UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K
(Mark One)
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20192020
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number
001-16174
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
(Exact name of registrant as specified in its charter)
Israel | Not Applicable | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
5 Basel Street, Petach Tikva, ISRAEL, 4951033
(Address of principal executive offices and Zip Code)
+972 (3) 914-8171914-8213
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
American Depositary Shares, each representing one Ordinary Share | TEVA | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
☐
No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
☒
No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§
232-405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes ☒
No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2
of the Exchange Act.| Large accelerated filer | ☒ | |||||
Accelerated filer | ||||||
| ☐ | ||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act). Yes ☐
No ☒The aggregate market value of the voting common equity held by2019)2020), was approximately $8.82$11.83 billion. Teva Pharmaceutical Industries Limited has no2019.2020.
non-affiliates
of the registrant, computed by reference to the closing price at which the American Depositary Shares were last sold on the New York Stock Exchange, as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, non-voting
common equity. For purpose of this calculation only, this amount excludes ordinary shares and American Depositary Shares held by directors and executive officers and by each person who owns or may be deemed to own 10% or more of the registrant’s common equity at June 30, As of December 31, 2019,2020, the registrant had 1,092,189,0071,096,511,852 ordinary shares outstanding.
Portions of the registrant’s definitive proxy statement for its annual meeting of shareholders to be filed within 120 days after the close of the registrant’s fiscal year are incorporated by reference into Part III of this Annual Report on Form
10-K.
TABLE OF CONTENTS
Page | |||||||||
1 | |||||||||
1 | |||||||||
PART I | |||||||||
Item 1. | 2 | ||||||||
Item 1A. | |||||||||
Item 1B. | |||||||||
Item 2. | |||||||||
Item 3. | |||||||||
Item 4. | |||||||||
PART II | |||||||||
Item 5. | |||||||||
Item 6. | |||||||||
Item 7. | |||||||||
Item 7A. | |||||||||
Item 8. | |||||||||
Item 9. | |||||||||
Item 9A. | |||||||||
Item 9B. | |||||||||
PART III | |||||||||
Item 10. | |||||||||
Item 11. | |||||||||
Item 12. | |||||||||
Item 13. | |||||||||
Item 14. | |||||||||
PART IV | |||||||||
Item 15. | |||||||||
Item 16. | |||||||||
INTRODUCTION AND USE OF CERTAIN TERMS
Unless otherwise indicated, all references to the “Company,” “we,” “our” and “Teva” refer to Teva Pharmaceutical Industries Limited and its subsidiaries, and references to “revenues” refer to net revenues. References to “U.S. dollars,” “dollars,” “U.S. $” and “$” are to the lawful currency of the United States of America, and references to “NIS” are to new Israeli shekels. References to “ADS(s)” are to Teva’s American Depositary Share(s). References to “MS” are to multiple sclerosis. Market data, including both sales and share data, is based on information provided by IQVIA, (formerly IMS Health Inc.), a provider of market research to the pharmaceutical industry, (“IQVIA”), unless otherwise stated. References to “Actavis Generics” are to the generic pharmaceuticals business we purchased from Allergan plc (“Allergan”) on August 2, 2016. References to “R&D” are to Research and Development, references to “IPR&D” are to
in-process
R&D, references to “S&M” are to Selling and Marketing and references to “G&A” are to General and Administrative. Some amounts in this report may not add up due to rounding. All percentages have been calculated using unrounded amounts. This report on Form10-K
contains many of the trademarks and trade names used by Teva in the United States and internationally to distinguish its products and services. Any third-party trademarks mentioned in this report are the property of their respective owners.CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTOR SUMMARY
In addition to historical information, this Annual Report on Form
10-K,
and the reports and documents incorporated by reference in this Annual Report on Form10-K,
may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are based on management’s current beliefs and expectations and are subject to substantial risks and uncertainties, both known and unknown, that could cause our future results, performance or achievements to differ significantly from that expressed or implied by such forward-looking statements. You can identify these forward-looking statements by the use of words such as “should,” “expect,” “anticipate,” “estimate,” “target,” “may,” “project,” “guidance,” “intend,” “plan,” “believe” and other words and terms of similar meaning and expression in connection with any discussion of future operating or financial performance. Important factors that could cause or contribute to such differences include risks relating to:our ability to successfully compete in the marketplace, including: that we are substantially dependent on our generic products; consolidation of our customer base and commercial alliances among our customers; delays in launches of new generic products; the increase in the number of competitors targeting generic opportunities and seeking U.S. market exclusivity for generic versions of significant products; our ability to develop and commercialize biopharmaceutical products; competition for our specialty products, especiallyincluding AUSTEDO, our leading medicine, which faces competition from existing and potential additional generic versions, competing glatiramer acetate products and orally-administered alternatives; the uncertainty of commercial success of AJOVY®or AUSTEDO®; competition from companies with greater resources and capabilities; delays in launches of new products and our ability to achieve expected results from investments in our product pipeline; our ability to develop and commercialize biopharmaceuticaladditional pharmaceutical products; efforts of pharmaceutical companies to limit the use of generics, including through legislation and regulations and the effectiveness of our patents and other measures to protect our intellectual property rights;
®
, AJOVY®
and COPAXONE®
our substantial indebtedness, which may limit our ability to incur additional indebtedness, engage in additional transactions or make new investments, may result in a further downgrade of our credit ratings; and our inability to raise debt or borrow funds in amounts or on terms that are favorable to us;
our business and operations in general, including: implementationuncertainty regarding the magnitude, duration, and geographic reach of therestructuring plan announced in December 2017;optimization efforts; our ability to attract, hire and retain highly skilled personnel; our ability to develop and commercialize additional pharmaceutical products; compliance with anti-corruption, sanctions and trade control laws; manufacturing or quality control problems; interruptions in our supply chain; disruptions of information technology systems; breaches of our data security; variations in intellectual property laws; challenges associated with conducting business globally, including adverse effects of political or economic instability, major hostilities or terrorism; significant salescosts and delays resulting from the extensive pharmaceutical regulation to a limited number of customers; our abilitywhich we are subject or delays in governmental processing time due to successfully bid for suitable acquisition targets or licensing opportunities, or to consummatetravel and integrate acquisitions; our prospects and opportunities for growth if we sell assets and potential difficulties related towork restrictions caused by the operation of our new global enterprise resource planning (ERP) system;
COVID-19
pandemic and its impact on our business, financial condition, operations, cash flows, and liquidity and on the economy in general; our ability to successfully execute and maintain the activities and efforts related to the measures we have taken or may take in response to theCOVID-19
pandemic and associated costs therewith; effectiveness of our COVID-19
pandemic;
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the effects of reforms in healthcare regulation and reductions in pharmaceutical pricing, reimbursement and coverage; significant sales to a limited number of customers; our ability to successfully bid for suitable acquisition targets or licensing opportunities, or to consummate and integrate acquisitions; and our prospects and opportunities for growth if we sell assets; |
compliance, regulatory and litigation matters, including: failure to comply with complex legal and regulatory environments; increased legal and regulatory action in connection with public concern over the abuse of opioid medications in the U.S. and our ability to reach a final resolution of the remaining opioid-related litigation; costsscrutiny from competition and delays resulting frompricing authorities around the extensive governmental regulationworld, including our ability to which we are subject;successfully defend against the effectsU.S. Department of reforms in healthcare regulation and reductions in pharmaceutical pricing, reimbursement and coverage; governmental investigations into S&M practices;Justice (“DOJ”) criminal charges of Sherman Act violations; potential liability for patent infringement; product liability claims; increased government scrutiny of our patent settlement agreements; failure to comply with complex Medicare and Medicaid reporting and payment obligations; compliance with anti-corruption sanctions and trade control laws; and environmental risks;
other financial and economic risks, including: our exposure to currency fluctuations and restrictions as well as credit risks; potential impairments of our intangible assets; potential significant increases in tax liabilities; and the effect on our overall effective tax rate of the termination or expiration of governmental programs or tax benefits, or of a change in our business;
and other factors discussed in this Annual Report on Form
10-K,
including in the sections captioned “Risk Factors.” Forward-looking statements speak only as of the date on which they are made, and we assume no obligation to update or revise any forward-looking statements or other information contained herein, whether as a result of new information, future events or otherwise. You are cautioned not to put undue reliance on these forward-looking statements.PART I
ITEM 1. BUSINESS
Business Overview
We are a global pharmaceutical company, committed to helping patients around the world to access affordable medicines and benefit from innovations to improve their health. Our mission is to be a global leader in generics, specialty medicines and biopharmaceuticals, improving the lives of patients.
We operate worldwide, with headquarters in Israel and a significant presence in the United States, Europe and many other markets around the world. Our key strengths include our world-leading generic medicines expertise and portfolio, focused specialty medicines portfolio and global infrastructure and scale.
Teva was incorporated in Israel on February 13, 1944 and is the successor to a number of Israeli corporations, the oldest of which was established in 1901.
Our Business Segments
We operate our business through three segments: North America, Europe and International Markets. Each business segment manages our entire product portfolio in its region, including generics, specialty and(“OTC”) products. This structure enables strong alignment and integration between operations, commercial regions, R&D and our global marketing and portfolio function, optimizing our product lifecycle across therapeutic areas.
over-the-counter
In addition to these three segments, we have other activities, primarily the sale of active pharmaceutical ingredients (“API”) 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.2
For information regarding our major customers, see note 19 to our consolidated financial statements.
Below is an overview of our three business segments.
North America
Our North America segment includes the United States and Canada.
We are the leading generic drugpharmaceutical company in the United States. We market over 500 generic prescription products in more than 1,500 dosage strengths, packaging sizes and forms, including oral solid dosage forms, injectable products, inhaled products, liquids, ointments and creams. Most of our generic sales in the United States are made to retail drug chains, mail order distributors and wholesalers.
Our wholesale and retail selling efforts are supported by participation in key pharmaceutical conferences as well as focused advertising in professional journals and on leading pharmacy websites. We continue to strengthen consumer awareness of the benefits of generic medicines through partnerships and digital marketing programs.
Our specialty portfolio in North America has an established presence infocuses on three main areas: central nervous system (“CNS”) medicines.and pain, respiratory and oncology.
Our CNS portfolio includes AJOVYAmerica. In addition, we continue to strengthen our specialty portfolio with AJOVYAmerica since it launched nearly 25 years ago.
®
for the preventive treatment of migraine in adults, AUSTEDO®
for the treatment of neurodegenerative and movement disorders – chorea associated with Huntington disease and tardive dyskinesia and COPAXONE®
, which is still among the leading products for the treatment of multiple sclerosis (“MS”) in North ®
, QVAR®
and our newly launched digital inhaler portfolio.We maintain a meaningful presence in oncology medicines, including both specialty and generic medicines.medicines (including biosimilars). In November 2019, we launched TRUXIMA
®
, our first oncology biosimilar product in the United States. BENDEKA®
is a liquid,low-volume
(50 mL) and short-time10-minute
infusion formulation of bendamustine hydrochloride that we licensed from Eagle Pharmaceuticals, Inc. (“Eagle”).Anda, our distribution business in the United States, distributes generic, specialty and OTC pharmaceutical products from various third party manufacturers to independent retail pharmacies, pharmacy retail chains, hospitals and physician offices in the United States. Anda is able to compete in the secondary distribution market by maintaining high inventory levels for a broad offering of products, competitive pricing and offering next day delivery throughout the United States.
Europe
Our Europe segment includes the European Union and certain other European countries.
We are the leading generic pharmaceutical company in Europe. We are among the top three generic pharmaceutical companies in a majoritynumber of European Union markets, including some of the largest markets in the European Union. No single country in Europe represents more than 25% of our total European generic revenues, and therefore we are not highly dependent on any single country that could be affected by pricing reforms or changes in regulations and public policy.
Despite their diversity and highly fragmented nature, the European markets share many characteristics that allow us to leverage our
pan-European
presence and broad portfolio. Global customers are important partners in3
our generic business and are expanding across Europe, although customer consolidation is lower than in the United States. We are one of a few generic pharmaceutical companies with a
pan-European
footprint. Most competitors focus on a select few markets or business lines.Our OTC portfolio in Europe includes global brands such as SUDOCREMPoland and FLUX®and Decubal®in the Nordic countries.Poland.
®
as well as local and regional brands such as NasenDuo®
in Germany and Flegamina®
in Our specialty portfolio in Europe focuses on three main areas: CNS and pain (including migraine), respiratory and oncology. Our leading product, COPAXONE, continues to be among the leading products for the treatment of MS, though new treatments are being introduced to various markets in the European Union.
AJOVY was granted EU marketing authorization in the European Union by the European Medicines Agency (“EMA”) in a centralized process in April 2019. We commenced launching2019 and, as of December 31, 2020, we have launched AJOVY in certain European markets in May 2019 and are moving forward with plans to launch the product in othermost European countries.
International Markets
Our International Markets segment includes all countries in which we operate other than those in our North America and Europe segments. These markets comprise more than 35 countries, covering a substantial portion of the global pharmaceutical market.
Our key international markets are Japan, Russia and Israel. In Japan, we operate a majority of our business through a business venture with Takeda Pharmaceutical Companies Limited (“Takeda”), in which we own a 51% stake and Takeda owns the remaining 49%. The countriesOn February 1, 2021, we completed the sale of the majority of the generic and operational assets of our business venture in Japan. Countries in our International Markets segment range frominclude highly regulated, pure generic markets, such as Israel, to hybrid markets, such as Japan, to branded generics oriented markets, such as Russia and certain Latin American markets.
America markets, and hybrid markets, such as Japan. Each market’s strategy is built upon differentiation and filling the unmet needs of that market. Our integrated sales force enables us to extract synergies across our branded generic, OTC and specialty medicines product offerings and across various channels (e.g., retail, institutional).
Our specialty portfolio in our International Markets segment focuses on three main areas: CNS and pain, respiratory and oncology.
Our Product Portfolio and Business Offering
Our product and service portfolio includes generic medicines, biopharmaceuticals, specialty medicines, OTC products, a distribution business, API and contract manufacturing. Each region manages the entire range of products and services offered in its region and our global marketing and portfolio function optimizes our pipeline and product lifecycle across therapeutic areas. In most markets in which we operate, we use an integrated and comprehensive marketing model, offering a broad portfolio of products, including specialty, generic and OTC products.
Generic Medicines
Generic medicines are the chemical and therapeutic equivalents of originator medicines and are typically more affordable in comparison to the originator’s products. Generics are required to meet similar governmental requirements as their brand-name equivalents, such as those relating to manufacturing processes and health authorities’ inspections, and must receive regulatory approval prior to their sale in any given country. Generic
medicines may be manufactured and marketed if relevant patents on their brand-name equivalents (and any additional government-mandated market exclusivity periods) have expired or have been challenged or otherwise circumvented.
We develop, manufacture and sell generic medicines in a variety of dosage forms, including tablets, capsules, injectables, inhalants, liquids, ointments and creams. We offer a broad range of basic chemical entities,
4
as well as specialized product families, such as sterile products, hormones, high-potency drugs and cytotoxic substances, in both parenteral and solid dosage forms.
Our generics business has a wide-reaching commercial presence. We are the leading generic pharmaceutical company in the United States and have a top three leadership position in many countries, including some of the key European markets. We have a robust product portfolio, comprehensive R&D capabilities and product pipeline and a global operational network, which enables us to execute key generic launches to further expand our product pipeline and diversify our revenue stream. We use these capabilities to help overcome price erosion in our generics business.
When considering whether to develop a generic medicine, we take into account a number of factors, including our overall strategy, regional and local patient and customer needs, R&D and manufacturing capabilities, regulatory considerations, commercial factors and the intellectual property landscape. We will challenge patents when appropriate if we believe they are either invalid or would not be infringed by our generic version. We may seek alliances to acquire rights to products we do not have in our portfolio, to share development costs or litigation risks, or to resolve patent and regulatory barriers to entry.
In markets such as the United States, the United Kingdom, Canada, the Netherlands and Israel, generic medicines may be substituted by the pharmacist for their brand name equivalent or prescribed by International Nonproprietary Name (“INN”). In these
so-called
“pure generic” markets, physicians and patients have little control over the choice of generic manufacturer, and consequently generic medicines are not actively marketed or promoted to physicians or consumers. Instead, the relationship between the manufacturer and pharmacy chains and distributors, health funds and other health insurers is critical. Many of these markets have automatic substitution models when generics are available as alternatives to brands. In Russia, Turkey, Ukraine, Kazakhstan and certain Latin American and European countries, generic medicines are generally sold under brand names alongside the originator brand. These markets are referred to as “branded generic” markets and are generally “out of pocket” markets in which consumers can pay for a particular branded generic medicine (as opposed to government or privately funded medical health insurance), often at the recommendation of their physician. Branded generic products are actively promoted and a sales force is necessary to create and maintain brand awareness. Other markets, such as Germany, Japan, France, Italy and Spain, are hybrid markets with elements of both approaches.Our position in the generics market is supported by our global R&D function, as well as our API R&D and manufacturing activities, which provide significant vertical integration for our products.
For information about our product launches and pipeline of generic medicines in North America and Europe, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Information—North America Segment” and “Item 7—Management’s Discussions and Analysis of Financial Condition and Results of Operations—Segment Information—Europe Segment.”
Biologic medicines are large and complex medicines produced by or made from living cells or organisms, often produced using cutting-edge biotechnological methods. Biosimilars are highly similar to the reference biologic, in both structure and function (e.g., pharmacodynamics, pharmacokinetics, safety, efficacy and immunogenicity) and, for any approved uses, have no clinically meaningful differences from the reference product in terms of safety, purity, and potency.
5
In November 2019 and February 2020, we launched TRUXIMABiosimilar Medicines
®
(rituximab)In January 2020 and March 2020, we launched HERZUMA
®
®
(trastuzumab)In November 2020, a Biologics License Application (“BLA”) was initially approvedaccepted for review by the FDA in December 2018,and a Marketing Authorization Application was accepted for review by the European Medicines Agency (“EMA”) for a proposed biosimilar to Humiraadditional indications approved in May 2019, so that HERZUMA’s label now matches allAlvotech, see “Item 7—Management’s Discussion and Analysis of the reference product’s indications: (i) adjuvant treatmentFinancial Condition and Results of HER2 overexpressing node positive or node negative (ER/PR negative or with one high risk feature) breast cancer, as part of a treatment regimen consisting of doxorubicin, cyclophosphamide, and either paclitaxel or docetaxel, as part of a treatment regimen with docetaxel and carboplatin, or as a single agent following multi-modality anthracycline based therapy, and (ii) in combination with paclitaxel for first-line treatment of HER2-overexpressing metastatic breast cancer, or as a single agent for treatment of HER2-overexpressing breast cancer in patients who have received one or more chemotherapy regimens for metastatic disease, and (iii) in combination with cisplatin and capecitabine or5-fluorouracil,Operations— Alvotech Partnership.”for the treatment of patients with HER2 overexpressing metastatic gastric or gastroesophageal junction adenocarcinoma who have not received prior treatment for metastatic disease.
®
(adalimumab) that is under development by Alvotech. For further information regarding our partnership with We entered into an exclusive partnership with Celltrionhave additional biosimilar products in October 2016 to commercialize HERZUMAdevelopment in the United Statesvarious stages of clinical trials and Canada.regulatory review.
Specialty Medicines
Our specialty medicines business, which is focused on delivering innovative solutions to patients and providers via medicines, devices and services in key regions and markets around the world, includes our core therapeutic areas of CNS (with a strong emphasis on MS, neurodegenerative disorders, neuropsychiatry, movement disorders and pain care including migraine) and respiratory medicines (with a focus on asthma and COPD). We also have specialty products in oncology and selected other areas.
We deploy medical and sales and marketing professionals within specific therapeutic areas who seek to address the needs of patients and healthcare professionals. We tailor our patient support, payer relations and medical affairs activities to the distinct characteristics of each therapeutic area and medicine.
The U.S. market is the most significant market in our specialty business. In Europe and International Markets, we leverage existing synergies between our specialty business and our generics and OTC businesses. Our specialty presence in International Markets is mainly built on our CNS, franchise, with gradual development in other therapeutic areas closely related to our branded generics portfolios in those countries.pain, respiratory and oncology medicines.
We have built specialized “Patient Support Programs” to help patients adhere to their treatments, improve patient outcomes and, in certain markets, to ensure timely delivery of medicines and assist in securing reimbursement. These programs reflect the importance we place on supporting patients and ensuring better medical outcomes for them. As part of our restructuring plan, we outsourced certain of these services to external vendors. Patient Support Programs are currently operated in many countries around the world in multiple therapeutic areas. We believe that it is important to provide a range of services and solutions tailored to meet the needs of patients according to their specific condition and local market requirements. We believe this capability provides an important competitive advantage in the specialty medicines market.
Below is a description of our key specialty products:
CNS (including Movement Disorders, Pain and PainMigraine)
Ourportfolio includes COPAXONE for the treatment of relapsing forms of MS, AJOVY for the preventive treatment of migraine and AUSTEDO for the treatment of tardive dyskinesia and chorea associated with Huntington disease.disease, AJOVY for the preventive treatment of migraine and COPAXONE for the treatment of relapsing forms of MS.
CNS and pain
AUSTEDO
AUSTEDO (deutetrabenazine) is a deuterated form of a small molecule inhibitor of vesicular monoamine 2 transporter, or VMAT2, that is designed to regulate the levels of a specific
6
neurotransmitter, dopamine, in the brain. The FDA granted Deutetrabenazine New Chemical Entity exclusivity until April 2022 and Orphan Drug exclusivity for the treatment of chorea associated with Huntington disease until April 2024. |
AUSTEDO was launched in the U.S. in 2017. It is indicated for the treatment of chorea associated with Huntington disease and for the treatment of tardive dyskinesia in adults, which is a debilitating, often irreversible movement disorder caused by certain medications used to treat mental health or gastrointestinal conditions.
AUSTEDO launched in China for the treatment of chorea associated with Huntington disease and for the treatment of tardive dyskinesia in early 2021. We continue with additional submissions in various other countries around the world.
AUSTEDO is protected in the United States by five Orange Book patents expiring between 2031 and 2033 and in Europe by two patents expiring in 2029. The first date for expected generic ANDA filings on AUSTEDO is in April 2021.
AJOVY
AJOVY (fremanezumab-vfrm) injection is a fully humanized monoclonal antibody that binds to calcitonin gene-related peptide (“CGRP”) and it is indicated for the preventive treatment of migraine in adults. AJOVY was launched in the U.S. in 2018. AJOVY was approved in Canada in April 2020.
During 2019, AJOVY was granted a marketing authorization in the European Union by the EMA in a centralized process and began receiving marketing authorizations in various countries in our International Markets segment. By the end of 2020, we launched AJOVY in most European countries and in certain International Markets countries. We are moving forward with plans to launch in other countries around the world.
On January 27, 2020, the FDA approved an auto-injector device for AJOVY in the U.S., which became commercially available in April 2020. We have also received approval from the EMA for AJOVY’s auto-injector submission in the EU in October 2019, and we commenced launch in March 2020.
AJOVY is protected by patents expiring in 2026 in Europe and in 2027 in the United States. Applications for patent term extensions have been submitted in various markets around the world, and certain extensions in Europe and other countries have already been granted until 2031. Additional patents relating to the use of AJOVY in the treatment of migraine have also been issued in the United States and will expire in 2035 and 2037. Such patents are also pending in other countries. AJOVY will also be protected by regulatory exclusivity of 12 years from marketing approval in the United States and 10 years from marketing approval in Europe.
We have filed a lawsuit in the U.S. District Court for the District of Massachusetts alleging that Eli Lilly & Co.’s (“Lilly”) marketing and sale of its galcanezumab product for the treatment of migraine infringes nine Teva patents. Lilly then submitted IPR (inter partes review) petitions to the Patent Trial and Appeal Board, challenging the validity of the nine patents asserted against it in the litigation. The litigation in the district court was stayed pending resolution of the IPR petitions. On February 18, 2020, the Patent Trial and Appeal Board issued decisions on the first six IPRs, finding the six composition of matter patents invalid as being obvious. On April 21, 2020, we filed notices of appeal in connection with these decisions. On March 31, 2020 the Patent Trial and Appeal Board issued a decision upholding the three method of treatment patents and, on June 1, 2020, Lilly filed notices of appeal in connection with the decisions on these three patents. The litigation stay ended following the issuance of the most recent IPR decisions, and the parties are proceeding with the litigation. In addition, in 2018 we entered into separate agreements with Alder Biopharmaceuticals, Inc. and Lilly, resolving the European Patent Office oppositions that they filed against our AJOVY patents. The settlement agreement with Lilly also resolved Lilly’s action to revoke the patent protecting AJOVY in the United Kingdom.
7
COPAXONE
COPAXONE
COPAXONE is believed to have a unique mechanism of action that works with the immune system, unlike many therapies that are believed to rely on general immune suppression or cell sequestration to exert their effect. COPAXONE provides a proven mix of efficacy, safety and tolerability.
The market for MS treatments continues to develop, particularly with the approval of generic versions of COPAXONE discussed above, as well as additional generic versions expected to be approved in the future.COPAXONE. Oral treatments for MS, such as Tecfidera
®
, Gilenya®
and Aubagio®
, continue to present significant and increasing competition. COPAXONE also continues to face competition from existing injectable products, as well as from monoclonal antibodies, such as Ocrevus®
.Oncology
Our specialtyportfolio includes BENDEKA®/ TREANDA
oncology
®
, GRANIX®
and TRISENOX®
in the United States and LONQUEX®
, TEVAGRASTIM®
/RATIOGRASTIM®
and TRISENOX®
outside the United States.BENDEKA and TREANDA
BENDEKA
B-cell
low-volume
(50 mL) and short-time10-minute
infusion formulation of bendamustine hydrochloride that we licensed from BENDEKA faces direct competition from BelrapzoEagle launched (abendamustine hydrochloride in June 2018, which competes directly with BENDEKA.product from Eagle). Other competitors to BENDEKA include combination therapies such as
®
ready-to-dilute
R-CHOP
(a combination of cyclophosphamide, vincristine, doxorubicin and prednisone in combination with rituximab) andCVP-R
(a combination of cyclophosphamide, vincristine and prednisolone in combination with rituximab) for the treatment of NHL, as well as a combination of fludarabine, doxorubicin and rituximab for the treatment of CLL and newer targeted oral therapies, such as ibrutinib, idelilisib and venetoclax.In July 2018, Eagle prevailed in its suit against the FDA to obtain seven years of orphan drug exclusivity in the United States for BENDEKA. On March 13, 2020, this decision was upheld in the appellate court. As things currently stand, drug applications referencing BENDEKA, TREANDA or any other bendamustine product will not be approved by the FDA until the orphan drug exclusivity expires in December 2022. In April 2019, we signed an amendment to the license agreement with Eagle extending the royalty term applicable to the United States to the full period for which we sell BENDEKA and increased the royalty rate. In consideration, Eagle agreed to assume a portion of BENDEKA-related patent litigation expenses.
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There are 15 patents listed in the U.S. Orange Book for BENDEKA with expiry dates betweenin 2026 and 2031. Teva and Eagle received noticesIn September 2019, a patent infringement action against four of Abbreviated New Drug Application (“ANDA”) filings by Slayback Pharmaceuticals, Fresenius Kabi, Apotex, Mylan, and Lupin Pharmaceuticals, Inc. (“Lupin”)six ANDA filers for generic versions of BENDEKA whichwas tried in the United States District Court for the District of Delaware. On April 27, 2020, the District Court upheld the validity of all contained Paragraph IV challenges against one or more of the BENDEKAasserted patents and found that all four ANDA filers infringe at least one of the patents. In response,Three of the four ANDA filers have appealed the district court decision, but barring an adverse appellate decision, these ANDA filers should be enjoined until the patents expire in 2031. The litigation against the fifth ANDA filer was dismissed after the withdrawal of its patent challenge, and the case against the sixth ANDA filer is in the early stages of litigation.
Additionally, in July 2018, Teva and Eagle filed patent infringement lawsuitssuit against each of the ANDA filersHospira, Inc. (“Hospira”) related to its 505(b)(2) new drug application (“NDA”) referencing BENDEKA in the U.S. District Court for the District of Delaware, four of which are pending a decision by the court, which could come as early as the first half of 2020. The respective30-monthstays, automatically triggered by the patent infringement lawsuits, began expiring in January 2020. The asserted patents expire in 2031. Additionally, Teva and Eagle received a notification from early 2018 that Hospira, Inc. (“Hospira”) filed a 505(b)(2) new drug application (“NDA”) referencing BENDEKA. In July 2018, Teva and Eagle filed suit against Hospira in the U.S. District Court for the District of Delaware. Hospira’s30-monthstay expires in December 2020. On December 16, 2019, the Delaware District Court dismissed the case against Hospira on all but one of the asserted patents, which expires in 2031. Trial against Hospira on that patent is scheduled to begin on November 15, 2021.
In addition to the settlement with Eagle regarding its bendamustine 505(b)(2) NDA, was filed for a liquid version of bendamustinebetween 2015 and 21 ANDAs were filed2020, we reached final settlements with 22 ANDA filers for generic versions of the lyophilized form of TREANDA. We have reached final settlements with all 22 filers,TREANDA and one 505(b)(2) NDA filer for a generic version of the liquid form of TREANDA, providing for the launch of generic versions of TREANDA prior to patent expiration.
Respiratory
Ourportfolio includes our legacy products, ProAir and QVAR, as well as our new digital inhalers withQVARAirDuo,and AirDuo®and CINQAIR®/CINQAERO
respiratory
built-in
sensors: ProAir®
Digihaler®
, ®
Digihaler®
and ArmonAir®
Digihaler®
. Our portfolio also includes BRALTUS®
, CINQAIR®
/CINQAERO®
, DuoResp®
Spiromax®
®
RespiClick®
/ ArmonAir®
RespiClick®
.We are committed to maintaining a leading presence in the respiratory market by delivering a range of medicines for the treatment of asthma and COPD. Our portfolio is centered on optimizing respiratory treatment for patients and healthcare providers through the development and commercialization of innovative delivery systems and therapies that help address unmet needs.
The key areas of focus for our respiratory R&D includeis the development of differentiated respiratory therapies for patients using innovative delivery systems to deliver chemical and biological therapies. Our device strategy is intended to result in “device consistency,” allowing physicians to choose the device that best matches a patient’s needs both in terms of ease of use and effectiveness of delivery of the prescribed molecule.
®
; andOur legacy products include ProAir and QVAR:
ProAir HFA
®
HFA, another albuterol inhaler. ProAir RespiClick
dry-powder,
short-acting beta-agonist inhaler for the treatment or prevention of bronchospasm with reversible obstructive airway disease and for the prevention of exercise-induced bronchospasm in patients four years of age and older.9
QVAR
QVAR RediHaler
Our Digihaler portfolio consists of ProAir Digihaler, ArmonAir Digihalerand AirDuo Digihaler that capture objective inhaler use data that may help health care professionals and patients make more informed treatment decisions that may improve health outcomes:
ProAir Digihaler
built-in
sensors which connects to a AirDuo Digihaler
built-in
sensors which connects to a companion mobile application and provides inhaler use information to people with asthma.Additional products in our respiratory portfolio include:
BRALTUS
®
inhaler. It was launched in Europe in August 2016.CINQAIR/CINQAERO
interleukin-5
antagonist monoclonal antibody foradd-on
maintenance treatment of adult patients with severe asthma and with an eosinophilic AirDuo RespiClick
Below is a description of key products in our specialty pipeline:
(date entered phase 3) Fremanezumab Fibromyalgia | Fremanezumab Additional indication | |||||||
TEV-48574 Respiratory | Fasinumab Osteoarthritic Pain (March 2016) (1) | |||||||
TEV-53275 Respiratory | ||||||||
Small Molecules | Deutetrabenazine Dyskinesia in Cerebral Palsy (September 2019) | Risperidone LAI Schizophrenia (2) | ||||||
Digihaler ® | ||||||||
(date entered phase 3) | ||||||||
QVAR ® Digihaler® (beclomethasone dipropionate HFA) (U.S.) | ||||||||
| (1) | ||||||||
Developed in collaboration with Regeneron Pharmaceuticals, Inc. (“Regeneron”). co-primary endpoints for fasinumab 1 mg monthly were achieved. Fasinumab 1 mg monthly demonstrated significant improvements in FDA-approved prescription doses ofnon-steroidal anti-inflammatory drugs for osteoarthritis. The FACT OA1 trial included an additional treatment arm, fasinumab 1 mg every two months, sub-group of patients from one phase 3 long-term safety trial, there was an increase in joint replacement with fasinumab 1 mg monthly treatment during theoff-drug |
Active treatment of patients with fasinumab, which only involved dosing in an optional second-year extension phase of one trial, has been discontinued following a recommendation from the fasinumab program’s Independent Data Monitoring Committee that the program should be terminated, based on available evidence obtained to date. The core efficacy data has already been obtained to support potential fasinumab regulatory filings. Long-term safety data continues to be gathered, and is expected to be reported in 2021, along with a decision on the program.
| (2) | In January 2021, we announced positive results for a phase 3 clinical trial designed to evaluate the efficacy of risperidone LAI. No new safety signals were identified that are inconsistent with the known safety profile of other risperidone formulations. The second phase 3 study evaluating long-term safety and tolerability is ongoing. |
During 2020, development of the following projects was discontinued:
AUSTEDO for the treatment of Tourette syndrome in pediatric patients in the U.S., which was being developed under a partnership agreement with Nuvelution Pharma, Inc.; and
fremanezumab (anti CGRP) for post-traumatic headache.
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(date entered phase 3) | ||||||||
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.We produce approximately 350 APIs for our own use and for sale to third parties in many therapeutic areas. APIs used in pharmaceutical products are subject to regulatory oversight by national health authorities. We utilize a variety of production technologies, including chemical synthesis, semi-synthetic fermentation, enzymatic synthesis, high potency manufacturing, plant extract technology and peptide synthesis. Our advanced technology and expertise in the field of solid state particle technology enable us to meet specifications for particle size distribution, bulk density, specific surface area and polymorphism, as well as other characteristics.
We provide contract manufacturing services related to products divested in connection with the sale of certain business lines, as well as other miscellaneous items. Our other activities are not included in our North America, Europe and International Markets segments described above.
Research and Development
Our R&D activities span the breadth of our business, including generic medicines (finished goods and API), biosimilars, specialty pharmaceuticals, biopharmaceuticalsmedicines and OTC medicines.
All of our R&D activities are concentrated under one global group with overall responsibility for generics, specialtybiosimilars and biologics,specialty, enabling better focus and efficiency.
A strong focus for Teva is the development of new generic medicines. We develop generic products for the United States,our North America, Europe and our International Markets segment.segments. Our focus is on developing complex formulations with complex technologies, which have higher barriers to entry. Generic R&D activities, which are carried out in development centers located around the world, include product formulation, analytical method development, stability testing, management of bioequivalence,performed.performed as well as most of our phase 1 studies for specialty and biosimilar products. We have more than 1,2501,160 generic products in our
bio-analytical
studies, other clinical studies and registration of generic drugs in all of the markets where we operate. We also operate several clinics where most of our bioequivalent studies are pre-approved
global pipeline, which includes products in all stages of the approval process:pre-submission,
post-submission and after tentative approval.In addition, our generic R&D supports our OTC business in developing OTC products, as well as in overseeing the work performed by contract developers.
AB-rated
respiratory programs and devices for our long active injectable pipeline.We pursue biosimilar pipeline projects in other therapeutic and disease areas that leverage our global R&D and commercial areas of expertise. Biosimilar development activities, such as analytical method development, testing for analytical biosimilarity,
pre-clinical
work, clinical studies and regulatory strategy, are conducted in Teva’s various global development sites.Our specialty R&D product pipeline is focused on biologic and select small molecule products. Specialty development activities include preclinical assessment (including toxicology, pharmacokinetics, pharmacodynamics and pharmacology studies), clinical development (including pharmacology and the design,
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execution and analysis of global safety and efficacy trials), as well as regulatory strategy to deliver registration of our pipeline products. We develop novel specialty products in our core therapeutic and disease focus areas. We have CNS projects in areas such as migraine, pain, movement disorders/neurodegeneration and neuropsychiatry. Our respiratory projects are focused on asthma and COPD and include both novel compounds and delivery systems designed to address unmet patient needs.
Our API R&D division focuses on the development of processes for the manufacturing of APIs, including intermediates, chemicals and fermentation products, for both our generic and proprietary drugs. Our facilities include two large development centers in India and Croatia, focusing on synthetic products, and three centers with specific expertise: a center in Hungary specializing in fermentation and semi-synthetic products, a center in Israel for oligonucleotides and a center in the Czech Republic for high-potency APIs. Our substantial investment in API R&D generates a steady flow of API products, supporting the timely introduction of generic products to market.market in compliance with increasing regulatory requirements. The API R&D division also seeks methods to continuously reduce API production costs, enabling us to improve our cost structure.
While our focus is on internal growth that leverages our R&D capabilities, we have entered into, and expect to pursue,EagleRegeneron and Regeneron)Alvotech). In parallel, we evaluate and expand the development scope of our existing R&D pipeline products as well as our existing products for submission in additional markets.
in-licensing,
acquisition and partnership opportunities to supplement and expand our existing specialty and biosimilar pipeline (e.g., the transactions with Celltrion, Operations
We operate our business globally and believe that our global infrastructure provides us with the following capabilities and advantages:
global R&D facilities that enable us to have a broad global generic pipeline and product line, as well as a focused pipeline of specialty products;
pharmaceutical manufacturing facilities approved by the FDA, EMA and other regulatory authorities located around the world, which offer a broad range of production technologies and the ability to concentrate production in order to achieve high quality and economies of scale;
API manufacturing capabilities that offer a stable, high-quality supply of key APIs, vertically integrated with our pharmaceutical operations; and
high-volume, technologically advanced distribution facilities that allow us to deliver new products to our customers quickly and efficiently, providing a cost-effective, safe and reliable supply.
These capabilities provide us with the means to respond on a global scale to a wide range of therapeutic and commercial requirements of patients, customers and healthcare providers.
Pharmaceutical Production
We operate 4746 finished dosage and packaging pharmaceutical plants in 22 countries. These plants manufacture solid dosage forms, sterile injectables, liquids, semi-solids, inhalers, transdermal patches and other medical devices. In 2019,2020, we produced approximately 7368 billion tablets and capsules and approximately 753646 million sterile units.
Our primary manufacturing technologies, solid dosage forms, injectablesinjectable and blow-fill-seal, are available in North America, Europe, Latin America, India and Israel. The manufacturing sites located in Israel, Germany, Hungary, Croatia, Bulgaria, India, Spain, Poland and the Czech Republic make up the majority of our production capacity.
We use several external contract manufacturers to achieve operational and cost benefits. We continue to strengthen our third party operations unit to strategically work with our supplier base in order to meet cost, supply security and quality targets on a sustainable basebasis in alignment with our global procurement organization.
Our policy is to maintain multiple supply sources for our strategic products and APIs to appropriately mitigate risk in our supply chain to the extent possible. However, our ability to do so may be limited by regulatory and other requirements.
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Between 2017 and 2019, we closed or divested a significant number of manufacturing plants in North America,the United States, Europe, Israel and Japan in connection with a restructuring plan. We are continuing our restructuring plan, announced in December 2017. We planongoing efforts to continue to optimizeconsolidate our manufacturing and supply network prospectively as well.network.
Raw Materials for Pharmaceutical Production
In general, we purchase our raw materials and supplies required for the production of our products in the open market. For some products, we purchase such raw materials and supplies from one source (the only source available to us) or a single source (the only approved source among many available to us), thereby requiring us to obtain such raw materials and supplies from that particular source. We attempt, if possible, to mitigate our raw material supply risks through inventory management and alternative sourcing strategies.
We source a large portion of our APIs from our own manufacturing facilities. Additional APIs are purchased from suppliers located in Europe, Asia and the United States. We have implemented a supplier audit program to ensure that our suppliers meet our high standards and are able to fulfill the requirements of our global operations.
We currently have 1715 API production facilities, producing approximately 350 APIs in various therapeutic areas. Our API intellectual property portfolio includes hundreds of granted patents and pending applications worldwide.
We have expertise in a variety of production technologies, including chemical synthesis, semi-synthetic fermentation, enzymatic synthesis, high-potency manufacturing, plant extract technology, peptides synthesis, vitamin D derivatives synthesis and prostaglandins synthesis. Our advanced technology and expertise in the field of solid state particle technology enable us to meet specifications for particle size distribution, bulk density, specific surface area and polymorphism, as well as other characteristics.
Our API facilities are required to comply with applicable current Good Manufacturing Practices (“cGMP”) requirements under U.S., European, Japanese and other applicable quality standards. Our API plants are regularly inspected by the FDA, European agencies and other authorities, as applicable.
Patents and Other Intellectual Property Rights
We rely on a combination of patents, trademarks, copyrights, trade secrets and other proprietary
know-how
and regulatory exclusivities, as well as contractual protections, to establish and protect our intellectual property rights. We own or license numerous patents covering our products in the United States and other countries. We have also developed many brand names and own many trademarks covering our products. We consider the overall protection of our intellectual property rights to be of material value and act to protect these rights from infringement. We license or assign certain intellectual property rights to third parties in connection with certain business transactions.Environment, Health and Safety
We are committed to business practices that promote socially and environmentally responsible economic growth. During 2019,2020, we continued to make significant progress on our multi-year plan towards our long-term environment, health and safety (“EHS”) goal referred to as “Target Zero”: zero incidents, zero injuries and zero releases. Among other things, in 2019,2020, we:
continued the implementation of our global EHS management system, which promotes proactive compliance with applicable EHS requirements, establishes EHS standards throughout our global operations and helps drive continuous improvement in our EHS performance;
provided EHS regulatory monitoring tools in all countries where we have significant operations; and
14
proactively evaluated EHS compliance through self-evaluation and an internal and external audit program, addressing
non-conformities
through appropriate corrective and preventative action.Please see the section entitled “Environmental Sustainability” from our Teva 2019 ESG Progress Report (which is located on our website) for more detailed information regarding our environmental goals. Nothing on our website, including our 2019 ESG Progress Report or sections thereof, shall be deemed incorporated by reference into this Annual Report or any other filing with the Securities and Exchange Commission.
Quality
We are committed not only to complying with quality requirements but to developing and leveraging quality as a competitive advantage. In 2019,2020, we successfully completed numerous inspections by various regulatory agencies of our finished dosage pharmaceutical and API plants and our pharmacovigilance function, continuedwe actively engaged in discussions with authorities aboutto mitigate drug shortages and participated in several industry-wide task forces. We continue to focus on maintaining a solid and sustainable quality compliance foundation, as well as making quality a priority to foster continuous compliance. We seek to ensure that quality is an embedded part of our corporate culture and is reflected in all of our daily operations, delivering reliable and high quality products.
For information regarding significant regulatory events, see note 15 to our consolidated financial statements.
Competition
Sales of generic medicines have benefitted from increasing awareness and acceptance on the part of healthcare insurers and institutions, consumers, physicians and pharmacists around the world. Factors contributing to this increased awareness are the passage of legislation permitting or encouraging generic substitution and the publication by regulatory authorities of lists of equivalent pharmaceuticals, which provide physicians and pharmacists with generic alternatives. In addition, various government agencies and many private managed care or insurance programs encourage the substitution of brand-name pharmaceuticals with generic products as a cost-savings measure in the purchase of, or reimbursement for, prescription pharmaceuticals.
In the United States, we are subject to competition in the generic drug market from domestic and international generic drug manufacturers and brand-name pharmaceutical companies through lifecycle management initiatives,introduction of next-generation medicines, authorized generics, existing brand equivalents and manufacturers of therapeutically similar drugs. An increase in FDA approvals for existing generic products is increasing the competition on our base generic products. Price competition from additional generic versions of the same product typically results in margin pressures, which is causing some generics companies to increase focus on portfolio efficiency and product life cycle management.efficiency.
The European market continues to be ever more competitive, especially in terms of pricing, higher quality standards, customer service and portfolio relevance. We are one of only a few companies with a
pan-European
footprint, while most of our European competitors focus on a limited number of selected markets or business lines. Our leadership position in Europe allows us to be a reliable partner to fulfill the needs of patients, physicians, pharmacies, customers and payers.In our International Markets, our global scale and broad portfolio give us a significant competitive advantage over local competitors, allowing us to optimize our offerings through a combination of high quality medicines and uniqueapproaches.
go-to-market
Furthermore, in significant markets such as Japan and Russia, governments have issued or are in process of issuing regulations designed to increase generic penetration. Specifically, in Japan, ongoing regulatory pricing reductions and generic competition to
off-patented
products have negatively affected our sales in Japan. These conditions result in intense competition in the generic market, with generic companies competing for advantage based on pricing, time to market, reputation and customer service.15
The biosimilars business is also highly competitive and continues to evolve as intellectual property protections for biological products continue to expire in the United States. While we believe that our biologics knowledge and experience provide us with competitive advantages, we anticipate significant competition in the biosimilar space. Risks related to commercialization of our prospective biosimilars include the number of competitors, potential for steeper than anticipated price erosion, and intellectual property challenges that may impact timely commercialization. There is also a risk of lower or slower uptake due to various factors that may differ among biosimilars such as competitive practices, physician hesitancy to prescribe biosimilars for certain therapeutic areas, and level of financial incentives (payer or government). We anticipate that the downward pressure on uptake may ease in the future as physicians and payers become increasingly aware of the benefits of biosimilars and more comfortable prescribing them.
Our specialty medicines business faces intense competition from both specialty and generic pharmaceutical companies. The specialty business may continue to be affected by price reforms and changes in the political landscape, following recent public debate in the United States. We believe that our primary competitive advantages include our commercial marketing teams, global R&D capabilities, the body of scientific evidence substantiating the safety and efficacy of our various medicines, our patient-centric solutions, physician and patient experience with our medicines and our medical capabilities, which are tailored to our product offerings, regional and local markets and the needs of our stakeholders.
Human Capital Management
Our People
Our employees are the heart of our Company. In the highly competitive pharmaceutical industry, it is imperative that we attract, develop and retain top talent on an ongoing basis. To do this, we seek to make Teva an inclusive, diverse and safe workplace, with meaningful compensation, benefits and wellness programs, and offering training and leadership development programs that foster career growth.
Our Human Resources and Compensation Committee, Compliance Committee and Board play key roles in overseeing culture and talent at Teva and devote time throughout the year to human capital strategy and execution in such areas as: inclusion and diversity, Company culture, employee engagement, training and development, recruiting and turnover, leadership development and succession planning. Management regularly updates the Board on internal metrics in these areas.
Employees
As of December 31, 2020, Teva’s work force consisted of 40,216 employees. As a global company, we have employees in 60 countries around the world, representing a wide range of nationalities. In certain countries, we are party to collective bargaining agreements with certain groups of employees.
The following table presents our workforce headcount by employment type:
December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Full-time | 37,100 | 38,130 | 40,556 | |||||||||
Part-time | 1,272 | 1,158 | 621 | |||||||||
Contractor | 1,844 | 1,497 | 1,756 | |||||||||
Total | 40,216 | 40,785 | 42,933 | |||||||||
Total full time equivalent | 39,717 | 40,039 | 42,535 | |||||||||
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The following table presents our workforce headcount by geographic area (excluding contractors):
December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
North America | 6,918 | 7,336 | 7,752 | |||||||||
Europe | 18,569 | 18,207 | 19,004 | |||||||||
International Markets (excluding Israel) | 9,210 | 9,408 | 9,579 | |||||||||
Israel | 3,675 | 4,337 | 4,843 | |||||||||
Total (excluding contractors) | 38,372 | 39,288 | 41,177 | |||||||||
Inclusion and Diversity
Inclusion and diversity are essential to our ability to innovate and grow our business. It is our desire to create and sustain an inclusive and diverse work environment.
Employees identifying as female represent 45% of our global employee population, 47% of managers, and 23% of top executives, as of December 31, 2020.
We seek to underscore our inclusive and diverse culture through employee resource groups and training, among other things. For instance, in the U.S., the Teva Inclusion Network is made up of nine employee resource groups (“ERGs”), which have a key role in creating a culture of inclusion and bring together employees with shared characteristics and life experiences to foster opportunities for networking, mentoring, collaboration, community outreach, career development, leadership training and cultural exchanges. Currently, our ERGs include groups for women, men, African Americans, Hispanics/Latinos, Asian Americans, employees with disabilities, military veterans, pride and parenting stages. We also train and offer educational resources to our employees on unconscious bias.
Health and Safety
We believe that every person has the right to a safe and healthy work environment, and we believe all injuries, illnesses and safety incidents are preventable. We aspire toward Target Zero: Zero Incidents, Zero Injuries and Zero Releases (spills and accidental discharges). We also ensure our employees are properly trained on the safety precautions implemented across our Company.
Since the start of the
COVID-19
pandemic, we have operated conscientiously, focusing on the health, safety and well-being of our employees as a top priority. We have reduced the number of employees in our facilities to enable social distancing by introducing virtual solutions and flexible work arrangements. We adhere to PPE and hygiene instructions to protect our people, their families and the communities where we operate and live. We handle suspected and confirmedCOVID-19
cases with the highest safety measures and with full respect for our employees’ privacy.Employee Career Growth, Training and Development
We invest in employee career growth and development at Teva in order to remain competitive in our industry. Our programs also benefit employees individually by providing them with the resources they need to enhance their professional and management abilities, develop leadership skills and achieve their career aspirations.
We maintain a range of learning resources to support employees of all levels in developing skills and contributing to Teva’s strategy, ultimately driving business performance. Much of our employee training is
in-role,
amplified by global online training and locally-tailored training modules to meet different challenges, help gain new leadership and essential skills and ensure compliance with our policies.17
In order to measure our success at promoting talent from inside our organization, we track the proportion of positions filled with internal candidates and other related statistics.
To continue our employee training and development during the
COVID-19
pandemic, many of ourin-person
programs have been modified to be virtual. In addition, we equipped our managers with information and tools on effective management in times of disruption and provided employees with online resources to address the challenges of working remotely, including with respect to maintaining their well-being.Compensation, Benefits and Wellness
Our commitment to our employees starts with compensation and benefit programs that show how we value their contributions by providing a full complement of competitive compensation, health and retirement programs for them and their families. In addition to salaries, we offer variable pay in the form of bonuses and stock-based compensation for eligible employees. We have one global annual bonus design for all eligible employees, demonstrating our One Teva culture. We offer benefits that vary by country and are designed to be competitive in the marketplace.
Through practical tools and local programs, we also address the physical, financial, social and emotional needs of our employees and their families. We offer programs and initiatives that promote healthy diets, physical activity and mental well-being. For example, we provide annual medical
check-ups
and examinations for employees across many of our markets. In addition, we enhanced our well-being programs in response to theCOVID-19
pandemic.Employee Engagement and Satisfaction
To understand whether our human capital strategies are effective and are resonating with our employees, and where we can improve, we conduct an annual employee survey. In 2019, 82% of our employees completed the survey. In 2020, in the midst of the
COVID-19
pandemic, 86% participated. The 2020 employee survey served as one of the ways we sought to monitor employee morale during this time. Results of the survey show that employee engagement levels are high. Employees are feeling connected with Teva’s mission and values. They feel pride in Teva’s positive impact on society and have trust in Teva’s future. Management reviews the survey results closely to determine areas for improvement and creates action plans to address any gaps. Survey results are communicated to employees though global communications and town halls and shared with our Board of Directors.We have also created an initiative to recognize and celebrate Teva heroes—those who have gone above and beyond during this challenging time to deliver on Teva’s mission and provide medicines to our patients around the world.
Please see the section entitled “Our People” from our Teva 2019 ESG Progress Report (which is located on our website) for more detailed information regarding our Human Capital programs and initiatives. Nothing on our website, including our 2019 ESG Progress Report or sections thereof, shall be deemed incorporated by reference into this Annual Report or any other filing with the Securities and Exchange Commission.
Regulation
United States
Food and Drug Administration and the Drug Enforcement Administration
All pharmaceutical manufacturers selling products in the United States are subject to extensive regulation by the United States federal government, principally by the FDA and the Drug Enforcement Administration (“DEA”), and, to a lesser extent, by state and local governments. The Federal Food, Drug, and Cosmetic Act, the
18
Controlled Substances Act (“CSA”) and other federal and state statutes and regulations govern or influence the development, manufacture, testing, safety, efficacy, labeling, approval, storage, distribution, recordkeeping, advertising, promotion, sale, import and export of our products. Our facilities are periodically inspected by the FDA, which has extensive enforcement powers over the activities of pharmaceutical manufacturers. Noncompliance with applicable requirements may result in fines, criminal penalties, civil injunction against shipment of products, recall and seizure of products, total or partial suspension of production, sale or import of products, refusal of the government to enter into supply contracts or to approve NDAs, ANDAs or biologics license applications (“BLAs”)BLAs and criminal prosecution by the U.S. Department of Justice.Justice (“DOJ”). The FDA also has the authority to deny or revoke approvals of marketing applications and the power to halt the operations of
non-complying
manufacturers. Any failure to comply with applicable FDA policies and regulations could have a material adverse effect on our operations.FDA approval is required before any “new drug” (including generic versions of previously approved drugs) may be marketed, including new strengths, dosage forms and formulations of previously approved drugs. Applications for FDA approval must contain information relating to bioequivalence (for generics), safety, toxicity and efficacy (for new drugs), product formulation, raw material suppliers, stability, manufacturing processes, packaging, labeling and quality control. FDA procedures generally require that commercial manufacturing equipment be used to produce test batches for FDA approval. The FDA also requires validation of manufacturing processes so that a company may market new products. The FDA conducts
pre-approval
and post-approval reviews and plant inspections to implement these requirements.The federal CSA and its implementing regulations establish a closed system of controlled substance distribution for legitimate handlers. The CSA imposes registration, security, recordkeeping and reporting, storage, manufacturing, distribution, importation and other requirements upon legitimate handlers under the oversight of the DEA. The DEA categorizes controlled substances into one of five schedules—Schedule I, II, III, IV, or V—with varying qualifications for listing in each schedule. Facilities that manufacture, distribute, conduct chemical analysis, import or export any controlled substance must register annually with the DEA. The DEA inspects all registered facilities to review security, record keeping and reporting and handling prior to issuing a controlled substance registration and periodically thereafter. Failure to maintain compliance with applicable requirements, particularly as manifested in the loss or diversion of controlled substances, can result in enforcement action, such as civil penalties, refusal to renew necessary registrations or the initiation of proceedings to revoke those registrations. In certain circumstances, violations could lead to criminal prosecution.
The Drug Price Competition and Patent Term Restoration Act (the “Hatch-Waxman Act”) established the procedures for obtaining FDA approval for generic forms of brand-name drugs. This act also provides market exclusivity provisions that can delay the approval of certain NDAs and ANDAs. One such provision allows a five-year period of data exclusivity for NDAs containing new chemical entities and a three-year period of market exclusivity for NDAs (including different dosage forms) containing new clinical trial(s) essential to the approval of the application. The Orphan Drug Act grants seven years of exclusive marketing rights to a specific drug for a specific orphan indication. The term “orphan drug” refers, generally, to a drug that treats a rare disease affecting fewer than 200,000 Americans. Market exclusivity provisions are distinct from patent protections and apply equally to patented and
non-patented
drug products. Another provision of the Hatch-Waxman Act extends certain patents for up to five years as compensation for the reduction of effective life of the patent which resulted from time spent in clinical trials and time spent by the FDA reviewing a drug application.Under the Hatch-Waxman Act, any company submitting an ANDA or an NDA under Section 505(b)(2) of the Food, Drug, and Cosmetic Act (i.e., an NDA that, similar to an ANDA, relies, in whole or in part, on FDA’s prior approval of another company’s drug product; also known as a “505(b)(2) application”) must make certain certifications with respect to the patent status of the drug for which it is seeking approval. In the event that such applicant plans to challenge the validity or enforceability of an existing listed patent or asserts that the proposed product does not infringe an existing listed patent, it files a “Paragraph IV” certification. In the case of ANDAs, the Hatch-Waxman Act provides for a potential
180-day
period of generic exclusivity for the first company to19
submit an ANDA with a Paragraph IV certification. This filing triggers a regulatory process in which the FDA is required to delay the final approval of subsequently filed ANDAs containing Paragraph IV certifications until 180 days after the first commercial marketing. For both ANDAs and 505(b)(2) applications, when litigation is brought by the patent holder, in response to this Paragraph IV certification, the FDA generally may not approve the ANDA or 505(b)(2) application until the earlier of 30 months or a court decision finding the patent invalid, not infringed or unenforceable. Submission of an ANDA or a 505(b)(2) application with a Paragraph IV certification can result in protracted and expensive patent litigation.
Products manufactured outside the United States and marketed in the United States are subject to all of the above regulations, as well as to FDA, DEA and United States customs regulations at the port of entry. Products marketed outside the United States that are manufactured in the United States are additionally subject to various export statutes and regulations, as well as regulation by the country in which the products are to be sold.
Our products also include biopharmaceutical products that are comparable to brand-name biologics, but that are not approved as biosimilar versions of such brand-name products. While regulations are still being developed by the FDA relating to the Biologics Price Competition and Innovation Act of 2009, which created a statutory pathway for the approval of biosimilar versions of brand-name biological products and a process to resolve patent disputes, the FDA has issued guidance to provide a roadmap for development of biosimilar products.
In August 2017, the FDA user fee reauthorization legislation, known as the FDA Reauthorization Act of 2017 (“FDARA”) was enacted in the United States. The agreements for pharmaceuticals, biosimilars and medical devices were negotiated with industry representatives over the course of 2016 to establish the amounts regulated companies would pay the FDA to support the product review process at the agency. Various fees must be paid by these manufacturers at different times, such as annually and with the submission of different types of applications. In return for this additional funding, the FDA has entered into agreements with each of the affected industries (known as the “user fee agreements”) that commit the agency to interacting with manufacturers and reviewing applications such as NDAs, ANDAs and BLAs in certain ways, and taking action on those applications at certain times. The agency is obligated to set specific timelines to communicate with companies, meet with company product sponsors during the review process and take action on their applications. On the generics side, FDARA established a new
180-day
exclusivity for certain generic drugs that are no longer protected by exclusivity or patents, as well as new programs for enhanced and priority review of certain generic drug applications. On the branded side, this was the sixth agreement between the industry and the FDA. The user fee agreement for biosimilars was reauthorized for the second time as well.The Patient Protection and Affordable Care Act and Certain Government Programs
The Patient Protection and Affordable Care Act (“ACA”) from 2010 represented the most significant health care reform in the United States in over thirty years. It was passed to require individuals to have health insurance and to control the rate of growth in healthcare spending through, among other things, stronger prevention and wellness measures, increased access to primary care, changes in healthcare delivery systems and the creation of health insurance exchanges. Enrollment in the health insurance exchanges began in October 2013. However, the individual mandate was subsequently repealed by Congress in the tax reform bill signed into law in December 2017. The Joint Committee on Taxation estimates that the repeal will result in over 13 million Americans losing their health insurance coverage over the next ten years and is likely to lead to increases in insurance premiums. In
December 2018, a U.S. federal district court ruled that the ACA is unconstitutional, but such decision has been stayed, and will not take effect while such decision ispending resolution by the Supreme Court following oral arguments on appeal.November 10, 2020.
The ACA requires the pharmaceutical industry to share in the costs of reform, by, among other things, increasing Medicaid rebates and expanding Medicaid rebates to cover Medicaid managed care programs. The ACA also included funding of pharmaceutical costs for Medicare patients in excess of the prescription drug coverage limit and below the catastrophic coverage threshold. Commencing 2019, under the ACA, pharmaceutical companies arewere obligated to fund 70% of the patient obligation for branded prescription pharmaceuticals in this gap, or “donut hole.” Additionally, an excise tax was levied against certain branded pharmaceutical products. The tax is specified by statute to be approximately $3.5$2.8 billion in 2017, $4.2 billion in 20182019 and $2.8 billion each year
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thereafter. The tax is to be apportioned to qualifying pharmaceutical companies based on an allocation of their governmental programs as a portion of total pharmaceutical government programs.
The Centers for Medicare & Medicaid Services (“CMS”) administer the Medicaid drug rebate program, in which pharmaceutical manufacturers pay quarterly rebates to each state Medicaid agency. Generally, for generic drugs marketed under ANDAs, manufacturers (including Teva) are required to rebate 13% of the average manufacturer price, and for products marketed under NDAs or BLAs, manufacturers are required to rebate the greater of 23.1% of the average manufacturer price or the difference between such price and the commercial best price during a specified period. An additional rebate for products marketed under ANDAs, NDAs or BLAs is payable if the average manufacturer price increases at a rate higher than inflation and other methodologies apply to new formulations of existing drugs. This provision was extended at the end of 2015 to cover generic drugs marketed under ANDAs as well. The Association for Accessible Medicines, the generic drug manufacturers’ trade association, is working to undo this policy as penalty on the industry and will continue to lobby for its abolishment.
Various state Medicaid programs have implemented voluntary supplemental drug rebate programs that may provide states with additional manufacturer rebates in exchange for preferred status on a state’s formulary or for patient populations that are not included in the traditional Medicaid drug benefit coverage. In addition, a number of states, including New York, have enacted legislation that requires entities to pay assessments or taxes on the sale or distribution of opioid medications in order to address the misuse of prescription opioid medications.
Europe
General
In Europe, marketing authorizations for pharmaceutical products may be obtained either through a centralized procedure involving the EMA, a mutual recognition procedure which requires submission of applications in other member states following approval by a
so-called
reference member state, a decentralized procedure that entails simultaneous submission of applications to chosen member states or occasionally through a local national procedure.During 2019,2020, we continued to register products in the European Union, primarily using the decentralized procedure (simultaneous submission of applications to chosen member states). We continue to use, on occasion, the mutual recognition and centralized procedures.
The European pharmaceutical industry is highly regulated and much of the legislative and regulatory framework is driven by the European Parliament and the European Commission. This has many benefits, including the potential to harmonize standards across the complex European market, but it also has the potential to create complexities affecting the entire European market.
European Union
The medicines regulatory framework of the European Union requires that medicinal products, including generic versions of previously approved products and new strengths, dosage forms and formulations of previously approved products, receive a marketing authorization before they can be placed on the market in the European Union. Authorizations are granted after a favorable assessment of quality, safety and efficacy by the respective health authorities. In order to obtain authorization, application must be made to the EMA or to the competent authority of the member state concerned. Besides various formal requirements, the application must contain the results of pharmaceutical (physico-chemical, biological or microbiological) tests,
pre-clinical
(toxicological and pharmacological) tests and clinical trials. All of these tests must have been conducted in accordance with relevant European regulations and must allow the reviewer to evaluate the quality, safety and efficacy of the medicinal product.In order to control expenditures on pharmaceuticals, most member states of the European Union regulate the pricing of such products and in some cases limit the range of different forms of a drug available for prescription by national health services. These controls can result in considerable price differences among member states.
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In addition to patent protection, exclusivity provisions in the European Union may prevent companies from applying for marketing approval for a generic product for eight years (or ten years for orphan medicinal products) from the date of the first marketing authorization of the original product in the European Union. Further, the generic product will be barred from market entry (marketing exclusivity) for a further two years, with the possibility of extending the market exclusivity by one additional year under certain circumstances.
The term of certain pharmaceutical patents may be extended in the European Union by up to five years upon grant of Supplementary Patent Certificates (“SPC”). The purpose of this extension is to increase effective patent life (i.e., the period between grant of a marketing authorization and patent expiry) to 15 years.
Subject to the respective pediatric regulation, the holder of an SPC may obtain a further patent term extension of up to six months under certain conditions. This
six-month
period cannot be claimed if the license holder claims aone-year
extension of the period of marketing exclusivity based on the grounds that a new pediatric indication brings a significant clinical benefit in comparison with other existing therapies.In July 2019, the SPC Manufacturing Waiver Regulation came into force in the European Union (subject to certain conditions and transitional provisions)conditions) allowing products manufactured prior to SPC expiry to be exempt from SPC infringement if such products are manufactured for export to
non-European
Union markets or for launch in the European Union upon expiry of the SPC. This waiver will apply from July 2, 2022 to all SPCs that come into effect after July 1, 2019 or, if the SPC was applied for after July 1, 2019, from the date the SPC comes into effect.Orphan designated products, which receive, under certain conditions, a blanket period of ten years of market exclusivity, may receive an additional two years of exclusivity instead of an extension of the SPC if the requirements of the pediatric regulation are met.
The legislation also allows for R&D work during the patent term for the purpose of developing and submitting registration dossiers.
In 2016, the United Kingdom conducted a referendum and voted to leave the European Union, also known as “Brexit.” On March 29, 2017, the BritishUnited Kingdom government invoked Article 50 of the Lisbon Treaty onto exit the European Union and onUnion. On January 31, 2020, the United Kingdom left the European Union. The United KingdomUnion, and European Union entered a transition period of 11 months which may be extended once by agreement of the E.U. and the U.K. before Julymonths. On December 24, 2020, for up to one or two years. However, the transition agreement between the two parties means that the United Kingdom will abide by current regulatory and trading frameworks at least untilEuropean Union agreed on a new Trade and Cooperation Agreement and on December 31, 2020, pending the agreementUnited Kingdom formally left the transition period. The Trade and Cooperation Agreement is comprehensive, but does not cover all areas of regulation pertinent to the pharmaceutical industry, so certain complexities remain. We continue to have processes and contingencies in place to minimize their future relationship. As pharmaceutical legislationimpact, and to maintain our ability to supply medicines to patients in the United Kingdom, is largely derived fromand to supply medicines made in the United Kingdom to other markets.
In November 2020, the European Union law and relies on mutual recognitionCommission published a “Pharmaceutical strategy for Europe,” which sets out a suite of decision making, implementation of a number of practical steps is required before the end of 2020 if the transition period is not extended. We are working on processes to ensure a smooth transition irrespective ofpolicies that will shape the future relationship between the European Unionregulatory environment. These wide-ranging policies represent a multi-year program aimed, through review and the United Kingdom.revision of existing legislation, to provide a flexible regulatory system that, amongst other things, will lead to accelerated availability of medicines and promote sustainability of that system.
International Markets
In addition to regulations in the United States and Europe, we, and our partners, are subject to a variety of regulations in other jurisdictions governing, among other things, clinical trials and any commercial sales, marketing and distribution of our products. Such regulations may be similar or, in some cases, more stringent than those applicable in the United States and Europe.
Whether or not we, or our partners, obtain FDA approval for a product, we must obtain the requisite approvals from regulatory authorities in foreign countries prior to the commencement of clinical trials or
22
marketing of such product in those countries. The requirements and processes governing the conduct of clinical trials, product licensing, pricing and reimbursement vary from country to country. In addition, we, and our partners, may be subject to foreign laws and regulations and other compliance requirements, including, without limitation, anti kickbackanti-kickback laws, false claims laws and other fraud and abuse laws, as well as laws and regulations requiring transparency of pricing and marketing information and governing the privacy and security of health information.
If we, or our partners, fail to comply with applicable foreign regulatory requirements, we may be subject to, among other things, fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution.
Miscellaneous Regulatory Matters
We are subject to various national, regional and local laws of general applicability, such as laws regulating working conditions. We are also subject to country specific data protection laws and regulations applicable to the storagecollection and processing of personal data around the world. In addition, we are subject to various national, regional and local environmental protection laws and regulations, including those governing the emission of material into the environment. We are also subject to various national, regional and local laws regulating how we interact with healthcare professionals and representatives of government that impact our promotional and other commercial activities.
Data exclusivity provisions exist in many countries around the world and may be introduced in additional countries in the future, although their application is not uniform. In general, these exclusivity provisions prevent the approval and/or submission of generic drug applications to the health authorities for a fixed period of time following the first approval of the brand-name product in that country. As these exclusivity provisions operate independently of patent exclusivity, they may prevent the submission of generic drug applications for some products even after the patent protection has expired.
On 16 July 2020, the Court of Justice of the European Union invalidated Decision 2016/1250 on the adequacy of the protection provided by thebasis, and in collaboration with the data importers, whether the law of the importer’s country ensures a level of protection for the personal data that is essentially equivalent to the EEA’s protections. If not, data exporters will need to assess whether they can implement supplementary measures to help ensure the requisite level of protection. As a result, companies are now required to conduct and document comprehensive data transfer assessments before allowing any personal data to flow from the EU to outside the EU, and if supplementary measures cannot address an adequate level of protection, then such transfers shall be restricted. Teva is preparing for these new developments by aligning our data mapping documentation with these new requirements and Teva will continue to closely monitor further guidance from authorities on how to adequately address data transfers going forward.
EU-US
Data Privacy Shield (“Schrems II”). The General Data Protection Regulation (the “GDPR”) provides that the transfer of personal data to a country outside the European Economic Area (“EEA”) may, in principle, take place only if the third country ensures an adequate level of data protection, and theEU-U.S.
Privacy Shield was previously approved by the European Commission to provide such adequate level of data protection. However, in the view of the Court, U.S. law and practice are not circumscribed in a way that satisfies requirements that are essentially equivalent to those required under EU law, and therefore theEU-U.S.
