On July 30, 2015 Teva Pharmaceutical Industries Ltd. (NYSE:TEVA) reported results for the quarter ended June 30, 2015 (Press release, Teva, JUL 30, 2015, View Source;p=RssLanding&cat=news&id=2072734 [SID:1234506762]).
"Teva’s second quarter solid performance was driven by important contributions from across our integrated portfolio of high-quality generic and specialty medicines," stated Erez Vigodman, Teva’s President and CEO. "We continue to deliver on our promise to take bold steps forward, both organic and inorganic, to position Teva for sustainable, profitable growth, execute on our strategic and operational initiatives, improve our profitability, strengthen our cash flow generation, and build the most competitive operating network in the industry."
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Mr. Vigodman continued, "Based on our strong performance in the first half of the year, we are raising our guidance for 2015. We expect to complete the acquisition of Allergan’s global generics business in the first quarter of 2016, which will further diversify our business and support the continued creation of shareholder value. We remain excited about our future as we continue the positive momentum to transform our Company."
Second Quarter 2015 Results
Revenues in the second quarter of 2015 amounted to $5.0 billion, down 2% compared to the second quarter of 2014. Excluding the impact of foreign exchange fluctuations and the sale of our U.S. OTC plants in July 2014, revenues grew 6%.
Exchange rate differences (net of profits from certain hedging transactions) between the second quarter of 2015 and the second quarter of 2014 decreased our revenues by $341 million and reduced our non-GAAP operating income by $4 million but increased our GAAP operating income by $17 million.
Non-GAAP gross profit was $3.1 billion in the second quarter of 2015, up 7% from the second quarter of 2014. Non-GAAP gross profit margin was 62.8% in the second quarter of 2015, compared to 58.1% in the second quarter of 2014. GAAP gross profit was $2.9 billion in the second quarter of 2015, compared to $2.7 billion in the second quarter of 2014. GAAP gross profit margin was 58.4% in the quarter, compared to 52.7% in the second quarter of 2014.
Research and Development (R&D) expenditures (excluding equity compensation expenses and purchase of in-process R&D) in the second quarter of 2015 amounted to $357 million, compared to $340 million in the second quarter of 2014. R&D expenses were 7.2% of revenues in the quarter, compared to 6.7% in the second quarter of 2014. R&D expenses related to our generic medicines segment amounted to $134 million, up 7% compared to $125 million in the second quarter of 2014. In local currency terms, expenses increased 12%. The increase is the result of additional development activities for the U.S. market. R&D expenses related to our specialty medicines segment amounted to $220 million, an increase of 4% compared to $211 million in the second quarter of 2014. In local currency terms, expenses increased 6%, mainly as a result of investments in the assets acquired via the Labrys and Auspex deals.
Selling and Marketing (S&M) expenditures (excluding amortization of purchased intangible assets and equity compensation expenses) amounted to $846 million, or 17.0% of revenues, in the second quarter of 2015, compared to $911 million, or 18.1% of revenues, in the second quarter of 2014. S&M expenses related to our generic medicines segment amounted to $335 million, a decrease of 14% compared to $388 million in the second quarter of 2014. In local currency terms, S&M expenses decreased 1%. S&M expenses related to our specialty medicines segment amounted to $457 million, a decrease of 5% compared to $481 million in the second quarter of 2014. In local currency terms, S&M expenses increased 1%.
General and Administrative (G&A) expenditures (excluding equity compensation expenses) amounted to $307 million in the second quarter of 2015, or 6.2% of revenues, compared to $291 million and 5.8% in the second quarter of 2014.
Quarterly non-GAAP operating income was $1.6 billion, an increase of 16% compared to the second quarter of 2014. Quarterly GAAP operating income was $662 million in the second quarter of 2015, a decrease of 28% compared to $925 million in the second quarter of 2014.
Non-GAAP financial expenses amounted to $41 million in the second quarter of 2015, compared to $76 million in the second quarter of 2014. GAAP financial expenses for the second quarter of 2015 amounted to $41 million, compared to $78 million in the second quarter of 2014. The decrease was mainly due to finance income from derivative financial instruments as well as a lower cost of debt, partially offset by the impact of higher debt.
The provision for non-GAAP tax for the second quarter of 2015 amounted to $345 million on pre-tax non-GAAP income of $1.6 billion, for a quarterly tax rate of 22%. The provision for non-GAAP tax in the second quarter of 2014 was $245 million on pre-tax non-GAAP income of $1.3 billion, for a quarterly tax rate of 19%. GAAP tax expenses for the second quarter of 2015 amounted to $88 million or 14% on pre-tax income of $621 million. In the second quarter of 2014, the provision for taxes amounted to$102 million or 12% on pre-tax income of $847 million.
