TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
| 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).
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 in other comprehensive income (loss) will be amortized under financial
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 September 30, 2019 and 2018, and losses of $22 million and $21 million were recognized under financial expenses, net for the nine months ended September 30, 2019 and 2018
, respectively
.
In the third quarter of 2016, Teva terminated interest rate swap agreements designated as fair value hedge relating to its 2.95% senior 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
were
recorded under senior notes and loans, are amortized under financial
over the life of the debt as additional interest expense.
With respect to the interest rate swap agreements,
terminated in 2016 and in 2019 as described above,
gains of $3
million and $2
million were recognized under financial expenses, net for the three months ended September 30, 2019 and 2018,
and gains of $6 million
and $5 million
were recognized under financial expenses, net for the nine months ended September 30, 2019 and 2018
, respectively
.
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
In the three months ended September 30, 2019, Teva recorded $61 million of restructuring expenses, compared to $88 million in the three months ended September 30, 2018.
In the nine months ended September 30, 2019, Teva recorded $140 million of restructuring expenses, compared to $442 million in the nine months ended September 30, 2018.
Since the announcement of its restructuring plan, Teva reduced its global headcount by 11,554 full-time-equivalent employees.
During the three months ended September 30, 2019 and 2018, Teva recorded impairments of property, plant and equipment related to restructuring costs of $8 million and $2 million, respectively.
During the nine months ended September 30, 2019 and 2018, Teva recorded impairments of property, plant and equipment related to restructuring costs of $29 million and $155 million, respectively.
The following tables provide the components of costs associated with Teva’s restructuring plan, including other costs associated with Teva’s restructuring plan and recorded under different items:
The following table provides the components of and changes in the Company’s restructuring accruals:
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Balance as of January 1, 2019 | | $ | | ) | | $ | | ) | | $ | | ) |
| | | | ) | | | | ) | | | | ) |
| | | | | | | | | | | | |
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Balance as of September 30, 2019 | | $ | | ) | | $ | | ) | | $ | | ) |
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| * | 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 $63
million in revenues from this site in the remainder of 2019 and approximately $
230
, assuming remediation or enforcement does not cause any unscheduled slowdown or stoppage at the facility.
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
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 insurance it desires, or any insurance on reasonable terms, in all of its markets.
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 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 tripled 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—potentially measured in multiples of the annual brand 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 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 filed by a purported class of direct purchasers. Similar complaints were also filed by a purported class of indirect purchasers, certain 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 court found the patent to be invalid and unenforceable based on inequitable conduct. Teva has either settled or reached agreements in principle to settle with all of the plaintiffs in the Philadelphia Modafinil Action. Additionally, Cephalon and Teva reached a settlement with 48 state attorneys general, which was approved by the court on November 7, 2016, and on July 23, 2019, reached a settlement with the State of California, which is pending final court approval, and is fully covered by the settlement fund explained below.
Notes to Consolidated Financial Statements
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 (less
set-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 Modafinil 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.
The remaining balance of the settlement fund after consideration of the
State of California noted above is approximately $
19
million. In February 2019, in connection with the settlement of other unrelated FTC antitrust lawsuits, as described below, Teva and the FTC agreed to amend certain non
-
financial 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 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. No final decision regarding infringement has yet been taken by the 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”), from wh
ich
Teva later acquired certain assets and liabilities, 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 retailer plaintiffs filing separately) and the various actions were consolidated in a multidistrict litigation in Georgia federal court. 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 also settled with most of the retailer plaintiffs in April 2019.
O
n July 16, 2018, the direct purchaser plaintiffs’ motion for class certification was denied. As a result, the three direct purchasers that had sought class certification are now proceeding as individual plaintiffs, and trial on their claims has been scheduled to begin in February 2020. In addition, in August 2019, certain other direct-purchaser plaintiffs (who would have been members of the direct purchaser class, had it been certified) filed their own claims in federal court in Philadelphia, challenging (in one complaint) both the September 2006 settlement between Watson and Solvay referenced above, as well as Teva’s December 2011 settlement with AbbVie involving AndroGel
and TriCor
, referenced below. The defendants have moved the Philadelphia court to transfer all of these claims to the same Georgia federal court that has been presiding over the multidistrict litigation, and that motion remains pending. Annual sales of AndroGel
®
1% were approximately
$350 million at the time of the settlement and approximately $140 million
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
) 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 U.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, in August 2017, the Third Circuit reversed the district court’s decision and remanded for further proceedings. Annual sales of Effexor XR
were approximately $2.6 billion at the time of settlement and at the time Teva launched its generic 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, but in June 2015, the U.S. Court of Appeals for the Third Circuit reversed and remanded for further proceedings. In December 2018, the court granted the direct-purchaser plaintiffs’ motion for class certification. On March 18, 2019, the appeals court granted the defendants’ petition for immediate appellate review and the district 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 version of Lamictal
in July 2008.
In April 2013, purported classes of direct purchasers of, and end payers for, Niaspan
(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 purchaser
opt-out
plaintiffs filed complaints with allegations nearly identical to those of the direct purchaser class and, in
August 2019, the district court certified
the direct-purchaser class
, although the court has yet to rule on the
indirect
purchaser’ pending motion
for class certification. 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. Defendants moved to strike the District Attorney’s claims for restitution and civil penalties to the extent 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 version of Niaspan
in September 2013.