Privacy Shield cannot be considered to ensure an adequate level of data protection. As a practical result of the ruling and ensuing guidance from the European Data Protection Board, companies must now verify, on acase-by-case
In October 2015, the European Commission adopted regulations providing detailed rules for the safety features appearing on the packaging of medicinal products for human use. This legislation, part of the Falsified
Medicines Directive (“FMD”), is intended to prevent counterfeit medicines entering into the supply chain and will allow wholesale distributors and others who supply medicines to the public to verify the authenticity of the medicine at the level of the individual pack. The safety features comprise a unique identifier and a tamper-evidenttamper-
23
evident seal on the outer packaging, which are to be applied to certain categories of medicines. FMD is effective as of February 2019. Teva’s packaging sites, distribution centers and contract manufacturing operators (“CMOs”) for the European market comply with this new requirement.
In November 2017,2013, the federal Drug Supply Chain Security Act (the “DSCSA”) became effective in the United States, mandating an industry-wide, national serialization system for pharmaceutical packaging with a
ten-year
phase-in
process. By November 2018, all manufacturers andre-packagers
were required to mark each prescription drug package with a unique serialized code. Teva’s packing sites, distribution centers and CMOs for the U.S. market comply with the new requirements. In addition, under the DSCSA, Teva is required by November 2023, to provide to downstream trading partners, serial number specific transaction details. This will require additional modification to the packing sites, distribution centers and CMOs for the U.S. market. Subsequently, in February 2019, the EU enacted the Falsified Medicines Directive (“FMD”), traceability requirements for drug products, which Teva complies with as well. Other countries are following suit with variations of two main requirements: (i) to be able to associate the unit data with the uniquely-identified shipping package, or (ii) to report the data for tracking and tracing of products, reimbursements and other purposes. Certain countries, such as Russia, China, Korea, Turkey, Argentina, Brazil and India (for exported products), already have laws mandating serialization and aggregation and we are working to comply with these requirements. Other countries, including India (domestic market), Indonesia, Kazakhstan, Malaysia, Taiwan, Ukraine and other Latin American countries are currently considering mandating similar requirements.December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
United States | 6,390 | 7,056 | 8,807 | |||||||||
Europe | 18,780 | 19,236 | 22,352 | |||||||||
International Markets (excluding Israel) | 10,908 | 11,351 | 14,387 | |||||||||
Israel | 3,961 | 4,893 | 6,245 | |||||||||
Total | 40,039 | 42,535 | 51,792 | |||||||||
Available Information
Our main corporate website address is http://www.tevapharm.com. Copies of our Quarterly Reports on Formcalling1-800-950-5089.sending an email to TevaIR@tevapharm.com. All of our SEC filings are also available on our website at http://www.tevapharm.com, as soon as reasonably practicable after having been electronically filed or furnished to the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The information on our website is not, and will not be deemed, a part of this Report or incorporated into any other filings we make with the SEC. We also file our annual reports and other information with the Israeli Securities Authority through its fair disclosure electronic system called MAGNA. You may review these filings on the website of the MAGNA system operated by the Israeli Securities Authority at www.magna.isa.gov.il or on the website of the Tel Aviv Stock Exchange (the “TASE”) at www.tase.co.il.
10-Q,
Annual Report on Form10-K
and Current Reports on Form8-K
filed or furnished to the U.S. Securities and Exchange Commission (the “SEC”), and any amendments to the foregoing, will be provided without charge to any shareholder submitting a written request to our company secretary at our principal executive offices or by ITEM 1A. | RISK FACTORS |
Our business faces significant risks. You should carefully consider all of the information set forth in this annual reportAnnual Report and in our other filings with the SEC, including the following risk factors which we face and which are faced by our industry. Our business, financial condition and results of operations could be materially adversely affected by any of these risks. This report also contains forward-looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-looking statements as a result of certain factors including the risks described below and elsewhere in this report and our other SEC filings. SeeFor a summary of the risk factors included in this Item 1A and for further details on our forward-looking statements, see “Forward-Looking Statements”Statements and Summary of Risk Factors” on page 1.
Risks related to our ability to successfully compete in the marketplace
Sales of our generic medicines comprise a significant portion of our business, and we therefore continue to beare subject to the significant risks associated with the generic pharmaceutical business.
In 2019,2020, total revenues from sales of our generic medicines in all our business segments were $9,325$9,316 million, or 55% of our total revenues. Generic pharmaceuticals are, as a general matter, less profitable
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than specialty pharmaceuticals, and have faced price erosion in each of our business segments, placing even greater importance on our ability to continually introduce new products. We have become more dependent on sales of our generics medicines and are increasingly subject to market and regulatory factors and other risks affecting generic pharmaceuticals worldwide.
During 2019,2020, our generics business was impacted by increased volatility in demand and fluctuations in overall prescription volumes due in large part to theUnited States continued to be affected by certain adverse market forces, including: (i) pricing pressure that has impacted certain products or product families involume of our generic portfolio (ii) an accelerated FDA approval process for generic versions ofoff-patentmedicines, resulting in increased competition for these products, and (iii) delays in the launch of someglobal nature of our new generic products. Wesupply chain, we have also experienced supply discontinuities due to regulatory actions and approval delays, which also had an impact on our ability to timely meet demand in certain instances. These adverse market forces have been affecting our business for a number of years and, consequently, have a direct impact on our overall performance.
COVID-19
pandemic. The effects of theCOVID-19
pandemic may continue in 2021. Due to the We also expect to continue to experience significant adverse challenges in the U.S. generics market deriving from limitations on our ability to influence generic medicine pricing in the long term and a decrease in value from future launches and growth. The developments in the U.S. generics market were the cause ofThese and other challenges have required us to recognize significant goodwill impairments of $17.1 billion in 2017.past years. If these trends continue or worsen, or if we experience further difficulty in this market, this may continue to adversely affect our revenues and profits from our North America business segment.
Sales of our generic products may be adversely affected by the continuing consolidation of our customer base and commercial alliances among our customers.
A significant portion of our sales are made to relatively few U.S. retail drug chains, wholesalers, managed care purchasing organizations, mail order distributors and hospitals. These customers have undergone significant consolidation and formed various commercial alliances in recent years, which may continue to increase the pricing pressures that we face in the United States. Additionally, the emergence of large buying groups, and the prevalence and influence of managed care organizations and similar institutions, have increased pressure on price, as well as terms and conditions required to do business. During 2017, certainCertain of these Group Purchasing Organizations (“GPOs”) madehave been making aggressive requests for pricing proposals and established commercial alliances
resulting in greater bargaining power. Due to such consolidation and subsequent changes in these commercial alliances, there are threefour large GPOs that account for approximately 85% of generics purchases in the United States. We expect the trend of increased pricing pressures from our customers and price erosion in the U.S. generics market to continue.
The traditional model for distribution of pharmaceutical products is also undergoing disruption as a result of the entry or potential entry of new competitors and significant mergers among key industry participants. For example, in 2020, Amazon.com has made initial moves to develop alaunched its pharmaceutical distribution business. Also, the consolidation resulting from theIn November 2020, Mylan and Pfizer’s Upjohn completed a merger betweenof their businesses by forming Viatris Inc., and, in November 2018, CVS Health and Aetna in November 2018completed a merger which created a vertically integrated organization with increased control over the physician and pharmacy networks and, ultimately, over which medicines are sold to patients. In addition, several major hospital systems in the United States announced a plan to form a nonprofit company that will provide U.S. hospitals with a number of generic drugs. In January 2018, Amazon Inc., Berkshire Hathaway Inc. and JPMorgan Chase & Co., announced that they plan to join forces by forming an independent health care company for their combined one million U.S. employees. This initiative is expected to further increase competition and enhance price erosion. These changes to the traditional supply chain could lead to our customers having increased negotiation leverage and to additional pricing pressure and price erosion.
Our net sales may also be affected by fluctuations in the buying patterns of retail chains, mail order distributors, wholesalers and other trade buyers, whether resulting from seasonality, pricing, wholesaler buying decisions or other factors. Our business was also impacted by increased volatility in demand due in large part to the
COVID-19
pandemic and fluctuations in overall market prescription volumes. In addition, since a significant portion of our U.S. revenues is derived from relatively few key customers, any financial difficulties experienced by a single key customer, or any delay in receiving payments from such a customer, could have a material adverse effect on our business, financial condition and results of operations.Our revenues and profits from generic products may decline as a result of competition from other pharmaceutical companies and changes in regulatory policy.
Our generic drugs face intense competition. Prices of generic drugs may, and often do, decline, sometimes dramatically, especially as additional generic pharmaceutical companies (including
low-cost
generic producers based in China and India) receive approvals and enter the market for a given product and competition intensifies. Consequently, our ability to sustain our sales and profitability on any given product over time is affected by the number of companies selling such product, including new market entrants, and the timing of their approvals. The goals established under the Generic Drug User Fee Act, and increased funding of the FDA’s Office of Generic Drugs, have led to more and faster generic approvals, and consequently increased competition for some of our products. The FDA has stated that it has established new steps to enhance competition, promote access and lower drug prices and is approving record-breaking numbers of generic applications. While these FDA improvements are expected to benefit Teva’s generic product pipeline, they will also benefit competitors that seek to launch products in established generic markets where Teva currently offers products.Furthermore, brand pharmaceutical companies continue to defend theirmanage products vigorouslyin a challenging environment through life cycle management and marketing agreements with payers, pharmacy benefits managers and generic manufacturers. For example, brand companies often sell or license their own generic versions of their products, either directly or through other generic pharmaceutical companies
(so-called
“authorized generics”). No significant regulatory approvals are required for authorized generics, and brand companies do not face any other significant barriers to entry into such market. Brand companies may seek to delay introductions of generic equivalents through a variety of commercial and regulatory tactics. Many pharmaceutical companies increasingly have used state and federal legislative and regulatory means to delay generic (including biosimilar) competition. These efforts have included pursuing new patents for existing products to extend patent protection; selling the brand product as their own generic equivalent (an authorized generic); using the Citizen Petition process to request amendments to FDA standards or otherwise delay generic (or biosimilar) drug approvals; seeking changes to U.S. Pharmacopeia, an organization which publishes industry recognized compendia of drug standards; using the legislative and regulatory process to have drugs reclassified or rescheduled; attaching patent extension amendments to unrelated federal legislation; and entering into agreements with pharmacy benefit management companies to block the dispensing of generic (including biosimilar) products. These actions may increase the costs and risks of our efforts to introduce generic products and may delay or prevent such introduction altogether.In addition, the U.S. Congress and various state legislatures in the United States have passed, or have proposed passing, legislation that could have an adverse impact on pharmaceutical manufacturers’ ability to (i) settle litigation initiated pursuant to the federal Hatch-Waxman Act and Biologics Price Competition and Innovation Act (“BPCIA”) and (ii) secure the full benefit ofregulatory approval status secured under the federal Hatch-Waxman Act. Hatch-Waxman and BPCIA create various pathways for generic drug manufacturers to secure accelerated approvals of their abbreviated new drug applications and abbreviated biologics license applications. The new laws and proposals from the federal and state governments could change Hatch-Waxman and BPCIA, as well as impact the ability of generic manufacturers to accelerate the launch of their new generic and biosimilar products, and the ability of brand manufacturers to protect their investments in the intellectual property associated with their branded specialty and innovative biologic products. Teva continues to monitor these legislative developments and advocate for policies that support both innovation and access to high quality medicines for patients.
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We have experienced, and may continue to experience, delays in launches of our new generic products.
Although we believe we have one of the most extensive pipelines of generic products in the industry, in recent years we were unable to successfully execute a number of generic launches and these challenges may continue in the foreseeable future. As a result of these unsuccessful launches, we may not be able to realize the economic benefits anticipated in connection with planned launches. If we cannot execute timely launches of new products, we may not be able to offset the increasing price erosion on existing products in the United States
26
resulting from pricing pressures and accelerated generics approvals for competing products. Such unsuccessful launches can be caused by many factors, including the impact of the
COVID-19
pandemic, delays in regulatory approvals, lack of operational or clinical readiness or patent litigation. Failure or delays to execute launches of new generic products could have a material adverse effect on our business, financial condition and results of operations.The increase in the number of competitors targeting generic opportunities and seeking U.S. market exclusivity for generic versions of significant products may adversely affect our revenues and profits
.
Our ability to achieve continued growth and profitability through sales of generic pharmaceuticals is dependent on our continued success in challenging patents, developing
non-infringing
products or developing products with increased complexity to provide opportunities with U.S. market exclusivity or limited competition.To the extent that we succeed in being the first to market a generic version of a product, and particularly if we are the only company authorized to sell during the
180-day
period of exclusivity in the U.S. market, as provided under the Hatch-Waxman Act, our sales, profits and profitability can be substantially increased in the period following the introduction of such product and prior to a competitor’s introduction of an equivalent product. Even after the exclusivity period ends, there is often continuing benefit from having the first generic product in the market.However, the number of generic manufacturers targeting significant new generic opportunities with exclusivity under the Hatch-Waxman Act, or which are complex to develop, continues to increase. Additionally, many of the smaller generic manufacturers have increased their capabilities, level of sophistication and development resources in recent years. The FDA has also been limiting the availability of exclusivity periods for new products, which reduces the economic benefit from beingfor generic approvals. The failure to maintain our industry-leading performance in the United States onopportunities and to develop and commercialize high complexity generic products could adversely affect our sales and profitability.
first-to-file
first-to-file
The
180-day
market exclusivity period is triggered by commercial marketing of the generic product. However, the exclusivity period can be forfeited by our failure to obtain tentative or final approval of our product within a specified statutory period or to launch a product following final court decisions that are no longer subject to appeal holding the applicable patents to be invalid, unenforceable or not infringed. The Hatch-Waxman Act also contains other forfeiture provisions that may deprive the first “Paragraph IV” filer of exclusivity if certain conditions are met, some of which may be outside our control. Accordingly, we may face the risk that our exclusivity period is forfeited before we are able to commercialize a product.We may be unable to take advantage of the increasing number of high-value biopharmaceutical opportunities.
We aim to be a global leader in biopharmaceuticals. TRUXIMA, our first oncology biosimilar product in the United States, launched in November 2019 and is the first rituximab biosimilar to be approved in the United States. HERZUMA, a biosimilar to Herceptin
®
(trastuzumab), was launched in the United States in March 2020. In August 2020, we entered into a partnership agreement with a biopharmaceutical company, Alvotech, for the exclusive commercialization in the U.S. of five biosimilar product candidates. We are developing a product pipeline and manufacturing capabilities for biosimilar products, which are expected to make up an increasing proportion of the high-value generic opportunities in the coming years. The development, manufacture and commercialization of biopharmaceutical products require specialized expertise and are very costly and subject to complex regulation, which is still evolving. Due to the complex process required to develop biosimilars, obstacles and delays may arise that increase the cost of development or force us to abandon a potential product in which we may have invested substantial amounts of time and resources. We are behind many of our competitors in developing biopharmaceuticals and will require significant investments and collaborations with third parties to benefit from these opportunities. Failure to develop and commercialize biopharmaceuticals could have a material adverse effect on our business, financial condition, results of operations and prospects.27
Our leading specialty medicine, pharmaceutical products face intense competition from companies that have greater resources and capabilities.
We face intense competition to our specialty pharmaceutical products. Many of our competitors are larger and/or have substantially more experience in the development, acquisition and marketing of branded, innovative and consumer-oriented products. They may be able to respond more quickly to new or emerging market preferences or to devote greater resources to the development and marketing of new products and/or technologies than we can. As a result, any products and/or innovations that we develop may become obsolete or noncompetitive before we can recover the expenses incurred in connection with their development. In addition, we must demonstrate the benefits of our products relative to competing products that are often more familiar or otherwise better established to physicians, patients and third-party payers. If competitors introduce new products or new variations on their existing products, our marketed products, even those protected by patents, may be replaced in the marketplace or we may be required to lower our prices. For example:
Our future success depends on our ability to maximize the growth and commercial success of AUSTEDO. If our revenues derived from AUSTEDO do not increase as expected, it may have an adverse effect on our results of operations.
AJOVY faces strong competition from two products that were introduced into the market around the same time and are competing for market share in the same space, as well as from other emerging competing therapies. Our auto-injector for AJOVY launched in April 2020, but we may still be at a competitive disadvantage in our ability to sell and market this product compared to competing products that launched earlier with an auto-injector due to our late entry into the market.
COPAXONE faces increasing competition from generic versions in the United StatesU.S. and competing glatiramer acetate products in Europe, as well as from orally-administered therapies.
co-promotion,
contract sales force or other such arrangements with third parties, for example, where our own direct sales force is not large enough or sufficiently well-aligned to achieve maximum market penetration. Any failure to attract or retain qualified sales personnel or to enter into third-party arrangements on favorable terms could prevent us from successfully maintaining current sales levels or commercializing new innovative and specialty products. Furthermore, due to the impact of theCOVID-19
pandemic, the ability to promote our new specialty products, primarily AJOVY and AUSTEDO, has been impacted by less physician visits by patients and less physician interactions with our sales personnel as well as the reluctance of physicians to introduce new medication at a time when access to patients may be restricted.If generic or biosimilar products that compete with any of our specialty products are approved and sold, sales of our specialty products will be adversely affected.
In addition to COPAXONE, certain of our other leading specialty medicines also face patent challenges and impending patent expirations. For example, in January 2019, we launched our own ProAir authorized generic in the United States following the launch of a generic version of VentolinIn June 2014, we settled a patent challenge to ProAir HFA with Perrigo, under which Perrigo is now permitted to launch its generic product. In November 2017, we settled another patent challenge to ProAir HFA with Lupin, under which Lupin is now permitted to launch its generic product. As of the date hereof, neither Perrigo nor Lupin have launched genericGeneric versions of ProAir HFA. Also,were launched in addition to the ANDAs and NDAs filed by competitors in connection with TREANDA and BENDEKA,2020. Eagle has launched abendamustine hydrochloride in June 2018, which directly competes with BENDEKA, in addition to the ANDAs and NDAs that have been filed by competitors in connection with TREANDA and BENDEKA. The first date for expected generic ANDA filings on AUSTEDO is in April 2021.
®
HFA, another albuterol inhaler. ready-to-dilute
Generic equivalents and biosimilars for branded pharmaceutical products are typically sold at lower costs than the branded products. After the introduction of a competing generic product, a significant percentage of the
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prescriptions previously written for the branded product are often written for the generic version. Legislation enacted in most U.S. states allows or, in some instances mandates, that a pharmacist dispense an available generic equivalent when filling a prescription for a branded product in the absence of specific instructions from the prescribing physician. Pursuant to the provisions of the Hatch Waxman Act, manufacturers of branded products often bring lawsuits to enforce their patent rights against generic products released prior to the expiration of branded products’ patents, but it is possible for generic manufacturers to offer generic products while such litigation is pending. As a result, branded products typically experience a significant loss in revenues following the introduction of a competing generic product, even if subject to an existing patent. Our specialty products are or may become subject to competition from generic equivalents because our patent protection expired or may expire soon. In addition, we may not be successful in our efforts to extend the proprietary protection afforded our specialty products through the development and commercialization of proprietary product improvements and new and enhanced dosage forms.
Investments in our pipeline of specialty and other products may not achieve expected results.
We must invest significant resources to develop specialty medicines and biosimilars, both through our own efforts and through collaborations with, andEagleRegeneron and Regeneron)Alvotech).
in-licensing
or acquisition of products from, third parties. We have entered into, and expect to pursue,in-licensing,
acquisition and partnership opportunities to supplement and expand our existing specialty and biosimilar pipeline (e.g., the transactions with Celltrion, The development of specialty medicines involves processes and expertise different from those used in the development of generic medicines, which increase the risk of failure. For example, the time from discovery to commercial launch of a specialty medicine can be 15 years or more and involves multiple stages, including intensive preclinical and clinical testing and highly complex, lengthy and expensive approval processes, which vary from country to country. The longer it takes to develop a new product, the less time that remains to recover development costs and generate profits. Specialty medicines currently in development include fasinumab for osteoarthritic pain, AUSTEDO for Tourette syndromedyskinesia in cerebral palsy, AJOVY for fibromyalgia and fremanezumabrisperidone LAI for post-traumatic headache and fibromyalgia.schizophrenia.
During each stage, we may encounter obstacles that delay the development process and increase expenses, potentially forcing us to abandon a potential product in which we may have invested substantial amounts of time and money.resources. These obstacles may include preclinical failures, difficulty enrolling patients in clinical trials, delays in completing formulation and other work needed to support an application for approval, adverse reactions or other safety concerns arising during clinical testing, insufficient clinical trial data to support the safety or efficacy of the product candidate and delays or failure to obtain the required regulatory approvals for the product candidate or the facilities in which it is manufactured. For example, in 2019,2020, the development of CINQAIR/CINQAEROAUSTEDO for severe asthma with eosinophiliaTourette syndrome and the development of fremanezumabAJOVY for episodic clusterpost-traumatic headache were both discontinued.
When we enter into partnerships and joint ventures with third parties, such as our collaborations with Celltrion, Eagle, Otsuka, NuvelutionRegeneron and Regeneron,Alvotech, we face the risk that some of these third parties may fail to perform their obligations or fail to reach the levels of success that we are relying on to meet our revenue and profit goals. There is a trend in the specialty pharmaceutical industry of seeking to “outsource” drug development by acquiring companies with promising drug candidates and we face substantial competition from historically innovative companies, as well as companies with greater financial resources than us, for such acquisition targets.
Our success depends on our ability to develop and commercialize additional pharmaceutical products.
Our financial results depend upon our ability to develop and commercialize additional generic, specialty and biosimilar products in a timely manner, particularly in light of the increasing generic competition to COPAXONE, generic and other competition to our respiratory products, such as ProAir, and patent challenges and impending patent expirations facing certain of our other specialty medicines, such as BENDEKA and
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We depend on the effectiveness of our patents, confidentiality agreements and other measures to protect our intellectual property rights.
The success of our specialty medicines business depends substantially on our ability to obtain patents and to defend our intellectual property rights. If we fail to protect our intellectual property adequately, competitors may manufacture and market products identical or similar to ours. We have been issued numerous patents covering our specialty medicines, and have filed, and expect to continue to file, patent applications seeking to protect newly developed technologies and products in various countries, including the United States. Currently pending patent applications may not result in issued patents or be approved on a timely basis or at all. Any existing or future patents issued to or licensed by us may not provide us with any competitive advantages for our products or may be challenged or circumvented by competitors or governments.
Efforts to defend the validity of our patents are expensive and time-consuming, and there can be no assurance that such efforts will be successful. Our ability to enforce our patents also depends on the laws of individual countries and each country’s practices regarding the enforcement of intellectual property rights. The loss of patent protection or regulatory exclusivity on specialty medicines could materially impact our business, results of operations, financial condition and prospects. For example, COPAXONE 40 mg/mL is protected by one European patent expiring in 2030. The European Patent Office upheld the patent in its first instance decision; an appeal hearing will be heard in June 2020. This patent is also being challenged in various European jurisdictions.
We also rely on trade secrets, unpatented proprietary
know-how,
trademarks, regulatory exclusivity and continuing technological innovation that we seek to protect, in part by confidentiality agreements with licensees, suppliers, employees and consultants. These measures may not provide adequate protection for our unpatented technology. If these agreements are breached, it is possible that we will not have adequate remedies. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. Furthermore, our trade secrets and proprietary technology may otherwise become known or be independently developed by our competitors or we may not be able to maintain the confidentiality of information relating to such products. If we are unable to adequately protect our technology, trade secrets or proprietaryknow-how,
or enforce our intellectual property rights, our results of operations, financial condition and cash flows could suffer.30
Risks related to our substantial indebtedness
We have substantial debt of $26,908$25,919 million as of December 31, 2019,2020, which has increased our expenses and restricts our ability to incur additional indebtedness or engage in other transactions.
Our consolidated debt was $25,919 million at December 31, 2020, compared to $26,908 million at December 31, 2019, compared to $28,917 million at December 31, 2018.2019. If we are unable to meet our debt service obligations and other financial obligations, we could be forced to restructure or refinance our indebtedness and other financial transactions, seek additional debt or equity capital or sell our assets. We might then be unable to obtain such financing or capital or sell our assets on satisfactory terms, if at all. Any refinancing of our indebtedness could be at significantly higher interest rates, incur significant transaction fees or include more restrictive covenants. See “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity” and note 9 to our consolidated financial statements for a detailed discussion of our outstanding indebtedness.
We may have lower-than-anticipated cash flows in the future, which could further reduce our available cash. Although we believe that we will have access to cash sufficient to meet our business objectives and capital needs, this reduced availability of cash could constrain our ability to grow our business. We may have lower-than-anticipated net income in the future. Our revolving credit facility (“RCF”) contains certain covenants, including certain limitations on incurring liens and indebtedness and maintenance of certain financial ratios, including the requirement to maintain compliance with a net debt to EBITDA ratio, which becomes more restrictive over time. We borrowed $500up to €270 million from our revolving credit facilityRCF during 2019,2020, which has since been fully repaid. As of December 31, 2019,2020 and as of the date of this Annual Report, we did not have any outstanding debt under the revolving credit facility. Under specified
circumstances, includingrevolving credit facility.RCF. Additionally, violations of the covenants, under certain circumstances, would result in an event of default in all borrowings under the revolving credit facilityRCF and, when greater than a specified threshold amount as set forth in each series of senior notes is outstanding, could lead to an event of default under our senior notes due to cross acceleration provisions.
non-compliance
with any of the covenants and the unavailability of any waiver, amendment or other modification thereto, we will not be able to borrow under the As of December 31, 2019,2020, we were in compliance with all applicable financial ratios. We continue to take steps to reduce our debt levels and improve profitability to ensure continual compliance with the financial maintenance covenants. If such covenants will not be met, we believe we will be able to renegotiate and amend the covenants, or refinance the debt with different repayment terms to address such situation as circumstances warrant. We have amended such covenants in the past, including the net debt to EBITDA ratio covenant to permit a higher ratio, most recently in April 2019, when we amended the terms of our revolving credit facility. Although we have successfully negotiated amendments to our loan agreements in the past, we cannot guarantee that we will be able to amend such agreements on terms satisfactory to us, or at all, if required to maintain compliance in the future. If we experience lower than required earnings and cash flows to continue to maintain compliance and efforts could not be successfully completed on commercially acceptable terms, we may curtail additional planned spending, may divest additional assets in order to generate enough cash to meet our debt requirements and all other financial obligations.
This substantial level of debt and lower levels of cash flow and earnings have severely impacted our business and resulted in thea restructuring plan announced in Decemberbetween 2017 that included: (i) a substantial reduction in our global workforce; (ii) substantial optimization of our generics medicines portfolio; (iii) the restructuring and optimization of our manufacturing and supply network, including the closure or divestment of a significant number of manufacturing plants around the world; (iv) a thorough review of R&D programs in preparation of the closure or divestment of a significant number of R&D facilities, headquarters and other office locations across all geographies; (v) a review of additional potential divestments ofnon-core2019.assets; and (vi) the suspension of dividend payments to holders of ordinary shares.
Our substantial net debt could also have other important consequences to our business, including, but not limited to:
making it more difficult for us to satisfy our obligations;
limiting our ability to borrow additional funds and increasing the cost of any such borrowing;
increasing our vulnerability to, and reducing our flexibility to respond to, general adverse economic and industry conditions;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
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placing us at a competitive disadvantage as compared to our competitors, to the extent that they are not as highly leveraged; and
restricting us from pursuing certain business opportunities.
Additionally, if the
COVID-19
pandemic has a significant impact on our business and financial results for an extended period of time, our credit losses, liquidity and cash resources could be negatively impacted. We may be required to draw down funds from our RCF or pursue additional sources of financing to fund our operations, such as secured financing. If we seek secured financing in excess of the limitation in our debt instruments, we may have to secure our current outstanding debt as well. Capital and credit markets have been disrupted by the crisis and foreign exchanges have experienced increased volatility. As a result, access to additional financing may be challenging and is largely dependent upon evolving market conditions and other factors.We may need to raise additional funds in the future, which may not be available on acceptable terms or at all.
We may consider issuing additional debt or equity securities in the future to refinance existing debt or for general corporate purposes, including to fund potential acquisitions or investments. If we issue ordinary equity, convertible preferred equity or convertible debt securities to raise additional funds, our existing shareholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing shareholders. If we incur additional debt, it may increase our leverage relative to our earnings or to our equity capitalization, requiring us to pay additional interest and potentially lowering our credit
ratings. We may not be able to market such issuances on favorable terms, or at all, in which case, we may not be able to develop or enhance our products, execute our business plan, take advantage of future opportunities or respond to competitive pressures or unanticipated customer requirements.
If our credit ratings are further downgraded by leading rating agencies, we may not be able to raise debt or borrow funds in amounts or on terms that are favorable to us, if at all.
Our credit ratings impact the cost and availability of future borrowings and, accordingly, our cost of capital. Our ratings at any time will reflect each rating organization’s then opinion of our financial strength, operating performance and ability to meet our debt obligations. Following the completion of the Actavis Generics acquisition, Standard and Poor’s Financial Services LLC (“Standard and Poor’s”) and Moody’s Investor Service, Inc. (“Moody’s”) downgraded our ratings to BBB and Baa2, respectively, compared toA-and A2, respectively, prior to the announcement of the acquisition in July 2015. In February 2017, following the court ruling invalidating our COPAXONE 40 mg/mL patents, both Standard and Poor’s and Moody’s changed our ratings outlook from stable to negative. In August 2017, following our release of revised 2017 guidance, both Standard and Poor’s and Moody’s downgraded our rating toBBB-and Baa3, respectively. In November 2017, Fitch Ratings Inc. (“Fitch”) downgraded our rating toFebruary 8, 2018, Standard and Poor’s downgraded our rating tonon-investmentgrade fromBBB-to BB, with a stable outlook. On February 14, 2019, Standard and Poor’s revised our rating outlook from stable to negative. On August 16, 2019, Moody’s revised our rating outlook to negative. On October 24, 2019,September 3, 2020, Standard and Poor’s placedFinancial Services LLC (“Standard and Poor’s”) downgraded our rating on Creditwatch negative following the announcementfrom BB tothe framework agreement to settle the multistate opioid litigation.our revenue and EBITDA.
non-investment
grade, fromBBB-
to BB, with a negative outlook. On January 12, 2018, Moody’s Investor Service, Inc. (“Moody’s”) downgraded our rating tonon-investment
grade from Baa3 to Ba2, with a stable outlook. On BB-
due to rising litigation risks, but removed our rating outlook from CreditWatch back to stable, reflecting recent stabilization of The downgrade of our ratings to
non-investment
grade by Fitch, Moody’s and Standard & Poor’s limits our ability to borrow at interest rates consistent with the interest rates that were available to us prior to such downgrades. This may limit our ability to sell additional debt securities or borrow money in the amounts, at the times or interest rates, or upon the terms and conditions that would have been available to us if our previous credit ratings had been maintained.Additional risks related to our business and operations
The widespread outbreak of an illness or any other communicable disease, or any other public health crisis, such as the
COVID-19
pandemic, could adversely affect our business, results of operations and financial condition.The
COVID-19
pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. The virus has spread globally to multiple countries and regions, including to the United States, certain European countries, Israel, India and Latin America,32
where we currently manufacture most of our products and conduct our clinical trials. The potential closure of our facilities in these or other areas in which we operate, or other protectionist measures or restrictions inhibiting our employees’ ability to access our facilities, may materially affect our operations, including potentially interrupting our manufacturing, supply chain, clinical trial and
pre-commercial
launch activities. TheCOVID-19
pandemic may also affect our employees as well as employees and operations at third-party manufacturers or suppliers that may result in delays or disruptions in manufacturing and supply. TheCOVID-19
pandemic has also led to a new working environment, which may affect employee wellbeing and engagement, causing stress and fear of returning to work at the office. This in turn may result in lower productivity and motivation among employees.In 2020, we did not experience significant impacts or delays from the
COVID-19
pandemic on our business operations. We have experienced minimal delays in clinical trials due to cessation or slow-downs of recruitment for patient studies and suspended regulatory inspections, delays in regulatory approvals of new products due to reduced capacity orre-prioritization
of regulatory agencies and delays inpre-commercial
launch activities. In addition, we experienced slightly lower demand due to less physician and hospital activity in certain regions and for certain medicines in the second half of 2020 resulting from the impact of theCOVID-19
pandemic. While we expect to be able to continue our operations and to satisfy the demand for our products, while protecting the health and safety of our employees and customers, the uncertainty surrounding the full economic implications of the pandemic may result in a period of business disruption. AnyCOVID-19
related disruption could have a material adverse impact on our business and our results of operation and financial condition. Changes in patient behavior resulting in less visits to physicians and medical facilities, or increased layoffs in the U.S. employment market, which may affect healthcare benefits coverage, have caused a decline or slower growth in the number of patients diagnosed with diseases for which we produce treatments, and if this trend continues or worsens, our revenues could be adversely affected. In addition, a recession or market correction resulting from the spread ofCOVID-19
could materially affect our business, the value of our shares and our access to the capital and credit markets including our liquidity and cash resources. The new working environment, with many employees working remotely, has exposed many companies to cyber-attacks and data security breaches. If such breach were to occur, it may have a material adverse effect on our business, operations and reputation.We have taken precautionary measures, and may take additional measures, intended to minimize the risk of the
COVID-19
pandemic to our employees and operations. The extent of the impact of theCOVID-19
pandemic on our operational and financial performance, including our ability to execute our business strategies in the expected time frame or at all, will depend on future developments, such as the duration and spread of theCOVID-19
pandemic and long-term impact on the world’s economy, all of which are uncertain and cannot be predicted.Implementation of our restructuring planongoing optimization efforts may adversely affect our business, financial condition and results of operations.
We may face wrongful termination, discrimination or other legal claims from employees affected by ongoing changes in our workforce. We may incur substantial costs defending against such claims, regardless of their merits, and such claims may significantly increase our severance costs. Additionally, we may see variances in the estimated severance costs depending on the category of employees and locations in which severance is incurred.
Upon the proposed divestiture of any facility in connection with our ongoing plant optimization, we may not be able to divest such facility at a favorable price or in a timely manner. Any divestiture that we are unable to complete may cause additional costs associated with retaining the facility or closing and disposing of the impacted businesses.
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We cannot guarantee that, following completion of the restructuring plan,such efficiency measures, our business will be more efficient or effective than prior to implementation of the plan, and we may need to take additional restructuring steps in the future to maintain the goals announced in December 2017.effective.
Our continued success depends on our ability to attract, hire and retain highly skilled key personnel.
Given the size, complexity and global reach of our business and our multiple areas of focus, we are especially reliant upon our ability to recruit and retain highly qualified management and other key employees. Our ability to attract and retain such employees may be diminished by the relatively frequent senior management transitionsfinancial, legal and regulatory challenges we have faced in recent years (including the departure of our Chief Financial Officer, Head of Global Operations and Head of Global Brand and Communications in 2019) and the financial challenges we face.years. In addition, the success of our R&D activity depends on our ability to attract and retain sufficient numbers of skilled scientific personnel, which may be limited by the streamlining and reduction ofdue to our R&D spending and programs. Any difficulty in recruiting, hiring, retaining and motivating talented and skilled members of our organization may delay or prevent the achievement of major business objectives.
Manufacturing or quality control problems may damage our reputation for quality production, demand costly remedial activities and negatively impact our financial results.
As a pharmaceutical company, we are subject to substantial regulation by various governmental authorities. For instance, we must comply with requirements of the FDA, EMA and other healthcare regulators with respect to the manufacture, labeling, sale, distribution, marketing, advertising, promotion and development of pharmaceutical products. Failure to strictly and promptly comply with these regulations and requirements may damage our reputation and lead to financial penalties, compliance expenditures associated with remediation efforts, the recall or seizure of products, total or partial suspension of production and/or distribution, suspension of the applicable regulator’s review of our submissions, enforcement actions, injunctions and criminal prosecution.
We must register our facilities, whether located in the United States or elsewhere, with the FDA as well asfor products sold in the United States, and with other regulators outside the United States and ourfor products sold outside of the United States. Our products must be produced in a manner consistent with cGMP, or similar quality and compliance standards in each territory in which we manufacture. In addition, the FDA and other agencies periodically inspect our manufacturing facilities. Following an inspection, an agency may issue a notice listing conditions that are believed to violate cGMP or other regulations, or a warning letter for violations of “regulatory significance” that may result in enforcement action if not promptly and adequately corrected.
In recent years, regulatory agencies around the world have increased their scrutiny of pharmaceutical manufacturers. This has resulted in requests for product recalls, temporary plant shutdowns to address specific issues and other remedial actions. Our manufacturing facilities, as well as those of our vendors and manufacturing partners, have also been the subject of increased regulatory oversight, leading to increased expenditures required to ensure compliance with new or more stringent production and quality control regulations. For example:
These regulatory actions also adversely affected our ability to supply various products around the world and to obtain approvals for new products manufactured at the affected facilities. If any regulatory body were to require one or more of our significant manufacturing facilities to cease or limit production, our business and reputation could be adversely affected. In addition, because regulatory approval to manufacture a drug is site-specific, the delay and cost of remedial actions or obtaining approval to manufacture at a different facility could also have a material adverse effect on our business, financial condition and results of operations.
The manufacture of our products is highly complex, and an interruption in our supply chain or problems with internal or third party information technology systems could adversely affect our results of operations.
Our products are either manufactured at our own facilities or obtained through supply agreements with third parties. Many of our products are the result of complex manufacturing processes, and some require highly
34
specialized raw materials. Problems may arise during manufacturing for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with or shortages of raw materials, natural disasters, and environmental factors. For some of our key raw materials, we have only a single, external source of supply, and alternate sources of supply may not be readily available. If our supply of certain raw materials or finished products is interrupted from time to time, or proves insufficient to meet demand, our cash flows and results of operations could be adversely impacted. Moreover, the streamlining of our manufacturing network may result in our product supply becoming more dependent on a smaller number of specific manufacturing plants. Our inability to timely manufacture any of our key products may result in claims and penalties from customers and could have a material adverse effect on our business, financial condition and results of operations.
In recent years, medicine shortages have become an increasingly widespread problem around the world and particularly in Europe. We are working diligently across our supply chain to ensure continuous and stable supply. Many European countries are implementing legal and regulatory measures, such as mandatory stockpiling and high penalties in order to prevent supply disruptions. Such measures may lead to substantial monetary losses in case we experience long-term supply disruptions in the relevant territories.
We also rely on complex shipping arrangements to and from the various facilities of our supply chain. Customs clearance and shipping by land, air or sea routes rely on and may be affected by factors that are not in our full control or are hard to predict.
In addition, we rely on complex information technology systems, including Internet-based systems, to support our supply-chain processes as well as internal and external communications. The size and complexity of our systems make them potentially vulnerable to breakdown or interruption, whether due to computer viruses, lack of system upgrades or other causes that may result in the loss of key information or the impairment of production and other supply chain processes. Such disruptions and breaches of security could have a material adverse effect on our business, financial condition and results of operation.
Significant disruptions of our information technology systems could adversely affect our business.
We rely extensively on information technology systems in order to conduct business, including some systems that are managed by third-party service providers. These systems include, but are not limited to, programs and processes relating to internal and external communications, ordering and managing materials from suppliers, converting materials to finished products, shipping products to customers, processing transactions, summarizing and reporting results of operations, and complying with regulatory, legal or tax requirements. These information technology systems could be damaged or cease to function properly due to the poor performance or failure of third-party service providers, catastrophic events, power outages, network outages, failed upgrades or other similar events. If our business continuity plans do not effectively resolve such issues on a timely basis, we may suffer significant interruptions in conducting our business, which may adversely impact our business, financial condition and results of operations.
Furthermore, our systems and networks have been, and are expected to continue to be, the target of advanced cyber-attacks which may pose a risk to the security of our systems and the confidentiality, availability and integrity of our data, as well as disrupt our operations or damage our facilities or those of third parties. As cybersecurity threats rapidly evolve in sophistication and become more prevalent, we are continually increasing our attention to these threats. We assess potential threats and vulnerabilities and make investments seeking to address them, including ongoing monitoring and updating of networks and systems, increasing specialized information security skills, deploying employee security training and updating our security policies. However, because the techniques, tools and tactics used in cyber-attacks frequently change and may be difficult to detect for periods of time, we may face difficulties in anticipating and implementing adequate preventative measures or fully mitigating harms after such an attack. AsIn addition, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly
35
compromise information security. We outsource administration of certain functions to vendors that could be targets of cyber-attacks. Any theft, loss and/or fraudulent use of customer, employee or proprietary data as a result of a cyber-attack targeting us or one of our third-party service providers could subject us to significant litigation, liability and costs, as well as adversely impact our reputation with customers and regulators, among others. A significant cyber-attack on our information technology systems may lead to substantial interruptions in our business, legal claims and liability, regulatory investigations and penalties, and reputational damage, which could have a material adverse effect on our business, financial condition and results of operations. While we maintain insurance coverage that is designed to address certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise in the event we experience a cybersecurity incident, data security breach or disruption, unauthorized access or failure of systems.
A significant data security breach could adversely affect our business and reputation.
In the ordinary course of our business, we collect and store sensitive data in our data centers and on our networks, including intellectual property, proprietary business information (both ours and that of our customers, suppliers and business partners) and personally identifiable information of our employees. We are subject to laws and regulations governing the collection, use and transmission of personal information, including health information. As the legislative and regulatory landscape for data privacy and protection continues to evolve around the world, there has been an increasing focus on privacy and data protection issues that may affect our business, including the U.S.’s federal Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”), the EU’s General Data Protection Regulation (“GDPR”), California Consumer Privacy Act (“CCPA”) and other laws and regulations governing the collection, use, disclosure and transmission of data.data in other jurisdictions. Although Teva is not HIPAA-regulated, we do business with customers who are, and increased focus on compliance with HIPAA and state laws that govern the privacy and security of medical data may impact our business.
HIPAA mandates the adoption of specific standards for electronic transactions and code sets that are used to transmit certain types of health information. HIPAA’s objective is to encourage efficiency and reduce the cost of
The Health Information Technology for Economic and Clinical Health (“HITECH”) Act imposed certain of the HIPAA privacy and security requirements directly upon business associates of covered entities and significantly increased the monetary penalties for violations of HIPAA. Regulations also require business associates to notify covered entities, who in turn must notify affected individuals and government authorities, of data security breaches involving unsecured PHI. Since the passage of the HITECH Act, enforcement of HIPAA violations has increased. If we knowingly breach the HIPAA privacy and security requirements made applicable to business associates by the HITECH Act, it could expose us to criminal liability (as well as contractual liability to the associated covered entity); a breach of safeguards and processes that is not due to reasonable cause or involves willful neglect could expose us to significant civil penalties and the possibility of civil litigation under HIPAA and applicable state law.
We have procedures in place to detect and respond to data security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventative measures. In addition, hardware, software or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. We outsource administration of certain functions to vendors that could be targets of cyber attacks. Any theft, loss and/or fraudulent use of customer, employee or proprietary data as a result of a cyber attack targeting us or one of our third-party service providers could subject us to significant litigation, liability and costs, as well as adversely impact our reputation with customers and regulators, among others. If our efforts to protect the security of information about our customers, suppliers and employees are unsuccessful, a significant data security breach may result in costly government enforcement actions, private litigation and negative publicity resulting in reputation or brand damage with customers, and our business, financial condition, results of operations or prospects could suffer. While we maintain insurance coverage that is designed to address certain aspects
36
Because our facilities are located throughout the world, we are subject to varying intellectual property laws that may adversely affect our ability to manufacture our products.
We are subject to intellectual property laws in all countries where we have manufacturing facilities. Modifications of such laws or court decisions regarding such laws may adversely affect us and may impact our ability to produce and export products manufactured in any such country in a timely fashion. Additionally, the existence of third-party patents in such countries, with the attendant risk of litigation, may cause us to move production to a different country (potentially leading to significant production delays) or otherwise adversely affect our ability to export certain products from such countries.
We have significant operations globally, including in countries that may be adversely affected by political or economic instability, major hostilities or acts of terrorism, which exposes us to risks and challenges associated with conducting business internationally.
We are a global pharmaceutical company with worldwide operations. Although approximately 51% of our sales are in the United States and Western Europe, an increasing portion of our sales and operational network are located in other regions, such as Latin America, Central and Eastern Europe and Asia, which may be more susceptible to political and economic instability. Other countries and regions, such as the United States and Western Europe, also face potential instability due to political and other developments. In the United States, although the reforms in the U.S. tax code did not include a “border adjustment tax” or other restrictions on trade, if such tax or restriction were to be implemented in the future, this could interfere with international trade in pharmaceuticals. In addition, in the United States, the executive administration has discussed, and in some cases implemented, changes with respect to certain trade policies, tariffs and other government regulations affecting trade between the United States and other countries. As a company that manufactures most of its products outside the United States, a “border adjustment tax” or other restriction on trade, if enacted, may have a material adverse effect on our business, financial condition and results of operations. In addition, given that a significant portion of our business is conducted in the European Union, including the U.K., the formal change in the relationship between the U.K. and the European Union caused by the U.K. referendum to leave the European Union, referred to as “Brexit,” may pose certain implications to our research, commercial and general business operations in the U.K. and the European Union, including the approval and supply of our products. FinalizationOn December 24, 2020, the United Kingdom and European Union agreed on a new Trade and Cooperation Agreement and on December 31, 2020, the United Kingdom formally left the transition period. The Trade and Cooperation Agreement is comprehensive, but does not cover all areas of regulation pertinent to the pharmaceutical industry, so certain complexities remain. This finalization of the long-term relationship between the United Kingdom and the European Union following the end of the transitional period as early as December 31, 2020 and the impact on the remaining European Union countries will dictate how and whether the broader European Union will be impacted and what the resultingmay result in an impact on our business may be.operations in Europe.
Significant portions of our operations are conducted outside the markets in which our products are sold, and accordingly we often import a substantial number of products into such markets. We may, therefore, be denied access to our customers or suppliers or denied the ability to ship products from any of our sites as a result of a closing of the borders of the countries in which we sell our products, or in which our operations are located, due to economic, legislative, political and military conditions, including hostilities and acts of terror, in such countries. In addition, certain countries have put regulations in place requiring local manufacturing of goods, while foreign-made products are subject to pricing penalties or even bans from participation in public procurement auctions.
We face additional risks inherent in conducting business internationally, including compliance with laws and regulations of many jurisdictions that apply to our international operations. These laws and regulations include data privacy requirements, labor relations laws, tax laws, competition regulations, import and trade restrictions, economic sanctions, export requirements, the Foreign Corrupt Practices Act (“FCPA”), the UK Bribery Act 2010 and other local laws that prohibit corrupt payments to governmental officials or certain payments or remunerations to customers. Given the high level of complexity of these laws, there is a risk that some provisions may be breached by us, for example through fraudulent or negligent behavior of individual employees (or third parties acting on our behalf), our failure to comply with certain formal documentation requirements, or otherwise. Actions by our employees, or by third-party intermediaries acting on our behalf, in
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violation of such laws, whether carried out in the United States or elsewhere in connection with the conduct of our business have exposed us, and may further expose us, to significant liability for violations of the FCPA or other anti-corruption laws. In 2016, we paid a monetary fine for FCPA violations and entered into a three year deferred prosecution agreement with the DOJ, which included retaining an independent compliance monitor. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, requirements to obtain export licenses, cessation of business activities in sanctioned countries, implementation of compliance programs and prohibitions on the conduct of our business. Any such violation could include prohibitions on our ability to offer our products in one or more countries and could materially damage our reputation, our brand, our ability to attract and retain employees, our business, our financial condition and our results of operations.
Our corporate headquarters and a sizable portion of our manufacturing activities are located in Israel. Our Israeli operations are dependent upon materials imported from outside Israel. Accordingly, our operations could be materially and adversely affected by acts of terrorism or if major hostilities were to occur in the Middle East or trade between Israel and its present trading partners were materially impaired, including as a result of acts of terrorism in the United States or elsewhere.
We are subject to extensive governmentalpharmaceutical regulation, which can be costly and subject our business to disruption, delays and potential penalties.
We are subject to extensive regulation by the FDA and various other U.S. federal and state authorities, and the EMA and other foreign regulatory authorities. The process of obtaining regulatory approvals to market a drug or medical device can be costly and time-consuming, and approvals might not be granted for future products, or additional indications or uses of existing products, on a timely basis, if at all. Delays in the receipt of, or failure to obtain approvals for, future products, or new indications and uses, could result in delayed realization of product revenues, reduction in revenues and substantial additional costs. For example, in the last three years, we experienced delays in obtaining anticipated approvals for various generic and specialty products, and weduring 2020 the
COVID-19
pandemic caused some delays in approvals due to travel and work restrictions. We may continue to experience similar delays.In addition, no assurance can be given that we will remain in compliance with applicable FDA and other regulatory requirements once approval or marketing authorization has been obtained for a product. These requirements include, among other things, regulations regarding manufacturing practices, product labeling, and advertising and post marketing reporting, including adverse event reports and field alerts due to manufacturing quality concerns. Our facilities are subject to ongoing regulation, including periodic inspection by the FDA and other regulatory authorities, and we must incur expense and expend effort to ensure compliance with these complex regulations. In addition, we are subject to regulations in various jurisdictions, including the Federal Drug Supply Chain Security Act in the U.S., the Falsified Medicines Directive in the EU and many other such regulations in other countries that require us to develop electronic systems to serialize, track, trace and authenticate units of our products through the supply chain and distribution system. Compliance with these regulations may result in increased expenses for us or impose greater administrative burdens on our organization, and failure to meet these requirements could result in fines or other penalties.
Failure to comply with all applicable regulatory requirements may subject us to operating restrictions and criminal prosecution, monetary penalties and other disciplinary actions, including, sanctions, warning letters, product seizures, recalls, fines, injunctions, suspension, shutdown of production, revocation of approvals or the inability to obtain future approvals, or exclusion from future participation in government healthcare programs. Any of these events could disrupt our business and have a material adverse effect on our revenues, profitability and financial condition.
Healthcare reforms, and related reductions in pharmaceutical pricing, reimbursement and coverage, by governmental authorities and third-party payers may adversely affect our business.
The continuing increase in expenditures for healthcare has been the subject of considerable government attention almost everywhere we conduct business. Both private health insurance funds and government health authorities continue to seek ways to reduce or contain healthcare costs, including by reducing or eliminating coverage for certain products and lowering reimbursement levels. The focus on reducing or containing healthcare costs has been increased by controversies, political debate and publicity about prices for pharmaceutical products that some consider excessive, including Congressional and other inquiries into drug pricing, including with respect to our specialty medicines, which could have a material adverse effect on our reputation. In most of the countries and regions where we operate, including the United States, Western Europe, Israel, Russia, Japan, certain countries in Central and Eastern Europe and several countries in Latin America, pharmaceutical prices are subject to new government policies designed to reduce healthcare costs, and may be subject to additional regulatory efforts, funding restrictions, legislative proposals, policy interpretations, investigations and legal proceedings regarding pricing practices. These changes frequently adversely affect pricing and profitability and may cause delays in market entry. Certain U.S. states have implemented, and other states are considering, pharmaceutical price controls or patient access constraints under the Medicaid program, and some jurisdictions have implemented or are considering price-control regimes that would apply to broader segments of their populations that are not Medicaid-eligible. Private third-party payers, such as health plans, increasingly challenge pharmaceutical product pricing, which could result in lower prices, lower reimbursement rates and a reduction in demand for our products. We cannot predict which additional measures may be adopted or the impact of current and additional measures on the marketing, pricing and demand for our products, which could have a material adverse effect on our business, financial condition and results of operations.
Significant developments that may adversely affect pricing in the United States include (i)Medicare reforms by Congress and regulatory changes to Medicare Part B (physician administered drugs) and Medicare Part D (prescription drug benefit), additional changes to the enactment of federal healthcare reform lawsAffordable Care Act (“ACA”) under the Biden Administration and regulations, including the Medicare Prescription Drug Improvement and Modernization Act of 2003 and the ACA and (ii) trends in the practices of managed care groups and institutional and governmental purchasers, including the impact of consolidation of our customers. ChangesIn particular, additional pressure to reduce health care costs in states is critical as the
COVID-19
pandemic strained state healthcare budgets and swelled Medicaid rolls due to economic downturns and job loss. Many new Medicaid recipients were previously covered under employer-sponsored plans.The branded pharmaceutical industry faces uncertainty regarding whether the Interim Final Rule (IFR) published on November 27, 2020 by the CMS will survive pending court challenges. Originally set to be effective January 1, 2021, the IFR imposes a mandatory Most Favored Nation (MFN) pricing model on fifty single-source drugs and biologics (including biosimilars) reimbursed by Medicare Part B, to be administered by the Centers for Medicare and Medicaid Innovation. PhRMA, the Biotechnology Industry Organization (BIO), a biotechnology company, and several patient support groups filed litigation to enjoin the implementation process and allow for more thoughtful deliberations over the imposition of drug price control proposals. On December 28, 2020, the court in the BIO case imposed a preliminary injunction on implementation of the IFR pending completion of regulatory notice-and-comment requirements by CMS. Subsequently, on January 13, 2021 the DOJ and PhRMA agreed to stay their litigation (which sought a similar national injunction of IFR implementation) until a final rule based on the IFR is published in the Federal Register. As a result, while the IFR as published will not go into effect, CMS could propose pricing changes similar to the healthcare system enacted as part of healthcare reformIFR in the United States,future, albeit with more notice and opportunity for stakeholders to participate in the regulatory process. There is likely to be consideration of Medicare Part D reform as well, which could impact pricing policies, such as direct price negotiation between the increasedU.S. Department of Health and Human Services and manufacturers.
Increased purchasing power of entities that negotiate on behalf of Medicare, Medicaid, and private sector beneficiaries may result in increased pricing pressure by influencing for instance, the reimbursement policies of third-party payers. Healthcare reform legislation has increased the number of patients who have insurance coverage for our
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products, but provisions such as the assessment of a branded pharmaceutical manufacturer fee and an increase in the amount of rebates that manufacturers pay for coverage of their drugs by Medicaid programs may have an adverse effect on us. It is uncertain how current and future reforms in these areas will influence the future of our business operations and financial condition. In 2017, a new executive administration, which had promised to repeal and replace the ACA, took office in the United States. In December 2018, a U.S. federal district court ruled that the ACA is unconstitutional, but such decision has been stayed and will not take effect while such decision is on appeal. We cannot predict the outcome of litigation regarding the constitutionality of the ACA or the form any replacement of the ACA may take, if any, although it may have the impact of reducing the number of insured individuals as well as coverage for pharmaceutical products.
A significant portion of our revenues is derived from sales to a limited number of customers.
A significant portion of our revenues is derived from sales to a limited number of customers. If we were to experience a significant reduction in or loss of business with one or more such customers, or if one or more such customers were to experience difficulty in paying us on a timely basis, our business, financial condition and results of operations could be materially adversely affected. For a description of our revenue from our main customers, see note 19 to our consolidated financial statements.
We may not be able to find or successfully bid for suitable acquisition targets or licensing opportunities, or consummate and integrate future acquisitions.
We may evaluate or pursue potential acquisitions, strategic alliances and licenses, among other transactions, as part of our business strategy. Relying on acquisitions, licensing agreements and other transactions as sources of new specialty, biosimilar and other products, or as a means of growth, involves risks that could adversely affect our future revenues and operating results. We may not be successful in seeking or consummating appropriate opportunities to enable us to execute our business strategy. We may not be able to pursue relevant acquisitions and licensing opportunities due to financial capacity constraints, and we may not be able to obtain necessary regulatory approvals, including those of competition authorities, and as a result, or for other reasons, we may fail to consummate an announced acquisition. We may fail to integrate acquisitions successfully into our existing business, and could incur or assume significant debt and unknown or contingent liabilities, including, among others, patent infringement or product liability claims. In addition, partners for which we may enter into licensing or other collaboration agreements may not be able to perform their responsibilities challenging the ability to monetize opportunities related to them.
We may decide to sell assets, which could adversely affect our prospects and opportunities for growth.
We may from time to time consider selling certain assets if we determine that such assets are not critical to our strategy or we believe the opportunity to monetize the asset is attractive or for various other reasons, including for the reduction of indebtedness. We closed or divested a significant number of manufacturing plants and R&D facilities between 2017 and 2019 in connection with our restructuring plan and may close or divest additional plants and facilities as part of our ongoing efficiency measures and plant rationalization process. We have explored and may continue to explore the sale of certain
non-core
assets. We may fail to identify appropriate opportunities to divest assets on terms acceptable to us or may fail to transition employees and continuing operations from disposed businesses efficiently. If divestiture opportunities are found, consummation of any such divestiture may be subject to closing conditions, including obtaining necessary regulatory approvals, including those of competition authorities, and as a result, or for other reasons, we may fail to consummate an announced divestiture. Although our expectation is to engage in asset sales only if they advance or otherwise support our overall strategy, any such sale could reduce the size or scope of our business, the durability of our manufacturing network, our market share in particular markets or our opportunities with respect to certain markets.40
Compliance, regulatory and litigation risks
Our operations are subject to complex legal and regulatory environments. If we fail to comply with applicable laws and regulations we may suffer legal consequences that may have a material effect on our business, operations or reputation.
We operate around the world in complex legal and regulatory environments. Any failure to comply with applicable laws, rules and regulations may result in civil and/or criminal legal proceedings and lead to fines, damages, mandated compliance programs and other sanctions and remedies that may materially affect our business and operations as well as our reputation. In addition, as rules and regulations change or as interpretations of those rules and regulations evolve, our prior conduct or that of companies we have acquired may be investigated.
Examples of rules and regulations impacting our operations include rules and regulations applicable to the sales and marketing of our products, competition laws, trade control laws, anti-bribery laws, privacy laws, compliance with cGMP, labor laws, safety and laws regarding manufacturing practices, product labeling, advertising and post marketing reporting including adverse event reports and field alerts due to manufacturing quality concerns, tax and financial reporting laws and environmental laws.
We are currently subject to several governmental and civil proceedings and litigations relating to our pricing and marketing practices, intellectual property, product liability, competition matters, opioids, securities disclosure and corporate governance and environmental matters. These investigations and litigations are costly and involve a significant diversion of management attention. Such proceedings are unpredictable and may develop over lengthy periods of time. An adverse resolution of these proceedings may result in large monetary fines, damages, additional litigation, such as securities and derivative actions, and other
non-monetary
sanctions and remedies, such as mandated compliance agreements, which can be expensive and disruptive to operations.Public concern over the abuse of opioid medications, in the United States, including increased legal and regulatory action, could negatively affect our business.
Certain governmental and regulatory agencies are focused on the abuse of opioid medications in the United States. Federal,U.S. federal, state and local governmental and regulatory agencies are conducting investigations of us, other pharmaceutical manufacturers and other supply chain participants with regard to the manufacture, sale, marketing and distribution of opioid medications. A number of state attorneys general, including a coordinated multistate effort, are investigating our sales and marketing of opioids, and we have received subpoena requestssubpoenas from the DOJ seeking documents relating to the manufacture, marketing and sale of opioid medications. In addition, we are currently litigating civil claims and administrative actions brought by various states and political subdivisions as well as private claimants, against various manufacturers, distributors and retail pharmacies throughout the United States in connection with our manufacture, sale and distribution of opioids. On October 21, 2019, TevaAlso, several jurisdictions and certainconsumers in Canada have initiated litigation regarding opioids alleging similar claims as those in the United States, and we may be sued in other defendants reached anjurisdictions globally for similar claims as well. For further information, including on a nation-wide framework agreement in principlewe entered into with a group of Attorneys General from North Carolina, Pennsylvania, Tennessee and Texas for a nationwide settlement framework. The framework is designed to provide a mechanism by which Teva attempts to seek resolution of remaining potential and pending opioid claims by both the U.S. states and political subdivisions (i.e., counties, tribes and other plaintiffs) thereof. Under this agreement, Teva would provide buprenorphine naloxone (sublingual tablets), in quantities with an estimated value of up to approximately $23 billion at wholesale acquisition cost over a ten year period. In addition, Teva would also provide cash payments of up to $250 million over a ten year period. This global settlement framework is predicated on settlement with all U.S. states and related subdivisions. Teva cannot predict if the nationwide settlement framework will be finalized. Responding to governmental investigations and managing legal proceedings is costly and involves a significant diversion of management attention. Such proceedings are unpredictable and may develop over lengthy periods of time. An adverse resolution of any of these lawsuits or investigations, including failure to consummate the broad resolution contemplated by the framework agreement, may involve substantial monetary penalties and could have a material adverse effect on our reputation, business, results of operations and cash flows. See “Government Investigations and Litigation Relating to Pricing and Marketing”attorney generals, see “Opioids Litigation” in note 12 to theour consolidated financial statements.
In addition to the costs and potential consequences associated with defending the governmental investigations and legal proceedings, legislative, regulatory or industry measures to address the misuse of prescription opioid medications may also affect our business in ways that we are not able to predict. For example, a number of states, including New York, have enacted legislation that requires entities to paythe payment of assessments or taxes on the sale or distribution of opioid medications in those states. If other state or local jurisdictions successfully enact similar legislation and we are not able to mitigate the impact on our business through operational changes or commercial arrangements, such legislation in the aggregate may have a material adverse effect on our business, financial condition and results of operations.
Furthermore, we utilize controlled substances in certain of our current products and products in development, and therefore must meet the requirements of the Controlled Substances Act of 1970 and related regulations administered by the DEA in the U.S., as well as the requirements of similar laws and regulations in other countries where we operate, relating to the manufacture, shipment, storage, sale, and use of controlled substances. While we are committed to compliance and have robust compliance systems in place, risk associated with these laws and regulations cannot be entirely eliminated by policies and procedures. The DEA and other regulatory agencies also set annual procurement quotas that limit the availability of the controlled substances used in certain of our current products and products in development, and quota levels may impact our ability to meet commercial demand or complete clinical trials. In addition, prescription drug abuse and the diversion of opioids and other controlled substances are the frequent subject of public attention, which presents significant reputational risk. The occurrence of any of the above risks could have a material adverse effect on our business, financial condition, results of operations, cash flows, and/or share price.
The pharmaceutical sector is facing increased government scrutiny from competition and pricing authorities around the world, which may expose us to significant damages and commercial restrictions that can materially and adversely affect our business.
We are required to comply with competition laws in the territories where we do business around the world. Compliance with these laws has been the subject of increasing focus and activity by regulatory authorities, both in the United States and Europe, in recent years. Alleged actions by our employees, in violation of such laws, or evolving interpretations of competition law as applicable to certain practices, have exposed us, and may further expose us, to investigations and legal proceedings, which may result in significant liability for violations of competition laws, which may have a material adverse effect on our reputation, business, financial condition and results of operations.
We are subject to a DOJ civil litigation broughtinvestigation and a criminal indictment charging Teva USA with criminal felony Sherman Act violations, that, if resulting in a conviction or guilty plea, could have a material adverse effect on behalf of the federal government.our business, including monetary penalties, debarment from federally funded health care programs and reputational harm. In addition, Teva iswe are a party to numerous civil claims brought by state officials and private plaintiffs alleging that Teva, together with other pharmaceutical manufacturers, engaged in conspiracies to fix prices and/or allocate market share of generic products in the United States. Responding
We have been involved in numerous litigations involving challenges to such investigationsthe validity or enforceability of listed patents (including our own), and therefore settling patent litigations has been and will likely continue to be an important part of our business. We have been facing increased scrutiny of our patent settlements, including from the U.S. Federal Trade Commission (“FTC”) and the European Commission. Accordingly, we may receive formal or informal requests from competition law authorities around the world for information about a particular settlement agreement, and there is costlya risk that governmental authorities, customers, other downstream purchasers or others may commence actions against us alleging violations of antitrust laws. We are currently defendants in antitrust actions brought by U.S. states, the European Commission and involvesprivate plaintiffs involving numerous settlement agreements and, since 2015, we are subject to a significant diversion of management attention. Such proceedings are unpredictable and may develop over lengthy periods of time. Future settlements may involve large monetary penalties. In addition, government authorities have significant leverageconsent decree with the FTC, which imposes on us certain injunctive reliefs with respect to persuade pharmaceutical companiesour ability to enter into corporate integrity agreements,patent settlements in the United States. The U.S. Congress and certain state legislatures in the United States have also passed, or proposed passing, legislation that could adversely impact our ability to settle patent litigations. For example, the State of California has enacted legislation that prohibits, with certain exceptions and safe harbors, various types of patent litigation settlements, and imposes substantial monetary penalties on companies and individuals who do not comply. Such legislation creates a risk of significant potential exposure for settling patent litigations and, in turn, makes it more difficult to settle in the first place, which can be expensive and disruptive to operations. See “Government Investigations and Litigation Relating to Pricing and Marketing” in note 12 tocould have a material adverse effect on our consolidated financial statements. business.
Following calls in recent years from policy makers and other stakeholders in many countries for governmental intervention against the high prices of certain pharmaceutical products, we are currently, and may in the future be, subject to governmental investigations, claims or other legal action or regulatory actionactions regarding our
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pricing includingand/or other alleged exclusionary practices. These include U.S. Congressional investigations regarding both our brandedspecialty and generic medications.medicines, the European Commission’s inquiry into COPAXONE and the U.K. Competition and Markets Authority inquiry regarding hydrocortisone. Also, in September 2020, the U.S. House Committee on Oversight and Reform held a hearing focused on pricing of branded medications, which focused in part on historic pricing of COPAXONE in the U.S. It is not possible to predict the ultimate outcome of any such investigations, claims or claimsproceedings or what other investigations or lawsuits or regulatory responses may result from such assertions, andwhich could have a material adverse effect on our reputation, business, financial condition and results of operations.
See note 12 to our consolidated financial statements for more information on our material investigations, proceedings and litigations relating to competition law and governmental investigations.Third parties may claim that we infringe their proprietary rights and may prevent us from manufacturing and selling some of our products, and we have sold and may in the future elect to sell products prior to the final resolution of outstanding patent litigation, and, as a result, we could be subject to liability for damages in the United States, Europe and other markets where we do business.
Our ability to introduce new products depends in large part upon the success of our challenges to patent rights held by third parties or our ability to develop
non-infringing
products. Based upon a variety of legal and commercial factors, we may elect to sell a product even though patent litigation is still pending, either before any court decision is rendered or while an appeal of a lower court decision is pending. The outcome of such patent litigation could, in certain cases, materially adversely affect our business. For example, we launched a generic version of Protonix®
(pantoprazole) despite pending litigation with the company that sells the brand versions, which we eventually settled in 2013 for $1.6 billion. For further details, see note 12 to our consolidated financial statements.If we sell products prior to a final court decision, whether in the United States, Europe or elsewhere, and such decision is adverse to us, we could be required to cease selling the infringing products, causing us to lose future sales revenue from such products and to face substantial liabilities for patent infringement, in the form of either payment for the innovator’s lost profits or a royalty on our sales of the infringing products. These damages may be significant, and could materially adversely affect our business. In the United States, in the event of a finding of willful infringement, the damages assessed may be up to three times the profits lost by the patent owner. Because of the discount pricing typically involved with generic pharmaceutical products, patented brand products generally realize a significantly higher profit margin than generic pharmaceutical products. As a result, the damages assessed may be significantly higher than our profits. In addition, even if we do not suffer damages, we may incur significant legal and related expenses in the course of successfully defending against infringement claims.
We may be susceptible to significant product liability claims that are not covered by insurance.
Our business inherently exposes us to claims for injuries allegedly resulting from the use of our products. As our portfolio of available products expands, particularly with new specialty products, we may experience increases in product liability claims asserted against us.
Teva maintains an insurance program, which may include commercial insurance, self-insurance (including direct risk retention), or a combination of both approaches, in amounts and on terms that it believes are reasonable and prudent in light of its business and related risks. Teva sells, and will continue to sell, pharmaceutical products that are not covered by its product liability insurance. In addition, it may be subject to claims for which insurance coverage is denied, as well as claims that exceed its policy limits. Product liability coverage for pharmaceutical companies is becoming more expensive and increasingly difficult to obtain. As a
result, Teva may not be able to obtain the type and amount of insurance it desires, or any insurance on reasonable terms, in the markets in which it operates.
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Any failure to comply with the complex reporting and payment obligations under the Medicare and Medicaid programs may result in further litigation or sanctions, in addition to those that we have announced in previous years.
The U.S. laws and regulations regarding Medicare and/or Medicaid reimbursement and rebates and other governmental programs are complex. Some of the applicable laws may impose liability even in the absence of specific intent to defraud. The subjective decisions and complex methodologies used in making calculations under these programs are subject to review and challenge, and it is possible that such reviews could result in material changes. A number of state attorney generals and others have filed lawsuits alleging that we and other pharmaceutical companies reported inflated average wholesale prices, leading to excessive payments by Medicare and/or Medicaid for prescription drugs. In addition, the U.S. government has alleged violations of the federal Anti-Kickback Statute, and related causes of action under the federal False Claims Act and state law in connection with Teva’s donations to patient assistance programs. Such allegations could, if proven or settled, result in additional monetary penalties (beyond the lawsuits we have already settled) and possible exclusion from Medicare, Medicaid and other programs. In addition, we are notified from time to time of governmental investigations
regarding drug reimbursement or pricing issues. See “Government Investigations and Litigation Relating to Pricing and Marketing” in note 12 to our consolidated financial statements. Certain parts of Medicare benefits are under scrutiny, as the U.S. Congress looks for ways to reduce government spending on prescription medicines.
