Teva Pharmaceutical has reported results for the year and the quarter ended December 31, 2017.
“2017 was a challenging year for Teva. Starting 2018 we are focused on meeting financial obligations and ensuring a much more solid and sustainable business model going forward. We are making strong progress on the restructuring plan, and I am optimistic about the progress made and remain confident in ability to deliver on targets in the coming year,” Kåre Schultz, Teva’s President and CEO, said.
2017 Annual Results
Revenues in 2017 were $22.4 billion, an increase of 2%, or 6% in local currency terms, compared to 2016, primarily due to: (i) an increase in generic medicines segment from the inclusion of Actavis Generics revenues for the full year of 2017 as compared to five month in 2016, partially offset by the adverse market dynamics in the United States; (ii) the acquisition of Anda in the fourth quarter of 2016; and (iii) a decrease in revenues of specialty medicines segment due to generic competition to certain key products.
Exchange rate differences, including the impact of Venezuela, between 2017 and 2016 negatively impacted revenues by $914 million, GAAP operating income by $290 million and non-GAAP operating income by $335 million. Adjustments to the exchange rates used for the Venezuelan bolivar and the November 30, 2017 deconsolidation of subsidiaries in Venezuela resulted in a decrease of $1,062 million in revenues, a decrease of $249 million in GAAP operating income and a decrease of $323 million in non-GAAP operating income, compared to results in 2016. In light of the political and economic conditions in Venezuela, the company excluded changes in revenues and operating profit in Venezuela from any discussion of local currency results.
GAAP gross profit was $10.8 billion in 2017, down 9% compared to 2016. GAAP gross profit margin for the year was 48.4%, compared to 54.1% in 2016. Non-GAAP gross profit was $12.2 billion in 2017, down 9% compared to 2016. Non-GAAP gross profit margin was 54.7% in 2017, compared to 61.3% in 2016. The decrease in GAAP gross profit as a percentage of revenues primarily reflects lower profitability of generic medicines segment, higher amortization of purchased intangible assets, lower profitability of specialty medicines segment and the inclusion of Anda, and lower profitability of other activities, partially offset by lower inventory step-up expenses, inventory related expenses in connection with the devaluation in Venezuela and lower costs related to regulatory actions taken in certain facilities. The decrease in non-GAAP gross profit as a percentage of revenues primarily reflects lower profitability of generic medicines segment, lower profitability of specialty medicines segment due to loss of exclusivity of key products, the inclusion of Anda as well as lower profitability of other activities.
Research and Development (R&D) expenses in 2017 were $1.8 billion, a decrease of 12.5% compared to 2016. R&D expenses excluding equity compensation expenses and purchase of in-process R&D in 2017 were $1.6 billion, or 7.1% of revenues, compared to $1.7 billion, or 7.6%, in 2016. R&D expenses related to generic medicines segment were $702 million, compared to $659 million in 2016. R&D expenses related to specialty medicines segment were $884 million, compared to $998 million in 2016.
Selling and Marketing (S&M) expenses in 2017 were $3.7 billion, a decrease of 5.3% compared to 2016. S&M expenses excluding amortization of purchased intangible assets and equity compensation expenses were $3.4 billion, or 15.2% of revenues, in 2017, compared to $3.7 billion, or 17.0% of revenues, in 2016. S&M expenses related to generic medicines segment were $1.6 billion, a decrease of 8% compared to $1.7 billion in 2016. S&M expenses related to specialty medicines segment were $1.7 billion, a decrease of 13% compared to $1.9 billion in 2016.
General and Administrative (G&A) expenses in 2017 were $1.3 billion, an increase of $45 million compared to 2016. G&A expenses excluding equity compensation expenses and other expenses were $1.2 billion in 2017, or 5.5% of revenues, compared to $1.2 billion and 5.4% in 2016.
Operating loss was $17.5 billion in 2017, compared to operating income of $2.2 billion in 2016. Non-GAAP operating income was $6.1 billion, down 11% compared to $6.8 billion in 2016.
Adjusted EBITDA (non-GAAP operating income, which excludes amortization and certain other items, and excluding depreciation expenses) for 2017 was $6.7 billion, down 9% compared to 2016.
In 2017, financial expenses were $895 million, compared to $1.3 billion in 2016. Non-GAAP financial expenses were $908 million in 2017, compared to $442 million in 2016.
