mg every two months (1mg8W).
Fasinumab is protected by patents expiring in 2028 and will also be protected by regulatory exclusivity of 12 years from marketing approval in the United States and 10 years from marketing approval in Europe.
Chronic lower
back pain
Subcutaneous
3 (December 2017)
Respiratory
CINQAIR/CINQAERO
Severe asthma with
eosinophilia
Subcutaneous
3 (August 2015)
In January 2018, we announced that the higher dose-regimens be discontinued based onphase 3 study did not meet its primary endpoint. We are reviewing the risk benefit assessment,full data to determine next steps.
ProAir e-RespiClick™
Bronchospasm and that the program may continue with the lower dose-regimensexercise induced bronchitis
Oral inhalation
Approved by FDA
(December 2018)
AirDuo
®
Digihaler
TM
Treatment of fasinumab. We understand that Regeneron is modifying the trials accordingly.asthma in patients aged 12 years and older
Oral inhalation
Approved by FDA
(July 2019)
Oncology
Truxima (formerly CT-P10)
(biosimilar to
Rituxan
®
US)
Approved by FDA
(November 2018)
Approved in
Canada (April
2019)
Herzuma (formerly CT-P06)
(biosimilar to
Herceptin
®
US)
Approved by
FDA (December
2018)
(3)Developed under collaboration agreement with Celltrion. During the first quarter of 2018, Celltrion received complete response letters from the FDA regarding the BLAs for these biosimilar products. Celltrion is working on resolving all issues and resubmitting the BLAs.

51

North America Gross Profit

Gross profit from our North America segment in the firstsecond quarter of 20182019 was $1.4 billion,$1,067 million, a decrease of 31%9%, compared to $2.1 billion$1,179 million in the firstsecond quarter of 2017.2018. The decrease was mainly due to lower revenues from COPAXONE, as well as a decline in sales of certain other specialty products, partially offset by increases in sales of AUSTEDO, QVAR and generic products revenues.

AJOVY.

Gross profit margin for our North America segment in the firstsecond quarter of 20182019 decreased to 56.6% from 64.2%51.5%, compared to 52.1% in the firstsecond quarter of 2017. This2018. The decrease was mainly due to lower revenues from COPAXONE revenues (4.0 points) and continued price erosioncertain other specialty products, partially offset by improved gross profit margin of generic products (3.0 points).

products.

North America R&D Expenses

R&D expenses relating to our North America segment in the firstsecond quarter of 20182019 were $188$175 million, a decrease of 30%4%, compared to $267$182 million in the firstsecond quarter of 2017.

2018.

For a description of our R&D expenses in the firstsecond quarter of 2018,2019, 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 firstsecond quarter of 20182019 were $305$269 million, a decrease of 31%1%, compared to $441$272 million in the firstsecond quarter of 2017.2018. The decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.

plan, partially offset by increased expenses related to AJOVY.

North America G&A Expenses

G&A expenses relating to our North America segment in the firstsecond quarter of 20182019 were $126$117 million, a decreasean increase of 9%14%, compared to $139$103 million in the firstsecond quarter of 2017.2018. The decreaseincrease was mainly due to legal expenses, partially offset by cost reductions and efficiency measures as part of the restructuring plan.

North America Other Income

(Expense)

Other incomeexpenses from our North America segment in the firstsecond quarter of 2019 was $2 million, compared to other income of $100 million in the second quarter of 2018. The income in the second quarter of 2018 was $102 million, an increase of 40% compared to $73 million in the first quarter of 2017. The increase was mainly due to higher Section 8 recoveries from multiple cases in Canada. Section 8 of the Patented Medicines (Notice of Compliance) Regulations relates to recoverieslegal recovery of lost revenue related toprofits, where U.S. patent infringement proceedings.

litigation had previously prevented a product’s sales.

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. The data presented for prior periods have been conformed to reflect the changes to our segment reporting commencing in the first quarter of 2018. See note 17 to our consolidated financial statements and “Teva Consolidated Results—Operating Income” below.

Profit from our North America segment in the firstsecond quarter of 20182019 was $915$504 million, a decrease of 30%, compared to $1.3 billion$722 million in the firstsecond quarter of 2017.2018. The decrease was mainly due to lower revenues due to generic competition forfrom COPAXONE, as well as a decline in sales of certain other specialty products and continued price erosion in the U.S. generics market,non-recurrence of other income, partially offset by increases in sales of AUSTEDO and QVAR, as well as cost reductions and efficiency measures as part of the restructuring planplan.
52

ERP Implementation
Teva is in the process of implementing a company-wide enterprise resource planning (“ERP”) system in the U.S. to upgrade certain operational and higher other income.

financial processes. ERP implementation is a complex and time-consuming project. As with any new information system we implement, this application, along with the internal controls over financial reporting included in this process, has required testing for effectiveness and management has made appropriate efforts in this regard. In connection with this ERP implementation, we are updating our internal controls over financial reporting, as necessary, to accommodate modifications to our business processes and accounting procedures. We do not expect that the ERP implementation will have an adverse effect on our business. However, if the design or implementation of our new ERP system is deficient, it could adversely affect our operations, such as manufacturing or distribution, and/or the effectiveness of our internal controls.

Europe Segment

The following table presents revenues, expenses and profit for our Europe segment for the three months ended March 31, 2018June 30, 2019 and 2017:

   Three months ended March 31, 
   2018  2017 
   (U.S.$ in millions / % of Segment Revenues) 

Revenues

  $1,442        100 $1,341        100

Gross profit

   797    55  734    55

R&D expenses

   73    5  106    8

S&M expenses

   255    18  279    21

G&A expenses

   91    6  79    6

Other expenses

   1   §   2   § 
  

 

 

   

 

 

 

 

 

 

   

 

 

 

Segment profit*

  $377    26  268    20
  

 

 

   

 

 

 

 

 

 

   

 

 

 

2018:
                 
 
Three months ended June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions / % of Segment Revenues)
 
                 
Revenues
 $
1,183
   
100.0
 $
1,328
   
100.0
Gross profit
  
674
   
56.9
  
727
   
54.7
R&D expenses
  
70
   
5.9
  
73
   
5.5
S&M expenses
  
216
   
18.3
  
233
   
17.5
G&A expenses
  
70
   
5.9
  
78
   
5.9
Other (income) expense
  
1
   
§
   
(3
  
§
 
                 
Segment profit*
 $
316
   
26.7
 $
346
   
26.1
                 
*Segment profit does not include amortization and certain other items. The data presented for prior periods have been conformed to reflect the changes to our segment reporting commencing in the first quarter of 2018. See note 17 to our consolidated financial statements and “Teva Consolidated Results—Operating Income” below.
§Represents an amount less than 0.5%.

Europe Revenues

Our Europe segment includes the European Union and certain other European countries. Revenues from our Europe segment in the firstsecond quarter of 20182019 were $1.4 billion, an increase$1,183 million, a decrease of 8%11% or $101$145 million, compared to the firstsecond quarter of 2017.2018. In local currency terms, revenues decreased by 6%5%, mainly due to a decline in COPAXONE revenues due to the lossentry of revenues from the closure of our distribution business in Hungarycompeting glatiramer acetate products and the saletermination of our women’s health business,the PGT joint venture, partially offset by new generic product launches.

Revenues by Major Products and Activities

The following table presents revenues for our Europe segment by major products and activities for the three months ended March 31, 2018June 30, 2019 and 2017:

   Three months ended   Percentage 
   March 31,   Change 
   2018   2017   2017-2018 
   (U.S.$ in millions)     

Generic products

  $997   $850    17

COPAXONE

   153    152    1

Respiratory products

   113    84    35

2018:

             
 
Three months ended
June 30,
  
Percentage
Change
 
 
2019
  
2018
  
2018-2019
 
 
(U.S. $ in millions)
   
Generic products
 $
844
  $
907
   
(7
%) 
COPAXONE
  
107
   
140
   
(24
%) 
Respiratory products
  
89
   
106
   
(16
%) 
Other
  
143
   
175
   
(18 
%) 
             
Total
 $
1,183
  $
1,328
   
(11
%) 
             
Generic products
revenues in our Europe segment in the firstsecond quarter of 2018,2019, including OTC products, increaseddecreased by 17%7% to $997$844 million, compared to the firstsecond quarter of 2017.2018. In local currency terms, revenues increaseddecreased by 2%,1% compared to the second quarter of 2018, mainly due to new product launchesthe loss of revenues from the termination of the PGT joint venture and volume growthdecline due to specific market conditions in OTC,various European Union countries, partially offset by price reductions.

new generic product launches.

COPAXONE
revenues in our Europe segment in the firstsecond quarter of 2018 increased2019 decreased by 1%24% to $153$107 million, compared to the firstsecond quarter of 2017.2018. In local currency terms, revenues decreased by 13%19%, mainly due to price reductions resulting from the entry of generic competition.

competing glatiramer acetate products.

Revenues of COPAXONE in our Europe segment were 24%27% of global COPAXONE revenues in the firstsecond quarter of 2018,2019, compared to 16%22% in the firstsecond quarter of 2017.

2018.

For further information onabout COPAXONE, see “—North America Revenues—Revenues by Major Product” above.

Respiratory products
revenues in our Europe segment in the firstsecond quarter of 2018 increased2019 decreased by 35%16% to $113$89 million, compared to the firstsecond quarter of 2017.2018. In local currency terms, revenues increaseddecreased by 18%11%, mainly due to lower sales in the launch of BRALTUS® in 2017.

United Kingdom.

Product Launches and Pipeline

As of March 31, 2018,June 30, 2019, our generic products pipeline in Europe included 234384 generic approvals in Europe relating to 4649 compounds in 95101 formulations, and approximately 1,5031,326 marketing authorization applications pending approval in 37 European countries, relating to 183144 compounds in 364296 formulations including one application pending with the EMA for one strength in 30 countries.

53

For information regarding our specialty pipeline and launches in the firstsecond quarter of 2018,2019, see “—North America Segment—ProductSegment —Product Launches and Pipeline.”

Europe Gross Profit

Gross profit from our Europe segment in the firstsecond quarter of 20182019 was $797$674 million, an increasea decrease of 9%7% compared to $734$727 million in the firstsecond quarter of 2017.2018. The increasedecrease was mainly due to a decline in COPAXONE revenues and the positive impact of currency fluctuations, partially offset by the loss of revenues from the sale of our women’s health business.

new generic product launches.

Gross profit margin for our Europe segment in the firstsecond quarter of 20182019 increased to 55.3%56.9%, fromcompared to 54.7% in the firstsecond quarter of 2017. This2018. The increase was mainly due to lower cost of goods sold related to the closuretermination of our distribution business in Hungary (1.6 points), partially offset by other production costs (1.0 points).

the PGT joint venture and network optimization.

Europe R&D Expenses

R&D expenses relating to our Europe segment in the firstsecond quarter of 20182019 were $73$70 million, a decrease of 31%4% compared to $106$73 million in the firstsecond quarter of 2017.

2018.

For a description of our R&D expenses in the firstsecond quarter of 2018,2019, see “—Teva Consolidated Results—Research and Development (R&D) Expenses” below.

Europe S&M Expenses

S&M expenses relating to our Europe segment in the firstsecond quarter of 20182019 were $255$216 million, a decrease of 9%7% compared to $279$233 million in the firstsecond quarter of 2017.2018. The decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan, partially offset by currency fluctuations.

plan.

Europe G&A Expenses

G&A expenses relating to our Europe segment in the firstsecond quarter of 20182019 were $91$70 million, an increasea decrease of 15%10% compared to $79$78 million in the firstsecond quarter of 2017.2018. The increasedecrease was mainly due to currency fluctuations, partially offset by cost reductions and efficiency measures as part of the restructuring plan.