Sanctions and other trade control laws create the potential for significant liabilities, penalties and reputational harm.
As a company with global operations, we may be subject to national laws as well as international treaties and conventions controlling imports, exports,
re-export,
transfer and diversion of goods (including finished goods, materials, APIs, packaging materials, other products and machines), services and technology. These include import and customs laws, export controls, trade embargoes and economic sanctions, restrictions on sales to parties that are listed on (or are owned or controlled by one or more parties listed on) denied party watch lists and anti-boycott measures (collectively “Customs and Trade Controls”). Applicable Customs and Trade Controls are administered by Israel’s Ministry of Finance, the U.S. Treasury’s Office of Foreign Assets Control (OFAC), the U.S. Department of Commerce, other U.S. agencies and multiple other agencies of other jurisdictions around the world where we do business. Customs and Trade Controls relate to a number of aspects of our business, including most notably the sales of finished goods and API as well as the licensing of our intellectual property. Compliance with Customs and Trade Controls has been the subject of increasing focus and activity by regulatory authorities, both in the United States and elsewhere, in recent years, and requirements under applicable Customs and Trade Controls in general, change frequently. Although we have policies and procedures designed to address compliance with Customs and Trade Controls, actions by our employees, by third-party intermediaries (such as distributors and wholesalers) or others acting on our behalf in violation of relevant laws and regulations may expose us to liability and penalties for violations of Customs and Trade Controls and accordingly may have a material adverse effect on our reputation and our business, financial condition and results of operations.Our failure to comply with applicable environmental laws and regulations worldwide could adversely impact our business and results of operations.
We are subject to laws and regulations concerning the environment, safety matters, regulation of chemicals and product safety in the countries where we manufacture and sell our products or otherwise operate our business. These requirements include regulation of the handling, manufacture, transportation, storage, use and disposal of materials, including the discharge of pollutants into the environment. If we fail to comply with these laws and regulations, we may be subject to enforcement proceedings including fines and penalties. In the normal course of our business, we are also exposed to risks relating to possible releases of hazardous substances into the environment, which could cause environmental or property damage or personal injuries, and which could require remediation of contaminated soil and groundwater. Under certain laws, we may be required to remediate
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contamination at certain of our properties, regardless of whether the contamination was caused by us or by previous occupants or users of the property.
Additional financial risks
Because we have substantial international operations, our sales and profits may be adversely affected by currency fluctuations and restrictions as well as credit risks.
In 2019,2020, approximately 48% of revenues were denominated in currencies other than the U.S. dollar. As a result, we are subject to significant foreign currency risks, including repatriation restrictions in certain countries, and may face heightened risks as we enter new markets. An increasing proportion of our sales, particularly in Latin America, Central and Eastern European countries and Asia, are recorded in local currencies, which exposes us to the direct risk of devaluations, hyperinflation or exchange rate fluctuations. Exchange rate movements during 20192020 in comparison with 20182019, including hedging effects, negatively impacted overall revenues by $402$33 million and negatively impacted our operating income (loss) by $135$56 million. The imposition of price controls or restrictions on the conversion of foreign currencies could also have a material adverse effect on our financial results.
In particular, although the majority of our net sales and operating costs is recorded in, or linked to, the U.S. dollar, our reporting currency, in 20192020 we incurred a substantial amount of operating costs in currencies other than the U.S. dollar.
As a result, fluctuations in exchange rates between the currencies in which such costs are incurred and the U.S. dollar may have a material adverse effect on our results of operations, the value of balance sheet items denominated in foreign currencies and our financial condition.
We use derivative financial instruments and “hedging” techniques to manage some of our balance sheet and operating income net exposure to currency exchange rate fluctuations in the major foreign currencies in which we operate. However, not all of our potential exposure is covered, and some elements of our consolidated financial statements, such as our equity position, or operating profit, are not fully protected against foreign currency exposures. Therefore, our exposure to exchange rate fluctuations could have a material adverse effect on our financial results.
Our intangible assets may continue to lead to significant impairments in the future.
We regularly review our long-lived assets, including identifiable intangible assets, goodwill and property, plant and equipment, for impairment. Goodwill and acquired indefinite life intangible assets are subject to impairment review on an annual basis and whenever potential impairment indicators are present. Other long-lived assets are reviewed when there is an indication that impairment may have occurred. The amount of
goodwill, identifiable intangible assets and property, plant and equipment on our consolidated balance sheet has increased significantly in the past five years mainly as a result of our acquisitions. In 2017, we recorded goodwill impairments of $17.1 billion and impairments of intangible assets of $3.2 billion. In 2018, we recorded goodwill impairments of $3.0 billion and impairments of intangible assets of $2.0 billion. In 2019, we recorded impairments of intangible assets of $1,639 million.may increase following acquisitions or other collaboration agreements. Changes in market conditions or other changes in the future outlook of value may lead to further impairments in the future. In addition, the potential divestment of assets, including the closure or divestment of manufacturing plants and R&D facilities, headquarters and other office locations, may lead to additional impairments. Future events or decisions may lead to asset impairments and/or related charges. For assets that are not impaired, we may adjust the remaining useful lives. Certain
See notes 6 and 7 in our consolidated financial statements, for descriptions of impairments of intangible assets and goodwill in recent periods.non-cash
impairments may result from a change in our strategic goals, business direction or other factors relating to the overall business environment. Any significant impairment could have a material adverse effect on our results of operations.Our tax liabilities could be larger than anticipated.
We are subject to tax in many jurisdictions, and significant judgment is required in determining our provision for income taxes. Likewise, we are subject to audit by tax authorities in many jurisdictions. In such
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audits, our interpretation of tax legislation may be challenged and tax authorities in various jurisdictions may disagree with, and subsequently challenge, the amount of profits taxed in such jurisdictions under our inter-company agreements.
Although we believe our estimates are reasonable, the ultimate outcome of such audits and related litigation could be different from our provision for taxes and may have a material adverse effect on our consolidated financial statements and cash flows.
The base erosion and profit shifting (“BEPS”) project undertaken by the Organization for Economic Cooperation and Development (“OECD”) may have adverse consequences to our tax liabilities. The BEPS project contemplates changes to numerous international tax principles, as well as national tax incentives, and these changes, when adopted by individual countries, could adversely affect our provision for income taxes. Countries have only recently begun to translate theThe first wave of BEPS recommendations intois being implemented by countries in specific national tax laws, and itthe OECD is currently working on further initiatives that may further change current international tax principles. It remains difficult to predict the magnitude of the effect of such new rules on our financial results.
The termination or expiration of governmental programs or tax benefits, or a change in our business, could adversely affect our overall effective tax rate.
Our tax expenses and the resulting effective tax rate reflected in our consolidated financial statements may increase over time as a result of changes in corporate income tax rates, other changes in the tax laws of the various countries in which we operate or changes in our product mix or the mix of countries where we generate profit. We have benefited, and currently benefit, from a variety of Israeli and other government programs and tax benefits that generally carry conditions that we must meet in order to be eligible to obtain such benefits. If we fail to meet the conditions upon which certain favorable tax treatment is based, we would not be able to claim future tax benefits and could be required to refund tax benefits already received. Additionally, some of these programs and the related tax benefits are available to us for a limited number of years, and these benefits expire from time to time.
Any of the following could have a material effect on our overall effective tax rate:
some government programs may be discontinued, or the applicable tax rates may increase;
we may be unable to meet the requirements for continuing to qualify for some programs and the restructuring plan may lead to the loss of certain tax benefits we currently receive;
these programs and tax benefits may be unavailable at their current levels;
upon expiration of a particular benefit, we may not be eligible to participate in a new program or qualify for a new tax benefit that would offset the loss of the expiring tax benefit; or
we may be required to refund previously recognized tax benefits if we are found to be in violation of the stipulated conditions.
Equity ownership risks
Shareholder rights and responsibilities as a shareholder are governed by Israeli law, which differs in some material respects from the rights and responsibilities of shareholders of U.S. companies.
The rights and responsibilities of the holders of our ordinary shares are governed by our articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders of U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising his or her rights and performing his or her obligations towards the company and other shareholders, and to refrain from abusing his or her power in the company, including, among other things, in voting at a general meeting of shareholders on matters such as
46
amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and related party transactions requiring shareholder approval. In addition, a shareholder who is aware that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company. There is limited case law available to assist in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.
Provisions of Israeli law and our articles of association may delay, prevent or make difficult an acquisition of us, prevent a change of control and negatively impact our share price.
Israeli corporate law regulates acquisitions of shares through tender offers and mergers, requires special approvals for transactions involving directors, officers or significant shareholders, and regulates other matters that may be relevant to these types of transactions. Furthermore, Israeli tax considerations may make potential acquisition transactions unappealing to us or to some of our shareholders. For example, Israeli tax law may subject a shareholder who exchanges his or her ordinary shares for shares in a foreign corporation to taxation before disposition of the investment in the foreign corporation. These provisions of Israeli law may delay, prevent or make difficult an acquisition of our company, which could prevent a change of control and, therefore, depress the price of our shares.
In addition, our articles of association contain certain provisions that may make it more difficult to acquire us, such as provisions that provide for a classified Boardboard of Directorsdirectors and that our Board of Directors may issue preferred shares. These provisions may have the effect of delaying or deterring a change in control of us, thereby limiting the opportunity for shareholders to receive a premium for their shares and possibly affecting the price that some investors are willing to pay for our securities.
Our ADSs and ordinary shares are traded on different markets and this may result in price variations.
Our ADSs have been traded in the United States since 1982, and since 2012 on the New York Stock Exchange (the “NYSE”), and our ordinary shares have been listed on the TASE since 1951. Trading in our securities on these markets takes place in different currencies (our ADSs are traded in U.S. dollars and our ordinary shares are traded in New Israeli Shekels), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Israel). As a result, the trading prices of our securities on these two markets may differ due to these factors. In addition, any decrease in the price of our securities on one of these markets could cause a decrease in the trading price of our securities on the other market.
It may be difficult to enforce a
non-Israeli
judgment against us, our officers and our directors.We are incorporated in Israel. Certain of our executive officers and directors and our outside auditors are not residents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce against us or any of those persons in an Israeli court a U.S. court judgment based on the civil liability provisions of the U.S. federal securities laws. It may also be difficult to effect service of process on these persons in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to enforce civil liabilities under U.S. federal securities laws in original actions filed in Israel.
ITEM 1B. |
Not applicable.
47
ITEM 2. PROPERTIES
We own or lease 9086 manufacturing and R&D facilities, occupying approximately 25.325.2 million square feet. As of December 31, 2019,2020, our manufacturing and R&D facilities are used by our business segments as follows:
Business Segment | Number of Facilities | Square Feet (in thousands) | ||||||
North America | 19 | 4,442 | ||||||
Europe | 34 | 12,605 | ||||||
International Markets | 37 | 8,226 | ||||||
Worldwide Total Manufacturing and R&D Facilities | 90 | 25,273 | ||||||
Business Segment | Number of Facilities | Square Feet (in thousands) | ||||||
North America | 19 | 5,125 | ||||||
Europe | 32 | 12,300 | ||||||
International Markets | 35 | 7,769 | ||||||
Worldwide Total Manufacturing and R&D Facilities | 86 | 25,194 | ||||||
In addition to the manufacturing facilities discussed above, we maintain numerous office, distribution and warehouse facilities around the world.
We generally seek to own our manufacturing and R&D facilities, although some, principally in
non-U.S.
locations, are leased. Office, distribution and warehouse facilities are often leased.We are committed to maintaining all of our properties in good operating condition and repair, and the facilities are well utilized.
In Israel, our principal executive offices and corporate headquarters recently relocated from Petach-Tikva to Tel Aviv-Jaffa. Our executive offices in Petach-Tikva are leased until December 2021. We expect to move our corporate headquarters to2021 and we have an operating lease for the office space in Tel Aviv-Jaffa for an initial term of twelve and a consolidated site inTel-Avivin 2020.
half years, with an option for three extensions.
In the United States,North America, our principal leased propertiesexecutive offices are our North AmericanU.S. headquarters warehousing and distribution centers and offices in Parsippany, New Jersey and Westchester, Pennsylvania. Jersey. In Europe, our principal executive offices are in Amsterdam, the Netherlands.
We are currently completingcontinuing the process of relocating our principal U.S. headquarters from North Walesongoing review and Frazer, Pennsylvenia to Parsippany, New Jersey.
ITEM 3.LEGAL PROCEEDINGS
Information pertaining to legal proceedings can be found in “Item 8. 8—Financial Statements—Note 12b—12b.—Contingencies” and is incorporated by reference herein.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
American Depositary Shares (“ADSs”)
Our ADSs, which have been traded in the United States since 1982, were admitted to trade on the Nasdaq National Market in October 1987 and were subsequently traded on the Nasdaq Global Select Market. On May 30, 2012, we transferred the listing of our ADSs to the New York Stock Exchange (the “NYSE”). The ADSs are
48
quoted under the symbol “TEVA.” Citibank, N.A. serves as depositary for the ADSs. Each ADS represents one ordinary share.
Various other stock exchanges quote derivatives and options on our ADSs under the symbol “TEVA.”
Ordinary Shares
Our ordinary shares have been listed on the Tel Aviv Stock Exchange (“TASE”) since 1951.
Holders
The number of record holders of ADSs at December 31, 20192020 was 2,767.2,747.
The number of record holders of ordinary shares at December 31, 20192020 was 189.185.
The number of record holders is based upon the actual number of holders registered on our books at such date and does not include holders of shares in “street names” or persons, partnerships, associations, corporations or other entities identified in security position listings maintained by depository trust companies.
Dividends
We have not paid dividends on our ordinary shares or ADSs since December 2017.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Performance Graph
Set forth below is a performance graph comparing the cumulative total return (assuming reinvestment of dividends), in U.S. dollars, for the calendar years ended December 31, 2015, 2016, 2017, 2018, 2019 and 2019,2020, of $100 invested on December 31, 20142015 in the Company’s ADSs, the Standard & Poor’s 500 Index and the Dow Jones U.S. Pharmaceuticals Index.
| * | $100 invested on December 31, month-end |
ITEM 6. SELECTED FINANCIAL DATA
Operating Data
For the year ended December 31, | ||||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
(U.S. dollars in millions, except share and per share amounts) | ||||||||||||||||||||
Income Statement Data: (a) | ||||||||||||||||||||
Net revenues (b) | 16,887 | 18,271 | 21,853 | 21,464 | 19,303 | |||||||||||||||
Cost of sales (b) | 9,351 | 9,975 | 11,237 | 9,811 | 8,183 | |||||||||||||||
Gross profit | 7,537 | 8,296 | 10,615 | 11,653 | 11,120 | |||||||||||||||
Research and development expenses | 1,010 | 1,213 | 1,778 | 2,077 | 1,525 | |||||||||||||||
Selling and marketing expenses | 2,614 | 2,916 | 3,395 | 3,583 | 3,242 | |||||||||||||||
General and administrative expenses | 1,192 | 1,298 | 1,451 | 1,390 | 1,360 | |||||||||||||||
Intangible assets impairment | 1,639 | 1,991 | 3,238 | 589 | 265 | |||||||||||||||
Goodwill impairment | — | 3,027 | 17,100 | 900 | — | |||||||||||||||
Other asset impairments, restructuring and other items | 423 | 987 | 1,836 | 830 | 911 | |||||||||||||||
Legal settlements and loss contingencies | 1,178 | (1,208 | ) | 500 | 899 | 631 | ||||||||||||||
Other Income | (76 | ) | (291 | ) | (1,199 | ) | (769 | ) | (166 | ) | ||||||||||
Operating income (loss) | (443 | ) | (1,637 | ) | (17,484 | ) | 2,154 | 3,352 | ||||||||||||
Financial expenses—net | 822 | 959 | 895 | 1,330 | 1,000 | |||||||||||||||
Income (loss) before income taxes | (1,265 | ) | (2,596 | ) | (18,379 | ) | 824 | 2,352 | ||||||||||||
Income taxes (benefit) | (278 | ) | (195 | ) | (1,933 | ) | 521 | 634 | ||||||||||||
Share in (profits) losses of associated companies—net | 13 | 71 | 3 | (8 | ) | 121 | ||||||||||||||
Net income (loss) | (1,000 | ) | (2,472 | ) | (16,449 | ) | 311 | 1,597 | ||||||||||||
Net income (loss) attributable to non-controlling interests | (2 | ) | (322 | ) | (184 | ) | (18 | ) | 9 | |||||||||||
Net income (loss) attributable to Teva | (999 | ) | (2,150 | ) | (16,265 | ) | 329 | 1,588 | ||||||||||||
Accrued dividends on preferred shares | — | 249 | 260 | 261 | 15 | |||||||||||||||
Net income (loss) attributable to ordinary shareholders | (999 | ) | (2,399 | ) | (16,525 | ) | 68 | 1,573 | ||||||||||||
Earnings (loss) per share attributable to ordinary shareholders: | ||||||||||||||||||||
Basic ($) | (0.91 | ) | (2.35 | ) | (16.26 | ) | 0.07 | 1.84 | ||||||||||||
Diluted ($) | (0.91 | ) | (2.35 | ) | (16.26 | ) | 0.07 | 1.82 | ||||||||||||
Weighted average number of shares (in millions): | ||||||||||||||||||||
Basic | 1,091 | 1,021 | 1,016 | 955 | 855 | |||||||||||||||
Diluted | 1,091 | 1,021 | 1,016 | 961 | 864 | |||||||||||||||
Dividends per ordinary share | — | — | $ | 0.51 | $ | 1.36 | $ | 1.36 | ||||||||||||
For the year ended December 31, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
(U.S. dollars in millions, except share and per share amounts) | ||||||||||||||||||||
Income Statement Data: (a) | ||||||||||||||||||||
Net revenues | 16,659 | 16,887 | 18,271 | 21,853 | 21,464 | |||||||||||||||
Cost of sales | 8,933 | 9,351 | 9,975 | 11,237 | 9,811 | |||||||||||||||
Gross profit | 7,726 | 7,537 | 8,296 | 10,615 | 11,653 | |||||||||||||||
Research and development expenses | 997 | 1,010 | 1,213 | 1,778 | 2,077 | |||||||||||||||
Selling and marketing expenses | 2,498 | 2,614 | 2,916 | 3,395 | 3,583 | |||||||||||||||
General and administrative expenses | 1,173 | 1,192 | 1,298 | 1,451 | 1,390 | |||||||||||||||
Intangible assets impairment | 1,502 | 1,639 | 1,991 | 3,238 | 589 | |||||||||||||||
Goodwill impairment | 4,628 | — | 3,027 | 17,100 | 900 | |||||||||||||||
Other asset impairments, restructuring and other items | 479 | 423 | 987 | 1,836 | 830 | |||||||||||||||
Legal settlements and loss contingencies | 60 | 1,178 | (1,208 | ) | 500 | 899 | ||||||||||||||
Other Income | (40 | ) | (76 | ) | (291 | ) | (1,199 | ) | (769 | ) | ||||||||||
Operating income (loss) | (3,572 | ) | (443 | ) | (1,637 | ) | (17,484 | ) | 2,154 | |||||||||||
Financial expenses, net | 834 | 822 | 959 | 895 | 1,330 | |||||||||||||||
Income (loss) before income taxes | (4,406 | ) | (1,265 | ) | (2,596 | ) | (18,379 | ) | 824 | |||||||||||
Income taxes (benefit) | (168 | ) | (278 | ) | (195 | ) | (1,933 | ) | 521 | |||||||||||
Share in (profits) losses of associated companies, net | (138 | ) | 13 | 71 | 3 | (8 | ) | |||||||||||||
Net income (loss) | (4,099 | ) | (1,000 | ) | (2,472 | ) | (16,449 | ) | 311 | |||||||||||
Net income (loss) attributable to non-controlling interests | (109 | ) | (2 | ) | (322 | ) | (184 | ) | (18 | ) | ||||||||||
Net income (loss) attributable to Teva | (3,990 | ) | (999 | ) | (2,150 | ) | (16,265 | ) | 329 | |||||||||||
Accrued dividends on preferred shares | — | — | 249 | 260 | 261 | |||||||||||||||
Net income (loss) attributable to ordinary shareholders | (3,990 | ) | (999 | ) | (2,399 | ) | (16,525 | ) | 68 | |||||||||||
Earnings (loss) per share attributable to ordinary shareholders: | ||||||||||||||||||||
Basic ($) | (3.64 | ) | (0.91 | ) | (2.35 | ) | (16.26 | ) | 0.07 | |||||||||||
Diluted ($) | (3.64 | ) | (0.91 | ) | (2.35 | ) | (16.26 | ) | 0.07 | |||||||||||
Weighted average number of shares (in millions): | ||||||||||||||||||||
Basic | 1,095 | 1,091 | 1,021 | 1,016 | 955 | |||||||||||||||
Diluted | 1,095 | 1,091 | 1,021 | 1,016 | 961 | |||||||||||||||
Dividend per ordinary share | — | — | $ | 0.51 | $ | 1.36 | $ | 1.36 | ||||||||||||
| (a) | For a discussion of items that affected the comparability of results for the years |
50
Balance Sheet Data
As at December 31, | ||||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||
(U.S. dollars in millions) | ||||||||||||||||||||
Financial assets (cash, cash equivalents and investment in securities) | 2,033 | 1,846 | 1,060 | 1,949 | 8,404 | |||||||||||||||
Identifiable intangible assets, net | 11,232 | 14,005 | 17,640 | 21,487 | 7,675 | |||||||||||||||
Goodwill | 24,846 | 24,917 | 28,414 | 44,409 | 19,025 | |||||||||||||||
Working capital (operating assets minus liabilities) | 74 | (186 | ) | (384 | ) | 303 | 32 | |||||||||||||
Total assets | 57,470 | 60,683 | 70,615 | 93,057 | 54,233 | |||||||||||||||
Short-term debt, including current maturities | 2,345 | 2,216 | 3,646 | 3,276 | 1,585 | |||||||||||||||
Long-term debt, net of current maturities | 24,562 | 26,700 | 28,829 | 32,524 | 8,358 | |||||||||||||||
Total debt | 26,908 | 28,916 | 32,475 | 35,800 | 9,943 | |||||||||||||||
Total equity | 15,063 | 15,794 | 18,745 | 34,993 | 29,927 | |||||||||||||||
As at December 31, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
(U.S. dollars in millions) | ||||||||||||||||||||
Financial assets (cash, cash equivalents and investment in securities) | 2,478 | 2,033 | 1,846 | 1,060 | 1,949 | |||||||||||||||
Identifiable intangible assets, net | 8,923 | 11,232 | 14,005 | 17,640 | 21,487 | |||||||||||||||
Goodwill | 20,624 | 24,846 | 24,917 | 28,414 | 44,409 | |||||||||||||||
Working capital (operating assets minus liabilities) | 662 | 74 | (186 | ) | (384 | ) | 303 | |||||||||||||
Total assets | 50,640 | 57,470 | 60,683 | 70,615 | 93,057 | |||||||||||||||
Short-term debt, including current maturities | 3,188 | 2,345 | 2,216 | 3,646 | 3,276 | |||||||||||||||
Long-term debt, net of current maturities | 22,731 | 24,562 | 26,700 | 28,829 | 32,524 | |||||||||||||||
Total debt | 25,919 | 26,908 | 28,916 | 32,475 | 35,800 | |||||||||||||||
Total equity | 11,061 | 15,063 | 15,794 | 18,745 | 34,993 | |||||||||||||||
51
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Overview
We are a global pharmaceutical company, committed to helping patients around the world to access affordable medicines and benefit from innovations to improve their health. Our mission is to be a global leader in generics, specialty medicines and biopharmaceuticals, improving the lives of patients.
We operate worldwide, with headquarters in Israel and a significant presence in the United States, Europe and many other markets around the world. Our key strengths include our world-leading generic medicines expertise and portfolio, focused specialty medicines portfolio and global infrastructure and scale.
Teva was incorporated in Israel on February 13, 1944 and is the successor to a number of Israeli corporations, the oldest of which was established in 1901.
Our Business Segments
We operate our business through three segments: North America, Europe and International Markets. Each business segment manages our entire product portfolio in its region, including generics, specialty and OTC products. This structure enables strong alignment and integration between operations, commercial regions, R&D and our global marketing and portfolio function, optimizing our product lifecycle across therapeutic areas.
In addition to these three segments, we have other activities, primarily the sale of API 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.The
COVID-19
PandemicAs a leading global pharmaceutical company, Teva provides essential medicines to millions of patients around the world every day. Our priorities remain focused on the health and well-being of our employees and on our responsibility to continue to provide our medicines to the nearly 200 million patients who depend on us every day.
Our industry plays a critical role, particularly during such challenging times. We are working with governments to do all they can, in partnership with our industry, to maintain the development, production, supply and distribution of high quality medicines for patients worldwide during this unprecedented global health crisis.
Business Continuity
The supply chain supporting our key products – specialty, generics and API – remains largely uninterrupted, and with adequate product inventory across our network. Additionally, based on analysis of potential scenarios, we announcedcurrently have inventory and redundancy plans in place to address potential shortfalls, if any. We are closely monitoring the evolving situation in our key manufacturing locations and commercial markets as well as key products, and are accordingly adapting our business continuity plans. All our facilities that research, manufacture, order, pack, distribute and provide critical customer and patient services are currently functioning to meet demand for essential medicines for patients throughout the world.
Teva has worked since the early days of the
COVID-19
pandemic to support efforts of governments and health services to curb the impact of the virus. Our global manufacturing network has been tirelessly focused on securing and scaling production of both API and finished doses for potential treatments that were proven essential or may prove essential in treating the condition nearly everywhere Teva does business. Teva will continue to work with governments and international organizations throughout the world to support emerging needs related to this crisis, while doing everything possible to also continue to supply our vast portfolio of medicines to patients.52
R&D and New Launches
We do not expect a comprehensivematerial impact on our ongoing clinical research programs and product launches as a result of thetwo-yearCOVID-19restructuring planpandemic; however, we have experienced minimal delays in clinical trials due to cessation or slow-downs of recruitment for patient studies and suspended regulatory inspections, delays in regulatory approvals of new products due to reduced capacity or
re-prioritization
of regulatory agencies and delays inpre-commercial
launch activities. We may experience further delays if the pandemic continues for an extended period of time. All of our new product launches have been risk-assessed based on upcoming manufacturing and regulatory inspections.Workforce Policy and Measures
Our employees across all aspects of our business are safeguarding the continuity of our activities and we are committed to supporting their efforts while caring for their personal health and safety. We are enacting appropriate measures to ensure the safe supply and transport of our medicines and APIs, and have established measures intended to ensure our sites remain open, allowing us to maintain our business, R&D and manufacturing operations. We have reduced the number of people in our facilities to enable social distancing. By doing our part to reduce physical proximity to one another, we hope to better protect our cost base by $3 billion, unifyoverall workforce, and simplifyultimately, the communities in which we live.
As we work through this health crisis, we continue to adapt our organizationstrategy for returning to usual operations at all organizational levels as events develop, under guiding principles to protect our business and improve business performance, profitability, cash flow generationmaximize organizational productivity and productivity. This plan achieved its goals, includingefficiency, while simultaneously ensuring a total cost base reduction of $3 billion by the end of 2019. safe workplace.
Trends
We are still not experiencing material delays in development, production and distribution of medicines or disruptions in our supply chains; however, longer term effects cannot be predicted at this time and would depend on the duration and severity of the pandemic and the restrictive measures put in place to control its impact. In the first quarter of 2020, we experienced increasing demand for certain medicines, as would be expected during a global crisis of this nature. We saw a compensating effect with lower demand for certain medicines during the second quarter of 2020 and continuing slightly lower demand due to evaluate opportunitiesless physician and hospital activity in certain regions and for certain medicines in the second half of 2020. Although no one can predict future demand for pharmaceutical products, market dynamics or the scope or duration of the financial and other challenges arising from the pandemic, it is possible that we will continue to further optimizesee variable demand in 2021, but we do not currently anticipate a material negative impact on our manufacturing and supply network2021 financial results due to achieve additional operational efficiencies.the ongoing global pandemic.
Highlights
Significant highlights of 20192020 included:
Our revenues in 20192020 were $16,887$16,659 million, a decrease of 8%1% in both U.S. dollar or 5% inand local currency terms, compared to 2018,2019, mainly due to generic competition to COPAXONE, a decline in revenues from our U.S. generics business, BENDEKA/TREANDAcertain oncology products, COPAXONE and Japan,certain respiratory products, partially offset by higher revenues from AUSTEDO AJOVY and QVARAJOVY. The decline in revenues was also affected by reduced demand for certain products resulting from the United States. The data presented for prior periods have been revised to reflect a revision inimpact of the presentation of net revenues and cost of sales in the consolidated financial statements. See note 1b to our consolidated financial statements for additional information.
ImpairmentNo goodwill impairment charges were
57Alvotech Partnership
58
Comparison of 2018 to 2017.Revenues from ourU.S. generics business. Our North America segment has experienced some reductions in 2018 were $9,297 million, comparedvolume due to $12,141 millionless physician and hospital activity during the2017. This decrease was mainly duedemand for certain products related to a decline in revenues from COPAXONE,the treatment ofU.S. generics business, certain othernew specialty products,, as well as the loss of revenues from the sale of primarily AJOVY and AUSTEDO, has been impacted by less physician visits by patients and less physician interactions by our women’s health business, partially offset by higher revenues from AUSTEDO and our Anda business.sales personnel.
revenues in our North America segment (including biosimilars) in 2019 decreased2020 increased by 2%1% to $3,963$4,010 million, compared to 2018,2019, mainly due to a decline in significant products resultinghigher revenues from competitionTRUXIMA (the biosimilar to Rituxancertainnew generic product launches, partially offset by lower revenues from other factors, as well as price erosion acrossgeneric products.Among the most significant generic products we sold in North America in 2019 were epinephrine injectable solution (the generic equivalent of EpiPen®and EpiPen Jr.®), albuterol sulfate inhalation aerosol (ProAirHFA authorized generic of Teva’s specialty product), lidocaine transdermal patch (the generic equivalent of Lidoderm Patch, amphetamine salt tablets (the generic equivalent of Adderall IR) and TRUXIMA (the biosimilar to Rituxan®).We launched TRUXIMA in the United States in November 2019. HERZUMA (the biosomilar to Herceptin®) is expected to be available in the United States in the first quarter of 2020. TRUXIMAFor more information on our generic products, including biosimilars, see “Item 1—Business—Our Product Portfolio and HERZUMA are expected to be available in Canada in the first quarter of 2020.Business Offering—Generic Medicines.”59
Comparison
Revenues from generic products in our North America segment in 2018 were $4,056 million, compared to $5,203 million in 2017. This decrease was mainly dueto additional competition to methylphenidate extended-release tablets (Concerta®authorized generic), portfolio optimization primarily as part of the restructuring plan, as well as market dynamics and price erosion in our U.S. generics business, partially offset by new generic product launches.ContentsCOPAXONErevenues in our North America segment in 2019 decreased2020 increased by 42%45% to $1,017$134 million, compared to 2018,2019, mainly due to generic competitiongrowth in volume. In 2020, AJOVY’s exit market share in the United States.RevenuesStated in terms of COPAXONE in our North America segment were 67%total number of global COPAXONE revenues in 2019,prescriptions was 20%, compared to 74%17% in 2018.COPAXONE global sales accounted for approximately 9% of our global revenues in 2019 and a significantly higher percentage of our profits and cash flow from operations during this period.2019.Comparison of 2018 to 2017.AUSTEDOCOPAXONE revenues in our North America segment in 2018 were $1,7592020 increased by 55% to $637 million, compared to $3,116 million in 2017.2019. This decreaseincrease was mainly due to growth in volume.to generic competition in the United States.andcombined revenues in our North America segment in 20192020 decreased by 23%16% to $496$415 million, compared to 2018,2019, mainly due to the June 2018 launchemergence of alternative novel therapies and continued competition from Belrapzobendamustine hydrochloride) by Eagle Pharmaceuticals, Inc.hydrochloride product from Eagle).Comparison of 2018 to 2017.For more information on BENDEKA and TREANDA, combined revenues in our North America segment in 2018 were $642 million, compared to $656 million in 2017.ProAirCOPAXONErevenues in our North America segment in 20192020 decreased by 31%13% to $274$884 million, compared to 2018,2019, mainly due to shifting volumegeneric competition in the United States.(HFA and RespiClick) revenues in our North America segment in 2020 decreased by 12% to $241 million, compared to 2019. In January 2019, we launched our own ProAir authorized generic in the United States, following the launch of a generic version of VentolinHFA authorized generic (included underare included in “generic products” above).above. In 2019,2020, ProAir was the second-largestfourth largest short-acting beta-agonist in the market, with an exit market share of 24.9% (46.7% including our ProAir HFA authorized generic)10.2% in terms of total number of prescriptions for albuterol inhalers, compared to 46.1%23.3% in 2018.Comparison of 2018 to 2017.2019. The exit market share including our ProAir revenuesauthorized generic is 40.1%, making our overall albuterol product the largest in our North America segment in 2018 were $397 million,the market, compared to $501 million45.8% in 2017. This decrease was mainly due2019. Generic versions of ProAir were launched in 2020.to higher sales reserves recorded in the fourth quarter of 2018 in anticipation of generic competition to the short-acting beta-agonist class of drugs, including an approved generic version of Ventolin HFA.For more information on ProAir and our Digihaler portfolio, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines—Respiratory.”revenues in our North America segment in 2019 increased2020 decreased by 38%28% to $250$179 million, compared to 2018.2019. This increasedecrease was mainly due to a higher net price and an increase inlower volume. In 2019,2020, QVAR maintained its second-place position in the inhaled corticosteroids category in the United States, with an exit market share of 20.5%17.4% in terms of total number of prescriptions, compared to 21.5%20.5% in 2018.Comparison of 2018 to 2017. QVAR revenues in our North America segment in 2018 were $182 million, compared to $313 million in 2017. This decrease was mainly duelower volumes in connection with the launch of QVAR®RediHaler™and lower net pricing.60
AJOVYrevenues in our North America segment in 2019 were $93 million. In 2019, AJOVY’s exit market share in the United Stated in terms of total number of prescriptions was 17%.On January 27, 2020, the FDA approved an auto-injector device for AJOVY in the U.S.For more information on AJOVY, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines—AJOVY.”AUSTEDOrevenues in our North America segment in 2019 increased by 102% to $412 million, compared to 2018. This increase was mainly due to growth in volume in 2019.For more information on AUSTEDO, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines—AUSTEDO.”Comparison of 2018 to 2017. AUSTEDO revenues in our North America segment in 2018 were $204 million, compared to $24 million in 2017.revenues from third parties in our North America segment in 2019 increased2020 decreased by 11%2% to $1,492$1,462 million, compared to 2018, mainly due to higher volumes.2019.Comparison
. Anda revenues from third parties in our North America segment in 2018 were $1,347 million, compared to $1,153 million in 2017. This increase was mainly due to higher volumes.
61
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OurAs of December 31, 2020, our generic products pipeline in the United States includes as of December 31, 2019, 251213 product applications awaiting FDA approval, including 7975 tentative approvals. This total reflects all pending ANDAs, supplements for product line extensions and tentatively approved applications and includes some instances where more than one application was submitted for the same reference product. Excluding overlaps, the branded products underlying these pending applications had U.S. sales for the twelve months ended September 30, 20192020 exceeding $117$110 billion, according to IQVIA. Approximately 70% of pending applications include a paragraph IV patent challenge and we believe we are first to file with respect to 9580 of these products, or 116104 products including final approvals where launch is pending a settlement agreement or court decision. Collectively, these first to file opportunities represent over $75$78 billion in U.S. brand sales for the twelve months ended September 30, 2019,2020, according to IQVIA.
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Comparison of 2018 to 2017. Gross profit from our North America segment in 2018 was $4,979 million, compared to $7,322 million in 2017. This decrease was mainly due tolower revenues from COPAXONEAUSTEDO and a decline in salesfavorable mix of generic and other specialty products.Comparison of 2018 to 2017. R&D expenses relating to our North America segment in 2018 were $713 million, compared to $969 million in 2017.Comparison of 2018 to 2017. S&M expenses relating to our North America segment in 2018 were $1,154 million, compared to $1,288 million in 2017. This decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.Comparison of 2018 to 2017. G&A expenses relating to our North America segment in 2018 were $484 million, compared to $533 million in 2017. This decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.Comparison of 2018 to 2017. Other income from our North America segment in 2018 was $209 million, compared to $92 million in 2017. This increase was mainly due tohigher Section 8 recoveries in Canada.
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Comparison of 2018 to 2017. Profit from our North America segment in 2018 was $2,837 million, compared to $4,624 million in 2017. This decrease was mainly due to lower revenues from COPAXONE and a decline in sales of generic and other specialty products, partially offset by cost reductions and efficiency measures as part of the restructuring plan.
Comparison of 2018 to 2017. Revenues from our Europe segment in 2018 were $5,186 million, compared to $5,466 million in 2017. This decrease was mainly due to the loss of revenues from the closure of our distribution business in Hungary, the sale of our women’s health businesscompetition and a decline in COPAXONE revenues due to competing glatiramer acetate products, partially offset by the launch of AJOVY. Revenues from generic products were flat, due to a decline in doctor and hospital visits by patients resulting in fewer prescriptions during the second half of 2020 due to thelauncheslaunches. The.year-end.
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revenues in our Europe segment in 2019,2020, including OTC products, decreasedincreased by 3%1% to $3,470$3,513 million, compared to 2018.2019. In local currency terms, revenues increasedwere flat, due to a decline in doctor and hospital visits by 2%, mainlypatients resulting in fewer prescriptions during the second half of 2020 due to theComparison of 2018 to 2017AJOVY. Generic products revenues in our Europe segment in 20182020 were $3,593$31 million, compared to $3,471$3 million in 2017. This increase was2019, mainly due to currency fluctuationslaunches and new generic product launches, partially offset by the loss of revenues from the termination of the PGT joint venturereimbursements in additional European countries.revenues in our Europe segment in 20192020 decreased by 19%7% to $432$400 million, compared to 2018.2019. In local currency terms, revenues decreased by 15%9%, mainly due to price reductions resulting from competing glatiramer acetate products.Revenues of COPAXONE in our Europe segment were 29% of global COPAXONE revenues in 2019, compared to 23% in 2018.Comparison of 2018 to 2017. COPAXONE revenues in our Europe segment in 2018 were $535 million, compared to $595 million in 2017. This decrease was mainly due to price reductions resulting from the entry of competing glatiramer acetate products.revenues in our Europe segment in 2019 decreased by 12%2020 were $353 million, flat compared to $354 million compared to 2018.in 2019. In local currency terms, revenues decreased by 7%, mainly due to lower sales in the United Kingdom.Comparison of 2018 to 2017®in 2017.AJOVYwas granted a Marketing Authorization by the European Medicines Agency (“EMA”) in the European Union in a centralized process in April 2019. We commenced launching AJOVY in certain European markets in May 2019 and are moving forward with plans to launch the product in other European countries. We received approval from the EMA for AJOVY’s auto-injector submission in the European Union.For information about AJOVY patent protection, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines—AJOVY.”66
Comparison of 2018 to 2017. Gross profit from our Europe segment in 2018 was $2,884 million, flat compared to 2017. Gross profit was affected by the loss of revenues from the sale of our women’s health business and a decline in COPAXONE revenues, offset by new generic product launches and lower cost of goods sold.mix.Comparison of 2018 to 2017. R&D expenses relating to our Europe segment in 2018 were $283 million, compared to $390 million in 2017.Comparison
. S&M expenses relating to our Europe segment in 2018 were $1,003 million, compared to $1,130 million in 2017. This decrease was mainly due to cost reductions as part of the restructuring plan.Comparison of 2018 to 2017. G&A expenses relating to our Europe segment in 2018 were $325 million, compared to $354 million in 2017. This decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.Comparison of 2018 to 2017. Profit from our Europe segment in 2018 was $1,273 million, compared to $1,029 million in 2017. This increase was mainly due to cost reductions and efficiency measures as part of the restructuring plan.67
The data presented for prior periods have been revised to reflect a revision in the presentation of net revenues and cost of sales in the consolidated financial statements. See note 1b to our consolidated financial statements for additional information.Comparison of 2018 to 2017. Revenues from our International Markets segment in 2018 were $2,422 million, compared to $2,863 million in 2017. This decrease was mainly due tolower sales in Russia and Japan, the effect of the deconsolidation of our subsidiaries in Venezuela and loss of revenues from divested businesses in Israel. Revenues in 2020 were also impacted by reduced demand for certain products and higher demand for other products, resulting from the saleimpact of our women’s health business.theThe data presented for prior periods have been revised to reflect a revision in the presentation of net revenues and cost of sales in the consolidated financial statements. See note 1b to our consolidated financial statements for additional information.68
revenues in our International Markets segment in 2019,2020, which include OTC products, decreased by 6%5% to $1,893$1,792 million, compared to 2018.2019. In local currency terms, revenues decreased by 3%,were flat, mainly due to lower revenues in Japan resulting from regulatory price reductions and generic competition toproducts.Comparison of 2018 to 2017. Generic products, offset by higher revenues in our International Markets segmentmost other markets. Revenues in 20182020 were $2,022 million, compared to $2,370 million in 2017. This decrease was mainly due to lower revenues in Russia, lower sales in Japanalso impacted by reduced demand for certain products and higher demand for other products, resulting from regulatory price reductionsthe impact of thegeneric competition tooff-patentedproducts, loss of revenues from the termination of the PGT joint venture and the effect of the deconsolidation of our subsidiarieshospital visits by patients resulting in Venezuela.fewer prescriptions during 2020.revenues in our International Markets segment in 20192020 decreased by 13%16% to $63$53 million, compared to 2018.2019. In local currency terms, revenues decreased by 1%4%.ComparisonAJOVY.On May 12, 2017, we entered into a license and collaboration agreement with Otsuka Pharmaceutical Co., Ltd. (“Otsuka”) providing Otsuka with an exclusive license to conduct phase 2 and 3 clinical trials for AJOVY in Japan and, once approved, to commercialize the product in Japan. On July 29, 2020, Otsuka submitted an application to obtain manufacturing and marketing approval for AJOVY in Japan. As a result, Otsuka paid Teva a milestone payment of 2018 to 2017. COPAXONE revenues in our International Markets segment in 2018 were $72 million, compared to $91$15 million in 2017.the third quarter of 2020, which was recorded as revenue under “Other” in the table above.Distributionrevenues in our International Markets segment in 2019 increased by 6% to $20 million, compared to 2018. In local currency terms, revenues increased by 24%.Comparison of 2018 to 2017. Distribution revenues in our International Markets segment in 2018 were $19 million, compared to $17 million in 2017.The data presented for prior periods have been revised to reflect a revision in the presentation of net revenues and cost of sales in the consolidated financial statements. See note 1b to our consolidated financial statements for additional information.69
Comparison of 2018 to 2017. Gross profitlower revenues in Japan resulting from our International Markets segment in 2018 was $1,254 million, comparedregulatory price reductions and generic competition to $1,433 million in 2017.Comparison
. R&D expenses relating to our International Markets segment in 2018 were $96 million, compared to $154 million in 2017.Comparison of 2018 to 2017. S&M expenses relating to our International Markets segment in 2018 were $518 million, compared to $672 million in 2017. This decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.pandemic.Comparison of 2018 to 2017. G&A expenses relating to our International Markets segment in 2018 were $153 million, compared to $189 million in 2017. This decrease was mainly due to cost reductions as part of the restructuring plan.Comparison of 2018 to 2017. Profit from our International Markets segment in 2018 was $498 million, compared to $426 million in 2017.2019. This increase was mainly due tocost reductions higher revenues in most markets and efficiency measureslower S&M expenses, partially offset by lower sales in Japan, as part of the restructuring plan.discussed above.70
Comparison of 2018 to 2017. Revenues from other activities in 2018 were $1,366 million, compared to $1,383 million in 2017.The data presented with respect to revenues, gross profit, R&D expenses, S&M expenses, G&A expenses and operating income (loss) for prior periods have been revised to reflect a revision in the presentation of net revenues and cost of sales in the consolidated financial statements. See note 1b to our consolidated financial statements for additional information.Comparison of 2018 to 2017.Revenues in 2018 were $18,271 million, a decrease of 16% compared to 2017, mainly due to generic competition to COPAXONE, a decline in revenues in our U.S. generics business and loss of revenues following the divestment of certain products and discontinuation of certain activities.
Comparison of 2018 to 2017.Selling and Marketing (S&M) ExpensesGross profitNet R&D expenses for 2019 were $1,010 million, a decrease of 17% compared to 2018.71
Comparison of 2018 to 2017. In 2018, R&D expenses were $1,213 million, a decrease of 32% compared to 2017. R&D expenses as a percentage of revenues were 6.6% in 2018, compared to 8.1% in 2017.Sellingboth 2020 and Marketing (S&M) Expenses2019.S&M expenses in 2019 were $2,614 million, a decrease of 10% compared to 2018. Our S&M expenses were primarily the result of the factors discussed above under “—North America Segment—S&M Expenses,” “—Europe Segment—S&M Expenses” and “—International Markets Segment—S&M Expenses.”S&M expenses as a percentage of revenues were 15.5% in 2019, compared to 16.0% in 2018.Comparison of 2018 to 2017.S&M expenses in 2018 were $2,916 million, a decrease of 14% compared to 2017. S&M expenses as a percentage of revenues were 16.0% in 2018, compared to 15.5% in 2017.Comparison of 2018 to 2017.G&A expenses in 2018 were $1,298 million, a decrease of 11% compared to 2017. G&A expenses as a percentage of revenues were 7.1% in 2018, compared to 6.6% in 2017.7265
Comparison of 2018 to 2017.Identifiable intangible asset impairments in 2018 were $1,991 million, compared to $3,238 million in 2017.No goodwill impairments wereWe recorded in 2019, compared to a goodwill impairment charge of $3,027$4,628 million related to our North America reporting unit in 2018. Thethe year ended December 31, 2020. No goodwill impairment charge was recorded in 2018 was mainly attributable to goodwill associated with our International Markets reporting unit and Medis reporting unit.2019. See note 7 to our consolidated financial statements.Comparison of 2018 to 2017.Goodwill impairments in 2018 were $3,027 million, compared to $17,100 million in 2017. The goodwill impairment in 2017 was mainly in connection with our U.S. generics reporting unit.Comparison of 2018 to 2017. We recorded expenses of $987 million for other asset impairments, restructuring and other items in 2018, compared to $1,836 million in 2017.Significant regulatory eventsIn July 2018, the FDA completed an inspection of our manufacturing plant in Davie, Florida in the United States, and issued a FormFDA-483to the site. In October 2018, the FDA notified us that the inspection of the site is classified as “official action indicated” (OAI). On February 5, 2019, we received a warning letter from the FDA that contained four additional enumerated concerns related to production, quality control and investigations at this site. We have been working diligently to address the FDA’s concerns in a manner consistent with current good manufacturing practice (cGMP) requirements as quickly and as thoroughly as possible. An FDA follow up inspection occurred in January 2020, resulting in some follow up findings. If we are unable to remediate the findings to the FDA’s satisfaction, we may face additional consequences. These would potentially include delays in FDA approval for future products from the site, financial implications due to loss of revenues, impairments, inventory write offs, customer penalties, idle capacity charges, costs of additional remediation and possible FDA enforcement action. We expect to generate approximately $230 million in revenues from this site in 2020, assuming remediation or enforcement does not cause any unscheduled slowdown or stoppage at the facility or prevent approvals of new products from the site.In July 2018, we announced the voluntary recall of valsartan and certain combination valsartan medicines in various countries due to the detection of trace amounts of a previously unknown nitrosamine impurity called NDMA found in valsartan API supplied to us by Zhejiang Huahai Pharmaceutical (“Huahai”). Since July 2018, we have been actively engaged with regulatory agencies around the world in reviewing our sartan and other products to determine whether NDMA and/or other related nitrosamine impurities are present in specific products. Where necessary, we have initiated additional voluntary recalls. The aggregate direct impact of this recall on our 2018 and 2019 financial statements was $54 million, primarily related to inventory write-downs and returns. As a result of this loss, we initiated negotiations with Huahai and in December 2019, we reached a settlement with Huahai resolving our claims related to certain sartan API supplied by Huahai to Teva. Under the settlement agreement, Huahai agreed to compensate Teva for some of the direct losses suffered by Teva and provide Teva prospective cost reductions for API. The settlement does not release Huahai from liability for any losses we may incur as a result of third party personal injury or product liability claims relating to the sartan API at issue. In addition, multiple lawsuits have been filed in connection with this matter, which may lead to additional customer penalties, impairments and litigation costs. We expect additional expenses and loss of revenues and profits in connection with this matter going forward. 73
RestructuringIn 2019, we recorded $199 million of restructuring expenses, compared to $488 million in 2018. The expenses in 2019 were primarily related to headcount reductions across all functions, as part of our restructuring plan announced in 2017.Thetwo-yearrestructuring plan announced in 2017 reduced our total cost base by $3 billion by the end of 2019.Since the announcement, we reduced our global headcount by approximately 13,000 full-time-equivalent employees.Comparison of 2018 to 2017.Restructuring expenses in 2018 were $488 million, compared to $535 million in 2017.Comparison of 2018 to 2017.Legal settlements and loss contingencies in 2018 amounted to an income of $1,208 million, compared to an expense of $500 million in 2017. See note 11to our consolidated financial statements.Comparison of 2018 to 2017. Other income in 2018was $291 million, compared to $1,199 million in 2017. Other income in 2017 was mainly related to the sale of our women’s health business.Comparison of 2018 to 2017.Operating loss in 2018 was $1,637 million, compared to operating loss of $17,484 million in 2017. Operating loss as a percentage of revenues was 9.0% in 2018, compared to 80.0% in 2017.74
Comparison
In 2018, financial expenses were $959 million, compared to $895 million in 2017.
In 2018, we recognized a tax benefit of $195 million, or 8%, on apre-taxloss of $2,596 million. Our tax rate for 20182020 was lower than in 2019, mainly due toone-timelegal settlements and divestments that had a low corresponding tax effect.In 2017, we recognized a tax benefit of $1,933 million, or 11%, onpre-taxloss of $18,379 million. Our tax rate for 2017 was low due to aone-timeeffect resulting from the remeasurement of our deferred taxes and imposition of a deemed repatriation tax following the enactment of the Tax Cuts and Jobs Act in December 2017 in the United States, as well as aone-timetax benefit associated with the utilization of Actavis Generics’ historical capital losses. In addition, in 2017 we recorded goodwill impairments that did not have a corresponding tax effect.75
Comparison of 2018 to 2017. Share in losses of associated companies, net in 2018 was $71 million, comparedmainly due to a profitgain of $3$134 million reflecting the difference between the book value of our investment in 2017.American Well Corporation and its fair value as of the date it completed its initial public offering in September 2020 (see note 20 to our consolidated financial statements).Net loss attributable to ordinary shareholders was $999 million in 2019, compared to a net loss of $2,399 million in 2018.2019.Comparison
. Net loss attributable to Teva was $2,150 million in 2018, compared to a net loss of $16,265 million in 2017.ContentsNet loss attributable to ordinary shareholders was $2,399 million in 2018, compared to a net loss of $16,525 million in 2017.Additionally, no account was taken of the potential dilution by the mandatory convertible preferred shares, amounting to 74 million shares (including shares that were issued due to unpaid dividends until that date) for the period between January 1, 2018 and December 17, 2018, since they had an anti-dilutive effect on loss per share.On December 17, 2018, the mandatory convertible preferred shares automatically converted into ordinary shares at a ratio of 1 mandatory convertible preferred share to 16 ADSs, and all of the accumulated and unpaid dividends on the mandatory convertible preferred shares were paid in ADSs, at a ratio of 3.0262 ADSs per mandatory convertible preferred share, all in accordance with the conversion mechanism set forth in the terms of the mandatory convertible preferred shares. As a result of this conversion, we issued 70.6 million ADSs.76
InvestmentCash investment in property, plant and equipment in 20192020 was $525$578 million, compared to $651$525 million in 2018.2019. Depreciation was $537 million in 2020, compared to $609 million in 2019, compared to $676 million in 2018.2019.InThe RCF agreement provides for two separate tranches, a $1.15 billion tranche A and a $1.15 billion tranche B. Loans and letters of credit will be available from time to time under each tranche for Teva’s general corporate purposes. Tranche A has a maturity date of April 2019, we entered into8, 2022, with two$2.3 billion unsecured syndicated RCF, which replaced the previous $3 billion revolving credit facility. maturity date of April 8, 2024.77
20192020 Debt Balance and Movements
During the third quarter of 2019, we borrowed $500 million under the RCF, which was fully repaid by the fourth quarter of 2019. As of the date of this Annual Report on Form10-K,no amounts were outstanding under the RCF.Our debt as of December 31,During 2019, we borrowed up to $500 million from our RCF, which was effectively denominated in the following currencies: 65% in U.S. dollars, 32% in euros and 3% in Swiss francs.fully repaid before 2019The portion of total debt classified as short-term as of December 31, 2019 was 9%, compared to 8% as of December 31, 2018, due to a decrease in our total debt.Our financial leverage was 64% as of December 31, 2019, compared to 65% as of December 31, 2018.Our average debt maturity was approximately 6.4 years as of December 31, 2019, compared to 6.8 years as of December 31, 2018.78
2018 Debt Balance and MovementsIn January 2018, we prepaid in full $15 million of our U.S. dollar debentures.During the first quarter of 2018, we prepaid in full $2.3 billion of our3-yearand5-yearU.S. dollar term loans, as well as JPY 156.8 billion of our term loans.In March 2018, we completed debt issuances for an aggregate principal amount of $4.4 billion, consisting of senior notes with aggregate principal amounts of $2.5 billion and€1.6 billion with maturities ranging from four to ten years. The effective average interest rate of the notes issued is 5.3% per annum.In March 2018, we redeemed in full our $1.5 billion 1.4% senior notes due in July 2018 and our€1.0 billion 2.875% senior notes due in April 2019.In July 2018, we repaid at maturity our CHF 300 million 0.13% senior notes.In September 2018, we completed a debt tender offer, which resulted in a debt decrease of $405 million, comprised of:$300 million of our $2.0 billion 1.7% senior notes due in July 2019€90 million of our€1.75 billion 0.38% senior notes due in July 2020In October 2018, we repaid at maturity our CHF 450 million 1.5% senior notes.
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In September 2017, we entered into a partnership agreement with Nuvelution for development of AUSTEDO for the treatment of Tourette syndrome in pediatric patients in the United States. Nuvelution is funding2019 and managing clinical development, driving all operational aspects of the phase 3 program, and we are leading the regulatory process and are responsible for commercialization. If FDA approval is obtained for AUSTEDO for Tourette syndrome, we will pay Nuvelution apre-agreedreturn. In FebruaryMarch 2020, we received results for these clinical trials, which found that the clinical trials failed to meet their primary endpoints. No new safety signals were identified in these studies. See note 23 to our consolidated financial statements.respectively.80
deconsolidation charges; material tax and other awards or settlement amounts, botheither paid andor received;81
8275
Thenon-GAAPdiluted weighted average number of shares was 1,024 million for the year ended December 31, 2018.
83
Thenon-GAAPdiluted weighted average number of shares was 1,018 million for the year ended December 31, 2017.
84
Effective Tax RateNon-GAAPincome taxes in 2018 were $519 million onnon-GAAPpre-taxincome of $3,830 million.Non-GAAPincome taxes in 2017 were $788 million onnon-GAAPpre-taxincome of $5,165 million. The20192020 was 18%17%, compared to 14%18% in 2018 and 15% in 2017. Our annualnon-GAAPeffective tax rate for 2019 was higher than ournon-GAAPeffective tax rate for 2017 and 2018 primarily due to a lower tax shield on finance expenses.In the future, ournon-GAAPeffective tax rate is expected to remain similar to the 2019 rate.2019.Successexecution of our global operations optimization plan, which may affect our business and operations, and the risk of incurring additional restructuring expenses; our high debt levels andnon-investmentgrade credit rating will have a negative effect on our ability to borrow additional funds and may increase the cost of any such borrowing;
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Revenue Recognition and SR&AIncome TaxesContingenciesInventoriesGoodwillIdentifiable Intangible AssetsRestructuring Costs86
Our gross product revenues are subject to a variety of deductions which are generally estimated and recorded in the same period that the revenues are recognized, and primarily represent chargebacks, rebates and sales allowances to wholesalers, retailers and government agencies with respect to our pharmaceutical products. Those deductions represent estimates of rebates and discounts related to gross sales for the reporting period and, as such, knowledge and judgment of market conditions and practice are required when estimating the impact of these revenue deductions on gross sales for a reporting period.Historically, our changes of estimates reflecting actual results or updated expectations, have not been material to our overall business. Product-specific rebates, however, may have a significant impact on year-over-year individual product growth trends. If any of our ratios, factors, assessments, experiences or judgments are not indicative or accurate predictors of our future experience, our results could be materially affected. The sensitivity of our estimates can vary by program, type of customer and geographic location. However, estimates associated with governmental allowances, U.S. Medicaid and other performance-based contract rebates are most at risk for material adjustment because of the extensive time delay between the recording of the accrual and its ultimate settlement, an interval that can generally range up to one year. Because of this time lag, in any given quarter, our adjustments to actual can incorporate revisions of several prior quarters.The provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws in the jurisdictions in which we operate. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws.Accounting for uncertainty in income taxes requires that it be more likely than not that the tax benefits recognized in the financial statements be sustained based on technical merits. The amount of benefits recorded for these positions is measured as the largest benefit more likely than not to be sustained. Significant judgment is required in making these determinations.Deferred taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and tax bases of assets and liabilities under the applicable tax laws. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In the determination of the appropriate valuation allowances, we have considered the most recent projections of future business results and prudent tax planning alternatives that may allow us to realize the deferred tax assets. Taxes which would apply in the event of disposal of investments in subsidiaries have not been taken into account in computing deferred taxes, as it is our intention to hold these investments rather than realize them.Deferred taxes have not been provided fortax-exemptincome, as the Company intends to permanently reinvest these profits and does not currently foresee a need to distribute dividends out of these earnings. Furthermore, we do not expect ournon-Israelisubsidiaries to distribute taxable dividends in the foreseeable future, as their earnings and excess cash are used to pay down the group’s external liabilities, while we expect to have sufficient resources in the Israeli companies to fund our cash needs in Israel. In addition, the Company announced a suspension of dividend distribution on ordinary shares and ADSs in 2017. An assessment of the tax that would have been payable had the Company’s foreign subsidiaries distributed their income to the Company is not practicable because of the multiple levels of corporate ownership and multiple tax jurisdictions involved in each hypothetical dividend distribution.For a discussion of the valuation allowance, deferred tax and valuation allowance estimates see notes 1 and 13 of our consolidated financial statements.87
U.S. Tax Cuts and Jobs ActWe accounted for the tax effects of the Tax Cuts and Jobs Act, enacted on December 22, 2017, on a provisional basis in our 2017 consolidated financial statements. We completed our accounting analysis in the fourth quarter of 2018, within the one year measurement period from the enactment date. See Note 13 in the notes to the consolidated financial statements for additional information.From time to time, Teva and/or its subsidiaries are subject to claims for damages and/or equitable relief arising in the ordinary course of business. In addition, in large part as a result of the nature of its business, Teva is frequently subject to litigation, governmental investigations and other legal proceedings. Except for income tax contingencies or contingent consideration acquired in a business combination, Teva records a provision in its financial statements to the extent that it concludes that a contingent liability is probable and the amount thereof is estimable. When accruing these costs, Teva will recognize an accrual in the amount within a range of loss that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, Teva accrues for the minimum amount within the range. Teva records anticipated recoveries under existing insurance contracts that are probable of occurring at the gross amount that is expected to be collected.Teva reviews the adequacy of the accruals on a periodic basis and may determine to alter its provisions at any time in the future if it believes it would be appropriate to do so. As such accruals are based on management’s judgment as to the probability of losses and, where applicable, actuarially determined estimates, accruals may materially differ from actual verdicts, settlements or other agreements made with regards to such contingencies. Litigation outcomes and contingencies are unpredictable and excessive verdicts can occur. Accordingly, management’s assessments involve complex judgments concerning future events and often rely heavily on estimates and assumptions.InventoriesInventories are valued at the lower of cost or net realizable value. Cost of raw and packaging materials is determined mainly on a moving average basis. Cost of purchased products is determined mainly on a standard cost basis, approximating average costs. Cost of manufactured finished products and products in process is calculated assuming normal manufacturing capacity as follows: raw and packaging materials component is determined mainly on a moving average basis, while the capitalized production costs are determined either on an average basis over the production period, or on a standard cost basis, approximating average costs.Our inventories generally have a limited shelf life and are subject to impairment as they approach their expiration dates. We regularly evaluate the carrying value of our inventories and when, in our opinion, factors indicate that impairment has occurred, we establish a reduction in the cost basis against the inventories’ carrying value. Our determination that a valuation reserve might be required, in addition to the quantification of such reserve, requires us to utilize significant judgment. Although we make every effort to ensure the accuracy of forecasts of future product demand, any significant unanticipated decreases in demand could have a material impact on the carrying value of our inventories and reported operating results.Our policy is to capitalize saleable product for unapproved inventory items when economic benefits are probable. We evaluate expiry, legal risk and likelihood of regulatory approval on a regular basis. If at any time approval is deemed not to be probable, the inventory is written down to its net realizable value. To date, inventory allowance adjustments in the normal course of business have not been material. However, from time to time, due to a regulatory action or lack of approval or delay in approval of a product, we may experience a more significant impact. 88
Goodwill reflects the excess of the consideration transferred, including the fair value of any contingent consideration and anynon-controllinginterest in the acquiree, over the assigned fair values of the identifiable net assets acquired. Goodwill is not amortized, and is assigned to reporting units and tested for impairment at least annually, in the fourth quarter of the fiscal year.We perform an impairment test annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The provisions of the accounting standard for goodwill allow us to first assess qualitative factors to determine whether it is necessary to perform the next goodwill impairment quantitative test.Examples of events or circumstances that may be indicative of impairment include, but are not limited to: macroeconomic and industry conditions, overall financial performance and adverse changes in legal, regulatory, market share and other relevant entity specific events.The Company estimates the fair values of all reporting units using a discounted cash flow model which utilizes Level 3 unobservable inputs. Key estimates include the revenue growth rates and operating margins taking into consideration industry and market conditions, terminal growth rate and the discount rate. The discount rate used is based on the WACC, adjusted for the relevant risk associated with country-specific and business-specific characteristics.The carrying value of each reporting unit is determined by assigning the assets and liabilities, including the existing goodwill, to those reporting units.When necessary, we record charges for impairments of goodwill for the amount by which the carrying amount exceeds the fair value of these assets.See note 7 and note 19 to our consolidated financial statements for further details on the goodwill impairments recognized in 2018 and 2017, and Teva’s operating and reporting segments.Identifiable intangible assets are comprised of definite life intangible assets and indefinite life intangible assets.Definite life intangible assets consist mainly of acquired product rights and other rights relating to products for which marketing approval was received from the FDA or the equivalent agencies in other countries. These assets are amortized using mainly the straight-line method over their estimated period of useful life, or based on economic benefit models, if more appropriate, which is determined by identifying the period and manner in which substantially all of the cash flows are expected to be generated. Amortization of acquired developed products is recorded under cost of sales. Amortization of marketing and distribution rights is recorded under selling and marketing expenses when separableImpairment of identifiable intangible assets amounted to $1,639 million, $1,991 million and $3,238 million in the years ended December 31, 2019, 2018 and 2017, respectively. See note 6 to our consolidated financial statements.The fair value of acquired identifiable intangible assets is generally determined using an income approach. This method starts with a forecast of all expected future net cash flows associated with the asset and then adjusts the forecast to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams.89
Whenever impairment indicators are identified for definite life intangible assets, Teva reconsiders the asset’s estimated life, calculates the undiscounted value of the asset’s or asset group’s cash flows and then calculates, if required, the discounted value of cash flow by applying an appropriate discount rate to the undiscounted cash flow streams. Teva then compares such value against the asset’s or asset group’s carrying amount. If the carrying amount is greater, Teva records an impairment loss for the excess of carrying value over fair value based on the discounted cash flows.Examples of events or circumstances that may be indicative of impairment include:A projection or forecast that indicates losses or reduced profits associated with an asset. This could result, for example, from a change in the competitive landscape modifying our assumptions about market share or pricing prospectively, a government reimbursement program that results in an inability to sustain projected product revenues and profitability, or lack of acceptance of a product by patients, physicians or payers limiting our projected growth.A significant adverse change in legal factors or in the business climate that could affect the value of the asset. For example, a successful challenge of our patent rights by a competitor would likely result in generic competition earlier than expected. And conversely, a lost challenge of patent rights in connection with our generic file would likely result in delayed entry.A significant adverse change in the extent or manner in which an asset is used. For example, restrictions imposed by the FDA or other regulatory authorities could affect our ability to manufacture or sell a product.For IPR&D projects, this could result from, among other things, a change in outlook affecting assumptions around competition or timing of entry such as approval success or the related timing of approval, clinical trial data results, other delays in the projected launch dates or additional expenditures required to commercialize the product.The more significant estimates and assumptions inherent in the estimate of the fair value of identifiable intangible assets include (i) assumptions associated with forecasting product profitability, including sales and cost to sell projections, (ii) tax rates which seek to incorporate the geographic diversity of the projected cash flows, (iii) expected impact of competitive, legal and/or regulatory forces on the projections and the impact of technological risk, R&D expenditure for ongoing support of product rights or continued development of IPR&D, and (iv) estimated useful lives and IPR&D expected launch dates. Additionally, for IPR&D assets the risk of failure has been factored into the fair value measure.While all intangible assets other than goodwill can face events and circumstances that can lead to impairment, in general, intangible assets other than goodwill that are most at risk of impairment include IPR&D assets and newly acquired or recently impaired indefinite-lived brand assets. IPR&D assets are high-risk assets, as R&D is an inherently risky activity. Consequently, IPR&D assets could be determined to be no longer commercially viable. Newly acquired and recently impaired indefinite-lived assets are more vulnerable to impairment as the assets are recorded at fair value and are then subsequently measured at the lower of fair value or carrying value at the end of each reporting period. As such, immediately after acquisition or impairment, even small declines in the outlook for these assets can negatively impact our ability to recover the carrying value and can result in an impairment charge.
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ForWe enter into financial derivatives to hedge part of those currencies which do not have a sufficient natural hedge, we may choose to hedge, in order to reduce the impact of foreign exchange fluctuations on our operating results.9282
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2019,2020, based on criteria established in(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).9786
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management recorded an expense of $1,178 million in2020, the Company’s consolidated provision for legal settlements and loss contingencies was $1,625 million, which was mainly related toincluded an estimated settlement provision recorded in connection with the remaining opioid cases.