GAAP income tax expenses in 2017 were $1.9 billion or 11% on a pre-tax loss of $18 billion. In 2016, the provision for income taxes was $521 million or 63% on pre-tax income of $824 million. The provision for non-GAAP income taxes for 2017 amounted to $788 million on pre-tax non-GAAP income of $5.2 billion, for an annual tax rate of 15.3%. The provision for non-GAAP income taxes in 2016 was $1.1 billion on pre-tax non-GAAP income of $6.4 billion, for an annual tax rate of 17.4%.
GAAP net loss attributable to Teva and GAAP diluted loss per share were $16.3 billion and $16.26, respectively, in 2017, compared to net income attributable to Teva of $329 million and a gain per share of $0.07 in 2016. Non-GAAP net income attributable to ordinary shareholders for calculating diluted EPS and non-GAAP diluted EPS were $4.3 billion and $4.01, respectively in 2017, compared to $5.2 billion and $5.14 in 2016.
Non-GAAP information: Net non-GAAP adjustments in 2017 were $20.6 billion. Non-GAAP net income and non-GAAP EPS for the year were adjusted to exclude the following items:
An impairment of goodwill of $17.1 billion, mainly related to U.S. generics reporting unit; impairment of long-lived assets of $3.8 billion, mainly related to revaluation of generic products acquired from Actavis Generics, discontinued Actavis Generics products and Rimsa products, product and marketing rights related to business venture in Japan and an impairment of property, plant and equipment of $544 million amortization of purchased intangible assets totaling $1.4 billion, of which $1.2 billion is included in cost of goods sold and the remaining $209 million in selling and marketing expenses; restructuring expenses of $535 million; charge due to deconsolidation of subsidiaries in Venezuela of $396 million; legal settlements and loss contingencies of $500 million; contingent consideration of $154 million; equity compensation of $129 million; acquisition and integration expenses of $105 million; other R&D expenses of $221 million; inventory step-up of $67 million; costs related to regulatory actions taken in certain facilities of $47 million; financial income of $13 million; other non-GAAP items of $160 million; gain on sale of business of $1.1 billion; minority interest adjustment of negative $270 million; and tax effect and other income tax items of $2.7 billion (includes $1.0 billion U.S Tax Cuts and Job Act effect)
The company believes that excluding such items facilitates investors' understanding of Teva’s business. See the attached tables for a reconciliation of U.S. GAAP results to the adjusted non-GAAP figures.
In light of conditions in Venezuela, the company concluded that as of November 30, 2017, the company did not meet the accounting criteria for control over wholly-owned subsidiaries in Venezuela and that Teva no longer has significant influence over such subsidiaries. Therefore, effective November 30, 2017, the company deconsolidated the investment in subsidiaries in Venezuela, recording deconsolidation charges of $396 million.
Cash flow from operations generated during 2017 was $3.5 billion, down 33% compared to $5.2 billion in 2016. Free cash flow, excluding net capital expenditures, was $2.7 billion compared to $4.4 billion in 2016, a decrease of 38%. The decrease was mainly due to business performance as well as higher payments for legal settlements.
Total balance sheet assets were $70.6 billion as of December 31, 2017, compared to $86.1 billion as of September 30, 2017 and $93.1 billion as of December 31, 2016. The decrease from September 30, 2017 was mainly due to impairment of goodwill and long-lived assets.
Cash and investments at December 31, 2017 decreased to $1.1 billion, compared to $0.9 billion at September 30, 2017 and to $1.9 billion at December 31, 2016.
As of December 31, 2017, debt was $32.5 billion, a decrease of $2.2 billion compared to $34.7 billion as of September 30, 2017, and a decrease of $3.3 billion compared to $35.8 billion as of December 31, 2016. The decrease was mainly due to $4.4 billion of net debt repayments on various term loans, revolving credit facility and other short term loans, partially offset by foreign exchange fluctuations of $1.1 billion. The portion of total debt classified as short-term as of December 31, 2017 was 11%.
Total shareholders’ equity was $17.4 billion at December 31, 2017, compared to $30.3 billion at September 30, 2017 and to $35.0 billion at December 31, 2016.
Fourth Quarter 2017 Results
Revenues in the fourth quarter of 2017 were $5.5 billion, down 16% compared to the fourth quarter of 2016, primarily due to the decrease in revenues of specialty medicines segment due to generic competition for key products and the challenging market dynamics in the U.S. generics market. Excluding the impact of foreign exchange fluctuations, revenues decreased 12%.