Europe Profit

The profit

Profit of our Europe 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. The data presented for prior periods have been conformed to reflect the changes to our segment reporting commencing in the first quarter of 2018. See note 17 to our consolidated financial statements and “—Teva Consolidated Results—Operating Income” below.

Profit from our Europe segment in the firstsecond quarter of 20182019 was $377$316 million, an increasea decrease of 41%9% compared to $268$346 million in the firstsecond quarter of 2017.2018. The increasedecrease was mainly due to higherlower revenues as well asand the impact of currency fluctuations, partially offset by impact of cost reductions and efficiency measures as part of the restructuring plan.

Growth

International Markets Segment

The following table presents revenues, expenses and profit for our GrowthInternational Markets segment for the three months ended March 31, 2018June 30, 2019 and 2017:

   Three months ended March 31, 
                     2018                                       2017                
   (U.S.$ in millions / % of Segment Revenues) 

Revenues

  $750    100 $718    100

Gross profit

   313    42  292    41

R&D expenses

   24    4  47    7

S&M expenses

   134    18  158    22

G&A expenses

   41    5  48    7

Other income

   (8   (1%)   (1  § 
  

 

 

   

 

 

 

 

 

 

   

 

 

 

Segment profit*

  $122    16 $40    6
  

 

 

   

 

 

 

 

 

 

   

 

 

 

2018:
                 
 
Three months ended June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions / % of 
Segment Revenues) 
 
                 
Revenues
 $
741
   
100.0
 $
789
   
100.0
Gross profit
  
312
   
42.1
  
328
   
41.5
R&D expenses
  
24
   
3.2
  
25
   
3.2
S&M expenses
  
119
   
16.1
  
130
   
16.4
G&A expenses
  
34
   
4.7
  
37
   
4.7
Other (income) expense
  
(1
  
§
   
(3
  
§
 
                 
Segment profit*
 $
136
   
18.3
 $
139
   
17.6
                 
*Segment profit does not include amortization and certain other items. The data presented for prior periods have been conformed to reflect the changes to our segment reporting commencing in the first quarter of 2018. See note 17 to our consolidated financial statements and “—Teva Consolidated Results—Operating Income” below.
§Represents an amount less than 0.5%.

Growth

International Markets Revenues

Our GrowthInternational Markets segment includes all countries other than those in our North America and Europe segments. Our key growthinternational markets are Israel, Japan Russia and Israel.Russia. The countries in this category range from highly regulated, pure generic markets, such as Israel, to hybrid markets, such as Japan, to branded generics oriented markets, such as Russia and certain Commonwealth of Independent States (CIS), Latin American and Asia Pacific markets.

54

Revenues from our GrowthInternational Markets segment in the firstsecond quarter of 20182019 were $750$741 million, an increasea decrease of $32$48 million, or 4%6%, compared to the firstsecond quarter of 2017.2018. In local currency terms, revenues were flatdecreased 2% compared to the firstsecond quarter of 2017,2018, mainly due to lower sales in Japan, partially offset by higher sales in Israel, Japan and Russia, partially offset by the effect of the deconsolidation of our subsidiaries in Venezuela and the loss of revenues from the sale of our women’s health business.

Russia.

Revenues by Major Products and Activities

The following table presents revenues for our GrowthInternational Markets segment by major products and activities for the three months ended March 31, 2018June 30, 2019 and 2017:

   Three months ended   Percentage 
   March 31,   Change 
   2018   2017   2017-2018 
   (U.S.$ in millions)     

Generic products

  $488   $486   § 

COPAXONE

   16    21    (24%) 

Distribution

   153    125    22

§Represents an amount less than 0.5%.

2018:

             
 
Three months ended
June 30,
  
Percentage
Change
 
 
2019
  
2018
  
2018-2019
 
 
(U.S. $ in millions)
   
Generic products
 $
489
  $
537
   
(9
%) 
COPAXONE
  
13
   
22
   
(40
%) 
Distribution
  
164
   
154
   
6
%
Other
  
75
   
76
   
(1
%) 
             
Total
 $
741
  $
789
   
(6
%) 
             
Generic products
revenues in our GrowthInternational Markets segment in the firstsecond quarter of 2018,2019, which include OTC products, were flatdecreased by 9% to $489 million, compared to the firstsecond quarter of 2017.2018. In local currency terms, revenues decreased by 3%4%, mainly due to the effect of the deconsolidation of our subsidiarieslower sales in Venezuela.

Japan resulting from generic competition to off-patented products, partially offset by higher sales in Russia.

COPAXONE
revenues in our GrowthInternational Markets segment in the firstsecond quarter of 20182019 decreased by 24%40% to $16$13 million, compared to the firstsecond quarter of 2017.2018. In local currency terms, revenues decreased by 20%28%.

For further information about COPAXONE, see “—North America Revenues—Revenues by Major Product” above.

Distribution
revenues in our GrowthInternational Markets segment in the firstsecond quarter of 20182019 increased by 22%6% to $153$164 million, compared to the firstsecond quarter of 2017.2018. In local currency terms, revenues increased by 13%7%.

Growth

International Markets Gross Profit

Gross profit from our GrowthInternational Markets segment in the firstsecond quarter of 20182019 was $313$312 million, an increasea decrease of 7%5% compared to $292$328 million in the firstsecond quarter of 2017.2018.
Gross profit margin for our International Markets segment in the second quarter of 2019 increased to 42.1%, compared to 41.5% in the second quarter of 2018. The increase was mainly due to higher revenueslower cost of goods and portfolio optimization, mainly in Japan, including a milestone payment from Takeda following approval of AZILECT®,Russia and higher revenues in Israel, partially offset by the deconsolidation of our subsidiaries in Venezuela and the loss of revenues from the sale of our women’s health business.

Gross profit margin for our Growth Markets segment in the first quarter of 2018 increased to 41.7%, from 40.7% in the first quarter of 2017. This increase was mainly due to higher gross profit in Japan (3.5 points), partially offset by the deconsolidation of our subsidiaries in Venezuela (1.3 points) and currency fluctuations in Argentina (0.8 points).

GrowthIsrael.

International Markets R&D Expenses

R&D expenses relating to our GrowthInternational Markets segment in the firstsecond quarter of 20182019 were $24 million, a decrease of 49%6% compared to $47$25 million in the firstsecond quarter of 2017.

2018.

For a description of our R&D expenses in the firstsecond quarter of 2018,2019, see “—Teva Consolidated Results—Research and Development (R&D) Expenses” below.

Growth

International Markets S&M Expenses

S&M expenses relating to our GrowthInternational Markets segment in the firstsecond quarter of 20182019 were $134$119 million, a decrease of 15%8% compared to $158$130 million in the firstsecond quarter of 2017.2018. The decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.

Growth

International Markets G&A Expenses

G&A expenses relating to our GrowthInternational Markets segment in the firstsecond quarter of 20182019 were $41$34 million, a decrease of 15%7% compared to $48$37 million in the firstsecond quarter of 2017.2018. The decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.

Growth

International Markets Profit

The profit

Profit of our GrowthInternational 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. The data presented for prior periods have been conformed to reflect the changes to our segment reporting commencing in the first quarter of 2018. See note 17 to our consolidated financial statements and “—Teva Consolidated Results—Operating Income” below.

Profit from our GrowthInternational Markets segment in the firstsecond quarter of 20182019 was $122$136 million, a decrease of 2% compared to $40$139 million in the firstsecond quarter of 2017.2018. The increasedecrease was mainly due to lower sales in Japan resulting from generic competition to off-patent products, partially offset by higher revenues, as well assales in Russia and cost reductions and efficiency measures as part of the restructuring plan.

During the fourth quarter

55

Other Activities

We have other sources of revenues, primarily our API manufacturing business andthe sale of APIs to third parties, certain contract manufacturing services.services and an out-licensing platform offering a portfolio of products to other pharmaceutical companies through our affiliate Medis. Our other activities are not included in our North America, Europe or GrowthInternational Markets segments described above.

Our revenues from other activities in the firstsecond quarter of 2018 decreased by 2.6%2019 were $342 million, an increase of 6% compared to $342 million.the second quarter of 2018. In local currency terms, revenues decreasedincreased by 8%10%, mainly due to lowerhigher revenues from API sales to third parties.

API sales to third parties in the firstsecond quarter of 2018 decreased by 9% to $179 million. In2019 were $204 million, an increase of 10%, in both U.S. dollar and local currency terms, revenues decreased by 10%, mainly duecompared to the timing of certain shipments in the firstsecond quarter of 2018.

Teva Consolidated Results

Revenues

Revenues in the firstsecond quarter of 20182019 were $5.1 billion,$4,337 million, a decrease of 10%8%, or 15%5% in local currency terms, compared to the firstsecond quarter of 2017,2018, mainly due to adverse market dynamics in the U.S. generics market, generic competition to COPAXONE, as well as declines in revenues from TREANDA/BENDEKA, certain other specialty products in the United States, our Europe segment and loss ofJapan, partially offset by higher revenues following our divestment of certain productsfrom AUSTEDO, AJOVY and discontinuation of certain activities.QVAR in the United States. See “—North America Revenues,” “—Europe Revenues,” “—GrowthInternational Markets Revenues” and “—Other Activities” above.

Exchange rate movements during the firstsecond quarter of 2018 in comparison with the first quarter of 2017 positively2019 negatively impacted revenues by $240 million.

$125 million compared to the second quarter of 2018.

Gross Profit

Gross profit in the firstsecond quarter of 20182019 was $2.3 billion,$1,893 million, a decrease of 17%7% compared to the firstsecond quarter of 2017.2018. The lower gross profitdecrease was mainly a result of the factors discussed above under “—North America Gross Profit,” “—Europe Gross Profit” and “—GrowthInternational Markets Gross Profit” as well as lower remediation expenses and higher accelerated depreciation and inventorystep-up in the first quarter of 2017, which did not recur in the first quarter of 2018.

Profit.”

Gross profit as a percentage of revenues was 46.4%43.7% in the firstsecond quarter of 2018,2019, compared to 50.2%43.2% in the firstsecond quarter of 2017.

2018.

The decreaseincrease in gross profit as a percentage of revenues was mainly due to lower amortization expenses and higher profitability in Europe, mainly due to the termination of the PGT joint venture, partially offset by lower profitability in North America, (5.1 points), the sale of our women’s health business (0.9 points) and higher accelerated depreciation (0.4 points), partially offset by inventorystep-up expenses (1.3 points), higher profitabilityresulting mainly from a decline in Europe (0.9 points) and remediation expenses (0.7 points).

COPAXONE revenues due to generic competition.

Research and Development (R&D) Expenses

Net R&D expenses in the firstsecond quarter of 20182019 were $317$276 million, a decrease of 27%5% compared to the firstsecond quarter of 2017.

2018.

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 firstsecond quarter of 2018,2019, our R&D expenses were primarily related to generic products in our North America segment, as well as specialty product candidates in the pain, respiratory, migraine, headache and headacherespiratory therapeutic areas, with additional activities in selected other areas.

Our lower R&D expenses in the firstsecond quarter of 20182019 compared to the firstsecond quarter of 20172018 primarily resulted from pipeline optimization and project terminations phase 3 studies that ended and related headcount reductions, partially offset by higher costs due to an increase in phase 3 clinical activity (primarily fasinumab, in collaboration with Regeneron).

reductions.

R&D expenses as a percentage of revenues were 6.3%6.4% in the firstsecond quarter of 2018,2019, compared to 7.6%6.2% in the firstsecond quarter of 2017.

2018.

56

Selling and Marketing (S&M) Expenses

S&M expenses in the firstsecond quarter of 20182019 were $771$666 million, a decrease of 20%2% compared to the firstsecond quarter of 2017.2018. 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 “—GrowthInternational Markets Segment— S&M Expenses.”

S&M expenses as a percentage of revenues were 15%15.4% in the firstsecond quarter of 2018,2019, compared to 17%14.5% in the firstsecond quarter of 2017.

