On August 4, 2016 Teva Pharmaceutical Industries Ltd. (NYSE: TEVA) reported results for the quarter ended June 30, 2016 (Press release, Teva, AUG 4, 2016, View Source;p=RssLanding&cat=news&id=2192894 [SID:1234514316]).
Q2 2016
Revenues $5.0 billion
GAAP EPS $0.20
Non-GAAP EPS $1.25
Non-GAAP EPS adjusted to exclude the impact
of the December 2015 equity offerings
$1.43
On August 2, Teva completed the Actavis Generics acquisition
On August 3, Teva agreed to acquire Anda for $500 million
"We are pleased with our performance this quarter and the steps we are taking to transform our business, notably the recent completion of our acquisition of Actavis Generics and the proposed purchase of Anda Inc. We have brought together two leading businesses with complementary strengths, R&D capabilities, product pipelines and portfolios, geographical footprints, operational networks and cultures. The result is a stronger, more competitive Teva, well positioned to thrive in an evolving global marketplace," stated Erez Vigodman, President and CEO.
Vigodman continued, "Going forward we are focused on the integration of Actavis Generics, delivering on our operational and financial targets and on the ongoing development and commercialization of the more than 35 innovative products in our pipeline. We plan to use our strong cash flow to pay down debt and continue to invest in attractive specialty products. We are excited about our future and our ongoing pursuit to increase access to important medicines for patients around the world."
Second Quarter 2016 Results
Revenues in the second quarter of 2016 amounted to $5.0 billion, up 1% compared to the second quarter of 2015. Excluding the impact of foreign exchange fluctuations, revenues increased 4%.
Exchange rate differences between the second quarter of 2016 and the second quarter of 2015 reduced revenues by $141 million, GAAP operating income by $55 million and non-GAAP operating income by $52 million.
GAAP gross profit was $2.9 billion in the second quarter of 2016, down 1%, compared to the second quarter of 2015. GAAP gross profit margin was 57.1% in the quarter, compared to 58.4% in the second quarter of 2015. Non-GAAP gross profit was $3.2 billion in the second quarter of 2016, up 1% from the second quarter of 2015. Non-GAAP gross profit margin was 62.5% in the second quarter of 2016, compared to 62.8% in the second quarter of 2015.
Research and Development (R&D) expense (excluding equity compensation expenses and purchase of in-process R&D) in the second quarter of 2016 amounted to $370 million, compared to $357 million in the second quarter of 2015. R&D expenses were 7.3% of revenues in the quarter, compared to 7.2% in the second quarter of 2015. R&D expenses related to our generic medicines segment amounted to $125 million, compared to $134 million in the second quarter of 2015, a decrease of 7%. R&D expenses related to our specialty medicines segment amounted to $245 million, an increase of 11% compared to $220 million in the second quarter of 2015, mainly due to increased development costs related to assets acquired through the Labrys and Auspex transactions.
Selling and Marketing (S&M) expenses (excluding amortization of purchased intangible assets and equity compensation expenses) amounted to $898 million, or 17.8% of revenues, in the second quarter of 2016, compared to $846 million, or 17.0% of revenues, in the second quarter of 2015. S&M expenses related to our generic medicines segment amounted to $333 million, a decrease of 1% compared to $335 million in the second quarter of 2015, but an increase of 7% in local currency terms. The increase in local currency terms was mainly due to the additional costs related to our acquisition of Rimsa in the first quarter of 2016 and to the commencement of activities of our business venture in Japan. S&M expenses related to our specialty medicines segment amounted to $478 million, an increase of 5% in both U.S. dollar and local currency terms compared to $457 million in the second quarter of 2015, mainly due to increased royalties on sales.
General and Administrative (G&A) expenses (excluding equity compensation expenses) amounted to $299 million in the second quarter of 2016, or 5.9% of revenues, compared to $307 million and 6.2% in the second quarter of 2015.
GAAP operating income was $0.4 billion in the second quarter of 2016, down 45% compared to $0.7 billion in the second quarter of 2015. Quarterly non-GAAP operating income was $1.6 billion, down 2% compared to the second quarter of 2015.
EBITDA (non-GAAP operating income, which excludes amortization and certain other items, and excluding depreciation expenses for the period) amounted to $1.7 billion, down 1% compared to the second quarter of 2015.
GAAP financial expenses for the second quarter of 2016 amounted to $105 million, compared to $41 million in the second quarter of 2015. The increase in expenses is mainly the result of an impairment of our investment in Mesoblast. Non-GAAP financial expenses amounted to $6 million in the second quarter of 2016, compared to $41 million in the second quarter of 2015.