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
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 transdermal patches) violated the antitrust laws. Additional lawsuits containing similar allegations followed on behalf of other classes of putative direct purchaser and
end-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. Teva settled the multidistrict litigation with the various plaintiff groups in the first quarter of 2018 and a provision was included in the financial statements. The FTC also filed suit to challenge the Lidoderm
®
settlement, initially bringing antitrust claims against Watson, Endo and Allergan in Pennsylvania federal court in March 2016. The FTC later voluntarily dismissed those claims and refiled them (along with a stipulated order for permanent injunction to settle its claims against Endo) 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 its own complaint against Allergan and Watson, and that complaint was also assigned to the California federal court presiding over the multidistrict litigation. On February 22, 2019, the FTC dismissed its claims against Actavis and Allergan, in exchange for Teva’s agreement to amend the Modafinil Consent Decree, as described above. On July 23, 2019 Teva and the State of California also reached a settlement agreement.
On September 16, 2019, end-payers Blue Cross Blue Shield of Michigan and Blue Care Network of Michigan filed their own lawsuit against Watson, and other defendants, in Michigan state court. That lawsuit was subsequently removed to federal court and remains pending.
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/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. 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 version of Aggrenox
in July 2015.
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 Actoplus Met (pioglitazone and pioglitazone plus metformin) against Takeda, the innovator, and several generic manufacturers, including Teva, Actavis and Watson. The lawsuits allege, among other things, that the settlement agreements between Takeda and the generic manufacturers violated the antitrust laws. The court dismissed the end payer lawsuits against all defendants in September 2015. 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 following the Second Circuit’s decision
, but on October 8, 2019, the district court dismissed, with prejudice,
the direct purchasers’
claims against the generic manufacturers (including Teva, Actavis
, and
Watson).
At the time of the settlement, annual sales of Actos
and Actoplus Met were approximately $3.7 billion and approximately $500 million, respectively. At the time Teva launched its authorized generic version of Actos
and Actoplus Met in August 2012, annual sales of Actos
and Actoplus Met were approximately $2.8 billion and approximately $430 million, respectively.
In September 2014, the FTC sued AbbVie Inc. and certain of its affiliates (“AbbVie”) as well as Teva in
federal court in Philadelphia
alleging that they violated the antitrust laws when they entered into a
December 2011settlement
agreement to resolve the AndroGel
patent litigation and a supply agreement under which AbbVie agreed to supply Teva with an authorized generic version of TriCor
. 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 dismissed 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, among other things, the district court’s May 2015 dismissal of the FTC’s claim against Teva, but in February 2019, the FTC stipulated to dismiss Teva from its appeal, in exchange for Teva’s agreement to amend the Modafinil Consent Decree, as described above.
I
n August 2019, two groups of direct-purchaser plaintiffs filed similar claims against AbbVie and Teva, in the same federal court in Philadelphia where the FTC’s claims had been pending. The first group is challenging Teva’s December 2011 settlement with AbbVie, while the second group is challenging that settlement, as well as the September 2006 AndroGel
settlement between Watson and Solvay, referenced above. The defendants have moved to transfer the second group’s claims to the Georgia federal court that is presiding over the multidistrict litigation related to the September 2006 settlement between Watson and Solvay. That motion remains pending.
Notes to Consolidated Financial Statements
In May 2015, a purported class of end payers for Namenda IR
®
(memantine hydrochloride) filed a lawsuit against Forest Laboratories, LLC (“Forest”), the innovator, and several generic manufacturers, including Teva. The lawsuit alleges, among other things, that settlement agreements between Forest and the generic manufacturers to resolve patent litigation over Namenda IR
®
violated the antitrust laws. Annual sales of Namenda IR
®
at the time of the settlement were approximately $1.1 billion and approximately $550 million at the time other manufacturers first launched generic versions of Namenda IR
®
in July 2015.
On December 16, 2016, the U.K. Competition and Markets Authority (“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 certain Auden Mckenzie entities alleging competition law breaches in connection with the supply of 10mg and 20mg hydrocortisone tablets in the U.K. On December 18, 2017, the CMA issued a Statement of Draft Penalty Calculation. No final decision regarding infringement of competition law has yet been issued. On March 3, 2017, the CMA issued a second statement of objections in respect of certain additional allegations (relating to the same products and covering part of the same time period as in the first statement of objections) against Actavis UK, Allergan and certain Auden Mckenzie entities. On February 28, 2019, the CMA issued a third statement of objections with allegations of additional infringements relating to the supply of 10mg and 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 against Actavis UK in relation to the December 18, 2017 and March 3, 2017 statements of objections, 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.
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 clean 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
clean-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,
clean-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
clean-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.
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”). 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). Defendants moved to dismiss the complaint and on December 28, 2018, the court granted the motion in part and dismissed all of plaintiffs’ claims, except for their claim against Cephalon for breach of contract.
Revenues from our International Markets segment in the third quarter of 2019 were $736 million, an increase of $10 million, or 1%, compared to the third quarter of 2018. In local currency terms, revenues increased 1% compared to the third quarter of 2018, mainly due to higher distribution activities in Israel, partially offset by lower sales in Japan and Russia.
Revenues by Major Products and Activities
The following table presents revenues for our International Markets segment by major products and activities for the three months ended September 30, 2019 and 2018:
revenues in our International Markets segment in the third quarter of 2019, which include OTC products, decreased by 5% to $474 million, compared to the third quarter of 2018. In local currency terms, revenues decreased by 5%, mainly due to lower sales in Japan resulting from generic competition to
off-patented
products, as well as lower sales in Russia.
revenues in our International Markets segment in the third quarter of 2019 increased by 39% to $20 million, compared to $14 million in the third quarter of 2018. In local currency terms, revenues increased by 46%.