2018.

General and Administrative (G&A) Expenses

G&A expenses in the firstsecond quarter of 20182019 were $329$296 million, a decrease of 10%6% compared to the firstsecond quarter of 2017.2018. Our G&A expenses were primarily the result of the factors discussed above under “—North America Segment— G&A Expenses,” “—Europe Segment— G&A Expenses” and “—GrowthInternational Markets Segment— G&A Expenses,Expenses. as well as cost reductions in certain corporate functions as part of the restructuring plan.

G&A expenses as a percentage of revenues were 6.5%6.8% in the firstsecond quarter of 2019, compared to 6.7% in the second quarter of 2018.
Intangible Asset Impairments
We recorded expenses of $561 million for identifiable intangible asset impairments in the second quarter of 2019, compared to expenses of $521 million in the second quarter of 2018. See note 6 to our consolidated financial statements.
Goodwill Impairment
In the second quarter of 2019, there were no goodwill impairments recorded, compared to a goodwill impairment of $120 million in the second quarter of 2018. The goodwill impairment in the second quarter of 2018 flat comparedwas mainly attributable to the first quarter of 2017.

goodwill associated with our Rimsa reporting unit (now included in our International Markets reporting unit). See note 7 to our consolidated financial statements.

Other AssetAssets Impairments, Restructuring and Other Items

We recorded expenses of $707$101 million for other assetassets impairments, restructuring and other items in the firstsecond quarter of 2018,2019, compared to expenses of $240$194 million in the firstsecond quarter of 2017. The expenses in the first quarter of 2018 consisted of:

Impairments

Impairments of long-lived intangible assets in the first quarter of 2018 were $206 million, mainly consisting of:

a)Identifiable IPR&D of $117 million mainly related to revaluation of generic products acquired from Actavis Generics due to development progress and changes in other key valuation indications (market size, legal landscape, launch date or discount rate).

b)Identifiable product rights of $76 million due to revaluation of Actavis Generics product rights in the United States.

Impairments of property, plant and equipment in the first quarter of 2018 were $226 million, mainly consisting of:

$147 million related to restructuring costs, including:

$113 million related to site closures in Israel; and

$34 million related to headquarters and distribution sites consolidation in the United States;

Other impairment costs, mainly $56 million related to a plant located in India in connection with the P&G separation agreement.2018. See note 314 to our consolidated financial statements.

Significant regulatory events
In July 2018, the FDA completed an inspection of our manufacturing plant in Davie, Florida in the United States, and issued a Form FDA-483 to the site. In October 2018, the FDA notified us that the inspection of the site is classified as “official action indicated” (OAI). On February 5, 2019, we received a warning letter from the FDA that contains four enumerated concerns related to production, quality control and investigations at this site. We are working diligently to remediate the FDA’s concerns in a manner consistent with current good manufacturing practice (CGMP) requirements as quickly and as thoroughly as possible. If we are unable to remediate the warning letter findings to the FDA’s satisfaction, we may face additional consequences, including 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 $142 million in revenues from this site for the remainder of 2019, assuming remediation or enforcement does not cause any unscheduled slowdown or stoppage at the facility.
In July 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 impurity called NDMA found in valsartan API supplied to us by Zhejiang Huahai Pharmaceutical. Since July 2018, we have been actively engaged with regulatory agencies around the world in reviewing our valsartan and other sartan products for NDMA and other related impurities and, where necessary, have initiated additional voluntary recalls. The impact of this recall as of June 30, 2019 on our financial statements was $55 million, primarily related to inventory reserves and returns. We expect to continue to experience loss of revenues and profits in connection with this matter. In addition, multiple lawsuits have been filed in connection with this matter. We may also incur additional customer penalties, impairments and litigation costs going forward.
Restructuring

In the firstsecond quarter of 2018,2019, we recorded $247$47 million of restructuring expenses, compared to $130$107 million in the firstsecond quarter of 2017.2018. The expenses in the firstsecond quarter of 20182019 were primarily related to headcount reductions across all functions.

Since announcing ourfunctions as part of the restructuring plan announced in 2017.

The two-year restructuring plan announced in 2017 is intended to reduce our total cost base by $3 billion by the end of 2019.
57

Since the announcement, we reduced our global headcount by approximately 6,20011,145 full-time-equivalent employees.

Goodwill Impairment

In the first quarter of 2018, we recorded a goodwill impairment of $180 million. This impairment was driven by the change in fair value, including the discount rate and the change in allocated net assets to the Rimsa reporting unit. See note 7 to our consolidated financial statements.

Legal Settlements and Loss Contingencies

In the firstsecond quarter of 2018,2019, we recorded income of $1.3 billion, compared to an expense of $20$646 million in the first quarter of 2017. The income in the first quarter of 2018 consisted primarily of the working capital adjustment with Allergan, the Rimsa settlementlegal settlements and a reversal of the reserve recordedloss contingencies, compared to $20 million in the second quarter of 2017 with respect2018. The expense in the second quarter of 2019 was mainly related to the carvedilol patent$85 million settlement paid in the opioid litigation followingbrought by the reversal of the verdict granting the award to GSK (seeOklahoma Attorney General and an estimated provision made for certain other opioid cases. See note 16 to our consolidated financial statements).

statements.

Other Income

Other income in the firstsecond quarter of 20182019 was $203$9 million, compared to $72$96 million in the firstsecond quarter of 2017.2018. Other income in the second quarter of 2018 was primarily the result of legal recovery of lost profits, where U.S. patent infringement litigation had previously prevented a product’s sales.
Operating Income (Loss)
Operating loss was $644 million in the factors discussed above under “—North America Segment— Other Income,” as well as a $93second quarter of 2019, compared to $14 million net gain related toin the divestmentsecond quarter of our women’s health business.

Other income2018.

Operating loss as a percentage of revenues was 4.0%14.8% in the firstsecond quarter of 2018,2019, compared to 1.3%0.3% in the firstsecond quarter of 2017.

Operating Income

Operating income was $1.5 billion in the first quarter of 2018, compared to $895 million in the first quarter of 2017.

2018. The increase in operating income was mainly due to income from legal settlements and loss contingencies higher operating incomeexpenses, lower profit in our EuropeNorth America segment and Growth Markets segments and net gain fromhigher intangible asset impairments, partially offset by goodwill impairment in the sale of our women’s health business during the firstsecond quarter of 2018 partially offset by higherwhich did not recur in the second quarter of 2019 and lower other assetassets impairments, restructuring and other items, a goodwill impairment and lower operating incomeitems.

Financial Expenses, Net
Financial expenses were $206 million in our North America segment.

the second quarter of 2019, compared to $236 million in the second quarter of 2018. Financial expenses in the second quarter of 2019 were mainly comprised of interest expenses of $226 million. Financial expenses in the second quarter of 2018 were mainly comprised of interest expenses of $231 million.

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 ended March 31, 2018June 30, 2019 and 2017:

   Three months ended
March 31,
 
   2018   2017 
   (U.S.$ in millions) 

North America profit

  $915   $1,306 

Europe profit

   377    268 

Growth Markets profit

   122    40 
  

 

 

   

 

 

 

Total segment profit

   1,414    1,614 

Profit of other activities

   21    7 
  

 

 

   

 

 

 
   1,435    1,621 

Amounts not allocated to segments:

    

Amortization

   310    320 

Other asset impairments, restructuring and other items

   707    240 

Goodwill impairment

   180    —   

Gain on divestitures, net of divestitures related costs

   (93   —   

Inventorystep-up

   —      64 

Other R&D expenses

   22    —   

Costs related to regulatory actions taken in facilities

   1    34 

Legal settlements and loss contingencies

   (1,278   20 

Other unallocated amounts

   61    48 
  

 

 

   

 

 

 

Consolidated operating income

   1,525    895 
  

 

 

   

 

 

 

Financial expenses - net

   271    207 
  

 

 

   

 

 

 

Consolidated income before income taxes

  $1,254   $688 
  

 

 

   

 

 

 

The increase in operating margin was 14.2 points, mainly due to legal settlements and loss contingencies (25.6 points), higher profits in our Europe (2.7 points) and Growth Markets (1.7 points) segments and2018:

         
 
Three months ended
June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions)
 
North America profit
 $
504
  $
722
 
Europe profit
  
316
   
346
 
International Markets profit
  
136
   
139
 
         
Total segment profit
  
956
   
1,207
 
Profit of other activities
  
55
   
31
 
         
  
1,011
   
1,238
 
Amounts not allocated to segments:
      
Amortization
  
285
   
302
 
Other assets impairments, restructuring and other items
  
101
   
194
 
Goodwill impairment
  
—  
   
120
 
Intangible asset impairments
  
561
   
521
 
Gain on divestitures, net of divestitures related costs
  
(9
  
10
 
Other R&D expenses
  
§
   
—  
 
Costs related to regulatory actions taken in facilities
  
12
   
4
 
Legal settlements and loss contingencies
  
646
   
20
 
Other unallocated amounts
  
59
   
81
 
         
Consolidated operating income (loss)
  
(644
  
(14
         
Financial expenses, net
  
206
   
236
 
         
Consolidated income (loss) before income taxes
 $
(850
 $
(250
         
§  Represents an amount less than $1 million.
58

Tax Rate
In the sale of our women’s health business (1.8 points), partially offset by higher other asset impairments, restructuring and other items (9.7 points), goodwill impairment (3.6 points) and lower profit in our North America segment (5.1 points).

During the fourthsecond quarter of 2017,2019, we deconsolidated our subsidiaries in Venezuela from our financial results. Consequently, resultsrecognized a tax benefit of operations$179 million, or 21%, on pre-tax loss of our subsidiaries in Venezuela are not included in our financial results for$850 million. In the first quarter of 2018.

Financial Expenses, Net

Financial expenses were $271 million in the firstsecond quarter of 2018, compared to $207 million in the first quarterwe recognized a tax benefit of 2017. The increase was mainly due to $60 million of early redemption charges and accelerated amortization of issuance costs related to the repayment of senior notes and term loans, partially offset by a $29 million gain derived from net foreign exchange losses and financial derivatives during the first quarter of 2018, compared to a $36 million gain from the sale of Mylan shares during the first quarter of 2017.

Tax Rate

In the first quarter of 2018, income taxes were $46$76 million, or 4%30%, onpre-tax income loss of $1.3 billion. In the first quarter of 2017, income taxes were $54 million, or 8%, onpre-tax income of $688$250 million. Our tax rate for the firstsecond quarter of 20182019 was mainly affected byone-time legal settlements impairments, amortization and divestments that hadinterest disallowance as a low corresponding tax effect.

result of the U.S. Tax Cuts and Jobs Act.

The statutory Israeli corporate tax rate is 23% in 2018.2019. Our tax rate differs from the Israeli statutory tax rate mainly due to the mixgeneration of profits generated in various jurisdictions wherein which tax rates are different than the Israeli tax rate, tax benefits in Israel and other countries, as well as infrequent or nonrecurring items.

In future years, our effective tax rate is expected to increase following the enactment of the Tax Cuts and Jobs Act in the United States.

Share in (Profits) Losses (Income) of Associated Companies, Net

Share

We had no share in lossesincome of associated companies, net in the firstsecond quarter of 2018 was $74 million,2019, compared to share in profits of $7$8 million in the firstsecond quarter of 2017. The loss in the first quarter of 2018 is mainly due to a $94 million impairment related to the investment in New Chapter Inc. in connection with the P&G separation agreement.

2018.

Net Income

(Loss)

Net incomeloss attributable to Teva was $1.1 billion in the first quarter of 2018, compared to $645$689 million in the firstsecond quarter of 2017. The increase was mainly due2019, compared to $176 million in the factors previously discussed in “—Operating Income” above, partially offset by factors previously discussed in “—Financial Expenses, Net” and “—Share in (Profits) Lossessecond quarter of Associated Companies, Net.”