Non-GAAP net income and non-GAAP diluted EPS were $1.2 billion and $1.43, respectively, in the second quarter of 2015, up 15% and 14%, respectively, compared to the second quarter of 2014. GAAP net income and GAAP diluted EPS were $539 million and $0.63, respectively, in the second quarter of 2015, compared to $748 million and $0.87, respectively, in the second quarter of 2014.
Non-GAAP information: Net non-GAAP adjustments in the second quarter of 2015 amounted to $691 million. Non-GAAP net income and non-GAAP EPS for the quarter were adjusted to exclude the following items:
Legal settlements and loss contingencies of $384 million mainly related to the booking of an additional reserve for the settlement of the modafinil antitrust litigation;
Amortization of purchased intangible assets totaling $214 million, of which $206 million is included in cost of goods sold and the remaining $8 million in selling and marketing expenses;
Acquisition expenses of $132 million;
Impairment of long-lived assets of $81 million;
Restructuring expenses and other non-GAAP items of $54 million;
Equity compensation of $31 million;
Purchase of research and development in process of $24 million;
Contingent consideration of $18 million;
Costs related to regulatory actions taken in facilities of $10 million; and
Related tax benefit of $257 million.
Teva believes that excluding such items 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 2015 amounted to $1.5 billion, compared to $1.1 billion in the second quarter of 2014, an increase of 41%. The increase was mainly due to a decrease in accounts receivable net of SR&A and lower payments related to legal settlements in the second quarter of 2015. Free cash flow, excluding net capital expenditures, amounted to $1.3 billion compared to $0.9 in the second quarter of 2014, an increase of 51%.
Cash and investments at June 30, 2015 decreased to $2.8 billion, compared to $3.8 billion at March 31, 2015, mainly due to the Auspex acquisition payment and a repayment of $1 billion of senior notes, partially offset by short term borrowing and free cash flow generated during the quarter.
For the second quarter of 2015, the weighted average outstanding shares for the fully diluted earnings per share calculation was 859 million on both a GAAP and non-GAAP basis. At June 30, 2015, the outstanding shares for calculating Teva’s market capitalization were approximately 850 million.
Shareholders’ equity was $23.1 billion at June 30, 2015, compared to $22.7 billion at March 31, 2015. The increase primarily reflects $0.5 billion of GAAP net income offset by $0.3 billion of dividend payments.
Segment Results for the Second Quarter 2015
Generic Medicines Revenues
Generic medicines revenues in the second quarter of 2015 amounted to $2.5 billion, a decrease of 2% compared to the second quarter of 2014. In local currency terms, revenues increased 6%.
Generic revenues consisted of:
U.S. revenues of $1.3 billion, an increase of 24% compared to the second quarter of 2014. The increase resulted mainly from the launch of aripiprazole tablets (the generic equivalent of Abilify) this quarter, and from sales of other products that were not sold in the second quarter of 2014, the most significant of which was esomeprazole (the generic equivalent of Nexium). This was partially offset by declines in sales of other products, the most significant of which was capecitabine (the generic equivalent of Xeloda).
European revenues of $665 million, a decrease of 18%, or 3% in local currency terms, compared to the second quarter of 2014.
The decrease in local currency terms resulted mainly from our strategy of pursuing profitable and sustainable business in the region, with decreases in Spain, the U.K. and France offset by increases in Italy and Germany. This strategy has continued to lead to notable improvements in the profitability of our European generics business.
ROW revenues of $475 million, a decrease of 25%, or of 13% in local currency terms, compared to the second quarter of 2014. The decrease in local currency terms was mainly due to lower revenues in Canada and Japan, which were partially offset by higher revenues in Latin America and Russia.
API sales to third parties of $183 million (which is included in the market revenues above), an increase of 1%, compared to the second quarter of 2014.
Generic medicines revenues comprised 50% of our total revenues in the quarter, as in the second quarter of 2014.
Generic Medicines Gross Profit
Gross profit from our generic medicines segment in the second quarter of 2015 amounted to $1.2 billion, an increase of 14% compared to the second quarter of 2014. Gross profit margin for our generic medicines segment in the second quarter of 2015 increased to 48.6%, from 41.7% in the second quarter of 2014. The higher gross profit was mainly a result of the launches of arpiprazole (the generic equivalent of Abilify) and esomeprazole (the generic equivalent of Nexium) in the United States partially offset by lower gross profit in our ROW markets.
Generic Medicines Profit
Our generic medicines segment generated profit of $729 million in the second quarter of 2015, an increase of 36% compared to the second quarter of 2014. Generic medicines profitability as a percentage of generic medicines revenues was 29.6% in the second quarter of 2015, up from 21.3% in the second quarter of 2014. The increase was primarily due to higher gross profit coupled with a reduction in S&M expenses, partially offset by higher R&D expenses.