Exchange rate differences including the impact of Venezuela between the fourth quarter of 2017 and the fourth quarter of 2016 reduced revenues by $274 million, GAAP operating income by $118 million and non-GAAP operating income by $181 million.
In the fourth quarter of 2017, the company announced that it would not be paying annual bonuses for 2017 due to the financial results of the company being significantly below the company’s original annual operating plan for the year. As a result, in the fourth quarter of 2017, Teva reversed amounts accrued for such bonuses during the first three quarters of 2017 and made no further accrual for such bonuses.
GAAP gross profit was $2.5 billion in the fourth quarter of 2017, down 25% compared to the fourth quarter of 2016. GAAP gross profit margin was 46.6% in the quarter, compared to 52.2% in the fourth quarter of 2016. Non-GAAP gross profit was $2.8 billion in the fourth quarter of 2017, down 26% from the fourth quarter of 2016. Non-GAAP gross profit margin was 52.2% in the fourth quarter of 2017, compared to 59.4% in the fourth quarter of 2016.
Research and Development (R&D) expenses in the fourth quarter of 2017 were $360 million, down 47% compared to the fourth quarter of 2016 mainly due to portfolio optimization, various efficiency measures as well as the reversal of the annual bonus accrual. R&D expenses excluding equity compensation expenses and purchase of in-process R&D in the fourth quarter of 2017 were $310 million or 5.7% of quarterly revenues, compared to $514 million or 7.9% in the fourth quarter of 2016. R&D expenses related to generic medicines segment were $149 million, compared to $211 million in the fourth quarter of 2016, a decrease of 29%. R&D expenses related to specialty medicines segment were $162 million, a decrease of 45% compared to $296 million in the fourth quarter of 2016.
Selling and Marketing (S&M) expenses in the fourth quarter of 2017 were $865 million, a decrease of 23% compared to the fourth quarter of 2016. S&M expenses excluding amortization of purchased intangible assets and equity compensation expenses were $791 million, or 14.5% of revenues, in the fourth quarter of 2017, compared to $1.1 billion, or 17% of revenues, in the fourth quarter of 2016 mainly due to various efficiency measures as well as the reversal of the annual bonus accrual. S&M expenses related to generic medicines segment were $382 million, a decrease of 30% compared to $549 million in the fourth quarter of 2016, mainly due to lower expenses in Venezuela following exchange rate adjustments as well as certain other efficiency measures. S&M expenses related to specialty medicines segment were $372 million, a decrease of 26% compared to $506 million in the fourth quarter of 2016. The decrease was mainly due to cost reduction and efficiency measures in commercial operations, aligning with the life cycle of product portfolio.
General and Administrative (G&A) expenses in the fourth quarter of 2017 were $492 million, compared to $360 million in the fourth quarter of 2016. G&A expenses excluding equity compensation expenses were $477 million in the fourth quarter of 2017, or 8.7% of revenues, compared to $344 million and 53% in the fourth quarter of 2016.
GAAP operating loss was $13.0 billion in the fourth quarter of 2017, compared to an operating loss of $0.1 billion in the fourth quarter of 2016. Non-GAAP operating income was $1.4 billion, down 29%, compared to $1.9 billion in the fourth quarter of 2016.
Adjusted EBITDA (non-GAAP operating income, which excludes amortization and certain other items, and excluding depreciation expenses) was $1.5 billion, down 27% compared to $2.1 billion in the fourth quarter of 2016.
GAAP financial expenses for the fourth quarter of 2017 were $191 million, compared to $777 million in the fourth quarter of 2016. This decrease is mainly due to an impairment of monetary assets balance sheet items related to Venezuela in the fourth quarter of 2016. Non-GAAP financial expenses were $209 million in the fourth quarter of 2017, compared to $233 million in the fourth quarter of 2016.
Teva recorded a GAAP income tax benefit for the fourth quarter of 2017 of $1.5 billion, or 11% on pre-tax loss of $13.2 billion. GAAP income taxes in the fourth quarter of 2016 were $57 million, or 6% on pre-tax loss of $914 million. Non-GAAP income taxes for the fourth quarter of 2017 were $183 million on pre-tax non-GAAP income of $1.2 billion, for a quarterly tax rate of 15.6%. Non-GAAP income taxes in the fourth quarter of 2016 were $218 million on pre-tax non-GAAP income of $1.7 billion, for a quarterly tax rate of 12.7%.