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CONSOLIDATED STATEMENTS OF INCOME (LOSS)(U.S. dollars in millions, except share and per share data)
Amounts may not add up due to rounding.The accompanying notes are an integral part of the financial statements.102
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(U.S. dollars in millions)
Amounts may not add up due to rounding.The accompanying notes are an integral part of the financial statements.103
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Accounting for Venezuelan OperationsUntil November 30, 2017,Certain amounts in the financial position and results of operations of Teva’s Venezuelan business, conducted through a number of wholly-owned subsidiaries, were included in Teva’s consolidated financial statements and reported under highly-inflationary accounting principles, with the functional currency of the U.S. dollar.associated notes may not add up due to rounding. All percentages have been calculated using unrounded amounts.Effective November 30, 2017, Teva deconsolidated its Venezuelan subsidiaries and began accounting for its investments in its Venezuelan operations using the cost method of accounting under the measurement alternative. The estimated fair value of the investments was immaterial based on expected future cash flow, considering ongoing hyper-inflation and economic and political uncertainty in Venezuela. The assigned values are considered Level 3 measurements within the fair value hierarchy.Teva’s financial results include sales of finished goods to the Venezuelan subsidiaries, to the extent cash payments are received from these subsidiaries, while cost of sales is recorded when goods are imported to Venezuela. The Venezuelan subsidiaries’ results were immaterial in terms of assets, liabilities, operating results and cash flows for the eleven months ended November 30, 2017.Upon assessing the facts as of December 31, 2019, Teva continues to believe its previous conclusion regarding its lack of control or significant influence over its Venezuelan operations is appropriate. Teva will continue to monitor the conditions in Venezuela and their impact on its prospective accounting treatment and related disclosures.107
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)
In connection with the preparation of Teva’s consolidated financial statements for the fiscal year ended December 31, 2019, Teva determined that in the full years and interim periods of fiscal years 2017 and 2018, and the first three quarters of fiscal year 2019, it had an immaterial error in the presentation of distribution revenues from its Israeli distribution business. This business is part of the International Markets reporting segment and facilitates distribution of Teva and third party products to pharmacies, hospitals and other organizations in Israel.Specifically, the Company concluded that it presented revenue from its Israeli distribution business on a gross basis, although it should have reported such revenue on a net basis. Because Teva has no discretion in establishing prices for any specifies goods or services, limited inventory risk and is not primarily responsible for contract fulfillment, Teva does not meet the criteria for reporting revenues from such business as a principal (on a gross basis), as opposed to as an agent (on a net basis).The Company evaluated the cumulative impact of this item on its previously issued annual financial statements for 2017 and 2018, and the interim financial statements for 2017, 2018 and the first three quarters of 2019, and concluded that, for the reasons mentioned below, the revisions were not material, individually or in the aggregate, to any of its previously-issued interim or annual financial statements. Teva has revised its presentation of net revenue and cost of sales in the historical consolidated financial statements to reflect the change in this item, as described in more detail below.The impact of this revision is a decrease in net revenues with an offsetting decrease in cost of sales. There is no impact on gross profit, operating income or earnings per share. In addition, there is no impact on Teva’s balance sheet or statement of cash flows for the related periods.108
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)The following table summarizes the impact of the revision on net revenues and cost of sales in the consolidated statements of income in the relevant periods:
In February 2016, the FASB issued ASU92016-02“Leases” (the “new lease standard”). The guidance establishes aright-of-usemodel (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The guidance became effective on January 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application.7Teva adopted the new lease standard and all the related amendments on January 1, 2019 and used the effective date as Teva’s date of initial application. Consequently, financial information was not updated and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019.The new lease standard provides a number of optional practical expedients in transition. Teva did not elect the ‘package of practical expedients,’ which permits the Company not to reassess its prior conclusions regarding lease identification, lease classification and initial direct costs under the new standard. However, the Company did elect the practical expedient pertaining to the use of hindsight.The new lease standard also provides practical expedients for an entity’s ongoing accounting. Teva elected the short-term lease recognition exemption for all leases with a term shorter than 12 months. This means, for those leases, Teva does not recognize ROU assets or lease liabilities, including not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. Teva also elected the practical expedient to not separate lease andnon-leasecomponents for all of Teva’s leases, other than leases of real estate.Additionally, following the adoption of the new lease standard and in subsequent measurements, Teva applies the portfolio approach to account for the operating lease ROU assets and liabilities for certain car leases and incremental borrowing rates.109
In November 2018, the FASB issued ASU2018-18“Collaborative Arrangements (Topic 808)—Clarifying the interaction between Topic 808 and Topic 606.” The amendments provide guidance on whether certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606. It also specifically (i) addresses when the participant should be considered a customer in the context of a unit of account, (ii) addsunit-of-accountguidance in ASC 808 to align with guidance in ASC 606 and (iii) precludes presenting revenue from a collaborative arrangement together with revenue recognized under ASC 606 if the collaborative arrangement participant is not a customer. The guidance will be effective for fiscal years beginning110
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)after December 15, 2019. Early adoption is permitted and should be applied retrospectively. The adoption of this guidance will not have a significant impact on the Company’s consolidated financial statements.In August 2018, the FASB issued ASU2018-15“Intangibles—Goodwill andother—Internal-usesoftware (Subtopic350-40):Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtaininternal-usesoftware. The guidance will be effective for fiscal years beginning after December 15, 2019. Teva will apply the guidance prospectively to all implementation costs incurred after the date of adoption. The adoption of this guidance will not have a significant impact on the Company’s consolidated financial statements.In August 2018, the FASB issued ASU2018-13“Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” This guidance removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Certain disclosures required by this guidance must be applied on a retrospective basis and others on a prospective basis. The guidance will be effective for fiscal years beginning after December 15, 2019. The adoption of this guidance will not have a significant impact on the Company’s consolidated financial statements.In June 2016, the FASB issued ASU2016-13“Financial Instruments—Credit Losses—Measurement of Credit Losses on Financial Instruments.” This guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance will be effective for the fiscal year beginning on January 1, 2020, including interim periods within that year. The adoption of this guidance will not have a significant impact on the Company’s consolidated financial statements.
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The Company’s revenue recognition accounting policy until December 31, 2017, prior to the adoption of the new revenue standardThe Company recognizes revenues from product sales, including sales to distributors when persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collectability is reasonably assured. This generally occurs when products are shipped and title and risk and rewards for the products are transferred to the customer.Revenues from product sales are recorded net of provisions for estimated chargebacks, rebates, returns, prompt pay discounts and other deductions, such as shelf stock adjustments, which can be reasonably estimated. When sales provisions are not considered reasonably estimable by Teva, the revenue is deferred to a future period when more information is available to evaluate the impact.Provisions for chargebacks, rebates including Medicaid and other governmental program discounts and other promotional items, such as shelf stock adjustments, are included in sales reserves and allowances117
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)(“SR&A”). These provisions are recognized concurrently with the sales of products. Prompt payment discounts are netted against trade receivables.Calculations for these deductions from sales are based on historical experience and the specific terms in the individual agreements. Chargebacks and rebates are the largest components of sales reserves and allowances. Provisions for chargebacks are determined using historical chargeback experience and expected chargeback levels and wholesaler sales information for products, which are compared to externally obtained distribution channel reports for reasonableness. Rebates are recognized based on contractual obligations in place at the time of sales with consideration given to relevant factors that may affect the payment as well as historical experience for estimated market activity. Shelf-stock adjustments are granted to customers based on the existing inventory of a customer following decreases in the invoice or contract price of the related product and are estimated based on expected market performance. Teva records a reserve for estimated sales returns by applying historical experience of customer returns to the amounts invoiced and the amount of returned products to be destroyed versus products that can be placed back in inventory for resale.Revenue resulting from the achievement of milestone events stipulated in agreements is recognized when the milestone is achieved. Milestones are based on the occurrence of a substantive element specified in the contract or as a measure of substantive progress toward completion under the contractRevenues from licensees, sales of licensed products and technology are recorded in accordance with the contract terms, when third-party sales can be reliably measured and collection of the funds is reasonably assured.Royalty revenue is recognized as a component of net revenues in accordance with the terms of their respective contractual agreements when collectability is reasonably assured and when revenue can be reasonably measured.The Company’s revenue recognition accounting policy from January 1, 2018, following the adoption of the new revenue standardOn January 1, 2018, Teva adopted the new revenue standard to all contracts using the modified retrospective method. The cumulative initial effect of applying the new revenue standard was immaterial.118
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The table below summarizes the major classes of assets included as held for sale as of December 31, 2019 and 2018:
Eli Lilly and Alder BioPharmaceuticalsNotes to Consolidated Financial StatementsIn December 2018,
On January 8, 2018, Teva signed a global license agreement with Alder BioPharmaceuticals (“Alder”).development, manufacturing, marketing and distribution of generics, specialty medicines and biopharmaceuticals. The agreement validates Teva’s IP and resolves Alder’s opposition to Teva’s European patent with respect to anti-calcitonin gene-related peptide (CGRP) antibodies, including the withdrawal of Alder’s appeal before the European Patent Office. Under the termsmajority of the agreement, Alder will receive anon-exclusivelicense to Teva’s anti-CGRP antibodies patent portfolio to develop, manufacture and commercialize eptinezumabGroup’s revenues are in the United States and worldwide, excluding JapanEurope.PGT Healthcare PartnershipFunctional currency
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During the first quarter of 2018, Teva classified the plant in India as an asset held for saleThe accounting standard establishes a fair value hierarchy that prioritizes observable and recorded an impairment of $64 million under other assets impairments, restructuring and other items. In addition, Teva recorded a write-down of $94 million of its investment in New Chapter Inc. under share in losses of associated companies.unobservable inputs used to measure fair value into three broad levels, which are described below:During September 2018, Teva and P&G completedLevel 1: Quoted prices (unadjusted) in active markets that are accessible at the final net asset distribution as part ofmeasurement date for assets or liabilities. The fair value hierarchy gives the dissolution and Teva recorded a gain of $50 millionhighest priority to reflect the cash payment received from P&G under the dissolution agreement.Level 1 inputs.AUSTEDO®Level 2: Observable inputs that are based on inputs not quoted on active markets, but corroborated by market data.On September, 19, 2017, Teva entered into a partnership agreement with Nuvelution Pharma, Inc. (“Nuvelution”) for development ofAUSTEDO forLevel 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the treatment of Tourette syndrome in pediatric patients in the United States. Nuvelution is funding and managing clinical development, driving all operational aspects of the phaselowest priority to Level 3 program, and Teva is leading the regulatory process and is responsible for commercialization. If FDA approval is obtained for AUSTEDO for the treatment of Tourette syndrome, Teva will pay Nuvelution apre-agreedamount as compensation for their contribution to the partnership. In February 2020, Teva received results for these clinical trials, which found that the clinical trials failed to meet their primary endpoints. No new safety signals were identified in these studies. See note 23.OtsukaOn May 12, 2017, Teva entered into a license and collaboration agreement with Otsuka Pharmaceutical Co. Ltd. (“Otsuka”), providing Otsuka with an exclusive license to conduct phase 2 and 3 clinical trials for AJOVY in Japan and, if approved, to commercialize the product in Japan. Otsuka paid Teva an upfront payment of $50 million in consideration for the transaction. Teva may receive additional milestone payments upon filing with Japanese regulatory authorities, receipt of regulatory approval and achievement of certain revenue targets. Otsuka will also pay Teva royalties on AJOVY sales in Japan.AttenukineTMinputs.A milestonepayment of $20 million was received in 2017. The agreementstipulates additional milestone payments to Teva of up to $260 million, as well as future royalties.fair value.
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)Teva and Celltrion will share the profitThe Company’s investment in debt securities accounting policy from the commercialization of these products. Teva launched TRUXIMA in the United States in November 2019. HERZUMA is expected to be available in the United States in the first quarter of 2020.RegeneronIn September 2016, Teva and Regeneron Pharmaceuticals, Inc. (“Regeneron”) entered into a collaborative agreement to develop and commercialize Regeneron’s pain medication product, fasinumab. Teva and Regeneron share equally in the global commercial rights to this product, as well as ongoing associated R&D costs of approximately $1 billion. Teva made an upfront payment of $250 million to Regeneron in the third quarter of 2016 as part of the agreement. Milestone payments of $25 million, $35 million and $60 million were paid in the second quarter of 2017, the first quarter of 2018 and the fourth quarter of 2018, respectively.NOTE 3—Revenue from contracts with customers:On January 1, 2018, Teva adopted the new revenue standard to all contracts using the modified retrospective method. The cumulative initial effect of applying the new revenue standard was immaterial.Revenue recognition prior to and2020, following the adoption of the new revenueCECL standard128
Disaggregation of revenueThe following table disaggregates Teva’s revenues by major revenue streams. For additional information on disaggregation of revenues, see note 19.
Tablevolumes or the attainment of Contentsrevenue milestones for a specified period, the customer receives a rebate. Since rebates are contractually agreed upon, they are estimated based on the specific terms in each agreement based on historical trends and expected sales. Externally obtained inventory levels and expected sales usage by contract are evaluated in relation to estimates made for rebates payable to indirect customers and managed care agreements.TEVA PHARMACEUTICAL INDUSTRIES LIMITEDMedicaid and Other Governmental RebatesNotesPharmaceutical manufacturers whose products are covered by the Medicaid program are required to Consolidated Financial Statements—(Continued)SR&Aprovide a rebate to U.S. customers comprised approximately 83%each state as a percentage of the Company’s total SR&Atheir average manufacturer’s price for generic products dispensed and “best price” for specialty products dispensed. Many states have also implemented supplemental rebate programs that obligate manufacturers to pay rebates in excess of those required under federal law. The Company estimates these rebates based on historical trends of rebates paid, as of December 31, 2019, with the remaining balance primarily in Canada and Germany. Thewell as on changes in SR&A for third-party sales for the period ended December 31, 2018wholesaler inventory levels and 2019 were as follows:increases or decreases in sales.
NOTE4—Inventories:ChargebacksInventories, netThe Company has arrangements with various third parties, such as managed care organizations and drug store chains, establishing prices for certain of reserves, consistedTeva’s products. While these arrangements are made between the Company and the customers, the customers independently select a wholesaler from which they purchase the products. Alternatively, certain wholesalers may enter into agreements with the customers, with Teva’s concurrence, which establish the pricing for certain products which the wholesalers provide. Under either arrangement, Teva will issue a credit (referred to as a “chargeback”) to the wholesaler for the difference between the invoice price to the wholesaler and the customer’s contract prices. Provisions for chargebacks involve estimates of contract prices of over 2,000 products and multiple contracts with multiple wholesalers. Provisions for chargebacks involve estimates of usage by retailers and other indirect buyers with varying contract prices for multiple wholesalers. The provision for chargebacks varies in relation to changes in product mix, pricing and the following:level of inventory at the wholesalers and, therefore, will not necessarily fluctuate in proportion to an increase or decrease in sales. Provisions for estimating chargebacks are calculated using historical chargeback experience and/or expected chargeback levels for new products and anticipated pricing changes. Teva considers current and expected price competition when evaluating the provision for chargebacks. Chargeback provisions are compared to externally obtained distribution channel reports for reasonableness. The Company regularly monitors the provision for chargebacks and makes adjustments when the Company believes that actual chargebacks may differ from estimated provisions.
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TEVA PHARMACEUTICAL INDUSTRIES LIMITEDOther Promotional ArrangementsNotesOther promotional or incentive arrangements are periodically offered to Consolidated Financial Statements—(Continued)NOTE 5—Property, plant and equipment:Property, plant and equipment, net, consistedcustomers, specifically related to the launch of the following:
Depreciation expenses were$609 million,$676 million and$632 millionproducts or other targeted promotions. Provisions are made in the years ended December 31, 2019, 2018period for which the Company can estimate the incentive earned by the customer, in accordance with the contractual terms. The Company regularly monitors the provision for other promotional arrangements and 2017, respectively. Duringmakes adjustments when it believes that the years ended December 31, 2019, 2018 and 2017, Teva had impairments of property, plant and equipment in the amount of$139 million, $500 million and $544 million, respectively. See note 15.NOTE 6—Identifiable intangible assets:Identifiable intangible assets consisted of the following:
Product rights and trade namesProduct rights and trade names are assets presented at amortized cost. Product rights and trade names represent a portfolio of pharmaceutical productsactual provision may differ from various categories with a weighted average life of approximately 12 years. Amortization of intangible assets amounted to $1,113 million, $1,166 million and $1,444 million in the years ended December 31, 2019, 2018 and 2017, respectively.As of December 31, 2019, the estimated aggregate amortization of intangible assets for the years 2020 to 2024 is as follows: 2020—$1,019 million; 2021—$856 million; 2022—$794 million; 2023—$790 million and 2024—$773 million. These estimates do not include the impact of IPR&D that is expected to be successfully completed and reclassified to product rights.provisions. 131
Notes to Consolidated Financial Statements—(Continued)IPR&DTeva’s IPR&D are assets that have not yet been approved in major markets. Teva’s IPR&D is comprised mainly of the following acquisitions and related assets: various generic products (Actavis Generics)—$1,453 million; various generic products (Rimsa)—$48 million andAUSTEDO—$211 million. IPR&D carry intrinsic risks that the asset might not succeed in advanced phases and may be impaired in future periods.In 2019, Teva reclassified$291 million of products from IPR&D to product rights following regulatory approval,of which$174 million were reclassifiedin connection with methylphenidate ER.Intangible assets impairmentImpairment of identifiable intangible assets amounted to $1,639 million, $1,991 millionand $3,238 million in the years ended December 31, 2019, 2018 and 2017, respectively. These amountsare recorded in earnings under intangible assets impairment.Impairments in 2019 mainly consisted of:
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TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)NOTE 7—Goodwill:The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 were as follows:
Teva operates its business through three segments: North America, Europe and International Markets. Teva began reporting its financial results under this structure in the first quarter of 2018. Each of these business segments is a reporting unit. Additional reporting units include the Teva’s production and sale of APIs to third parties (“Teva API”) and anout-licensingplatform offering a portfolio of products to other pharmaceutical companies through its affiliate Medis. The Teva API and Medis reporting units are included in Other above. See note19.Teva determines the fair value of its reporting units using the income approach. The income approach is a forward-looking approach for estimating fair value. Within the income approach, the method used is the discounted cash flow method. Teva starts with a forecast of all the expected net cash flows associated with the reporting unit, which includes the application of a terminal value, and then applies a discount rate to arrive at a net present value amount. Cash flow projections are based on Teva’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the weighted average cost of capital (“WACC”), adjusted for the relevant risk associated with country-specific and business-specific characteristics. If any of these expectations were to vary materially from Teva’s assumptions, Teva may record an impairment of goodwill allocated to these reporting units in the future.During the first quarter of 2019, management assessed developmentsthat occurred inthe quarter and concluded that it was not more likely than not that the fair value of any of its reporting units was below their carrying amount as of March 31, 2019 and, therefore, no quantitative assessments were performed.In the second quarter of 2019, Teva completed its long-range planning (“LRP”) process, which is part of Teva’s internal financial planning and budgeting process, and includes discussion and review by Teva’s management and board of directors. Certain events and changes in circumstances reflected in the LRP indicated133
that it was more likely than not that, management noted that the Company’s market capitalization, including a reasonable control premium, was significantly below management’s assessment of the aggregate fair value of its reporting units. Management analyzed the difference and the underlying factors, mainlyreturns. Accordingly, no returned assets are recoded in connection with sales projectionsthose products. The returns provision is estimated by applying a historical return rate to the amounts of AJOVYrevenue estimated to be subject to returns. Revenue subject to returns is estimated based on the lag time from time of sale to date of return. The estimated lag time is developed by analyzing historical experience. Additionally, The Company considers specific factors, such as estimated levels of inventory in the Europedistribution channel, product dating and International Markets reporting units, sales projectionsexpiration, size and maturity of AUSTEDOlaunch, entrance of new competitors, changes in formularies or packaging and any changes to customer terms, for determining the North America reporting unit and market concerns regardingoverall expected levels of returns.related thereto.estimated amount.
During the third quarterResearch and development expenses are charged to statement of 2019, management assessed developments that occurredincome (loss) as incurred. Participations and grants in the quarterrespect of research and concluded that it was not more likely than not that the fair value of any of its reporting units was below their carrying amountdevelopment expenses are recognized as of September 30, 2019 and, therefore, no quantitative assessments were performed.Pursuant to Company policy, Teva conducted the annual goodwill impairment test for all reporting units during the fourth quarter of 2019. Management considered all information available, including information gathered from the 2020 Annual Operating Plan (“AOP”), and how it would affect the LRP prepared in the second quarter of 2019. Teva conducted its annual impairment test with the assistance of an independent valuation expert.No goodwill impairment charge was recorded during the fourth quarter of 2019.North AmericaDuring 2019, management noted a decrease in the fair value of the North America reporting unit, mainly due to lower projections for sales ofAJOVYand due to changes to certain discount rate parameters and the selected Terminal Growth Rate (“TGR”), partially offset by net increase of projections of other products.The estimated fair value exceeds its carrying amount for the North America reporting unit by 26%.The Company used a terminal growth rate of 1.61% and a discount rate of 10.22%. If Teva holds all other assumptions constant, a reduction in the terminal growth rateof 0.50% to 1.11%,or an increase in discount rate of 0.50%to 10.72%,would result inNorth America reporting unit to 21% and 18%, respectively.EuropeDuring 2019, management noted a decrease in the fair valueperiod of the Europe reporting unit, mainly due to projected currency translation effect.The estimated fair value exceeds the estimated carrying amount for the Europe reporting unit by 12%.The Company used a terminal growth rate of 1.36% and a discount rate of 9.52%. If Teva holds all other assumptions constant, a reduction in the terminal growth rate of 0.50%to 0.86%or an increase in discount rate of 0.50%to 10.02%,would result inEurope reporting unitAdvance payments for goods or services that will be used or rendered for future research and development activities are deferred. Such amounts are recognized as an expense as the related goods are delivered or the services are performed. to 8%Research and 6%, respectivelydevelopment.
International MarketsDuring 2019, management noted an increase in the fair value of the International Markets reporting unit mainly due to higher projections of certain products and changes to certain discount rate parameters and the selected TGR, partially offset by decrease in the profitability projections in the Japanese market related to new price regulation and further generic competition.The estimated fair value exceeds the estimated carrying amountRestructuring provisions are recognized for the International Markets reporting unit by 16%.direct expenditures arising from restructuring initiatives, where the plans are sufficiently detailed and where appropriate communication to those affected has been made.a reduction of the excess of fair value over carrying amount with respect to Teva’sInternational Markets reporting unit to 11% and 9%, respectively.Remaining reporting unitsThe percentage difference between estimated fair value and estimated carrying amount for the Medis and Teva API reporting units is 72% and 23%, respectively.Market CapitalizationTeva analyzed the aggregate fair value of its reporting units compared to its market capitalization as part of its annual goodwill impairment test,render service until termination in order to assessreceive the reasonablenessbenefits are recognized ratably over the future service period.termination liability is reasonably estimable.
In the second quarter of 2019, management noted a difference with regard to sales projections of AJOVY and AUSTEDO in the International Markets reporting unit. Management continues to believe that the majority of analysts do not focus on this market in preparing their financial models and, as a result, have not attributed value to the launch potential in this reporting unit. Accordingly, management’s projections exceed those it believes are being used by analysts, particularly in International Markets. However, if management were to conform to analyst expectations, the International Markets reporting unit’s fair value would approximate its book value. Future impairment charges, if any, reflecting conditions at that time may be materially different.In the second quarter of 2019, management also noted a difference with regard to sales projections of AUSTEDO in the North America reporting unit, resulting in higher fair value as analyzed by management compared to Teva’s market capitalization. Management continues to believe that it has more accurate information based on its knowledge of the market and its growth and therefore no adjustment was incorporated to the fair value.135
However, even if management wasSee note 14
Management continues to believe market concerns regarding the volatility and uncertainty of certain litigation risks, namely from the opioid and price fixing litigations, are impacting its market capitalization. Management believes that these concerns led to an acute reaction, which resulted in a decline in Teva’s share pricebusinesses in the second quarterdetermination of 2019, and will continue to impact the Company’s stock price into 2020. However, developments in these casesgain or loss on sale.
If management were to conformThe Company’s lease accounting policy until December 31, 2018, prior to the market’s expectationsadoption of the new lease standard
Management will continueNotes to monitor business conditions and potential events or circumstances that could have a negative effect onConsolidated Financial Statements—(Continued)NOTE 8—Leases:
Supplemental cash flow information related to operating leases was as follows:
136
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)Supplemental balance sheet information related to operating leases was as follows:
Maturities of(“ROU”) assets, other current liabilities and operating lease liabilities were as follows:
As of December 31, 2019, Teva rents out or subleases certain assets to third parties, which has additional operating leases for office space which have yet to commence, with undiscounted future payments of $92 million. These operating leases will commence during fiscal year 2020 with lease terms of 9 to 12 years.On October 10, 2019, Teva entered into an agreement to sell and lease back the land and building of its distribution center in Israel. Net proceeds from the asset sale amounted to $128 million.As of December 31, 2019,immaterial impact on Teva’s total finance lease assets and finance lease liabilitieswere$37 million and $29 million, respectively. The difference between those amounts is mainly due to prepaid payments.consolidated financial statements.
Teva 0.25% convertible senior debentures, due 2026, principal amount as of December 31, 2019 and 2018 were $514 million. These convertible senior debentures include a “net share settlement” feature according to which the principal amount will be paid in cash and in case of conversion, only the residual conversion value above the principal amount will be paid in Teva shares. Due to the “net share settlement” feature, exercisable at any time, these convertible senior debentures are classified in theBalanceSheet under short-term debt. Holders of the convertible debentures will be able to cause Teva to redeem the debentures on February 1, 2021.138
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)Long-term debt:
139
—
In
6.25x5.75x through December 31, 2019,2020, gradually declines to 5.75x5.50x in the first and second quarters of 2021, 5.00x in the third and fourth quarters of 2020,2021, and continues to gradually decline over the remaining term of the RCF.2019,2020, and as of the date of this10-K, 10-K, 0 amounts, including convertible senior debentures,
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Commencing in the third quarter ofIn 2015, Teva entered into forward starting interest rate swap and treasury lock agreements designated as cash flow hedges of the U.S. dollar debt issuance in July 2016, with respect to $3.75 billion and $1.5 billion notional amounts, respectively. These agreements hedged the variability in anticipated future interest payments due to possible changes in the benchmark interest rate between the date the agreements were entered into and the actual date of the U.S. dollar debt issuance in July 2016 (in connection with the closing of the Actavis Generics acquisition).Certain of the forward starting interest rate swaps and treasury lock agreements matured duringto protect the first half of 2016. In July 2016,Company from interest rate fluctuations in connection with a future debt issuance the debt issuances, Teva terminated the remainingCompany was planning. These forward starting interest rate swaps and treasury lock agreements.agreements were terminated in July 2016 upon the debt issuance. The termination of these transactions resulted in a loss position of $ 493$493 million, of which $ 242 million were settled on October 7, 2016 and the remaining amount was settled in January 2017. The change in fair value of these instruments recorded in other comprehensive income (loss) 143
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)will beand is amortized under financialexpenses-net expenses, net over the life of the debt. Such losses mainly reflect the changes in the benchmark interest rate between the date the agreements were entered into and the actual date of the U.S. debt issuance in July 2016.$500 $500 million
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TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)
million The expenses in 2020 were mainly related to a fine imposed by the European Commission in relation to a 2005 patent settlement agreement and an expenseincrease of $500 milliona reserve for certain product liability claims in 2018the United States, partially offset by proceeds received following a settlement of the FCPA derivative proceedings in Israel and 2017, respectively.settlement of an action brought against the sellers of Auden McKenzie (an acquisition made by Actavis Generics). The expenseexpenses in 2019 waswere mainly related to an estimated provision recorded in connection withthe remaining opioid cases. The 2018 income primarily consisted of the working capital adjustment with Allergan, the Rimsa settlement and reversal of the reserve recorded in the second quarter of 2017 with respect to the carvedilol patent litigation.opioid cases.
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For income tax contingencies, see note 13.146
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$235.5 94 147
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued), which was denied by the appellate court on November 4, 2019. On January 3, 2020, Janssen and
On July 8, 2011, Helsinn sued Teva over its filing of an ANDA to market a generic version of palonosetron IV solution (the generic equivalent of Aloxi®) and in November 2015, the U.S. District Court for the District of New Jersey ruled against Teva. The district court’s decision was reversed by the Federal Circuit Court of Appeals, after which Helsinn filed an appeal with the U.S. Supreme Court. On January 22, 2019, the Supreme Court affirmed the appellate court’s decision finding the asserted patent invalid. Separately, in October 2014, Helsinn filed an additional claim against Teva concerning later-acquired patents. Teva launched its generic palonosetron IV solution after obtaining final regulatory approval on March 23, 2018. On November 29, 2019, Teva and Helsinn settled their dispute regarding palonosetron IV solution. The settlement includes a full mutual release of claims and allows Teva to continue to market its generic product.In July 2015, Janssen sued Actavis and Teva (along with 10 other filers) over their filing of an ANDA to market their abiraterone acetate tablets, 250mg (generic versions of Zytiga®). In August 2017, Janssen sued Teva over its ANDA filing to market a 500mg generic version of Zytiga. In both cases, Janssen asserted a method of treatment patent. In January 2018, following a petition for inter partes review, the Patent Trials and Appeals Board (“PTAB”) found the patent to be invalid. In October 2018, the District Court for the District of New Jersey also found the patent to be invalid. Teva launched its generic 250mg product in November 2018. On May 14, 2019, the U.S. Court of Appeals affirmed that Janssen’s patent is invalid. That decision became final on June 20, 2019. Janssen did not seek U.S. Supreme Court review of this decision so this matter is considered closed. 148
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)
——InBeginning in April 2006, certain subsidiaries of Teva were named in a class action lawsuit filed in the U.S. District Court for the Eastern District of Pennsylvania. The case allegesPennsylvania with allegations that the settlement agreements entered into between Cephalon, Inc., now a Teva subsidiary (“Cephalon”), and various generic pharmaceutical companies in late 2005 and early 2006 to resolve patent litigation involving certain finished modafinil products (marketed as PROVIGILcasecases also allegesallege that Cephalon improperly asserted its PROVIGIL patent against the generic pharmaceutical companies. The first lawsuit was filed by a purported class of direct purchasers. Similar complaints were also filed by a purported class of indirect purchasers, certain chain pharmacies and by Apotex, Inc. (collectively, these cases are referred to as the “Philadelphia Modafinil Action”). Separately, Apotex challenged Cephalon’s PROVIGIL patent and, in October 2011, the court found the patent to be invalid and unenforceable based on inequitable conduct. Teva has either settled or reached agreements in principle to settle with all of the plaintiffs in the Philadelphia Modafinil Action. Additionally, Cephalon and Teva reached a settlement with 48 state attorneys general, which was approvedsuch cases, except for an action brought by the court on November 7, 2016, and on July 23, 2019, reached aState of Louisiana. The settlement with the State of California which is pendingthat was reached in 2019 received final court approval and is fullyin June 2020. All settlements entered into in connection with the above proceeding are covered by the settlement fund explained below.149
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)46.5 million.financial statements.
the Georgia AndroGel Litigation and thus no claims remain in the Georgia AndroGel Litigation. In August 2019,, certain other direct-purchaser plaintiffs (who would have been members of the direct purchaser class in the Georgia AndroGel Litigation, had it been certified) filed their own claims in the federal court in Philadelphia (where the Philadelphia AndroGel Litigation has been pending), challenging (in one complaint) both theSeptember 2006referenced above, as well asTeva’s and the December 2011®®, referenced below.AbbVie. Those claims remain pending. Annual sales of1%1% were approximately $350 1401%1% inNovember 2015.2015. A provision for this casethese matters was included in the financial statements.950 2.3150
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)
$1.1In NovemberBeginning in 2013, aseveral putative class action wasactions were filed in Pennsylvania federal court against Actavis, Inc. and certain of its affiliates, alleging that Watson’s 2012 patent lawsuit settlement with Endo Pharmaceuticals Inc. relating to LidodermAdditional lawsuits containing similar allegations followed on behalf of other classes of putative direct purchaser andend-payerplaintiffs, as well as retailers acting in their individual capacities, and thoseThe cases were consolidated as a multidistrict litigation in federal court in California. On February 21, 2017, the court granted both the indirect purchaser plaintiffs’California and the direct purchaser plaintiffs’ motions for class certification. Tevawere settled the multidistrict litigation with the various plaintiff groups in the first quarter of 2018, a provision was included in the financial statements and settlement amounts were subsequently paid in full.2018. The FTC also filed suit to challenge the Lidoderminitially bringing antitrust claims against Watson, Endo and Allerganalthough in Pennsylvania federal court in March 2016. The FTC later voluntarily dismissed those claims and refiled them (along with a stipulated order for permanent injunction to settle its claims against Endo) in the same California federal court in which the private multidistrict litigation referenced above was pending. On February 3, 2017, the State of California filed its own complaint against Allergan and Watson, and that complaint was also assigned to the California federal court presiding over the multidistrict litigation. On February 22, 2019, the FTC dismissed its claims against Actavis and Allergan, in exchange for Teva’s agreement to amend the Modafinil Consent Decree, as described above. OnIn July 23, 2019, Teva andalso settled a complaint brought by the State of California also reached a settlement agreement.California. On September 16, 2019,court. Thatcourt relating to the Lidodermwas subsequently removedon June 5, 2020, and those motions were granted in part and denied in part on October 16, 2020. In January 2021, Watson and BCBSM reached an agreement in principle to federal court and remains pending.settle the lawsuit. On January 24, 2020, the State of Mississippi filed a lawsuitcomplaint against Teva and Watson in Mississippi state court relating to the Lidodermalsoit subsequently amended on June 12, 2020. Teva and Watson have moved to dismiss that amended complaint, and their motion remains pending.Since November 2013, numerous lawsuits have been filed in various federal courts by purported classes of end payers for, and direct purchasers of, Aggrenox®(dipyridamole/aspirin tablets) against Boehringer Ingelheim (“BI”), the innovator, and several Teva subsidiaries. The lawsuits allege, among other things, that the settlement agreement between BI and Barr entered into in August 2008 violated the antitrust laws. A multidistrict litigation has been established in the U.S. District Court for the District of Connecticut. On April 11, 2017, the Orange County District Attorney filed a complaint for violations of California’s Unfair Competition Law based on the Aggrenox®patent litigation settlement. Teva has settled with the putative classes of direct purchasers and end payers, as well as with theopt-outdirect purchaser plaintiffs, and with two of theopt-outend payer plaintiffs. A provision with respect to the settlements was included in the financial statements and settlement amounts were subsequently paid in full. The district court overruled certain objections to the end payer settlement, including objections made by the Orange County District Attorney, and approved the settlement. The District Attorney subsequently appealed the court’s approval to the Second Circuit, but that appeal was dismissed in December 2019 and the District Attorney also subsequently dismissed the April 2017 complaint referenced above.Opt-outsfrom the end payer class also appealed certain aspects of the court’s approval order to the Second Circuit and that151
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)appeal remains pending. Annual sales ofAggrenox®were approximately $340 million at the time of the settlement and approximately $455 million at the timeTevalaunched its authorized generic version ofAggrenox®in July 2015.$3.7 billion and approximately $500 In September 2014, the FTC sued AbbVie Inc. and certain of its affiliates (“AbbVie”) as well as Teva in federal court in Philadelphia alleging that they violated the antitrust laws when they entered into a December 2011 settlement agreement to resolve the AndroGel®patent litigation and a supply agreement under which AbbVie agreed to supply Teva with an authorized generic version of TriCor®. The FTC alleges that Teva agreed to delay the entry of its generic testosterone gel product in exchange for entering into the TriCor supply agreement. In May 2015, the court dismissed the FTC’s claim concerning the settlement and supply agreements, and thus dismissed Teva from the case entirely. The FTC proceeded with a separate claim against AbbVie alone and in June 2018, following a bench trial, the court held that AbbVie had violated the antitrust laws by filing sham patent infringement lawsuits against both Teva and Perrigo in the underlying AndroGel patent litigation. The court ordered AbbVie to pay$448million in disgorgement but declined to award injunctive relief. The FTC filed a notice of appeal as to, among other things, the district court’s May 2015 dismissal of the FTC’s claim against Teva, but in February 2019, the FTC stipulated to dismiss Teva from its appeal, in exchange for Teva’s agreement to amend the Modafinil Consent Decree, as described above. In August 2019, two groups of direct-purchaser plaintiffs filed similar claims against AbbVie and Teva, in the same federal court in Philadelphia where the FTC’s claims had been pending. The first group, comprised of the three direct purchasers that had sought class certification in the Georgia AndroGel®case, referenced above, were challenging Teva’s December 2011 settlement with AbbVie, but in December 2019, Teva reached a settlement agreement with these plaintiffs. The second group, comprised of other directpurchasers, have filed claims challenging both Teva’s December 2011 settlement with AbbVie and the September 2006 AndroGel®settlement between Watson and Solvay, referenced above.Those claims remainpending.
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TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)Since November 2016, several putative indirect purchaser and direct purchaser class actions were filed in federal courts in Wisconsin, Massachusetts and Florida against Shire U.S., Inc. and Shire LLC (collectively, “Shire”), Actavis and Teva, alleging that Shire’s 2013 patent litigation settlement with Actavis related to the ADHD drug Intuniv®(guanfacine) violated various state consumer protection and antitrust laws. All cases are now in Massachusetts federal court. In AugustOctober 2019, the court deniedEuropean Commission commenced an inspection of Teva and subsequently requested information for purposes of investigating whether Teva may have abused a dominant position in the indirect purchasers’ motion for class certification, and they filed a petition for immediate appellate review, which remains pending. In September 2019,the court granted the direct purchasers’ motion for class certification and the parties filed various summary judgment motions, which remain pending.Multiple Sclerosis field, dating back to at least 2014. No formal proceedings have been initiated. Annual sales of IntunivCOPAXONE$Between September 1, 2020 and December 20, 2020, separate plaintiffs purporting to represent putative classes of direct and indirect purchasers and335retailer purchasers of BystolictheWatson’s 2013 settlement with Forest.$327million atTeva is involved in government investigations and litigation arising from the time Actavis launchedmarketing and promotion of its generic version of Intuniv®pharmaceutical products in 2014.the United States.
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TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)
Government Investigations and Litigation Relating There is also one similar complaint brought in Canada, which alleges that the defendants engaged in conspiracies to Pricing and MarketingTeva is involved in government investigations and litigation arising from the marketing and promotionfix prices and/or allocate market share of its pharmaceuticalgeneric drug products in the United States. Many of these investigations originate through what are known asqui tamcomplaints, in which the government reviews a complaint filed under seal by a whistleblower (a “relator”) that alleges violations of the federal False Claims Act. The government considers whether to investigate the allegations and will, in many cases, issue subpoenas requesting documents and other information, including conducting witness interviews. The government must decide whether to intervene and pursue the claims as the plaintiff. Once a decision is made by the government, the complaint is unsealed. If the government decides not to intervene, then the relator may decide to pursue the lawsuit on his own without the active participation of the government.A number of state attorneys general have filed various actions against Teva and/or certain of its subsidiaries relating to reimbursements or drug price reporting under Medicaid or other programs. Such price reporting is alleged to have caused states and others to pay inflated reimbursements for covered drugs. Teva and its154
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)subsidiaries have reached settlements in most of these cases. On October 4, 2018, Teva settled longstanding litigation filed by the State of Illinois against subsidiaries of Teva and Watson for a total settlement amount of $135 million. Teva accepted the settlement while denying any liability with respect to the claims made by the state.Followingthe final settlement payment,on January 8, 2020, thetrialcourt dismissed with prejudicethe Illinois litigation. In August 2013, judgment was entereddetriment of a class of private payors. The action is in a separate case brought by the State of Mississippi against Watson, pursuant to which Watson was ordered to pay compensatory damages amounting to $12.4 million. In March 2014, the Mississippi court amended the judgment to also include punitive damages in the amount of $17.9 million. The judgment was affirmed in all respects by the Mississippi Supreme Court in January 2018 and has since been satisfied in full. Certain Actavissubsidiaries were dismissed by the trial court in an action brought by the State of Utah. That dismissal was affirmed by the Utah Court of Appeals on February 28, 2019. The State’s time to seek further appellate review has expired and the matter is now concluded.A provision for these cases was included in the financial statements and settlement amounts were paid in full.Several qui tam complaints have been unsealed in recent years as a result of government decisions not to participate in the cases. The following is a summary of certain government investigations, qui tam actions and related matters.In January 2014, Teva received a civil investigative demand from the U.S. Attorney for the Southern District of New York seeking documents and information from January 1, 2006 related to sales, marketing and promotion of COPAXONE®and AZILECT®, focusing on educational and speaker programs. The demand states that the government is investigating possible civil violations of the federal False Claims Act. In March 2015, the docket in this matter and a False Claims Act civil qui tam complaint concerning this matter were unsealed by the court after the government declined to intervene. In February 2016, the court denied Teva’s motions to dismiss the False Claims Act claims and instructed the relators to amend their complaint with additional information. In March 2016, the relators filed an amended complaint. Teva’s motion for summary judgment on all claims was denied on February 27, 2019. On January 6, 2020, the court dismissed the case after the parties reached a settlement. A provision for this settlement is included in Teva’s financial statements.In January 2014, a qui tam complaint was filed in Rhode Island federal court alleging that Teva and several other defendants, including manufacturers of MS drugs and pharmacy benefit managers, violated the False Claims Act. The qui tam action was unsealed on April 4, 2018 after the government declined to intervene. The relator alleges that Teva and the other defendants induced fraudulent overpayments for illegitimate “Bona Fide Service Fees” in excess of fair market value to inflate prices for the Medicare Part D program. Teva moved to dismiss the complaint. The DOJ also moved to dismiss the complaint, arguing that it lacked merit and was not in the government’s interest to continue. On September 27, 2019, the Court granted the DOJ’s motion to dismiss.its early stages.On March 21, 2017, Teva received a subpoena from the U.S. Attorney’s office in Boston, Massachusetts requesting documents related to Teva’s donations to patient assistance programs. Subsequently, in August 2020, the U.S. Attorney’s office in Boston, Massachusetts brought a civil action in the U.S. District Court for the District of Massachusetts alleging violations of the federal Anti-Kickback Statute, and asserting causes of action under the federal False Claims Act and state law. It is alleged that Teva is cooperating in respondingcaused the submission of false claims to Medicare through Teva’s donations to bona fide independent charities that provide financial assistance to patients. An adverse judgment may involve damages, civil penalties and injunctive remedies. On October 19, 2020, Teva filed a motion to dismiss the subpoena.complaint, which remains pending.155
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)
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TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)$25Following these developments, thefinalized with its current terms and obligations. The Company considered a range of potential settlement outcomes. No single outcome inThe current provision remains a reasonable estimate of the range was considered to be more likely than any other outcome; accordingly, inultimate costs if the third quarternationwide settlement framework is finalized based on recent discussions. However, if not finalized for the entirety of 2019, Teva accrued to the new lowcases, a reasonable upper end of thea range resulting in an increase inof loss cannot be determined. An adverse resolution of any of these lawsuits or investigations may involve large monetary penalties, damages, and/or other forms of monetary and non-monetary relief and could have a material and adverse effect on Teva’s previously recorded estimated liability. There was no change in this estimate in the fourth quarterreputation, business, results of 2019.operations and cash flows.
157
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)On July 17, 2017, a lawsuit waswere filed in the U.S. District Court for the Southern District of Ohio derivatively on behalf of the Teva Employee Stock Purchase Plan, and alternatively as a putative class action lawsuit on behalf of individuals who purchased Teva stock through that plan. That complaint seeks unspecified damages, legal fees, interest and costs. The complaint alleges that Teva failed to maintain adequate financial controlsother federal courts based on the facts underpinning Teva’s FCPA DPAsimilar allegations, and also based on allegations substantially similar to those in the Ontario Teachers Securities Litigation. On November 29, 2017, the court granted Teva’s motion to transfer the litigationcases have been transferred to the U.S. District Court for the District of Connecticut where the Ontario Teachers Securities Litigation is pending. On November 1, 2019, the plaintiffConnecticut. Between August 2017 and October 2020, twenty complaints were filed an amended class action complaint, purportedly on behalf of individuals who purchased or otherwise acquired Teva’s securities through the Teva Employee Stock Purchase Plan between February 9, 2015 and November 3, 2016. The allegations in the amended complaint are substantially similar to the allegations in the Ontario Teachers Securities Litigation. On December 13, 2019, the defendants filed a motion to consolidate this action with the Ontario Teachers Securities Litigation. That motion remains pending.On August 3, 2017, a lawsuit was filed in the U.S. District Court for the District of Connecticut by OZ ELS Master Fund, Ltd. and related entities. The complaint asserts thatagainst Teva and certain of its current and former officers violated the federal securities lawsand directors seeking unspecified compensatory damages, legal fees, costs and expenses. The similar claims in connection with Teva’s alleged failure to disclose Teva’s participation in an alleged anticompetitive scheme to fix prices and allocate markets for generic drugs in the United States. On November 1, 2019, plaintiffs filed an amended complaint, purportedlythese complaints have been brought on behalf of purchasers plaintiffs, in various forums across the country, who have indicated that they intend toTeva’s securities between February 6, 2014 and August 3, 2017. The allegations in the amended complaint are substantially similar to the allegationsplaintiffs’ class if one is certified in the Ontario Teachers Securities Litigation. On December 13, 2019,March 10, 2020, the defendants filed a motion to consolidate this action withCourt consolidated the Ontario Teachers Securities Litigation.Litigation with all of the above-referenced putative class actions for all purposes and theremainsis pending. Motions to approve securities class actions were also filed in the Tel Aviv District Court in Israel with similar allegations to those made in the Ontario Teachers Securities Litigation.151483
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)
:
160
161
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)
161438
16414
Theone-timedeemed repatriation tax is based on the post-1986 earnings and profits for which the Company has previously deferred from U.S. income taxes and is payable over 8 years. The year ended December 31, 2017 included a $112 million provisional estimate for Teva’s
On December 17, 2018, the mandatory convertible preferred shares automatically converted into ordinary shares. As a result of this conversion, Teva issued 70.6 million ADSs.
165
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)
The weighted average fair value of options granted during these years was generally estimated by using the Black-Scholes option-pricing model as follows:
166151
2019,2020, less the weighted average exercise price in each range. This represents the potential amount receivable by the option holders had all option holders exercised their options as of such date. As of December 31, 2019,2020, there was an immaterial amount ofwere no exercisable options exercisable that were167
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)$11.50,$20.92The fair value of RSUs and PSUs is estimated based on the market value of the Company’s stock on the date of award grant (fair value of PSUs includes the effect of market conditions), less an estimate of dividends that will not accrue to RSU and PSU holders prior to vesting.
AsAs ofDecember 31, 2019,2020, the total unrecognized compensation cost before tax on employee stock options and RSU/$53 $20million and $159$164 2.7
Commencing in April 2015, dividends on Teva’s ordinary shares were declared in U.S. dollars. Dividendspaidper share in the years ended December 31, 2019, 2018 and 2017 were $0, $0 and $0.85, respectively.In addition, total dividends paid on Teva’s mandatory convertible preferred shares in the years ended December 31, 2019, 2018 and 2017 were$0,$0and $70million, respectively.168
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)
Since the announcement of its restructuring plan, Teva reduced its global headcount by approximately13,000 full-time-equivalent employees.
171
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)recall on Teva’s 2018 and 2019 financial statements was $54 million, primarily related to inventory write-downs and returns. As a result of this loss, Teva initiated negotiations with Huahai and inIn December 2019, Teva reached a settlement with Huahai resolving itsTeva’s claims related to certain sartan API Huahai supplied to Teva.by Huahai. Under the settlement agreement, Huahai agreed to compensate Teva for some of theits direct losses suffered by Teva and provide Tevait with prospective cost reductions for API. The settlement does not release Huahai from liability for any losses Teva may incur as a result of third party personal injury or product liability claims relating to the sartan API at issue. In addition, multiple lawsuits have been filed in connection with this matter, which may lead to additional customer penalties, impairments and litigation costs.—
—
51 million and 3851 million weighted average shares, respectively, and convertible senior debentures, since they had an anti-dilutive effect on—
The Company began reporting its financial results under this structure in the first quarter of 2018. This change was reflected through retroactiverecastingof prior period segment information.173
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)
17
4
175
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)
176162
Teva revenues from external customers attributed to Israel were less than 5% of the consolidated revenues in the years ended December 31, 2019, 2018 and 2017, respectively.
The following table represents the percentage of consolidated third party net sales to Teva’s major customers during the years ended December 31, 2019, 2018 and 2017.
Most of Teva’s revenues from these customers weregeneratedin the North America segment.163
177
NOTE 20—Fair value measurement:Financial itemscarried at fair value as ofDecember 31, 2019 and 2018 are classified in the tables below in one of the three categories described in note 1g:
178
TEVA PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)
179164
180165
NOTE 22 – Selected quarterly financial data (unaudited):The following table presents selected unaudited quarterly financial data for 2019 and 2018:
181166
NOTE 23 – Subsequent event:2019:
In September 2017, we entered into a partnership agreement with Nuvelution for the development of AUSTEDO for the treatment of Tourette syndrome in pediatric patients in the United States. See note 2. On February 19, 2020, we received results for these clinical trials, which found that the clinical trials failed to meet their primary endpoints. As a result, we will incur an intangible asset impairment of $211 million in the first quarter of 2020.182
183
184169
185170
10-K.
186
187
188
189
190
191176
192
193178
COVID-19
pandemic.
Our North America segment generated revenues of $8,542$8,447 million and profit of $2,252$2,421 million in 2019.2020. Revenues decreased by 8%,1% compared to 2019, mainly due to a decline in revenues from COPAXONE, our U.S. generics businessBENDEKA/TREANDA and certain other specialty products, partially offset by higher revenues from AUSTEDO, AJOVY and our Anda business and AJOVY. Profit decreased by 21%, mainlyU.S. generics business. Our North America segment has experienced some reductions in volume due to lower revenues from COPAXONEless physician and hospital activity during thenon-recurrenceCOVID-19of other income, partially offset by cost reductions and efficiency measures as part ofpandemic, but has also experienced increase in demand for certain products related to the restructuring plan.treatment ofOur Europe segment generated revenues of $4,795 million and profit of $1,318 million in 2019. Revenues decreased by 8%, or 2% in local currency terms, mainly due to a decline in COPAXONE56
COVID-19
53
Our Europe segment generated revenues of $4,757 million and profit of $1,331 million in 2020. Revenues decreased by 1%, or 2% in local currency terms compared to 2019, mainly due to price declines for our oncology products as a result of generic competition and a decline in COPAXONE revenues due to competing glatiramer acetate products, partially offset by the launch of AJOVY. Revenues from generic products were flat, due to a decline in doctor and hospital visits by patients resulting in fewer prescriptions during the second half of 2020 due to the
COVID-19
pandemic, partially offset by new generic product launches. TheCOVID-19
pandemic caused significant fluctuations in customer stocking throughout 2020, which mostly offset each other byyear-end.
Profit increased by 1%, mainly due to lower S&M expenses.Our International Markets segment generated revenues of $2,246$2,154 million and profit of $464$474 million in 2019.2020. Revenues decreased by 7%4%, or 3%flat in local currency terms mainly duecompared to 2019, with higher revenues in most markets offsetting the lower sales in Japan and certain discontinued activitiesloss of revenues from divested businesses in Israel. Revenues in 2020 were also impacted by reduced demand for certain products and higher demand for other products, resulting from the impact of thedecreasedincreased by 7%2%, mainly due to lowerhigher revenues in Japan, partially offset by higher sales in othermost markets and lower S&M and G&A expenses. The data presented for prior periods have been revised to reflect a revision in the presentation of net revenues and cost ofexpenses, partially offset by lower sales in the consolidated financial statements. See note 1b to our consolidated financial statements for additional information.Japan.
COVID-19
pandemic. In addition, theCOVID-19
pandemic has led to a decline in doctor and hospital visits by patients resulting in fewer prescriptions during 2020. Profit Our revenues from other activities in 2020 were $1,302 million, flat compared to 2019. In local currency terms, revenues decreased by 1%.
Impairments of identifiable intangible assets were $1,639$1,502 million and $1,991$1,639 million in the years ended December 31, 20192020 and 2018,2019, respectively. See note 6 to our consolidated financial statements.
We recorded in 2019, compared to a goodwill impairment charge of $3,027$4,628 million related to our North America reporting unit in 2018.the year ended December 31, 2020. See note 7 to our consolidated financial statements.
We recorded expenses of $423$479 million for other asset impairments, restructuring and other items in 2019,2020, compared to expenses of $987$423 million in 2018.2019. See note 15 to our consolidated financial statements.
In 2019,2020, we recorded an expense of $1,178$60 million in legal settlements and loss contingencies, compared to an income of $1,208$1,178 million in 2018. The expense in 2019 was mainly related to an estimated settlement provision recorded in connection with the remaining opioid cases.2019. See note 1211 to our consolidated financial statements.
Operating loss was $443$3,572 million in 2019,2020, compared to an operating loss of $1,637$443 million in 2018,2019. The increase in operating loss in 2020 was mainly due to highergoodwill impairment charges, recordedpartially offset by lower provisions in 2018.connection with legal settlements and loss contingencies, as well as higher profit in our North America segment.
Financial expenses were $834 million in 2020, compared to $822 million in 2019, compared2019. Financial expenses in 2020 were mainly comprised of interest expenses of $963 million, partially offset by gains on revaluations of marketable securities of $85 million (see note 20 to $959our consolidated financial statements) as well as a gain of $26 million in 2018.resulting from our hedging and derivatives activities. Financial expenses in 2019 and 2018 were mainly comprised of interest expenses of $881 million and $920 million, respectively.million.
In 2020, we recognized a tax benefit of $168 million, or 4%, on a
pre-tax
loss of $4,406 million. In 2019, we recognized a tax benefit of $278 million, or 22%, on aIn 2018, we recognized a tax benefit of $195 million, or 8%, on apre-taxloss of $2,596 million. Our tax rate for 20182020 was lower than in 2019, mainly due toone-timelegal settlements and divestments goodwill impairments that haddid not have a low corresponding tax effect.
pre-tax
loss of $1,265 million. Exchange rate movements during 2019,2020, including hedging effects, in comparison with 2018,2019, negatively impacted revenues by $402$33 million and operating income (loss) by $135$56 million.
54
As of December 31, 2019,2020, our debt was $26,908$25,919 million, compared to $28,916$26,908 million as of December 31, 2018.2019. This decrease was mainly due to senior notes repaid at maturity or prepaid with cash generated during the year.year, partially offset by exchange rate fluctuations.
Cash flow generated from operating activities was $1,216 million in 2020, compared to $748 million in 2019, a decrease of $1,698 million, or 69%, compared to 2018.2019. This decreaseincrease was mainly due to the working capital adjustment with Allergan and the Rimsa settlement in 2018 and lowerhigher profit in our North America segment.segment during 2020.
During 2019,2020, we generated free cash flow of $2,053$2,110 million, which we define as comprising $748$1,216 million in cash flow generated from operating activities, $1,487$1,405 million in beneficial interest collected in exchange for securitized tradeaccounts receivables and $343$67 million in proceeds from sale of property, plant and equipment and intangible assets, partially offset by $525$578 million in cash used for capital investments. The increase in 2020 compared to 2019, resulted mainly from higher cash flow generated from operating activities, partially offset by less cash generated from sales of assets and higher capital investments.
In August 2020, we entered into a partnership agreement with biopharmaceutical company Alvotech for the exclusive commercialization in the U.S. of five biosimilar product candidates. The initial pipeline for this partnership contains biosimilar candidates addressing multiple therapeutic areas. Under this agreement, Alvotech is responsible for the development, registration and supply of the biosimilar product candidates and Teva will exclusively commercialize the products in the United States. We paid an upfront payment in the third quarter of 2020 that was recorded as R&D expenses. During the fourth quarter of 2020, we accrued additional amounts due to the high probability that additional milestone payments will be paid in 2021. Additional development and commercial milestone payments of up to $450 million, as well as royalty payments, may be payable by Teva over the next few years. Teva and Alvotech will share profit from the commercialization of these biosimilars.
Results of Operations
The following table sets forth,discussion that follows includes a comparison of our results of operations and liquidity and capital resources for fiscal years 2020 and 2019. For a comparison of our results of operations and financial condition for fiscal years 2019 and 2018, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2019 Annual Report on Formperiods indicated, certain financial data derived from our financial statements, presented according to generally accepted accounting principles in the United States (“U.S. GAAP”), presented as percentages of net revenues, and the percentage change for each item as compared to the previous year.
10-K,
filed with the Percentage of Net Revenues Year Ended December 31, | Percentage Change Comparison | |||||||||||||||||||
2019 | 2018 | 2017 | 2019-2018 | 2018-2017 | ||||||||||||||||
% | % | % | % | % | ||||||||||||||||
Net revenues | 100.0 | 100.0 | 100.0 | (8 | ) | (16 | ) | |||||||||||||
Gross profit | 44.6 | 45.4 | 48.6 | (9 | ) | (22 | ) | |||||||||||||
Research and development expenses | 6.0 | 6.6 | 8.1 | (17 | ) | (32 | ) | |||||||||||||
Selling and marketing expenses | 15.5 | 16.0 | 15.5 | (10 | ) | (14 | ) | |||||||||||||
General and administrative expenses | 7.1 | 7.1 | 6.6 | (8 | ) | (11 | ) | |||||||||||||
Intangible assets impairments | 9.7 | 10.9 | 14.8 | (18 | ) | (39 | ) | |||||||||||||
Goodwill impairment | * | 16.6 | 78.3 | (100 | ) | (82 | ) | |||||||||||||
Other asset impairments, restructuring and other items | 2.5 | 5.4 | 8.4 | (57 | ) | (46 | ) | |||||||||||||
Legal settlements and loss contingencies | 7.0 | (6.6 | ) | 2.3 | n/a | n/a | ||||||||||||||
Other Income | (0.5 | ) | (1.6 | ) | (5.5 | ) | (74 | ) | (76 | ) | ||||||||||
Operating (loss) income | (2.6 | ) | (9.0 | ) | (80.0 | ) | (73 | ) | (91 | ) | ||||||||||
Financial expenses—net | 4.9 | 5.2 | 4.1 | (14 | ) | 7 | ||||||||||||||
Income (loss) before income taxes | (7.5 | ) | (14.2 | ) | (84.2 | ) | (51 | ) | (86 | ) | ||||||||||
Income taxes (benefit) | (1.6 | ) | (1.1 | ) | (8.8 | ) | 42 | (90 | ) | |||||||||||
Share in (profits) losses of associated companies—net | 0.1 | 0.4 | * | (81 | ) | 2,267 | ||||||||||||||
Net income (loss) attributable to non-controlling interests | * | (1.8 | ) | * | (99 | ) | 922 | |||||||||||||
Net income (loss) attributable to Teva | (5.9 | ) | (11.8 | ) | (74.4 | ) | (54 | ) | (87 | ) | ||||||||||
SEC on February 21, 2020.
Segment Information
North America Segment
The following table presents revenues, expenses and profit for our North America segment for the past threetwo years:
Year ended December 31, | ||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||
(U.S. $ in millions / % of Segment Revenues) | ||||||||||||||||||||||||
Revenues | $ | 8,542 | 100 | % | $ | 9,297 | 100.0 | % | $ | 12,141 | 100 | % | ||||||||||||
Gross profit | 4,350 | 50.9 | % | 4,979 | 53.6 | % | 7,322 | 60.3 | % | |||||||||||||||
R&D expenses | 652 | 7.6 | % | 713 | 7.7 | % | 969 | 8.0 | % | |||||||||||||||
S&M expenses | 1,021 | 12.0 | % | 1,154 | 12.4 | % | 1,288 | 10.6 | % | |||||||||||||||
G&A expenses | 439 | 5.1 | % | 484 | 5.2 | % | 533 | 4.4 | % | |||||||||||||||
Other (income) expense | (14 | ) | § | (209 | ) | (2.2 | %) | (92 | ) | (0.8 | %) | |||||||||||||
Segment profit* | $ | 2,252 | 26.4 | % | $ | 2,837 | 30.5 | % | $ | 4,624 | 38.1 | % | ||||||||||||
Year ended December 31, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
(U.S. $ in millions / % of Segment Revenues) | ||||||||||||||||
Revenues | $ | 8,447 | 100 | % | $ | 8,542 | 100.0 | % | ||||||||
Gross profit | 4,489 | 53.1 | % | 4,350 | 50.9 | % | ||||||||||
R&D expenses | 622 | 7.4 | % | 652 | 7.6 | % | ||||||||||
S&M expenses | 1,013 | 12.0 | % | 1,021 | 12.0 | % | ||||||||||
G&A expenses | 443 | 5.2 | % | 439 | 5.1 | % | ||||||||||
Other (income) expense | (10 | ) | § | (14 | ) | § | ||||||||||
Segment profit* | $ | 2,421 | 28.7 | % | $ | 2,252 | 26.4 | % | ||||||||
55
| * | Segment profit does not include amortization and certain other items. |
| § | Represents an amount less than 0.5%. |
North America Revenues
Our North America segment includes the United States and Canada. Revenues from our North America segment in 20192020 were $8,542$8,447 million, a decrease of $755$95 million, or 8%1%, compared to 2018,2019, mainly due to a decline in revenues from COPAXONE, our U.S. generics businessBENDEKA/TREANDA and certain other specialty products, partially offset by higher revenues from AUSTEDO, AJOVY and our Anda business and AJOVY.
COVID-19
pandemic, but has also experienced increase in COVID-19
and its symptoms. In addition, the ability to promote our Revenues by Major Products and Activities
The following table presents revenues for our North America segment by major products and activities for the past threetwo years:
Year ended December 31, | Percentage Change 2018-2019 | |||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||
(U.S. $ in millions) | ||||||||||||||||
Generic products | $ | 3,963 | $ | 4,056 | $ | 5,203 | (2 | %) | ||||||||
COPAXONE | 1,017 | 1,759 | 3,116 | (42 | %) | |||||||||||
BENDEKA/TREANDA | 496 | 642 | 656 | (23 | %) | |||||||||||
ProAir* | 274 | 397 | 501 | (31 | %) | |||||||||||
QVAR | 250 | 182 | 313 | 38 | % | |||||||||||
AJOVY | 93 | 3 | — | N/A | ||||||||||||
AUSTEDO | 412 | 204 | 24 | 102 | % | |||||||||||
Anda | 1,492 | 1,347 | 1,153 | 11 | % | |||||||||||
Other | 546 | 708 | 1,175 | (23 | %) | |||||||||||
Total | $ | 8,542 | $ | 9,297 | $ | 12,141 | ||||||||||
Year ended December 31, | Percentage Change 2019-2020 | |||||||||||
2020 | 2019 | |||||||||||
(U.S. $ in millions) | ||||||||||||
Generic products | $ | 4,010 | $ | 3,963 | 1 | % | ||||||
AJOVY | 134 | 93 | 45 | % | ||||||||
AUSTEDO | 637 | 412 | 55 | % | ||||||||
BENDEKA/TREANDA | 415 | 496 | (16 | %) | ||||||||
COPAXONE | 884 | 1,017 | (13 | %) | ||||||||
ProAir* | 241 | 274 | (12 | %) | ||||||||
QVAR | 179 | 250 | (28 | %) | ||||||||
Anda | 1,462 | 1,492 | (2 | %) | ||||||||
Other | 485 | 546 | (11 | %) | ||||||||
Total | $ | 8,447 | $ | 8,542 | (1 | %) | ||||||
| * | Does not include revenues from the ProAir authorized generic, which are included under generic products. |
Generic products
®
), our ProAir authorized generic and Among the portfolio. The most significant declinesgeneric products we sold in North America in 2020 were in cinacalcetTRUXIMA, albuterol sulfate inhalation aerosol (our ProAirauthorized generic), emtricitabine and tenofovir disoproxil fumarate tablets (the generic equivalent of Sensispar®), daptomycin (the generic equivalent of Cubicin®), methyphenidate (the generic equivalent of Ritalin®) and tadalafil (the generic equivalent of Cialis®). These declines were partially offset by new generic launches in 2019 and growth in certain products compared to 2018, primarily TRUXIMA (the biosimilar to RituxanTruvada, amphetamine salt tablets (the generic equivalent of Adderall IR) and our authorized generic version of ProAir.
®
), epinephrine injectable solution (the generic equivalent of EpiPen®
and EpiPen Jr.®
)®
)In 2019,2020, we led the U.S. generics market in total prescriptions and new prescriptions, with approximately 388348 million total prescriptions (based on trailing twelve months), representing 10.5%9.6% of total U.S. generic prescriptions according to IQVIA data.
56
AJOVY
For more information on COPAXONE,AJOVY, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines—COPAXONE.AJOVY.”
For more information on AUSTEDO, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines—AUSTEDO.”
BENDEKA
TREANDA
®
(aready-to-dilute
see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines—Oncology.”
For more information on COPAXONE, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines—COPAXONE.”
ProAir
®
HFA, another albuterol inhaler. Revenues from our ProAir QVAR
Anda
57
Product Launches and Pipeline
In 2019,2020, we launched the generic version of the following branded products and biosimilars in North America:the United States:
Product Name | Brand Name | Launch Date | Total Annual U.S. Branded Sales at Time of Launch (U.S. $ in millions (IQVIA)) (1) | |||||||||
Vardenafil hydrochloride tablets, 2.5 mg, 5 mg, 10 mg & 20 mg | Levitra ® | January | $ | 88 | ||||||||
Albuterol sulfate HFA inhalation aerosol with dose counter, 90 mcg (2) | ProAir ® | January | $ | 1,497 | ||||||||
Vigabatrin tablets, USP, 500 mg | Sabril ® | February | $ | 183 | ||||||||
ALYQ TM (tadalafil tablets), USP, 20 mg | Adcirca ® | February | $ | 475 | ||||||||
Ketoconazole cream, 2% (3) | Nizoral ® | February | $ | 92 | ||||||||
Clindamycin phosphate and benzoyl peroxide gel, 1.2%/2.5% | Acanya ® | February | $ | 21 | ||||||||
Minocycline hydrochloride extended-release tablets, USP, 80 mg & 105 mg | Solodyn ® ER | February | $ | 173 | ||||||||
Diclofenac epolamine topical patch, 1.3% | Flector ® | March | $ | 123 | ||||||||
Cyclobenzaprine hydrochloride extended-release capsules, 15 mg & 30 mg (2) | Amrix ® | March | $ | 50 | ||||||||
Deferasirox tablets, 125 mg, 250 mg & 500 mg | Exjade ® | March | $ | 134 | ||||||||
Methylergonovine maleate tablets, USP, .2 mg | Methergine ® | March | $ | 62 | ||||||||
Docosanol cream, 10% | Abreva ® | March | $ | 88 | ||||||||
Fluoxetine tablets, USP 20 mg | — | April | $ | 56 | ||||||||
Testosterone gel, metered 1.62% CIII | AndroGel ® 1.62% [CIII] | April | $ | 755 | ||||||||
Solifenacin succinate tablets, 5 mg & 10 mg | Vesicare ® | April | $ | 946 | ||||||||
Ambrisentan tablets, 5 mg & 10 mg | Letairis ® | May | $ | 254 | ||||||||
Product Name | Brand Name | Launch Date | Total Annual U.S. Branded Sales at Time of Launch (U.S. $ in millions (IQVIA)) (1) | |||||
Doxepin tablets, 3 mg & 6 mg | Silenor ® | January | $ | 50 | ||||
HERZUMA ® (trastuzumab-pkrb) for injection, 150 mg/vial & 420 mg/vial(2) | Herceptin ® | March | $ | 3,042 | ||||
Deferasirox Tablets, 180mg | Jadenu ® | April | $ | 53 | ||||
Romidepsin Injection, 27.5mg/5.5 mL (5mg/mL) (3) | (3) | April | — | |||||
Vigabatrin for Oral Solution, USP, 500mg | Sabril ® | May | $ | 254 | ||||
Everolimus Tablets, 2.5mg, 5mg & 7.5mg | Anfinitor ® | June | $ | 401 | ||||
Imiquimod Cream 3.75% (4) | Zyclara ® | July | $ | 24 | ||||
Sildenafil for Oral Suspension | Revatio ® | August | $ | 121 | ||||
PEG-3350, Sodium Sulfate, Sodium Chloride, Potassium Chloride, Sodium Ascorbate, and Ascorbic Acid for Oral Solution | MoviPrep ® | August | $ | 10 | ||||
Tobramycin Inhalation Solution, USP | Bethkis ® | September | $ | 42 | ||||
Dimethyl Fumarate Delayed-Release Capsules | Tecfidera ® | September | $ | 3,788 | ||||
Efavirenz, Emtricitabine and Tenofovir Disoproxil Fumarate Tablets | Atripla ® | September | $ | 578 | ||||
Emtricitabine and Tenofovir Disoproxil Fumarate Tablets, 200mg/300mg | Truvada ® | September | $ | 2,872 | ||||
Methylphenidate Hydrochloride Extended-Release Capsules | Aptensio XR ® | October | $ | 38 | ||||
Alvimopan Capsules | Entereg ® | December | $ | 92 | ||||
Colchicine Tablets, USP | Colcrys ® | December | $ | 415 | ||||
Product Name | Brand Name | Launch Date | Total Annual U.S. Branded Sales at Time of Launch (U.S. $ in millions (IQVIA)) (1) | |||||||||
Erlotinib tablets, 100 mg & 150 mg | Tarceva ® | May | $ | 188 | ||||||||
Mesalamine delayed-release capsules, 400 mg | Delzicol ® | May | $ | 130 | ||||||||
Ranolazine extended-release tablets, 500 mg & 1000 mg | Ranexa ® | May | $ | 950 | ||||||||
Aspirin and extended-release dipyridamole capsules, 25 mg/200 mg (3) | Aggrenox ® | June | $ | 168 | ||||||||
Desmopressin acetate injection, USP, 4 mcg/mL (3) | DDAVP ® | June | $ | 58 | ||||||||
Albendazole tablets, USP, 200 mg | Albenza ® | June | $ | 85 | ||||||||
Bosentan tablets, 62.5 mg & 125 mg | Tracleer ® | June | $ | 84 | ||||||||
Doxylamine succinate and pyridoxine hydrochloride delayed-release tablets, 10 mg/10 mg | Diclegis ® | June | $ | 151 | ||||||||
Penicillamine capsules, USP, 250 mg | Cuprimine ® | June | $ | 130 | ||||||||
1% Sodium hyaluronate injection | (4) | June | — | |||||||||
Oseltamivir phosphate for oral suspension, 6 mg/mL | Tamiflu ® | July | $ | 281 | ||||||||
Icatibant injection, 30 mg/3 mL | Firazyr ® | July | $ | 304 | ||||||||
Pregabalin capsules, 25 mg, 50 mg, 75 mg, 100 mg, 150 mg, 200 mg, 225 mg & 300 mg | Lyrica ® | July | $ | 5,456 | ||||||||
Ramelteon tablets, 8 mg | Rozerem ® | July | $ | 91 | ||||||||
Bisoprolol fumarate and hydrochlorothiazide tablets, 2.5 mg/6.25 mg, 5 mg/6.25 mg & 10 mg/6.25 mg (2) | Ziac ® | August | $ | 42 | ||||||||
Doxycycline hyclate delayed-release tablets, USP, 50 mg & 200 mg | Doryx ® | August | $ | 20 | ||||||||
Mycophenolic acid delayed-release tablets, USP, 180 mg & 360 mg | Myfortic ® DR | August | $ | 180 | ||||||||
Epinephrine injection, USP (auto-injector), 0.15 mg/0.3 mL | EpiPen Jr ® | August | $ | 201 | ||||||||
Minocycline hydrochloride extended-release tablets, USP, 55 mg | Solodyn ® ER | August | $ | 44 | ||||||||
Fulvestrant Injection, 250 mg/5 mL (50 mg/mL) | (5) | August | — | |||||||||
Triamcinolone acetonide injectable suspension, USP, 40 mg/mL (40 mg), 40 mg/mL (200 mg) & 40 mg/mL (400 mg) | Kenalog ® -40 | August | $ | 135 | ||||||||
Acyclovir cream, 5% (6) | Zovirax ® | August | $ | 97 | ||||||||
Fosaprepitant for injection, 150 mg/Vial | (5) | September | — | |||||||||
Treprostinil injection, 1 mg/mL (20 mg), 2.5 mg/mL (50 mg), 5 mg/mL (100 mg) & 10 mg/mL (200 mg) | Remodulin ® | September | $ | 3 | ||||||||
Ivermectin cream, 1% | Soolantra ® | October | $ | 206 | ||||||||
TRUXIMA, 100 mg/10 mL & 500 mg/50 mL | Rituxan ® (7) | November | $ | 4,378 | ||||||||
Deferasirox tablets, 90 mg & 360 mg | Jadenu ® | November | $ | 390 | ||||||||
| (1) | The figures presented are for the twelve months ended in the calendar quarter immediately prior to our launch or re-launch. |
| (2) | Biosimilar. |
| (3) |
| Approved via 505(b)(2) regulatory pathway; not equivalent to a brand product. |
Authorized generic. |
IQVIA reported brand sales are one of the many indicators of future potential value of a launch, but equally important are the mix and timing of competition, as well as cost effectiveness. The potential advantages of being the first filer with respect to some of these products may be subject to forfeiture, shared exclusivity or competition from
so-called
“authorized generics,” which may ultimately affect the value derived.58
In 2019,2020, we received tentative approvals for generic equivalents of the products listed in the table below, excluding overlapping applications. A “tentative approval” indicates that the FDA has substantially completed its review of an application and final approval is expected once the relevant patent expires, a court decision is reached, a
30-month
regulatory stay lapses or a180-day
exclusivity period awarded to another manufacturer either expires or is forfeited.Generic Name | Brand Name | Total U.S. Annual Branded Market (U.S. $ in millions (IQVIA))* | ||||||
Dapagliflozin tablets, 5 mg | Farxiga ® | $ | 1,688 | |||||
Deferasirox Oral Tablets 180 mg | Jadenu ® | $ | 55 | |||||
Efinaconazole Topical Solution | Jublia ® | $ | 231 | |||||
Enzalutamide capsules, 40 mg | Xtandi ® | $ | 999 | |||||
Everolimus tablets, 2.5 mg, 5 mg, 7.5 mg & 10 mg | Afinitor ® | $ | 770 | |||||
Icatibant injection, 30 mg/3 mL | Firazyr ® | $ | 318 | |||||
Ivermectin lotion, 0.5% | Sklice ® | $ | 81 | |||||
Sildenafil, 10 mg/mL | Revatio ® | $ | 189 | |||||
Sorafenib tablets, 200 mg | Nexavar ® | $ | 55 | |||||
Generic Name | Brand Name | Total U.S. Annual Branded Market (U.S. $ in millions (IQVIA))* | ||||
Eliglustat Capsules, 84mg | Cerdela ® | $ | 111 | |||
Icosapent Capsules, 500mg & 1000mg | Vascepa ® | $ | 972 | |||
Macitenta Tablets, 10mg | Opsumit ® | $ | 590 | |||
Pemetrexed Disodium Injection, 100mg vial | Alimta ® | $ | 255 | |||
Apixaban Tablets, 2.5 mg and 5 mg | Eliquisr ® | $ | 11,445 | |||
Pirfenidone Tablets | Esbriet ® | $ | 540 | |||
Micafungin for Injection | Mycamine ® | $ | 125 | |||
| * | For the twelve months ended in the calendar quarter immediately prior to the receipt of tentative approval. |
For a description of our specialty product pipeline, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines” above.
