On August 2, 2018 Teva Pharmaceutical Industries Ltd. (NYSE: TEVA, TASE: TEVA) reported results for the quarter ended June 30, 2018 (Press release, Teva, AUG 2, 2018, View Source [SID1234528342]).
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Mr. Kåre Schultz, Teva’s President and CEO, said, "I am satisfied with our progress in the second quarter. The restructuring program is on schedule, we have already achieved a significant cost base reduction towards our target for the year and we continue to reduce our net debt. COPAXONE maintained its market share and AUSTEDO continued to show solid growth. Given the second quarter results, we have decided to raise our 2018 full year guidance." Mr. Schultz continued, "Our PDUFA action date for fremanezumab is set for mid-September and we are preparing to launch this important product once approved."
Second Quarter 2018 Consolidated Results
Revenues in the second quarter of 2018 were $4.7 billion, a decrease of 18%, or 19% in local currency terms, compared to the second quarter of 2017, mainly due to continued price erosion in our U.S. generics business, generic competition to COPAXONE and loss of revenues following the divestment of certain products and discontinuation of certain activities.
Exchange rate differences between the second quarter of 2018 and the second quarter of 2017 positively impacted our revenues by $92 million, our GAAP operating income by $14 million and our non-GAAP operating income by $19 million.
GAAP gross profit was $2.1 billion in the second quarter of 2018, a decrease of 28% compared to the second quarter of 2017. GAAP gross profit margin was 43.8% in the second quarter of 2018, compared to 49.9% in the second quarter of 2017.
Non-GAAP gross profit was $2.4 billion in the second quarter of 2018, a decline of 27% from the second quarter of 2017. Non-GAAP gross profit margin was 50.4% in the second quarter of 2018, compared to 57.0% in the second quarter of 2017. The decrease in gross profit margin, on both a GAAP and a non-GAAP basis, resulted primarily from price erosion in our U.S. generics business and a decline in COPAXONE revenues due to generic competition, as well as the loss of revenue following the sale of our women’s health business.
Research and Development (R&D) expenses for the second quarter of 2018 were $290 million, a decrease of 38% compared to the second quarter of 2017. R&D expenses excluding equity compensation expenses and other R&D expenses were $281 million, or 6.0% of quarterly revenues in the second quarter of 2018, compared to $433 million, or 7.6%, in the second quarter of 2017. The decrease in R&D expenses resulted primarily from pipeline optimization, phase 3 studies that ended and related headcount reduction.
Selling and Marketing (S&M) expenses in the second quarter of 2018 were $710 million, a decrease of 25% compared to the second quarter of 2017. S&M expenses excluding amortization of purchased intangible assets, equity compensation expenses and other expenses were $662 million, or 14.1% of revenues, in the second quarter of 2018, compared to $891 million, or 15.6% of revenues, in the second quarter of 2017. The decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.
General and Administrative (G&A) expenses in the second quarter of 2018 were $316 million, a decrease of 12.9% compared to the second quarter of 2017. G&A expenses, excluding equity compensation expenses and other items, were $292 million in the second quarter of 2018, or 6.2% of quarterly revenues, compared to $365 million, or 6.4% in the second quarter of 2017. The decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.
GAAP other income in the second quarter of 2018 was $96 million compared to $24 million in the second quarter of 2017. Non-GAAP other income in the second quarter of 2018 was $106 million, an increase of 324% compared to $25 million in the second quarter of 2017. The increase in other income was mainly due to legal recovery of lost profits, where U.S. patent infringement litigation previously prevented a product’s sales.
GAAP operating loss in the second quarter of 2018 was $14 million, compared to $5.7 billion in the second quarter of 2017. Non-GAAP operating income in the second quarter of 2018 was $1.2 billion, a decrease of 22% compared to the second quarter of 2017. Non-GAAP operating margin was 26.3% in the second quarter of 2018 compared to 27.9% in the second quarter of 2017.
EBITDA (non-GAAP operating income, which excludes amortization and certain other items, as well as excluding depreciation expenses) was $1.4 billion in the second quarter of 2018, down 20% compared to $1.7 billion in the second quarter of 2017.