GAAP net loss attributable to Teva and GAAP diluted loss per share were $11.6 billion and a loss of $11.41, respectively, in the fourth quarter of 2017, compared to a GAAP net loss of $973 million and a loss of $1.10, respectively, in the fourth quarter of 2016. Non-GAAP net income attributable to ordinary shareholders for calculating diluted EPS and non-GAAP diluted EPS were $1.0 billion and $0.93, respectively, in the fourth quarter of 2017, compared to $1.5 billion and $1.38 in the fourth quarter of 2016.
For the fourth quarter of 2017, the weighted average outstanding shares for the fully diluted earnings per share calculation was 1,017 million on a GAAP basis and 1,018 million on a non-GAAP basis. The number of average weighted diluted shares outstanding used for the fully diluted share calculation for the fourth quarter of 2016 was 1,015 million shares on a GAAP basis and 1,076 million on a non-GAAP basis. The number of shares on a non-GAAP basis in 2016 includes the potential dilution resulting from mandatory convertible preferred shares, which had a dilutive effect on non-GAAP earnings per share.
As of December 31, 2017, the fully diluted share count for calculating Teva's market capitalization was approximately 1,086 million shares.
Non-GAAP information: Net non-GAAP adjustments in the fourth quarter of 2017 were $12.5 billion. Non-GAAP net income and non-GAAP EPS for the quarter were adjusted to exclude the following items: impairment of goodwill of $11.0 billion, mainly related to U.S. generics reporting unit; impairment of long lived assets of $3.2 billion, mainly related to revaluation of generics products acquired from Actavis Generics, as well as discontinued Actavis Generics and Rimsa products and an impairment of property, plant and equipment of $392 million deconsolidation of subsidiaries in Venezuela of $396 million; amortization of purchased intangible assets totaling $356 million, of which $291 million is included in cost of goods sold and the remaining $65 million in selling and marketing expenses; restructuring expenses of $235 million; other R&D expenses of $45 million; acquisition, integration and related expenses of $18 million; contingent consideration income of $25 million; equity compensation expenses of $26 million; legal settlements and loss contingencies of $176 million; other non GAAP items of $41million; gain on sale of business of $1.1 billion; minority interest adjustment of negative $226 million; and tax benefit and other income tax items of $1.7 billion (includes $1.0 billion U.S Tax Cuts and Job Act Effect)
The company believed 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.
Cash flow from operations generated during the fourth quarter of 2017 was $1.2 billion, a decrease of 17% compared to the fourth quarter of 2016. Free cash flow, excluding net capital expenditures, was $0.9 billion, down 16% compared to the fourth quarter of 2016.
Generic Medicines Revenues
Generic medicines revenues in the fourth quarter of 2017 were $3.1 billion, a decrease of 16% compared to the fourth quarter of 2016.
Generic revenues consisted of:
U.S. revenues of $1.2 billion, a decrease of 15% compared to the fourth quarter of 2016, mainly due to challenging market dynamics including pricing declines resulting from customer consolidation into large buying groups and accelerated FDA approvals for additional generic versions of competing off-patent medicines, partially offset by new product launches.
European revenues of $1.1 billion, flat compared to the fourth quarter of 2016, or a decrease of 8% in local currency terms, compared to the fourth quarter of 2016, mainly due to the exclusion of revenues of Actavis U.K., which was divested in January 2017.
ROW revenues of $864 million, a decrease of 31%, or an increase of 2% in local currency terms, compared to the fourth quarter of 2016. The increase in local currency terms was mainly due to increased sales in Russia and Israel.
OTC revenues related to PGT were $217 million, a decrease of 46% compared to $399 million in the fourth quarter of 2016. In local currency terms, revenues increased 9%. PGT’s in-market sales excluding Venezuela were $353 million in the fourth quarter of 2017, an increase of $45 million, or 10% in local currency terms, compared to the fourth quarter of 2016.
API sales to third parties of $181 million (which are included in the market revenues above) were flat compared to the fourth quarter of 2016.
Generic medicines revenues comprised 57% of our total revenues in the fourth quarter of 2017, the same as in the fourth quarter of 2016.