GAAP income tax expenses for the second quarter of 2016 amounted to $29 million, or 11% on pre-tax income of $256 million. In the second quarter of 2015, the provision for income taxes amounted to $88 million, or 14% on pre-tax income of $621 million. The provision for non-GAAP income taxes for the second quarter of 2016 amounted to $333 million on pre-tax non-GAAP income of $1.6 billion, for a quarterly tax rate of 21%. The provision for non-GAAP income taxes in the second quarter of 2015 was $345 million on pre-tax non-GAAP income of $1.6 billion, for a quarterly tax rate of 22%. While the tax rate may fluctuate quarterly, we expect our annual non-GAAP tax rate for 2016 to be 21%, similar to the rate in 2015.
For the second quarter of 2016, the weighted average outstanding shares for the fully diluted earnings per share calculation was 920 million on a GAAP basis and 979 million on a non-GAAP basis. The average weighted diluted shares outstanding used for the fully diluted share calculation for the second quarter of 2015 were 859 million shares, on both a GAAP and a non-GAAP basis. The increase in the number of shares resulted from our December 2015 equity offerings, with the number of shares on a non-GAAP basis including the potential dilution resulting from our mandatory convertible preferred shares, which had a dilutive effect on our non-GAAP earnings per share.
Excluding the impact of the December 2015 equity offerings to finance the Actavis Generics acquisition, the weighted average outstanding shares for the fully diluted earnings per share calculation on a non-GAAP basis for the second quarter of 2016 was 860 million shares.
As of June 30, 2016, the fully diluted share count for calculating Teva’s market capitalization was approximately 995 million shares.
GAAP net income attributable to Teva and GAAP diluted EPS were $254 million and $0.20, respectively, in the second quarter of 2016, compared to $539 million and $0.63, respectively, in the second quarter of 2015. Non-GAAP net income and non-GAAP diluted EPS were $1.2 billion and $1.25, respectively, in the second quarter of 2016, compared to $1.2 billion and $1.43 in the second quarter of 2015. Non-GAAP EPS adjusted to exclude the December 2015 equity offerings was $1.43.
Non-GAAP information: Net non-GAAP adjustments in the second quarter of 2016 amounted to $974 million. Non-GAAP net income and non-GAAP EPS for the quarter were adjusted to exclude the following items:
Impairment of long-lived assets of $572 million mainly related to Revascor and Zecuity;
Amortization of purchased intangible assets totaling $193 million, of which $146 million is included in cost of goods sold and the remaining $47 million in selling and marketing expenses;
Legal settlements and loss contingencies of $166 million mainly related to a settlement in principle reached in connection with the aripiprazole litigation;
Financial expenses of $99 million related to the impairment of our investment in Mesoblast;
Inventory step-up of $85 million;
Acquisition, integration and restructuring expenses of $82 million;
Other write-offs associated with the impairment of Zecuity and other items of $57 million;
Costs related to regulatory actions taken in facilities of $39 million;
Equity compensation of $28 million;
Minority interest adjustment of negative $43 million; and
Related tax benefit of $304 million.
The non-GAAP data presented by Teva are the results used by Teva’s management and board of directors to evaluate the operational performance of the company, to compare against the company’s work plans and budgets, and ultimately to evaluate the performance of management. Teva provides such non-GAAP data to investors as supplemental data and not in substitution or replacement for GAAP results, because management believes such data provides useful information to investors and facilitates investors’ understanding of its business. See the attached tables for a reconciliation of the U.S. GAAP results to the adjusted non-GAAP figures.
Cash flow from operations generated during the second quarter of 2016 amounted to $1.0 billion, a decrease of 35% compared to the second quarter of 2015. The decrease was mainly due to an increase in accounts receivables, net of SR&A, partially offset by an increase in accounts payable. Free cash flow, excluding net capital expenditures, amounted to $0.8 billion, a decrease of 40% compared to the second quarter of 2015.
Cash and investments at June 30, 2016 increased to $8.2 billion, compared to $7.2 billion at March 31, 2016.
Total shareholders’ equity was $32.0 billion at June 30, 2016, compared to $30.6 billion at March 31, 2016.
Segment Results for the Second Quarter 2016
Generic Medicines Segment
Three Months Ended June 30,
2016 2015
U.S.$ in millions / % of Segment Revenues
Revenues $ 2,294 100.0% $ 2,466 100.0%
Gross profit 1,072 46.7% 1,198 48.6%
R&D expenses 125 5.4% 134 5.4%
S&M expenses 333 14.5% 335 13.6%
Segment profit* $ 614 26.8% $ 729 29.6%
* Segment profit consists of gross profit for the segment, less R&D and S&M expenses related to the segment. Segment profit does not include G&A expenses, amortization and certain other items.