GAAP financial expenses for the second quarter of 2018 were $236 million, compared to $238 million in the second quarter of 2017. Non-GAAP financial expenses were $238 million in the second quarter of 2018, compared to $235 million in the second quarter of 2017. In the second quarter of 2018, we recognized a tax benefit of $76 million, or 30%, on pre-tax loss of $250 million. In the second quarter of 2017, we recognized a tax benefit of $22 million, on pre-tax loss of $6 billion. Non-GAAP income taxes for the second quarter of 2018 were $127 million, or 13%, on pre-tax non-GAAP income of $1.0 billion. Non-GAAP income taxes in the second quarter of 2017 were $230 million, or 17%, on pre-tax non-GAAP income of $1.4 billion. Our tax rate for the second quarter of 2018 on both GAAP and non-GAAP basis was mainly affected by the mix of products sold in different geographies.
We expect our annual non-GAAP tax rate for 2018 to be 15%, lower than our previous estimates. This is due to changes in the geographical mix of income we expect to earn this year. Our non-GAAP tax rate for 2017 was 15%.
GAAP net loss attributable to ordinary shareholders and GAAP diluted loss per share in the second quarter of 2018 were $241 million and $0.24, respectively, compared to $6.0 billion and $5.94, respectively, in the second quarter of 2017.
Non-GAAP net income attributable to ordinary shareholders and non-GAAP diluted EPS in the second quarter of 2018 were $794 million and $0.78, respectively, compared to $1,035 million and $1.02 in the second quarter of 2017.
For the second quarter of 2018, the weighted average outstanding shares for the fully diluted EPS calculation on a GAAP basis was 1,018 million, compared to 1,017 million for the second quarter of 2017. The weighted average outstanding shares for the fully diluted EPS calculation on a non-GAAP basis was 1,021 million, compared to 1,017 million for the second quarter of 2017. Additionally, no account was taken of the potential dilution by the mandatory convertible preferred shares, amounting to 63 million shares (including shares that may be issued due to unpaid dividends to date) for the three months ended June 30, 2018 and 59 million shares for the three months ended June 30 2017, as well as for the convertible senior debentures for the respective periods, since both had an anti-dilutive effect on loss per share.
Non-GAAP information: Net non-GAAP adjustments in the second quarter of 2018 were negative $1,035 million. Non-GAAP net income and non-GAAP EPS for the quarter were adjusted to exclude the following items:
Impairment of long-lived assets and goodwill of $668 million, comprised mainly of impairment of intangible assets of product rights and IPR&D assets related to the Actavis Generics acquisition, goodwill impairment related to Mexico reporting unit and impairment related to the closure of manufacturing sites and other fixed assets.
Amortization of purchased intangible assets totaling $302 million, of which $261 million is included in cost of goods sold and the remaining $41 million in S&M expenses;
Restructuring expenses of $107 million;
Equity compensation expenses of $47 million;
Contingent consideration of $47 million mainly related to a court decision regarding the status of Bendeka as an exclusive orphan drug;
Legal settlements and loss contingencies of $20 million;
Other non-GAAP items of $47 million; and
Tax benefit of $203 million.
Teva believes that excluding such items facilitates investors’ understanding of its business. See the attached tables for a reconciliation of the GAAP results to the adjusted non-GAAP figures. Investors should consider non-GAAP financial measures in addition to, and not as replacement for, or superior to, measures of financial performance prepared in accordance with GAAP.
Cash flow generated from operations during the second quarter of 2018 was $162 million, compared to $435 million in the second quarter of 2017. The decrease was mainly due to higher beneficial interest collected in exchange for securitized trade receivables and higher payments related to the restructuring plan during the second quarter of 2018.
Free cash flow, excluding net capital expenditures, was $0.6 billion in the second quarter of 2018 flat compared to $0.6 billion in the second quarter of 2017.
As of June 30, 2018, our debt was $30.2 billion, compared to $30.8 billion as of March 31, 2018. The decrease was mainly due to exchange rate fluctuations.
The portion of total debt classified as short-term as of June 30, 2018 was 4%, unchanged compared to March 31, 2018.
Segment Results for the Second Quarter 2018
Due to the organizational changes announced in November 2017, we began reporting our financial results under a new structure in the first quarter of 2018, consisting of the following 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) International Markets segment (previously named "Growth Markets" segment), which includes all countries other than those in our North America and Europe segments.