Generic Medicines Gross Profit
Gross profit of generic medicines segment in the fourth quarter of 2017 was $1.3 billion, a decrease of 31% compared to $1.8 billion in the fourth quarter of 2016. The lower gross profit was mainly due to higher production expenses, market dynamics in the United States as well as lower revenues in Venezuela following the continued currency devaluation.
Gross profit margin for generic medicines segment in the fourth quarter of 2017 decreased to 40.8%, compared to 49.4% in the fourth quarter of 2016.
Generic Medicines Profit
Generic medicines segment generated profit of $740 million in the fourth quarter of 2017, a decrease of 31% compared to the fourth quarter of 2016. Generic medicines profitability as a percentage of generic medicines revenues was 23.8% in the fourth quarter of 2017, down from 28.9% in the fourth quarter of 2016.
Specialty Medicines Revenues
Specialty medicines revenues in the fourth quarter of 2017 were $1.8 billion, down 19% compared to the fourth quarter of 2016. The decrease in specialty medicines revenues compared to the fourth quarter of 2016 was primarily due to lower sales of CNS products and the November 2017 divestiture of certain women health products in the United States. In addition, in the fourth quarter of 2016, we also benefited from a payment of $150 million, which we received in connection with agreement to sell royalties and other rights in Ninlaro® (ixazomib) to a subsidiary of Takeda.
U.S. specialty medicines revenues were $1.2 billion, down 32% compared to the fourth quarter of 2016. European specialty medicines revenues were $476 million, an increase of 24%, or 14% in local currency terms, compared to the fourth quarter of 2016. ROW specialty revenues were $154 million, up 51%, or 49% in local currency terms, compared to the fourth quarter of 2016. The increase in specialty medicines revenues in ROW compared to the fourth quarter of 2016 was primarily due to reclassification of income from certain intangible assets which were previously recorded in G&A accounts. Specialty medicines revenues comprised 33% of total revenues in the quarter, compared to 34% in the fourth quarter of 2016.
Global revenues of COPAXONE® were $821 million in the fourth quarter of 2017, a decrease of 19% compared to the fourth quarter of 2016.
In October 2017, the FDA approved a generic version of Copaxone 40 mg /mL and an additional generic version of COPAXONE 20 mg/mL. A generic version of COPAXONE 40 mg /mL was launched in the U.S. market. In the EU, a non-substitutable version of COPAXONE 40 mg/mL was approved.
COPAXONE revenues in the United States were $622 million, down 25% compared to $829 million in the fourth quarter of 2016, mainly due to generic competition, which resulted in higher rebates and lower volumes, partially offset by a price increase of 7.9% in January 2017, for both the 20 mg/mL and 40 mg/mL versions. At the end of the fourth quarter of 2017, according to December 2017 IQVIA (formerly IMS Health) data, U.S. market share for the COPAXONE products in terms of new and total prescriptions were 27.8% and 25.7%, respectively. Copaxone revenues outside the United States were $199 million, an increase of 7%, or flat in local currency terms, compared to the fourth quarter of 2016.
Global AZILECT® revenues were $40 million, a decrease of 55% compared to the fourth quarter of 2016 following the introduction of generic competition to AZILECT in the United States in 2017.
Revenues of respiratory products were $293 million in the fourth quarter of 2017, down 10% compared to $325 million in the fourth quarter of 2016. ProAir® revenues in the quarter were $102 million, down 27% compared to the fourth quarter of 2016. QVAR® global revenues were $61 million in the fourth quarter of 2017, down 47% compared to the fourth quarter of 2016. Both ProAir and QVAR were affected by negative net pricing effects.
Revenues of oncology products were $283 million in the fourth quarter of 2017, up 6% compared to the fourth quarter of 2016. Revenues of TREANDA® and BENDEKA® were $157 million, up 5% compared to the fourth quarter of 2016.
Specialty Medicines Gross Profit
Gross profit of specialty medicines segment was $1.5 billion in the fourth quarter of 2017, down 21% compared to $1.9 billion in the fourth quarter of 2016. Gross profit margin for specialty medicines segment in the fourth quarter of 2017 was 84.4%, compared to 87.4% in the fourth quarter of 2016.
Specialty Medicines Profit
Specialty medicines segment profit was $1.0 billion in the fourth quarter of 2017, down 13% compared to the fourth quarter of 2016.
Specialty medicines profit as a percentage of segment revenues was 54.7% in the fourth quarter of 2017, up from 51.0% in the fourth quarter of 2016.