For further information about COPAXONE, see “—North America Revenues—Revenues by Major Product” above.
revenues in our International Markets segment in the third quarter of 2019 increased by 18% to $176 million, compared to $149 million in the third quarter of 2018. In local currency terms, revenues increased by 15%, mainly due to agreements with new distribution partners.
International Markets Gross Profit
Gross profit from our International Markets segment in the third quarter of 2019 was $295 million, a decrease of 2% compared to $301 million in the third quarter of 2018.
Gross profit margin for our International Markets segment in the third quarter of 2019 decreased to 40.1%, compared to 41.4% in the third quarter of 2018. The decrease was mainly due to changes in product mix.
International Markets R&D Expenses
R&D expenses relating to our International Markets segment in the third quarter of 2019 were $21 million, flat compared to the third quarter of 2018.
For a description of our R&D expenses in the third quarter of 2019, see “—Teva Consolidated Results—Research and Development (R&D) Expenses” below.
International Markets S&M Expenses
S&M expenses relating to our International Markets segment in the third quarter of 2019 were $114 million, a decrease of 5% compared to $120 million in the third quarter of 2018. The decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.
International Markets G&A Expenses
G&A expenses relating to our International Markets segment in the third quarter of 2019 were $32 million, a decrease of 15% compared to $37 million in the third quarter of 2018. The decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.
International Markets Profit
Profit of our International Markets segment consists of gross profit less R&D expenses, S&M expenses, G&A expenses and any other income related to this segment. Segment profit does not include amortization and certain other items.
Profit from our International Markets segment in the third quarter of 2019 was $130 million, an increase of 6%, compared to $123 million in the third quarter of 2018. The increase was mainly due to cost reductions and efficiency measures as part of the restructuring plan.
We have other sources of revenues, primarily the sale of APIs to third parties, certain contract manufacturing services and an
out-licensing
platform offering a portfolio of products to other pharmaceutical companies through our affiliate Medis. Our other activities are not included in our North America, Europe or International Markets segments described above.
Our revenues from other activities in the third quarter of 2019 were $314 million, a decrease of 4% compared to the third quarter of 2018. In local currency terms, revenues decreased by 2%.
API sales to third parties in the third quarter of 2019 were $176 million, an increase of 3%, in both U.S. dollar and local currency terms, compared to the third quarter of 2018.
Teva Consolidated Results
Revenues in the third quarter of 2019 were $4,264 million, a decrease of 6%, or 5% in local currency terms, compared to the third quarter of 2018, mainly due to generic competition to COPAXONE, a decline in revenues from BENDEKA/TREANDA and certain other specialty products in the United States, as well as a decline in revenues in Russia and Japan, partially offset by higher revenues from AUSTEDO, AJOVY and QVAR in the United States. See “—North America Revenues,” “—Europe Revenues,” “—International Markets Revenues” and “—Other Activities” above.
Exchange rate movements during the third quarter of 2019 negatively impacted revenues by $55 million compared to the third quarter of 2018.
Gross profit in the third quarter of 2019 was $1,830 million, a decrease of 7% compared to the third quarter of 2018. The decrease was mainly a result of the factors discussed above under “—North America Gross Profit,” “—Europe Gross Profit” and “—International Markets Gross Profit.”
Gross profit as a percentage of revenues was 42.9% in the third quarter of 2019, compared to 43.7% in the third quarter of 2018.
The decrease in gross profit as a percentage of revenues was mainly due to lower profitability in North America, resulting mainly from a decline in COPAXONE revenues due to generic competition, partially offset by lower amortization expenses and higher profitability in Europe, resulting mainly from lower cost of goods sold related to network optimization.
Research and Development (R&D) Expenses
Net R&D expenses in the third quarter of 2019 were $240 million, a decrease of 23% compared to the third quarter of 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 third quarter of 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, migraine, headache and respiratory therapeutic areas, with additional activities in selected other areas.
Our lower R&D expenses in the third quarter of 2019, compared to the third quarter of 2018, primarily resulted from cost of labor reductions, pipeline optimization and project terminations, partially offset by increased investment in early stage projects.
R&D expenses as a percentage of revenues were 5.6% in the third quarter of 2019, compared to 6.9% in the third quarter of 2018.
Selling and Marketing (S&M) Expenses
S&M expenses in the third quarter of 2019 were $595 million, a decrease of 15% compared to the third quarter of 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 “—International Markets Segment— S&M Expenses.”
S&M expenses as a percentage of revenues were 13.9% in the third quarter of 2019, compared to 15.4% in the third quarter of 2018.
General and Administrative (G&A) Expenses
G&A expenses in the third quarter of 2019 were $285 million, a decrease of 8% compared to the third quarter of 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 “—International Markets Segment— G&A Expenses.”
G&A expenses as a percentage of revenues were 6.7% in the third quarter of 2019, compared to 6.8% in the third quarter of 2018.
Intangible Asset Impairments
We recorded expenses of $177 million for identifiable intangible asset impairments in the third quarter of 2019, compared to expenses of $519 million in the third quarter of 2018. See note 6 to our consolidated financial statements.
No goodwill impairments were recorded in the third quarter of 2019 and 2018.