2018.

Net incomeloss attributable to ordinary shareholders was $1.1 billion in the first quarter of 2018, compared to $580$689 million in the firstsecond quarter of 2017. The difference from2019, compared to net income attributable to Teva is due toloss of $241 million in the aforementioned factors.

second quarter of 2018.

Diluted Shares Outstanding and Earnings Per(Loss) per Share

The weighted average diluted shares outstanding used for the fully diluted share calculation for the three months ended March 31,June 30, 2019 and 2018 and 2017 were 1,0201,092 million and 1,0171,018 million shares, respectively.

Diluted earnings

In computing loss per share for the three months ended March 31, 2018 and 2017 take intoJune 30, 2019, no account was taken of the potential dilution that could occur uponby the assumed exercise of employee stock options andnon-vested RSUs granted under employee stock compensation plans using the treasury stock method.

and convertible senior debentures, since they had an anti-dilutive effect on loss per share.

Additionally, no account was taken of the potential dilution by the mandatory convertible preferred shares, amounting to 6463 million shares (including shares that may bewere issued due to unpaid dividends tountil that date) for the three months ended March 31,June 30, 2018, and 59 million for the three months ended March 31, 2017, as well as for the convertible senior debentures for the respective periods, since boththey had an anti-dilutive effect on earningsloss per share.

On December 17, 2018, the mandatory convertible preferred shares automatically converted into ADSs and all of the accumulated and unpaid dividends on the mandatory convertible preferred shares were paid in ADSs. As a result of this conversion, we issued 70.6 million ADSs in December 2018.
Diluted earningsloss per share were $1.03was $0.63 in the firstsecond quarter of 2018,2019, compared to $0.57diluted loss per share of $0.24 in the firstsecond quarter of 2017.

2018.

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”), as well as and the conversion of our convertible senior debentures, and mandatory convertible preferred shares, in each case, at period end.

As of March 31,June 30, 2019 and 2018, and 2017, the fully diluted share count for purposes of calculating our market capitalization was approximately 1,0951,107 million and 1,0821,109 million, respectively.

Impact of Currency Fluctuations on Results of Operations

In the second quarter of 2019, approximately 50% of our revenues were denominated in currencies other than the U.S. dollar. Because our results are reported in U.S. dollars, we are subject to significant foreign currency risks. Accordingly, changes in the rate of exchange between the U.S. dollar and the local currencies in the markets in which we operate (primarily the euro, British pound, Japanese yen, Israeli shekel, Canadian dollar, Polish zloty, Argentinean peso, Turkish lira and Russian ruble) impact our results.
During the second quarter of 2019, the following main currencies relevant to our operations decreased in value against the U.S. dollar (each on a quarterly average compared to quarterly average basis): Argentinian peso by 47%, Turkish lira by 26%, Hungarian forint by 8%, euro by 6%, British pound by 6%, Polish zloty by 6%, Russian ruble by 4%, Indian rupee by 4%, Canadian dollar by 4%, Swiss franc by 2%, Israeli shekel by 1% and Japanese yen by 1%.
As a result, exchange rate movements during the second quarter of 2019 negatively impacted overall revenues by $125 million and our operating income by $41 million, in comparison with the second quarter of 2018.
Commencing in the third quarter of 2018, the cumulative inflation in Argentina 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.
59

Comparison of Six Months Ended June 30, 2019 to Six Months Ended June 30, 2018
The factors used to explain quarterly changes on a year-over-year basis are also generally relevant to a comparison of the results for the six months ended June 30, 2019 and 2018. Additional factors affecting the six months comparison are described below.
The following table sets forth, for the periods indicated, certain financial data derived from our U.S. GAAP financial statements:
             
 
Percentage of Net Revenues
  
Percentage
Change
2019
 -
 2018
 
 
Six Months Ended
June 30,
  
 
2019
  
2018
  
 
%
  
%
  
%
 
Net revenues
  
100.0
   
100.0
   
(12
Gross profit
  
43.4
   
44.5
   
(14
Research and development expenses
  
6.2
   
6.2
   
(12
Selling and marketing expenses
  
15.2
   
14.5
   
(7
General and administrative expenses
  
6.8
   
6.6
   
(9
Other asset impairments, restructuring and other items
  
1.2
   
7.1
   
(85
Goodwill impairment
  
—  
   
3
   
—  
 
Legal settlements and loss contingencies
  
8.1
   
(12.9
  
—  
 
Other income
  
(0.2
  
(3.1
  
(95
Operating income (loss)
  
(5.9
  
15.6
   
—  
 
Financial expenses, net
  
4.9
   
5.2
   
(16
Income (loss) before income taxes
  
(10.8
  
10.4
   
—  
 
Tax benefit
  
(2.0
  
(0.3
  
466
 
Share in (profits) losses of associated companies, net
  
§
   
0.7
   
—  
 
Net income (loss) attributable to non-controlling interests
  
(0.3
  
0.2
   
—  
 
Net income (loss) attributable to Teva
  
(9.2
  
9.7
   
—  
 
Dividends on preferred shares
  
—  
   
1.3
   
—  
 
Net income (loss) attributable to ordinary shareholders
  
(9.2
  
8.3
   
—  
 
§Represents an amount less than 0.5%.
Segment Information
North America Segment
The following table presents revenues, expenses and profit for our North America segment for the six months ended June 30, 2019 and 2018:
                 
 
Six months ended June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions / % of Segment Revenues)
 
Revenues
 $
4,118
   
100.0
 $
4,794
   
100.0
%
Gross profit
  
2,107
   
51.2
  
2,582
   
53.9
%
R&D expenses
  
340
   
8.3
  
370
   
7.7
%
S&M expenses
  
537
   
13.0
  
548
   
11.4
%
G&A expenses
  
230
   
5.6
  
229
   
4.8
%
Other (income) expense
  
(2
  
§
   
(202
  
(4.2
%) 
                 
Segment profit*
 $
1,001
   
24.3
 $
1,637
   
34.1
%
                 
*Segment profit does not include amortization and certain other items.
§  Represents an amount less than 0.5%.
60
North America Revenues
Our North America segment includes the United States and Canada. Revenues from our North America segment in the first six months of 2019 were $4,118 million, a decrease of $676 million, or 14%, compared to the first six months of 2018.
Revenues by Major Products and Activities
The following table presents revenues for our North America segment by major products and activities for the six months ended June 30, 2019 and 2018:
             
 
Six months ended
June 30,
  
Percentage
Change
2018-2019
 
 
2019
  
2018
 
 
(U.S. $ in millions)
   
Generic products
 $
1,913
  $
2,035
   
(6
%) 
COPAXONE
  
482
   
940
   
(49
%) 
TREANDA/BENDEKA
  
229
   
341
   
(33
%) 
ProAir*
  
123
   
245
   
(50
%) 
QVAR
  
124
   
137
   
(10
%) 
AJOVY
  
43
   
—  
   
N/A
 
AUSTEDO
  
171
   
74
   
130
%
Anda
  
729
   
651
   
12
%
Other
  
305
   
372
   
(18
%) 
             
Total
 $
4,118
  $
4,794
   (14%) 
             
*Does not include sales of ProAir authorized generic, which are included under generics.
61

North America Gross Profit
Gross profit from our North America segment in the first six months of 2019 was $2,107 million, a decrease of 18%, compared to $2,582 million in the first six months of 2018.
Gross profit margin for our North America segment in the first six months of 2019 decreased to 51.2% from 53.9% in the first six months of 2018.
North America R&D Expenses
R&D expenses relating to our North America segment in the first six months of 2019 were $340 million, a decrease of 8%, compared to $370 million in the first six months of 2018.
North America S&M Expenses
S&M expenses relating to our North America segment in the first six months of 2019 were $537 million, a decrease of 2%, compared to $548 million in the first six months of 2018.
North America G&A Expenses
G&A expenses relating to our North America segment in the first six months of 2019 were $230 million, flat compared to the first six months of 2018.
North America Other Income
Other income from our North America segment in the first six months of 2019 was $2 million, compared to $202 million in the first six months of 2018.
North America Profit
Profit from our North America segment in the first six months of 2019 was $1,001 million, a decrease of 39%, compared to $1,637 million in the first six months of 2018.
62

Europe Segment
The following table presents revenues, expenses and profit for our Europe segment for the six months ended June 30, 2019 and 2018:
                 
 
Six months ended June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions / % of Segment Revenues)
 
Revenues
 $
2,448
   
100
 $
2,770
   
100
Gross profit
  
1,404
   
57.4
  
1,519
   
54.9
R&D expenses
  
136
   
5.5
  
146
   
5.3
S&M expenses
  
431
   
17.6
  
483
   
17.5
G&A expenses
  
119
   
4.8
  
169
   
6.1
Other (income) expense
  
(1
  
§
   
(2
  
§
 
                 
Segment profit*
 $
719
   
29.4
 $
723
   
26.1
                 
*Segment profit does not include amortization and certain other items.
§  Represents an amount less than 0.5%.
Europe Revenues
Our Europe segment includes the European Union and certain other European countries. Revenues from our Europe segment in the first six months of 2019 were $2,448 million, a decrease of 12% or $322 million, compared to the first six months of 2018. In local currency terms, revenues decreased by 5% compared to the first six months of 2018.
Revenues by Major Products and Activities
The following table presents revenues for our Europe segment by major products and activities for the six months ended June 30, 2019 and 2018:
             
 
Six months ended
June 30,
  
Percentage
Change
2018-2019
 
 
2019
  
2018
 
 
(U.S. $ in millions)
   
Generic products
 $
1,763
  $
1,904
   
(7
%) 
COPAXONE
  
221
   
293
   
(25
%) 
Respiratory products
  
181
   
219
   
(18
%) 
Other
  
283
   
354
   
(20
%) 
             
Total
 $
2,448
  $
2,770
   
(12
%) 
             
63

Europe Gross Profit
Gross profit from our Europe segment in the first six months of 2019 was $1,404 million, a decrease of 8% compared to $1,519 million in the first six months of 2018.
Gross profit margin for our Europe segment in the first six months of 2019 increased to 57.4% from 54.9% in the first six months of 2018.
Europe R&D Expenses
R&D expenses relating to our Europe segment in the first six months of 2019 were $136 million, a decrease of 7% compared to $146 million in the first six months of 2018.
Europe S&M Expenses
S&M expenses relating to our Europe segment in the first six months of 2019 were $431 million, a decrease of 11% compared to $483 million in the first six months of 2018.
Europe G&A Expenses
G&A expenses relating to our Europe segment in the first six months of 2019 were $119 million, a decrease of 30% compared to $169 million in the first six months of 2018.
Europe Profit
Profit from our Europe segment in the first six months of 2019 was $719 million, flat compared to the first six months of 2018.
International Markets Segment
The following table presents revenues, expenses and profit for our International Markets segment for the six months ended June 30, 2019 and 2018:
                 
 
Six months ended June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions / % of
Segment Revenues) 
 
Revenues
 $
1,409
   
100.0
 $
1,539
   
100.0
%
Gross profit
  
582
   
41.3
  
641
   
41.6
%
R&D expenses
  
46
   
3.2
  
49
   
3.2
%
S&M expenses
  
234
   
16.6
  
264
   
17.2
%
G&A expenses
  
70
   
5.0
  
78
   
5.1
%
Other (income) expense
  
(1
  
§
   
(11
  
(0.7
%) 
                 
Segment profit*
 $
233
   
16.5
 $
261
   
17.0
%
                 
*Segment profit does not include amortization and certain other items.
§  Represents an amount less than 0.5%.
International Markets Revenues
Our International Markets segment includes all countries other than those in our North America and Europe segments. Revenues from our International Markets segment in the first six months of 2019 were $1,409 million, a decrease of $130 million, or 8%, compared to the first six months of 2018. In local currency terms, revenues decreased by 3% compared to the first six months of 2018.
64