North America Gross Profit
Gross profit from our North America segment in 20192020 was $4,489 million, an increase of 3% compared to $4,350 million a decrease of 13% compared to $4,979 million in 2018.2019. This decreaseincrease was mainly due to higher revenues from AUSTEDO, partially offset by lower revenues from COPAXONE.
Gross profit margin for our North America segment in 2019 decreased2020 increased to 50.9%53.1%, compared to 53.6%50.9% in 2018.2019. This decreaseincrease was mainly due to lower COPAXONE revenues and a higher proportion of Anda revenues, partially offset by higher revenues from AUSTEDO.
North America R&D Expenses
R&D expenses relating to our North America segment in 20192020 were $652$622 million, a decrease of 9%5% compared to $713$652 million in 2018.2019.
For a description of our R&D expenses in 2019,2020, see “—Teva Consolidated Results—Research and Development (R&D) Expenses” below.
North America S&M Expenses
S&M expenses relating to our North America segment in 20192020 were $1,021$1,013 million, a decrease of 11%1% compared to $1,154$1,021 million in 2018. This decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.2019.
North America G&A Expenses
G&A expenses relating to our North America segment in 20192020 were $443 million, an increase of 1% compared to $439 million a decrease of 9% compared to $484 million in 2018. This decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.2019.
North America Other Income
Other income from our North America segment in 20192020 was $14$10 million, compared to $209$14 million in 2018. The higher other2019. Other income in 20182020 was mainly due to higher Section 8 recoveries from multiple cases in Canada and recoverycomprised of lost profits in cases in which U.S. patent infringement litigation had previously prevented the sale of certain products.
59
North America Profit
Profit from our North America segment consists of gross profit less R&D expenses, S&M expenses, G&A expenses and any other income related to this segment. Segment profit does not include amortization and certain other items.
Profit from our North America segment in 20192020 was $2,421 million, an increase of 7% compared to $2,252 million a decrease of 21% compared to $2,837 million in 2018.2019. This decreaseincrease was mainly due to higher gross profit margin and lower revenues from COPAXONE andnon-recurrenceof other income, partially offset by cost reductions and efficiency measuresR&D expenses, as part of the restructuring plan.discussed above.
Europe Segment
The following table presents revenues, expenses and profit for our Europe segment for the past threetwo years:
Year ended December 31, | ||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||
(U.S. $ in millions / % of Segment Revenues) | ||||||||||||||||||||||||
Revenues | $ | 4,795 | 100 | % | $ | 5,186 | 100 | % | $ | 5,466 | 100 | % | ||||||||||||
Gross profit | 2,704 | 56.4 | % | 2,884 | 55.6 | % | 2,887 | 52.8 | % | |||||||||||||||
R&D expenses | 262 | 5.5 | % | 283 | 5.5 | % | 390 | 7.1 | % | |||||||||||||||
S&M expenses | 890 | 18.6 | % | 1,003 | 19.3 | % | 1,130 | 20.7 | % | |||||||||||||||
G&A expenses | 239 | 5.0 | % | 325 | 6.3 | % | 354 | 6.5 | % | |||||||||||||||
Other (income) expense | (5 | ) | § | — | § | (16 | ) | § | ||||||||||||||||
Segment profit* | $ | 1,318 | 27.5 | % | $ | 1,273 | 24.5 | % | $ | 1,029 | 18.8 | % | ||||||||||||
Year ended December 31, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
(U.S. $ in millions / % of Segment Revenues) | ||||||||||||||||
Revenues | $ | 4,757 | 100 | % | $ | 4,795 | 100 | % | ||||||||
Gross profit | 2,666 | 56.0 | % | 2,704 | 56.4 | % | ||||||||||
R&D expenses | 247 | 5.2 | % | 262 | 5.5 | % | ||||||||||
S&M expenses | 830 | 17.4 | % | 890 | 18.6 | % | ||||||||||
G&A expenses | 261 | 5.5 | % | 239 | 5.0 | % | ||||||||||
Other (income) expense | (3 | ) | § | (5 | ) | § | ||||||||||
Segment profit* | $ | 1,331 | 28.0 | % | $ | 1,318 | 27.5 | % | ||||||||
| * | Segment profit does not include amortization and certain other items. |
| § | Represents an amount less than 0.5%. |
Europe Revenues
Our Europe segment includes the European Union and certain other European countries. Revenues from our Europe segment in 20192020 were $4,795$4,757 million, a decrease of $391$38 million, or 8%1%, compared to 2018.2019. In local currency terms, revenues decreased by 2%, mainly due to a decline in COPAXONE revenues due to competing glatiramer acetate products, lower sales of respiratory products in the United Kingdom and lower revenues fromprice declines for our oncology products due to competing biopharmaceutical products, partially offset by newas a result of generic product launches.
COVID-19
pandemic, partially offset by new generic product COVID-19
pandemic caused significant fluctuations in customer stocking throughout 2020, which mostly offset each other byRevenues by Major Products and Activities
The following table presents revenues for our Europe segment by major products and activities for the past threetwo years:
Year ended December 31, | Percentage Change 2018-2019 | |||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||
(U.S. $ in millions) | ||||||||||||||||
Generic products | $ | 3,470 | $ | 3,593 | $ | 3,471 | (3 | %) | ||||||||
COPAXONE | 432 | 535 | 595 | (19 | %) | |||||||||||
Respiratory products | 354 | 402 | 368 | (12 | %) | |||||||||||
Other | 539 | 656 | 1,033 | (18 | %) | |||||||||||
Total | $ | 4,795 | $ | 5,186 | $ | 5,466 | (8 | %) | ||||||||
Year ended December 31, | Percentage Change 2019-2020 | |||||||||||
2020 | 2019 | |||||||||||
(U.S. $ in millions) | ||||||||||||
Generic products | $ | 3,513 | $ | 3,470 | 1 | % | ||||||
AJOVY | 31 | 3 | 852 | % | ||||||||
COPAXONE | 400 | 432 | (7 | %) | ||||||||
Respiratory products | 353 | 354 | § | |||||||||
Other | 459 | 536 | (14 | %) | ||||||||
Total | $ | 4,757 | $ | 4,795 | (1 | %) | ||||||
| § | Represents an amount less than 0.5%. |
60
Generic products
COVID-19
pandemic, partially offset by new generic product launches. TheCOVID-19
pandemic caused significant fluctuations in customer stocking throughout 2020, which mostly offset each other byyear-end.
For more information on AJOVY, see “Item 1—Business—Our Product Portfolio and the impact of the valsartan voluntary recall.Business Offering—Specialty Medicines—AJOVY.”
COPAXONE
For more information on COPAXONE, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines—COPAXONE.”
Respiratory products
1%. Respiratory products revenues from our Europe segment in 2018 were $402 million, compared to $368 million in 2017. This increase was mainly due to thelaunch of BRALTUS
Product Launches and Pipeline
As of December 31, 2019,2020, our generic products pipeline in Europe included 660500 generic approvals relating to 8471 compounds in 178149 formulations, andno EMA approvals received. In addition, approximately 1,0831,105 marketing authorization applications pending approval in 37 European countries, relating to 123133 compounds in 243270 formulations. No applications are pending with the EMA.
For a description of our specialty product pipeline, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines” above.
Europe Gross Profit
Gross profit from our Europe segment in 20192020 was $2,704$2,666 million, a decrease of 6%1% compared to $2,884$2,704 million in 2018.2019. This decrease was mainly due to lower revenues from COPAXONE and other specialty products, as well as higher cost of goods sold, partially offset by new generic product launches.the launch of AJOVY.
Gross profit margin for our Europe segment in 2019 increased2020 decreased to 56.4%56.0%, compared to 55.6%56.4% in 2018.2019. This increasedecrease was mainly due to the termination of the PGT joint venturechange in 2018.
Europe R&D Expenses
R&D expenses relating to our Europe segment in 20192020 were $262$247 million, a decrease of 7%6% compared to $283$262 million in 2018.2019.
For a description of our R&D expenses in 2019,2020, see “—Teva Consolidated Results—Research and Development (R&D) Expenses” below.
Europe S&M Expenses
S&M expenses relating to our Europe segment in 20192020 were $890$830 million, a decrease of 11%7% compared to $1,003$890 million in 2018.2019. This decrease was mainly due to cost reductionslower marketing and efficiency measures as part oftravel costs attributed to restrictions related to the restructuring plan.
COVID-19
pandemic.61
Europe G&A Expenses
G&A expenses relating to our Europe segment in 20192020 were $261 million, an increase of 9% compared to $239 million a decrease of 26% compared to $325 million in 2018. This decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.2019.
Europe Profit
Profit of our Europe segment consists of gross profit less R&D expenses, S&M expenses, G&A expenses and any other income related to this segment. Segment profit does not include amortization and certain other items.
Profit from our Europe segment in 20192020 was $1,318$1,331 million, an increase of 4%1% compared to $1,273$1,318 million in 2018. This2019. The increase was mainly due to cost reductions and efficiency measureslower S&M expenses, as part of the restructuring plan.described above.
International Markets Segment
The following table presents revenues, expenses and profit for our International Markets segment for the past threetwo years:
2019 | 2018 | 2017 | ||||||||||||||||||||||
(U.S. $ in millions / % of Segment Revenues) | ||||||||||||||||||||||||
Revenues | $ | 2,246 | 100 | % | $ | 2,422 | 100 | % | $ | 2,863 | 100 | % | ||||||||||||
Gross profit | 1,167 | 51.9 | % | 1,254 | 51.8 | % | 1,433 | 50.1 | % | |||||||||||||||
R&D expenses | 88 | 3.9 | % | 96 | 4.0 | % | 154 | 5.4 | % | |||||||||||||||
S&M expenses | 481 | 21.4 | % | 518 | 21.4 | % | 672 | 23.5 | % | |||||||||||||||
G&A expenses | 138 | 6.1 | % | 153 | 6.3 | % | 189 | 6.6 | % | |||||||||||||||
Other (income) expense | (3 | ) | § | (11 | ) | § | (8 | ) | § | |||||||||||||||
Segment profit* | $ | 464 | 20.6 | % | $ | 498 | 20.6 | % | $ | 426 | 14.9 | % | ||||||||||||
2020 | 2019 | |||||||||||||||
(U.S. $ in millions / % of Segment Revenues) | ||||||||||||||||
Revenues | $ | 2,154 | 100 | % | $ | 2,246 | 100 | % | ||||||||
Gross profit | 1,096 | 50.9 | % | 1,167 | 51.9 | % | ||||||||||
R&D expenses | 70 | 3.3 | % | 88 | 3.9 | % | ||||||||||
S&M expenses | 427 | 19.8 | % | 481 | 21.4 | % | ||||||||||
G&A expenses | 136 | 6.3 | % | 138 | 6.1 | % | ||||||||||
Other (income) expense | (11 | ) | (0.5 | %) | (3 | ) | § | |||||||||
Segment profit* | $ | 474 | 22.0 | % | $ | 464 | 20.6 | % | ||||||||
| * | Segment profit does not include amortization and certain other items. |
| § | Represents an amount less than 0.5%. |
International Markets Revenues
Our International Markets segment includes all countries in which we operate other than those in our North America and Europe segments. The International Markets segment includes more than 35 countries, covering a substantial portion of the global pharmaceutical market. Our key international markets are Japan, Russia and Israel. The countries in our International Markets segment include highly regulated, pure generic markets, such as Israel, branded generics oriented markets, such as Russia and certain Latin American markets, and hybrid markets, such as Japan.
Revenues from our International Markets segment in 20192020 were $2,246$2,154 million, a decrease of $176$92 million, or 7%4%, compared to 2018.2019. In local currency terms, revenues decreased by 3%were flat compared to 2018, mainly due to2019, with higher revenues in most markets offsetting the lower sales in Japan and certain discontinued activities in Israel.
COVID-19
pandemic. In addition, theCOVID-19
pandemic has led to a decline in doctor and hospital visits by patients resulting in fewer prescriptions during 2020.62
Revenues by Major Products and Activities
The following table presents revenues for our International Markets segment by major products and activities for the past threetwo years:
Year ended December 31, | Percentage Change 2018-2019 | |||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||
(U.S. $ in millions) | ||||||||||||||||
Generic products | $ | 1,893 | $ | 2,022 | $ | 2,370 | (6 | %) | ||||||||
COPAXONE | 63 | 72 | 91 | (13 | %) | |||||||||||
Distribution | 20 | 19 | 17 | 6 | % | |||||||||||
Other | 271 | 309 | 385 | (12 | %) | |||||||||||
Total | $ | 2,246 | $ | 2,422 | $ | 2,863 | (7 | %) | ||||||||
Year ended December 31, | Percentage Change 2019-2020 | |||||||||||
2020 | 2019 | |||||||||||
(U.S. $ in millions) | ||||||||||||
Generic products | $ | 1,792 | $ | 1,893 | (5 | %) | ||||||
COPAXONE | 53 | 63 | (16 | %) | ||||||||
Other | 309 | 291 | 6 | % | ||||||||
Total | $ | 2,154 | $ | 2,246 | (4 | %) | ||||||
Generic products
off-patented
COVID-19
pandemic. In addition, theCOVID-19
pandemic has led to a decline in doctor and COPAXONE
For more information on COPAXONE, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines—COPAXONE.”
International Markets Gross Profit
Gross profit from our International Markets segment in 20192020 was $1,167$1,096 million, a decrease of 7%6% compared to $1,254$1,167 million in 2018.2019.
Gross profit margin for our International Markets segment in 2019 increased2020 decreased to 51.9%50.9%, compared to 51.8%51.9% in 2018.2019. This increasedecrease was mainly due portfolio optimization.
off-patented
products.International Markets R&D Expenses
R&D expenses relating to our International Markets segment in 20192020 were $88$70 million, a decrease of 9%20% compared to $96$88 million in 2018.2019.
For a description of our R&D expenses in 2019,2020, see “—Teva Consolidated Results—Research and Development (R&D) Expenses” below.
63
International Markets S&M Expenses
S&M expenses relating to our International Markets segment in 20192020 were $481$427 million, a decrease of 7%11% compared to $518$481 million in 2018.2019. This decrease was mainly due to cost reductionslower marketing and efficiency measures as part oftravel costs attributed to restrictions related to the restructuring plan.
COVID-19
International Markets G&A Expenses
G&A expenses relating to our International Markets segment in 20192020 were $136 million, flat compared to $138 million a decrease of 10% compared to $153 million in 2018. The decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.2019.
International Markets Profit
Profit of our International Markets segment consists of gross profit less R&D expenses, S&M expenses, G&A expenses and any other income related to this segment. Segment profit does not include amortization and certain other items.
Profit from our International Markets segment in 20192020 was $474 million, an increase of 2% compared to $464 million a decrease of 7% compared to $498 million in 2018. This decrease was mainly due to a decline in revenues in Japan, partially offset by higher sales in other markets and lower S&M and G&A expenses.
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 2019 decreased by 5% to $1,3042020 were $1,302 million, flat compared to 2018.2019. In local currency terms, revenues decreased by 3%1%.
API sales to third parties in 2019 increased by 1% to $7542020 were $774 million, an increase of 3% in both U.S. dollar and local currency terms.
Teva Consolidated Results
Revenues
Revenues in 20192020 were $16,887$16,659 million, a decrease of 8%1%, or 5% in both U.S. dollar and local currency terms, compared to 2018,2019, mainly due to generic competition to COPAXONE, a decline in revenues from our U.S. generics business, BENDEKA/TREANDAcertain oncology products, COPAXONE and Japan,certain respiratory products, partially offset by higher revenues from AUSTEDO AJOVY and QVARAJOVY. The decline in revenues was also affected by reduced demand for certain products resulting from the United States.impact of the
COVID-19
pandemic. See “—North America Revenues,” “—Europe Revenues,” “—International Markets Revenues” and “—Other Activities” above.Exchange rate movements during 20192020, including hedging effects, negatively impacted revenues by $402$33 million, compared to 2018.2019.
Gross Profit
Gross profit in 20192020 was $7,537$7,726 million, a decreasean increase of 9%3% compared to 2018.2019. This decreaseincrease was mainly a result of the factors discussed above under “—North America Gross Profit,” “—Europe Gross Profit” and “—International Markets Gross Profit.”
64
Gross profit as a percentage of revenues was 46.4% in 2020, compared to 44.6% in 2019, compared to 45.4% in 2018.2019.
This decreaseincrease in gross profit as a percentage of revenues was mainly due to lowerhigher profitability in North America, resulting from higher revenues from AUSTEDO and AJOVY, higher gross profit margin in our U.S. generics business, partially offset by a decline in COPAXONE revenues due to generic competition and a higher proportion of Anda revenues, partially offset by higher revenues from AUSTEDO and AJOVY, higher gross margin in our U.S. generics business and higher API sales.competition.
S&M expenses in 2018 was $8,2962020 were $2,498 million, a decrease of 22%4% compared to 2017. Gross profit2019. Our S&M expenses were primarily the result of the factors discussed above under “—North America Segment— S&M Expenses,” “—Europe Segment— S&M Expenses” and “—International Markets Segment— S&M Expenses.”
S&M expenses as a percentage of revenues was 45.4%were 15.0% in 2018,2020, compared to 48.6%15.5% in 2017. The decrease in gross profit as a percentage of revenues was mainly due to lower profitability in North America resulting from a decline in COPAXONE revenues due to generic competition and a decline in revenues in our U.S. generics business, higher accelerated depreciation and higher divestment expenses, partially offset by lower amortization expenses and higher profitability in Europe.2019.
Research and Development (R&D) Expenses
Our R&D activities for generic products in each of our segments include both (i) direct expenses relating to product formulation, analytical method development, stability testing, management of bioequivalence and other clinical studies and regulatory filings; and (ii) indirect expenses, such as costs of internal administration, infrastructure and personnel.
Our R&D activities for specialty and biosimilar products in each of our segments include costs of discovery research, preclinical development, early- and late-clinical development and drug formulation, clinical trials and product registration costs. These expenditures are reported net of contributions received from collaboration partners. Our spending takes place throughout the development process, including (i) early-stage projects in both discovery and preclinical phases; (ii) middle-stage projects in clinical programs up to phase 3; (iii) late-stage projects in phase 3 programs, including where a new drug application is currently pending approval; (iv) life cycle management and post-approval studies for marketed products; and (v) indirect expenses, that support our overall specialty R&D efforts but are not allocated by product or to specific R&D projects, such as the costs of internal administration, infrastructure and personnel.
Net R&D expenses for 2020 were $997 million, a decrease of 1% compared to 2019.
In 2019,2020, our R&D expenses were primarily related to specialty product candidates in the pain, migraine, headacheneuropsychiatry and respiratory therapeutic areas, with additional activities in selected other areas and generic products in our North America segment.including biosimilars.
Our lower R&D expenses in 2019, as2020, compared to 2018,2019, resulted primarily from project milestone timing and pipeline optimization and efficiencies realized as part of our restructuring plan.optimization.
R&D expenses as a percentage of revenues were 6.0% in 2019, compared to 6.6% in 2018.
General and Administrative (G&A) Expenses
G&A expenses in 20192020 were $1,192$1,173 million, a decrease of 8%2% compared to 2018. Our G&A expenses were primarily the result of the factors discussed above under “—North America Segment—G&A Expenses,” “—Europe Segment—G&A Expenses” and “—International Markets Segment—G&A Expenses,” as well as cost reductions in certain corporate functions as part of the restructuring plan.2019.
G&A expenses as a percentage of revenues were 7.1%7.0% in 2019,2020, flat compared to 2018.2019.
Identifiable Intangible Asset Impairments
We recorded expenses of $1,639$1,502 million for identifiable intangible asset impairments in 2019,2020, compared to expenses of $1,991$1,639 million in 2018.2019. See note 6 to our consolidated financial statements.
Goodwill Impairment
Other Asset Impairments, Restructuring and Other Items
We recorded expenses of $423$479 million for other asset impairments, restructuring and other items in 2019,2020, compared to expenses of $987$423 million in 2018. See2019. For further details, as well as a description of significant regulatory and other events, see note 15 to our consolidated financial statements.
Legal Settlements and Loss Contingencies
In 2019,2020, we recorded an expense of $1,178$60 million in legal settlements and loss contingencies, compared to an income of $1,208$1,178 million in 2018.2019. The expenseexpenses in 2020 were mainly related to a fine imposed by the European Commission in relation to a 2005 patent settlement agreement and an increase of a reserve for certain product liability claims in the United States, partially offset by proceeds received following a settlement of the FCPA derivative proceedings in Israel and settlement of an action brought against the sellers of Auden McKenzie (an acquisition made by Actavis Generics). The expenses in 2019 waswere mainly related to an estimated settlement provision recorded in connection with potential settlement of the remaining opioid cases. The income in 2018 primarily consisted of the working capital adjustment with Allergan, the Rimsa settlement and reversal of the reserve recorded in the second quarter of 2017 with respect to the carvedilol patent litigation.
Other Income
Other income in 20192020 was $76$40 million, compared to $291$76 million in 2018. Other income in 2019 was mainly related to the sale of activities in our International Markets segment.2019. See note 16 to our consolidated financial statements.
Operating Income (Loss)
Operating loss was $3,572 million in 2020, compared to operating loss of $443 million in 2019, compared to an operating loss of $1,637 million in 2018.2019.
Operating loss as a percentage of revenues was 21.4% in 2020, compared to 2.6% in 2019, compared to 9.0% in 2018.2019. The decreaseincrease in operating loss in 2020 was mainly due to highergoodwill impairment charges, recorded in 2018, partially offset by higherlower provisions in connection with legal settlements and loss contingencies, in 2019, as well as lowerhigher profit in our North America segment.
Financial Expenses, Net
Financial expenses were $834 million in 2020, compared to $822 million in 2019, compared2019.
Financial expenses in 2020 were mainly comprised of interest expenses of $963 million, partially offset by gains on revaluations of marketable securities of $85 million (see note 20 to $959our consolidated financial statements) as well as a gain of $26 million in 2018.
resulting from our hedging and derivatives activities. Financial expenses in 2019 were mainly comprised of interest expenses of $881 million. Financial expenses in 2018 were mainly comprised of interest expenses of $920 million.
66
The following table presents a reconciliation of our segment profits to Teva’s consolidated operating income (loss) and to consolidated income (loss) before income taxes for the past threetwo years:
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(U.S. $ in millions) | ||||||||||||
North America profit | $ | 2,252 | $ | 2,837 | $ | 4,624 | ||||||
Europe profit | 1,318 | 1,273 | 1,029 | |||||||||
International Markets profit | 464 | 498 | 426 | |||||||||
Total reportable segments profit | 4,034 | 4,608 | 6,079 | |||||||||
Profit (loss) of other activities | 108 | 115 | (6 | ) | ||||||||
Total segments profit | 4,142 | 4,723 | 6,073 | |||||||||
Amounts not allocated to segments: | ||||||||||||
Amortization | 1,113 | 1,166 | 1,444 | |||||||||
Other asset impairments, restructuring and other items | 423 | 987 | 1,836 | |||||||||
Goodwill impairment | — | 3,027 | 17,100 | |||||||||
Intangible asset impairments | 1,639 | 1,991 | 3,238 | |||||||||
Gain on divestitures, net of divestitures related costs | (50 | ) | (66 | ) | (1,083 | ) | ||||||
Inventory Step-up | — | — | 67 | |||||||||
Other R&D expenses | (15 | ) | 83 | 221 | ||||||||
Costs related to regulatory actions taken in facilities | 45 | 14 | 47 | |||||||||
Legal settlements and loss contingencies | 1,178 | (1,208 | ) | 500 | ||||||||
Other unallocated amounts | 252 | 366 | 187 | |||||||||
Consolidated operating income (loss) | (443 | ) | (1,637 | ) | (17,484 | ) | ||||||
Financial expenses, net | 822 | 959 | 895 | |||||||||
Consolidated income (loss) before income taxes | $ | (1,265 | ) | $ | (2,596 | ) | $ | (18,379 | ) | |||
Year ended December 31, | ||||||||
2020 | 2019 | |||||||
(U.S.$ in millions) | ||||||||
North America profit | $ | 2,421 | $ | 2,252 | ||||
Europe profit | 1,331 | 1,318 | ||||||
International Markets profit | 474 | 464 | ||||||
Total reportable segments profit | 4,225 | 4,034 | ||||||
Profit (loss) of other activities | 163 | 108 | ||||||
Total segments profit | 4,388 | 4,142 | ||||||
Amounts not allocated to segments: | ||||||||
Amortization | 1,020 | 1,113 | ||||||
Other asset impairments, restructuring and other items | 479 | 423 | ||||||
Goodwill impairment | 4,628 | — | ||||||
Intangible asset impairments | 1,502 | 1,639 | ||||||
Gain on divestitures, net of divestitures related costs | (8 | ) | (50 | ) | ||||
Other R&D expenses (income) | 37 | (15 | ) | |||||
Costs related to regulatory actions taken in facilities | 23 | 45 | ||||||
Legal settlements and loss contingencies | 60 | 1,178 | ||||||
Other unallocated amounts | 219 | 252 | ||||||
Consolidated operating income (loss) | (3,572 | ) | (443 | ) | ||||
Financial expenses, net | 834 | 822 | ||||||
Consolidated income (loss) before income taxes | $ | (4,406 | ) | $ | (1,265 | ) | ||
Tax Rate
In 2020, we recognized a tax benefit of $168 million, or 4%, on a
pre-tax
loss of $4,406 million.In 2019, we recognized a tax benefit of $278 million, or 22%, on a
pre-tax
loss of $1,265 million.The statutory Israeli corporate tax rate was 23% in 2019.2020. Our tax rate differs from the Israeli statutory tax rate mainly due to generation of profits in various jurisdictions in which tax rates are different than the Israeli tax rate, tax benefits in Israel and other countries, as well as infrequent or nonrecurring items.items with no corresponding tax effect, or with a tax rate that is different from the Israeli tax rate.
Share In (Profits) Losses of Associated Companies—Companies, Net
Share in profits of associated companies, net was $138 million in 2020, compared to share in losses of $13 million in 2019. Our share in profits of associated companies, net in 20192020 was $13 million, compared to $71 million in 2018.
Net Income (Loss) Attributable to Teva
Net loss attributable to Teva was $999$3,990 million in 2019,2020, compared to a net loss of $2,150 million in 2018.
67
Diluted Shares Outstanding and Earnings (Loss) Per Share
The weighted average diluted shares outstanding used for the fully diluted share calculation for 2020 and 2019 2018 and 2017 were 1,091 million, 1,021was 1,095 million and 1,0161,091 million shares, respectively.
In computing diluted loss per share for the twelve months ended December 31, 20192020 and 2018,2019, no account was taken of the potential dilution bythat could occur upon the assumed exercise of employee stock options and
non-vested
RSUs granted under employee stock compensation plans and convertible senior debentures, since they had an anti-dilutive effect on loss per share.Diluted loss per share was $3.64 for the year ended December 31, 2020, compared to diluted loss per share of $0.91 for the year ended December 31, 2019, compared to loss per share of $2.35 for the year ended December 31, 2018.2019.
Share Count for Market Capitalization
We calculate share amounts using the outstanding number of shares (i.e., excluding treasury shares) plus shares that would be outstanding upon the exercise of options and vesting of RSUs and performance share units (“PSUs”) and the conversion of our convertible senior debentures, in each case, at period end.
As of December 31, 20192020 and 2018,2019, the fully diluted share count for purposes of calculating our market capitalization was approximately 1,1081,117 million and 1,1001,108 million, respectively.
Impact of Currency Fluctuations on Results of Operations
In 2019,2020, approximately 48% of our revenues were denominated in currencies other than the U.S. dollar. BecauseSince our results are reported in U.S. dollars, we are subject to significant foreign currency risks. Accordingly, changes in the rate of exchange between the U.S. dollar and local currencies in the markets in which we operate (primarily the euro, Israeli shekel, Japanese yen, British pound, Japanese yen, Israeli shekel,Russian ruble, Canadian dollar, Swiss franc, Indian rupee and Polish zloty, Argentinean peso, Turkish lira and Russian ruble)zloty) impact our results.
During 2019,2020, the following main currencies relevant to our operations decreased in value against the U.S. dollar (each on an annual average compared to annual average basis): the Argentinian peso by 44%33%, the Brazilian real by 23%, the Turkish lira by 17%18%, the euroChilean peso by 5%11% and the British poundRussian ruble by 4%10%. The following main currencies relevant to our operations increased in value against the U.S. dollar: the Japanese yenSwiss franc by 1% and6%, the Israeli shekel by 1%4%, the Swedish krona by 3%, the Japanese yen by 2% and the euro by 2%.
As a result, exchange rate movements during 2019, in comparison with 2018,2020, including hedging effects, negatively impacted overall revenues by $402$33 million and negatively impacted our operating income by $135 million.$56 million in comparison with 2019. In 2020, the positive hedging impact recognized under revenues was $15 million, partially offset by a positive impact of $1 million recognized under cost of sales, in comparison with 2019. Hedging transactions against future projected revenues and expenses are recognized on the balance sheet at their fair value on a quarterly basis, while the foreign exchange impact on the underlying revenues and expenses may occur in subsequent quarters. See note 10 to our consolidated financial statements.
Commencing in the third quarter of 2018, the cumulative inflation in Argentina exceeded 100% or more over a
3-year
period. Although this triggered highly inflationary accounting treatment, it did not have a material impact on our results of operations.Liquidity and Capital Resources
Total balance sheet assets were $50,640 million as of December 31, 2020, compared to $57,470 million as of December 31, 2019, compared to $60,683 million as2019.
68
Our working capital balance, which includes tradeaccounts receivables net of SR&A, inventories, prepaid expenses and other current assets, tradeaccounts payables, employee-related obligations, accrued expenses and other current liabilities, was $662 million as of December 31, 2020, compared to $74 million as of December 31, 2019, compared to negative $186 million as of December 31, 2018.2019.
Cash and cash equivalents and short-term and long-term investments, as of December 31, 2019,2020, were $2,033$2,478 million, compared to $1,846$2,033 million as of December 31, 2018.2019. This increase was mainly due to cash flow generated during the year, and proceeds from issuance of senior notes in November 2019, partially offset by debt repayments and prepayments as discussed below.
Our cash on hand that is not used for ongoing operations is generally invested in bank deposits, as well as liquid securities that bear fixed and floating rates.
Our principal sources of short-term liquidity are our cash on hand, existing cash investments, liquid securities and available credit facilities, primarily our $2.3 billion unsecured syndicated revolving credit facility entered into in April 2019 (“RCF”).
one-year
extension options, of which $1.065 billion were extended to April 8, 2023. Tranche B has a The RCF contains certain covenants, including certain limitations on incurring liens and indebtedness and maintenance of certain financial ratios, including the requirement to maintain compliance with a net debt to EBITDA ratio, which becomes more restrictive over time. The net debt to EBITDA ratio limit was 6.25x through December 31, 2019, graduallyis 5.75x in the fourth quarter of 2020 and declines to 5.75x5.50x in the first and second quarters of 2021, 5.00x in the third and fourth quarters of 2020,2021, and continues to gradually decline over the remaining term of the RCF.
The RCF can be used for general corporate purposes, including repaying existing debt. As of December 31, 2019, 2020 and as of the date of this Annual Report on Form
10-K,
no amounts were outstanding under the RCF. Based on current and forecasted results, we expect that we will not exceed the financial covenant thresholds set forth in the RCF within one year from the date the financial statements are issued.Under specified circumstances, includingabove mentionedabove-mentioned circumstances, would result in an event of default in all borrowings under the RCF and, when greater than a specified threshold amount as set forth in each series of senior notes is outstanding, could lead to an event of default under our senior notes due to cross acceleration provisions.
non-compliance
with any of the covenants described above and the unavailability of any waiver, amendment or other modification thereto, we will not be able to borrow under the RCF. Additionally, violations of the covenants, under the We expect that we will continue to have sufficient cash resources to support our debt service payments and all other financial obligations within one year from the date that the financial statements are issued.
As of December 31, 2019,2020, our debt was $26,908$25,919 million, compared to $28,916$26,908 million as of December 31, 2018.2019.or prepaid with cash generated during the year.year, partially offset by exchange rate fluctuations.
This decrease was mainly due to senior notes repaid at maturity
In March 2020, we repaid at maturity our $700 million 2.25% senior notes.
In July 2020, we repaid at maturity our €1,010 million 0.375% senior notes.
69
During 2020 we borrowed up to €270 million from our RCF, which was fully repaid before year end.
Our debt as of December 31, 2020 was effectively denominated in the following currencies: 65% in U.S. dollars, 32% in euros and 3% in Swiss francs.
The portion of total debt classified as short-term as of December 31, 2020 was 12%, compared to 9% as of December 31, 2019, due to a reclassification of upcoming maturities in 2021.
Our financial leverage was 70% as of December 31, 2020, compared to 64% as of December 31, 2019.
Our average debt maturity was approximately 5.8 years as of December 31, 2020, compared to 6.4 years as of December 31, 2019.
On February 1, 2021, $491 million of our 0.25% convertible senior debentures, due 2026 were redeemed by holders. See note 9 of our consolidated financial statements.
2019 Debt Balance and Movements
During the first quarter of 2019, we repurchased and canceled approximately $126 million principal amount of our $1,700 million 1.7% senior notes due July 2019.
During the second quarter of 2019, we repurchased and canceled approximately $18 million principal amount of our $1,574 million 1.7% senior notes due July 2019.
In July 2019, we repaid at maturity our $1,556 million 1.7% senior notes.
In November 2019, we completed debt issuances for an aggregate principal amount of $2,102 million, comprised of $1,000 million principal amount of 7.125% senior notes due 2025, and€1,000 €1,000 million principal amount of 6.0% senior notes due 2025. See note 9 to our consolidated financial statements.
In November 2019, we completed a debt tender offer, which resulted in a debt decrease of $1,525 million from our 2.2% $3,000 million senior notes due in July 2021.
In December 2019, we partially redeemed€650 €650 million of our 0.375%€1,660 €1,660 million senior notes due in July 2020.
year-end.
Total Equity
Total equity was $11,061 million as of December 31, 2020, compared to $15,063 million as of December 31, 2019, compared to $15,794 million as of December 31, 2018.2019. This decrease was mainly due to a net loss of $1,000$4,099 million (primarily due to the goodwill impairment charge), partially offset by $119$129 million stock-based compensation expenses $84and $57 million in unrealized profit associated with hedging activities and a positive impact of foreign exchange fluctuation of $97 million.activities.
Exchange rate fluctuations affected our balance sheet, as approximately 35%56% of our net assets (including both2018,2019, changes in currency rates had a positivenegative impact of $97$69 million on our equity as of December 31, 2019,2020, mainly due to the change in value against the U.S. dollar of: the Russian ruble by 20%, the euro by 2%9%, the Russian rubleChilean peso by 6%, the Mexican peso by 5%, the Japanese yen by 5%, the British pound by 4%, the Polish zloty by 5%,2% and the Canadian dollar by 1%, the Japanese yen by 1%, the Chilean peso by 4%, the Mexican peso by 4% and the British pound by 6%2%. All comparisons are on a
non-monetary
and monetary assets) were in currencies other than the U.S. dollar. When compared to December 31, year-end
toyear-end
basis.70
Cash Flow
We seek to continually improve the efficiency of our working capital management. From time to time, as part of our cash management activities, we may make decisions in our commercial and supply chain activities which may drive an acceleration of receivable payments from customers or deceleration of payments to vendors, having the effect of increasing or decreasing cash from operations in an individual period. Such decisions had no material impact on our 2020 operating cash flow measurement, but may impactresults.
quarter-to-quarter
Cash flow generated from operating activities in 20192020 was $1,216 million, compared to $748 million a decrease of $1,698 million, or 69%, compared to 2018. This decreasein 2019. The increase was mainly due to the working capital adjustment with Allergan and the Rimsa settlement in 2018, and lowerhigher profit in our North America segment during 2019.
2020.During 2020, we generated free cash flow of $2,110 million, which we define as comprising $1,216 million in cash flow generated from operating activities, $1,405 million in beneficial interest collected in exchange for securitized accounts receivables and $67 million in proceeds from sale of property, plant and equipment and intangible assets, partially offset by $578 million in cash used for capital investments. During 2019, we generated free cash flow of $2,053 million, which we define as comprisingcomprised of $748 million in cash flow generated from operating activities, $1,487 million in beneficial interest collected in exchange for securitized tradeaccounts receivables and $343 million in proceeds from sale of property, plant and equipment and intangible assets, partially offset by $525 million in cash used for capital investments. During 2018, we generated free cash flow of $3,679 million, comprised of $2,446 millionThe increase in 2020 resulted mainly from higher cash flow generated from operating activities, $1,735 million in beneficial interest collected in exchange for securitized trade receivables and $149 million in proceeds from sale of property, plant and equipment and intangible assets, partially offset by $651 million inless cash used for capital investments. The decrease in 2019 resulted mainly from the lower cash flow generated from operating activities.sales of assets and higher capital investments.
Dividends
We have not paid dividends on our ordinary shares or ADSs since December 2017.
Commitments
In addition to financing obligations under short-term debt and long-term senior notes and loans, debentures and convertible debentures, our major contractual obligations and commercial commitments include leases, royalty payments, contingent payments pursuant to acquisition agreements and participation in joint ventures associated with R&D activities.
In August 2020, we entered into a partnership agreement with biopharmaceutical company Alvotech for the exclusive commercialization in the U.S. of five biosimilar product candidates. The initial pipeline for this partnership contains biosimilar candidates addressing multiple therapeutic areas. Under this agreement, Alvotech is responsible for the development, registration and supply of the biosimilar product candidates and Teva will exclusively commercialize the products in the United States. We paid an upfront payment in the third quarter of 2020 that was recorded as R&D expenses. During the fourth quarter of 2020, we accrued additional amounts due to the high probability that additional milestone payments will be paid in 2021. Additional development and commercial milestone payments of up to $450 million, as well as royalty payments, may be payable by Teva over the next few years. Teva and Alvotech will share profit from the commercialization of these biosimilars.
In September 2016, we entered into an agreement to develop and commercialize Regeneron’s pain medication product, fasinumab. We paid Regeneron $250 million upfront and will share equally with Regeneron in the global commercial benefitsrights of this product (excluding Japan, Korea and nine other Asian countries), as well as ongoing associated R&D costs of approximately $1.0 billion. MilestoneAdditional payments for achievement of $25 million, $35 million and $60development milestones in an aggregate amount of $120 million were paid in the second quarterduring 2017 and 2018. The agreement stipulates additional development and commercial milestone payments of 2017, the first quarter of 2018up to $2,230 million, as well as future royalties. For information regarding fasinumab phase 3 clinical trial results, see “Item 1—Business—Our Product Portfolio and the fourth quarter of 2018, respectively.Business Offering—Specialty Medicines” above.
In October 2016, we entered into an exclusive partnership with Celltrion to commercialize TRUXIMA
®
and HERZUMA®
, two of Celltrion’s biosimilar products in development for the U.S. and Canadian markets. We paid71
Celltrion $160 million, of which up towe received an aggregate credit of $60 million is refundable or creditable under certain circumstances.as of December 31, 2020. We will share the profit from the commercialization of these products with Celltrion. These two products, TRUXIMA and HERZUMA, were approved by the FDA in November and December 2018, respectively. Werespectively and were launched TRUXIMA in the United States in November 2019. HERZUMA is expected to be available in the United States in the first quarter of 2020.
We are committed to pay royalties to owners of
know-how,
partners in alliances and certain other arrangements, and to parties that financed R&D at a wide range of rates as a percentage of sales of certain products, as defined in the agreements. In some cases, the royalty period is not defined; in other cases, royalties will be paid over various periods not exceeding 20 years.In connection with certain development, supply and marketing, and research and collaboration or services agreements, we are required to indemnify, in unspecified amounts, the parties to such agreements against third-party claims relating to (i) infringement or violation of intellectual property or other rights of such third party; or (ii) damages to users of the related products. Except as described in our financial statements, we are not aware of any material pending action that may result in the counterparties to these agreements claiming such indemnification.
Supplemental
Non-GAAP
Income DataWe utilize certain
non-GAAP
financial measures to evaluate performance, in conjunction with other performance metrics. The following are examples of how we utilize thenon-GAAP
measures:our management and Board of Directors use the
non-GAAP
measures to evaluate our operational performance, to compare against work plans and budgets, and ultimately to evaluate the performance of management;our annual budgets are prepared on a
non-GAAP
basis; andsenior management’s annual compensation is derived, in part, using these
non-GAAP
measures. While qualitative factors and judgment also affect annual bonuses, the principal quantitative element in the determination of such bonuses is performance targets tied to the work plan, which is based on thenon-GAAP
presentation set forth below.Non-GAAP
financial measures have no standardized meaning and accordingly have limitations in their usefulness to investors. We provide suchnon-GAAP
data because management believes that such data provide useful information to investors. However, investors are cautioned that, unlike financial measures prepared in accordance with U.S. GAAP,non-GAAP
measures may not be comparable with the calculation of similar measures for other companies. Thesenon-GAAP
financial measures are presented solely to permit investors to more fully understand how management assesses our performance. The limitations of usingnon-GAAP
financial measures as performance measures are that they provide a view of our results of operations without including all events during a period and may not provide a comparable view of our performance to other companies in the pharmaceutical industry.Investors should consider
non-GAAP
financial measures in addition to, and not as replacements for, or superior to, measures of financial performance prepared in accordance with GAAP.In arriving at our
non-GAAP
presentation, we exclude items that either have anon-recurring
impact on the income statement or which, in the judgment of our management, are items that, either as a result of their nature or size, could, were they not singled out, potentially cause investors to extrapolate future performance from an improper base. In addition, we also exclude equity compensation expenses to facilitate a better understanding of our financial results, since we believe that such exclusion is important for understanding the trends in our financial results and that these expenses do not affect our business operations. While not all inclusive, examples of these items include:amortization of purchased intangible assets;
legal settlements and/or loss contingencies, due to the difficulty in predicting their timing and scope;
72
impairments of long-lived assets, including intangibles, property, plant and equipment and goodwill;
restructuring expenses, including severance, retention costs, contract cancellation costs and certain accelerated depreciation expenses primarily related to the rationalization of our plants or to certain other strategic activities, such as the realignment of R&D focus or other similar activities;
acquisition- or divestment- related items, including changes in contingent consideration, integration costs, banker and other professional fees, inventory
step-up
andin-process
R&D acquired in development arrangements;expenses related to our equity compensation;
significantdevaluationvaluation gains or losses;
one-time
financing costs and unusual tax items;
other exceptional items that we believe are sufficiently large that their exclusion is important to facilitate an understanding of trends in our financial results, such as impacts due to changes in accounting, significant costs for remediation of plants, such as inventory write-offs or related consulting costs, or other unusual events; and
corresponding tax effects of the foregoing items.
73
The following tables present supplemental
non-GAAP
data, in U.S. dollar, which we believe facilitates an understanding of the factors affecting our business. In these tables, we exclude the following amounts:Year Ended December 31, 2019 (U.S. $ and shares in millions, except per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
GAAP | Excluded for non GAAP measurement | Non GAAP | ||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of purchased intangible assets | Legal settlements and loss contingencies | Impairment of long- lived assets | Other R&D expenses | Restructuring costs | Costs related to regulatory actions taken in facilities | Equity compensation | Contingent consideration | Gain on sale of business | Other non GAAP items | Other items | ||||||||||||||||||||||||||||||||||||||||||
COGS | 9,351 | 973 | 45 | 26 | 121 | 8,185 | ||||||||||||||||||||||||||||||||||||||||||||||
R&D | 1,010 | (15 | ) | 20 | 1 | 1,004 | ||||||||||||||||||||||||||||||||||||||||||||||
S&M | 2,614 | 139 | 35 | 1 | 2,438 | |||||||||||||||||||||||||||||||||||||||||||||||
G&A | 1,192 | 42 | 5 | 1,145 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other income | (76 | ) | (50 | ) | (27 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Legal settlements and loss contingencies | 1,178 | 1,178 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Other asset impairments, restructuring and other items | 423 | 139 | 199 | 59 | 26 | — | ||||||||||||||||||||||||||||||||||||||||||||||
Intangible assets impairment | 1,639 | 1,639 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Financial expenses | 822 | �� | (3 | ) | 824 | |||||||||||||||||||||||||||||||||||||||||||||||
Corresponding tax effect | (278 | ) | (875 | ) | 597 | |||||||||||||||||||||||||||||||||||||||||||||||
Share in losses of associated companies – net | 13 | — | 13 | |||||||||||||||||||||||||||||||||||||||||||||||||
Net income attributable to non-controlling interests | (2 | ) | (82 | ) | 80 | |||||||||||||||||||||||||||||||||||||||||||||||
Total reconciled items | 1,113 | 1,178 | 1,778 | (15 | ) | 199 | 45 | 123 | 59 | (50 | ) | 155 | (959 | ) | ||||||||||||||||||||||||||||||||||||||
EPS—Basic | (0.91 | ) | 3.32 | 2.41 | ||||||||||||||||||||||||||||||||||||||||||||||||
EPS—Diluted | (0.91 | ) | 3.32 | 2.40 | ||||||||||||||||||||||||||||||||||||||||||||||||
Year Ended December 31, 2020 (U.S. $ and shares in millions, except per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP | Excluded for non-GAAP measurement | Non- GAAP | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of purchased intangible assets | Legal settlements and loss contingencies | Goodwill impairment | Impairment of long- lived assets | Other R&D expenses | Restructuring costs | Costs related to regulatory actions taken in facilities | Equity compensation | Contingent consideration | Gain on sale of business | Other non- GAAP items | Other items | |||||||||||||||||||||||||||||||||||||||||||||
COGS | 8,933 | 894 | 23 | 27 | 63 | 7,925 | ||||||||||||||||||||||||||||||||||||||||||||||||||
R&D | 997 | 37 | 20 | — | 941 | |||||||||||||||||||||||||||||||||||||||||||||||||||
S&M | 2,498 | 126 | 36 | 14 | 2,322 | |||||||||||||||||||||||||||||||||||||||||||||||||||
G&A | 1,173 | 46 | 12 | 1,115 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income | (40 | ) | (8 | ) | (31 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Legal settlements and loss contingencies | 60 | 60 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Other asset impairments, restructuring and other items | 479 | 416 | 120 | (81 | ) | 24 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Intangible assets impairment | 1,502 | 1,502 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill impairment | 4,628 | 4,628 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial expenses | 834 | (85 | ) | 918 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Income taxes | (168 | ) | (745 | ) | 577 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Share in profits (losses) of associated companies, net | (138 | ) | (134 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) attributable to non-controlling interests | (109 | ) | (177 | ) | 68 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Total reconciled items | 1,020 | 60 | 4,628 | 1,918 | 37 | 120 | 23 | 129 | (81 | ) | (8 | ) | 114 | (1,140 | ) | |||||||||||||||||||||||||||||||||||||||||
EPS—Basic | (3.64 | ) | 6.23 | 2.58 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
EPS—Diluted | (3.64 | ) | 6.22 | 2.57 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
The
non-GAAP
diluted weighted average number of shares was 1,099 million for the year ended December 31, 2020.74
Year ended December 31, 2019 (U.S. $ and shares in millions, except per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| GAAP | Excluded for non-GAAP measurement | Non- GAAP | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of purchased intangible assets | Legal settlements and loss contingencies | Impairment of long- lived assets | Other R&D expenses | Restructuring costs | Costs related to regulatory actions taken in facilities | Equity compensation | Contingent consideration | Gain on sale of business | Other non- GAAP items | Other items | ||||||||||||||||||||||||||||||||||||||||||
COGS | 9,351 | 973 | 45 | 26 | 121 | 8,185 | ||||||||||||||||||||||||||||||||||||||||||||||
R&D | 1,010 | (15 | ) | 20 | 1 | 1,004 | ||||||||||||||||||||||||||||||||||||||||||||||
S&M | 2,614 | 139 | 35 | 1 | 2,438 | |||||||||||||||||||||||||||||||||||||||||||||||
G&A | 1,192 | 42 | 5 | 1,145 | ||||||||||||||||||||||||||||||||||||||||||||||||
Other income | (76 | ) | (50 | ) | (27 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Legal settlements and loss contingencies | 1,178 | 1,178 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Other asset impairments, restructuring and other items | 423 | 139 | 199 | 59 | 26 | — | ||||||||||||||||||||||||||||||||||||||||||||||
Intangible assets impairment | 1,639 | 1,639 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
Financial expenses | 822 | (3 | ) | 824 | ||||||||||||||||||||||||||||||||||||||||||||||||
Income taxes | (278 | ) | (875 | ) | 597 | |||||||||||||||||||||||||||||||||||||||||||||||
Share in profits (losses) of associated companies, net | 13 | — | 13 | |||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) attributable to non-controlling interests | (2 | ) | (82 | ) | 80 | |||||||||||||||||||||||||||||||||||||||||||||||
Total reconciled items | 1,113 | 1,178 | 1,778 | (15 | ) | 199 | 45 | 123 | 59 | (50 | ) | 155 | (959 | ) | ||||||||||||||||||||||||||||||||||||||
EPS—Basic | (0.91 | ) | 3.32 | 2.41 | ||||||||||||||||||||||||||||||||||||||||||||||||
EPS—Diluted | (0.91 | ) | 3.32 | 2.40 | ||||||||||||||||||||||||||||||||||||||||||||||||
The
non-GAAP
diluted weighted average number of shares was 1,094 million for the year ended December 31, 2019.Year ended December 31, 2018 (U.S. $ and shares in millions, except per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
GAAP | Excluded for non GAAP measurement | Non GAAP | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of purchased intangible assets | Goodwill impairment | Legal settlements and loss contingencies | Impairment of long- lived assets | Other R&D expenses | Acquisition integration and related expenses | Restructuring costs | Costs related to regulatory actions taken in facilities | Equity compensation | Contingent consideration | Gain on sale of business | Other non GAAP items | Other items | ||||||||||||||||||||||||||||||||||||||||||||||||
COGS* | 9,975 | 1,004 | 14 | 28 | 204 | 8,725 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
R&D | 1,213 | 83 | 26 | 2 | 1,102 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
S&M | 2,916 | 162 | 43 | (7 | ) | 2,718 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
G&A | 1,298 | 55 | 15 | 1,228 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income | (291 | ) | (66 | ) | (225 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Legal settlements and loss contingencies | (1,208 | ) | (1,208 | ) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other asset impairments, restructuring and other items | 987 | 500 | 13 | 488 | 57 | (71 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Intangible assets impairment | 1,991 | 1,991 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill impairment | 3,027 | 3,027 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial expenses | 959 | 66 | 893 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corresponding tax effect | (195 | ) | (714 | ) | 519 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share in losses of associated companies – net | 71 | 103 | (32 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income attributable to non-controlling interests | (322 | ) | (431 | ) | 109 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total reconciled items | 1,166 | 3,027 | (1,208 | ) | 2,491 | 83 | 13 | 488 | 14 | 152 | 57 | (66 | ) | 143 | (976 | ) | ||||||||||||||||||||||||||||||||||||||||||||
EPS—Basic | (2.35 | ) | 5.27 | 2.92 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
EPS—Diluted | (2.35 | ) | 5.27 | 2.92 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year ended December 31, 2017 U.S. $ and shares in millions (except per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
GAAP | Excluded for non GAAP measurement | Non GAAP | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of purchased intangible assets | Goodwill impairment | Legal settlements and loss contingencies | Impairment of long- lived assets | Other R&D expenses | Inventory step-up | Acquisition, integration and related expenses | Restructuring costs | Costs related to regulatory actions taken in facilities | Equity compensation | Contingent consideration | Other non GAAP items | Other items | ||||||||||||||||||||||||||||||||||||||||||||||||
COGS* | 11,237 | 1,235 | 67 | 47 | 23 | 47 | 9,818 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
R&D | 1,778 | 221 | 22 | 20 | 1,515 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
S&M | 3,395 | 209 | 38 | (1 | ) | 3,149 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
G&A | 1,451 | 46 | (8 | ) | 1,413 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income | (1,199 | ) | (1,083 | ) | (116 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Legal settlements and loss contingencies | 500 | 500 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other asset impairments, restructuring and other items | 1,836 | 544 | 105 | 535 | 154 | 498 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Intangible assets impairment | 3,238 | 3,238 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill impairment | 17,100 | 17,100 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial expenses | 895 | (13 | ) | 908 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corresponding tax effect | (1,933 | ) | (2,721 | ) | 788 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share in losses of associated companies – net | 3 | 47 | (44 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income attributable to non-controlling interests | (184 | ) | (270 | ) | 86 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total reconciled items | 1,444 | 17,100 | 500 | 3,782 | 221 | 67 | 105 | 535 | 47 | 129 | 154 | (527 | ) | (2,957 | ) | |||||||||||||||||||||||||||||||||||||||||||||
EPS—Basic | (16.26 | ) | 20.27 | 4.01 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
EPS—Diluted | (16.26 | ) | 20.27 | 4.01 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-GAAP
Non-GAAP
income taxes for 2020 were $577 million onnon-GAAP
pre-tax
income of $3,470 million.Non-GAAP
income taxes in 2019 were $597 million onnon-GAAP
pre-tax
income of $3,317 million.non-GAAP
tax rate for Trend Information
The following factors are expected to have a significant effect on our 20202021 results:
variable demand for certain products in certain markets and changes in physician and hospital activity due to the impact of the
COVID-19
pandemic. For further details, see “—TheCOVID-19
Pandemic—Trends” above;continued success of our specialty products AJOVY, AUSTEDO and our biosimiliar products;AJOVY;
success of clinical trials and approval of our specialty product fasinumab, which is under development by Regeneron;
ability to successfully execute key generic launches in a timely manner;
ability to successfully develop and launch new biosimiliar products;
a decrease in sales of COPAXONE following the launches of generic versions to the product, and the possibility of additional generic competition in the future;
a decrease in sales of other specialty products due to potential loss of exclusivity or generic competition;
we expect continued competition for our generic products where multiple similar generic products have been launched, resulting in pricing pressure in the generics markets. We do, however, also see certain generic segments in which opportunities exist to grow our business, our portfolio of new drug applications and our portfolio of approved complex products; and
our disciplined cash management and debt repayment schedule;
our high debt levels and
non-investment
grade credit rating may increase the cost of any new borrowing;continued impact of currency fluctuations on revenues and netoperating income, as well as on various balance sheet and statements of income line items.items;
ongoing evaluation of opportunities to further optimize our manufacturing and supply network to achieve additional operational efficiencies, which may affect our business and operations; and
continued efforts towards achieving our long-term financial goals.
For additional information, please see “Item 1—Business” and elsewhere in this Item 7.
Aggregated Contractual Obligations
The following table summarizes our material contractual obligations and commitments as of December 31, 2019:2020:
Payments Due by Period | ||||||||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
(U.S. $ in millions) | ||||||||||||||||||||
Long-term debt obligations, including expected interest* | $ | 34,043 | $ | 2,737 | $ | 6,310 | $ | 8,723 | $ | 16,274 | ||||||||||
Purchase obligations (including purchase orders) | 1,876 | 1,624 | 248 | 4 | — | |||||||||||||||
Total | $ | 35,919 | $ | 4,361 | $ | 6,558 | $ | 8,727 | $ | 16,274 | ||||||||||
Payments Due by Period | ||||||||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
(U.S. $ in millions) | ||||||||||||||||||||
Long-term debt obligations, including estimated interest* | $ | 32,187 | $ | 3,563 | $ | 8,254 | $ | 7,902 | $ | 12,468 | ||||||||||
Purchase obligations (including purchase orders) | 1,766 | 1,465 | 246 | 38 | 17 | |||||||||||||||
Total | $ | 33,953 | $ | 5,028 | $ | 8,500 | $ | 7,940 | $ | 12,485 | ||||||||||
| * | Long-term debt obligations mainly include senior notes and convertible senior debentures as disclosed in note 9 to our consolidated financial statements. |
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The total gross amount of unrecognized tax benefits for uncertain tax positions was $1,223$888 million at December 31, 2019.2020. Payment of these obligations would result from settlements with tax authorities. Due to the difficulty in determining the timing and magnitude of settlements, these obligations are not included in the table above. Correspondingly, it is difficult to ascertain whether we will pay any significant amount related to these obligations within the next year.
We have committed to make potential future milestone payments to third parties under various agreements. These payments are contingent upon the occurrence of certain future events and, given the nature of these events, it is unclear when, if ever, we may be required to pay such amounts. As of December 31, 2019,2020, if all milestones and targets, for compounds in phase 2 and more advanced stages of development, are achieved, the total contingent payments could reach an aggregate amount of up to $426$509 million.
We have committed to pay royalties to owners of
know-how,
partners in alliances and other certain arrangements and to parties that financed research and development, at a wide range of rates as a percentage of sales or of the gross margin of certain products, as defined in the underlying agreements.Due to the uncertainty of the timing of these payments, these amounts, and the amounts described in the previous paragraph, are not included in the table above.
Off-Balance
Sheet ArrangementsExcept for securitization transactions, which are disclosed in note 10 f to our consolidated financial statements, we do not have any material
off-balance
sheet arrangements.Critical Accounting Policies
For a description of our significant accounting policies, see note 1 to our consolidated financial statements.
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in certain circumstances that affect the amounts reported in the accompanying consolidated financial statements and related footnotes. Actual results may differ from these estimates. We base our judgments on our experience and on various assumptions that we believe to be reasonable under the circumstances.
Of our policies, the following are considered critical to an understanding of our consolidated financial statements as they require the application of the most subjective and complex judgment, involving critical accounting estimates and assumptions impacting our consolidated financial statements. We have applied our policies and critical accounting estimates consistently across our businesses.
The significant accounting estimates relate to the following:
Revenue Recognition and SR&A in the United States
Income Taxes
Contingencies
Goodwill
Identifiable Intangible Assets
Restructuring Costs
Revenue Recognition and SR&A in the United States
Our gross product revenues are subject to a variety of deductions which are generally estimated and recorded in the same period that the revenues are recognized, and primarily represent chargebacks, rebates and
77
sales allowances to wholesalers, retailers and government agencies with respect to our pharmaceutical products. Those deductions represent estimates of rebates and discounts related to gross sales for the reporting period and, as such, knowledge and judgment of market conditions and practice are required when estimating the impact of these revenue deductions on gross sales for a reporting period.
Historically, our changes of estimates reflecting actual results or updated expectations, have not been material to our overall business. Product-specific rebates, however, may have a significant impact on year-over-year individual product growth trends. If any of our ratios, factors, assessments, experiences or judgments are not indicative or accurate predictors of our future experience, our results could be materially affected. The sensitivity of our estimates can vary by program, type of customer and geographic location. However, estimates associated with governmental allowances, U.S. Medicaid and other performance-based contract rebates are most at risk for material adjustment because of the extensive time delay between the recording of the accrual and its ultimate settlement, an interval that can generally range up to one year. Because of this time lag, in any given quarter, our adjustments to actual can incorporate revisions of several prior quarters. See also “Revenue recognition” in note 1 to the consolidated financial statements.
Income Taxes
The provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws in the jurisdictions in which we operate. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws.
Accounting for uncertainty in income taxes requires that it be more likely than not that the tax benefits recognized in the financial statements be sustained based on technical merits. The amount of benefits recorded for these positions is measured as the largest benefit more likely than not to be sustained. Significant judgment is required in making these determinations.
Deferred taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and tax bases of assets and liabilities under the applicable tax laws. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In the determination of the appropriate valuation allowances, we have considered the most recent projections of future business results and prudent tax planning alternatives that may allow us to realize the deferred tax assets. Taxes which would apply in the event of disposal of investments in subsidiaries have not been taken into account in computing deferred taxes, as it is our intention to hold these investments rather than realize them.
Deferred taxes have not been provided for
tax-exempt
income, as the Company intends to permanently reinvest these profits and does not currently foresee a need to distribute dividends out of these earnings. Furthermore, we do not expect ournon-Israeli
subsidiaries to distribute taxable dividends in the foreseeable future, as their earnings and excess cash are used to pay down the group’s external liabilities, while we expect to have sufficient resources in the Israeli companies to fund our cash needs in Israel. In addition, the Company announced a suspension of dividend distribution on ordinary shares and ADSs in 2017. An assessment of the tax that would have been payable had the Company’s foreign subsidiaries distributed their income to the Company is not practicable because of the multiple levels of corporate ownership and multiple tax jurisdictions involved in each hypothetical dividend distribution.For a discussion of the valuation allowance, deferred tax and valuation allowance estimates see notes 1 and 13 to our consolidated financial statements.
U.S. Tax Cuts and Jobs Act
We accounted for the tax effects of the Tax Cuts and Jobs Act, enacted on December 22, 2017, on a provisional basis in our 2017 consolidated financial statements. We completed our accounting analysis in the
78
fourth quarter of 2018, within the one year measurement period from the enactment date. See note 13 to our consolidated financial statements for additional information.
Contingencies
From time to time, Teva and/or its subsidiaries are subject to claims for damages and/or equitable relief arising in the ordinary course of business. In addition, in large part as a result of the nature of its business, Teva is frequently subject to litigation, governmental investigations and other legal proceedings. Except for income tax contingencies or contingent consideration acquired in a business combination, Teva records a provision in its financial statements to the extent that it concludes that a contingent liability is probable and the amount thereof is estimable. When accruing these costs, Teva will recognize an accrual in the amount within a range of loss that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, Teva accrues for the minimum amount within the range. Teva records anticipated recoveries under existing insurance contracts at the gross amount that is expected to be collected when they are considered virtually certain to occur.
Teva reviews the adequacy of the accruals on a periodic basis and may determine to alter its provisions at any time in the future if it believes it would be appropriate to do so. As such accruals are based on management’s judgment as to the probability of losses and, where applicable, actuarially determined estimates, accruals may materially differ from actual verdicts, settlements or other agreements made with regards to such contingencies. Litigation outcomes and contingencies are unpredictable and excessive verdicts can occur. Accordingly, management’s assessments involve complex judgments concerning future events and often rely heavily on estimates and assumptions.
Goodwill
Goodwill reflects the excess of the consideration transferred, including the fair value of any contingent consideration and any
non-controlling
interest in the acquiree, over the assigned fair values of the identifiable net assets acquired. Goodwill is not amortized, and is assigned to reporting units and tested for impairment at least annually, in the second quarter of the fiscal year.We perform an impairment test annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The provisions of the accounting standard for goodwill allow us to first assess qualitative factors to determine whether it is necessary to perform the next goodwill impairment quantitative test.
Examples of events or circumstances that may be indicative of impairment include, but are not limited to: macroeconomic and industry conditions, overall financial performance and adverse changes in legal, regulatory, market share and other relevant entity specific events.
The Company estimates the fair values of all reporting units using a discounted cash flow model which utilizes Level 3 unobservable inputs. Key estimates include the revenue growth rates and operating margins taking into consideration industry and market conditions, terminal growth rate and the discount rate. The discount rate used is based on the WACC, adjusted for the relevant risk associated with country-specific and business-specific characteristics.
The carrying value of each reporting unit is determined by assigning the assets and liabilities, including the existing goodwill, to those reporting units.
When necessary, we record charges for impairments of goodwill for the amount by which the carrying amount exceeds the fair value of these assets.
See note 7 and note 19 to our consolidated financial statements for further details on the goodwill impairments recognized in 2020 and 2018, and Teva’s operating and reporting segments.
79
Identifiable Intangible Assets
Identifiable intangible assets are comprised of definite life intangible assets and indefinite life intangible assets.
Definite life intangible assets consist mainly of acquired product rights and other rights relating to products for which marketing approval was received from the FDA or the equivalent agencies in other countries. These assets are amortized using mainly the straight-line method over their estimated period of useful life, or based on economic benefit models, if more appropriate, which is determined by identifying the period and manner in which substantially all of the cash flows are expected to be generated. Amortization of acquired developed products is recorded under cost of sales. Amortization of marketing and distribution rights is recorded under selling and marketing expenses when separable
Impairment of identifiable intangible assets amounted to $1,502 million and $1,639 million in the years ended December 31, 2020 and 2019, respectively. See note 6 to our consolidated financial statements.