Other Assets Impairments, Restructuring and Other Items
We recorded expenses of $160 million for other assets impairments, restructuring and other items in the third quarter of 2019, compared to expenses of $139 million in the third quarter of 2018. See note 14 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 $63 million in revenues from this site in the remainder of 2019 and approximately $230 million in 2020, 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. As of September 30, 2019, the accumulated impact of this recall 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.
In the third quarter of 2019, we recorded $61 million of restructuring expenses, compared to $88 million in the third quarter of 2018. The expenses in the third quarter of 2019 were primarily related to headcount reductions across all functions 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.
Since the announcement, we reduced our global headcount by 11,554 full-time-equivalent employees.
Legal Settlements and Loss Contingencies
In the third quarter of 2019, we recorded an expense of $468 million in legal settlements and loss contingencies, compared to $19 million in the third quarter of 2018. The expense in the third quarter of 2019 was mainly related to an increase in the estimated settlement provision recorded in connection with the remaining opioid cases. See note 16 to our consolidated financial statements.
Other income in the third quarter of 2019 was $14 million, compared to $35 million in the third quarter of 2018.
Operating loss was $81 million in the third quarter of 2019, compared to operating income of $16 million in the third quarter of 2018.
Operating income (loss) as a percentage of revenues was 1.9% in the third quarter of 2019, compared to 0.4% in the third quarter of 2018. The decrease was mainly due to higher provisions in connection with legal settlements and loss contingencies, partially offset by lower intangible asset impairments, lower R&D expenses and higher profit in our Europe segment.
Financial expenses were $211 million in the third quarter of 2019, compared to $229 million in the third quarter of 2018. Financial expenses in the third quarter of 2019 were mainly comprised of interest expenses of $219 million. Financial expenses in the third quarter of 2018 were mainly comprised of interest expenses of $240 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 September 30, 2019 and 2018:
| | | | | | | | | |
| | Three months ended
September 30, | |
| | | | | | |
| | | |
| | $ | | | | $ | | |
| | | | | | | | |
International Markets profit | | | | | | | | |
| | | | | | | | | |
| | | | | | | | |
Profit of other activities | | | | | | | | |
| | | | | | | | | |
| | | | | | | | |
Amounts not allocated to segments: | | | | | | | | |
| | | | | | | | |
Other assets impairments, restructuring and other items | | | | | | | | |
| | | | | | | | |
Intangible asset impairments | | | | | | | | |
Gain on divestitures, net of divestitures related costs | | | | ) | | | | ) |
Other R&D expenses (income) | | | | ) | | | | |
Costs related to regulatory actions taken in facilities | | | | | | | | |
Legal settlements and loss contingencies | | | | | | | | |
Other unallocated amounts | | | | | | | | |
| | | | | | | | | |
Consolidated operating income (loss) | | | | ) | | | | |
| | | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
Consolidated income (loss) before income taxes | | $ | | ) | | $ | | ) |
| | | | | | | | | |
In the third quarter of 2019, we recognized a tax expense of $11 million, on
pre-tax
loss of $292 million. In the third quarter of 2018, we recognized a tax benefit of $26 million, or 12%, on
pre-tax
loss of $213 million. Our tax rate for the third quarter of 2019 was mainly affected by impairments, amortization, legal settlements with low corresponding tax effect and interest disallowance as a result of the U.S. Tax Cuts and Jobs Act.
The statutory Israeli corporate tax rate is 23% in 2019. Our tax rate differs from the Israeli statutory tax rate mainly due to generation of profits in various jurisdictions in which tax rates are different than the Israeli tax rate, tax benefits in Israel and other countries, as well as infrequent or nonrecurring items.
Share in Losses (Income) of Associated Companies, Net
Share in losses of associated companies, net in the third quarter of 2019 was $4 million, compared to $10 million in the third quarter of 2018.
Net loss attributable to Teva was $314 million in the third quarter of 2019, compared to net loss of $208 million in the third quarter of 2018.
Net loss attributable to ordinary shareholders was $314 million in the third quarter of 2019, compared to net loss of $273 million in the third quarter of 2018.
Diluted Shares Outstanding and Earnings (Loss) per Share
The weighted average diluted shares outstanding used for the fully diluted share calculation for the three months ended September 30, 2019 and 2018 were 1,092 million and 1,018 million shares, respectively.
In computing loss per share for the three months ended September 30, 2019 and 2018, 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.
Additionally, no account was taken of the potential dilution by the mandatory convertible preferred shares, amounting to 66 million shares (including shares issued due to unpaid dividends up to that date) for the three months ended September 30, 2018, since they 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, we issued 70.6 million ADSs in December 2018.
Diluted loss per share was $0.29 in the third quarter of 2019, compared to diluted loss per share of $0.27 in the third quarter of 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”) and the conversion of our convertible senior debentures, in each case, at period end.
As of September 30, 2019 and 2018, the fully diluted share count for purposes of calculating our market capitalization was approximately 1,107 million and 1,111 million, respectively.
Impact of Currency Fluctuations on Results of Operations
In the third 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 and Russian ruble) impact our results.
During the third 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 37%, British pound by 5% and euro by 4%. The following main currencies relevant to our operations increased in value against the U.S. dollar: Japanese yen by 4% and new Israeli shekel by 3%.
As a result, exchange rate movements during the third quarter of 2019 negatively impacted overall revenues by $55 million and our operating income by $19 million, in comparison with the third 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.
North America Gross Profit
Gross profit from our North America segment in the first nine months of 2019 was $3,155 million, a decrease of 17%, compared to $3,778 million in the first nine months of 2018.
