On May 2, 2019 Teva Pharmaceutical Industries Ltd. (NYSE: TEVA, TASE: TEVA) reported results for the quarter ended March 31, 2019 (Press release, Teva, MAY 2, 2019, View Source [SID1234535652]).
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Mr. Kåre Schultz, Teva’s President and CEO, said, "The second year of our two-year restructuring program got off to a promising start. We are on track to reduce our total cost base by $3 billion by the end of 2019 and we have achieved a reduction of $2.5 billion to date, while continuing to lower our debt. "
Mr. Schultz continued: "We faced the expected loss of exclusivities of key products COPAXONE and ProAir to generic competition. Our focus is on stabilizing our global generics business and ensuring the success of our long-term organic growth drivers, especially AJOVY and AUSTEDO. Both products continue to gain momentum since their initial launches and we are making the necessary investments to be able to bring them to markets outside of the U.S. as well as explore additional indications."
First Quarter 2019 Consolidated Results
Revenues in the first quarter of 2019 were $4,295 million, a decrease of 15%, or 12% in local currency terms, compared to the first quarter of 2018, mainly due to generic competition to COPAXONE and a decline in revenues from our respiratory products and U.S. generics business.
Exchange rate differences between the first quarter of 2019 and the first quarter of 2018 negatively impacted our revenues and GAAP operating income by $177 million and $49 million, respectively. Our non-GAAP operating income was negatively impacted by $58 million.
GAAP gross profit was $1,856 million in the first quarter of 2019, a decrease of 20% compared to the first quarter of 2018. GAAP gross profit margin was 43.2% in the first quarter of 2019, compared to 45.7% in the first quarter of 2018. Non-GAAP gross profit was $2,150 million in the first quarter of 2019, a decline of 18% from the first quarter of 2018. Non-GAAP gross profit margin was 50.1% in the first quarter of 2019, compared to 51.7% in the first quarter of 2018. The decrease in gross profit margin was mainly due to lower profitability in North America resulting mainly from a decline in COPAXONE revenues due to generic competition and lower revenues of certain other specialty products.
Research and Development (R&D) expenses in the first quarter of 2019 were $261 million, a decrease of 18% compared to the first quarter of 2018. Non-GAAP R&D expenses were $255 million, or 5.9% of quarterly revenues in the first quarter of 2019, compared to $289 million, or 5.7%, in the first quarter of 2018. The decrease in R&D expenses resulted primarily from pipeline optimization, phase 3 studies that have ended and related headcount reductions.
Selling and Marketing (S&M) expenses in the first quarter of 2019 were $648 million, a decrease of 12% compared to the first quarter of 2018. Non-GAAP S&M expenses were $602 million, or 14.0% of quarterly revenues, in the first quarter of 2019, compared to $682 million, or 13.5%, in the first quarter of 2018. The decrease was mainly due to cost reduction and efficiency measures as part of the restructuring plan.
General and Administrative (G&A) expenses in the first quarter of 2019 were $292 million, a decrease of 11% compared to the first quarter of 2018. Non-GAAP G&A expenses were $280 million, or 6.5% of quarterly revenues, in the first quarter of 2019, compared to $322 million, or 6.4%, in the first quarter of 2018. The decrease was mainly due to cost reduction and efficiency measures as part of the restructuring plan.
GAAP other income in the first quarter of 2019 was $6 million, compared to $203 million in the first quarter of 2018. Non-GAAP other income in the first quarter of 2019 was $6 million, compared to $110 million in the first quarter of 2018. Other income in the first quarter of 2018 was primarily the result of higher Section 8 recoveries from multiple cases in Canada and net gain related to the divestment of our women’s health business.
GAAP operating income in the first quarter of 2019 was $134 million, compared to $1,525 million in the first quarter of 2018. Non-GAAP operating income in the first quarter of 2019 was $1,019 million, a decrease of 29% compared to $1,435 million in the first quarter of 2018. The decrease in non-GAAP operating income was mainly due to lower profits in North America resulting mainly from a decline in COPAXONE revenues due to generic competition, lower revenues of certain other specialty products in North America and lower other income, partially offset by cost reductions and efficiency measures as part of the restructuring plan.