The fair value of acquired identifiable intangible assets is determined using an income approach. This method starts with a forecast of all expected future net cash flows associated with the asset and then adjusts the forecast to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams.
Whenever impairment indicators are identified for definite life intangible assets, Teva reconsiders the asset’s estimated life, calculates the undiscounted value of the asset’s or asset group’s cash flows and then calculates, if required, the discounted value of cash flow by applying an appropriate discount rate to the undiscounted cash flow streams. Teva then compares such value against the asset’s or asset group’s carrying amount. If the carrying amount is greater, Teva records an impairment loss for the excess of carrying value over fair value based on the discounted cash flows.
Examples of events or circumstances that may be indicative of impairment include:
A projection or forecast that indicates losses or reduced profits associated with an asset. This could result, for example, from a change in the competitive landscape modifying our assumptions about market share or pricing prospectively, a government reimbursement program that results in an inability to sustain projected product revenues and profitability, or lack of acceptance of a product by patients, physicians or payers limiting our projected growth.
A significant adverse change in legal factors or in the business climate that could affect the value of the asset. For example, a successful challenge of our patent rights by a competitor would likely result in generic competition earlier than expected. And conversely, a lost challenge of patent rights in connection with our generic file would likely result in delayed entry.
A significant adverse change in the extent or manner in which an asset is used. For example, restrictions imposed by the FDA or other regulatory authorities could affect our ability to manufacture or sell a product.
For IPR&D projects, this could result from, among other things, a change in outlook affecting assumptions around competition or timing of entry such as approval success or the related timing of approval, clinical trial data results, other delays in the projected launch dates or additional expenditures required to commercialize the product.
The more significant estimates and assumptions inherent in the estimate of the fair value of identifiable intangible assets include (i) assumptions associated with forecasting product profitability, including sales and cost to sell projections, (ii) tax rates which seek to incorporate the geographic diversity of the projected cash flows, (iii) expected impact of competitive, legal and/or regulatory forces on the projections and the impact of
80
technological risk, R&D expenditure for ongoing support of product rights or continued development of IPR&D, and (iv) estimated useful lives and IPR&D expected launch dates. Additionally, for IPR&D assets the risk of failure has been factored into the fair value measure.
While all intangible assets other than goodwill can face events and circumstances that can lead to impairment, in general, intangible assets other than goodwill that are most at risk of impairment include IPR&D assets and newly acquired or recently impaired indefinite-lived brand assets. IPR&D assets are high-risk assets, as R&D is an inherently risky activity. Consequently, IPR&D assets could be determined to be no longer commercially viable. Newly acquired and recently impaired indefinite-lived assets are more vulnerable to impairment as the assets are recorded at fair value and are then subsequently measured at the lower of fair value or carrying value annually or when triggering events are present. As such, immediately after acquisition or impairment, even small declines in the outlook for these assets can negatively impact our ability to recover the carrying value and can result in an impairment charge.
Restructuring Costs
Restructuring costs have been recorded in connection with Teva’s restructuring plan between the years 2017 and 2019.2019 and ongoing expenses associated with other network consolidation impacts. Following these actions and in anticipation of ongoing efficiency measures in our business, Teva’s management has made estimates and judgments regarding future plans, mainly related to employee termination benefit costs, potential closures or divestments of manufacturing plants, headquarters and other office locations. In connection with these actions, management also assesses the recoverability of long-lived assets employed in
the business. In certain instances, asset lives have been shortened based on changes in the expected useful lives of the affected assets. Asset-related impairments and severance and other related costs are reflected within asset impairments, restructuring and others.
Recently Issued Accounting Pronouncements
See note 1 to our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
The objective of our financial risk management measures is to minimize the impact of risks arising from foreign exchange and interest rate fluctuations. To reduce these risks, we take various operational measures in order to achieve a natural hedge and may enter, from time to time, into financial derivative instruments. Our derivative transactions are executed through global banks. We believe that due to our diversified derivatives portfolio, the credit risk associated with any of these banks is minimal. No derivative instruments are entered into for trading purposes.
Exchange Rate Risk Management
We operate our business worldwide and, as such, we are subject to foreign exchange risks on our results of operations, our monetary assets and liabilities and our foreign subsidiaries’ net assets. For further information on currencies in which we operate, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—ImpactOperations —Impact of Currency Fluctuations on Results of Operations.”
We generally prefer to borrow in U.S. dollars; however, from time to time we borrow funds in other currencies, such as the euro, Swiss franc, Japanese yen and new Israeli shekel, in order to benefit from same currency revenues in relation to same currency costs and same currency assets in relation to same currency liabilities.
Cash Flow Exposure
Total revenues were $16,887$16,659 million in 2019.2020. Of these revenues, approximately 48% of our revenues were denominated in currencies other than the U.S. dollar, 20%21% in euros, 5% in Japanese yen and the rest in other currencies, none of which accounted for more than 4% of total revenues in 2019.2020. In most currencies, we record corresponding expenses.
In certain currencies, primarily the euro, our revenues generally exceed our expenses. Conversely, in other currencies, primarily the new Israeli shekel and the Indian rupee, our expenses generally exceed our revenues.
As of December 31, 2019,2020, we hedged part of our expected operating profitresults for 20202021 in currencies other than the U.S. dollar.dollar, primarily the euro, British pound, Swiss franc, Polish zloty, Japanese yen, Russian ruble and other European and Latin American currencies.
In certain cases, we may hedge exposure arising from a specific transaction, executed in a currency other than the functional currency, by entering into forward contracts and/or by using plain-vanilla and exotic option strategies. We generally limit the term of hedging transactions to a maximum of fifteen months.
Balance Sheet Exposure
With respect to our monetary assets and liabilities, the exposure arises when the monetary assets and/or liabilities are denominated in currencies other than the functional currency of our subsidiaries. We strive to limit our exposure through natural hedging. Most of the remaining exposure is hedged by entering into financial derivative instruments. To the extent possible, the hedging activity is carried out on a consolidated level.
The table below presents exposures exceeding $50 million in absolute values:
Net exposure as of December 31, | ||||
Liability/Asset | (U.S. $ in millions) | |||
USD/CHF | 438 | |||
| 395 | ||||
USD/JPY | ||||
BGN/EUR | 302 | |||
| 118 | ||||
CAD/EUR | 99 | |||
PLN/EUR | ||||
96 | ||||
USD/MXN | ||||
INR/USD | ||||
Outstanding Foreign Exchange Hedging Transactions
As of December 31, 2019,2020, we had long and short forwards and currency option contracts with a corresponding notional amount of approximately $2.7$2.4 billion and $1.1$0.5 billion, respectively. As of December 31, 2018,2019, we had long and short forwards and currency option contracts with corresponding notional amounts of approximately $3.4$2.7 billion and $210 million,$1.1 billion, respectively.
The table below presents the net notional and fair values of the financial derivatives entered into as of December 31, 20192020 in order to reduce currency exposure arising from our cash flow and balance sheet exposures. The table below presents only currency paired with hedged net notional values exceeding $50 million.
Currency (sold) | Cross Currency (bought) | Net Notional Value | Fair Value | 2019 Weighted Average Cross Currency Prices or Strike Prices | ||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||
(U.S. $ in millions) | ||||||||||||||||||||||||
Forward: | ||||||||||||||||||||||||
EUR | USD | 503 | 147 | (6 | ) | 2 | 1.12 | |||||||||||||||||
EUR | GBP | 445 | 416 | 12 | (3 | ) | 0.88 | |||||||||||||||||
CHF | USD | 384 | 274 | (5 | ) | (1 | ) | 0.98 | ||||||||||||||||
JPY | USD | 302 | 283 | 2 | (5 | ) | 107.71 | |||||||||||||||||
EUR | PLN | 216 | 115 | 4 | 1 | 4.33 | ||||||||||||||||||
USD | RUB | 205 | * | (5 | ) | * | 64.78 | |||||||||||||||||
USD | INR | 192 | 70 | — | 2 | 72.69 | ||||||||||||||||||
NIS | USD | 131 | 66 | (1 | ) | — | 3.48 | |||||||||||||||||
PLN | USD | 105 | * | (2 | ) | * | 3.85 | |||||||||||||||||
CAD | USD | 101 | * | — | * | 1.31 | ||||||||||||||||||
EUR | CAD | 96 | 140 | — | (4 | ) | 1.47 | |||||||||||||||||
RUB | EUR | 92 | * | (2 | ) | — | 71.51 | |||||||||||||||||
MXN | USD | 68 | * | (2 | ) | — | 19.49 | |||||||||||||||||
USD | GBP | * | 60 | * | — | * | ||||||||||||||||||
CHF | EUR | * | 53 | * | (1 | ) | * | |||||||||||||||||
Options: | ||||||||||||||||||||||||
EUR | USD | 381 | * | (2 | ) | * | 1.10 | |||||||||||||||||
JPY | USD | 139 | 77 | — | — | 109.72 | ||||||||||||||||||
EUR | GBP | 131 | * | — | * | 0.84 | ||||||||||||||||||
CHF | USD | 85 | 99 | (1 | ) | — | 0.99 | |||||||||||||||||
GBP | USD | 63 | * | (1 | ) | * | 1.26 | |||||||||||||||||
Currency (sold) | Cross Currency (bought) | Net Notional Value | Fair Value | 2020 Weighted Average Cross Currency Prices or Strike Prices | ||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||
(U.S. $ in millions) | ||||||||||||||||||||||||
Forward: | ||||||||||||||||||||||||
CHF | USD | 464 | 384 | (12 | ) | (5 | ) | 0.90 | ||||||||||||||||
EUR | USD | 400 | 503 | (16 | ) | (6 | ) | 1.18 | ||||||||||||||||
JPY | USD | 326 | 302 | (5 | ) | 2 | 104.57 | |||||||||||||||||
USD | INR | 145 | 192 | 2 | — | 75.21 | ||||||||||||||||||
GBP | USD | 133 | * | (3 | ) | — | 1.33 | |||||||||||||||||
EUR | PLN | 103 | 216 | — | 4 | 4.57 | ||||||||||||||||||
EUR | CAD | 101 | 96 | (1 | ) | — | 1.55 | |||||||||||||||||
MXN | USD | 91 | 68 | (2 | ) | (2 | ) | 20.52 | ||||||||||||||||
CAD | USD | 70 | 101 | (2 | ) | — | 1.31 | |||||||||||||||||
PLN | USD | 54 | 105 | — | (2 | ) | 3.74 | |||||||||||||||||
EUR | GBP | * | 445 | — | 12 | — | ||||||||||||||||||
USD | RUB | * | 205 | — | (5 | ) | — | |||||||||||||||||
NIS | USD | * | 131 | — | (1 | ) | — | |||||||||||||||||
RUB | EUR | * | 92 | — | (2 | ) | — | |||||||||||||||||
Options: | ||||||||||||||||||||||||
EUR | USD | 167 | 381 | (3 | ) | (2 | ) | 1.16 | ||||||||||||||||
JPY | USD | 89 | 139 | — | — | 106.23 | ||||||||||||||||||
CHF | USD | 84 | 85 | (2 | ) | (1 | ) | 0.93 | ||||||||||||||||
GBP | USD | 53 | 63 | (1 | ) | (1 | ) | 1.28 | ||||||||||||||||
EUR | GBP | * | 131 | — | — | — | ||||||||||||||||||
| * | Represents Net Notional Value of less than $50 million. |
83
Foreign Subsidiaries Net Assets
Under certain market conditions, we may hedge against possible fluctuations in foreign subsidiaries’ net assets (“net investment hedge”). In these cases, we may use cross currency swaps and forward contracts. During 2017, we entered into a cross currency swap agreement, to hedge $1 billion of our subsidiaries’ euro denominated net assets. AsIn the first quarter of December 31, 2019, the fair value of this2020, these cross currency swap liability was $22 million.agreements expired.
Interest Rate Risk Management
We are subject to interest rate risk on our investments and on our borrowings. We manage interest rate risk in the aggregate, while focusing on our immediate and intermediate liquidity needs.
We raise capital through various debt instruments including senior notes that bear a fixed or variable interest rate, syndicated bank loans that bear a fixed or floating interest rate securitizations and convertible debentures that bear a fixed and floating interest rate. In some cases, as described below, we have swapped from a fixed to a floating interest rate (“fair value hedge”), from a floating to a fixed interest rate and from a fixed to a fixed interest rate with an exchange from a currency other than the functional currency (“cash flow hedge”), reducing overall interest expenses or hedging risks associated with interest rate fluctuations.
In certain cases, we may hedge, in whole or in part, against exposure arising from a specific transaction, such as debt issuances related to an acquisition or debt refinancing, by entering into forward and interest rate swap contracts and/or by using options.
The table below presents the aggregate outstanding notional amounts of the hedged itemsdebt by currencies and maturities as of December 31, 2019 and 2018:2020:
December 31, | ||||||||
2019 | 2018 | |||||||
(U.S. $ in millions) | ||||||||
Cross currency swap—cash flow hedge | $ | — | $ | 588 | ||||
Interest rate swap—fair value hedge | $ | — | $ | 500 | ||||
Currency | Total Amount | Interest Rate Ranges | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 & thereafter | ||||||||||||||||||||||||||||
(U.S. dollars in millions) | ||||||||||||||||||||||||||||||||||||
Fixed Rate: | ||||||||||||||||||||||||||||||||||||
USD | 16,404 | 1.70 | % | 7.13 | % | 700 | 2,092 | 856 | 2,995 | 1,250 | 8,512 | |||||||||||||||||||||||||
Euro | 9,368 | 0.38 | % | 6.00 | % | 1,131 | 587 | 784 | 1,451 | 1,673 | 3,743 | |||||||||||||||||||||||||
CHF | 723 | 0.50 | % | 1.00 | % | — | — | 361 | — | — | 362 | |||||||||||||||||||||||||
USD convertible debentures* | 514 | 0.25 | % | 0.25 | % | 514 | — | — | — | — | — | |||||||||||||||||||||||||
Floating Rate: | ||||||||||||||||||||||||||||||||||||
Others | 1 | 1.00 | % | 2.00 | % | — | — | — | — | 1 | ||||||||||||||||||||||||||
Total: | 27,010 | $ | 2,345 | $ | 2,679 | $ | 2,001 | $ | 4,446 | $ | 2,923 | $ | 12,618 | |||||||||||||||||||||||
Less debt issuance costs | (103 | ) | ||||||||||||||||||||||||||||||||||
Total: | $ | 26,908 | ||||||||||||||||||||||||||||||||||
Currency | Total Amount | Interest Rate Ranges | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 & thereafter | ||||||||||||||||||||||||||||
(U.S. dollars in millions) | ||||||||||||||||||||||||||||||||||||
Fixed Rate: | ||||||||||||||||||||||||||||||||||||
USD | 16,286 | 2.20 | % | 7.13 | % | 2,674 | 853 | 2,996 | 1,250 | 1,000 | 7,513 | |||||||||||||||||||||||||
Euro | 8,408 | 0.38 | % | 6.00 | % | — | 861 | 1,595 | 1,839 | 2,337 | 1,776 | |||||||||||||||||||||||||
CHF | 795 | 0.50 | % | 1.00 | % | — | 397 | — | — | 398 | — | |||||||||||||||||||||||||
USD convertible debentures* | 514 | 0.25 | % | 0.25 | % | — | — | — | — | — | 514 | |||||||||||||||||||||||||
Floating Rate: | ||||||||||||||||||||||||||||||||||||
Others | 1 | 1.00 | % | 2.00 | % | — | — | — | — | — | 1 | |||||||||||||||||||||||||
Total: | 26,004 | $ | 2,674 | $ | 2,111 | $ | 4,591 | $ | 3,089 | $ | 3,735 | $ | 9,804 | |||||||||||||||||||||||
Less debt issuance costs | (86 | ) | ||||||||||||||||||||||||||||||||||
Total: | $ | 25,918 | ||||||||||||||||||||||||||||||||||
| * | Classified under short-term debt. |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 20192020
Page | |||||||
Consolidated Financial Statements: | |||||||
85
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Teva Pharmaceutical Industries LimitedTEVA PHARMACEUTICAL INDUSTRIES LIMITED
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Teva Pharmaceutical Industries Limited and its subsidiaries20192020 and 2018,2019,2019,2020, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 20192020 appearing under Item 15(a) (collectively referred to as the “consolidated financial statements”).
(the “Company”) as of December 31,
and the related consolidated statements of income (loss), of comprehensive income (loss), of changes in equity and of cash flows for each of the three years in the period ended December 31,
We also have audited the Company’s internal control over financial reporting as of December 31,
Internal Control—Control - Integrated Framework
In our opinion, the consolidated20192020 and 20182019and the results of its operations and its cash flows for each of the three years in the period ended December 31, 201920202019,2020, based on criteria established in(2013) issued by the COSO.
financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31,
,
in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
Internal Control—Control - Integrated Framework
Change in Accounting Principle
As discussed in Note 1(c)1(cc) to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the Report of Teva Management on Internal Control over Financial Reporting appearing underappearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated
financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated
financial statements included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the
consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill impairment assessment—International Markets andImpairment Assessment – North America reporting unitsunit
As described in Notes 1 and 7 to the consolidated financial statements, the Company’s consolidated goodwill balance and goodwill balance for the International Markets and North America reporting unitsunit was $24,846 million, $2,532$20,624 million and $11,091$6,473 million, respectively, as of December 31, 2019.2020. As disclosed by management, goodwill is assigned to reporting units and tested for impairment at least annually, in the fourthsecond quarter of the fiscal year, and whenever events or changes in circumstances indicate that the carrying amountvalue of goodwill may not be recoverable. During the second quarter of 2020, management noted that market concerns regarding the uncertainty related to the opioid and price fixing litigation risks were impacting its market capitalization. Teva conducted a quantitative analysis of the North America reporting unit as part of its annual goodwill impairment test and utilized the assistance of an independent valuation expert. No goodwill impairment charge was recorded during the second quarter of 2020. During the third quarter of 2020, management noted factors that led to an assessment of the North America reporting unit for impairment, including a 25% reduction in the Company’s market capitalization from the second quarter of 2020 to the third quarter of 2020 and recent developments that indicate the timeframe for resolution of the opioids litigation will take significantly longer than previously expected which introduces greater uncertainty to a favorable resolution, resulting in an impairment charge of $4,628 million. Management determines the fair value of its reporting units using the income approach. Within the income approach, the method that was used is the discounted cash flow method. ManagementFor each of the second and third quarter impairment assessments, management started with a forecast of all the expected net cash flows associated with the reporting units,unit, which includes the application of a terminal value, and then applied a discount rate to arrive at a net present value amount. Cash flow projections are based on management’sAs disclosed by management, key estimates ofinclude the revenue growth rates and operating
87
margins taking into consideration industry and market conditions.conditions, terminal growth rate and the discount rate. Market conditions include estimates related to the timeframe and resolution of the opioids and price fixing litigation.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessmentassessments for the International Markets and North America reporting unitsunit is a critical audit matter are there was(i) the significant judgment by management when determining the fair value measurement of the reporting units. This in turn led tounit; (ii) a high degree of auditor judgment, effortsubjectivity and subjectivityeffort in performing procedures and evaluating management’s fair value estimate, which included significant assumptions related to revenue growth rates, discount rate, estimates related to the timeframe and resolution of the opioids and price fixing litigation and terminal growth rate. In addition,rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the International Markets and North America reporting units.unit. These procedures also included, among others, (i) testing management’s process for determining the fair value estimate; (ii) evaluating the appropriateness of the discounted cash flow model; (iii) testing the completeness, accuracy and relevance of underlying data used in the model; and (iv) evaluating the reasonableness of significant assumptions used by management includingrelated to the revenue growth rates, discount rate, estimates related to the timeframe and resolution of the opioids and price fixing litigation and terminal growth rate. Evaluating management’s assumptions related to revenue growth rates and terminal growth rate involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting units,unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Evaluating management’s assumption related to estimates related to the timeframe and resolution of the opioids and price fixing litigation involved obtaining and evaluating letters of audit inquiry with internal and external legal counsel and discussing the status of significant known actual and potential litigation with the Company’s internal and external legal counsel. Professionals with specialized skill and knowledge were used to assist in the evaluation of management’s discounted cash flow model and certain significant assumptions, including the discount rate.
rate assumption.Sales Reserves and Allowances (“SR&A”)— - Rebates, Chargebacks and Medicaid in the United States
As described in Notes 1 and 3 to the consolidated financial statements, revenues from product sales are recorded netthe amount of provisions for estimatedconsideration to which the Company expects to be entitled varies as a result of rebates, chargebacks, rebates and other deductions which can be reasonably estimated.SR&A that the Company offers to its customers and their customers. A minimum amount of variable consideration is recorded by the Company concurrently with the satisfaction of performance obligations to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. As of December 31, 2019,2020, consolidated SR&A for rebates, chargebacks and Medicaid were $5,346$3,990 million. These provisions are recognized concurrently with the sales of products. Provisions for chargebacks involve estimates of usage by retailers and other indirect buyers with varying contract prices for multiple wholesalers. The provision for chargebacks varies in relation to changes in product mix, pricing and the level of inventory at the wholesalers. Provisions are calculated using historical chargeback experience and/or expected chargeback levels for new products and anticipated pricing changes. Provisions for rebates are recognizedestimated based on contractual obligationsthe specific terms in place at the time of sales with consideration given to relevant factors that may affect the payment as well aseach agreement based on historical experience for estimated market activity.trends and expected sales. Provisions for Medicaid are based on historical trends of rebates paid, as well as on changes in wholesaler inventory levels and increases or decreases in sales.
The principal considerations for our determination that performing procedures relating to SR&A for rebates, chargebacks and Medicaid in the United States is a critical audit matter are there was(i) the significant judgment by management to estimate the reserves due to the significant measurement uncertainty involved in developing the reserves. Thisreserves, as the reserves are based on assumptions developed using contractual and mandated terms with customers, historical experience, and projected market conditions in turn led tothe US; and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant assumptions, including wholesaler inventory levels and expected chargeback levels.
88
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to SR&A for rebates, chargebacks and Medicaid in the United States, including controls over the assumptions used by management to estimate the reserves. These procedures also included, among others, (i) developing independent estimates of the reserves using third party information, the contractual or mandated terms of the specific rebate or chargeback programs, and the historical trends of payments and comparing the independent estimates to management’s estimates; (ii) evaluating the reasonableness of significant assumptions used by management, including wholesaler inventory levels and expected chargeback levels; and (iii) testing the completeness, accuracy, and relevance of underlying data used to estimate the reserves, including testing actual claims processed by the Company.
Opioid and Price Fixing and Market Allocation Litigation in the United States
As described in Notes 1, 11 and 12 to the consolidated financial statements, management evaluates litigation contingencies and records a provision in its financial statements to the extent that it concludes that a contingent liability is probable and the amount thereof is estimable. Such contingencies include those related to opioid and price fixing and market allocation litigation in the United States. For the year endedAs of December 31, 2019,
The principal considerations for our determination that performing procedures relating to opioid and price fixing and market allocation litigation in the United States is a critical audit matter are there wasthe significant judgment by management when assessing the likelihood of a loss being incurred and management’s determination ofwhen determining whether a reasonable estimate of the loss or range of loss for each claim can be made. Thismade, which in turn led to high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s assessment of the loss contingencies associated with these legal matters. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s evaluation of the loss contingencies relating to opioid and price fixing and market allocation litigation in the United States, including controls over determining whether a loss is probable and whether the amount of loss can be reasonably estimated, as well as financial statement disclosures. These procedures also included, among others, obtaining and evaluating the letters of audit inquiry with internal and external legal counsel; discussing the status of significant known actual and potential litigation with the Company’s in-houseinternal legal counsel; evaluating the reasonableness of management’s assessment regarding whether a loss is probable and whether the amount of loss can be reasonably estimated; testing the completeness, accuracy, and relevance of underlying data used to estimate loss amounts; and evaluating the sufficiency of the Company’s litigation contingency disclosures. Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of the factual investigation performed by management and their advisors with respect to price fixing and market allocation allegations.
/s/ Kesselman & Kesselman |
Kesselman & Kesselman
Certified Public Accountants (Isr.)
A member of PricewaterhouseCoopers International Limited
Tel Aviv, Israel
February 10, 2021
We have served as the Company’s auditor since at least 1976. We have not been able to determine the specific year we began serving as the auditor of the company.
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in millions)
December 31, | December 31, | |||||||
2019 | 2018 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,975 | $ | 1,782 | ||||
Accounts receivables | 5,676 | 5,822 | ||||||
Inventories | 4,422 | 4,731 | ||||||
Prepaid expenses | 870 | 899 | ||||||
Other current assets | 434 | 468 | ||||||
Assets held for sale | 87 | 92 | ||||||
Total current assets | 13,464 | 13,794 | ||||||
Deferred income taxes | 386 | 368 | ||||||
Other non-current assets | 591 | 731 | ||||||
Property, plant and equipment, net | 6,436 | 6,868 | ||||||
Operating lease right-of-use assets | 514 | — | ||||||
Identifiable intangible assets, net | 11,232 | 14,005 | ||||||
Goodwill | 24,846 | 24,917 | ||||||
Total assets | $ | 57,470 | $ | 60,683 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Short-term debt | $ | 2,345 | $ | 2,216 | ||||
Sales reserves and allowances | 6,159 | 6,711 | ||||||
Accounts payables | 1,718 | 1,853 | ||||||
Employee-related obligations | 693 | 870 | ||||||
Accrued expenses | 1,869 | 1,868 | ||||||
Other current liabilities | 889 | 804 | ||||||
Total current liabilities | 13,674 | 14,322 | ||||||
Long-term liabilities: | ||||||||
Deferred income taxes | 1,096 | 2,140 | ||||||
Other taxes and long-term liabilities | 2,640 | 1,727 | ||||||
Senior notes and loans | 24,562 | 26,700 | ||||||
Operating lease liabilities | 435 | — | ||||||
Total long-term liabilities | 28,733 | 30,567 | ||||||
Commitments and contingencies | ||||||||
Total liabilities | 42,407 | 44,889 | ||||||
Equity: | ||||||||
Teva shareholders’ equity: | ||||||||
Ordinary shares of NIS 0.10 par value per share; December 31, 201 9 and December 31, 2018 : authorized 2,495 million shares; issued 1,198 million 1,196 million shares,shares and | 56 | 56 | ||||||
Additional paid-in capital | 27,312 | 27,210 | ||||||
Accumulated deficit | (6,956 | ) | (5,958 | ) | ||||
Accumulated other comprehensive loss | (2,312 | ) | (2,459 | ) | ||||
Treasury shares as of December 31, 201 9 and December 31, 2018 : 106 million ordinary shares | (4,128 | ) | (4,142 | ) | ||||
13,972 | 14,707 | |||||||
Non-controlling interests | 1,091 | 1,087 | ||||||
Total equity | 15,063 | 15,794 | ||||||
Total liabilities and equity | $ | 57,470 | $ | 60,683 | ||||
December 31, | December 31, | |||||||
2020 | 2019 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 2,177 | $ | 1,975 | ||||
Accounts receivables, net of allowance for credit losses of $126 million and $135 million as of December 31, 2020 and December 31, 2019 | 4,581 | 5,676 | ||||||
Inventories | 4,403 | 4,422 | ||||||
Prepaid expenses | 945 | 870 | ||||||
Other current assets | 710 | 434 | ||||||
Assets held for sale | 189 | 87 | ||||||
Total current assets | 13,005 | 13,464 | ||||||
Deferred income taxes | 695 | 386 | ||||||
Other non-current assets | 538 | 591 | ||||||
Property, plant and equipment, net | 6,296 | 6,436 | ||||||
Operating lease right-of-use assets | 559 | 514 | ||||||
Identifiable intangible assets, net | 8,923 | 11,232 | ||||||
Goodwill | 20,624 | 24,846 | ||||||
Total assets | $ | 50,640 | $ | 57,470 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Short-term debt | $ | 3,188 | $ | 2,345 | ||||
Sales reserves and allowances | 4,824 | 6,159 | ||||||
Accounts payables | 1,756 | 1,718 | ||||||
Employee-related obligations | 685 | 693 | ||||||
Accrued expenses | 1,780 | 1,869 | ||||||
Other current liabilities | 933 | 889 | ||||||
Total current liabilities | 13,164 | 13,674 | ||||||
Long-term liabilities: | ||||||||
Deferred income taxes | 964 | 1,096 | ||||||
Other taxes and long-term liabilities | 2,240 | 2,640 | ||||||
Senior notes and loans | 22,731 | 24,562 | ||||||
Operating lease liabilities | 479 | 435 | ||||||
Total long-term liabilities | 26,414 | 28,733 | ||||||
Commitments and contingencies | 0 | |||||||
Total liabilities | 39,579 | 42,407 | ||||||
Equity: | ||||||||
Teva shareholders’ equity: | ||||||||
Ordinary shares of NIS 0.10 par value per share; December 31, 2020 and December 31, 2019: authorized 2,495 million | 57 | 56 | ||||||
Additional paid-in capital | 27,443 | 27,312 | ||||||
Accumulated deficit | (10,946 | ) | (6,956 | ) | ||||
Accumulated other comprehensive loss | (2,399 | ) | (2,312 | ) | ||||
Treasury shares as of December 31, 2020 and December 31, 2019 : 106 million ordinary shares | (4,128 | ) | (4,128 | ) | ||||
| 10,026 | 13,972 | |||||||
Non-controlling interests | 1,035 | 1,091 | ||||||
Total equity | 11,061 | 15,063 | ||||||
Total liabilities and equity | $ | 50,640 | $ | 57,470 | ||||
Amounts may not add up due to rounding.
The accompanying notes are an integral part of the financial statements.
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(U.S. dollars in millions, except share and per share data)
Year ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Net revenues | $ | 16,659 | $ | 16,887 | $ | 18,271 | ||||||
Cost of sales | 8,933 | 9,351 | 9,975 | |||||||||
Gross profit | 7,726 | 7,537 | 8,296 | |||||||||
Research and development expenses | 997 | 1,010 | 1,213 | |||||||||
Selling and marketing expenses | 2,498 | 2,614 | 2,916 | |||||||||
General and administrative expenses | 1,173 | 1,192 | 1,298 | |||||||||
Intangible assets impairments | 1,502 | 1,639 | 1,991 | |||||||||
Goodwill impairment | 4,628 | — | 3,027 | |||||||||
Other asset impairments, restructuring and other items | 479 | 423 | 987 | |||||||||
Legal settlements and loss contingencies | 60 | 1,178 | (1,208 | ) | ||||||||
Other income | (40 | ) | (76 | ) | (291 | ) | ||||||
Operating (loss) income | (3,572 | ) | (443 | ) | (1,637 | ) | ||||||
Financial expenses , net | 834 | 822 | 959 | |||||||||
Income (loss) before income taxes | (4,406 | ) | (1,265 | ) | (2,596 | ) | ||||||
Income taxes (benefit) | (168 | ) | (278 | ) | (195 | ) | ||||||
Share in (profits) losses of associated companies , net | (138 | ) | 13 | 71 | ||||||||
Net income (loss) | (4,099 | ) | (1,000 | ) | (2,472 | ) | ||||||
Net loss attributable to non-controlling interests | (109 | ) | (2 | ) | (322 | ) | ||||||
Net income (loss) attributable to Teva | (3,990 | ) | (999 | ) | (2,150 | ) | ||||||
Accrued dividends on preferred shares | — | — | 249 | |||||||||
Net income (loss) attributable to ordinary shareholders | $ | (3,990 | ) | $ | (999 | ) | $ | (2,399 | ) | |||
Earnings (loss) per share attributable to ordinary shareholders: | ||||||||||||
Basic | $ | (3.64 | ) | $ | (0.91 | ) | $ | (2.35 | ) | |||
Diluted | $ | (3.64 | ) | $ | (0.91 | ) | $ | (2.35 | ) | |||
Weighted average number of shares (in millions): | ||||||||||||
Basic | 1,095 | 1,091 | 1,021 | |||||||||
Diluted | 1,095 | 1,091 | 1,021 | |||||||||
Amounts may not add up due to rounding.
The accompanying notes are an integral part of the financial statements.
91
TEVA PHARMACEUTICAL INDUSTRIES LIMITED CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(U.S. dollars in millions)
Year ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Net income (loss) | $ | (4,099 | ) | $ | (1,000 | ) | $ | (2,472 | ) | |||
Other comprehensive income (loss), net of tax: | ||||||||||||
Currency translation adjustment | (69 | ) | 97 | (713 | ) | |||||||
Unrealized gain (loss) on derivative financial instruments, net | 57 | 84 | 115 | |||||||||
Unrealized gain (loss) on available-for-sale securities, net | 0 | (1 | ) | 0 | ||||||||
Unrealized gain (loss) on defined benefit plans, net | (18 | ) | (20 | ) | 13 | |||||||
Total other comprehensive income (loss) | (30 | ) | 160 | (585 | ) | |||||||
Total comprehensive income (loss) | (4,129 | ) | (840 | ) | (3,057 | ) | ||||||
Comprehensive income (loss) attributable to non-controlling interests | (53 | ) | 12 | (296 | ) | |||||||
Comprehensive income (loss) attributable to Teva | $ | (4,076 | ) | $ | (852 | ) | $ | (2,761 | ) | |||
Amounts may not add up due to rounding.
The accompanying notes are an integral part of the financial statements.
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Net revenues | $ | 16,887 | $ | 18,271 | $ | 21,853 | ||||||
Cost of sales | 9,351 | 9,975 | 11,237 | |||||||||
Gross profit | 7,537 | 8,296 | 10,615 | |||||||||
Research and development expenses | 1,010 | 1,213 | 1,778 | |||||||||
Selling and marketing expenses | 2,614 | 2,916 | 3,395 | |||||||||
General and administrative expenses | 1,192 | 1,298 | 1,451 | |||||||||
Intangible assets impairments | 1,639 | 1,991 | 3,238 | |||||||||
Goodwill impairment | — | 3,027 | 17,100 | |||||||||
Other asset impairments, restructuring and other items | 423 | 987 | 1,836 | |||||||||
Legal settlements and loss contingencies | 1,178 | (1,208 | ) | 500 | ||||||||
Other income | (76 | ) | (291 | ) | (1,199 | ) | ||||||
Operating (loss) income | (443 | ) | (1,637 | ) | (17,484 | ) | ||||||
Financial expenses—net | 822 | 959 | 895 | |||||||||
Income (loss) before income taxes | (1,265 | ) | (2,596 | ) | (18,379 | ) | ||||||
Income taxes (benefit) | (278 | ) | (195 | ) | (1,933 | ) | ||||||
Share in (profits) losses of associated companies—net | 13 | 71 | 3 | |||||||||
Net income (loss) | (1,000 | ) | (2,472 | ) | (16,449 | ) | ||||||
Net loss attributable to non-controlling interests | (2 | ) | (322 | ) | (184 | ) | ||||||
Net income (loss) attributable to Teva | (999 | ) | (2,150 | ) | (16,265 | ) | ||||||
Accrued dividends on preferred shares | — | 249 | 260 | |||||||||
Net income (loss) attributable to ordinary shareholders | $ | (999 | ) | $ | (2,399 | ) | $ | (16,525 | ) | |||
Earnings (loss) per share attributable to ordinary shareholders: | ||||||||||||
Basic | $ | (0.91 | ) | $ | (2.35 | ) | $ | (16.26 | ) | |||
Diluted | $ | (0.91 | ) | $ | (2.35 | ) | $ | (16.26 | ) | |||
Weighted average number of shares (in millions): | ||||||||||||
Basic | 1,091 | 1,021 | 1,016 | |||||||||
Diluted | 1,091 | 1,021 | 1,016 | |||||||||
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Net income (loss) | $ | (1,000 | ) | $ | (2,472 | ) | $ | (16,449 | ) | |||
Other comprehensive income (loss), net of tax: | ||||||||||||
Currency translation adjustment* | 97 | (713 | ) | 1,516 | ||||||||
Unrealized gain (loss) on derivative financial instruments, net | 84 | 115 | (140 | ) | ||||||||
Unrealized gain (loss) on available-for-sale securities, net | (1 | ) | — | 3 | ||||||||
Unrealized gain (loss) on defined benefit plans, net | (20 | ) | 13 | (10 | ) | |||||||
Total other comprehensive income (loss) | 160 | (585 | ) | 1,369 | ||||||||
Total comprehensive loss | (840 | ) | (3,057 | ) | (15,080 | ) | ||||||
Comprehensive income (loss) attributable to non-controlling interests | 12 | (296 | ) | (121 | ) | |||||||
Comprehensive loss attributable to Teva | $ | (852 | ) | $ | (2,761 | ) | $ | (14,959 | ) | |||
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
| Teva shareholders’ equity | ||||||||||||||||||||||||||||||||||||||||
| Ordinary shares | ||||||||||||||||||||||||||||||||||||||||
| Number of shares (in millions) | Stated value | MCPS** | Additional paid-in capital | Retained earnings (accumulated deficit) | Accumulated other compre- hensive income (loss) | Treasury shares | Total Teva share-holders’ equity | Non- controlling interests | Total equity | |||||||||||||||||||||||||||||||
(U.S. dollars in millions) | ||||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2017 | 1,123 | 54 | 3,620 | 23,409 | 13,607 | (3,159 | ) | (4,194 | ) | 33,337 | 1,656 | 34,993 | ||||||||||||||||||||||||||||
Changes during 2017: | ||||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss) | (16,265 | ) | 1,306 | (14,959 | ) | (121 | ) | (15,080 | ) | |||||||||||||||||||||||||||||||
Exercise of options by employees and vested RSUs | 1 | * | (45 | ) | 45 | * | * | |||||||||||||||||||||||||||||||||
Stock-based compensation expense | 133 | 133 | 133 | |||||||||||||||||||||||||||||||||||||
Dividends to ordinary shareholders | (901 | ) | (901 | ) | (901 | ) | ||||||||||||||||||||||||||||||||||
Dividends to preferred shareholders | 11 | (11 | ) | (249 | ) | (249 | ) | (249 | ) | |||||||||||||||||||||||||||||||
Transactions with non-controlling interests | — | (111 | ) | (111 | ) | |||||||||||||||||||||||||||||||||||
Other | (7 | ) | 5 | (2 | ) | (38 | ) | (40 | ) | |||||||||||||||||||||||||||||||
Balance at December 31, 2017 | 1,124 | 54 | 3,631 | 23,479 | (3,803 | ) | (1,853 | ) | (4,149 | ) | 17,359 | 1,386 | 18,745 | |||||||||||||||||||||||||||
Changes during 2018: | ||||||||||||||||||||||||||||||||||||||||
Cumulative effect of new accounting standard**** | (5 | ) | 5 | — | ||||||||||||||||||||||||||||||||||||
Comprehensive income (loss) | (2,150 | ) | (611 | ) | (2,761 | ) | (296 | ) | (3,057 | ) | ||||||||||||||||||||||||||||||
Issuance of Treasury Shares | * | (3 | ) | 7 | 4 | 4 | ||||||||||||||||||||||||||||||||||
Stock-based compensation expense | 155 | 155 | 155 | |||||||||||||||||||||||||||||||||||||
Issuance of shares*** | 72 | 2 | (3,880 | ) | 3,826 | (52 | ) | (52 | ) | |||||||||||||||||||||||||||||||
Dividends to preferred shareholders | 249 | (249 | ) | — | — | |||||||||||||||||||||||||||||||||||
Transactions with non-controlling interests | 2 | 2 | (3 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | 1,196 | 56 | — | 27,210 | (5,958 | ) | (2,459 | ) | (4,142 | ) | 14,707 | 1,087 | 15,794 | |||||||||||||||||||||||||||
Changes during 2019: | ||||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss) | (999 | ) | 147 | (852 | ) | 12 | (840 | ) | ||||||||||||||||||||||||||||||||
Issuance of Shares | 2 | * | * | |||||||||||||||||||||||||||||||||||||
Issuance of Treasury Shares | * | (8 | ) | 14 | 6 | 6 | ||||||||||||||||||||||||||||||||||
Stock-based compensation expense | 119 | 119 | 119 | |||||||||||||||||||||||||||||||||||||
Transactions with non-controlling interests | (8 | ) | (8 | ) | ||||||||||||||||||||||||||||||||||||
Other | (8 | ) | (8 | ) | (8 | ) | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | 1,198 | $ | 56 | — | $ | 27,312 | $ | (6,956 | ) | $ | (2,312 | ) | $ | (4,128 | ) | $ | 13,972 | $ | 1,091 | $ | 15,063 | |||||||||||||||||||
Teva shareholders’ equity | ||||||||||||||||||||||||||||||||||||||||
Ordinary shares | ||||||||||||||||||||||||||||||||||||||||
Number of shares (in millions) | Stated value | MCPS** | Additional paid-in capital | Retained earnings (accumulated deficit) | Accumulated other comprehensive income (loss) | Treasury shares | Total Teva share-holders’ equity | Non- controlling interests | Total equity | |||||||||||||||||||||||||||||||
(U.S. dollars in millions) | ||||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2018 | 1,124 | 54 | 3,631 | 23,479 | (3,803 | ) | (1,853 | ) | (4,149 | ) | 17,359 | 1,386 | 18,745 | |||||||||||||||||||||||||||
Changes during 2018: | ||||||||||||||||||||||||||||||||||||||||
Cumulative effect of new accounting standard**** | (5 | ) | 5 | — | ||||||||||||||||||||||||||||||||||||
Net income (loss) | (2,150 | ) | (2,150 | ) | (322 | ) | (2,472 | ) | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | (611 | ) | (611 | ) | 26 | (585 | ) | |||||||||||||||||||||||||||||||||
Issuance of Treasury Shares | * | (3 | ) | 7 | 4 | 4 | ||||||||||||||||||||||||||||||||||
Stock-based compensation expense | 155 | 155 | 155 | |||||||||||||||||||||||||||||||||||||
Issuance of shares*** | 72 | 2 | (3,880 | ) | 3,826 | (52 | ) | (52 | ) | |||||||||||||||||||||||||||||||
Dividends to preferred shareholders | 249 | (249 | ) | — | — | |||||||||||||||||||||||||||||||||||
Transactions with non-controlling interests | 2 | 2 | (3 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | 1,196 | 56 | — | 27,210 | (5,958 | ) | (2,459 | ) | (4,142 | ) | 14,707 | 1,087 | 15,794 | |||||||||||||||||||||||||||
Changes during 2019: | ||||||||||||||||||||||||||||||||||||||||
Net income (loss) | (999 | ) | (999 | ) | (2 | ) | (1,000 | ) | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | 147 | 147 | 14 | 160 | ||||||||||||||||||||||||||||||||||||
Issuance of Shares | 2 | * | * | |||||||||||||||||||||||||||||||||||||
Issuance of Treasury Shares | * | (8 | ) | 14 | 6 | 6 | ||||||||||||||||||||||||||||||||||
Stock-based compensation expense | 119 | 119 | 119 | |||||||||||||||||||||||||||||||||||||
Transactions with non-controlling interests | (8 | ) | (8 | ) | ||||||||||||||||||||||||||||||||||||
Other | (8 | ) | (8 | ) | (8 | ) | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | 1,198 | 56 | — | 27,312 | (6,956 | ) | (2,312 | ) | (4,128 | ) | 13,972 | 1,091 | 15,063 | |||||||||||||||||||||||||||
Changes during 2020: | ||||||||||||||||||||||||||||||||||||||||
Net income (loss) | (3,990 | ) | (3,990 | ) | (109 | ) | (4,099 | ) | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | (86 | ) | (86 | ) | 56 | (30 | ) | |||||||||||||||||||||||||||||||||
Issuance of Shares | 4 | * | * | 1 | 1 | |||||||||||||||||||||||||||||||||||
Stock-based compensation expense | 129 | 129 | 129 | |||||||||||||||||||||||||||||||||||||
Transactions with non-controlling interests | (2 | ) | (2 | ) | ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | 1,202 | $ | 57 | 0 | $ | 27,443 | $ | (10,946 | ) | $ | (2,399 | ) | $ | (4,128 | ) | $ | 10,026 | $ | 1,035 | $ | 11,061 | |||||||||||||||||||
| * | Represents an amount less than 0.5 million. |
| ** | Mandatory convertible preferred shares. |
| *** | Mainly MCPS conversion. |
| **** | Following the adoption of ASU 2016-01, the Company recorded a $ 5 million opening balance reclassification from accumulated other comprehensive income to retained earnings. |
Amounts may not add up due to rounding.
The accompanying notes are an integral part of the financial statements.
91043
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in millions)
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Operating activities: | ||||||||||||
Net loss | $ | (1,000 | ) | $ | (2,472 | ) | $ | (16,449 | ) | |||
Adjustments to reconcile net loss to net cash provided by operations: | ||||||||||||
Impairment of long-lived assets | 1,778 | 5,621 | 20,882 | |||||||||
Depreciation and amortization | 1,722 | 1,842 | 2,112 | |||||||||
Net change in operating assets and liabilities | (896 | ) | (1,823 | ) | (1,645 | ) | ||||||
Deferred income taxes—net and uncertain tax positions | (985 | ) | (837 | ) | (2,331 | ) | ||||||
Stock-based compensation | 119 | 155 | 133 | |||||||||
Other items | 28 | (135 | ) | 13 | ||||||||
Research and development in process | — | 114 | 175 | |||||||||
Net loss from sale of long-lived assets and investments | (18 | ) | (19 | ) | (1,090 | ) | ||||||
Venezuela deconsolidation loss | — | — | 383 | |||||||||
Venezuela impairment of net monetary assets | — | — | 42 | |||||||||
Net cash provided by operating activities | 748 | 2,446 | 2,225 | |||||||||
Investing activities: | ||||||||||||
Beneficial interest collected in exchange for securitized trade receivables | 1,487 | 1,735 | 1,282 | |||||||||
Proceeds from sales of long-lived assets and investments | 343 | 890 | 3,477 | |||||||||
Purchases of property, plant and equipment | (525 | ) | (651 | ) | (874 | ) | ||||||
Purchases of investments and other assets | (8 | ) | (119 | ) | (200 | ) | ||||||
Other investing activities | 58 | 11 | (282 | ) | ||||||||
Acquisitions of subsidiaries, net of cash acquired | — | — | 43 | |||||||||
Net cash provided by investing activities | 1,355 | 1,866 | 3,446 | |||||||||
Financing activities: | ||||||||||||
Repayment of senior notes and loans and other long-term liabilities | (3,944 | ) | (7,446 | ) | (3,300 | ) | ||||||
Proceeds from senior notes and loans, net of issuance costs | 2,083 | 4,434 | 506 | |||||||||
Net change in short-term debt | (2 | ) | (260 | ) | (1,683 | ) | ||||||
Other financing activities | (11 | ) | (57 | ) | (74 | ) | ||||||
Dividends paid on ordinary shares* | — | (12 | ) | (901 | ) | |||||||
Dividends paid on preferred shares* | (52 | ) | (10 | ) | (260 | ) | ||||||
Dividends paid to non-controlling interests | — | — | (38 | ) | ||||||||
Net cash used in financing activities | (1,926 | ) | (3,351 | ) | (5,750 | ) | ||||||
Translation adjustment on cash and cash equivalents | 16 | (142 | ) | 54 | ||||||||
Net change in cash and cash equivalents | 193 | 819 | (25 | ) | ||||||||
Balance of cash and cash equivalents at beginning of year | 1,782 | 963 | 988 | |||||||||
Balance of cash and cash equivalents at end of year | $ | 1,975 | $ | 1,782 | $ | 963 | ||||||
Year ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Operating activities: | ||||||||||||
| Net income (loss) | $ | (4,099 | ) | $ | (1,000 | ) | $ | (2,472 | ) | |||
Adjustments to reconcile net loss to net cash provided by operations: | ||||||||||||
Impairment of goodwill, | 6,546 | 1,778 | 5,621 | |||||||||
Depreciation and amortization | 1,557 | 1,722 | 1,842 | |||||||||
Net change in operating assets and liabilities | (2,188 | ) | (896 | ) | (1,823 | ) | ||||||
Deferred income taxes , net and uncertain tax positions | (696 | ) | (985 | ) | (837 | ) | ||||||
Stock-based compensation | 129 | 119 | 155 | |||||||||
Other items | 100 | 28 | (135 | ) | ||||||||
Research and development in process | 80 | 0 | 114 | |||||||||
| Net loss (gain) from investments and from sale of long lived assets | (213 | ) | (18 | ) | (19 | ) | ||||||
Net cash provided by operating activities | 1,216 | 748 | 2,446 | |||||||||
Investing activities: | ||||||||||||
Beneficial interest collected in exchange for securitized trade receivables | 1,405 | 1,487 | 1,735 | |||||||||
Proceeds from sales of long-lived assets and investments | 67 | 343 | 890 | |||||||||
Purchases of property, plant and equipment | (578 | ) | (525 | ) | (651 | ) | ||||||
Purchases of investments and other assets | (55 | ) | (8 | ) | (119 | ) | ||||||
Other investing activities | 24 | 58 | 11 | |||||||||
Net cash provided by investing activities | 863 | 1,355 | 1,866 | |||||||||
Financing activities: | ||||||||||||
Repayment of senior notes and loans and other long | (1,871 | ) | (3,944 | ) | (7,446 | ) | ||||||
Proceeds from senior notes and loans, net of issuance costs | 0 | 2,083 | 4,434 | |||||||||
Proceeds from short term debt | 550 | 500 | 0 | |||||||||
| Repayment of short term debt | (559 | ) | (502 | ) | (260 | ) | ||||||
Other financing activities | (5 | ) | (11 | ) | (57 | ) | ||||||
| Tax withholding payments made on shares and dividends | 0 | (52 | ) | (22 | ) | |||||||
Net cash used in financing activities | (1,885 | ) | (1,926 | ) | (3,351 | ) | ||||||
Translation adjustment on cash and cash equivalents | 8 | 16 | (142 | ) | ||||||||
Net change in cash and cash equivalents | 202 | 193 | 819 | |||||||||
Balance of cash and cash equivalents at beginning of year | 1,975 | 1,782 | 963 | |||||||||
Balance of cash and cash equivalents at end of year | $ | 2,177 | $ | 1,975 | $ | 1,782 | ||||||
Amounts may not add up due to rounding.
The accompanying notes are an integral part of the financial statements.
91054
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(U.S. dollars in millions)
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Supplemental cash flow information: | ||||||||||||
Non-cash financing and investing activities: | ||||||||||||
Beneficial interest obtained in exchange for securitized trade receivables | $ | 1,511 | $ | 1,716 | $ | 1,295 | ||||||
Conversion of mandatory convertible preferred shares into ordinary shares | — | $ | 3,880 | — | ||||||||
Cash paid during the year for: | ||||||||||||
Interest | $ | 840 | $ | 815 | $ | 795 | ||||||
Income taxes, net of refunds | $ | 552 | $ | 420 | $ | 106 | ||||||
Year ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Supplemental cash flow information: | ||||||||||||
Non-cash financing and investing activities: | ||||||||||||
Beneficial interest obtained in exchange for securitized trade receivables | $ | 1,397 | $ | 1,511 | $ | 1,716 | ||||||
Conversion of mandatory convertible preferred shares into ordinary shares | 0 | $ | 0 | 3,880 | ||||||||
Cash paid during the year for: | ||||||||||||
| Interest | $ | 846 | $ | 840 | $ | 815 | ||||||
Income taxes, net of refunds | $ | 709 | $ | 552 | $ | 420 | ||||||
Net change in operating assets and liabilities:
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Other current assets | $ | (1,416 | ) | $ | (1,437 | ) | $ | 658 | ||||
Trade payables, accrued expenses, employee-related obligations and other current liabilities | 643 | (500 | ) | (3,083 | ) | |||||||
Trade receivables net of sales reserves and allowances | (394 | ) | 88 | 514 | ||||||||
Inventories | 271 | 26 | 199 | |||||||||
Inventory step-up | — | — | 67 | |||||||||
| $ | (896 | ) | $ | (1,823 | ) | $ | (1,645 | ) | ||||
Year ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Other current assets | $ | (1,473 | ) | $ | (1,416 | ) | $ | (1,437 | ) | |||
| Trade payables, accrued expenses, employee-related obligations and other liabilities | (463 | ) | 643 | (500 | ) | |||||||
Trade receivables net of sales reserves and allowances | (293 | ) | (394 | ) | 88 | |||||||
Inventories | 41 | 271 | 26 | |||||||||
| $ | (2,188 | ) | $ | (896 | ) | $ | (1,823 | ) | ||||
Amounts may not add up due to rounding.
The accompanying notes are an integral part of the financial statements.
91065
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
NOTE 1—Significant accounting policies:
a. | General: |
Operations
Teva Pharmaceutical Industries Limited (the “Parent Company”), headquartered in Israel, together with its subsidiaries and associated companies (the “Company,” “Teva” or the “Group”), is engaged in the development, manufacturing, marketing and distribution of generics, specialty medicines and biopharmaceuticals. The majority of the Group’s revenues are in the United States and Europe.
Basis of presentation and use of estimatesestimate
s
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
In preparing the Company’s consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported years. Actual results could differ from those estimates.
As applicable to these consolidated financial statements, the most significant estimates and assumptions relate to determining the valuation and recoverability of intangible assets and goodwill; assessing sales reserves and allowances in the United States, and contingent consideration; assessing compliance with debt covenants; uncertain tax positions, valuation allowances, contingencies, inventory valuation and restructuring. The inputs into Teva’s judgments and estimates also consider the economic implications of the
COVID-19
pandemic on its critical and significant accounting estimates, most significantly in relation to sales, reserves and allowances, IPR&D assets, marketed product rights and goodwill, all of which will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning theCOVID-19
pandemic and the actions taken to contain or treat it, as well as the economic impact on Teva’s employees, third-party manufacturers and suppliers, customers and markets. All estimates made by Teva related to the impact of theCOVID-19
pandemic within its financial statements may change in future periods.Functional currency
A major part of the Group’s operations is carried out by the Company in the United States, Israel and certain other countries. The functional currency of these entities is the U.S. dollar (“dollar” or “$”).
The functional currency of certain subsidiaries and associated companies is their local currency. The financial statements of those companies are included in the consolidated financial statements, translated into U.S. dollars. Assets and liabilities are translated at
year-end
exchange rates, while revenues and expenses are translated at monthly average exchange rates during the year. Differences resulting from translation are presented as other comprehensive income (loss) in the consolidated statements of comprehensive income (loss).In the event of a divestiture of a foreign subsidiary, the related foreign currency translation results are reversed from equity to income. Foreign currency exchange gains and losses are included in net income (loss).
9
6
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries, joint ventures and VIEs for which the Company is considered the primary beneficiary. For those consolidated subsidiariesentities where Teva owns less than 100%, the outside shareholders’ interests are shown as
non-controlling
interestsin equity. Investments in affiliates over which the Company has significant influence but not a controlling interest, are carried on the equity basis.
For VIEs, the Company performs an analysis to determine whether the variable interests give a controlling financial interest in a VIE. The Company periodically reassesses whether it controls its VIEs.
Intercompany transactions and balances are eliminated on consolidation; profits from intercompany sales, not yet realized outside the Group, are also eliminated.
b. |
Net revenues | Cost of sales | |||||||||||||||||||||||
As reported | Adjustment | As revised | As reported | Adjustment | As revised | |||||||||||||||||||
(U.S. $ in millions) | ||||||||||||||||||||||||
2017 | 22,385 | (533 | ) | 21,853 | 11,770 | (533 | ) | 11,237 | ||||||||||||||||
2018 | 18,854 | (583 | ) | 18,271 | 10,558 | (583 | ) | 9,975 | ||||||||||||||||
New accounting pronouncements |
Recently adopted accounting pronouncements
In June 2018,March 2020, the FASB issued ASU2018-072020-04“Improvement to Nonemployee Share-Based Payments Accounting.Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This guidance simplifies theprovides optional expedients and exceptions for applying generally accepted accounting fornon-employeeshare-based payment transactions.principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments specifyguidance applies only to contracts, hedging relationships, and other transactions that ASC 718 applies to all share-based payment transactions in which a grantor acquires goodsreference LIBOR or servicesanother reference rate expected to be used or consumed indiscontinued because of reference rate reform. This guidance is effective for all entities as of March 12, 2020 through December 31, 2022. There was no impact to the Company’s consolidated financial statements for the period ended December 31, 2020 as a grantor’s own operations by issuing share-based payment awards.result of adopting this standard update. The Company is continuing to evaluate the potential impact of the replacement of the LIBOR benchmark on its interest rate risk management activities and has started initial negotiations to transform the facility base rate of its securitization program. However, it is not expected to have a material impact on the consolidated financial results.
In April 2019, the FASB issued ASU20192020 with no material impact on its consolidated financial statements.
2019-04
“Codification Improvements to Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 825).” This ASU provides clarifications of three topics related to financial instruments accounting. Teva adopted the provisions of this update as of January 1, In November 2018, the FASB issued ASUguidance in ASC 808 to align with guidance in ASC 606 and (iii) precludes presenting revenue from a collaborative arrangement together with revenue recognized under ASC 606 if the collaborative arrangement participant is not a customer. Teva adopted the provisions of this update as of January 1, 2020 with no material impact on its consolidated financial statements.
2018-18
“Collaborative Arrangements (Topic 808)—Clarifying the interaction between Topic 808 and Topic 606.” The amendments provide guidance on whether certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606. It also specifically (i) addresses when the participant should be considered a customer in the context of a unit of account, (ii) addsunit-of-account
In August 2017,2018, the FASB issued ASU2017-122018-15“DerivativesIntangibles—Goodwill and Hedging—Targeted Improvements toHedging Activities.Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” This guidance expands and refines hedge accounting for bothnon-financialand financial risk components and aligns the recognition and presentationrequirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtainthe effects of the hedging instrument and the hedged item in the financial statements.adoption. Teva adopted the provisions of this update as of January 1, 20192020 with no material impact on its consolidated financial statements.
other—Internal-use
software (Subtopic350-40):
Customer’s Accounting for internal-use
software. Teva applied the guidance prospectively to all implementation costs incurred after the date of TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
In August 2018, the FASB issued ASUadoptionnew disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Certain disclosures required by this guidance must be applied on a retrospective basis and others on a prospective basis. Teva adopted the provisions of this standard has a material effect on Teva’s financial statements. The most significant impact is reflected in: (i) effectiveupdate as of January 1, 2019, the recognition of approximately $553 million ROU assets and $561 million lease liabilities on Teva’s balance sheet for its operating leases of real estate, vehicles and equipment (the difference between the additional lease assets and lease liabilities did not have2020 with no material impact on its consolidated financial statements.the amount, timing and uncertainty of cash flows arising from leases. However, theinform credit loss estimates. Upon adoption of thisthe standard, does not have a significantthere was no immediate impact on Teva’s consolidated statementsto the Company’s financial position, results of income and consolidated statements ofoperations or cash flows. Also,On an ongoing basis, the Company will contemplate forward-looking economic conditions in recording lifetime expected credit losses for the Company’s accounting for finance leases remained substantially unchanged. See note 8financial assets measured at cost, such as the Company’s trade receivables and note 1ddcertain short-term investments.for further discussion.In April 2019,9
2018-13
“Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” This guidance removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The In June 2016, the retained earnings),FASB issued ASU(ii) the requirementrequires consideration of a broader range of reasonable and supportable information to provide significant new disclosures regarding Teva’s leasing activities and to enable users of financial statements to assess
2016-13
“Financial Instruments—Credit Losses—Measurement of Credit Losses on Financial Instruments.” This guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and Recently issued accounting pronouncements, not yet adopted
In August 2020, the FASB issued ASU
2020-06
“Debt – Debt with Conversion and Other Options(Subtopic 470-20)
and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40).” This guidance simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The amendments to this guidance are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.In December 2019, the FASB issued ASU(“the Update”(the “update”). The amendments in this Updateupdate simplify the accounting for income taxes by removing the following exceptions in ASC 740: (1) exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items; (2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) exception to the general methodology for calculating income taxes in an interim period when aloss exceeds the anticipated loss for the year.
2019-12
“Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes” year-to-date
In addition, this Updatethe update also simplifies the accounting for income taxes in certain topics as follows: (1) requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as aUpdateupdate are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
non-income-based
tax; (2) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; (3) specifying that an entity can elect (rather than be required to) allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; and (4) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments in this 8
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Company reviewed the FASB issued ASU2019-04“Codification Improvementsabove topics, noting that Items (1) and (4) of this paragraph are expected to Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 825).” This ASU provides clarifications of three topics related to financial instruments accounting. The guidance will be effective for fiscal years beginning after December 15, 2019.relevant, but not material. The adoption of this guidance will not have a significant impact on the Company’s consolidated financial statements.
Acquisitions: |
Teva’s consolidated financial statements include the operations of acquired businessesbusinesses from the date of the acquisition’s consummation. Acquired businesses are accounted for using the acquisition method of accounting, which requires, among other things, that most assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date and that the fair value of acquired in process research and development (“IPR&D”) be recorded on the balance sheet. Transaction costs are expensed as incurred. Any excess of the consideration transferred over the assigned values of the net assets acquired is recorded as goodwill. When Teva acquires net assets that do not constitute a business, as defined under U.S. GAAP, no goodwill is recognized and acquired IPR&D is expensed.
Contingent consideration incurred in a business combination is included as part of the acquisition price and recorded at a probability weighted assessment of its fair value as of the acquisition date. The fair value of the contingent consideration is
re-measured
at each reporting period, with any adjustments in fair value recognized in earnings under other assets impairments, restructuring and other items.Collaborative arrangements: |
Collaborative agreements are contractual arrangements in which the parties are active participants to the arrangement and are exposed to the significant risks and rewards that are dependent on the ultimate commercial success of the endeavor.
The Company recognizes revenue generated and costs incurred on sales to third parties as it relates to collaborative agreements as gross or net. If the Company is the principal participant in a transaction, revenues and costs are recorded on a gross basis; otherwise, revenues are recorded on a net basis.
Equity investments: |
The Company measures equity investments at fair value with changes in fair value recognized in net income. The Company accounts for equity investments that do not have a readily determinable fair value as cost method investments under the measurement alternative prescribed within ASU
The Company accounts for equity investments as current when the Company has the intent and ability to sell such assets within the next twelve months.2016-01
“Financial Instruments—Recognition and Measurement of Financial Assets and Financial Liabilities” to the extent such investments are not subject to consolidation or the equity method. Under the measurement alternative, these financial instruments are carried at cost, less any impairment (assessed quarterly), adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. In addition, income is recognized when dividends are received only to the extent they are distributed from net accumulated earnings of the investee. Otherwise, such distributions are considered returns of investment and are recorded as a reduction of the cost of the investment.Fair value measurement: |
The Company measures fair value and discloses fair value measurements for financial assets and liabilities. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
9
9
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
The accounting standard establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable inputs that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in its assessment of fair value.
Investment in debt securities: |
Investment in securities consists of debt securities classified asand recorded at fair value. The fair value of quoted securities is based on current market value. When debt securities do not have an active market, fair value is determined using a valuation model. This model is based on reference to other instruments with similar characteristics, or a discounted cash flow analysis, or other pricing models making use of market inputs and relying as little as possible on entity-specific inputs.
available-for-sale
The Company’s investment in debt securities accounting policy until December 31, 2019, prior to the adoption of the new Current Expected Credit Losses (“CECL”) standard
Unrealized gains of available for sale debt securities, net of taxes, are reflected in other comprehensive income. Unrealized losses considered to be temporary are reflected in other comprehensive income; unrealized losses that are considered to be other-than-temporary are charged to income as an impairment charge. Realized gains and losses for debt securities are included in financial expense,expenses, net.
The Company considers available evidence in evaluating potential impairments of its investments, including the duration and extent to which fair value is less than cost. For debt securities, an other-than-temporary impairment has occurred if the Company does not expect to recover the entire amortized cost basis of the debt security. If the Company does not intend to sell the impaired debt security, and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis, the amount of the other-than-temporary impairment recognized in earnings, recorded in financial expense, net, is limited to the portion attributed to credit loss. The remaining portion of the other-than-temporary impairment related to other factors is recognized in other comprehensive income.
The Company’s investment in debt securities accounting policy from January 1, 2020, following the adoption of the new CECL standard
Unrealized gains and losses forsecurities are excluded from earnings and reported net of the related tax effect in the accumulated other comprehensive income component of shareholders’ equity.
available-for-sale
The CECL methodology, which became effective January 1, 2020, requires the Company to estimate lifetime expected credit losses for alldebt securities in an unrealized loss position.
available-for-sale
100
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Comparative information continues to be reported in accordance with the methodology in effect for prior periods. When estimating a security’s probability of default and the recovery rate, the Company assesses the security’s credit indicators, including credit ratings. If the assessment indicates that an expected credit loss exists, the Company determines the portion of the unrealized loss attributable to credit deterioration and records an allowance for the expected credit loss through the Consolidated Statements of Income. Unrealized gains and any portion of a security’s unrealized loss attributable to
non-credit
losses are recorded in the Consolidated Statements of Comprehensive Income, net of tax.Cash and cash equivalents: |
All highly liquid investments, which include short-term bank deposits and money market instruments, that are not restricted as to withdrawal or use, and investment in short-term debentures, the period to maturity of which did not exceed three months at the time of investment, are considered to be cash equivalents.
Accounts receivables: |
The Company’s accounts receivables accounting policy until December 31, 2019, prior to the adoption of the new CECL standard
Accounts receivables are stated at their net realizable value. The allowance against gross accounts receivables reflects the best estimate of losses inherent in the receivables portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available information. An allowance for doubtful debts is reflected in net accounts receivables. Accounts receivables are written off after all reasonable means to collect the full amount have been exhausted.
The Company’s accounts receivables accounting policy from January 1, 2020, following the adoption of the new CECL standard
Accounts receivable have been reduced by an allowance for doubtful accounts. The Company maintains the allowance for estimated losses resulting from the inability of the Company’s customers to make required payments. The allowance represents the current estimate of lifetime expected credit losses over the remaining duration of existing accounts receivable considering current market conditions and supportable forecasts when appropriate. The estimate is a result of the Company’s ongoing evaluation of collectability, customer creditworthiness, historical levels of credit losses, and future expectations.
Write-off
activity and recoveries for the periods presented were not material.Concentration of credit risks: |
Most of Teva’s cash and cash equivalents (which, along with investment in securities, totaled $2,030$2,478 million at December 31, 2019)2020) were deposited with European, U.S. and Israeli banks and financial institutions and were comprised mainly of cash deposits.
The pharmaceutical industry, particularly in the United States, has been significantly affected by consolidation among managed care providers, large pharmacy chains, wholesaling organizations and other buyer groups. The U.S. market constituted approximately 47%48% of Teva’s consolidated revenues in 2019.2020. The exposure of credit risks relating to other trade receivablescollateral. collateral and from time to time the Company may choose to purchase trade credit insurance.
outside the U.S.
is limited, due to the relatively large number of group customers and their wide geographic distribution. Teva performs ongoing credit evaluations of its customers for the purpose of determining the appropriate allowance for doubtful accounts and generally does not require 101
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Inventories: |
Inventories are valued at the lower of cost or net realizable value. Cost of raw and packaging materials, purchased products, manufactured finished products, products in process and capitalized production costs are determined predominantly on a standard cost basis, approximating actual costs. Other methods which are utilized for determining the value of inventories are moving average, cost basis and the first in first out method. Teva regularly reviews its inventories for obsolescence and other impairment risks and reserves are established when necessary.
Inventories acquired in a business combination are
stepped-up
to their estimated fair value and amortized to cost of sales as that inventory is sold.Long-lived assets: |
Teva’s long-lived,
non-current
assets are comprised mainly of goodwill, identifiable intangible assets, property, plant and equipment, and operating lease ROU assets. All long-lived assets are monitored forimpairment indicators throughout the year. Impairment testing for goodwill and all indefinite-livedindefinite-lived intangible assets is performed at least annually. When necessary, charges for impairments of long-lived assets, other than goodwill, are recorded for the amount by which the fair value is less than the carrying value of these assets.
Goodwill
Goodwill reflects the excess of the consideration transferred, including the fair value of any contingent consideration and anyfourthsecond quarter of the fiscal year.
non-controlling
interest in the acquiree, over the assigned fair values of the identifiable net assets acquired. Goodwill is not amortized, and is assigned to reporting units and tested for impairment at least on an annual basis, in the The Company has historically performed its annual goodwill assessment during the fourth quarter of each year. During the second quarter of 2020, the Company decided to change the date of its annual impairment assessment from October 1 to June 30. The change was made to more closely align the impairment assessment date with the Company’s long-term planning and forecasting process. See note 7.
The goodwill impairment test is performed according to the following principles:
| 1. | An initial qualitative assessment may be performed to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. |
| 2. | If the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying mount, a quantitative fair value test is performed. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value is recognized. |
An interim goodwill impairment test may be required in advance or after of the annual impairment test if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For example, a substantial decline in the Company’s market capitalization, unexpected adverse business conditions, economic factors and unanticipated competitive activities may indicate that an interim impairment test is required. In the event that the Company’s market capitalization declines below its book value, the Company considers the length and severity of the decline and the reason for the decline when assessing whether potential goodwill impairment exists.