Specialty Medicines Revenues
Specialty medicines revenues in the second quarter of 2015 amounted to $2.1 billion, an increase of 3% compared to the second quarter of 2014. In local currency terms, revenues increased 8%. U.S. specialty medicines revenues amounted to $1.6 billion, up 14% compared to the second quarter of 2014. European specialty medicines revenues amounted to $378 million, a decrease of 25%, or of 8% in local currency terms, compared to the second quarter of 2014. ROW specialty revenues amounted to $90 million, down 16%, or 2% in local currency terms, compared to the second quarter of 2014.
Specialty medicines revenues comprised 42% of our total revenues in the quarter, compared to 40% in the second quarter of 2014.
The increase in specialty medicines revenues compared to the second quarter of 2014 was primarily due to higher sales of Copaxone in the U.S.
Global sales 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 12% compared to the second quarter of 2014.
In the United States, sales of Copaxone amounted to $870 million, an increase of 31% compared to the second quarter of 2014.
The increase was mainly due to higher sales volume in the second quarter of 2015 as well as price increases in August 2014 and January 2015. In addition, our U.S. Copaxone revenues in the second quarter of 2014 were relatively low following the launch of Copaxone 40 mg/mL in January 2014. At the end of the second quarter of 2015, according to June 2015 IMS data, our U.S. market shares for the Copaxone products in terms of new and total prescriptions were 23.8% and 31.2%, respectively. Copaxone 40 mg/mL accounted for 68.5% of total Copaxone prescriptions in the U.S.
In June 2015, Sandoz launched its once daily generic version of Copaxone 20 mg/mL, Glatopa, in the United States.
Sales outside the United States amounted to $184 million, a decrease of 34%, or of 20% in local currency terms, compared to the second quarter of 2014. The decrease in local currency terms stemmed from lower volumes sold in Europe due to increased competition, and from the effect of macro-economic conditions in certain Latin American countries.
Our global Azilect revenues amounted to $105 million, an increase of 2% compared to the second quarter of 2014. In local currency terms, sales increased 15%. The increase in local currency terms was mainly due to higher sales to Lundbeck, our marketing partner in certain territories. Global in-market sales decreased 10%.
Sales of our respiratory products amounted to $253 million, down 2% compared to the second quarter of 2014. ProAir revenues in the quarter amounted to $128 million, down 4% compared to the second quarter of 2014, as negative price fluctuations were partially offset by volume growth. In April 2015, the FDA approved ProAir RespiClick (albuterol sulfate) inhalation powder, a breath-actuated, multi-dose, dry-powder, short-acting beta-agonist inhaler. It was launched in the U.S. in May 2015.
QVAR global revenues amounted to $83 million in the second quarter of 2015, up 12% compared to the second quarter of 2014, due to volume growth.
Sales of our oncology products amounted to amounted to $293 million in the second quarter of 2015, up 3% from the second quarter of 2014. Sales of Treanda amounted to $179 million, down 1% compared to the second quarter of 2014.
Specialty Medicines Gross Profit
Gross profit from our specialty medicines segment amounted to $1.8 billion, up $40 million compared to the second quarter of 2014. Gross profit margin for our specialty medicines segment in the second quarter of 2015 was 86.5%, compared to 87.2% in the second quarter of 2014.
Specialty Medicines Profit
Our specialty medicines segment profit amounted to $1.1 billion in the second quarter of 2015, up 5% compared to the second quarter of 2014, mainly due to higher revenues and lower S&M expenses, which were partially offset by higher R&D expenses.
Specialty medicines profit as a percentage of segment revenues was 54.1% in the second quarter of 2015, up from 53.1% in the second quarter of 2014.
Beginning in 2015, expenses related to our equity compensation are excluded from our franchise results. The data presented have been conformed to reflect the exclusion of equity compensation expenses for all periods.
Other Activities
Our OTC revenues related to PGT amounted to $210 million, a decrease of 7% compared to $226 million in the second quarter of 2014. In local currency terms, revenues increased 10%. The increase in local currency terms was mainly due to higher sales in Latin America. PGT’s in-market sales amounted to $325 million in the second quarter of 2015, a decrease of $25 million compared to the second quarter of 2014. This decrease was due to foreign currency exchange fluctuations.
Our revenues from OTC products in the second quarter of 2015 amounted to $210 million, compared to $274 million in the second quarter of 2014. The decline was mainly due to the sale of our U.S. OTC plants, previously purchased from P&G, back to P&G in July 2014.
Other revenues amounted to $200 million in the second quarter of 2015, mostly from the distribution of third-party products in Israel and Hungary, compared to revenues of $229 million, in the second quarter of 2014.
Updated 2015 Financial Outlook
We are updating our 2015 full-year financial outlook. See detailed guidance below:
Dividend
The Board of Directors, at its meeting on July 26, 2015, declared a cash dividend for the second quarter of 2015 of $0.34.
The record date will be August 20, 2015, and the payment date will be September 3, 2015. Tax will be withheld at a rate of 15%.