Gross profit margin for our North America segment in the first nine months of 2019 decreased to 51.1% from 53.5% in the first nine months of 2018.
North America R&D Expenses
R&D expenses relating to our North America segment in the first nine months of 2019 were $497 million, a decrease of 6%, compared to $528 million in the first nine months of 2018.
North America S&M Expenses
S&M expenses relating to our North America segment in the first nine months of 2019 were $756 million, a decrease of 7%, compared to $813 million in the first nine months of 2018.
North America G&A Expenses
G&A expenses relating to our North America segment in the first nine months of 2019 were $342 million, a decrease of 4%, compared to $357 million in the first nine months of 2018.
North America Other Income (Expense)
Other income from our North America segment in the first nine months of 2019 was $6 million, compared to $206 million in the first nine months of 2018.
Profit from our North America segment in the first nine months of 2019 was $1,566 million, a decrease of 31%, compared to $2,286 million in the first nine months of 2018.
Gross profit from our Europe segment in the first nine months of 2019 was $2,066 million, a decrease of 6% compared to $2,195 million in the first nine months of 2018.
Gross profit margin for our Europe segment in the first nine months of 2019 increased to 57.2% from 55.1% in the first nine months of 2018.
R&D expenses relating to our Europe segment in the first nine months of 2019 were $199 million, a decrease of 4%, compared to $208 million in the first nine months of 2018.
S&M expenses relating to our Europe segment in the first nine months of 2019 were $637 million, a decrease of 12%, compared to $725 million in the first nine months of 2018.
G&A expenses relating to our Europe segment in the first nine months of 2019 were $175 million, a decrease of 28%, compared to $243 million in the first nine months of 2018.
Profit from our Europe segment in the first nine months of 2019 was $1,060 million, an increase of 4%, compared to $1,020 million in the first nine months of 2018.
International Markets Segment
The following table presents revenues, expenses and profit for our International Markets segment for the nine months ended September 30, 2019 and 2018:
| | | | | | | | | | | | | | | | | |
| | | | | | |
| | (U.S. $ in millions / % of Segment Revenues) | |
| | $ | | | | | | % | | $ | | | | | | % |
| | | | | | | | % | | | | | | | | % |
| | | | | | | | % | | | | | | | | % |
| | | | | | | | % | | | | | | | | % |
| | | | | | | | % | | | | | | | | % |
| | | | ) | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | | |
| | $ | | | | | | % | | $ | | | | | | % |
| | | | | | | | | | | | | | | | | |
| * | 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 nine months of 2019 were $2,145 million, a decrease of $120 million, or 5%, compared to the first nine months of 2018. In local currency terms, revenues decreased by 1% compared to the first nine months of 2018.
Revenues by Major Products and Activities
The following table presents revenues for our International Markets segment by major products and activities for the nine months ended September 30, 2019 and 2018:
International Markets Gross Profit
Gross profit from our International Markets segment in the first nine months of 2019 was $877 million, a decrease of 7%, compared to $942 million in the first nine months of 2018.
Gross profit margin for our International Markets segment in the first nine months of 2019 decreased to 40.9%, from 41.6% in the first nine months of 2018. The decrease was mainly due to lower sales in Japan.
International Markets R&D Expenses
R&D expenses relating to our International Markets segment in the first nine months of 2019 were $66 million, a decrease of 5%, compared to $70 million in the first nine months of 2018.
International Markets S&M Expenses
S&M expenses relating to our International Markets segment in the first nine months of 2019 were $348 million, a decrease of 9%, compared to $384 million in the first nine months of 2018.
International Markets G&A Expenses
G&A expenses relating to our International Markets segment in the first nine months of 2019 were $102 million, a decrease of 12%, compared to $115 million in the first nine months of 2018.
International Markets Profit
Profit from our International Markets segment in the first nine months of 2019 was $363 million, a decrease of 6%, compared to $384 million in the first nine months of 2018.
Our revenues from other activities in the first nine months of 2019 decreased by 2% to $972 million, compared to the first nine months of 2018. In local currency terms, revenues were flat.
API sales to third parties in the first nine months of 2019 increased by 6%, in both U.S. dollar and local currency terms, to $566 million, compared to the first nine months of 2018.
Teva Consolidated Results
Revenues in the first nine months of 2019 were $12,896 million, a decrease of 10% or 7% in local currency terms, compared to the first nine months of 2018.
Exchange rate movements during the first nine months of 2019, compared to the first nine months of 2018, negatively impacted revenues by $357 million.
Gross profit in the first nine months of 2019 was $5,579 million, a decrease of $746 million compared to the first nine months of 2018.
Gross profit as a percentage of revenues was 43.3% in the first nine months of 2019, compared to 44.2% in the first nine months of 2018.
Research and Development (R&D) Expenses
Net R&D expenses in the first nine months of 2019 were $778 million, a decrease of 15% compared to the first nine months of 2018.
R&D expenses as a percentage of revenues were 6.0% in the first nine months of 2019, compared to 6.4% in the first nine months of 2018.
Selling and Marketing (S&M) Expenses
S&M expenses in the first nine months of 2019 were $1,908 million, a decrease of 10% compared to the first nine months of 2018.
S&M expenses as a percentage of revenues were 14.8% in the first nine months of 2019, flat compared to the first nine months of 2018.
General and Administrative (G&A) Expenses
G&A expenses in the first nine months of 2019 were $873 million, a decrease of 8% compared to the first nine months of 2018.