Identifiable intangible assets
Identifiable intangible assets are comprised of definite life intangible assets and indefinite life intangible assets.
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TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Definite life intangible assets consist mainly of acquired product rights and other rights relating to products for which marketing approval was received from the U.S. Food and Drug Administration (“FDA”) or the equivalent agencies in other countries. These assets are amortized mainly using the straight-line method over their estimated period of useful life, or based on economic benefit models, if more appropriate, which is determined by identifying the period and manner in which substantially all of the cash flows are expected to be generated. Amortization of acquired developed products is recorded under cost of sales. Amortization of marketing and distribution rights is recorded under selling and marketing (“S&M”) expenses when separable.
Indefinite life intangible assets are mainly comprised of IPR&D assets. Teva monitors these assets for items such as research and development milestonesprogress and progressfor indicators of fair value change such as level of expected competition and or pricing, to identify any triggering events. Teva determines the fair value of the asset annually or when triggering events are present, based on discounted cash flows and records an impairment loss if book value exceeds fair value.
IPR&D acquired in a business combination is capitalized as an indefinite life intangible asset until the related research and development efforts are either completed or abandoned. In the reporting periods where they are treated as indefinite life intangible assets, they are not amortized but rather are monitored triggering events and tested for impairment. Upon completion of the related research and development efforts, management determines the useful life of the intangible assets and amortizes them accordingly. In case of abandonment or a reduction in the expected realizable value of the asset, the related research and development assets are impaired.
Whenever impairment indicators are identified for definite life intangible assets, Teva reconsiders the asset’s estimated life, calculates the undiscounted value of the asset’s or asset group’s cash flows and compares such value against the asset’s or asset group’s carrying amount. If the carrying amount is greater, Teva records an impairment loss for the excess of book value over fair value based on the discounted cash flows.
In determining the estimated fair value of identifiable intangible assets, Teva utilized a discounted cash flow model. The key assumptions within the model related to forecasting future revenue and operating income, an appropriate discount rate and an appropriate terminal value based on the nature of the long-lived asset. The Company’s updated forecasts of net cash flows for the impaired assets reflect, among others, the following: (i) for IPR&D assets, the impact of changes to the development programs, the projected development and regulatory timeframes and the risks associated with these assets; and (ii) for product rights, pricing and volume projections, as well as patent life and any significant changes to the competitive environment.
Property, plant and equipment
Property, plant and equipment are stated at cost, after deduction of the related investment grants, and depreciated using the straight-line method over the estimated useful life of the assets: buildings, mainly 40 years; machinery and equipment, mainly between 15 to 20 years; and other assets, between 5 to 10 years.
For property, plant and equipment and leaselease
assets, whenever impairment indicators are identified, Teva reconsiders the asset’s estimated life, calculates the undiscounted value of the asset’s cash flows and compares such value against the asset’s carrying amount. If the carrying amount is greater, Teva records an impairment loss for the excess of book value over fair value.right-of-use
Lease(ROU) assets
right-of-use
See notes 1c, 1ddnote 8 and 8note 1 cc for further discussion.
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TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Contingencies: |
The Company is involved in various patent, product liability, commercial, government investigations, environmental claims and other legal proceedings that arise from time to time in the ordinary course of business. Except for income tax contingencies, contingent consideration, other contingent liabilities incurred or acquired in a business combination, Teva records accruals for these types of contingencies to the extent that Teva concludes their occurrence is probable and that the related liabilities are estimable. When accruing these costs, the Company will recognize an accrual in the amount within a range of loss that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company accrues for the minimum amount within the range. Teva records anticipated recoveries under existing insurance contracts that are probable of occurring at the gross amount that is expected to be collected. Legal costs are expensed as incurred.
The Company recognizes gain contingencies when they are realized or when all related contingencies have been resolved.
Treasury shares: |
Treasury shares are presented as a reduction of Teva shareholders’ equity and carried at their cost to Teva, under treasury shares.
Stock-based compensation: |
Teva recognizes stock based compensation for the estimated fair value of share-based awards, restricted share units (“RSUs”) and performance share units (“PSUs”). The compensation expense for PSUs is recognized only if it is probable that the performance condition will be achieved.
Teva measures compensation expense for share-based awards based on estimated fair values on the date of grant using the Black-Scholes option-pricing model. This option pricing model requires estimates as to the option’s expected term and the price volatility of the underlying stock. Teva amortizes the value of share-based awards to expense over the vesting period on a straight-line basis.
Teva measures compensation expense for the RSUs and PSUs based on the market value of the underlying stock at the date of grant, less an estimate of dividends that will not accrue to the RSU and PSU holders prior to vesting.
Deferred income taxes: |
Deferred income taxes are determined utilizing the “asset and liability” method based on the estimated future tax effects of temporary differences between the financial accounting and tax basis of assets and liabilities under the applicable tax laws, and on tax rates anticipated to be in effect when the deferred income taxes are expected to be paid or realized. A valuation allowance is provided if, based upon the weight of available evidence, it is more likely than not that a portion of the deferred income tax assets will not be realized. In determining whether a valuation allowance is needed, Teva considers all available evidence, including historical information, long range forecast of future taxable income and evaluation of tax planning strategies. Amounts recorded for valuation allowance can result from a complex series of judgments about future events and can rely on estimates and assumptions. Deferred income tax liabilities and assets are classified as
non-current.
10
4
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Deferred tax has not been provided on the following items:
| 1. | Taxes that would apply in the event of disposal of investments in subsidiaries, as it is generally the Company’s intention to hold these investments, not to realize them. The determination of the amount of related unrecognized deferred tax liability is not practicable. |
| 2. | Amounts of tax-exempt income generated from the Company’s current Approved Enterprises and unremitted earnings from foreign subsidiaries retained for reinvestment in the Group. See note |
Uncertain tax positions: |
Teva recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized. Teva regularly
re-evaluates
its tax positions based on developments in its tax audits, statute of limitations expirations, changes in tax laws and new information that can affect the technical merits and change the assessment of Teva’s ability to sustain the tax benefit. In addition, the Company classifies interest and penalties recognized in the financial statements relating to uncertain tax position under the income taxes line item.Provisions for uncertain tax positions, whereas Teva has net operating losses to offset additional income taxes that would result from the settlement of the tax position, are presented as a reduction of the deferred tax assets for such net operating loss.
Derivatives and hedging: |
The Group carries out transactions involving derivative financial instruments (mainly forward exchange contracts, currency options, cross-currency swap contracts, interest rate swap contracts and treasury locks). The transactions are designed to hedge the Company’s currency and interest rate exposures. The Company does not enter into derivative transactions for trading purposes.
Derivative instruments are recognized on the balance sheet at their fair value.
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk is recognized in financial expenses—expenses
,
net in the statements of income in the period that the changes in fair value occur.For derivative instruments that are designated and qualify as a cash-flow hedge, the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the anticipated transaction in the same period or periods during which the hedged transaction affects earnings.
For derivative instruments that are designated asexpenses-net.expenses
net-investment
hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income. The effective portion is determined by looking into changes in spot exchange rate. The change in fair value attributable to changes other than those due to fluctuations in the spot exchange rate are excluded from the assessment of hedge effectiveness and are recognized in the statement of income under financial,
net.For derivative instruments that qualify for hedge accounting, the cash flows associated with these derivatives are reported in the consolidated statements of cash flows consistently with the classification of the cash flows from the underlying hedged items that these derivatives are hedging.
10
5
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Derivative instruments that do not qualify for hedge accounting are recognized on the Balance Sheet at their fair value, with changes in the fair value recognized as a component of financial expenses—expenses
,
net in the statements of income. The cash flows associated with these derivatives are reflected as cash flows from operating activities in the consolidated statements of cash flows.Revenue recognition: |
A contract with a customer exists only when: the parties to the contract have approved it and are committed to perform their respective obligations, the Company can identify each party’s rights regarding the distinct goods or services to be transferred (“performance obligations”), the Company can determine the transaction price for the goods or services to be transferred, the contract has commercial substance and it is probable that the Company will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
Revenues are recorded in the amount of consideration to which the Company expects to be entitled in exchange for performance obligations upon transfer of control to the customer, excluding amounts collected on behalf of other third parties and sales taxes.
The amount of consideration to which Teva expects to be entitled varies as a result of rebates, chargebacks, returns and other sales reserves and allowances (“SR&A”) that the Company offers to its customers and their customers, as well as the occurrence or nonoccurrence of future events, including milestone events. A minimum amount of variable consideration is recorded by the Company concurrently with the satisfaction of performance obligations to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently
resolved. Estimates of variable consideration are based on historical experience and the specific terms in the individual agreements (which the Company believes approximates expected value). Rebates and chargebacks are the largest components of SR&A. If a minimum cannot be reasonably estimated, such revenue may be deferred to a future period when better information is available. For further description of SR&A components and how they are estimated, see “Variable Consideration” below.
Shipping and handling costs, after control of the product has transferred to a customer, are accounted for as a fulfillment cost and are recorded under S&M expenses.
Teva does not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between the time of transfer of the promised goods or services to the customer and the time the customer pays for these goods or services to be generally one
year or less, based on the practical expedient. The Company’s credit terms to customers are, on average, between thirty and ninety days.
The Company generally recognizes the incremental costs of obtaining contracts as an expense since the amortization period of the assets that the Company otherwise would have recognized is one year or less. The costs are recorded under S&M expenses. Similarly, Teva does not disclose the value of unsatisfied performance obligations for contracts with original expected duration of one year or less.
Nature of revenue streams
Revenue from sales of goods, including sales to distributors is recognized when the customer obtains control of the product. This generally occurs when products are shipped once the Company has a present right to payment and legal title, and risk and rewards of ownership are obtained by the customer.
10
6
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Licensing arrangements performance obligations generally include intellectual property (“IP”) rights, certain R&D and contract manufacturing services. The Company accounts for IP rights and services separately if they are distinct
distinct—i.e. if they are separately identifiable from other items in the arrangement and if the customer can benefit from them on their own or with other resources that are readily available to the customer. The consideration is allocated between IP rights and services based on their relative stand-alone selling prices.
Revenue for distinct IP rights is accounted for based on the nature of the promise to grant the license. In determining whether the Company’s promise is to provide a right to access its IP or a right to use its IP, the Company considers the nature of the IP to which the customer will have rights. IP is either functional IP which has significant standalone functionality or symbolic IP which does not have significant standalone functionality. Revenue from functional IP is recognized at the point in time when control of the distinct license is transferred to the customer. Revenue from symbolic IP is recognized over the access period to the Company’s IP.
Revenue from sales based milestones and royalties promised in exchange for a license of IP is recognized only when, or as, the later of subsequent sale or the performance obligation to which some or all of the sales-based royalty has been allocated, is satisfied. Revenues from licensing arrangements included royalty income of $129 million, $147 million $165 million and $327$165 million for the years ended December 31
, 2020
, 2019
and 2018 and 2017,
, respectively. The amounts recognized in 2017 include royalty income resulting from the Ninlaro®transaction.
Distribution revenues are derived from sales of third-party products for which the Company acts as distributor, mostly in the United States via Anda and in Israel via Salomon Levin and Elstein Ltd. (SLE). In the United States, the Company is the principal in these arrangements and therefore records revenue on a gross basis as it controls the promised goods before transferring these goods to the customer. In Israel, the Company is the
agent in these arrangements and therefore records revenue on a net basis as it has no discretion in establishing prices for any specifies goods or services, limited inventory risk and is not primarily responsible for contract fulfillment. See also section b above. Revenue is recognized when the customer obtains control of the products. This generally occurs when products are shipped once the Company has a present right to payment and legal title and risk and rewards of ownership are obtained by the customer.
Other revenues are primarily comprised of contract manufacturing services, sales of medical devices and other miscellaneous items. Revenue is recognized when the customer obtains control of the products. This generally occurs when products are shipped once the Company has a present right to payment and legal title and risk and rewards of ownership are obtained by the customer.
Contract assets and liabilities
Contract assets are mainly comprised of trade receivables net of allowance for doubtful debts, which includes amounts billed and currently due from customers.
Contract liabilities are mainly comprised of deferred revenues which were immaterial as of December 31, 20192020 and 2018.2019.
Variable consideration
Variable consideration mainly includes SR&A, comprised of rebates (including Medicaid and other governmental program discounts), chargebacks, returns and other promotional (including shelf stock adjustments) items. Provisions for prompt payment discounts are netted against trade receivables.
10
7
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
The Company recognizes these provisions at the time of sale and adjusts them if the actual amounts differ from the estimated provisions. The following describes the nature of each deduction and how provisions are estimated:
Rebates
Rebates are primarily related to volume incentives and are offered to key customers to promote loyalty. These rebate programs provide that, upon the attainment ofcustomers.
customers and managed care agreements.pre-established
volumes or the attainment of revenue milestones for a specified period, the customer receives a rebate. Since rebates are contractually agreed upon, they are estimated based on the specific terms in each agreement based on historical trends and expected sales. Externally obtained inventory levels and expected sales usage by contract are evaluated in relation to estimates made for rebates payable to indirect Medicaid and Other Governmental Rebates
Pharmaceutical manufacturers whose products are covered by the Medicaid program are required to provide a rebate to each state as a percentage of their average manufacturer’s price for thegeneric products dispensed and “best price” for specialty products dispensed. Many states have also implemented supplemental rebate programs that obligate manufacturers to pay rebates in excess of those required under federal law. The Company estimates these rebates based on historical trends of rebates paid, as well as on changes in wholesaler inventory levels and increases or decreases in sales.
Chargebacks
The Company has arrangements with various third parties, such as managed care organizations and drug store chains, establishing prices for certain of Teva’s products. While these arrangements are made between the
Company and the customers, the customers independently select a wholesaler from which they purchase the products. Alternatively, certain wholesalers may enter into agreements with the customers, with Teva’s concurrence, which establish the pricing for certain products which the wholesalers provide. Under either arrangement, Teva will issue a credit (referred to as a “chargeback”) to the wholesaler for the difference between the invoice price to the wholesaler and the customer’s contract prices.prices. Provisions for chargebacks involve estimates of contract prices of over 2,000 products and multiple contracts with multiple wholesalers. ProvisionsProvisions for chargebacks involve estimates of usage by retailers and other indirect buyers with varying contract pricesprices for multiple wholesalers. The provision for chargebacks varies in relation to changes in product mix, pricing and the level of inventory at the wholesalers and, therefore, will not necessarily fluctuate in proportion to an increase or decrease in sales. Provisions for estimating chargebacks are calculated using historical chargeback experience and/or expected chargeback levels for new products and anticipated pricing changes. Teva considers current and expected price competition when evaluating the provision for chargebacks. Chargeback provisions are compared to externally obtained distribution channel reports for reasonableness. The Company regularly monitors the provision for chargebacks and makes adjustments when the Company believes that actual chargebacks may differ from estimated provisions.
Other Promotional Arrangements
Other promotional or incentive arrangements are periodically offered to customers, specifically related to the launch of products or other targeted promotions. Provisions are made in the period for which the Company can estimate the incentive earned by the customer, in accordance with the contractual terms. The Company regularly monitors the provision for other promotional arrangements and makes adjustments when it believes that the actual provision may differ from the estimated provisions.
10
8
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Shelf Stock Adjustments
The custom in the pharmaceutical industry is generally to grant customers a shelf stock adjustment based on the customers’ existing inventory contemporaneously with decreases in the market price of the related product. The most significant of these relate to products for which an exclusive or semi-exclusive period exists. Provisions for price reductions depend on future events, including price competition, new competitive launches and the level of customer inventories at the time of the price decline. Teva regularly monitors the competitive factors that influence the pricing of its products and customer inventory levels and adjust these estimates where appropriate.
Returns
Returns primarily relate to customer returns of expired products which, the customer has the right to return up to one year following the expiration date. Such returned products are destroyed and credits and/or refunds are issued to the customer for the value of the returns. Accordingly, no returned assets are recoded in connection with those products. The returns provision is estimated by applying a historical return rate to the amounts of revenue estimated to be subject to returns. Revenue subject to returns is estimated based on the lag time from time of sale to date of return. The estimated lag time is developed by analyzing historical experience. Additionally, The Company considers specific factors, such as estimated levels of inventory in the distribution channel, product dating and expiration, size and maturity of launch, entrance of new competitors, changes in formularies or packaging and any changes to customer terms, for determining the overall expected levels of returns.
Prompt Pay Discounts
Prompt pay discounts are offered to most customers to encourage timely payment. Discounts are estimated at the time of invoice based on historical discounts in relation to sales. Prompt pay discounts are almost always utilized by customers. As a result, the actual discounts do not vary significantly from the estimated amount.
Research and development: |
Research and development expenses are charged to statement of income (loss) as incurred. Participations and grants in respect of research and development expenses are recognized as a reduction of research and development expenses as the related costs are incurred, or as the related milestone is met. Upfront fees received in connection with cooperation agreements are deferred and recognized over the period of the applicable agreements as a reduction of research and development expenses.
Advance payments for goods or services that will be used or rendered for future research and development activities are deferred. Such amounts are recognized as an expense as the related goods are delivered or the services are performed.
Research and development
in-process
acquired as part of an asset purchase, which has not reached technological feasibility and has no alternative future use, is expensed as incurred.Shipping and handling costs: |
Shipping and handling costs, which are included in S&M expenses, were $124 million, $138 million $159 million and $164$159 million for the years ended December 31
, 2020
, 2019
and 2018 and 2017,
, respectively.
10
9
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Advertising costs: |
Advertising costs are expensed as incurred. Advertising costs for the years ended December 31
, 2020
, 2019
and 2018 and 2017
were $225 million, $213 million $256 million and $318$256 million, respectively.
Restructuring: |
Restructuring provisions are recognized for the direct expenditures arising from restructuring initiatives, where the plans are sufficiently detailed and where appropriate communication to those affected has been made.
Costs for
one-time
termination benefits in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period.Contractual termination benefits are provided to employees when employment is terminated due to an event specified in the provisions of an existing plan or agreement. A liability is recorded and the expense is recognized when it is probable that employees will be entitled to the benefits and the amount is reasonably estimable.
Special termination benefits arise when the Company offers, for a short period of time, to provide certain additional benefits to employees electing voluntary termination. A liability is recorded and the expense is recognized in the period the employees irrevocably accept the offer and the amount of the termination liability is reasonably estimable.
Segment reporting: |
The Company’s business includes three reporting segments based on three geographical areas:
| (a) | North America segment, which includes the United States and Canada. |
| (b) | Europe segment, which includes the European Union and certain other European countries. |
| (c) | International Markets segment, which includes all countries in which Teva operates other than those in the North America and Europe segments. |
Each business segment manages the entire product portfolio in its region, including generics, specialty and(“OTC”) products.
over-the-counter
In addition to these three segments, Teva has 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 its affiliate Medis.Earnings per share: |
Basic earnings per share are computed by dividing the net income attributable to ordinary shareholders by the weighted average number of ordinary shares (including fully vested RSUs and PSUs) outstanding during the year, net of treasury shares.
In computing diluted earnings per share, basic earnings per share are adjusted to take into account the potential dilution that could occur upon: (i) the exercise of options and
non-vested
RSUs and PSUs granted under employee stock compensation plans and one series of convertible senior debentures, using the treasury stock method; (ii) the conversion of the remaining convertible senior debentures using the“if-converted”
method, by1
10
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
adding to net income interest expense on the debentures and amortization of issuance costs, net of tax benefits, and by adding the weighted average number of shares issuable upon assumed conversion of the debentures; and (iii) until December 17, 2018, the conversion of the mandatory convertible preferred shares (“MCPS”) using the
“if-converted”
method by adding to net income attributable to ordinary shareholders the dividends on the preferred shares and by adding the weighted average number of shares issuable upon assumed conversion of the mandatory convertible preferred shares.On December 17
, 2018
, the mandatory convertible preferred shares automatically converted into ordinary shares. As a result of this conversion, Teva issued 70.6 million ADSs.
See note 14.14
.
Securitization |
Teva accounts for transfers of certain of its trade receivable as sales when it has surrendered control over the related assets in accordance with ASC Topic 860 “Transfer and Servicing” of Financial Assets. Whether control has been relinquished requires, among other things, an evaluation of relevant legal considerations and an assessment of the nature and extent of the Company’s continuing involvement with the assets transferred. Assets obtained and liabilities incurred in connection with transfers reported as sales are initially recognized in the balance sheet at fair value. Refer to note 10f.
10 f.Divestitures |
The Company nets the proceeds on the divestitures of products with the carrying amount of the related assets and records gain or loss on sale within other income. Any contingent payments that are potentially due to the Company as a result of these divestitures are recorded when it is probable that a significant reversal of income will not occur, or in the case of a business, when such payments are realizable. For divestures of businesses, including divestitures of products that qualify as a business, the Company reflects the relative fair value of goodwill associated with the businesses in the determination of gain or loss on sale.
Debt instruments |
Debt instruments are initially recognized at the fair value of the consideration received. Debt issuance costs are recorded on the consolidated balance sheet as a reduction of liability. They are subsequently recognized at
amortized cost using the effective interest method. Debt may be considered extinguished when it has been modified and the terms of the new debt instruments and old debt instruments are “substantially different” (as defined in the debt modification guidance in ASC
470-50
“Debt—Modifications and Extinguishments”). The Company classifies the current portion of long term debt asnon-current
liabilities on the Balance Sheet when it has the intent and ability to refinance the obligation on a long-term basis, in accordance with ASC470-50
“Debt”.Leases |
The Company’s lease accounting policy until December 31, 2018, prior to the adoption of the new lease standard
Teva leases real estate, cars and equipment for use in its operations, which are classified as operating leases. In addition to rent, the leases may require Teva to pay directly for fees, insurance, maintenance and other operating expenses. Rental expense for the year ended December 31, 2018 and theyearended December 31, 2017,were$175 million and $200 million, respectively.was $175 million. The Company also has capital leases for properties.
1
11
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
The Company’s lease accounting policy from January 1, 2019, following the adoption of the new lease standard
Teva adopted the new accounting standard ASC 842 “Leases” and all the related amendments on January 1, 2019 and used the effective date as Teva’s date of initial application.
Teva determines if an arrangement is a lease at inception. Lease classification is governed by five criteria in ASCIf any of these five criteria is met, Teva classifies the lease as a finance lease. Otherwise, Teva classifies the lease as an operating lease. When determining lease classification, Teva’s approach in assessing two of the mentioned criteria is: (i) generally, 75% or more of the remaining economic life of the underlying asset is a major part of the remaining economic life of that underlying asset; and (ii) generally, 90% or more of the fair value of the underlying asset comprises substantially all of the fair value of the underlying asset.
842-10-25-2.
Operating leases are included in operating lease(“ROU”) assets, other current liabilities and operating lease liabilities in the consolidated balance sheets. Finance leases are included in property, plant and equipment, other current liabilities, and other long-term liabilities in the consolidated balance sheets.
right-of-use
ROU assets represent Teva’s right to use an underlying asset for the lease term and lease liabilities represent Teva’s obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Teva uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of the lease payments.
For finance leases, Teva recognizes interest on the lease liability separately from amortization of the ROU assets in the statement of comprehensive income. For operating leases, lease expenses are recognized on a straight-line basis over the lease term.
The new standard also provides practical expedients for an entity’s ongoing accounting. Teva elected the short-term lease recognition exemption for all leases with a term shorter than 12 months. This means that for those leases, Teva does not recognize ROU assets or lease liabilities, including ROU assets or lease liabilities for existing short-term leases of assets in transition, but recognizes lease expenses over the lease term on a straight line basis. Teva also elected the practical expedient to not separate lease and
non-lease
components for all of Teva’s leases, other than leases of real estate.Lease terms will include options to extend or terminate the lease when it is reasonably certain that Teva will either exercise or not exercise the option to renew or terminate the lease.
Teva’s lease agreements have remaining lease terms ranging from 1 year to 8078 years. Some of these agreements include options to extend the leases for up to 15
10
years and some include options to terminate the leases immediately. Certain leases also include options to purchase the leased property.
The depreciable life of leasehold improvements is limited by the expected lease term, unless there is a transfer of title or a purchase option for the leased asset reasonably certain of exercise.
Some of Teva’s vehicle lease agreements include rental payments based on the actual usage of the vehicles and other lease agreements include rental payments adjusted periodically for inflation. Teva’s lease agreements do not contain any material residual value guarantees.
The new Lease Standard will havelease standard has no impact on Teva’s debt-covenant compliance under its RCF.
1
12
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Teva rents out or subleases certain assets to third parties, which has an immaterial impact on Teva’s consolidated financial statements.
NOTE 2—Certain transactions:
a. | Business acquisitions: |
Actavis Generics and Anda acquisitions
On August 2, 2016, Teva consummated its acquisition of Allergan plc’s (“Allergan”) worldwide generic pharmaceuticals business (“Actavis Generics”). At closing, Teva transferred to Allergan consideration of approximately $33.4 billion in cash and approximately 100.3 million Teva shares.
On October 3, 2016, Teva consummated the acquisition of Anda Inc. (“Anda”), a medicines distribution business in the United States, from Allergan, for cash consideration of $500 million. This transaction was related to the Actavis Generics acquisition and, as such, the purchase price accounting and related disclosures were treated on a combined basis.
The final cash consideration for the Actavis Generics acquisition was subject to certain net working capital adjustments. On January 31, 2018, Teva and Allergan entered into a settlement agreement and mutual releases for which Allergan made a
one-time
payment of $703 million to Teva to settle the working capital adjustments under the Master Purchase Agreement, dated July 26, 2015. As the measurement period has ended, this amount was recorded as a gain under legal settlements and loss contingencies in the first quarter of 2018.Rimsa
On March 3, 2016, Teva completed the acquisition of Representaciones e Investigaciones Médicas, S.A. de C.V. (“Rimsa”), a pharmaceutical manufacturing and distribution company in Mexico, for $2.3 billion, in a cash free, debt free set of transactions. Teva financed the transaction using cash on hand.
Following the closing of the acquisition, Teva identified issues concerning Rimsa’s
pre-acquisition
quality, manufacturing and other practices, at which point Teva began an assessment of the extent and cost of remediation required to return its products to the market. In September 2016,2
lawsuits were filed: apre-emptive
suit by the Rimsa sellers against Teva and Teva’s lawsuit alleging fraud and breach of contract against the Rimsa sellers. The Rimsa sellers subsequently dismissed their lawsuit and the dismissal was approved by court order on December 20, 2016.On February 15, 2018, Teva and the Rimsa sellers entered into a settlement agreement and mutual releases with respect to Teva’s breach of contract claim, pursuant to which the Rimsa sellers made a2018.2018.
one-time
payment to Teva. Teva’s breach of contract claim was subsequently dismissed by the court. As the measurement period has ended, this payment was recorded as a gain under legal settlements and loss contingencies in the first quarter of December 31, 2019 | December 31, 2018 | |||||||
(U.S. $ in millions) | ||||||||
Property, plant and equipment, net | 98 | 92 | ||||||
Goodwill | — | 51 | ||||||
Adjustments of assets held for sale to fair value | (11 | ) | (51 | ) | ||||
Total assets of the disposal group classified as held for sale in the consolidated balance sheets | $ | 87 | $ | 92 | ||||
Other significant agreements: |
The Company has entered into alliances and other arrangements with third parties to acquire rights to products it does not have, to access markets it does not operate in and to otherwise share development costs or business risks. The Company’s most significant agreements of this nature are summarized below.
11
3
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Alvotech Partnership
In August 2020, Teva entered into a partnership agreement with biopharmaceutical company Alvotech for the exclusive commercialization in the U.S. of five biosimilar product candidates. The initial pipeline for this partnership contains biosimilar candidates addressing multiple therapeutic areas. Under this agreement, Alvotech is responsible for the development, registration and supply of the biosimilar product candidates and Teva will exclusively commercialize the products in the United States. Teva paid an upfront payment in the third quarter of 2020 that w
as
recorded as R&D expenses. During the fourth quarter of 2020, Teva accrued additional amounts due to the high probability that additional milestone payments will be paid in 2021. Additional development and commercial milestone payments of upto
$450 million,
as well as royalty payments, may be payable by Teva over the next few years. Teva and Alvotech will share profit from the commercialization of these biosimilar
s.
NOTE 1—Significant accounting policies:
a. | General: |
Operations
Teva entered into an agreementPharmaceutical Industries Limited (the “Parent Company”), headquartered in Israel, together with Eli Lilly, resolvingits subsidiaries and associated companies (the “Company,” “Teva” or the European Patent Office opposition they had filed against Teva’s AJOVY®patents. The settlement agreement with Lilly also resolved Lilly’s action to revoke the patent protecting AJOVY“Group”), is engaged in the United Kingdom.
Basis of presentation and Korea. Teva received a $25 million upfront paymentuse of estimate
s
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
In preparing the Company’s consolidated financial statements, management is required to make estimates and assumptions that was recognized as revenueaffect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the first quarterreported years. Actual results could differ from those estimates.
As applicable to these consolidated financial statements, the most significant estimates and assumptions relate to determining the valuation and recoverability of 2018.intangible assets and goodwill; assessing sales reserves and allowances in the United States, and contingent consideration; assessing compliance with debt covenants; uncertain tax positions, valuation allowances, contingencies, inventory valuation and restructuring. The agreement stipulates additional milestone paymentsinputs into Teva’s judgments and estimates also consider the economic implications of theTevasales, reserves and allowances, IPR&D assets, marketed product rights and goodwill, all of upwhich will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning the$175 million,contain or treat it, as well as the economic impact on Teva’s employees, third-party manufacturers and suppliers, customers and markets. All estimates made by Teva related to the impact of theroyalties.periods.
COVID-19
pandemic on its critical and significant accounting estimates, most significantly in relation to COVID-19
pandemic and the actions taken to COVID-19
pandemic within its financial statements may change in future Certain amounts in the consolidated financial statements and associated notes may not add up due to rounding. All percentages have been calculated using unrounded amounts.
A major part of the Group’s operations is carried out by the Company in the United States, Israel and certain other countries. The functional currency of these entities is the U.S. dollar (“dollar” or “$”).
The functional currency of certain subsidiaries and associated companies is their local currency. The financial statements of those companies are included in the consolidated financial statements, translated into U.S. dollars. Assets and liabilities are translated at
year-end
exchange rates, while revenues and expenses are translated at monthly average exchange rates during the year. Differences resulting from translation are presented as other comprehensive income (loss) in the consolidated statements of comprehensive income (loss).In the event of a divestiture of a foreign subsidiary, the related foreign currency translation results are reversed from equity to income. Foreign currency exchange gains and losses are included in net income (loss).
9
6
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries, joint ventures and VIEs for which the Company is considered the primary beneficiary. For those consolidated entities where Teva owns less than 100%, the outside shareholders’ interests are shown as
non-controlling
interestsin equity. Investments in affiliates over which the Company has significant influence but not a controlling interest, are carried on the equity basis.
For VIEs, the Company performs an analysis to determine whether the variable interests give a controlling financial interest in a VIE. The Company periodically reassesses whether it controls its VIEs.
Intercompany transactions and balances are eliminated on consolidation; profits from intercompany sales, not yet realized outside the Group, are also eliminated.
b. | New accounting pronouncements |
Recently adopted accounting pronouncements
In JulyMarch 2020, the FASB issued ASU
2020-04
“Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The guidance applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This guidance is effective for all entities as of March 12, 2020 through December 31, 2022. There was no impact to the Company’s consolidated financial statements for the period ended December 31, 2020 as a result of adopting this standard update. The Company is continuing to evaluate the potential impact of the replacement of the LIBOR benchmark on its interest rate risk management activities and has started initial negotiations to transform the facility base rate of its securitization program. However, it is not expected to have a material impact on the consolidated financial results.In April 2019, the FASB issued ASU
2019-04
“Codification Improvements to Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 825).” This ASU provides clarifications of three topics related to financial instruments accounting. Teva adopted the provisions of this update as of January 1, 2020 with no material impact on its consolidated financial statements.In November 2018, the FASB issued ASUguidance in ASC 808 to align with guidance in ASC 606 and (iii) precludes presenting revenue from a collaborative arrangement together with revenue recognized under ASC 606 if the collaborative arrangement participant is not a customer. Teva terminatedadopted the provisions of this update as of January 1, 2020 with no material impact on its joint ventureconsolidated financial statements.
2018-18
“Collaborative Arrangements (Topic 808)—Clarifying the interaction between Topic 808 and Topic 606.” The amendments provide guidance on whether certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606. It also specifically (i) addresses when the participant should be considered a customer in the context of a unit of account, (ii) addsunit-of-account
In August 2018, the FASB issued ASUProcter & Gamblerequirements for capitalizing implementation costs incurred to develop or obtain
2018-15
“Intangibles—Goodwill andother—Internal-use
software (Subtopic350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the internal-use
software. Teva applied the guidance prospectively to all implementation costs incurred after the date of adoption. Teva adopted the provisions of this update as of January 1, 2020 with no material impact on its consolidated financial statements.9
7
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
In August 2018, the FASB issued ASU
2018-13
“Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” This guidance removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Certain disclosures required by this guidance must be applied on a retrospective basis and others on a prospective basis. Teva adopted the provisions of this update as of January 1, 2020 with no material impact on its consolidated financial statements.In June 2016, the FASB issued ASU(“P&G”), PGT Healthcare partnership (“PGT”), whichwill contemplate forward-looking economic conditions in recording lifetime expected credit losses for the two companies establishedCompany’s financial assets measured at cost, such as the Company’s trade receivables and certain short-term investments.
2016-13
“Financial Instruments—Credit Losses—Measurement of Credit Losses on Financial Instruments.” This guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Upon adoption of the standard, there was no immediate impact to the Company’s financial position, results of operations or cash flows. On an ongoing basis, the Company Recently issued accounting pronouncements, not yet adopted
In August 2020, the FASB issued ASU2011 to market OTC medicines. Teva will continue to maintain its OTC businessEntity’s Own Equity (Subtopic 815 – 40).” This guidance simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an independent basis.entity’s own equity. The amendments to this guidance are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
2020-06
“Debt – Debt with Conversion and Other Options(Subtopic 470-20)
and Derivatives and Hedging – Contracts in In December 2019, the FASB issued ASUAs2019-12“Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes” (the “update”). The amendments in this update simplify the accounting for income taxes by removing the following exceptions in ASC 740: (1) exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items; (2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) exception to the general methodology for calculating income taxes in an interim period when aloss exceeds the anticipated loss for the year.
year-to-date
In addition, the update also simplifies the accounting for income taxes in certain topics as follows: (1) requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as aseparation, Teva transferredbusiness combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; (3) specifying that an entity can elect (rather than be required to) allocate the consolidated amount of current and deferred tax expense to P&Ga legal entity that is not subject to tax in its separate financial statements; and (4) requiring that an entity reflect the shares it heldeffect of an enacted change in New Chapter Inc.tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments in this update are effective for fiscal years, and ownership rights in an OTC plant located in India. Teva provides certain services to P&Ginterim periods within those fiscal years, beginning after the separation for a transition period.December 15, 2020. The
non-income-based
tax; (2) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the 9
8
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Company reviewed the above topics, noting that Items (1) and (4) of this paragraph are expected to be relevant, but not material. The adoption of this guidance will not have a significant impact on the Company’s consolidated financial statements.
c. | Acquisitions: |
Teva’s consolidated financial statements include the operations of acquired businesses from the date of the acquisition’s consummation. Acquired businesses are accounted for using the acquisition method of accounting, which requires, among other things, that most assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date and that the fair value of acquired in process research and development (“IPR&D”) be recorded on the balance sheet. Transaction costs are expensed as incurred. Any excess of the consideration transferred over the assigned values of the net assets acquired is recorded as goodwill. When Teva acquires net assets that do not constitute a business, as defined under U.S. GAAP, no goodwill is recognized and acquired IPR&D is expensed.
Contingent consideration incurred in a business combination is included as part of the acquisition price and recorded at a probability weighted assessment of its fair value as of the acquisition date. The fair value of the contingent consideration is
re-measured
at each reporting period, with any adjustments in fair value recognized in earnings under other assets impairments, restructuring and other items.d. | Collaborative arrangements: |
Collaborative agreements are contractual arrangements in which the parties are active participants to the arrangement and are exposed to the significant risks and rewards that are dependent on the ultimate commercial success of the endeavor.
The Company recognizes revenue generated and costs incurred on sales to third parties as it relates to collaborative agreements as gross or net. If the Company is the principal participant in a transaction, revenues and costs are recorded on a gross basis; otherwise, revenues are recorded on a net basis.
e. | Equity investments: |
The Company measures equity investments at fair value with changes in fair value recognized in net income. The Company accounts for equity investments that do not have a readily determinable fair value as cost method investments under the measurement alternative prescribed within ASU
2016-01
“Financial Instruments—Recognition and Measurement of Financial Assets and Financial Liabilities” to the extent such investments are not subject to consolidation or the equity method. Under the measurement alternative, these financial instruments are carried at cost, less any impairment (assessed quarterly), adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. In addition, income is recognized when dividends are received only to the extent they are distributed from net accumulated earnings of the investee. Otherwise, such distributions are considered returns of investment and are recorded as a reduction of the cost of the investment. The Company accounts for equity investments as current when the Company has the intent and ability to sell such assets within the next twelve months.f. | Fair value measurement: |
The Company measures fair value and discloses fair value measurements for financial assets and liabilities. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
9
9
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
In December 2016, Teva entered into a license agreement for research, development, manufacturedetermining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and commercializingminimize the use of Attenukine technology with a subsidiaryunobservable inputs to the extent possible and considers counterparty credit risk in its assessment of Takeda Pharmaceutical Company Ltd. (“Takeda”). Teva received a $30 million upfront payment.
g. | Investment in debt securities: |
Investment in securities consists of debt securities classified asNinlaro®available-for-saleand recorded at fair value. The fair value of quoted securities is based on current market value. When debt securities do not have an active market, fair value is determined using a valuation model. This model is based on reference to other instruments with similar characteristics, or a discounted cash flow analysis, or other pricing models making use of market inputs and relying as little as possible on entity-specific inputs.In November 2016, Teva entered intoUnrealized gains of available for sale debt securities, net of taxes, are reflected in other comprehensive income. Unrealized losses considered to be temporary are reflected in other comprehensive income; unrealized losses that are considered to be other-than-temporary are charged to income as an agreementimpairment charge. Realized gains and losses for debt securities are included in financial expenses, net.CelltrionIn October 2016, Teva and Celltrion, Inc. (“Celltrion”) entered into a collaborative agreement to commercialize TRUXIMA®and HERZUMA®, two biosimilar products for the U.S. and Canadian markets. Teva paid Celltrion $160 million, of which up to $60 million is refundable or creditable under certain circumstances. 127
The Company’s investment in debt securities accounting policy until December 31, 2019, prior to the adoption of the new Current Expected Credit Losses (“CECL”) standard
The Company considers available evidence in evaluating potential impairments of its investments, including the duration and extent to which fair value is less than cost. For debt securities, an other-than-temporary impairment has occurred if the Company does not expect to recover the entire amortized cost basis of the debt security. If the Company does not intend to sell the impaired debt security, and it is not more likely than not it will be required to sell the debt security before the recovery of its royalties and other rights in Ninlaro (ixazomib) to a subsidiary of Takeda, for a $150 million upfront payment to Teva and an additional $150 million payment based on sales during 2017. Teva was entitled to these royalties pursuant to an agreement from 2014 assigning the Ninlaro patents to an affiliate of Takeda in consideration of milestone payments and sales royalties. In the first six months of 2017, Teva received payments inamortized cost basis, the amount of $150 million, which werethe other-than-temporary impairment recognized as revenue forin earnings, recorded in financial expense, net, is limited to the period.
portion attributed to credit loss. The remaining portion of the other-than-temporary impairment related to other factors is recognized in other comprehensive income.Unrealized gains and losses forSee note 1 for a summaryavailable-for-salesecurities are excluded from earnings and reported net of the significant accounting policies.related tax effect in the accumulated other comprehensive income component of shareholders’ equity.
The CECL methodology, which became effective January 1, 2020, requires the Company to estimate lifetime expected credit losses for alldebt securities in an unrealized loss position.
available-for-sale
100
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Year ended December 31, 201 9 | ||||||||||||||||||||
North America | Europe | International Markets | Other activities | Total | ||||||||||||||||
(U.S. | ||||||||||||||||||||
Sale of goods | 6,941 | 4,770 | 2,045 | 754 | 14,510 | |||||||||||||||
Licensing arrangements | 109 | 29 | 4 | 5 | 147 | |||||||||||||||
Distribution | 1,492 | 2 | 20 | — | 1,514 | |||||||||||||||
Other | § | (6 | ) | 177 | 545 | 716 | ||||||||||||||
| $ | 8,542 | $ | 4,795 | $ | 2,246 | $ | 1,304 | $ | 16,887 | |||||||||||
Year ended December 31, 201 8 | ||||||||||||||||||||
North America | Europe | International Markets | Other activities | Total | ||||||||||||||||
(U.S. | ||||||||||||||||||||
Sale of goods | 7,838 | 5,153 | 2,151 | 739 | 15,881 | |||||||||||||||
Licensing arrangements | 111 | 23 | 22 | 9 | 165 | |||||||||||||||
Distribution | 1,347 | 7 | 19 | — | 1,373 | |||||||||||||||
Other | 1 | 3 | 230 | 618 | 852 | |||||||||||||||
| $ | 9,297 | $ | 5,186 | $ | 2,422 | $ | 1,366 | $ | 18,271 | |||||||||||
Year ended December 31, 201 7 | ||||||||||||||||||||
North America | Europe | International Markets | Other activities | Total | ||||||||||||||||
(U.S. | ||||||||||||||||||||
Sale of goods | 10,706 | 5,244 | 2,558 | 748 | 19,256 | |||||||||||||||
Licensing arrangements | 281 | 3 | 38 | 5 | 327 | |||||||||||||||
Distribution | 1,153 | 214 | 17 | — | 1,384 | |||||||||||||||
Other | 1 | 5 | 250 | 630 | 886 | |||||||||||||||
| $ | 12,141 | $ | 5,466 | $ | 2,863 | $ | 1,383 | $ | 21,853 | |||||||||||
Comparative information continues to be reported in accordance with the methodology in effect for prior periods. When estimating a security’s probability of default and the recovery rate, the Company assesses the security’s credit indicators, including credit ratings. If the assessment indicates that an expected credit loss exists, the Company determines the portion of the unrealized loss attributable to credit deterioration and records an allowance for the expected credit loss through the Consolidated Statements of Income. Unrealized gains and any portion of a security’s unrealized loss attributable to
non-credit
losses are recorded in the Consolidated Statements of Comprehensive Income, net of tax.h. | Cash and cash equivalents: |
All highly liquid investments, which include short-term bank deposits and money market instruments, that are not restricted as to withdrawal or use, and investment in short-term debentures, the period to maturity of which did not exceed three months at the time of investment, are considered to be cash equivalents.
i. | Accounts receivables: |
The financial data presentedCompany’s accounts receivables accounting policy until December 31, 2019, prior to the adoption of the new CECL standard
Accounts receivables are stated at their net realizable value. The allowance against gross accounts receivables reflects the best estimate of losses inherent in the tables above with respectreceivables portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available information. An allowance for doubtful debts is reflected in net accounts receivables. Accounts receivables are written off after all reasonable means to prior periodscollect the full amount have been revisedexhausted.
The Company’s accounts receivables accounting policy from January 1, 2020, following the adoption of the new CECL standard
Accounts receivable have been reduced by an allowance for doubtful accounts. The Company maintains the allowance for estimated losses resulting from the inability of the Company’s customers to reflectmake required payments. The allowance represents the current estimate of lifetime expected credit losses over the remaining duration of existing accounts receivable considering current market conditions and supportable forecasts when appropriate. The estimate is a revisionresult of the Company’s ongoing evaluation of collectability, customer creditworthiness, historical levels of credit losses, and future expectations.
Write-off
activity and recoveries for the periods presented were not material.j. | Concentration of credit risks: |
Most of Teva’s cash and cash equivalents (which, along with investment in securities, totaled $2,478 million at December 31, 2020) were deposited with European, U.S. and Israeli banks and financial institutions and were comprised mainly of cash deposits.
The pharmaceutical industry, particularly in the presentationUnited States, has been significantly affected by consolidation among managed care providers, large pharmacy chains, wholesaling organizations and other buyer groups. The U.S. market constituted approximately 48% of Teva’s consolidated revenues in 2020. The exposure of credit risks relating to other trade receivables outside the U.S. is limited, due to the relatively large number of group customers and their wide geographic distribution. Teva performs ongoing credit evaluations of its customers for the purpose of determining the appropriate allowance for doubtful accounts and generally does not require collateral and from time to time the Company may choose to purchase trade credit insurance.
101
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
k. | Inventories: |
Inventories are valued at the lower of cost or net revenuesrealizable value. Cost of raw and packaging materials, purchased products, manufactured finished products, products in process and capitalized production costs are determined predominantly on a standard cost basis, approximating actual costs. Other methods which are utilized for determining the value of inventories are moving average, cost basis and the first in first out method. Teva regularly reviews its inventories for obsolescence and other impairment risks and reserves are established when necessary.
Inventories acquired in a business combination are
stepped-up
to their estimated fair value and amortized to cost of sales as that inventory is sold.l. | Long-lived assets: |
Teva’s long-lived,
non-current
assets are comprised mainly of goodwill, identifiable intangible assets, property, plant and equipment, and operating lease ROU assets. All long-lived assets are monitored for impairment indicators throughout the year. Impairment testing for goodwill and all indefinite-lived intangible assets is performed at least annually. When necessary, charges for impairments of long-lived assets, other than goodwill, are recorded for the amount by which the fair value is less than the carrying value of these assets.Goodwill
Goodwill reflects the excess of the consideration transferred, including the fair value of any contingent consideration and any
non-controlling
interest in the acquiree, over the assigned fair values of the identifiable net assets acquired. Goodwill is not amortized, and is assigned to reporting units and tested for impairment at least on an annual basis, in the second quarter of the fiscal year.The Company has historically performed its annual goodwill assessment during the fourth quarter of each year. During the second quarter of 2020, the Company decided to change the date of its annual impairment assessment from October 1 to June 30. The change was made to more closely align the impairment assessment date with the Company’s long-term planning and forecasting process. See note 7.
The goodwill impairment test is performed according to the following principles:
| 1. | An initial qualitative assessment may be performed to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. |
| 2. | If the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying mount, a quantitative fair value test is performed. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value is recognized. |
An interim goodwill impairment test may be required in advance or after of the annual impairment test if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For example, a substantial decline in the Company’s market capitalization, unexpected adverse business conditions, economic factors and unanticipated competitive activities may indicate that an interim impairment test is required. In the event that the Company’s market capitalization declines below its book value, the Company considers the length and severity of the decline and the reason for the decline when assessing whether potential goodwill impairment exists.
Identifiable intangible assets
Identifiable intangible assets are comprised of definite life intangible assets and indefinite life intangible assets.
102
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Definite life intangible assets consist mainly of acquired product rights and other rights relating to products for which marketing approval was received from the U.S. Food and Drug Administration (“FDA”) or the equivalent agencies in other countries. These assets are amortized mainly using the straight-line method over their estimated period of useful life, or based on economic benefit models, if more appropriate, which is determined by identifying the period and manner in which substantially all of the cash flows are expected to be generated. Amortization of acquired developed products is recorded under cost of sales. Amortization of marketing and distribution rights is recorded under selling and marketing (“S&M”) expenses when separable.
Indefinite life intangible assets are mainly comprised of IPR&D assets. Teva monitors these assets for items such as research and development progress and for indicators of fair value change such as level of expected competition and or pricing, to identify any triggering events. Teva determines the fair value of the asset annually or when triggering events are present, based on discounted cash flows and records an impairment loss if book value exceeds fair value.
IPR&D acquired in a business combination is capitalized as an indefinite life intangible asset until the related research and development efforts are either completed or abandoned. In the reporting periods where they are treated as indefinite life intangible assets, they are not amortized but rather are monitored triggering events and tested for impairment. Upon completion of the related research and development efforts, management determines the useful life of the intangible assets and amortizes them accordingly. In case of abandonment or a reduction in the expected realizable value of the asset, the related research and development assets are impaired.
Whenever impairment indicators are identified for definite life intangible assets, Teva reconsiders the asset’s estimated life, calculates the undiscounted value of the asset’s or asset group’s cash flows and compares such value against the asset’s or asset group’s carrying amount. If the carrying amount is greater, Teva records an impairment loss for the excess of book value over fair value based on the discounted cash flows.
In determining the estimated fair value of identifiable intangible assets, Teva utilized a discounted cash flow model. The key assumptions within the model related to forecasting future revenue and operating income, an appropriate discount rate and an appropriate terminal value based on the nature of the long-lived asset. The Company’s updated forecasts of net cash flows for the impaired assets reflect, among others, the following: (i) for IPR&D assets, the impact of changes to the development programs, the projected development and regulatory timeframes and the risks associated with these assets; and (ii) for product rights, pricing and volume projections, as well as patent life and any significant changes to the competitive environment.
Property, plant and equipment
Property, plant and equipment are stated at cost, after deduction of the related investment grants, and depreciated using the straight-line method over the estimated useful life of the assets: buildings, mainly 40 years; machinery and equipment, mainly between 15 to 20 years; and other assets, between 5 to 10 years.
For property, plant and equipment and leaseassets, whenever impairment indicators are identified, Teva reconsiders the asset’s estimated life, calculates the undiscounted value of the asset’s cash flows and compares such value against the asset’s carrying amount. If the carrying amount is greater, Teva records an impairment loss for the excess of book value over fair value.
right-of-use
Lease(ROU) assets
right-of-use
See note 8 and note 1 cc for further discussion.
10
3
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
m. | Contingencies: |
The Company is involved in various patent, product liability, commercial, government investigations, environmental claims and other legal proceedings that arise from time to time in the ordinary course of business. Except for income tax contingencies, contingent consideration, other contingent liabilities incurred or acquired in a business combination, Teva records accruals for these types of contingencies to the extent that Teva concludes their occurrence is probable and that the related liabilities are estimable. When accruing these costs, the Company will recognize an accrual in the amount within a range of loss that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company accrues for the minimum amount within the range. Teva records anticipated recoveries under existing insurance contracts that are probable of occurring at the gross amount that is expected to be collected. Legal costs are expensed as incurred.
The Company recognizes gain contingencies when they are realized or when all related contingencies have been resolved.
n. | Treasury shares: |
Treasury shares are presented as a reduction of Teva shareholders’ equity and carried at their cost to Teva, under treasury shares.
o. | Stock-based compensation: |
Teva recognizes stock based compensation for the estimated fair value of share-based awards, restricted share units (“RSUs”) and performance share units (“PSUs”). The compensation expense for PSUs is recognized only if it is probable that the performance condition will be achieved.
Teva measures compensation expense for share-based awards based on estimated fair values on the date of grant using the Black-Scholes option-pricing model. This option pricing model requires estimates as to the option’s expected term and the price volatility of the underlying stock. Teva amortizes the value of share-based awards to expense over the vesting period on a straight-line basis.
Teva measures compensation expense for the RSUs and PSUs based on the market value of the underlying stock at the date of grant, less an estimate of dividends that will not accrue to the RSU and PSU holders prior to vesting.
p. | Deferred income taxes: |
Deferred income taxes are determined utilizing the “asset and liability” method based on the estimated future tax effects of temporary differences between the financial accounting and tax basis of assets and liabilities under the applicable tax laws, and on tax rates anticipated to be in effect when the deferred income taxes are expected to be paid or realized. A valuation allowance is provided if, based upon the weight of available evidence, it is more likely than not that a portion of the deferred income tax assets will not be realized. In determining whether a valuation allowance is needed, Teva considers all available evidence, including historical information, long range forecast of future taxable income and evaluation of tax planning strategies. Amounts recorded for valuation allowance can result from a complex series of judgments about future events and can rely on estimates and assumptions. Deferred income tax liabilities and assets are classified as
non-current.
10
4
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Deferred tax has not been provided on the following items:
| 1. | Taxes that would apply in the event of disposal of investments in subsidiaries, as it is generally the Company’s intention to hold these investments, not to realize them. The determination of the amount of related unrecognized deferred tax liability is not practicable. |
| 2. | Amounts of tax-exempt income generated from the Company’s current Approved Enterprises and unremitted earnings from foreign subsidiaries retained for reinvestment in the Group. See note 13 f. |
q. | Uncertain tax positions: |
Teva recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized. Teva regularly
re-evaluates
its tax positions based on developments in its tax audits, statute of limitations expirations, changes in tax laws and new information that can affect the technical merits and change the assessment of Teva’s ability to sustain the tax benefit. In addition, the Company classifies interest and penalties recognized in the financial statements relating to uncertain tax position under the income taxes line item.Provisions for uncertain tax positions, whereas Teva has net operating losses to offset additional income taxes that would result from the settlement of the tax position, are presented as a reduction of the deferred tax assets for such net operating loss.
r. | Derivatives and hedging: |
The Group carries out transactions involving derivative financial instruments (mainly forward exchange contracts, currency options, cross-currency swap contracts, interest rate swap contracts and treasury locks). The transactions are designed to hedge the Company’s currency and interest rate exposures. The Company does not enter into derivative transactions for trading purposes.
Derivative instruments are recognized on the balance sheet at their fair value.
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk is recognized in financial expenses
,
net in the statements of income in the period that the changes in fair value occur.For derivative instruments that are designated and qualify as a cash-flow hedge, the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the anticipated transaction in the same period or periods during which the hedged transaction affects earnings.
For derivative instruments that are designated as
net-investment
hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income. The effective portion is determined by looking into changes in spot exchange rate. The change in fair value attributable to changes other than those due to fluctuations in the spot exchange rate are excluded from the assessment of hedge effectiveness and are recognized in the statement of income under financialexpenses
,
net.For derivative instruments that qualify for hedge accounting, the cash flows associated with these derivatives are reported in the consolidated financial statements. See note 1b.statements of cash flows consistently with the classification of the cash flows from the underlying hedged items that these derivatives are hedging.
10
5
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Derivative instruments that do not qualify for hedge accounting are recognized on the Balance Sheet at their fair value, with changes in the fair value recognized as a component of financial expenses
,
net in the statements of income. The cash flows associated with these derivatives are reflected as cash flows from operating activities in the consolidated statements of cash flows.s. | Revenue recognition: |
A contract with a customer exists only when: the parties to the contract have approved it and are committed to perform their respective obligations, the Company can identify each party’s rights regarding the distinct goods or services to be transferred (“performance obligations”), the Company can determine the transaction price for the goods or services to be transferred, the contract has commercial substance and it is probable that the Company will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
Revenues are recorded in the amount of consideration to which the Company expects to be entitled in exchange for performance obligations upon transfer of control to the customer, excluding amounts collected on behalf of other third parties and sales taxes.
The amount of consideration to which Teva expects to be entitled varies as a result of rebates, chargebacks, returns and other sales reserves and allowances (“SR&A”) that the Company offers to its customers and their customers, as well as the occurrence or nonoccurrence of future events, including milestone events. A minimum amount of variable consideration is recorded by the Company concurrently with the satisfaction of performance obligations to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Estimates of variable consideration are based on historical experience and the specific terms in the individual agreements (which the Company believes approximates expected value). Rebates and chargebacks are the largest components of SR&A. If a minimum cannot be reasonably estimated, such revenue may be deferred to a future period when better information is available. For further description of SR&A components and how they are estimated, see “Variable Consideration” below.
Shipping and handling costs, after control of the product has transferred to a customer, are accounted for as a fulfillment cost and are recorded under S&M expenses.
Teva does not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between the time of transfer of the promised goods or services to the customer and the time the customer pays for these goods or services to be generally one
year or less, based on the practical expedient. The Company’s credit terms to customers are, on average, between thirty and ninety days.
The Company generally recognizes the incremental costs of obtaining contracts as an expense since the amortization period of the assets that the Company otherwise would have recognized is one year or less. The costs are recorded under S&M expenses. Similarly, Teva does not disclose the value of unsatisfied performance obligations for contracts with original expected duration of one year or less.
Nature of revenue streams
Revenue from sales of goods, including sales to distributors is recognized when the customer obtains control of the product. This generally occurs when products are shipped once the Company has a present right to payment and legal title, and risk and rewards of ownership are obtained by the customer.
10
6
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Licensing arrangements performance obligations generally include intellectual property (“IP”) rights, certain R&D and contract manufacturing services. The Company accounts for IP rights and services separately if they are distinct—i.e. if they are separately identifiable from other items in the arrangement and if the customer can benefit from them on their own or with other resources that are readily available to the customer. The consideration is allocated between IP rights and services based on their relative stand-alone selling prices.
Revenue for distinct IP rights is accounted for based on the nature of the promise to grant the license. In determining whether the Company’s promise is to provide a right to access its IP or a right to use its IP, the Company considers the nature of the IP to which the customer will have rights. IP is either functional IP which has significant standalone functionality or symbolic IP which does not have significant standalone functionality. Revenue from functional IP is recognized at the point in time when control of the distinct license is transferred to the customer. Revenue from symbolic IP is recognized over the access period to the Company’s IP.
Revenue from sales based milestones and royalties promised in exchange for a license of IP is recognized only when, or as, the later of subsequent sale or the performance obligation to which some or all of the sales-based royalty has been allocated, is satisfied. Revenues from licensing arrangements included royalty income of $129 million, $147 million and $165 million for the years ended December 31
, 2020
, 2019
and 2018
, respectively.
Distribution revenues are derived from sales of third-party products for which the Company acts as distributor, mostly in the United States via Anda and in Israel via Salomon Levin and Elstein Ltd. (SLE). In the United States, the Company is the principal in these arrangements and therefore records revenue on a gross basis as it controls the promised goods before transferring these goods to the customer. In Israel, the Company is the agent in these arrangements and therefore records revenue on a net basis as it has no discretion in establishing prices for any specifies goods or services, limited inventory risk and is not primarily responsible for contract fulfillment. Revenue is recognized when the customer obtains control of the products. This generally occurs when products are shipped once the Company has a present right to payment and legal title and risk and rewards of ownership are obtained by the customer.
Other revenues are primarily comprised of contract manufacturing services, sales of medical devices and other miscellaneous items. Revenue is recognized when the customer obtains control of the products. This generally occurs when products are shipped once the Company has a present right to payment and legal title and risk and rewards of ownership are obtained by the customer.
Contract assets and liabilities
Contract assets are mainly comprised of trade receivables net of allowance for doubtful debts, which includes amounts billed and currently due from customers.
Contract liabilities are mainly comprised of deferred revenues which were immaterial as of December 31, 2020 and 2019.
Variable consideration
Variable consideration mainly includes SR&A, comprised of rebates (including Medicaid and other governmental program discounts), chargebacks, returns and other promotional (including shelf stock adjustments) items. Provisions for prompt payment discounts are netted against trade receivables.
10
7
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
The Company recognizes these provisions at the time of sale and adjusts them if the actual amounts differ from the estimated provisions. For description ofThe following describes the nature of each deduction and how provisions are estimated see noteestimated: 1.
Rebates
Rebates are primarily related to volume incentives and are offered to key customers to promote loyalty. These rebate programs provide that, upon the attainment of129
pre-established
Sales Reserves and Allowances | ||||||||||||||||||||||||||||||||
Reserves included in Accounts Receivable, net | Rebates | Medicaid and other governmental allowances | Chargebacks | Returns | Other | Total reserves included in Sales Reserves and Allowances | Total | |||||||||||||||||||||||||
(U.S. $ in millions) | ||||||||||||||||||||||||||||||||
Balance at January 1, 2018 | $ | 196 | $ | 3,077 | $ | 1,908 | $ | 1,849 | $ | 780 | $ | 267 | $ | 7,881 | $ | 8,077 | ||||||||||||||||
Provisions related to sales made in current year period | 514 | 6,572 | 1,284 | 10,206 | 442 | 417 | 18,899 | $ | 19,413 | |||||||||||||||||||||||
Provisions related to sales made in prior periods | 3 | (14 | ) | 24 | — | 28 | (30 | ) | (62 | ) | $ | (59 | ) | |||||||||||||||||||
Credits and payments | (538 | ) | (6,596 | ) | (1,850 | ) | (10,519 | ) | (606 | ) | (463 | ) | (19,942 | ) | $ | (20,480 | ) | |||||||||||||||
Translation differences | — | (33 | ) | (5 | ) | (6 | ) | (6 | ) | (15 | ) | (65 | ) | $ | (65 | ) | ||||||||||||||||
Balance at December 31, 2018 | $ | 175 | $ | 3,006 | $ | 1,361 | $ | 1,530 | $ | 638 | $ | 176 | $ | 6,711 | $ | 6,886 | ||||||||||||||||
Provisions related to sales made in current year period | 383 | 5,552 | 976 | 9,565 | 281 | 394 | 16,767 | $ | 17,150 | |||||||||||||||||||||||
Provisions related to sales made in prior periods | — | (92 | ) | (151 | ) | (17 | ) | 77 | (6 | ) | (189 | ) | $ | (189 | ) | |||||||||||||||||
Credits and payments | (471 | ) | (5,570 | ) | (1,076 | ) | (9,736 | ) | (360 | ) | (392 | ) | (17,134 | ) | $ | (17,605 | ) | |||||||||||||||
Translation differences | — | (1 | ) | (1 | ) | 1 | 1 | 4 | 4 | $ | 4 | |||||||||||||||||||||
Balance at December 31, 201 9 | $ | 87 | $ | 2,895 | $ | 1,109 | $ | 1,342 | $ | 637 | $ | 176 | $ | 6,159 | $ | 6,246 | ||||||||||||||||
December 31, | ||||||||
2019 | 2018 | |||||||
(U.S. $ in millions) | ||||||||
Finished products | $ | 2,504 | $ | 2,665 | ||||
Raw and packaging materials | 1,183 | 1,328 | ||||||
Products in process | 583 | 590 | ||||||
Materials in transit and payments on account | 151 | 148 | ||||||
| $ | 4,422 | $ | 4,731 | |||||
December 31, | ||||||||
2019 | 2018 | |||||||
(U.S. $ in millions) | ||||||||
Machinery and equipment | $ | 5,385 | $ | 5,658 | ||||
Buildings | 2,839 | 3,133 | ||||||
Computer equipment and other assets | 2,131 | 2,089 | ||||||
Assets under construction and payments on account | 672 | 565 | ||||||
Land | 323 | 351 | ||||||
11,350 | 11,796 | |||||||
Less—accumulated depreciation | (4,914 | ) | (4,928 | ) | ||||
| $ | 6,436 | $ | 6,868 | |||||
Gross carrying amount net of impairment | Accumulated amortization | Net carrying amount | ||||||||||||||||||||||
December 31, | ||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
(U.S. $ in millions) | ||||||||||||||||||||||||
Product rights | $ | 19,663 | $ | 20,361 | $ | 10,640 | $ | 9,565 | $ | 9,023 | $ | 10,796 | ||||||||||||
Trade names | 600 | 606 | 126 | 91 | 474 | 515 | ||||||||||||||||||
In-process research and development (IPR&D) | 1,735 | 2,694 | — | — | 1,735 | 2,694 | ||||||||||||||||||
Total | $ | 21,998 | $ | 23,661 | $ | 10,766 | $ | 9,656 | $ | 11,232 | $ | 14,005 | ||||||||||||
10TEVA PHARMACEUTICAL INDUSTRIES LIMITED8
North America | Europe | International Market | Other | Total | ||||||||||||||||
(U.S. $ in millions) | ||||||||||||||||||||
Balance as of January 1, 201 8 (1) | 11,144 | 9,001 | 5,404 | 2,865 | 28,414 | |||||||||||||||
Changes during the year: | ||||||||||||||||||||
Goodwill impairment (2) | — | — | (2,834 | ) | (193 | ) | (3,027 | ) | ||||||||||||
Goodwill disposal (3) | — | (65 | ) | (14 | ) | — | (79 | ) | ||||||||||||
Goodwill reclassified as assets to held for sale | — | (3 | ) | — | (17 | ) | (20 | ) | ||||||||||||
Translation differences and Other | (46 | ) | (280 | ) | (77 | ) | 32 | (371 | ) | |||||||||||
Balance as of December 31, 201 8 (1) | $ | 11,098 | $ | 8,653 | $ | 2,479 | $ | 2,687 | $ | 24,917 | ||||||||||
Changes during the year: | ||||||||||||||||||||
Goodwill disposal | (23 | ) | (5 | ) | — | — | (28 | ) | ||||||||||||
Translation differences and Other | 16 | (112 | ) | 53 | — | (43 | ) | |||||||||||||
Balance as of December 31, 201 9 (1) | $ | 11,091 | $ | 8,536 | $ | 2,532 | $ | 2,687 | $ | 24,846 | ||||||||||
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Shelf Stock Adjustments
The custom in the carrying amountpharmaceutical industry is generally to grant customers a shelf stock adjustment based on the customers’ existing inventory contemporaneously with decreases in the market price of the North Americarelated product. The most significant of these relate to products for which an exclusive or semi-exclusive period exists. Provisions for price reductions depend on future events, including price competition, new competitive launches and International Markets reporting units may exceed their fair value. Consequently, management conducted a quantitative analysisthe level of customer inventories at the time of the price decline. Teva regularly monitors the competitive factors that influence the pricing of its products and customer inventory levels and adjust these estimates where appropriate.
Returns
Returns primarily relate to customer returns of expired products which, the customer has the right to return up to one year following the expiration date. Such returned products are destroyed and credits and/or refunds are issued to the customer for these reporting units, which resulted in no impairment charge. Teva determined that it was not more likely than not that the fair value of its remaining reporting units was less than their carrying amount. In connection with its goodwill impairment test during the second quarter of 2019
Prompt Pay Discounts
Prompt pay discounts are offered to most customers to encourage timely payment. Discounts are estimated at the volatility and uncertaintytime of certain litigation risks, namelyinvoice based on historical discounts in relation to sales. Prompt pay discounts are almost always utilized by customers. As a result, the actual discounts do not vary significantly from the opioid and price fixing litigations, and concern surrounding the Company’s cash flow and overall liquidity. After considering these factors management concluded that the fair value of Teva’s reporting units exceeded their carrying amount and therefore did not record an impairment charge in the second quarter of 2019
t. | Research and development: |
a reduction of research and development expenses as the excess of fair valuerelated costs are incurred, or as the related milestone is met. Upfront fees received in connection with cooperation agreements are deferred and recognized over carrying amount with respect to Teva’s
applicable agreements as a reduction of the excess of fair value over carrying amount with respect to Teva’sresearch and development expenses.
in-process
acquired as part of an asset purchase, which has not reached technological feasibility and has no alternative future use, is expensed as incurred.u. | Shipping and handling costs: |
Shipping and handling costs, which are included in S&M expenses, were $124 million, $138 million and $159 million for the years ended December 31
, 2020
, 2019
and 2018
, respectively.
101349
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
v. | Advertising costs: |
Advertising costs are expensed as incurred. Advertising costs for the years ended December 31
, 2020
, 2019
and 2018
were $225 million, $213 million and $256 million, respectively.
w. | Restructuring: |
Costs forThe Company used a terminal growth rate of 2.03% and a discount rate of 9.80%. If Teva holds all other assumptions constant, a reductionone-timetermination benefits in which the terminal growth rate of 0.50%or an increase in discount rate of 0.50% to 10.3%,would result in
employee is required to 1.53%
Contractual termination benefits are provided to employees when employment is terminated due to an event specified in the provisions of an existing plan or agreement. A liability is recorded and the expense is recognized when it is probable that employees will be entitled to the benefits and the amount is reasonably estimable.
Special termination benefits arise when the Company offers, for a short period of time, to provide certain additional benefits to employees electing voluntary termination. A liability is recorded and the expense is recognized in the period the employees irrevocably accept the offer and the amount of the results of its cash flow projections used for its goodwill impairment analysis.
x. | Segment reporting: |
The Company’s business includes three reporting segments based on three geographical areas:
| (a) | North America segment, which includes the United States and Canada. |
| (b) | Europe segment, which includes the European Union and certain other European countries. |
| (c) | International Markets segment, which includes all countries in which Teva operates other than those in the North America and Europe segments. |
Each business segment manages the entire product portfolio in its region, including generics, specialty and(“OTC”) products.
over-the-counter
In addition to these three segments, Teva notedhas other sources of revenues, primarily the sale of APIs to third parties, certain contract manufacturing services and anmarket capitalization was below management’s assessmentaffiliate Medis.
out-licensing
platform offering a portfolio of products to other pharmaceutical companies through its y. | Earnings per share: |
Basic earnings per share are computed by dividing the net income attributable to ordinary shareholders by the weighted average number of ordinary shares (including fully vested RSUs and PSUs) outstanding during the year, net of treasury shares.