Generic Medicines Revenues
Generic medicines revenues in the second quarter of 2016 amounted to $2.3 billion, a decrease of 7% compared to the second quarter of 2015. In local currency terms, revenues decreased 4%.
Generic revenues consisted of:
U.S. revenues of $892 million, a decrease of 33% compared to the second quarter of 2015. The decrease resulted mainly from a decline in sales of aripiprazole (Abilify), esomeprazole (Nexium) and budesonide (Pulmicort) due to loss of exclusivity.
European revenues of $660 million, a decrease of 1%, in both U.S. dollar and local currency terms, compared to the second quarter of 2015. This resulted mainly from our strategy of pursuing profitable and sustainable business in the region along with higher API sales to third parties.
ROW revenues of $742 million, an increase of 56%, or 71% in local currency terms, compared to the second quarter of 2015. The increase in local currency terms was mainly due to higher revenues in Japan from our new business venture with Takeda, which commenced operations in April 2016, as well as an increase in revenues in Venezuela and Canada.
API sales to third parties of $207 million (which is included in the market revenues above), an increase of 13%, compared to the second quarter of 2015, with higher revenues in both Europe and the United States.
Generic medicines revenues comprised 46% of our total revenues in the quarter, compared to 50% in the second quarter of 2015.
Generic Medicines Gross Profit
Gross profit from our generic medicines segment in the second quarter of 2016 amounted to $1.1 billion, a decrease of 11% compared to the second quarter of 2015. The lower gross profit was mainly a result of the lower sales of aripiprazole (Abilify) and esomeprazole (Nexium) in the United States, which are both high gross profit products. This decrease was partially offset by higher gross profit of our ROW and European markets and of our API business. Gross profit margin for our generic medicines segment in the second quarter of 2016 decreased to 46.7%, from 48.6% in the second quarter of 2015.
Generic Medicines Profit
Our generic medicines segment generated profit of $614 million in the second quarter of 2016, a decrease of 16% compared to the second quarter of 2015. Generic medicines profitability as a percentage of generic medicines revenues was 26.8% in the second quarter of 2016, down from 29.6% in the second quarter of 2015. The decrease was primarily due to the lower gross profit of the segment.
Specialty Medicines Segment
Three Months Ended June 30,
2016 2015
U.S.$ in millions / % of Segment Revenues
Revenues $ 2,271 100.0% $ 2,090 100.0%
Gross profit 1,978 87.1% 1,808 86.5%
R&D expenses 245 10.8% 220 10.5%
S&M expenses 478 21.0% 457 21.9%
Segment profit* $ 1,255 55.3% $ 1,131 54.1%
* Segment profit is comprised of gross profit for the segment, less R&D and S&M expenses related to the segment. Segment profit does not include G&A expenses, amortization and certain other items.
Specialty Medicines Revenues
Specialty medicines revenues in the second quarter of 2016 amounted to $2.3 billion, an increase of 9% compared to the second quarter of 2015. U.S. specialty medicines revenues amounted to $1.8 billion, up 9% compared to the second quarter of 2015. European specialty medicines revenues amounted to $414 million, an increase of 10%, or 9% in local currency terms, compared to the second quarter of 2015. ROW specialty revenues amounted to $85 million, down 6%, though up 5% in local currency terms, compared to the second quarter of 2015.
Specialty medicines revenues comprised 45% of our total revenues in the quarter, compared to 42% in the second quarter of 2015.
The increase in specialty medicines revenues compared to the second quarter of 2015 was due to higher revenues in all our core therapeutic areas.
The following table presents revenues by therapeutic area and key products for our specialty medicines segment for the three months ended June 30, 2016 and 2015:
Three Months Ended
June 30,
Percentage
Change
2016 2015 2016 – 2015
U.S. $ in millions
CNS $ 1,415 $ 1,353 5%
Copaxone 1,141 1,054 8%
Azilect 108 105 3%
Nuvigil 51 91 (44%)
Respiratory 313 253 24%
ProAir 135 128 5%
QVAR 116 83 40%
Oncology 334 293 14%
Treanda and Bendeka 207 179 16%
Women’s Health 117 110 6%
Other Specialty 92 81 14%
Total Specialty Medicines $ 2,271 $ 2,090 9%
Global revenues of Copaxone (20 mg/mL and 40 mg/mL), the leading multiple sclerosis therapy in the U.S. and globally, amounted to $1.1 billion, an increase of 8% compared to the second quarter of 2015.