Revenues by Major Products and Activities
The following table presents revenues for our International Markets segment by major products and activities for the six months ended June 30, 2019 and 2018:
             
 
Six months ended
June 30,
  
Percentage
Change
2018-2019
 
 
2019
  
2018
 
 
(U.S. $ in millions)
   
Generic products
 $
930
  $
1,025
   
(9
%) 
COPAXONE
  
27
   
38
   
(31
%) 
Distribution
  
315
   
307
   
3
%
Other
  
137
   
168
   
(19
%) 
             
Total
 $
1,409
  $
1,539
   
(8
%) 
             
International Markets Gross Profit
Gross profit from our International Markets segment in the first six months of 2019 was $582 million, a decrease of 9% compared to $641 million in the first six months of 2018.
Gross profit margin for our International Markets segment in the first six months of 2019 decreased to 41.3%, from 41.6% in the first six months of 2018. The decrease was mainly due to lower sales in Japan, partially offset by higher sales in Russia.
International Markets R&D Expenses
R&D expenses relating to our International Markets segment in the first six months of 2019 were $46 million, a decrease of 7% compared to $49 million in the first six months of 2018.
International Markets S&M Expenses
S&M expenses relating to our International Markets segment in the first six months of 2019 were $234 million, a decrease of 11% compared to $264 million in the first six months of 2018.
International Markets G&A Expenses
G&A expenses relating to our International Markets segment in the first six months of 2019 were $70 million, a decrease of 10% compared to $78 million in the first six months of 2018.
International Markets Profit
Profit from our International Markets segment in the first six months of 2019 was $233 million, compared to $261 million in the first six months of 2018.
65
Other Activities
Our revenues from other activities in the first six months of 2019 decreased by 1% to $658 million, compared to the first six months of 2018. In local currency terms, revenues increased by 2%.
API sales to third parties in the first six months of 2019 increased by 7%, in both U.S. dollar and local currency terms, to $390 million, compared to the first six months of 2018.
Teva Consolidated Results
Revenues
Revenues in the first six months of 2019 were $8,632 million, a decrease of 12% or 9% in local currency terms, compared to the first six months of 2018.
Exchange rate movements during the first six months of 2019 compared to the first six months of 2018 negatively impacted revenues by $301 million.
Gross Profit
Gross profit in the first six months of 2019 was $3,749 million, a decrease of $599 million compared to the first six months of 2018.
Gross profit as a percentage of revenues was 43.4% in the first six months of 2019, compared to 44.5% in the first six months of 2018.
Research and Development (R&D) Expenses
Net R&D expenses in the first six months of 2019 were $537 million, a decrease of 12% compared to the first six months of 2018.
R&D expenses as a percentage of revenues were 6.2% in the first six months of 2019, flat compared to the first six months of 2018.
66

Selling and Marketing (S&M) Expenses
S&M expenses in the first six months of 2019 were $1,313 million, a decrease of 7% compared to the first six months of 2018.
S&M expenses as a percentage of revenues were 15.2% in the first six months of 2019, compared to 14.5% in the first six months of 2018.
General and Administrative (G&A) Expenses
G&A expenses in the first six months of 2019 were $589 million, a decrease of 9% compared to the first six months of 2018.
G&A expenses as a percentage of revenues were 6.8% in the first six months of 2019, compared to 6.6% in the first six months of 2018.
Intangible Asset Impairments
We recorded expenses of $1,030 million for identifiable intangible asset impairments in the first six months of 2019, compared to expenses of $727 million in the first six months of 2018. See note 6 to our consolidated financial statements.
Goodwill Impairment
In the first six months of 2019, there were no goodwill impairments recorded, compared to a $300 million goodwill impairment charge recorded in the first six months of 2018. See note 7 to our consolidated financial statements.
Other Asset Impairments, Restructuring and Other Items
We recorded expenses of $103 million for other asset impairments, restructuring and other items in the first six months of 2019, compared to expenses of $695 million in the first six months of 2018. See note 14 to our consolidated financial statements.
67

Legal Settlements and Loss Contingencies
In the first six months of 2019, we recorded an expense of $703 million in legal settlements and loss contingencies, compared to an income of $1,258 million in the first six months of 2018. The expense in the first six months of 2019 was mainly related to the $85 million settlement paid in the opioid litigation brought by the Oklahoma Attorney General and an estimated provision made for certain other opioid cases. See note 16 to our consolidated financial statements.
Other Income
Other income in the first six months of 2019 was $15 million, compared to $299 million in the first six months of 2018.
Other income as a percentage of revenues was 0.2% in the first six months of 2019, compared to 3.1% in the first six months of 2018.
Operating Income (Loss)
Operating loss was $510 million in the first six months of 2019, compared to an operating income of $1,511 million in the first six months of 2018.
Financial Expenses, Net
Financial expenses were $425 million in the first six months of 2019, compared to $507 million in the first six months of 2018.
Financial expenses in the first six months of 2019 were mainly comprised of interest expenses of $454 million, partially offset by $27 million of interest income. Financial expenses in the first six months of 2018 were mainly comprised of interest expenses of $449 million and $60 million of early redemption charges and accelerated amortization related to the repayment of senior notes and term loans in the first quarter of 2018.
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 six months ended June 30, 2019 and 2018:
         
 
Six months ended
June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions)
 
North America profit
 $
1,001
  $
1,637
 
Europe profit
  
719
   
723
 
International Markets profit
  
233
   
261
 
         
Total segment profit
  
1,954
   
2,621
 
Profit of other activities
  
76
   
52
 
         
  
2,029
   
2,673
 
Amounts not allocated to segments:
      
Amortization
  
568
   
612
 
Other asset impairments, restructuring and other items
  
103
   
695
 
Goodwill impairment
  
—  
   
300
 
Intangible asset impairments
  
1,030
   
727
 
Gain on divestitures, net of divestitures related costs
  
(9
  
(83
Other R&D expenses
  
§
   
22
 
Costs related to regulatory actions taken in facilities
  
16
   
5
 
Legal settlements and loss contingencies
  
703
   
(1,258
Other unallocated amounts
  
129
   
142
 
         
Consolidated operating income (loss)
  
(510
  
1,511
 
         
Financial expenses, net
  
425
   
507
 
         
Consolidated income (loss) before income taxes
 $
(934
) $
1,004
 
         
§Represents an amount less than $1 million.
68

Tax Rate
In the first six months of 2019, we recognized a tax benefit of $170 million, on pre-tax loss of $934 million. In the first six months of 2018, we recognized a tax benefit of $30 million, on pre-tax income of $1,004 million. Our tax rate for the first six months of 2019 was mainly affected by impairments, amortization and interest disallowance as a result of the U.S. Tax Cuts and Jobs Act.
Share in Losses (Income) of Associated Companies, Net
Share in losses of associated companies, net in the first six months of 2019 was $4 million, compared to share in losses of $66 million in the first six months of 2018.
Net Income (Loss)
Net loss attributable to Teva was $794 million in the first six months of 2019, compared to net income attributable to Teva of $944 million in the first six months of 2018.
Net loss attributable to ordinary shareholders was $794 million in the first six months of 2019, compared to net income of $814 million in the first six months of 2018.
Diluted Shares Outstanding and Earnings (Loss) per Share
The weighted average diluted shares outstanding used for the fully diluted share calculation for the six months ended June 30, 2019 and 2018 were 1,091 million and 1,020 million shares, respectively.
In computing diluted loss per share for the six months ended June 30, 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.
Diluted earnings per share for the six months ended June 30, 2018 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.
Additionally, no account was taken of the potential dilution by the mandatory convertible preferred shares, amounting to 65 million shares (including shares that may be issued due to unpaid dividends to date) for the six months ended June 30, 2018, since they had an anti-dilutive effect on loss per share.
Diluted loss per share was $0.73 in the first six months of 2019, compared to diluted earnings per share of $0.80 in the first six months of 2018.
Impact of Currency Fluctuations on Results of Operations
In the first six months of 2019, approximately 51%49% of our revenues came from sales outside ofwere denominated in currencies other than the United States.U.S. dollar. Because our results are reported in U.S. dollars, we are subject to significant foreign currency risks and, accordingly, changes in the exchange rate between the U.S. dollar and the local currencies in the markets in which we operate (primarily the euro, British pound, Japanese yen, new Israeli shekel, British pound, Canadian dollar,Polish zloty, Argentinean peso, Turkish lira and Russian ruble, and Polish zloty)ruble) impact our results. During the first quartersix months of 2018,2019, the following main currencies relevant to our operations decreased in value against the U.S. dollar (each on an annual average compared to annual average basis):dollar: Argentinean peso by 20%. During the first quarter of 2018, the following main currencies relevant to our operations increased in value against the U.S. dollar:48%, Turkish lira by 27%, Russian ruble by 9%, Hungarian forint by 9%, Polish zloty by 8%, euro by 15%7%, British pound by 12%6%, Indian rupee by 6%, Canadian dollar by 4%, new Israeli shekel by 8%, Polish zloty by 19%,3% and Japanese yen by 5%, Canadian dollar by 5%, Hungarian forint by 15%, Chilean peso by 9%, Swiss franc by 6% and Russian ruble by 3%1% (all compared on a six-monthly average basis).

As a result, exchange rate movements during the first quartersix months of 2018, in comparison with the first quarter of 2017, positively2019 negatively impacted overall revenues by $240$301 million and our operating income by $37 million.

$91 million, in comparison to the first six months of 2018.

Liquidity and Capital Resources

Total balance sheet assets were $69.2 billion$59,424 million as of June 30, 2019, compared to $59,854 million as of March 31, 2018, compared to $70.6 billion as of December 31, 2017.

Trade receivables as of March 31, 2018, net of sales reserves and allowances (“SR&A”), were negative $1.1 billion, compared to negative $0.8 billion as of December 31, 2017, mainly due to the decrease in sales in the first quarter of 2018, compared with the fourth quarter of 2017.

As of March 31, 2018, we do not present any material assets held for sale following the completion of the sale of our woman’s health business. As of December 31, 2017, we presented net assets held for sale in the amount of $0.6 billion.

Accrued expenses as of March 31, 2018 were $2.6 billion, compared to $3.0 billion as of December 31, 2017. The decrease was mainly due to $0.4 billion in connection with legal settlements.

2019.

Our working capital balance, which includes trade receivables net of SR&A, inventories, prepaid expenses and other current assets, trade payables, employee-related obligations, accrued expenses and other current liabilities, was negative $0.2 billion$65 million as of June 30, 2019, compared to $59 million as of March 31, 2018,2019.
Trade receivables as of June 30, 2019 were $5,260 million, compared to negative $0.4 billion$5,108 million as of DecemberMarch 31, 2017.

2019. The increase in the second quarter of 2019 was mainly due to timing of sales within the quarter and timing of issuance of credit memos to customers. SR&A as of June 30, 2019 was $6,054 million, compared to $6,200 million as of March 31, 2019. The reduction in the second quarter of 2019 is attributable to the payout of certain rebates, primarily managed care and Medicaid for prior periods. Payments exceed new provisions for the current period due to a decline in sales resulting in overall reduction to the liability. 

69

Accrued expenses as of June 30, 2019, were $2,335 million, compared to $1,869 million as of March 31, 2019. The increase in the second quarter of 2019 was mainly due to provisions made under legal settlements and loss contingencies.
Investment in property, plant and equipment in the firstsecond quarter of 20182019 was approximately $0.2 billion, flat$112 million, compared to the fourth quarter of 2017. Depreciation was $0.2 billion$125 million in the first quarter of 2018, flat2019. Depreciation in the second quarter of 2019 was $153 million, compared to $152 million in the fourthfirst quarter of 2017.

2019.