In addition to these three segments, we have other activities, primarily the sale of API to third parties and certain contract manufacturing services.
Segment profit is comprised of gross profit for the segment, less R&D, S&M, G&A expenses and other income related to each segment. Segment profit does not include amortization and certain other items.
North America Segment
Our North America segment includes the United States and Canada.
Revenues from our North America segment in the second quarter of 2018 were $2.3 billion, a decrease of $906 million, or 29%, compared to the second quarter of 2017, mainly due to a decline in revenues of COPAXONE as well as an equally significant decline in revenues in our U.S. generics business and the loss of revenues from the sale of our women’s health business, partially offset by higher revenues from AUSTEDO and our distribution business.
Revenues in the United States, our largest market, were $2.1 billion in the second quarter of 2018, a decrease of $899 million, or 30%, compared to the second quarter of 2017.
Generic products revenues in our North America segment in the second quarter of 2018 decreased by 29% to $947 million, compared to the second quarter of 2017, mainly due to continued price erosion in our U.S. generics business, additional competition to methylphenidate extended-release tablets (Concerta authorized generic) and portfolio optimization.
In the second quarter of 2018, we led the U.S. generics market in total prescriptions and new prescriptions, with approximately 576 million total prescriptions, representing 15% of total U.S. generic prescriptions according to IQVIA data.
COPAXONE revenues in our North America segment in the second quarter of 2018 decreased by 46% to $464 million, of which $448 million were generated in the United States, compared to the second quarter of 2017, mainly due to generic competition in the United States.
BENDEKA and TREANDA combined revenues in our North America segment in the second quarter of 2018 decreased by 2% to $160 million, compared to the second quarter of 2017, mainly due to lower volumes, partially offset by a higher pricing.
ProAir revenues in our North America segment in the second quarter of 2018 decreased by 7% to $115 million, compared to the second quarter of 2017, mainly due to lower net pricing.
QVAR revenues in our North America segment in the second quarter of 2018 decreased by 69% to $30 million, compared to the second quarter of 2017. The decrease in sales was mainly due to lower volumes in this quarter following wholesaler stocking in the first quarter of 2018 in connection with the launch of QVAR RediHaler. QVAR maintained its second-place position in the inhaled corticosteroids category in the United States.
AUSTEDO revenues in our North America segment in the second quarter of 2018 were $44 million. AUSTEDO was approved by the FDA for the treatment of chorea associated with Huntington disease and was launched in the United States in April 2017. In August 2017, the FDA also approved AUSTEDO for the treatment of tardive dyskinesia.
Distribution revenues in our North America segment in the second quarter of 2018 generated by Anda increased by 16% to $320 million, compared to the second quarter of 2017.
North America Gross Profit
Gross profit from our North America segment in the second quarter of 2018 was $1.2 billion, a decrease of 42% compared to $2.1 billion in the second quarter of 2017. The decrease was mainly due to lower revenues from COPAXONE and generic products.
Gross profit margin for our North America segment in the second quarter of 2018 decreased to 53.2%, compared to 64.9% in the second quarter of 2017. This decrease was mainly due to lower COPAXONE revenues and continued price erosion of generic products.
North America Profit
Profit from our North America segment in the second quarter of 2018 was $722 million, a decrease of 42% compared to $1.3 billion in the second quarter of 2017. The decrease was mainly due to lower revenues from COPAXONE and generic products, partially offset by cost reductions and efficiency measures as part of the restructuring plan and higher other income.
Europe Segment
Our Europe segment includes the European Union and certain other European countries.
neric products revenues in our Europe segment in the second quarter of 2018, including OTC products, increased by 10% to $907 million, compared to the second quarter of 2017. In local currency terms, revenues increased by 3%, mainly due to new product launches, partially offset by price reductions.
COPAXONE revenues in our Europe segment in the second quarter of 2018 increased by 1% to $140 million, compared to the second quarter of 2017. In local currency terms, revenues decreased by 7%, mainly due to price reductions resulting from the entry of generic competition.
Respiratory products revenues in our Europe segment in the second quarter of 2018 increased by 26% to $106 million, compared to the second quarter of 2017. In local currency terms, revenues increased by 18%, mainly due to the launch of BRALTUS in 2017.