G&A expenses as a percentage of revenues were 6.8% in the first nine months of 2019, compared to 6.7% in the first nine months of 2018.
Intangible Asset Impairments
We recorded expenses of $1,206 million for identifiable intangible asset impairments, in the first nine months of 2019, compared to expenses of $1,246 million in the first nine months of 2018. See note 6 to our consolidated financial statements.
In the first nine months of 2019, no goodwill impairments were recorded, compared to a $300 million goodwill impairment charge recorded in the first nine months of 2018. See note 7 to our consolidated financial statements.
Other Asset Impairments, Restructuring and Other Items
We recorded expenses of $263 million for other asset impairments, restructuring and other items in the first nine months of 2019, compared to expenses of $834 million in the first nine months of 2018. See note 14 to our consolidated financial statements.
Legal Settlements and Loss Contingencies
In the first nine months of 2019, we recorded an expense of $1,171 million in legal settlements and loss contingencies, compared to an income of $1,239 million in the first nine months of 2018. The expense in the first nine months of 2019 was mainly related to an estimated settlement provision recorded in connection with the remaining opioid cases. See note 16 to our consolidated financial statements.
Other income in the first nine months of 2019 was $29 million, compared to $334 million in the first nine months of 2018.
Other income as a percentage of revenues was 0.2% in the first nine months of 2019, compared to 2.3% in the first nine months of 2018.
Operating loss was $591 million in the first nine months of 2019, compared to an operating income of $1,527 million in the first nine months of 2018.
Financial expenses were $635 million in the first nine months of 2019, compared to $736 million in the first nine months of 2018.
Financial expenses in the first nine months of 2019 were mainly comprised of interest expenses of $672 million, partially offset by $36 million of interest income. Financial expenses in the first nine months of 2018 were mainly comprised of interest expenses of $689 million, $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, as well as a $22 million loss resulting from our hedging and derivatives activities, partially offset by $33 million of interest income.
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 nine months ended September 30, 2019 and 2018:
| | | | | | | | | |
| | Nine months ended
September 30, | |
| | | | | | |
| | | |
| | $ | | | | $ | | |
| | | | | | | | |
International Markets profit | | | | | | | | |
| | | | | | | | | |
| | | | | | | | |
Profit (loss) of other activities | | | | | | | | |
| | | | | | | | | |
| | | | | | | | |
Amounts not allocated to segments: | | | | | | | | |
| | | | | | | | |
Other asset impairments, restructuring and other items | | | | | | | | |
| | | | | | | | |
Intangible asset impairments | | | | | | | | |
Gain on divestitures, net of divestitures related costs | | | | ) | | | | ) |
| | | | ) | | | | |
Costs related to regulatory actions taken in facilities | | | | | | | | |
Legal settlements and loss contingencies | | | | | | | | ) |
Other unallocated amounts | | | | | | | | |
| | | | | | | | | |
Consolidated operating income (loss) | | | | ) | | | | |
| | | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
Consolidated income (loss) before income taxes | | $ | | ) | | $ | | |
| | | | | | | | | |
In the first nine months of 2019, we recognized a tax benefit of $159 million, or 13%, on
pre-tax
loss of $1,226 million. In the first nine months of 2018, we recognized a tax benefit of $56 million, on
pre-tax
income of $791 million. Our tax rate for the first nine months of 2019 was mainly affected by impairments, amortization, legal settlements with low corresponding tax effect 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 nine months of 2019 was $8 million, compared to share in losses of $76 million in the first nine months of 2018.
Net loss attributable to Teva was $1,108 million in the first nine months of 2019, compared to net income attributable to Teva of $736 million in the first nine months of 2018.
Net loss attributable to ordinary shareholders was $1,108 million in the first nine months of 2019, compared to net income of $541 million in the first nine 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 nine months ended September 30, 2019 and 2018 were 1,091 million and 1,020 million shares, respectively.
In computing diluted loss per share for the nine months ended September 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 nine months ended September 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 68 million shares (including shares issued due to unpaid dividends up to that date) for the nine months ended September 30, 2018, as well as for the convertible senior debentures, since both had an anti-dilutive effect on earnings per share.
Diluted loss per share was $1.02 in the first nine months of 2019, compared to diluted earnings per share of $0.53 in the first nine months of 2018.
Impact of Currency Fluctuations on Results of Operations
In the first nine months 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 and, accordingly, changes in the exchange rate between the U.S. dollar and local currencies in the markets in which we operate (primarily the euro, British pound, Japanese yen, Israeli shekel, Canadian dollar and Russian ruble) impact our results. During the first nine months of 2019, the following main currencies relevant to our operations decreased in value against the U.S. dollar: Argentinean peso by 44%, Polish zloty by 7%, Russian ruble by 6%, euro by 6% and British pound by 6% (all compared on a nine-month average basis).
As a result, exchange rate movements during the first nine months of 2019 negatively impacted overall revenues by $357 million and our operating income by $110 million, in comparison to the first nine months of 2018.
Liquidity and Capital Resources
Total balance sheet assets were $57,246 million as of September 30, 2019, compared to $59,424 million as of June 30, 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 $306 million as of September 30, 2019, compared to negative $65 million as of June 30, 2019.
Accrued expenses as of September 30, 2019, were $1,748 million, compared to $2,335 million as of June 30, 2019. The lower accrued expenses in the third quarter of 2019 resulted mainly from a reclassification of provisions made under legal settlements and loss contingencies in the second quarter of 2019 to long-term liabilities.
