Results include the generic business of Actavis, since August 2; Provides updated outlook for 2016.

Teva Pharmaceutical Industries Ltd. reported results for the quarter ended September 30, 2016.

Q3 2016:
Revenues $5.6 billion
Cash flow from operations $1.5 billion
GAAP EPS $0.35; 984 million shares
Non-GAAP EPS $1.31; 1,044 million shares 

“This has been a year of transition for Teva, underscored this quarter by the close of our strategic acquisition of Actavis Generics, which had significant contribution to our results. Actavis will continue to contribute in a meaningful way to the future growth of our generics business through the strengthened R&D capabilities and complementary pipeline and portfolio, and enhance our leadership in an increasingly evolving industry,” stated Erez Vigodman, Teva’s President and CEO.

“We were also pleased to report this quarter that we have successfully completed the second pivotal phase three study for SD-809 for tardive dyskinesia and plan to submit that NDA to the U.S. FDA at the end of this year, and have also resubmitted SD-809 for Huntington disease in response to the FDA’s Complete Response Letter,” Vigodman added. “Going forward, we will focus on also growing our specialty pipeline through in-house opportunities, including in the development and commercialization of our key pipeline assets, most notably our anti-CGRP product for migraine headaches and fasinumab. In the face of the industry and company-specific challenges we have been dealing with this year, we remain excited about the future as we strive to create a platform that is unique to the industry, working every day to find the delicate balance between access and innovation and laying the foundation for Teva’s continued growth.”

Third Quarter 2016 Results

Revenues in the third quarter of 2016 were $5.6 billion, up 15% compared to the third quarter of 2015, primarily due to the inclusion of revenues of $887 million of the Actavis generics business, following the closing of the acquisition on August 2. Excluding the impact of foreign exchange fluctuations, revenues increased 19%.

Exchange rate differences between the third quarter of 2016 and the third quarter of 2015 reduced revenues by $188 million, GAAP operating income by $83 million and non-GAAP operating income by $65 million.

GAAP gross profit was $2.8 billion in the third quarter of 2016, up 1% compared to the third quarter of 2015. GAAP gross profit margin was 50.4% in the quarter, compared to 57.5% in the third quarter of 2015. Non-GAAP gross profit was $3.4 billion in the third quarter of 2016, up 14% from the third quarter of 2015. Non-GAAP gross profit margin was 61.0% in the third quarter of 2016, compared to 61.8% in the third quarter of 2015.

Research and Development (R&D) expenses for the third quarter of 2016 amounted to $663 million, an increase of 84% compared to the third quarter of 2015 mainly due to $250 million paid to Regeneron pursuant to our collaborative agreement to develop and commercialize its pain medication product fasinumab. R&D expenses excluding equity compensation expenses and purchase of in-process R&D in the third quarter of 2016 were $406 million, compared to $356 million in the third quarter of 2015. R&D expenses were 7.3% of revenues in the quarter, compared to 7.4% in the third quarter of 2015. R&D expenses related to our generic medicines segment were $184 million, compared to $132 million in the third quarter of 2015, an increase of 39%, mainly due to the inclusion of two months of expenses of the Actavis generics business. R&D expenses related to our specialty medicines segment were $228 million, an increase of 4% compared to $220 million in the third quarter of 2015.

General and Administrative (G&A) expenses in the third quarter of 2016 amounted to $310 million, compared to $316 million in the third quarter of 2015. G&A expenses excluding equity compensation expenses were $304 million in the third quarter of 2016, or 5.5% of revenues, compared to $307 million and 6.4% in the third quarter of 2015.

In light of advanced discussions with the U.S. Department of Justice and the U.S. Securities and Exchange Commission to settle our previously-disclosed FCPA investigations, we are establishing a provision of approximately $520 million. The provision relates to conduct in three countries, Russia, Mexico and Ukraine, during the time period covering 2007-2013. None of the conduct in question involved Teva’s U.S. business.

Upon learning of FCPA concerns in 2012, Teva accelerated the pace of changes to address these issues by completely transforming its governance program and processes on every level. This resulted in actions including, terminating problematic business relationships with third parties, separating relevant employees from the company, fully overhauling the management of several subsidiaries, and ceasing operations in several countries. The company has also restructured through a new global organizational structure and chain of command that reduces risks.

The compliance program that Teva has in place now is serious, rigorous, and comprehensive and is designed to protect the company and its subsidiaries against future violations. Today, Teva has a culture of compliance that begins with a strong tone at the top — including executive regional and local management — and underpins every single business decision.

Quarterly GAAP operating income was $0.8 billion in the third quarter of 2016, down 24% compared to $1.0 billion in the third quarter of 2015. Quarterly non-GAAP operating income was $1.8 billion, up 16%, compared to $1.6 billion in the third quarter of 2015.

Adjusted EBITDA (non-GAAP operating income, which excludes amortization and certain other items, and excluding depreciation expenses) was $1.9 billion, up 16% compared to $1.7 billion in the third quarter of 2015.