Europe Gross Profit
Gross profit from our Europe segment in the second quarter of 2018 was $731 million, an increase of 6% compared to $692 million in the second quarter of 2017. The increase was mainly due to the positive impact of currency fluctuations, partially offset by the loss of revenues from the sale of our women’s health business.
Gross profit margin for our Europe segment in the second quarter of 2018 increased to 55.0%, compared to 53.4% in the second quarter of 2017. This increase was mainly due to the closure of our distribution business in Hungary.
Europe Profit
Profit from our Europe segment in the second quarter of 2018 was $346 million, an increase of 58% compared to $219 million in the second quarter of 2017. The increase was mainly due to cost reductions and efficiency measures as part of the restructuring plan.
International Markets Segment
Our International Markets segment includes all countries other than those in our North America and Europe segments. The key markets in this segment are Japan, Israel and Russia.
Generic products revenues in our International Markets segment in the second quarter of 2018, which include OTC products, decreased by 11% to $537 million, compared to the second quarter of 2017. In local currency terms, revenues decreased by 9%, mainly due to lower sales in Russia and the effect of the deconsolidation of our subsidiaries in Venezuela.
COPAXONE revenues in our International Markets segment in the second quarter of 2018 decreased by 15% to $22 million, compared to the second quarter of 2017. In local currency terms, revenues decreased by 4%.
Distribution revenues in our International Markets segment in the second quarter of 2018 increased by 14% to $154 million, compared to the second quarter of 2017. In local currency terms, revenues increased by 14%, mainly due to higher sales in Israel.
International Markets Gross Profit
Gross profit from our International Markets segment in the second quarter of 2018 was $328 million, a decrease of 18% compared to $400 million in the second quarter of 2017. This decrease was mainly due to lower gross profit in Japan and Russia and the deconsolidation of our subsidiaries in Venezuela, partially offset by higher gross profit in Israel and certain Latin American markets.
Gross profit margin for our International Markets segment in the second quarter of 2018 decreased to 41.6%, compared to 45.2% in the second quarter of 2017.
International Markets Profit
Profit from our International Markets segment in the second quarter of 2018 was $139 million, compared to $121 million in the second quarter of 2017. The increase was mainly due to cost reductions and efficiency measures as part of the restructuring plan.
Profit as a percentage of International Markets revenues in the second quarter of 2018 was 18%, compared to 14% in the second quarter of 2017. This increase was mainly due to lower operating expenses as part of the restructuring plan.
During the fourth quarter of 2017, we deconsolidated our subsidiaries in Venezuela from our financial results. Consequently, results of operations of our subsidiaries in Venezuela are not included in the second quarter of 2018.
Other Activities
We have other sources of revenues, primarily the sale of API to third parties and certain contract manufacturing services. These other activities are not included in our North America, Europe or International Markets segments.
Our revenues from other activities in the second quarter of 2018 decreased by 13.5% to $321 million, compared to the second quarter of 2017. In local currency terms, revenues decreased by 16%, mainly due to lower API sales to third parties.
API sales to third parties in the second quarter of 2018 decreased by 9% to $186 million, compared to the second quarter of 2017. In local currency terms, revenues decreased by 9%.
These estimates reflect management’s current expectations for Teva’s performance in 2018. Actual results may vary, whether as a result of exchange rate differences, market conditions or other factors. In addition, the non-GAAP measures exclude the amortization of purchased intangible assets, costs related to certain regulatory actions, inventory step-up, legal settlements and reserves, impairments and related tax effects.
See "Non-GAAP Financial Measures" below.
Conference Call
Teva will host a conference call and live webcast along with a slide presentation on Thursday, August 2, 2018 at 8:00 a.m. ET to discuss its second quarter 2018 results and overall business environment. A question & answer session will follow.
United States 1-877-391-1148
International +44 (0) 1452 580733
For a list of other international toll-free numbers, click here.
Passcode: 6984104
A live webcast of the call will also be available on Teva’s website at: ir.tevapharm.com. Please log in at least 10 minutes prior to the conference call in order to download the applicable software.
Following the conclusion of the call, a replay of the webcast will be available within 24 hours on the Company’s website. The replay can also be accessed until August 30, 2018, 9:00 a.m. ET by calling United States 1 (866) 331-1332 or International +44 (0) 3333009785; passcode: 698410