Cash and cash equivalents and short-term and long-term investments as of June 30, 2019 were $2,232 million, compared to $2,040 million as of March 31, 2018 were $1.5 billion, compared to $1.1 billion as2019. The increase in the second quarter of December 31, 2017,2019 was mainly due to proceeds from the issuance of senior notes in March 2018, proceeds from the sale of our women’s health business, proceeds from the working capital adjustment with Allergan and the legal settlement with Rimsa, as well as other free cash flow generated during the quarter, offset by debt prepayments as discussed below.

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 revolving credit facility (“RCF”).
In April 2019, we entered into a $2.3 billion unsecured syndicated RCF, which replaced the previous $3 billion syndicated revolving linecredit facility. The RCF contains certain covenants, including certain limitations on incurring liens and indebtedness and maintenance of credit,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 6.25x through December 31, 2019, gradually 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 of June 30, 2019, no amounts were outstanding under the RCF. As of the date of this report, $500 million was outstanding under the RCF. Based on current and forecasted results, we expect that we will not utilizedexceed the financial covenant thresholds set forth in the RCF within one year from the date that 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 of June 30, 2019, our debt was $28,726 million, compared to $28,624 million as of March 31, 2018, as well as internally generated funds, which we believe are sufficient to meet ouron-going operating needs.

2018 Debt Balance and Movements

As of March 31, 2018, our debt was $30.8 billion, compared to $32.5 billion as of December 31, 2017.2019. The decreaseincrease was mainly due to $6.5 billion of debt prepayments, partially offset by our March 2018 issuance of an aggregate principal amount of $4.4 billion of senior notes, as well as exchange raterates fluctuations.

In January 2018 we prepaid in full $15 million of our U.S. dollar debentures.

During the first quarter of 2018,2019, we prepaid in full $2.3 billion of our3-yearrepurchased and5-year U.S. dollar term loans, as well as JPY 156.8 billion of our term loans.

In March 2018, we completed debt issuances for an aggregate canceled approximately $126 million principal amount of $4.4 billion, consisting of senior notes with aggregate principal amounts of $2.5 billion and €1.6 billion with maturities ranging from four to ten years. The effective average interest rate of the notes issued is 5.3% per annum. See note 11 to our consolidated financial statements.

In March 2018, we redeemed in full our $1.5 billion 1.4%$1,700 million 1.7% senior notes due in July 20182019.

During the second quarter of 2019, we repurchased and canceled approximately $18 million principal amount of our Euro 1.0 billion 2.875%$1,574 million 1.7% senior notes due in AprilJuly 2019.

In July 2019, we repaid at maturity our $1,556 million 1.7% senior notes.
Our debt as of March 31, 2018June 30, 2019 was effectively denominated in the following currencies: 63%66% in U.S. dollars, 32% in euros and 5%2% in Swiss francs.

The portion of total debt classified as short-term as of June 30, 2019 was 10%, similar to March 31, 2018 was 4%, compared to 11% as of December 31, 2017, mainly due to the activities described above.

2019.

Our financial leverage was 60%65% as of June 30, 2019, a slight increase compared to 64% as of March 31, 2018, compared to 63% as of December 31, 2017.

2019.

Our average debt maturity was approximately 7.36.3 years as of June 30, 2019, compared to 6.6 years as of March 31, 2018, compared to 6.4 years as of December 31, 2017.

2019.

Total Equity

Total equity was $20.1 billion$15,251 million as of June 30, 2019, compared to $15,821 million as of March 31, 2018, compared to $18.7 billion as of December 31, 2017.2019. The increasedecrease was mainly due to $1.1 billionnet loss of net income during the quarter and $239$671 million, positive impact ofpartially offset by $86 million in exchange rate fluctuations.

fluctuations in the second quarter of 2019.

Exchange rate fluctuations affected our balance sheet, as approximately 61%36% of our net assets in the firstsecond quarter of 20182019 (including bothnon-monetary and monetary assets) were in currencies other than the U.S. dollar. When compared to DecemberMarch 31, 2017,2019, changes in currency rates had a positive impact of $330$86 million on our equity as of March 31, 2018,June 30, 2019, mainly due to the changechanges in value against the U.S. dollar of: the Japanese yen by 3%, the euro by (3%)1%, the Mexican pesoRussian ruble by (8%), the Japanese Yen by (6%)4%, the British pound by (4%)3%, the Canadian dollar by 2% and the Polish zloty by (2%) and the Bulgarian lev by (3%)3%. All comparisons are on aquarter-end toquarter-end basis.

70
Cash Flow

Cash flow used in operating activities during the second quarter of 2019 was $227 million, compared to cash flow generated from operating activities duringof $162 million in the firstsecond quarter of 2018 was $1.5 billion, compared to $0.1 billion2018. The decrease in cash flow in the firstsecond quarter of 2017. The increase2019 was mainly due to proceeds from the working capital adjustment with Allerganlower revenues, timing of certain customer payments and the legal settlement with Rimsa, compared tocredits and payments made to the SEC and DOJof U.S. customer rebates paid this quarter, primarily related to the FCPA settlement in the first quarter of 2017.

managed care and Medicaid.

Cash flow generated from operating activities in the firstsecond quarter of 2018,2019, net of cash usedreceived for capital investments and beneficial interest collected in exchange for securitized trade receivables, was $1.9 billion,$168 million, compared to $0.3 billion$559 million in the firstsecond quarter of 2017.2018. The increasedecrease in cash flow was mainly due to the increase in cash flow generated from operating activities as well as lower net capital investments and higher beneficial interest collected in exchange for securitized trade receivables.

reasons mentioned above.

Dividends

In December 2017, we announced an immediate suspension of

We have not paid dividends on our ordinary shares andor ADSs and that dividends on our mandatory convertible preferred shares will be evaluated on a quarterly basis per current practice.

We have suspended cash dividends on our mandatory convertible preferred shares in the first quarter of 2018 due to our accumulated deficit.

since December 2017.

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.

In September 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.

Milestone payments of $25 million, $35 million and $60 million were paid in the second quarter of 2017, the first quarter of 2018 and the fourth quarter of 2018, respectively.

In October 2016, we entered into an exclusive partnership with Celltrion to commercialize two of Celltrion’s biosimilar products in development for the U.S. and Canadian markets. We paid Celltrion $160 million, of which up to $60 million is refundable or creditable under certain circumstances. 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 and December 2018, respectively.

In September 2017, we entered into a partnership agreement with Nuvelution for development of AUSTEDO for the treatment of Tourette syndrome in pediatric patients in the United States. Nuvelution will fund and manage clinical development, driving all operational aspects of the phase 3 program, and we will lead the regulatory process and be responsible for commercialization. Upon and subject to FDA approval of AUSTEDO for Tourette syndrome, we will pay Nuvelution apre-agreed return.

Dividends on our mandatory convertible preferred shares (aggregate liquidation preference of approximately $3.7 billion) are payable on a cumulative basis when, as and if declared by our Board of Directors at an annual rate of 7% on the liquidation preference of $1,000 per mandatory convertible preferred share. Declared dividends are paid in cash on March 15, June 15, September 15 and December 15 of each year to and including December 15, 2018. We have suspended cash dividend payments on our mandatory convertible preferred shares.

We are committed to pay royalties to owners ofknow-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.

Our principal sources of short-term liquidity are our existing cash investments, liquid securities and available credit facilities, primarily our $3 billion syndicated revolving credit facility (“RCF”), which was not utilized as of March 31, 2018, as well as internally generated funds.

Pursuant to the requirements of the RCF, we have entered into negative pledge agreements with certain banks and institutional investors. Under the agreements, we and certain subsidiaries have undertaken not to register floating charges on assets in favor of any third parties without the prior consent of the banks, to maintain certain financial ratios, including the requirement to maintain compliance with a net debt to EBITDA ratio, which becomes more restrictive over time, and to fulfill other restrictions, as stipulated by the agreements. As of March 31, 2018, we did not have any outstanding debt under the RCF, which is our only debt subject to the net debt to EBITDA covenant. Assuming utilization of the RCF and under specified circumstances, includingnon-compliance with such covenants and the unavailability of any waiver, amendment or other modification thereto and the expiration of any applicable grace period thereto, substantially all of our other debt could be negatively impacted bynon-compliance with such covenants. We have sufficient resources to meet our financial obligations in the ordinary course of business for at least twelve months from the date of the release of this Quarterly Report.

2018

2019 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 Form10-K for the year ended December 31, 2017,2018, other than as set forth below. These changes are the result
For a description of the significant debt movements during the first quarter of 2018, as described underour new revolving credit facility entered into in April 2019, see “—2018 Debt BalanceLiquidity and Movements”Capital Resources” above.

In the first quarter of 2018, we repaid debt in a total amount of approximately $6.5 billion and raised new debt in a total amount of approximately $4.4 billion. As of March 31, 2018, the total debt on the balance sheet is approximately $30.8 billion. See note 11 to our consolidated financial statements.

SupplementalNon-GAAP Income Data

We utilize certainnon-GAAP financial measures to evaluate performance, in conjunction with other performance metrics. The following are examples of how we utilize thenon-GAAP measures:

our management and Board of Directors use thenon-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 anon-GAAP basis; and

senior management’s annual compensation is derived, in part, using thesenon-GAAP measures. While qualitative factors and judgment also affect annual bonuses, the principal quantitative element in the determination of such bonuses is performance targets tied to the work plan, and thuswhich is based on thenon-GAAP presentation set forth below.

71

Non-GAAP financial measures have no standardized meaning and accordingly have limitations in their usefulness to investors. We provide suchnon-GAAP data because management believes that such data provide useful information to investors. However, investors are cautioned that, unlike financial measures prepared in accordance with U.S. GAAP,non-GAAP measures may not be comparable with the calculation of similar measures for other companies. Thesenon-GAAP financial measures are presented solely to permit investors to more fully understand how management assesses our performance. The limitations of using thesenon-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 considernon-GAAP financial measures in addition to, and not as replacements for, or superior to, measures of financial performance prepared in accordance with U.S. GAAP.

In arriving at ournon-GAAP presentation, we exclude items that either have anon-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 thissuch 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:

amortization of purchased intangible assets;

legal settlements and/or loss contingencies, due to the difficulty in predicting their timing and size;scope;

impairments of long-lived assets, including intangibles, property, plant and equipment and goodwill;

restructuring expenses, including severance, retention costs, contract cancellation 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
acquisition- or divestment relateddivestment-related items, including changes in contingent consideration, integration costs, banker and other professional fees, inventorystep-up andin-process R&D acquired in development arrangements;

expenses related to our equity compensation;

significantone-time financing costs and devaluation losses;

deconsolidation charges;

material
unusual tax and items;
other awards or settlements, bothsettlement amounts, either paid andor 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 supplementalnon-GAAP data, in U.S. dollars,dollar, which we believe facilitates an understanding of the factors affecting our business. In these tables, we exclude the following amounts:

   Three Months Ended
March 31,
 
   2018   2017 
   (U.S. $ in millions) 

Gain on divestitures, net of divestitures related costs

   (93   —   

Amortization of purchased intangible assets

   310    320 

Restructuring expenses

   247    130 

Inventorystep-up

   —      64 

Capital loss from currency translation

   —      52 

Equity compensation expenses

   30    36 

Costs related to regulatory actions taken in facilities

   1    34 

Acquisition, integration and related expenses

   2    23 

Other R&D expenses

   22    —   

Contingent consideration

   8    21 

Legal settlements and loss contingencies

   (1,278   20 

Goodwill impairment

   180    —   

Impairment of long-lived assets

   432    11 

Othernon-GAAP items

   49    15 

Financial expense (income)

   68    (28

Minority interest

   (8   (13

Impairments of equity investments

   94    —   

Tax effect

   (165   (186

The data so presented — after these exclusions — are the results used by management and our board

                 
 
Three months ended
June 30,
  
Six months ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(U.S. $ in millions)
 