Copaxone revenues in the United States amounted to $955 million, an increase of 10% compared to the second quarter of 2015. The increase was mainly due to a reduction of sales in the Medicaid channel, resulting in both lower rebates in the current quarter and a positive change in the estimate for rebates in prior quarters, as well as the impact of a price increase of 7.9% in January 2016 on both Copaxone products. At the end of the second quarter of 2016, according to June 2016 IMS data, our U.S. market shares for the Copaxone products in terms of new and total prescriptions were 24.9% and 29.1%, respectively. Copaxone 40 mg/mL accounted for 82% of total Copaxone prescriptions in the U.S.
Copaxone revenues outside the United States amounted to $186 million, an increase of 1%, or 3% in local currency terms, compared to the second quarter of 2015 due to higher volumes in certain European and ROW markets.
Our global Azilect revenues amounted to $108 million, an increase of 3% compared to the second quarter of 2015. Global in-market sales decreased 9% due to generic competition in certain European markets.
Revenues of our respiratory products amounted to $313 million, up 24% compared to the second quarter of 2015. ProAir revenues in the quarter amounted to $135 million, up 5% compared to the second quarter of 2015, due to positive price effects, partially offset by lower volumes. QVAR global revenues amounted to $116 million in the second quarter of 2016, up 40% compared to the second quarter of 2015, mainly due to positive price effects.
Revenues of our oncology products amounted to $334 million in the second quarter of 2016, up 14% from the second quarter of 2015. Revenues of Treanda and Bendeka amounted to $207 million, an increase of 16% compared to the second quarter of 2015, mainly due to higher volumes sold.
Specialty Medicines Gross Profit
Gross profit from our specialty medicines segment amounted to $2.0 billion, an increase of $170 million compared to the second quarter of 2015. Gross profit margin for our specialty medicines segment in the second quarter of 2016 was 87.1%, compared to 86.5% in the second quarter of 2015.
Specialty Medicines Profit
Our specialty medicines segment profit amounted to $1.3 billion in the second quarter of 2016, up 11% compared to the second quarter of 2015, mainly due to higher gross profit, which was partially offset by increases in S&M and R&D expenses.
Specialty medicines profit as a percentage of segment revenues was 55.3% in the second quarter of 2016, up from 54.1% in the second quarter of 2015.
The following tables present details of our multiple sclerosis franchise and of our other specialty medicines for the three months ended June 30, 2016 and 2015:
Multiple Sclerosis
Three months ended June 30,
2016 2015
U.S.$ in millions / % of MS Revenues
Revenues $ 1,141 100.0% $ 1,054 100.0%
Gross profit 1,029 90.2% 953 90.4%
R&D expenses 20 1.8% 26 2.5%
S&M expenses 81 7.1% 88 8.3%
MS profit $ 928 81.3% $ 839 79.6%
Other Specialty
Three months ended June 30,
2016 2015
U.S.$ in millions / % of Other Specialty Revenues
Revenues $ 1,130 100.0% $ 1,036 100.0%
Gross profit 949 84.0% 855 82.5%
R&D expenses 225 19.9% 194 18.7%
S&M expenses 397 35.2% 369 35.6%
Other Specialty profit $ 327 28.9% $ 292 28.2%
Other Activities
Our OTC revenues related to PGT amounted to $262 million, an increase of 25% compared to $210 million in the second quarter of 2015. In local currency terms, revenues increased 58%, mainly due to inflation in Venezuela. PGT’s in-market sales amounted to $379 million in the second quarter of 2016, an increase of $54 million compared to the second quarter of 2015.
Other revenues amounted to $211 million in the second quarter of 2016, mostly from the distribution of third-party products in Israel and Hungary, compared to revenues of $200 million, in the second quarter of 2015.
FY 2016 Financial Outlook
We expect revenues for 2016 to be $22.0-22.5 billion.
Non-GAAP EPS for 2016 is expected to be $5.20-5.40, based on a weighted average number of shares of 1,021 million.
Cash flow from operating activities for 2016 is expected to be $5.7-6.1 billion.
These estimates reflect management’s current expectations for Teva’s performance in 2016. Actual results may vary, whether as a result of exchange rate differences, market conditions or other factors. In addition, the non-GAAP figures 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.
Dividends
On August 1, 2016, the Board of Directors declared a cash dividend of $0.34 per ordinary share for the second quarter of 2016. For holders of our ordinary shares that are traded on the Tel Aviv Stock Exchange, the dividend will be converted into new Israeli shekels based on the official exchange rate as of August 4, 2016. The record date will be August 22, 2016, and the payment date will be September 8, 2016. Tax will be withheld at a rate of 15%.
On August 1, 2016, the Board of Directors further declared a quarterly cash dividend of $17.50 per mandatory convertible preferred share. The record date will be September 1, 2016 and the payment date will be September 15, 2016. Tax will be withheld at a rate of 15%.
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