EBITDA (non-GAAP operating income, which excludes amortization and certain other items, as well as depreciation expenses) was $1,154 million in the first quarter of 2019, a decrease of 27% compared to $1,587 million in the first quarter of 2018.
GAAP Financial expenses were $218 million in the first quarter of 2019, compared to $271 million in the first quarter of 2018.
Non-GAAP financial expenses were $220 million in the first quarter of 2019, compared to $203 million in the first quarter of 2018. The increase in non-GAAP financial expenses was mainly due to increased interest expense as a result of the $4.4 billion bond issuance in March 2018, partially offset by reduced financial expenses as a result debt repayments during 2018.
In the first quarter of 2019, we recognized a tax expense of $9 million, or 11%, on pre-tax loss of $84 million. In the first quarter of 2018, we recognized a tax expense of $46 million on pre-tax income of $1,254 million. Our tax rate for the first quarter of 2019 was mainly affected by impairments, amortization and interest disallowance as a result of the U.S. Tax Cuts and Jobs Act. Non-GAAP income taxes for the first quarter of 2019 were $125 million, or 16%, on pre-tax non-GAAP income of $799 million. Non-GAAP income taxes in the first quarter of 2018 were $211 million, or 17%, on pre-tax non-GAAP income of $1,232 million. Our non-GAAP tax rate for the first quarter of 2019 was mainly affected by the mix of products sold in different geographies.
GAAP net loss attributable to ordinary shareholders and GAAP diluted loss per share in the first quarter of 2019 were $105 million and $0.10, respectively, compared to income of $1,055 million and diluted earnings per share of $1.03 in the first quarter of 2018. Non-GAAP net income attributable to ordinary shareholders and non-GAAP diluted EPS in the first quarter of 2019 were $654 million and $0.60, respectively, compared to $954 million and $0.94 in the first quarter of 2018.
The weighted average diluted outstanding shares used for the fully diluted share calculation on a GAAP basis for the three months ended March 31, 2019 and 2018 were 1,090 million and 1,020 million shares, respectively. In the first quarter of 2019, the weighted average outstanding shares for the fully diluted EPS calculation on a non-GAAP basis was 1,093 million, compared to 1,020 million in the first quarter of 2018. The increase was mainly due to the conversion of the mandatory convertible preferred shares to ordinary shares on December 17, 2018.
As of March 31, 2019 and 2018, the fully diluted share count for purposes of calculating our market capitalization was approximately 1,107 million and 1,095 million, respectively. Non-GAAP information: Net non-GAAP adjustments in the first quarter of 2019 were $759 million. Non-GAAP net income and non-GAAP EPS for the first quarter of 2019 were adjusted to exclude the following items:
Impairment of long-lived assets of $489 million comprised mainly of impairment of intangible assets of product rights and IPR&D assets related to the Actavis Generics acquisition;
Amortization of purchased intangible assets amounting to $283 million, of which $248 million is included in cost of goods sold and the remaining $35 million in S&M expenses;
Legal settlements and loss contingencies of $57 million;
Equity compensation expenses of $34 million;
Restructuring expenses of $32 million;
Contingent consideration income of $71 million;
Minority income of $8 million;
Other non-GAAP items of $59 million; and
Income tax of $116 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 first quarter of 2019 was $112 million, compared to $1,496 million in the first quarter of 2018.
Free cash flow (cash flow generated from operations net of capital expenditures and deferred purchase price cash component collected for securitized trade receivables) was $360 million in the first quarter of 2019, compared to $1,894 million in the first quarter of 2018. The higher free cash flow in the first quarter of 2018 was mainly due to the proceeds from the working capital adjustment with Allergan and the legal settlement with Rimsa. In addition, the lower cash flow in the first quarter of 2019 was mainly due to lower revenues from COPAXONE, as well as a decline in sales of certain other specialty products and generic products.