Gain on divestitures, net of divestitures related costs
  
(9
  
10
   
(9
  
(83
Amortization of purchased intangible assets
  
285
   
302
   
568
   
612
 
Restructuring expenses
  
47
   
107
   
79
   
354
 
Equity compensation expenses
  
35
   
47
   
69
   
77
 
Costs related to regulatory actions taken in facilities
  
12
   
4
   
16
   
5
 
Acquisition, integration and related expenses
  
   
3
   
2
   
5
 
Other R&D expenses
  
   
   
   
22
 
Contingent consideration
  
24
   
47
   
(47
  
55
 
Legal settlements and loss contingencies
  
646
   
20
   
703
   
(1,258
Goodwill impairment
  
   
120
   
   
300
 
Impairment of long-lived assets
  
609
   
548
   
1,097
   
980
 
Other non-GAAP items
  
6
   
44
   
60
   
93
 
Financial expense (income)
  
8
   
(2
  
6
   
66
 
Minority interest
  
(8
  
(12
  
(16
  
(20
Impairments of equity investments
  
   
   
   
94
 
Corresponding tax effect
  
(312
  
(203
  
(429
  
(368
72

Table of directors to evaluate our operational performance, to compare against work plans and budgets, and ultimately to evaluate the performance of management. For example, each year we prepare a detailed work plan for the next fiscal year. This work plan is used to manage the business and is the plan against which management’s performance is measured. All such plans are prepared on a basis comparable to the presentation below, in that none of the plans take into account those elements that are factored out in ournon-GAAP presentations. In addition, at quarterly meetings of the Board at which management provides financial updates to the Board, presentations are made comparing the current fiscal quarterly results against: (i) the comparable quarter of the prior year, (ii) the immediately preceding fiscal quarter and (iii) the work plan. Such presentations are based upon thenon-GAAP approach reflected in the tables below. Moreover, while there are always qualitative factors and elements of judgment involved in the granting of annual cash bonuses, the principal quantitative element in the determination of such bonuses is performance targets tied to the work plan and thus, tied to the samenon-GAAP presentation as is set forth below.

In arriving at ournon-GAAP presentation, we have in the past factored out items, and would expect in the future to continue to factor out items, that either have anon-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. While not all inclusive, examples of these items include: legal settlements and reserves, purchase accounting expense adjustments related to acquisitions, including adjustments for write-offs of IPR&D, amortization of intangible assets and inventory“step-ups” following acquisitions; changes in the fair value of contingent consideration related to business combination; restructuring expenses related to efforts to rationalize and integrate operations on a global basis; material tax and other

awards or settlements—both in terms of amounts paid or amounts received; impairments related to intangible and other assets such as intellectual property, product rights or goodwill; the income tax effects of the foregoing types of items when they occur; and costs related to regulatory actions taken at our facilities (such as uncapitalized production costs, consulting expenses or write-offs of inventory related to remediation). Included in restructuring expenses are severance, shut down costs, contract termination costs and other costs that we believe are sufficiently large that their exclusion is important to understanding trends in our financial results.

These data arenon-GAAP financial measures and should not be considered replacements for GAAP results. We provide suchnon-GAAP data because management believes that such data provide useful information to investors. However, investors are cautioned that, unlike financial measures prepared in accordance with GAAP,non-GAAP measures may not be comparable with the calculation of similar measures for other companies. Thesenon-GAAP financial measures are presented solely to permit investors to more fully understand how management assesses our performance. The limitations of using thesenon-GAAP financial measures as performance measures are that they provide a view of our results of operations without including all events during a period, such as the effects of acquisition, merger-related, restructuring and other charges, and may not provide a comparable view of our performance to other companies in the pharmaceutical industry.

Investors should considernon-GAAP financial measures in addition to, and not as replacements for, or superior to, measures of financial performance prepared in accordance with GAAP.

Contents

The following table presents the GAAP measures, relatednon-GAAP adjustments and the correspondingnon-GAAP amounts for the applicable periods:

     Three Months Ended March 31, 2018  Three Months Ended March 31, 2017 
     U.S. dollars and shares in millions (except per share amounts) 
     GAAP  Non-GAAP
Adjustments
  Dividends
on
Preferred
Shares
  Non-GAAP  % of Net
Revenues
  GAAP  Non-GAAP
Adjustments
  Dividends
on
Preferred
Shares
  Non-GAAP  % of Net
Revenues
 
  Gross profit (1)  2,348   303    2,651   52  2,839   377    3,216   57
  Operating income (loss) (1)(2)  1,525   (90   1,435   28  895   726    1,621   29
  Net income attributable to ordinary shareholders (1)(2)(3)(4)  1,055   (101   954   19  580   499    1,079   19
  Earnings per share attributable to ordinary shareholders - diluted  1.03   (0.09   0.94    0.57   0.49    1.06  

(1)

  Amortization of purchased intangible assets   264       267    
  Inventorystep-up   —         64    
  Costs related to regulatory actions taken in facilities   1       34    
  Equity compensation expenses  ��6       5    
  Other COGS related adjustments   32       7    
    

 

 

      

 

 

    
  Gross profit adjustments   303       377    

(2)

  

Gain on divestitures, net of divestitures related costs

   (93      —      
  Goodwill impairment   180       —      
  Restructuring expenses   247       130    
  Amortization of purchased intangible assets   46       53    
  Capital loss on currency translation   —         52    
  Equity compensation expenses   24       31    
  Acquisition, Integration and related expenses   2       23    
  Other R&D expenses   22       —      
  Contingent consideration   8       21    
  Legal settlements and loss contingencies   (1,278      20    
  Impairment of long-lived assets   432       11    
  Other operating related adjustments   17       8    
    

 

 

      

 

 

    
     (393      349    
    

 

 

      

 

 

    
  Operating income adjustments   (90      726    
    

 

 

      

 

 

    

(3)

  Financial expense (income)   68       (28   
  Tax effect   (165      (186   
  Impairment of equity investment   94       —      
  Minority interest   (8      (13   
    

 

 

      

 

 

    
  Net income adjustments   (101      499    
    

 

 

      

 

 

    

                                                         
   
Three months ended June 30, 2019
 
   
U.S. $ and shares in millions (except per share amounts)
 
   
Excluded for non-GAAP measurement
 
   
GAAP
  
Amorti-
zation
of
purchased
intangible
assets
  
Legal
settlements
and loss
contin-
gencies
  
Impair-
ment
of long-
lived
assets
  
Restruc-
turing
costs
  
Costs
related to
regulatory
actions
taken in
facilities
  
Equity
compen-
sation
  
Contin-
gent
conside-
ration
  
Gain on
sale of
business
  
Other
non-
GAAP
items
  
Other
items
  
Corres-
ponding
tax
effect
  
Non-
GAAP
 
   
Cost of Sales
  
2,443
   
249
            
12
   
7
         
26
         
2,149
 
 
  
  
R&D expenses
  
276
                  
6
         
—  
         
271
 
   
S&M expenses
  
666
   
35
               
10
                  
621
 
   
G&A expenses
  
296
                  
12
         
(2
        
286
 
   
Other (income) expenses
  
(9
                       
(9
           
(0
   
Legal settlements and loss contingencies
  
646
      
646
                              
—  
 
   
Other assets impairments, restructuring and other items
  
101
         
48
   
47
         
24
      
(18
        
—  
 
   
Intangible assets impairment
  
561
         
561
                           
—  
 
   
Financial expenses, net
  
206
                              
8
      
198
 
   
Income taxes
  
(179
                                
(312
)  
134
 
   
Net income (loss) attributable to non-controlling interests
  
18
                              
(8
     
26
 
                                                         
   
Total reconciled items
     
285
   
646
   
609
   
47
   
12
   
35
   
24
   
(9
  
6
   
(0
  
(312
)   
                                                         
   
EPS—Basic
  
(0.63
                                
1.23
   
0.60
 
   
EPS—Diluted
  
(0.63
                                
1.23
   
0.60
 
The non-GAAP diluted weighted average number of shares was 1,093 million for the three months ended June 30, 2019.
73

                                                           
  
Three months ended June 30, 2018
 
  
U.S. $ and shares in millions (except per share amounts)
 
  
Excluded for non-GAAP measurement
 
  
GAAP
  
Amorti-
zation
of
purchased
intangible
assets
  
Legal
settlements
and loss
contin-
gencies
  
Impair-
ment
of long-
lived
assets
    
Acquisition,
integration
and related
expenses
  
Restruc-
turing
costs
  
Costs
related to
regulatory
actions
taken in
facilities
  
Equity
compens-
ation
  
Contin-
gent
conside-
ration
  
Other
non-
GAAP
items
  
Other
items
  
Corres-
ponding
tax
effect
  
Non-
GAAP
 
 
Cost of Sales
  
2,668
   
261
                  
4
   
9
      
32
         
2,362
 
 
R&D expenses
  
290
                        
9
      
—  
         
281
 
  
 
S&M expenses
  
682
   
41
                     
12
      
(5
        
634
 
 
G&A expenses
  
316
                        
17
      
7
         
292
 
 
Other (income) expenses
  
(96
                             
10
         
(106
 
Legal settlements and loss contingencies
  
20
      
20
                                 
—  
 
 
Other assets impairments, restructuring and other items
  
194
         
27
      
3
   
107
         
47
   
10
         
—  
 
 
Intangible assets impairment
  
521
         
521
                              
—  
 
 
Goodwill impairment
  
120
         
120
                              
—  
 
 
Financial expenses, net
  
236
                                 
(2
     
238
 
 
Income taxes
  
(76
                                   
(203
  
127
 
 
Share in losses (income) of associated companies, net
  
(8
                                
—  
      
(8
 
Net income (loss) attributable to non-controlling interests
  
10
                                 
(12
     
22
 
                                                           
 
Total reconciled items
     
302
   
20
   
668
      
3
   
107
   
4
   
47
   
47
   
54
   
(14
  
(203
   
                                             
 
EPS—Basic
  
(0.24
                                   
1.02
   
0.78
 
 
EPS—Diluted
  
(0.24
                                   
1.02
   
0.78
 
The non-GAAP diluted weighted average number of shares was 1,021 million for the three months ended June 30, 2018.
74

                                                               
  
Six months ended June 30, 2019
 
  
U.S. $ and shares in millions (except per share amounts)
 
  
Excluded for non-GAAP measurement
 
  
GAAP
  
Amorti-
zation
 of
purchased
intangible
assets
  
Legal
settlements
and loss
contingencies
  
Impair-
ment of
long-
lived
assets
  
Acquisition,
integration
and related
expenses
  
Restruc-
turing
costs
  
Costs
related to
regulatory
actions
taken in
facilities
  
Equity
compen-
sation
  
Contingent
conside-
ration
  
Gain on
sale of
business
  
Other
non-
GAAP
items
  
Other
items
  
Corres-
ponding
tax
effect
  
Unusual
tax
item*
  
Non-
GAAP
 
  
 
Cost of Sales
  
4,883
   
497
               
16
   
14
         
61
            
4,294
 
 
R&D expenses
  
537
                     
11
         
0
            
525
 
 
S&M expenses
  
1,313
   
71
                  
20
         
            
1,223
 
 
G&A expenses
  
589
                     
24
         
(1
           
566
 
 
Other (income) expenses
  
(15
                          
(9
              
(6
 
Legal settlements and loss contingencies
  
703
      
703
                                    
 
 
Other assets impairments, restructuring and other items
  
103
         
68
   
2
   
79
         
(47
     
1
            
(0
 
Intangible assets impairment
  
1,030
         
1,030
                                 
 
 
Financial expenses, net
  
425
                                 
6
         
419
 
 
Corresponding tax effect
  
(170
                                   
(490
)  
61
   
259
 
 
Share in losses (income) of associated companies, net
  
4
                                 
         
4
 
 
Net income (loss) attributable to non-controlling interests
  
26
                                 
(16
        
42
 
                                                               
 
Total reconciled items
     
568
   
703
   
1,098
   
2
   
79
   
16
   
69
   
(47
  
(9
  
60
   
(10
  (490
)  
61
    
                                                               
 
EPS—Basic
  
(0.73
                                       1.93
   
1.20
 
 
EPS—Diluted
  
(0.73
                                       1.93
   
1.20
 
(4)*Thenon-GAAP diluted weighted average number of shares was 1,020 and 1,017 million for the three months ended March 31, 2018 and 2017, respectively. For the three months ended March 31, 2018, the mandatory convertible preferred shares amounting to 64 million weighted average shares had an anti-dilutive effect on earnings per share and were therefore excluded from the outstanding shares calculation.Non-GAAP earnings per share can be reconciled with GAAP earnings per share by dividing eachInterest disallowance as a result of the amounts included in footnotes1-3 above by the applicable weighted average share number.U.S. Tax Cuts and Jobs Act.