Investment in property, plant and equipment in the third quarter of 2019 was approximately $169 million, compared to $112 million in the second quarter of 2019. Depreciation in the third quarter of 2019 was $151 million, compared to $153 million in the second quarter of 2019.
Cash and cash equivalents and short-term and long-term investments as of September 30, 2019 were $1,301 million, compared to $2,232 million as of June 30, 2019. The decrease in the third quarter of 2019 was mainly due to repayment at maturity of our $1,556 million 1.7% senior note in July 2019, partially offset by cash generated during the quarter.
Our cash on hand that is not used for ongoing operations is generally invested in bank deposits as well as liquid securities that bear fixed and floating rates.
Our principal sources of short-term liquidity are our cash on hand, existing cash investments, liquid securities and available credit facilities, primarily our $2.3 billion revolving credit facility (“RCF”).
In April 2019, we entered into a $2.3 billion unsecured syndicated RCF, which replaced the previous $3 billion revolving credit facility. The RCF contains certain covenants, including certain limitations on incurring liens and indebtedness and maintenance of certain financial ratios, including the requirement to maintain compliance with a net debt to EBITDA ratio, which becomes more restrictive over time. The net debt to EBITDA ratio limit is 6.25x 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 September 30, 2019, $100 million were outstanding under the RCF. As of the date of this quarterly report on Form 10-Q, no amounts are outstanding under the RCF. Based on current and forecasted results, we expect that we will not exceed the financial covenant thresholds set forth in the RCF within one year from the date the financial statements are issued.
Under specified circumstances, including
non-compliance
with any of the covenants described above and the unavailability of any waiver, amendment or other modification thereto, we will not be able to borrow under the RCF. Additionally, violations of the covenants, under the above-mentioned circumstances, would result in an event of default in all borrowings under the RCF and, when greater than a specified threshold amount as set forth in each series of senior notes is outstanding, could lead to an event of default under our senior notes due to cross acceleration provisions.
We expect that we will continue to have sufficient cash resources to support our debt service payments and all other financial obligations within one year from the date that the financial statements are issued.
Debt Balance and Movements
As of September 30, 2019, our debt was $26,942 million, compared to $28,726 million as of June 30, 2019. The decrease was mainly due to repayment at maturity of our $1,556 million 1.7% senior notes, as well as exchange rate fluctuations.
During the first quarter of 2019, we repurchased and canceled approximately $126 million principal amount of our $1,700 million 1.7% senior notes due July 2019.
During the second quarter of 2019, we repurchased and canceled approximately $18 million principal amount of our $1,574 million 1.7% senior notes due July 2019.
In July 2019, we repaid at maturity our $1,556 million 1.7% senior notes.
During the third quarter of 2019, we borrowed $500 million under the RCF and repaid $400 million of such borrowings. As of September 30, 2019, $100 million was outstanding under the RCF. As of the date of this Quarterly Report on Form
10-Q,
no amounts were outstanding under the RCF.
Our debt as of September 30, 2019 was effectively denominated in the following currencies: 65% in U.S. dollars, 32% in euros and 3% in Swiss francs.
The portion of total debt classified as short-term as of September 30, 2019 was 12%, compared to 10% as of June 30, 2019.
Our financial leverage was 64% as of September 30, 2019, a slight decrease compared to 65% as of June 30, 2019.
Our average debt maturity was approximately 6.4 years as of September 30, 2019, compared to 6.3 years as of June 30, 2019.
Total equity was $14,925 million as of September 30, 2019, compared to $15,251 million as of June 30, 2019. The decrease was mainly due to $307 million of net loss and the negative impact of $138 million from exchange rate fluctuations, partially offset by $87 million of unrealized gain from derivative financial instruments in the third quarter of 2019.
Exchange rate fluctuations affected our balance sheet, as approximately 36% of our net assets in the third quarter of 2019 (including both
non-monetary
and monetary assets) were in currencies other than the U.S. dollar. When compared to June 30, 2019, changes in currency rates had a negative impact of $138 million on our equity as of September 30, 2019, mainly due to the changes in value against the U.S. dollar of: the Polish zloty by 7%, the Chilean peso by 7%, the euro by 4%, the Bulgarian lev by 4% and the British pound by 3%. All comparisons are on a
quarter-end
to
quarter-end
basis.
Cash flow generated from operating activities during the third quarter of 2019 was $325 million, compared to $421 million in the third quarter of 2018. The decrease in the third quarter of 2019 was mainly due to lower revenues and a reduction in sales reserves associated with the revenue decline.
Cash flow generated from operating activities in the third quarter of 2019, net of cash received for capital investments and beneficial interest collected in exchange for securitized trade receivables, was $551 million, compared to $704 million in the third quarter of 2018. The decrease in cash flow was mainly due to the reasons mentioned above, as well as higher capital investments during the third quarter of 2019 compared to the third quarter of 2018.
We have not paid dividends on our ordinary shares or ADSs since December 2017.
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. TRUXIMA is expected to launch in the U.S. in November 2019.
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 a
pre-agreed
return.
We are committed to pay royalties to owners of
know-how,
partners in alliances and certain other arrangements, and to parties that financed R&D at a wide range of rates as a percentage of sales of certain products, as defined in the agreements. In some cases, the royalty period is not defined; in other cases, royalties will be paid over various periods not exceeding 20 years.