GAAP financial expenses for the third quarter of 2016 were $150 million, compared to $697 million in the third quarter of 2015. Expenses in the third quarter of 2015 were mainly the result of a $623 million loss on our shares of Mylan, reflecting the price of Mylan’s shares as of September 30, 2015, while expenses in the current quarter were affected by the borrowings used to finance the acquisition of the Actavis generics business. Non-GAAP financial expenses were $151 million in the third quarter of 2016, compared to $65 million in the third quarter of 2015.

GAAP income tax expenses for the third quarter of 2016 were $207 million, or 34% on pre-tax income of $615 million. In the third quarter of 2015, the provision for income taxes was $193 million, or 62% on pre-tax income of $313 million. The provision for non-GAAP income taxes for the third quarter of 2016 was $261 million on pre-tax non-GAAP income of $1.6 billion, for a quarterly tax rate of 16%. The provision for non-GAAP income taxes in the third quarter of 2015 was $319 million on pre-tax non-GAAP income of $1.5 billion, for a quarterly tax rate of 21%.

We expect our annual non-GAAP tax rate for 2016 to be 18%, mainly due to synergies associated with the acquisition of the Actavis generics business and nonrecurring tax benefits in jurisdictions with higher tax rates.

GAAP net income attributable to Teva and GAAP diluted EPS were $412 million and $0.35, respectively, in the third quarter of 2016, compared to $103 million and $0.12, respectively, in the third quarter of 2015. Non-GAAP net income attributable to ordinary shareholders for calculating diluted EPS and non-GAAP diluted EPS were $1.4 billion and $1.31, respectively, in the third quarter of 2016, compared to $1.2 billion and $1.35 in the third quarter of 2015.

For the third quarter of 2016, the weighted average outstanding shares for the fully diluted earnings per share calculation was 984 million on a GAAP basis and 1,044 million on a non-GAAP basis. The number of average weighted diluted shares outstanding used for the fully diluted share calculation for the third quarter of 2015 was 862 million shares, on both a GAAP and non-GAAP basis. The increase in the number of shares resulted from our December 2015 equity offerings and from the issuance of shares to Allergan in August 2016 in connection with the closing of the Actavis acquisition. The number of shares on a non-GAAP basis includes the potential dilution resulting from our mandatory convertible preferred shares, which had a dilutive effect on our non-GAAP earnings per share.

As of September 30, 2016, the fully diluted share count for calculating Teva’s market capitalization was approximately 1,088 million shares.

Non-GAAP information: Net non-GAAP adjustments in the third quarter of 2016 were $952 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 $533 million, primarily a provision of approximately $520 million relating to the previously-mentioned FCPA investigations;
• Amortization of purchased intangible assets totaling $429 million, of which $387 million is included in cost of goods sold and the remaining $42 million in selling and marketing expenses. This includes amortization expenses of $237 million related to Actavis’ intangible assets;
• Acquisition and related expenses, including contingent consideration, of $371 million, including $250 million paid to Regeneron pursuant to our collaborative agreement to develop and commercialize its pain medication product fasinumab and a contingent consideration expense of $43 million related to Bendeka™ as well as expenses related to the Actavis generics acquisition;
• Inventory step-up of $152 million, related mainly to the acquisition of the Actavis generics business;
• Restructuring expenses of $115 million, related mainly to the acquisition of the Actavis generics business;
• Costs related to regulatory actions taken in facilities of $46 million;
• Equity compensation expense of $31 million;
• Impairment of long-lived assets of $29 million;
• Net gain from other non-GAAP items of $678 million, including a net gain of $693 million from the divestments of products in connection with the acquisition of the Actavis generics business;
• Minority interest adjustment of negative $22 million; and
• Corresponding tax benefit of $54 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.

Cash flow from operations generated during the third quarter of 2016 was $1.5 billion, an increase of 34% compared to the third quarter of 2015. The increase was mainly due to lower payments for legal settlements, partially offset by an increase in accounts receivable, net of SR&A, and an increase in inventories. Cash flow was affected by the inclusion of two months of the generic business of Actavis. Free cash flow, excluding net capital expenditures, was $1.2 billion, up 27% compared to the third quarter of 2015.

Total balance sheet assets were $98.7 billion as of September 30, 2016, compared to $57.9 billion as of June 30, 2016. The increase was mainly due to an increase of $19.7 billion of goodwill and an increase of other intangible assets of $20.3 billion, both related mainly to the Actavis acquisition.

Cash and investments at September 30, 2016 decreased to $2.7 billion, compared to $8.2 billion at June 30, 2016.

As of September 30, 2016, our debt was $36.9 billion, an increase of $26.0 billion compared to $10.9 billion as of June 30, 2016. The increase was mainly due to the $20.4 billion of debt issuances and the $5.0 billion term loans borrowed to finance the Actavis acquisition. The portion of total debt classified as short-term as of September 30, 2016 was 10%.

Total shareholders’ equity was $37.0 billion at September 30, 2016, compared to $32.0 billion at June 30, 2016.

(Source: Business Wire)