The non-GAAP diluted weighted average number of shares was 1,093 million for the six months ended June 30, 2019.
75
                                                           
  
Six months ended June 30, 2018
 
  
U.S. $ and shares in millions (except per share amounts)
 
  
Excluded for non-GAAP measurement
 
  
GAAP
  
Amorti-
zation of
purchased
intangible
assets
  
Legal
settlements
and loss
contingencies
  
Impair-
ment of
long-
lived
assets
  
Other
R&D
expenses
  
Acquisition,
integration
and related
expenses
  
Restruc-
turing
costs
  
Costs
related to
regulatory
actions
taken in
facilities
  
Equity
compen-
sation
  
Contingent
conside-
ration
  
Other
non-
GAAP
items
  
Other
items
  
Corres-
ponding
tax
effect
  
Non-
GAAP
 
 
Cost of Sales
  
5,418
   
525
                  
5
   
15
      
64
         
4,809
 
 
R&D expenses
  
607
            
22
            
14
      
1
         
570
 
 
S&M expenses
  
1,420
   
87
                     
21
      
(4
        
1,316
 
  
 
G&A expenses
  
645
                        
27
      
4
         
614
 
 
Other (income) expenses
  
(299
                             
(83
        
(216
 
Legal settlements and loss contingencies
  
(1,258
     
(1,258
                                
—  
 
 
Other assets impairments, restructuring and other items
  
695
         
253
      
5
   
354
         
55
   
28
         
—  
 
 
Intangible assets impairment
  
727
         
727
                              
—  
 
 
Goodwill impairment
  
300
         
300
                              
—  
 
 
Financial expenses, net
  
507
                                 
66
      
441
 
 
Corresponding tax effect
  
(30
                                   
(368
)  
338
 
 
Share in losses (income) of associated companies, net
  
66
                                 
94
      
(28
 
Net income (loss) attributable to non-controlling interests
  
24
                                 
(20
     
44
 
                                                           
 
Total reconciled items
     
612
   
(1,258
  
1,280
   
22
   
5
   
354
   
5
   
77
   
55
   
10
   
140
   (368
)   
                                                           
 
EPS—Basic
  
0.80
                                     0.92
   
1.72
 
 
EPS—Diluted
  
0.80
                                     0.91
   
1.71
 
The non-GAAP diluted weighted average number of shares was 1,020 million for the six months ended June 30, 2018.
76

Non-GAAP Tax Rate

Non-GAAP income taxes for the firstsecond quarter of 2019 were $134 million, or 16%, on pre-tax non-GAAP income of $812 million. Non-GAAP income taxes in the second quarter of 2018 were $211$127 million, or 17%13%, onpre-taxnon-GAAP pre-tax non-GAAP income of $1.2 billion.Non-GAAP income taxes in the first quarter of 2017 were $240 million, or 17%, onpre-taxnon-GAAP income of $1.4 billion.

We expect our annual$1,000 million. Our non-GAAP tax rate for 2018 to be 17%. Ournon-GAAP tax rate for 2017the second quarter of 2019 was 15%. The expected 2018 non-GAAP tax rate is higher than our 2017non-GAAP tax rate, as we expect less tax benefits associated withmainly affected by the Actavis Generics acquisition as a resultmix of products sold in different geographies and the enactment of the Tax Cuts and Jobs Act in the United States.

Non-GAAP income taxes for the first six months of 2019 were $259 million, or 16%, on pre-tax non-GAAP income of $1,611 million. Non-GAAP income taxes in the first six months of 2018 were $338 million, or 15% on pre-tax non-GAAP income of $2,232 million.
We expect our annual non-GAAP tax rate for 2019 to be 16%, which is higher than our previous projection. This is due to changes in the geographical mix of income we expect to earn this year. Our non-GAAP tax rate for 2018 was 14%.
Off-Balance Sheet Arrangements

Except for securitization transactions, which are disclosed in note 16d16 (d) to our consolidated financial statements included in our annual report on Form10-K for the year ended December 31, 2017, we do not have any materialoff-balance sheet arrangements.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in certain circumstances that affect the amounts reported in the accompanying consolidated financial statements and related footnotes. Actual results may differ from these estimates. We base our judgments on our experience and on various assumptions that we believe to be reasonable under the circumstances.

As applicable to our consolidated financial statements, the most significant estimates and assumptions relate to purchase price allocation on acquisitions, including determination of useful lives and contingent consideration; determining the valuation and recoverability of intangible assets and goodwill; and assessing sales reserves and allowances, uncertain tax positions, valuation allowances, contingencies, restructuring costs and inventory valuation.

Please refer to note 1 in the consolidated financial statements and critical accounting policies included in our Annual Report on Form 10-K for the year ended December 31, 2017 for2018, we do not have any material off-balance sheet arrangements.

Critical Accounting Policies
For a summary of our significant accounting policies.

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 ended December 31, 2018.

Recently Issued Accounting Pronouncements

See note 2 to our consolidated financial statements.

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has not been any material change in our assessment of material contractual obligations and commitmentsmarket risk as set forth in Item 7A to our Annual Report on Form10-K for the year ended December 31, 2017, other than as set forth below. These changes are the result of the significant debt movements during the first quarter of 2018, as described under Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—2018 Debt Balance and Movements” above.

Our outstanding debt obligations, the corresponding interest rates, currency and repayment schedules as of March 31, 2018 are set forth in the table below in U.S. dollar equivalent terms, taking into account recent changes in our debt movement:

Currency

  Total
Amount
  Interest
Rate Ranges
  2018   2019   2020   2021   2022   2023 &
thereafter
 
   (U.S. dollars in millions) 

Fixed Rate:

               

USD

   18,433   1.70  6.75  —      2,000    700    3,620    863    11,250 

Euro

   9,914   0.38  3.85  —      —      2,152    587    863    6,312 

CHF

   1,521   0.13  1.50  786          367    368 

USD convertible debentures*

   514   0.25  0.25  514    —      —      —      —      —   

Floating Rate:

               

USD

   500   2.80  2.80  —      —      —      —      —      500 

JPY

   —       —      —      —      —      —      —   

Others

   7   8.00  13.00  2    —      —      —      —      5 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total:

   30,889    $1,302   $2,000   $2,852   $4,207   $2,093   $18,435 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less debt issuance costs

   (137             
  

 

 

              

Total:

  $30,752              
  

 

 

              

2018.
ITEM 4.CONTROLS AND PROCEDURES

Disclosure Controls and Procedures
Teva maintains “disclosure controls and procedures. Our management, including our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and proceduresprocedures” (as defined in RuleRules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934)1934, as of the end of the period covered by this Quarterly Report, has concludedamended) that as of such date, Teva’s disclosure controls and procedures were effectiveare designed to ensureprovide reasonable assurance that the information required to be disclosed in theTeva’s reports that we filefiled or submitsubmitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to ourTeva’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective.

After evaluating the effectiveness of our disclosure controls and procedures as of June 30, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, Teva’s disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal control. Control over Financial Reporting
During the period covered by this Quarterly Report,quarter ended June 30, 2019, there were no changes in Teva’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect Teva’s internal control over financial reporting.

77
PART II — OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

We are subject to various litigation and other legal proceedings. For a discussion of these matters, see “Commitments and Contingencies” included in note 16 to the consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form10-Q.

ITEM 1A.RISK FACTORS

There are no material changes to the risk factors previously disclosed in our Annual Report on Form10-K for the year ended December 31, 2017.

2018.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

There were no sales of unregistered equity securities during the three months ended March 31, 2018.

2019.

Repurchase of Shares

In December 2011, our Board of Directors authorized us to repurchase up to an aggregate amount of $3.0 billion of our ordinary shares or ADSs, of which $1.3 billion remained available for purchase, when in October 2014, the Board of Directors authorized us to increase our share repurchase program by $1.7 billion to $3.0 billion, of which $2.1 billion remained available as of March 31, 2018.June 30, 2019. We did not repurchase any of our shares during the three months ended March 31, 2018June 30, 2019 and currently cannot do so due to our accumulated deficit. The repurchase program has no time limit. Repurchases may be commenced or suspended at any time, subject to applicable law.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

Not applicable.

None.
78

ITEM 6.
EXHIBITS

 4.1 
10.1
    4.2First Supplemental Senior Indenture, dated as of March  14, 2018, among Teva Pharmaceutical Finance Netherlands III B.V., Teva Pharmaceutical Industries Limited and The Bank of New York Mellon, as trustee, including the form of 6.000% Senior Notes due 2024 and the form of 6.750% Senior Notes due 2028 (2)
    4.3Registration Rights Agreement, dated as of March  14, 2018, among Teva Pharmaceutical Finance Netherlands III B.V., Teva Pharmaceutical Industries Limited and the initial purchasers party thereto(3)
    4.4Senior Indenture, dated as of March  14, 2018, among Teva Pharmaceutical Finance Netherlands II B.V., Teva Pharmaceutical Industries Limited and The Bank of New York Mellon, as trustee (4)America, N.A. and the lenders party thereto (1)
 4.5 First Supplemental Senior Indenture, dated as of March  14, 2018, among Teva Pharmaceutical Finance Netherlands II B.V., Teva Pharmaceutical Industries Limited, The Bank of New York Mellon, as trustee, and The Bank of New York Mellon, London Branch, as paying agent, including the form of 3.250% Senior Notes due 2022 and the form of 4.500% Senior Notes due 2025(5)
 4.6
31.1
 Registration Rights Agreement, dated as of March  14, 2018, among Teva Pharmaceutical Finance Netherlands II B.V., Teva Pharmaceutical Industries Limited and the initial purchasers party thereto(6)
  31.1
 31.2 
31.2
 32 
32
101.INS 
101.INS
XBRL Taxonomy Instance Document
101.SCH 
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL 
101.CAL
XBRL Taxonomy Calculation Linkbase Document
101.DEF 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB 
101.LAB
XBRL Taxonomy Label Linkbase Document
101.PRE 
101.PRE
XBRL Taxonomy Presentation Linkbase Document

*Filed herewith.
(1)1.Incorporated by reference to Exhibit 4.110.1 to Current Report on Form8-K filed on March 14, 2018.April 10, 2019.
(2)Incorporated by reference to Exhibit 4.2 to Form8-K filed on March 14, 2018.
(3)Incorporated by reference to Exhibit 4.4 to Form8-K filed on March 14, 2018.
(4)Incorporated by reference to Exhibit 4.5 to Form8-K filed on March 14, 2018.
(5)Incorporated by reference to Exhibit 4.6 to Form8-K filed on March 14, 2018.
(6)Incorporated by reference to Exhibit 4.8 to Form8-K filed on March 14, 2018.

79
 
 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Date: May 3, 2018  By:
Date: August 7, 2019
 

By:
/s/ Michael McClellan

 
Name:
 Name:
Michael McClellan
 
Title:
 Title:

Executive Vice President,

Chief Financial Officer

(Duly Authorized Officer)

78

80