In connection with certain development, supply and marketing, and research and collaboration or services agreements, we are required to indemnify, in unspecified amounts, the parties to such agreements against third-party claims relating to (i) infringement or violation of intellectual property or other rights of such third party; or (ii) damages to users of the related products. Except as described in our financial statements, we are not aware of any material pending action that may result in the counterparties to these agreements claiming such indemnification.
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 Form
10-K
for the year ended December 31, 2018, other than as set forth below.
For a description of our new revolving credit facility entered into in April 2019, see “—Liquidity and Capital Resources” above.
Supplemental
Non-GAAP
Income Data
We utilize certain
non-GAAP
financial measures to evaluate performance, in conjunction with other performance metrics. The following are examples of how we utilize the
non-GAAP
measures:
| | • | our management and Board of Directors use the non-GAAP measures to evaluate our operational performance, to compare against work plans and budgets, and ultimately to evaluate the performance of management; |
| | • | our annual budgets are prepared on a non-GAAP basis; and |
| | • | senior management’s annual compensation is derived, in part, using these non-GAAP measures. While qualitative factors and judgment also affect annual bonuses, the principal quantitative element in the determination of such bonuses is performance targets tied to the work plan, which is based on thenon-GAAP presentation set forth below. |
Non-GAAP
financial measures have no standardized meaning and accordingly have limitations in their usefulness to investors. We provide such
non-GAAP
data because management believes that such data provide useful information to investors. However, investors are cautioned that, unlike financial measures prepared in accordance with U.S. GAAP,
non-GAAP
measures may not be comparable with the calculation of similar measures for other companies. These
non-GAAP
financial measures are presented solely to permit investors to more fully understand how management assesses our performance. The limitations of using
non-GAAP
financial measures as performance measures are that they provide a view of our results of operations without including all events during a period and may not provide a comparable view of our performance to other companies in the pharmaceutical industry.
Investors should consider
non-GAAP
financial measures in addition to, and not as replacements for, or superior to, measures of financial performance prepared in accordance with GAAP.
In arriving at our
non-GAAP
presentation, we exclude items that either have a
non-recurring
impact on the income statement or which, in the judgment of our management, are items that, either as a result of their nature or size, could, were they not singled out, potentially cause investors to extrapolate future performance from an improper base. In addition, we also exclude equity compensation expenses to facilitate a better understanding of our financial results, since we believe that such exclusion is important for understanding the trends in our financial results and that these expenses do not affect our business operations. While not all inclusive, examples of these items include:
| | • | amortization of purchased intangible assets; |
| | • | legal settlements and/or loss contingencies, due to the difficulty in predicting their timing and scope; |
| | • | impairments of long-lived assets, including intangibles, property, plant and equipment and goodwill; |
| | • | restructuring expenses, including severance, retention costs, 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- or divestment- related items, including changes in contingent consideration, integration costs, banker and other professional fees, inventory step-up andin-process R&D acquired in development arrangements; |
| | • | expenses related to our equity compensation; |
| | • | significant one-time financing costs and devaluation losses; |
| | • | deconsolidation charges; |
| | • | other awards or settlement amounts, either paid or received; |
| | • | other exceptional items that we believe are sufficiently large that their exclusion is important to facilitate an understanding of trends in our financial results, such as impacts due to changes in accounting, significant costs for remediation of plants, such as inventory write-offs or related consulting costs, or other unusual events; and |
| | • | corresponding tax effects of the foregoing items. |
The following tables present supplemental
non-GAAP
data, in U.S. dollar, which we believe facilitates an understanding of the factors affecting our business. In these tables, we exclude the following amounts:
Non-GAAP
income taxes for the third quarter of 2019 were $183 million, or 22%, on
pre-tax
non-GAAP
income of $843 million.
Non-GAAP
income taxes in the third quarter of 2018 were $85 million, or 10%, on
pre-tax
non-GAAP
income of $868 million. Our
non-GAAP
tax rate for the third quarter of 2019 was mainly affected by legal settlements with low corresponding tax effect, interest expense disallowance and other changes to tax positions and deductions.
Non-GAAP
income taxes for the first nine months of 2019 were $442 million, or 18%, on
pre-tax
non-GAAP
income of $2,454 million.
Non-GAAP
income taxes in the first nine months of 2018 were $423 million, or 14% on
pre-tax
non-GAAP
income of $3,100 million.
We expect our annual
non-GAAP
tax rate for 2019 to be 18%, which is higher than our previous projections and our
non-GAAP
tax rate for 2018. This is due to legal settlements with low corresponding tax effect, interest expense disallowance and other changes to tax positions and deductions. Our
non-GAAP
tax rate for 2018 was 14%.
Off-Balance
Sheet Arrangements
Except for securitization transactions, which are disclosed in note 16(d) to our consolidated financial statements included in our Annual Report on Form
10-K
for the year ended December 31, 2018, we do not have any material
off-balance
sheet arrangements.
Critical Accounting Policies
For a summary of our significant accounting policies, see note 1 to our consolidated financial statements and “Critical Accounting Policies” included in our Annual Report on Form
10-K
for the year 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 market risk as set forth in Item 7A to our Annual Report on Form 10-K for the year ended December 31, 2018.
| ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Teva maintains “disclosure controls and procedures” (as defined in Rules
13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended) that are designed to provide reasonable assurance that information required to be disclosed in Teva’s reports filed or submitted 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 Teva’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 September 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 over Financial Reporting
In the third quarter of 2019 Teva completed the implementation of a company-wide enterprise resource planning (ERP) system in the U.S. to upgrade certain operational and financial processes. In connection with this ERP implementation, there have been changes in internal control over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