As of March 31, 2019, our debt was $28,624 million, compared to $28,916 million as of December 31, 2018, mainly due to favorable exchange rates, as well as the repurchase and cancellation of $126 million of our $1,700 million 1.7% senior notes due July 2019. The portion of total debt classified as short-term as of March 31, 2019 was 10%, compared to 8% as of December 31, 2018. The increase in 2019 was due to a net increase in current maturities.
Segment Results for the First Quarter 2019
North America Segment
Our North America segment includes the United States and Canada.
Generic products revenues in our North America segment in the first quarter of 2019 decreased by 11% to $966 million, compared to the first quarter of 2018, mainly due to market dynamics, price erosion in our U.S. generics business and portfolio optimization, partially offset by new generic product launches.
In the first quarter of 2019, we led the U.S. generics market in total prescriptions and new prescriptions, with approximately 436 million total prescriptions (based on trailing twelve months), representing 12% of total U.S. generic prescriptions according to IQVIA data.
COPAXONE revenues in our North America segment in the first quarter of 2019 decreased by 56% to $208 million, compared to the first quarter of 2018, mainly due to generic competition in the United States.
COPAXONE revenues in the United States were $194 million in the first quarter of 2019.
BENDEKA and TREANDA combined revenues in our North America segment in the first quarter of 2019 decreased by 33% to $122 million, compared to the first quarter of 2018, mainly due to lower volumes and lower pricing, resulting partly from the June 2018 launch of a ready-to-dilute bendamustine hydrochloride by Eagle Pharmaceuticals, Inc.
ProAir revenues in our North America segment in the first quarter of 2019 decreased by 55% to $59 million, compared to the first quarter of 2018, mainly due to lower volumes and lower net pricing. In January 2019, we launched our own ProAir authorized generic in the United States, following the launch of a generic version of Ventolin HFA, another albuterol inhaler. Revenues from our ProAir HFA authorized generic are included in "generic products" above.
QVAR revenues in our North America segment in the first quarter of 2019 decreased by 41% to $64 million, compared to the first quarter of 2018. The decrease in sales in the first quarter of 2019 was mainly due to higher than normal volumes during the first quarter of 2018 in connection with the launch of QVAR RediHaler and lower net pricing.
AJOVY revenues in our North America segment in the first quarter of 2019 were $20 million. AJOVY was approved by the FDA and launched in the United States in September 2018 for the preventive treatment of migraine in adults.
AUSTEDO revenues in our North America segment in the first quarter of 2019 were $74 million, compared to $30 million in the first quarter of 2018.
Anda revenues in our North America segment increased by 14% to $379 million in the first quarter of 2019, compared to the first quarter of 2018 mainly due to higher volumes.
North America Gross Profit
Gross profit from our North America segment in the first quarter of 2019 was $1,039 million, a decrease of 26% compared to $1,403 million in the first quarter of 2018. The decrease was mainly due to lower revenues from COPAXONE, as well as a decline in sales of certain other specialty products and generic products, partially offset by higher sales of AUSTEDO and AJOVY.
Gross profit margin for our North America segment in the first quarter of 2019 decreased to 50.8%, compared to 55.5% in the first quarter of 2018. The decrease was mainly due to lower revenues from COPAXONE and certain other specialty products, partially offset by generic products and Anda.
North America Profit
Profit from our North America segment in the first quarter of 2019 was $498 million, a decrease of 46% compared to $915 million in the first quarter of 2018. The decrease was mainly due to lower revenues from COPAXONE, a decline in sales of certain other specialty products and generic products and lower other income, partially offset by cost reductions and efficiency measures as part of the restructuring plan.
Generic products revenues in our Europe segment in the first quarter of 2019, including OTC products, decreased by 8% to $919 million, compared to the first quarter of 2018. In local currency terms, revenues were flat compared to the first quarter of 2018, mainly due to the loss of revenues from the termination of the PGT joint venture, partially offset by new generic product launches.
COPAXONE revenues in our Europe segment in the first quarter of 2019 decreased by 26% to $114 million, compared to the first quarter of 2018. In local currency terms, revenues decreased by 20%, mainly due to price reductions resulting from the entry of competing glatiramer acetate products.
Respiratory products revenues in our Europe segment in the first quarter of 2019 decreased by 19% to $91 million, compared to the first quarter of 2018. In local currency terms, revenues decreased by 13%, mainly due to lower volumes in the U.K.
Europe Gross Profit
Gross profit from our Europe segment in the first quarter of 2019 was $730 million, a decrease of 8% compared to $792 million in the first quarter of 2018. The decrease was mainly due to a decline in COPAXONE revenues, the loss of revenues resulting from the sale of our women’s health business and the impact of currency fluctuations, partially offset by new generic product launches and lower cost of goods sold.
Gross profit margin for our Europe segment in the first quarter of 2019 increased to 57.8%, compared to 55.0% in the first quarter of 2018. The increase was mainly due to the termination of the PGT joint venture.
Europe Profit
Profit from our Europe segment in the first quarter of 2019 was $403 million, an increase of 7% compared to $377 million in the first quarter of 2018. The increase was mainly due to lower cost of goods sold related to the termination of the PGT joint venture and 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 Israel, Japan and Russia.
The following table presents revenues, expenses and profit for our International Markets segment for the three months ended March 31, 2019 and 2018:
Generic products revenues in our International Markets segment in the first quarter of 2019, which include OTC products, decreased by 10% to $441 million, compared to the first quarter of 2018. In local currency terms, revenues decreased by 1%, mainly due to lower sales in Japan resulting from regulatory pricing reductions and generic competition to off-patent products, partially offset by higher sales in Russia.
COPAXONE revenues in our International Markets segment in the first quarter of 2019 decreased by 18% to $13 million, compared to the first quarter of 2018. In local currency terms, revenues increased by 3%.
Distribution revenues in our International Markets segment in the first quarter of 2019 decreased by 1% to $151 million, compared to the first quarter of 2018. In local currency terms, revenues increased by 4%.
International Markets Gross Profit
Gross profit from our International Markets segment in the first quarter of 2019 was $269 million, a decrease of 14% compared to $313 million in the first quarter of 2018.
Gross profit margin for our International Markets segment in the first quarter of 2019 decreased to 40.3%, compared to 41.8% in the first quarter of 2018. The decrease was mainly due to lower sales in Japan, partially offset by higher sales in Russia.
International Markets Profit
Profit from our International Markets segment in the first quarter of 2019 was $97 million, a decrease of 20% compared to $122 million in the first quarter of 2018. The decrease was mainly due to lower sales in Japan resulting from regulatory pricing reductions and generic competition to off-patent products, partially offset by higher sales in Russia and cost reductions and efficiency measures as part of the restructuring plan.
Other Activities
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 first quarter of 2019 were $317 million a decrease of 7% compared to the first quarter of 2018. In local currency terms, revenues decreased by 5%.
API sales to third parties in the first quarter of 2019 were $187 million, an increase of 4% compared to the first quarter of 2018. In local currency terms, revenues increased by 5%.
Conference Call
Teva will host a conference call and live webcast along with a slide presentation on Thursday, May 2, 2019 at 8:00 a.m. ET to discuss its first quarter 2019 results and overall business environment. A question & answer session will follow.
United States 1 (866) 966-1396
International +44 (0) 2071 928000
Israel 1 (809) 203-624
For a list of other international toll-free numbers, click here.
Passcode: 9470199
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, 2019, 9:00 a.m. ET by calling United States 1 (866) 331-1332 or International +44 (0) 3333009785; passcode: 9470199.