In computing diluted earnings per share, basic earnings per share are adjusted to take into account the potential dilution that could occur upon: (i) the exercise of options andaggregate fair value ofremaining convertible senior debentures using the Company’s reporting units. However, as of December 31, 2019, the Company’s market capitalization plus a reasonable control premium exceeded its book value.
non-vested
RSUs and PSUs granted under employee stock compensation plans and one series of convertible senior debentures, using the treasury stock method; (ii) the conversion of the “if-converted”
method, by1In further consideration of the market capitalization analysis at year end, management analyzed the differences and the underlying factors addressed during the Company’s second quarter market reconciliation analysis and noted the following changes:10
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
adding to net income interest expense on the debentures and amortization of issuance costs, net of tax benefits, and by adding the weighted average number of shares issuable upon assumed conversion of the debentures; and (iii) until December 17, 2018, the conversion of the mandatory convertible preferred shares (“MCPS”) using the
“if-converted”
method by adding to net income attributable to ordinary shareholders the dividends on the preferred shares and by adding the weighted average number of shares issuable upon assumed conversion of the mandatory convertible preferred shares.On December 17
, 2018
, the mandatory convertible preferred shares automatically converted into ordinary shares. As a result of this conversion, Teva issued 70.6 million ADSs.
.
z. | Securitization |
Teva accounts for transfers of certain of its trade receivable as sales when it has surrendered control over the related assets in accordance with ASC Topic 860 “Transfer and Servicing” of Financial Assets. Whether control has been relinquished requires, among other things, an evaluation of relevant legal considerations and an assessment of the nature and extent of the Company’s continuing involvement with the assets transferred. Assets obtained and liabilities incurred in connection with transfers reported as sales are initially recognized in the balance sheet at fair value. Refer to reduce its AUSTEDO projectionsnote 10 f.
aa. | Divestitures |
The Company nets the proceeds on the divestitures of products with the carrying amount of the related assets and records gain or loss on sale within other income. Any contingent payments that are potentially due to thosethe Company as a result of these divestitures are recorded when it believesis probable that a significant reversal of income will not occur, or in the case of a business, when such payments are being used by analysts,realizable. For divestures of businesses, including divestitures of products that qualify as a business, the estimatedCompany reflects the relative fair value of goodwill associated with the North America reporting unit would still exceed its carrying amount.
bb. | Debt instruments |
Debt instruments are expected to clarify the outlook with regards to the opioid litigation, assuming the proposed settlement framework is finalized in 2020. Based upon Teva’s current estimates of fair value, even if management was to adjustinitially recognized at the fair value of the North America reporting unit for this uncertainty,consideration received. Debt issuance costs are recorded on the estimated fair value would still exceed its carrying amount.consolidated balance sheet as a reduction of liability. They are subsequently recognized at amortized cost using the effective interest method. Debt may be considered extinguished when it has been modified and the terms of the new debt instruments and old debt instruments are “substantially different” (as defined in the debt modification guidance in ASC
470-50
“Debt—Modifications and Extinguishments”). The Company classifies the current portion of long term debt asnon-current
liabilities on the Balance Sheet when it has the intent and ability to refinance the obligation on a long-term basis, in accordance with ASC470-50
“Debt”.cc. | Leases |
Teva leases real estate, cars and equipment for use in its operations, which are classified as operating leases. In addition to rent, the North America reporting unit in connection with both AUSTEDO projectionsleases may require Teva to pay directly for fees, insurance, maintenance and other operating expenses. Rental expense for the volatility and uncertaintyyear ended December 31, 2018 was $175 million. The Company also has capital leases for properties.
1
11
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
The Company’s lease accounting policy from January 1, 2019, following the estimated fair valueadoption of the Company.new lease standard
Teva adopted the new accounting standard ASC 842 “Leases” and all the related amendments on January 1, 2019 and used the effective date as Teva’s date of initial application.
Teva determines if an arrangement is a lease at inception. Lease classification is governed by five criteria in ASCThe components842-10-25-2.If any of these five criteria is met, Teva classifies the lease as a finance lease. Otherwise, Teva classifies the lease as an operating lease. When determining lease classification, Teva’s approach in assessing two of the mentioned criteria is: (i) generally, 75% or more of the remaining economic life of the underlying asset is a major part of the remaining economic life of that underlying asset; and (ii) generally, 90% or more of the fair value of the underlying asset comprises substantially all of the fair value of the underlying asset.
Operating leases are included in operating lease cost for the year ended December 31, 2019 were as follows:
right-of-use
Year ended December 31, 2019 | ||||
(U.S. $ in millions) | ||||
Operating lease cost: | ||||
Fixed payments and variable payments that depend on an index or rate | $ | 166 | ||
Variable lease payments not included in the lease liability | 6 | |||
Short-term lease cost | 6 | |||
Total operating lease cost | $ | 178 | ||
Year ended December 31, 2019 | ||||
(U.S. $ in millions) | ||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Operating cash flows from operating leases | $ | 169 | ||
Right-of-use assets obtained in exchange for lease obligations(non-cash): | ||||
Operating leases | $ | 142 | ||
December 31, 2019 | ||||
(U.S. $ in millions) | ||||
Operating leases: | ||||
Operating lease ROU assets | $ | 514 | ||
Other current liabilities | 118 | |||
Operating lease liabilities | 435 | |||
Total operating lease liabilities | $ | 553 | ||
December 31, | ||||
2019 | ||||
(U.S. $ in millions) | ||||
2020 | $ | 146 | ||
2021 | 117 | |||
2022 | 92 | |||
2023 | 66 | |||
2024 and thereafter | 298 | |||
Total operating lease payments | $ | 719 | ||
Less: imputed interest | 166 | |||
Present value of lease liabilities | $ | 553 | ||
in the consolidated balance sheets. Finance leases are included in property, plant and equipment, other current liabilities, and other long-term liabilities in the consolidated balance sheets.
ROU assets represent Teva’s right to use an underlying asset for the lease term and lease liabilities represent Teva’s obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Teva uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of the lease payments.
For finance leases, Teva recognizes interest on the lease liability separately from amortization of the ROU assets in the statement of comprehensive income. For operating leases, lease expenses are recognized on a straight-line basis over the lease term.
The new standard also provides practical expedients for an entity’s ongoing accounting. Teva elected the short-term lease recognition exemption for all leases with a term shorter than 12 months. This means that for those leases, Teva does not recognize ROU assets or lease liabilities, including ROU assets or lease liabilities for existing short-term leases of assets in transition, but recognizes lease expenses over the lease term on a straight line basis. Teva also elected the practical expedient to not separate lease and
non-lease
components for all of Teva’s leases, other than leases of real estate.Lease terms will include options to extend or terminate the lease when it is reasonably certain that Teva will either exercise or not exercise the option to renew or terminate the lease.
Teva’s lease agreements have remaining lease terms ranging from 1 year to 78 years. Some of these agreements include options to extend the leases for up to
10
years and some include options to terminate the leases immediately. Certain leases also include options to purchase the leased property.
The depreciable life of leasehold improvements is limited by the expected lease term, unless there is a transfer of title or a purchase option for the leased asset reasonably certain of exercise.
Some of Teva’s vehicle lease agreements include rental payments based on the actual usage of the vehicles and other lease agreements include rental payments adjusted periodically for inflation. Teva’s lease agreements do not contain any material residual value guarantees.
The new lease standard has no impact on Teva’s debt-covenant compliance under its RCF.
December 31, | ||||
2018 | ||||
(U.S. $ in millions) | ||||
According to ASC 840: | ||||
2019 | $ | 193 | ||
2020 | 154 | |||
2021 | 118 | |||
2022 | 91 | |||
2023 | 66 | |||
2024 and thereafter | 283 | |||
Total lease payments | $ | 905 | ||
1137
12
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
NOTE 9—Debt obligations: 2—Certain transactions:
a. | Business acquisitions: |
Actavis Generics and Anda acquisitions
On August 2, 2016, Teva consummated its acquisition of Allergan plc’s (“Allergan”) worldwide generic pharmaceuticals business (“Actavis Generics”). At closing, Teva transferred to Allergan consideration of approximately $33.4 billion in cash and approximately 100.3 million Teva shares.
On October 3, 2016, Teva consummated the acquisition of Anda Inc. (“Anda”), a medicines distribution business in the United States, from Allergan, for cash consideration of $500 million. This transaction was related to the Actavis Generics acquisition and, as such, the purchase price accounting and related disclosures were treated on a combined basis.
The final cash consideration for the Actavis Generics acquisition was subject to certain net working capital adjustments. On January 31, 2018, Teva and Allergan entered into a settlement agreement and mutual releases for which Allergan made a one-time payment of $703 million to Teva to settle the working capital adjustments under the Master Purchase Agreement, dated July 26, 2015. As the measurement period has ended, this amount was recorded as a gain under legal settlements and loss contingencies in the first quarter of 2018.
Rimsa
On March 3, 2016, Teva completed the acquisition of Representaciones e Investigaciones Médicas, S.A. de C.V. (“Rimsa”), a pharmaceutical manufacturing and distribution company in Mexico, for $2.3 billion, in a cash free, debt free set of transactions. Teva financed the transaction using cash on hand.
Following the closing of the acquisition, Teva identified issues concerning Rimsa’s pre-acquisition quality, manufacturing and other practices, at which point Teva began an assessment of the extent and cost of remediation required to return its products to the market. In September 2016, 2 lawsuits were filed: a pre-emptive suit by the Rimsa sellers against Teva and Teva’s lawsuit alleging fraud and breach of contract against the Rimsa sellers. The Rimsa sellers subsequently dismissed their lawsuit and the dismissal was approved by court order on December 20, 2016.
On February 15, 2018, Teva and the Rimsa sellers entered into a settlement agreement and mutual releases with respect to Teva’s breach of contract claim, pursuant to which the Rimsa sellers made a
one-time
payment to Teva. Teva’s breach of contract claim was subsequently dismissed by the court. As the measurement period has ended, this payment was recorded as a gain under legal settlements and loss contingencies in the first quarter of 2018.b. | Other significant agreements: |
The Company has entered into alliances and other arrangements with third parties to acquire rights to products it does not have, to access markets it does not operate in and to otherwise share development costs or business risks. The Company’s most significant agreements of this nature are summarized below.
December 31, | ||||||||||||||||
Weighted average interest rate as of December 31, 201 9 | Maturity | 2019 | 2018 | |||||||||||||
(U.S. $ in millions) | ||||||||||||||||
Bank and financial institutions | — | — | — | 2 | ||||||||||||
Convertible debentures | 0.25 % | 2026 | 514 | 514 | ||||||||||||
Current maturities of long-term liabilities | 1,831 | 1,700 | ||||||||||||||
Total short term debt | $ | 2,345 | $ | 2,216 | ||||||||||||
11Convertible senior debentures3
Weighted average interest 201 9 | Maturity | December 31, 2019 | December 31, 2018 | |||||||||||||
% | (U.S. $ in millions) | |||||||||||||||
Senior notes EUR 1,010 million (2) | 0.38 | % | 2020 | $ | 1,131 | $ | 1,897 | |||||||||
Senior notes EUR 1,500 million | 1.13 | % | 2024 | 1,673 | 1,707 | |||||||||||
Senior notes EUR 1,300 million | 1.25 | % | 2023 | 1,451 | 1,480 | |||||||||||
Senior notes EUR 900 million | 4.50 | % | 2025 | 1,008 | 1,029 | |||||||||||
Senior notes EUR 750 million | 1.63 | % | 2028 | 833 | 850 | |||||||||||
Senior notes EUR 700 million | 3.25 | % | 2022 | 784 | 801 | |||||||||||
Senior notes EUR 700 million | 1.88 | % | 2027 | 782 | 798 | |||||||||||
Senior notes EUR 1,000 million (4) | 6.00 | % | 2025 | 1,120 | — | |||||||||||
Senior notes USD 1,000 million (5) | 7.13 | % | 2025 | 1,000 | — | |||||||||||
Senior notes USD 3,500 million | 3.15 | % | 2026 | 3,494 | 3,493 | |||||||||||
Senior notes USD 1,475 million (3) | 2.20 | % | 2021 | 1,474 | 2,997 | |||||||||||
Senior notes USD 3,000 million | 2.80 | % | 2023 | 2,995 | 2,993 | |||||||||||
Senior notes USD 1,556 million (1) | 1.70 | % | 2019 | — | 1,700 | |||||||||||
Senior notes USD 2,000 million | 4.10 | % | 2046 | 1,985 | 1,985 | |||||||||||
Senior notes USD 1,250 million | 6.00 | % | 2024 | 1,250 | 1,250 | |||||||||||
Senior notes USD 1,250 million | 6.75 | % | 2028 | 1,250 | 1,250 | |||||||||||
Senior notes USD 844 million | 2.95 | % | 2022 | 856 | 860 | |||||||||||
Senior notes USD 789 million | 6.15 | % | 2036 | 782 | 782 | |||||||||||
Senior notes USD 700 million | 2.25 | % | 2020 | 700 | 700 | |||||||||||
Senior notes USD 613 million | 3.65 | % | 2021 | 618 | 621 | |||||||||||
Senior notes USD 588 million | 3.65 | % | 2021 | 587 | 587 | |||||||||||
Senior notes CHF 350 million | 0.50 | % | 2022 | 361 | 356 | |||||||||||
Senior notes CHF 350 million | 1.00 | % | 2025 | 362 | 356 | |||||||||||
Fair value hedge accounting adjustments | — | (9 | ) | |||||||||||||
Total senior notes | 26,496 | 28,483 | ||||||||||||||
Other long-term debt | 1.13 | % | 2026 | 1 | 12 | |||||||||||
Less current maturities | (1,831 | ) | (1,700 | ) | ||||||||||||
Derivative instruments | — | 9 | ||||||||||||||
Less debt issuance costs | (103 | ) | (104 | ) | ||||||||||||
Total senior notes and loans | $ | 24,562 | $ | 26,700 | ||||||||||||
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Alvotech Partnership
In August 2020, Teva entered into a partnership agreement with biopharmaceutical company Alvotech for the exclusive commercialization in the U.S. of five biosimilar product candidates. The initial pipeline for this partnership contains biosimilar candidates addressing multiple therapeutic areas. Under this agreement, Alvotech is responsible for the development, registration and supply of the biosimilar product candidates and Teva will exclusively commercialize the products in the United States. Teva paid an upfront payment in the third quarter of 2020 that w
as
recorded as R&D expenses. During the fourth quarter of 2020, Teva accrued additional amounts due to the high probability that additional milestone payments will be paid in 2021. Additional development and commercial milestone payments of upto
$450 million,
as well as royalty payments, may be payable by Teva over the next few years. Teva and Alvotech will share profit from the commercialization of these biosimilar
s.
Notes to Consolidated Financial Statements
NOTE 1—Significant accounting policies:
a. | General: |
Operations
Teva Pharmaceutical Industries Limited (the “Parent Company”), headquartered in Israel, together with its subsidiaries and associated companies (the “Company,” “Teva” or the “Group”), is engaged in the development, manufacturing, marketing and distribution of generics, specialty medicines and biopharmaceuticals. The majority of the Group’s revenues are in the United States and Europe.
Basis of presentation and use of estimate
s
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
In preparing the Company’s consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported years. Actual results could differ from those estimates.
As applicable to these consolidated financial statements, the most significant estimates and assumptions relate to determining the valuation and recoverability of intangible assets and goodwill; assessing sales reserves and allowances in the United States, and contingent consideration; assessing compliance with debt covenants; uncertain tax positions, valuation allowances, contingencies, inventory valuation and restructuring. The inputs into Teva’s judgments and estimates also consider the economic implications of the
COVID-19
pandemic on its critical and significant accounting estimates, most significantly in relation to sales, reserves and allowances, IPR&D assets, marketed product rights and goodwill, all of which will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning theCOVID-19
pandemic and the actions taken to contain or treat it, as well as the economic impact on Teva’s employees, third-party manufacturers and suppliers, customers and markets. All estimates made by Teva related to the impact of theCOVID-19
pandemic within its financial statements may change in future periods.Certain amounts in the consolidated financial statements and associated notes may not add up due to rounding. All percentages have been calculated using unrounded amounts.
Functional currency
A major part of the Group’s operations is carried out by the Company in the United States, Israel and certain other countries. The functional currency of these entities is the U.S. dollar (“dollar” or “$”).
The functional currency of certain subsidiaries and associated companies is their local currency. The financial statements of those companies are included in the consolidated financial statements, translated into U.S. dollars. Assets and liabilities are translated at
year-end
exchange rates, while revenues and expenses are translated at monthly average exchange rates during the year. Differences resulting from translation are presented as other comprehensive income (loss) in the consolidated statements of comprehensive income (loss).In the event of a divestiture of a foreign subsidiary, the related foreign currency translation results are reversed from equity to income. Foreign currency exchange gains and losses are included in net income (loss).
9
6
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries, joint ventures and VIEs for which the Company is considered the primary beneficiary. For those consolidated entities where Teva owns less than 100%, the outside shareholders’ interests are shown as
non-controlling
interestsin equity. Investments in affiliates over which the Company has significant influence but not a controlling interest, are carried on the equity basis.
For VIEs, the Company performs an analysis to determine whether the variable interests give a controlling financial interest in a VIE. The Company periodically reassesses whether it controls its VIEs.
Intercompany transactions and balances are eliminated on consolidation; profits from intercompany sales, not yet realized outside the Group, are also eliminated.
b. | New accounting pronouncements |
Recently adopted accounting pronouncements
In March 2020, the FASB issued ASU
2020-04
“Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The guidance applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This guidance is effective for all entities as of March 12, 2020 through December 31, 2022. There was no impact to the Company’s consolidated financial statements for the period ended December 31, 2020 as a result of adopting this standard update. The Company is continuing to evaluate the potential impact of the replacement of the LIBOR benchmark on its interest rate risk management activities and has started initial negotiations to transform the facility base rate of its securitization program. However, it is not expected to have a material impact on the consolidated financial results.In April 2019, the FASB issued ASU
2019-04
“Codification Improvements to Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 825).” This ASU provides clarifications of three topics related to financial instruments accounting. Teva adopted the provisions of this update as of January 1, 2020 with no material impact on its consolidated financial statements.In November 2018, the FASB issued ASUguidance in ASC 808 to align with guidance in ASC 606 and (iii) precludes presenting revenue from a collaborative arrangement together with revenue recognized under ASC 606 if the collaborative arrangement participant is not a customer. Teva adopted the provisions of this update as of January 1, 2020 with no material impact on its consolidated financial statements.
2018-18
“Collaborative Arrangements (Topic 808)—Clarifying the interaction between Topic 808 and Topic 606.” The amendments provide guidance on whether certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606. It also specifically (i) addresses when the participant should be considered a customer in the context of a unit of account, (ii) addsunit-of-account
In August 2018, the FASB issued ASU
2018-15
“Intangibles—Goodwill andother—Internal-use
software (Subtopic350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” This guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtaininternal-use
software. Teva applied the guidance prospectively to all implementation costs incurred after the date of adoption. Teva adopted the provisions of this update as of January 1, 2020 with no material impact on its consolidated financial statements.9
7
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
In August 2018, the FASB issued ASU
2018-13
“Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” This guidance removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Certain disclosures required by this guidance must be applied on a retrospective basis and others on a prospective basis. Teva adopted the provisions of this update as of January 1, 2020 with no material impact on its consolidated financial statements.In June 2016, the FASB issued ASU
2016-13
“Financial Instruments—Credit Losses—Measurement of Credit Losses on Financial Instruments.” This guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Upon adoption of the standard, there was no immediate impact to the Company’s financial position, results of operations or cash flows. On an ongoing basis, the Company will contemplate forward-looking economic conditions in recording lifetime expected credit losses for the Company’s financial assets measured at cost, such as the Company’s trade receivables and certain short-term investments.Recently issued accounting pronouncements, not yet adopted
In August 2020, the FASB issued ASU
2020-06
“Debt – Debt with Conversion and Other Options(Subtopic 470-20)
and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40).” This guidance simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The amendments to this guidance are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.In December 2019, the FASB issued ASUloss exceeds the anticipated loss for the year.
2019-12
“Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes” (the “update”). The amendments in this update simplify the accounting for income taxes by removing the following exceptions in ASC 740: (1) exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items; (2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) exception to the general methodology for calculating income taxes in an interim period when ayear-to-date
In addition, the update also simplifies the accounting for income taxes in certain topics as follows: (1) requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a
non-income-based
tax; (2) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; (3) specifying that an entity can elect (rather than be required to) allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; and (4) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The9
8
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Company reviewed the above topics, noting that Items (1) and (4) of this paragraph are expected to be relevant, but not material. The adoption of this guidance will not have a significant impact on the Company’s consolidated financial statements.
c. | Acquisitions: |
Teva’s consolidated financial statements include the operations of acquired businesses from the date of the acquisition’s consummation. Acquired businesses are accounted for using the acquisition method of accounting, which requires, among other things, that most assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date and that the fair value of acquired in process research and development (“IPR&D”) be recorded on the balance sheet. Transaction costs are expensed as incurred. Any excess of the consideration transferred over the assigned values of the net assets acquired is recorded as goodwill. When Teva acquires net assets that do not constitute a business, as defined under U.S. GAAP, no goodwill is recognized and acquired IPR&D is expensed.
Contingent consideration incurred in a business combination is included as part of the acquisition price and recorded at a probability weighted assessment of its fair value as of the acquisition date. The fair value of the contingent consideration is
re-measured
at each reporting period, with any adjustments in fair value recognized in earnings under other assets impairments, restructuring and other items.d. | Collaborative arrangements: |
Collaborative agreements are contractual arrangements in which the parties are active participants to the arrangement and are exposed to the significant risks and rewards that are dependent on the ultimate commercial success of the endeavor.
The Company recognizes revenue generated and costs incurred on sales to third parties as it relates to collaborative agreements as gross or net. If the Company is the principal participant in a transaction, revenues and costs are recorded on a gross basis; otherwise, revenues are recorded on a net basis.
e. | Equity investments: |
The Company measures equity investments at fair value with changes in fair value recognized in net income. The Company accounts for equity investments that do not have a readily determinable fair value as cost method investments under the measurement alternative prescribed within ASU
2016-01
“Financial Instruments—Recognition and Measurement of Financial Assets and Financial Liabilities” to the extent such investments are not subject to consolidation or the equity method. Under the measurement alternative, these financial instruments are carried at cost, less any impairment (assessed quarterly), adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. In addition, income is recognized when dividends are received only to the extent they are distributed from net accumulated earnings of the investee. Otherwise, such distributions are considered returns of investment and are recorded as a reduction of the cost of the investment. The Company accounts for equity investments as current when the Company has the intent and ability to sell such assets within the next twelve months.f. | Fair value measurement: |
The Company measures fair value and discloses fair value measurements for financial assets and liabilities. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
9
9
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
The accounting standard establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable inputs that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in its assessment of fair value.
g. | Investment in debt securities: |
Investment in securities consists of debt securities classified asand recorded at fair value. The fair value of quoted securities is based on current market value. When debt securities do not have an active market, fair value is determined using a valuation model. This model is based on reference to other instruments with similar characteristics, or a discounted cash flow analysis, or other pricing models making use of market inputs and relying as little as possible on entity-specific inputs.
available-for-sale
The Company’s investment in debt securities accounting policy until December 31, 2019, prior to the adoption of the new Current Expected Credit Losses (“CECL”) standard
Unrealized gains of available for sale debt securities, net of taxes, are reflected in other comprehensive income. Unrealized losses considered to be temporary are reflected in other comprehensive income; unrealized losses that are considered to be other-than-temporary are charged to income as an impairment charge. Realized gains and losses for debt securities are included in financial expenses, net.
The Company considers available evidence in evaluating potential impairments of its investments, including the duration and extent to which fair value is less than cost. For debt securities, an other-than-temporary impairment has occurred if the Company does not expect to recover the entire amortized cost basis of the debt security. If the Company does not intend to sell the impaired debt security, and it is not more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis, the amount of the other-than-temporary impairment recognized in earnings, recorded in financial expense, net, is limited to the portion attributed to credit loss. The remaining portion of the other-than-temporary impairment related to other factors is recognized in other comprehensive income.
The Company’s investment in debt securities accounting policy from January 1, 2020, following the adoption of the new CECL standard
Unrealized gains and losses forsecurities are excluded from earnings and reported net of the related tax effect in the accumulated other comprehensive income component of shareholders’ equity.
available-for-sale
The CECL methodology, which became effective January 1, 2020, requires the Company to estimate lifetime expected credit losses for alldebt securities in an unrealized loss position.
available-for-sale
100
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Comparative information continues to be reported in accordance with the methodology in effect for prior periods. When estimating a security’s probability of default and the recovery rate, the Company assesses the security’s credit indicators, including credit ratings. If the assessment indicates that an expected credit loss exists, the Company determines the portion of the unrealized loss attributable to credit deterioration and records an allowance for the expected credit loss through the Consolidated Statements of Income. Unrealized gains and any portion of a security’s unrealized loss attributable to
non-credit
losses are recorded in the Consolidated Statements of Comprehensive Income, net of tax.h. | Cash and cash equivalents: |
All highly liquid investments, which include short-term bank deposits and money market instruments, that are not restricted as to withdrawal or use, and investment in short-term debentures, the period to maturity of which did not exceed three months at the time of investment, are considered to be cash equivalents.
i. | Accounts receivables: |
The Company’s accounts receivables accounting policy until December 31, 2019, prior to the adoption of the new CECL standard
Accounts receivables are stated at their net realizable value. The allowance against gross accounts receivables reflects the best estimate of losses inherent in the receivables portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available information. An allowance for doubtful debts is reflected in net accounts receivables. Accounts receivables are written off after all reasonable means to collect the full amount have been exhausted.
The Company’s accounts receivables accounting policy from January 1, 2020, following the adoption of the new CECL standard
Accounts receivable have been reduced by an allowance for doubtful accounts. The Company maintains the allowance for estimated losses resulting from the inability of the Company’s customers to make required payments. The allowance represents the current estimate of lifetime expected credit losses over the remaining duration of existing accounts receivable considering current market conditions and supportable forecasts when appropriate. The estimate is a result of the Company’s ongoing evaluation of collectability, customer creditworthiness, historical levels of credit losses, and future expectations.
Write-off
activity and recoveries for the periods presented were not material.j. | Concentration of credit risks: |
Most of Teva’s cash and cash equivalents (which, along with investment in securities, totaled $2,478 million at December 31, 2020) were deposited with European, U.S. and Israeli banks and financial institutions and were comprised mainly of cash deposits.
The pharmaceutical industry, particularly in the United States, has been significantly affected by consolidation among managed care providers, large pharmacy chains, wholesaling organizations and other buyer groups. The U.S. market constituted approximately 48% of Teva’s consolidated revenues in 2020. The exposure of credit risks relating to other trade receivables outside the U.S. is limited, due to the relatively large number of group customers and their wide geographic distribution. Teva performs ongoing credit evaluations of its customers for the purpose of determining the appropriate allowance for doubtful accounts and generally does not require collateral and from time to time the Company may choose to purchase trade credit insurance.
101
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
k. | Inventories: |
Inventories are valued at the lower of cost or net realizable value. Cost of raw and packaging materials, purchased products, manufactured finished products, products in process and capitalized production costs are determined predominantly on a standard cost basis, approximating actual costs. Other methods which are utilized for determining the value of inventories are moving average, cost basis and the first in first out method. Teva regularly reviews its inventories for obsolescence and other impairment risks and reserves are established when necessary.
Inventories acquired in a business combination are
stepped-up
to their estimated fair value and amortized to cost of sales as that inventory is sold.l. | Long-lived assets: |
Teva’s long-lived,
non-current
assets are comprised mainly of goodwill, identifiable intangible assets, property, plant and equipment, and operating lease ROU assets. All long-lived assets are monitored for impairment indicators throughout the year. Impairment testing for goodwill and all indefinite-lived intangible assets is performed at least annually. When necessary, charges for impairments of long-lived assets, other than goodwill, are recorded for the amount by which the fair value is less than the carrying value of these assets.Goodwill
Goodwill reflects the excess of the consideration transferred, including the fair value of any contingent consideration and any
non-controlling
interest in the acquiree, over the assigned fair values of the identifiable net assets acquired. Goodwill is not amortized, and is assigned to reporting units and tested for impairment at least on an annual basis, in the second quarter of the fiscal year.The Company has historically performed its annual goodwill assessment during the fourth quarter of each year. During the second quarter of 2020, the Company decided to change the date of its annual impairment assessment from October 1 to June 30. The change was made to more closely align the impairment assessment date with the Company’s long-term planning and forecasting process. See note 7.
The goodwill impairment test is performed according to the following principles:
| 1. | An initial qualitative assessment may be performed to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. |
| 2. | If the Company concludes it is more likely than not that the fair value of the reporting unit is less than its carrying mount, a quantitative fair value test is performed. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value is recognized. |
An interim goodwill impairment test may be required in advance or after of the annual impairment test if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For example, a substantial decline in the Company’s market capitalization, unexpected adverse business conditions, economic factors and unanticipated competitive activities may indicate that an interim impairment test is required. In the event that the Company’s market capitalization declines below its book value, the Company considers the length and severity of the decline and the reason for the decline when assessing whether potential goodwill impairment exists.
Identifiable intangible assets
Identifiable intangible assets are comprised of definite life intangible assets and indefinite life intangible assets.
102
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Definite life intangible assets consist mainly of acquired product rights and other rights relating to products for which marketing approval was received from the U.S. Food and Drug Administration (“FDA”) or the equivalent agencies in other countries. These assets are amortized mainly using the straight-line method over their estimated period of useful life, or based on economic benefit models, if more appropriate, which is determined by identifying the period and manner in which substantially all of the cash flows are expected to be generated. Amortization of acquired developed products is recorded under cost of sales. Amortization of marketing and distribution rights is recorded under selling and marketing (“S&M”) expenses when separable.
Indefinite life intangible assets are mainly comprised of IPR&D assets. Teva monitors these assets for items such as research and development progress and for indicators of fair value change such as level of expected competition and or pricing, to identify any triggering events. Teva determines the fair value of the asset annually or when triggering events are present, based on discounted cash flows and records an impairment loss if book value exceeds fair value.
IPR&D acquired in a business combination is capitalized as an indefinite life intangible asset until the related research and development efforts are either completed or abandoned. In the reporting periods where they are treated as indefinite life intangible assets, they are not amortized but rather are monitored triggering events and tested for impairment. Upon completion of the related research and development efforts, management determines the useful life of the intangible assets and amortizes them accordingly. In case of abandonment or a reduction in the expected realizable value of the asset, the related research and development assets are impaired.
Whenever impairment indicators are identified for definite life intangible assets, Teva reconsiders the asset’s estimated life, calculates the undiscounted value of the asset’s or asset group’s cash flows and compares such value against the asset’s or asset group’s carrying amount. If the carrying amount is greater, Teva records an impairment loss for the excess of book value over fair value based on the discounted cash flows.
In determining the estimated fair value of identifiable intangible assets, Teva utilized a discounted cash flow model. The key assumptions within the model related to forecasting future revenue and operating income, an appropriate discount rate and an appropriate terminal value based on the nature of the long-lived asset. The Company’s updated forecasts of net cash flows for the impaired assets reflect, among others, the following: (i) for IPR&D assets, the impact of changes to the development programs, the projected development and regulatory timeframes and the risks associated with these assets; and (ii) for product rights, pricing and volume projections, as well as patent life and any significant changes to the competitive environment.
Property, plant and equipment
Property, plant and equipment are stated at cost, after deduction of the related investment grants, and depreciated using the straight-line method over the estimated useful life of the assets: buildings, mainly 40 years; machinery and equipment, mainly between 15 to 20 years; and other assets, between 5 to 10 years.
For property, plant and equipment and leaseassets, whenever impairment indicators are identified, Teva reconsiders the asset’s estimated life, calculates the undiscounted value of the asset’s cash flows and compares such value against the asset’s carrying amount. If the carrying amount is greater, Teva records an impairment loss for the excess of book value over fair value.
right-of-use
Lease(ROU) assets
right-of-use
See note 8 and note 1 cc for further discussion.
10
3
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
m. | Contingencies: |
The Company is involved in various patent, product liability, commercial, government investigations, environmental claims and other legal proceedings that arise from time to time in the ordinary course of business. Except for income tax contingencies, contingent consideration, other contingent liabilities incurred or acquired in a business combination, Teva records accruals for these types of contingencies to the extent that Teva concludes their occurrence is probable and that the related liabilities are estimable. When accruing these costs, the Company will recognize an accrual in the amount within a range of loss that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, the Company accrues for the minimum amount within the range. Teva records anticipated recoveries under existing insurance contracts that are probable of occurring at the gross amount that is expected to be collected. Legal costs are expensed as incurred.
The Company recognizes gain contingencies when they are realized or when all related contingencies have been resolved.
n. | Treasury shares: |
Treasury shares are presented as a reduction of Teva shareholders’ equity and carried at their cost to Teva, under treasury shares.
o. | Stock-based compensation: |
Teva recognizes stock based compensation for the estimated fair value of share-based awards, restricted share units (“RSUs”) and performance share units (“PSUs”). The compensation expense for PSUs is recognized only if it is probable that the performance condition will be achieved.
Teva measures compensation expense for share-based awards based on estimated fair values on the date of grant using the Black-Scholes option-pricing model. This option pricing model requires estimates as to the option’s expected term and the price volatility of the underlying stock. Teva amortizes the value of share-based awards to expense over the vesting period on a straight-line basis.
Teva measures compensation expense for the RSUs and PSUs based on the market value of the underlying stock at the date of grant, less an estimate of dividends that will not accrue to the RSU and PSU holders prior to vesting.
p. | Deferred income taxes: |
Deferred income taxes are determined utilizing the “asset and liability” method based on the estimated future tax effects of temporary differences between the financial accounting and tax basis of assets and liabilities under the applicable tax laws, and on tax rates anticipated to be in effect when the deferred income taxes are expected to be paid or realized. A valuation allowance is provided if, based upon the weight of available evidence, it is more likely than not that a portion of the deferred income tax assets will not be realized. In determining whether a valuation allowance is needed, Teva considers all available evidence, including historical information, long range forecast of future taxable income and evaluation of tax planning strategies. Amounts recorded for valuation allowance can result from a complex series of judgments about future events and can rely on estimates and assumptions. Deferred income tax liabilities and assets are classified as
non-current.
10
4
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Deferred tax has not been provided on the following items:
| 1. | Taxes that would apply in the event of disposal of investments in subsidiaries, as it is generally the Company’s intention to hold these investments, not to realize them. The determination of the amount of related unrecognized deferred tax liability is not practicable. |
| 2. | Amounts of tax-exempt income generated from the Company’s current Approved Enterprises and unremitted earnings from foreign subsidiaries retained for reinvestment in the Group. See note 13 f. |
q. | Uncertain tax positions: |
Teva recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized. Teva regularly
re-evaluates
its tax positions based on developments in its tax audits, statute of limitations expirations, changes in tax laws and new information that can affect the technical merits and change the assessment of Teva’s ability to sustain the tax benefit. In addition, the Company classifies interest and penalties recognized in the financial statements relating to uncertain tax position under the income taxes line item.Provisions for uncertain tax positions, whereas Teva has net operating losses to offset additional income taxes that would result from the settlement of the tax position, are presented as a reduction of the deferred tax assets for such net operating loss.
r. | Derivatives and hedging: |
The Group carries out transactions involving derivative financial instruments (mainly forward exchange contracts, currency options, cross-currency swap contracts, interest rate swap contracts and treasury locks). The transactions are designed to hedge the Company’s currency and interest rate exposures. The Company does not enter into derivative transactions for trading purposes.
Derivative instruments are recognized on the balance sheet at their fair value.
For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk is recognized in financial expenses
,
net in the statements of income in the period that the changes in fair value occur.For derivative instruments that are designated and qualify as a cash-flow hedge, the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the anticipated transaction in the same period or periods during which the hedged transaction affects earnings.
For derivative instruments that are designated as
net-investment
hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income. The effective portion is determined by looking into changes in spot exchange rate. The change in fair value attributable to changes other than those due to fluctuations in the spot exchange rate are excluded from the assessment of hedge effectiveness and are recognized in the statement of income under financialexpenses
,
net.For derivative instruments that qualify for hedge accounting, the cash flows associated with these derivatives are reported in the consolidated statements of cash flows consistently with the classification of the cash flows from the underlying hedged items that these derivatives are hedging.
10
5
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Derivative instruments that do not qualify for hedge accounting are recognized on the Balance Sheet at their fair value, with changes in the fair value recognized as a component of financial expenses
,
net in the statements of income. The cash flows associated with these derivatives are reflected as cash flows from operating activities in the consolidated statements of cash flows.s. | Revenue recognition: |
A contract with a customer exists only when: the parties to the contract have approved it and are committed to perform their respective obligations, the Company can identify each party’s rights regarding the distinct goods or services to be transferred (“performance obligations”), the Company can determine the transaction price for the goods or services to be transferred, the contract has commercial substance and it is probable that the Company will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
Revenues are recorded in the amount of consideration to which the Company expects to be entitled in exchange for performance obligations upon transfer of control to the customer, excluding amounts collected on behalf of other third parties and sales taxes.
The amount of consideration to which Teva expects to be entitled varies as a result of rebates, chargebacks, returns and other sales reserves and allowances (“SR&A”) that the Company offers to its customers and their customers, as well as the occurrence or nonoccurrence of future events, including milestone events. A minimum amount of variable consideration is recorded by the Company concurrently with the satisfaction of performance obligations to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Estimates of variable consideration are based on historical experience and the specific terms in the individual agreements (which the Company believes approximates expected value). Rebates and chargebacks are the largest components of SR&A. If a minimum cannot be reasonably estimated, such revenue may be deferred to a future period when better information is available. For further description of SR&A components and how they are estimated, see “Variable Consideration” below.
Shipping and handling costs, after control of the product has transferred to a customer, are accounted for as a fulfillment cost and are recorded under S&M expenses.
Teva does not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between the time of transfer of the promised goods or services to the customer and the time the customer pays for these goods or services to be generally one
year or less, based on the practical expedient. The Company’s credit terms to customers are, on average, between thirty and ninety days.
The Company generally recognizes the incremental costs of obtaining contracts as an expense since the amortization period of the assets that the Company otherwise would have recognized is one year or less. The costs are recorded under S&M expenses. Similarly, Teva does not disclose the value of unsatisfied performance obligations for contracts with original expected duration of one year or less.
Nature of revenue streams
Revenue from sales of goods, including sales to distributors is recognized when the customer obtains control of the product. This generally occurs when products are shipped once the Company has a present right to payment and legal title, and risk and rewards of ownership are obtained by the customer.
10
6
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Licensing arrangements performance obligations generally include intellectual property (“IP”) rights, certain R&D and contract manufacturing services. The Company accounts for IP rights and services separately if they are distinct—i.e. if they are separately identifiable from other items in the arrangement and if the customer can benefit from them on their own or with other resources that are readily available to the customer. The consideration is allocated between IP rights and services based on their relative stand-alone selling prices.
Revenue for distinct IP rights is accounted for based on the nature of the promise to grant the license. In determining whether the Company’s promise is to provide a right to access its IP or a right to use its IP, the Company considers the nature of the IP to which the customer will have rights. IP is either functional IP which has significant standalone functionality or symbolic IP which does not have significant standalone functionality. Revenue from functional IP is recognized at the point in time when control of the distinct license is transferred to the customer. Revenue from symbolic IP is recognized over the access period to the Company’s IP.
Revenue from sales based milestones and royalties promised in exchange for a license of IP is recognized only when, or as, the later of subsequent sale or the performance obligation to which some or all of the sales-based royalty has been allocated, is satisfied. Revenues from licensing arrangements included royalty income of $129 million, $147 million and $165 million for the years ended December 31
, 2020
, 2019
and 2018
, respectively.
Distribution revenues are derived from sales of third-party products for which the Company acts as distributor, mostly in the United States via Anda and in Israel via Salomon Levin and Elstein Ltd. (SLE). In the United States, the Company is the principal in these arrangements and therefore records revenue on a gross basis as it controls the promised goods before transferring these goods to the customer. In Israel, the Company is the agent in these arrangements and therefore records revenue on a net basis as it has no discretion in establishing prices for any specifies goods or services, limited inventory risk and is not primarily responsible for contract fulfillment. Revenue is recognized when the customer obtains control of the products. This generally occurs when products are shipped once the Company has a present right to payment and legal title and risk and rewards of ownership are obtained by the customer.
Other revenues are primarily comprised of contract manufacturing services, sales of medical devices and other miscellaneous items. Revenue is recognized when the customer obtains control of the products. This generally occurs when products are shipped once the Company has a present right to payment and legal title and risk and rewards of ownership are obtained by the customer.
Contract assets and liabilities
Contract assets are mainly comprised of trade receivables net of allowance for doubtful debts, which includes amounts billed and currently due from customers.
Contract liabilities are mainly comprised of deferred revenues which were immaterial as of December 31, 2020 and 2019.
Variable consideration
Variable consideration mainly includes SR&A, comprised of rebates (including Medicaid and other governmental program discounts), chargebacks, returns and other promotional (including shelf stock adjustments) items. Provisions for prompt payment discounts are netted against trade receivables.
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7
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
The Company recognizes these provisions at the time of sale and adjusts them if the actual amounts differ from the estimated provisions. The following describes the nature of each deduction and how provisions are estimated:
Rebates
Rebates are primarily related to volume incentives and are offered to key customers to promote loyalty. These rebate programs provide that, upon the attainment of
pre-established
volumes or the attainment of revenue milestones for a specified period, the customer receives a rebate. Since rebates are contractually agreed upon, they are estimated based on the specific terms in each agreement based on historical trends and expected sales. Externally obtained inventory levels and expected sales usage by contract are evaluated in relation to estimates made for rebates payable to indirect customers and managed care agreements.Medicaid and Other Governmental Rebates
Pharmaceutical manufacturers whose products are covered by the Medicaid program are required to provide a rebate to each state as a percentage of their average manufacturer’s price for generic products dispensed and “best price” for specialty products dispensed. Many states have also implemented supplemental rebate programs that obligate manufacturers to pay rebates in excess of those required under federal law. The Company estimates these rebates based on historical trends of rebates paid, as well as on changes in wholesaler inventory levels and increases or decreases in sales.
Chargebacks
The Company has arrangements with various third parties, such as managed care organizations and drug store chains, establishing prices for certain of Teva’s products. While these arrangements are made between the Company and the customers, the customers independently select a wholesaler from which they purchase the products. Alternatively, certain wholesalers may enter into agreements with the customers, with Teva’s concurrence, which establish the pricing for certain products which the wholesalers provide. Under either arrangement, Teva will issue a credit (referred to as a “chargeback”) to the wholesaler for the difference between the invoice price to the wholesaler and the customer’s contract prices. Provisions for chargebacks involve estimates of contract prices of over 2,000 products and multiple contracts with multiple wholesalers. Provisions for chargebacks involve estimates of usage by retailers and other indirect buyers with varying contract prices for multiple wholesalers. The provision for chargebacks varies in relation to changes in product mix, pricing and the level of inventory at the wholesalers and, therefore, will not necessarily fluctuate in proportion to an increase or decrease in sales. Provisions for estimating chargebacks are calculated using historical chargeback experience and/or expected chargeback levels for new products and anticipated pricing changes. Teva considers current and expected price competition when evaluating the provision for chargebacks. Chargeback provisions are compared to externally obtained distribution channel reports for reasonableness. The Company regularly monitors the provision for chargebacks and makes adjustments when the Company believes that actual chargebacks may differ from estimated provisions.
Other Promotional Arrangements
Other promotional or incentive arrangements are periodically offered to customers, specifically related to the launch of products or other targeted promotions. Provisions are made in the period for which the Company can estimate the incentive earned by the customer, in accordance with the contractual terms. The Company regularly monitors the provision for other promotional arrangements and makes adjustments when it believes that the actual provision may differ from the estimated provisions.
10
8
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Shelf Stock Adjustments
The custom in the pharmaceutical industry is generally to grant customers a shelf stock adjustment based on the customers’ existing inventory contemporaneously with decreases in the market price of the related product. The most significant of these relate to products for which an exclusive or semi-exclusive period exists. Provisions for price reductions depend on future events, including price competition, new competitive launches and the level of customer inventories at the time of the price decline. Teva regularly monitors the competitive factors that influence the pricing of its products and customer inventory levels and adjust these estimates where appropriate.
Returns
Returns primarily relate to customer returns of expired products which, the customer has the right to return up to one year following the expiration date. Such returned products are destroyed and credits and/or refunds are issued to the customer for the value of the returns. Accordingly, no returned assets are recoded in connection with those products. The returns provision is estimated by applying a historical return rate to the amounts of revenue estimated to be subject to returns. Revenue subject to returns is estimated based on the lag time from time of sale to date of return. The estimated lag time is developed by analyzing historical experience. Additionally, The Company considers specific factors, such as estimated levels of inventory in the distribution channel, product dating and expiration, size and maturity of launch, entrance of new competitors, changes in formularies or packaging and any changes to customer terms, for determining the overall expected levels of returns.
Prompt Pay Discounts
Prompt pay discounts are offered to most customers to encourage timely payment. Discounts are estimated at the time of invoice based on historical discounts in relation to sales. Prompt pay discounts are almost always utilized by customers. As a result, the actual discounts do not vary significantly from the estimated amount.
t. | Research and development: |
Research and development expenses are charged to statement of income (loss) as incurred. Participations and grants in respect of research and development expenses are recognized as a reduction of research and development expenses as the related costs are incurred, or as the related milestone is met. Upfront fees received in connection with cooperation agreements are deferred and recognized over the period of the applicable agreements as a reduction of research and development expenses.
Advance payments for goods or services that will be used or rendered for future research and development activities are deferred. Such amounts are recognized as an expense as the related goods are delivered or the services are performed.
Research and development
in-process
acquired as part of an asset purchase, which has not reached technological feasibility and has no alternative future use, is expensed as incurred.u. | Shipping and handling costs: |
Shipping and handling costs, which are included in S&M expenses, were $124 million, $138 million and $159 million for the years ended December 31
, 2020
, 2019
and 2018
, respectively.
10
9
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
v. | Advertising costs: |
Advertising costs are expensed as incurred. Advertising costs for the years ended December 31
, 2020
, 2019
and 2018
were $225 million, $213 million and $256 million, respectively.
w. | Restructuring: |
Restructuring provisions are recognized for the direct expenditures arising from restructuring initiatives, where the plans are sufficiently detailed and where appropriate communication to those affected has been made.
Costs for
one-time
termination benefits in which the employee is required to render service until termination in order to receive the benefits are recognized ratably over the future service period.Contractual termination benefits are provided to employees when employment is terminated due to an event specified in the provisions of an existing plan or agreement. A liability is recorded and the expense is recognized when it is probable that employees will be entitled to the benefits and the amount is reasonably estimable.
Special termination benefits arise when the Company offers, for a short period of time, to provide certain additional benefits to employees electing voluntary termination. A liability is recorded and the expense is recognized in the period the employees irrevocably accept the offer and the amount of the termination liability is reasonably estimable.
x. | Segment reporting: |
The Company’s business includes three reporting segments based on three geographical areas:
| (a) | North America segment, which includes the United States and Canada. |
| (b) | Europe segment, which includes the European Union and certain other European countries. |
| (c) | International Markets segment, which includes all countries in which Teva operates other than those in the North America and Europe segments. |
Each business segment manages the entire product portfolio in its region, including generics, specialty and(“OTC”) products.
over-the-counter
In addition to these three segments, Teva has 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 its affiliate Medis.y. | Earnings per share: |
Basic earnings per share are computed by dividing the net income attributable to ordinary shareholders by the weighted average number of ordinary shares (including fully vested RSUs and PSUs) outstanding during the year, net of treasury shares.
In computing diluted earnings per share, basic earnings per share are adjusted to take into account the potential dilution that could occur upon: (i) the exercise of options and
non-vested
RSUs and PSUs granted under employee stock compensation plans and one series of convertible senior debentures, using the treasury stock method; (ii) the conversion of the remaining convertible senior debentures using the“if-converted”
method, by1
10
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
adding to net income interest expense on the debentures and amortization of issuance costs, net of tax benefits, and by adding the weighted average number of shares issuable upon assumed conversion of the debentures; and (iii) until December 17, 2018, the conversion of the mandatory convertible preferred shares (“MCPS”) using the
“if-converted”
method by adding to net income attributable to ordinary shareholders the dividends on the preferred shares and by adding the weighted average number of shares issuable upon assumed conversion of the mandatory convertible preferred shares.On December 17
, 2018
, the mandatory convertible preferred shares automatically converted into ordinary shares. As a result of this conversion, Teva issued 70.6 million ADSs.
See note 14
.
z. | Securitization |
Teva accounts for transfers of certain of its trade receivable as sales when it has surrendered control over the related assets in accordance with ASC Topic 860 “Transfer and Servicing” of Financial Assets. Whether control has been relinquished requires, among other things, an evaluation of relevant legal considerations and an assessment of the nature and extent of the Company’s continuing involvement with the assets transferred. Assets obtained and liabilities incurred in connection with transfers reported as sales are initially recognized in the balance sheet at fair value. Refer to note 10 f.
aa. | Divestitures |
The Company nets the proceeds on the divestitures of products with the carrying amount of the related assets and records gain or loss on sale within other income. Any contingent payments that are potentially due to the Company as a result of these divestitures are recorded when it is probable that a significant reversal of income will not occur, or in the case of a business, when such payments are realizable. For divestures of businesses, including divestitures of products that qualify as a business, the Company reflects the relative fair value of goodwill associated with the businesses in the determination of gain or loss on sale.
bb. | Debt instruments |
Debt instruments are initially recognized at the fair value of the consideration received. Debt issuance costs are recorded on the consolidated balance sheet as a reduction of liability. They are subsequently recognized at amortized cost using the effective interest method. Debt may be considered extinguished when it has been modified and the terms of the new debt instruments and old debt instruments are “substantially different” (as defined in the debt modification guidance in ASC
470-50
“Debt—Modifications and Extinguishments”). The Company classifies the current portion of long term debt asnon-current
liabilities on the Balance Sheet when it has the intent and ability to refinance the obligation on a long-term basis, in accordance with ASC470-50
“Debt”.cc. | Leases |
The Company’s lease accounting policy until December 31, 2018, prior to the adoption of the new lease standard
Teva leases real estate, cars and equipment for use in its operations, which are classified as operating leases. In addition to rent, the leases may require Teva to pay directly for fees, insurance, maintenance and other operating expenses. Rental expense for the year ended December 31, 2018 was $175 million. The Company also has capital leases for properties.
1
11
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
The Company’s lease accounting policy from January 1, 2019, following the adoption of the new lease standard
Teva adopted the new accounting standard ASC 842 “Leases” and all the related amendments on January 1, 2019 and used the effective date as Teva’s date of initial application.
Teva determines if an arrangement is a lease at inception. Lease classification is governed by five criteria in ASCIf any of these five criteria is met, Teva classifies the lease as a finance lease. Otherwise, Teva classifies the lease as an operating lease. When determining lease classification, Teva’s approach in assessing two of the mentioned criteria is: (i) generally, 75% or more of the remaining economic life of the underlying asset is a major part of the remaining economic life of that underlying asset; and (ii) generally, 90% or more of the fair value of the underlying asset comprises substantially all of the fair value of the underlying asset.
842-10-25-2.
Operating leases are included in operating lease(“ROU”) assets, other current liabilities and operating lease liabilities in the consolidated balance sheets. Finance leases are included in property, plant and equipment, other current liabilities, and other long-term liabilities in the consolidated balance sheets.
right-of-use
ROU assets represent Teva’s right to use an underlying asset for the lease term and lease liabilities represent Teva’s obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Teva uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of the lease payments.
For finance leases, Teva recognizes interest on the lease liability separately from amortization of the ROU assets in the statement of comprehensive income. For operating leases, lease expenses are recognized on a straight-line basis over the lease term.
The new standard also provides practical expedients for an entity’s ongoing accounting. Teva elected the short-term lease recognition exemption for all leases with a term shorter than 12 months. This means that for those leases, Teva does not recognize ROU assets or lease liabilities, including ROU assets or lease liabilities for existing short-term leases of assets in transition, but recognizes lease expenses over the lease term on a straight line basis. Teva also elected the practical expedient to not separate lease and
non-lease
components for all of Teva’s leases, other than leases of real estate.Lease terms will include options to extend or terminate the lease when it is reasonably certain that Teva will either exercise or not exercise the option to renew or terminate the lease.
Teva’s lease agreements have remaining lease terms ranging from 1 year to 78 years. Some of these agreements include options to extend the leases for up to
10
years and some include options to terminate the leases immediately. Certain leases also include options to purchase the leased property.
The depreciable life of leasehold improvements is limited by the expected lease term, unless there is a transfer of title or a purchase option for the leased asset reasonably certain of exercise.
Some of Teva’s vehicle lease agreements include rental payments based on the actual usage of the vehicles and other lease agreements include rental payments adjusted periodically for inflation. Teva’s lease agreements do not contain any material residual value guarantees.
The new lease standard has no impact on Teva’s debt-covenant compliance under its RCF.
1
12
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Teva rents out or subleases certain assets to third parties, which has an immaterial impact on Teva’s consolidated financial statements.
NOTE 2—Certain transactions:
a. | Business acquisitions: |
Actavis Generics and Anda acquisitions
On August 2, 2016, Teva consummated its acquisition of Allergan plc’s (“Allergan”) worldwide generic pharmaceuticals business (“Actavis Generics”). At closing, Teva transferred to Allergan consideration of approximately $33.4 billion in cash and approximately 100.3 million Teva shares.
On October 3, 2016, Teva consummated the acquisition of Anda Inc. (“Anda”), a medicines distribution business in the United States, from Allergan, for cash consideration of $500 million. This transaction was related to the Actavis Generics acquisition and, as such, the purchase price accounting and related disclosures were treated on a combined basis.
The final cash consideration for the Actavis Generics acquisition was subject to certain net working capital adjustments. On January 31, 2018, Teva and Allergan entered into a settlement agreement and mutual releases for which Allergan made a one-time payment of $703 million to Teva to settle the working capital adjustments under the Master Purchase Agreement, dated July 26, 2015. As the measurement period has ended, this amount was recorded as a gain under legal settlements and loss contingencies in the first quarter of 2018.
Rimsa
On March 3, 2016, Teva completed the acquisition of Representaciones e Investigaciones Médicas, S.A. de C.V. (“Rimsa”), a pharmaceutical manufacturing and distribution company in Mexico, for $2.3 billion, in a cash free, debt free set of transactions. Teva financed the transaction using cash on hand.
Following the closing of the acquisition, Teva identified issues concerning Rimsa’s pre-acquisition quality, manufacturing and other practices, at which point Teva began an assessment of the extent and cost of remediation required to return its products to the market. In September 2016, 2 lawsuits were filed: a pre-emptive suit by the Rimsa sellers against Teva and Teva’s lawsuit alleging fraud and breach of contract against the Rimsa sellers. The Rimsa sellers subsequently dismissed their lawsuit and the dismissal was approved by court order on December 20, 2016.
On February 15, 2018, Teva and the Rimsa sellers entered into a settlement agreement and mutual releases with respect to Teva’s breach of contract claim, pursuant to which the Rimsa sellers made a
one-time
payment to Teva. Teva’s breach of contract claim was subsequently dismissed by the court. As the measurement period has ended, this payment was recorded as a gain under legal settlements and loss contingencies in the first quarter of 2018.b. | Other significant agreements: |
The Company has entered into alliances and other arrangements with third parties to acquire rights to products it does not have, to access markets it does not operate in and to otherwise share development costs or business risks. The Company’s most significant agreements of this nature are summarized below.
11
3
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Alvotech Partnership
In August 2020, Teva entered into a partnership agreement with biopharmaceutical company Alvotech for the exclusive commercialization in the U.S. of five biosimilar product candidates. The initial pipeline for this partnership contains biosimilar candidates addressing multiple therapeutic areas. Under this agreement, Alvotech is responsible for the development, registration and supply of the biosimilar product candidates and Teva will exclusively commercialize the products in the United States. Teva paid an upfront payment in the third quarter of 2020 that w
as
recorded as R&D expenses. During the fourth quarter of 2020, Teva accrued additional amounts due to the high probability that additional milestone payments will be paid in 2021. Additional development and commercial milestone payments of upto
$450 million,
as well as royalty payments, may be payable by Teva over the next few years. Teva and Alvotech will share profit from the commercialization of these biosimilar
s.
Eli Lilly and Alder BioPharmaceuticals
In December 2018, Teva entered into an agreeme
n
t with Eli Lilly, resolving the European Patent Office opposition they had filed against Teva’s AJOVY®
patents. The settlement agreement with Lilly also resolved Lilly’s action to revoke the patent protecting AJOVY in the United Kingdom.On January 8, 2018, Teva signed a global license agreement with Alder BioPharmaceuticals (“Alder”). The agreement validates Teva’s intellectual property and resolves Alder’s opposition to Teva’s European patent with respect to anti-calcitonin gene-related peptide (CGRP) antibodies, including the withdrawal of Alder’s appeal before
the European Patent Office. Under the terms of the agreement, Alder will receive a non-exclusive license to Teva’s anti-CGRP antibodies patent portfolio to develop, manufacture and commercialize eptinezumab in the United States and worldwide, excluding Japan and Korea. Teva received a
$25 million
upfront payment that was recognized as revenue during the first quarter of 2018, and a
$25
million milestone payment in March 2020 that was recognized as revenue in the first quarter of 2020. The agreement stipulates additional commercial milestone payments to Teva of up to
$150
million, as well as future royalties.
PGT Healthcare Partnership
In July 2018, Teva terminated its joint venture with the Procter & Gamble Company (“P&G”), PGT Healthcare partnership (“PGT”), which the two companies established in 2011 to market OTC medicines. Teva will continue to maintain its OTC business on an independent basis.
As part of the separation, Teva transferred to P&G the shares it held in New Chapter Inc. and ownership rights in an OTC plant located in India. Teva provides certain services to P&G after the separation for a transition period.
During the first quarter of 2018, Teva classified the plant in India as an asset held for sale and recorded an impairment of
$64
million under other assets impairments, restructuring and other items. In addition, Teva recorded a write-down of
$94
million of its investment in New Chapter Inc. under share in losses of associated companies.
During September 2018, Teva and P&G completed the final net asset distribution as part of the dissolution and Teva recorded a gain of
$50
million to reflect the cash payment received from P&G under the dissolution agreement.
AUSTEDO
®
On September 19, 2017, Teva entered into a partnership agreement with Nuvelution Pharma, Inc. (“Nuvelution”) for development of AUSTEDO for the treatment of Tourette syndrome in pediatric patients in the
11
4
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
United States. There are no further plans in this indication following clinical trial results received in February 2020, which failed to meet their primary endpoints.
Otsuka
On May 12, 2017, Teva entered into a license and collaboration agreement with Otsuka Pharmaceutical Co. Ltd. (“Otsuka”), providing Otsuka with an exclusive license to conduct phase 2 and 3 clinical trials for AJOVY in Japan and, if approved, to commercialize the product in Japan. Otsuka paid Teva an upfront payment of $50 million in consideration for the transaction. Results for these trials were received in January 2020 indicating that primary and secondary endpoints were achieved and that no clinically significant adverse events were observed in subjects. In the third quarter of 2020, Otsuka submitted an application to obtain manufacturing and marketing approval for AJOVY in Japan and, as a result, paid Teva a milestone payment of $15 million, which was recognized as revenue in the third quarter of 2020. Teva may receive additional milestone payments upon achievement of certain commercial and revenue targets. Otsuka will also pay Teva royalties on AJOVY sales in Japan.
Celltrion
In October 2016, Teva and Celltrion, Inc. (“Celltrion”) entered into a collaborative agreement to commercialize TRUXIMA
®
and HERZUMA®
, two biosimilar products for the U.S. and Canadian markets. Teva paid Celltrion $160 million, of which Teva received an aggregate credit of $60 million as of December 31, 2020. Teva and Celltrion share the profit from the commercialization of these products. These two products, TRUXIMA and HERZUMA, were approved by the FDA in November and December 2018, respectively and were launched in the United States in November 2019 and March 2020, respectively.Regeneron
In September 2016, Teva and Regeneron Pharmaceuticals, Inc. (“Regeneron”) entered into a collaborative agreement to develop and commercialize Regeneron’s pain medication product, fasinumab. Teva and Regeneron share in the global commercial rights to this product (excluding Japan, Korea and nine other Asian countries), as well as ongoing associated R&D costs of approximately $1 billion. Teva made an upfront payment of $250 million to Regeneron in the third quarter of 2016 and additional payments for achievement of development milestones in an aggregate amount of $120 million were paid during 2017 and 2018. The agreement stipulates additional development and commercial milestone payments of up to $2,230 million, as well as future royalties.
c. |
Certain assets of Teva’s business venture in Japan
Teva operates its business in Japan, which is part of Teva’s International Market segment, through a business venture with The Takeda Pharmaceutical Company Limited (“Takeda”), in which Teva owns a
51%stake and Takeda owns the remaining
49%.In July 2020, Teva and Takeda entered into a purchase agreement to sell the majority of the business venture’s generic and operational assets. This transaction was completed on February 1, 2021.
Teva is accounting for the business venture assets and liabilities under the purchase agreement as held for sale and determined that the fair value less cost to sell did not exceed the carrying value, resulting in an impairment charge of
$247million in other assets impairments, restructuring and other items recognized in 2020
.
11
5
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Teva determined that the sale of this portion of the Teva-Takeda business venture does not constitute a strategic shift for Teva, and does not and will not have a major effect on its operations and financial results. Accordingly, the operations associated with the transactions are not reported as discontinued operations.
Assets held for sale include the Teva-Takeda business venture assets that are held for sale, the anticipated sale of certain OTC assets and other manufacturing assets that are expected to be sold within the next year.
The table below summarizes all Teva assets included as held for sale as of December 31, 2020 and December 31, 2019:
December 31, 2020 | December 31, 2019 | |||||||
(U.S. $ in millions) | ||||||||
Inventories | $ | 146 | $ | 0 | ||||
Property, plant and equipment, net and others | 312 | 98 | ||||||
Goodwill | 27 | 0 | ||||||
Adjustments of assets held for sale to fair value | (296 | ) | (11 | ) | ||||
Total assets of the disposal group classified as held for sale in the consolidated balance sheets | $ | 189 | $ | 87 | ||||
11
6
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
NOTE 3—Revenue from contracts with customers:
Disaggregation of revenue
The following table disaggregates Teva’s revenues by major revenue streams. For additional information on disaggregation of revenues, see note 19.
Year ended December 31, 2020 | ||||||||||||||||||||
North America | Europe | International Markets | Other activities | Total | ||||||||||||||||
(U.S.$ in millions) | ||||||||||||||||||||
Sale of goods | 6,902 | 4,736 | 1,946 | 772 | 14,354 | |||||||||||||||
Licensing arrangements | 84 | 32 | 9 | 4 | 129 | |||||||||||||||
Distribution | 1,462 | 3 | 30 | — | 1,495 | |||||||||||||||
Other | 0§ | (14 | ) | 169 | 527 | 680 | ||||||||||||||
| $ | 8,447 | $ | 4,757 | $ | 2,154 | $ | 1,302 | $ | 16,659 | |||||||||||
Year ended December 31, 2019 | ||||||||||||||||||||
North America | Europe | International Markets | Other activities | Total | ||||||||||||||||
(U.S.$ in millions) | ||||||||||||||||||||
Sale of goods | 6,941 | 4,770 | 2,045 | 754 | 14,510 | |||||||||||||||
Licensing arrangements | 109 | 29 | 4 | 5 | 147 | |||||||||||||||
Distribution | 1,492 | 2 | 20 | — | 1,514 | |||||||||||||||
Other | 0§ | (6 | ) | 177 | 545 | 716 | ||||||||||||||
| $ | 8,542 | $ | 4,795 | $ | 2,246 | $ | 1,304 | $ | 16,887 | |||||||||||
Year ended December 31, 2018 | ||||||||||||||||||||
North America | Europe | International Markets | Other activities | Total | ||||||||||||||||
(U.S.$ in millions) | ||||||||||||||||||||
Sale of goods | 7,838 | 5,153 | 2,151 | 739 | 15,881 | |||||||||||||||
Licensing arrangements | 111 | 23 | 22 | 9 | 165 | |||||||||||||||
Distribution | 1,347 | 7 | 19 | — | 1,373 | |||||||||||||||
Other | 1 | 3 | 230 | 618 | 852 | |||||||||||||||
| $ | 9,297 | $ | 5,186 | $ | 2,422 | $ | 1,366 | $ | 18,271 | |||||||||||
| § | Represents an amount less than $1 million. |
Variable consideration
Variable consideration mainly includes SR&A, comprised of rebates (including Medicaid and other governmental program discounts), chargebacks, returns and other promotional (including shelf stock adjustments) items. Provisions for prompt payment discounts are netted against trade receivables.
The Company recognizes these provisions at the time of sale and adjusts them if the actual amounts differ from the estimated provisions. For description of the nature of each deduction and how provisions are estimated see note 1.
11
7
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
SR&A to U.S. customers comprised approximately 79% of the Company’s total SR&A as of December 31, 2020, with the remaining balance primarily in Canada and Germany. The changes in SR&A for third-party sales for the period ended December 31, 2019 and 2020 were as follows:
Sales Reserves and Allowances | ||||||||||||||||||||||||||||||||
Reserves included in Accounts Receivable, net | Rebates | Medicaid and other governmental allowances | Chargebacks | Returns | Other | Total reserves included in Sales Reserves and Allowances | Total | |||||||||||||||||||||||||
(U.S.$ in millions) | ||||||||||||||||||||||||||||||||
| Balance at January 1, 2019 | $ | 175 | 3,006 | $ | 1,361 | $ | 1,530 | $ | 638 | $ | 176 | $ | 6,711 | $ | 6,886 | |||||||||||||||||
Provisions related to sales made in current year period | 383 | 5,552 | 976 | 9,565 | 281 | 394 | 16,767 | $ | 17,150 | |||||||||||||||||||||||
Provisions related to sales made in prior periods | — | (92 | ) | (151 | ) | (17 | ) | 77 | (6 | ) | (189 | ) | $ | (189 | ) | |||||||||||||||||
Credits and payments | (471 | ) | (5,570 | ) | (1,076 | ) | (9,736 | ) | (360 | ) | (392 | ) | (17,134 | ) | $ | (17,605 | ) | |||||||||||||||
Translation differences | — | (1 | ) | (1 | ) | 1 | 1 | 4 | 4 | $ | 4 | |||||||||||||||||||||
| Balance at December 31, 2019 | $ | 87 | 2,895 | $ | 1,109 | $ | 1,342 | $ | 637 | $ | 176 | $ | 6,159 | $ | 6,246 | |||||||||||||||||
Provisions related to sales made in current year period | 391 | 4,703 | 744 | 8,438 | 459 | 71 | 14,415 | $ | 14,806 | |||||||||||||||||||||||
Provisions related to sales made in prior periods | — | (219 | ) | (184 | ) | (65 | ) | (28 | ) | (1 | ) | (497 | ) | $ | (497 | ) | ||||||||||||||||
Credits and payments | (398 | ) | (5,360 | ) | (849 | ) | (8,614 | ) | (386 | ) | (100 | ) | (15,309 | ) | $ | (15,707 | ) | |||||||||||||||
Translation differences | — | 35 | 8 | 7 | 4 | 2 | 56 | $ | 56 | |||||||||||||||||||||||
| Balance at December 31, 2020 | $ | 80 | 2,054 | $ | 828 | $ | 1,108 | $ | 686 | $ | 148 | $ | 4,824 | $ | 4,904 | |||||||||||||||||
NOTE 4—Inventories:
Inventories, net of reserves, consisted of the following:
December 31, | ||||||||
2020 | 2019 | |||||||
(U.S. $ in millions) | ||||||||
Finished products | $2,378 | $2,504 | ||||||
Raw and packaging materials | 1,231 | 1,183 | ||||||
Products in process | 605 | 583 | ||||||
Materials in transit and payments on account | 189 | 151 | ||||||
| $4,403 | $4,422 | |||||||
11
8
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
NOTE 5—Property, plant and equipment:
Property, plant and equipment, net, consisted of the following:
December 31, | ||||||||
2020 | 2019 | |||||||
(U.S. $ in millions) | ||||||||
Machinery and equipment | $ | 5,245 | $ | 5,385 | ||||
Buildings | 2,720 | 2,839 | ||||||
Computer equipment and other assets | 2,197 | 2,131 | ||||||
Assets under construction and payments on account | 933 | 672 | ||||||
Land | 292 | 323 | ||||||
| 11,388 | 11,350 | |||||||
Less—accumulated depreciatio n | (5,092 | ) | (4,914 | ) | ||||
| $6,296 | $6,436 | |||||||
Depreciation expenses were $537 million, $609 million and $676 million in the years ended December 31, 2020, 2019 and 2018, respectively. During the years ended December 31, 2020, 2019 and 2018, Teva had impairments of
property
, plant and equipment in the amount of $416 million, $139 million and $500 million, respectively.See note
15
.
NOTE 6—Identifiable intangible assets:
Identifiable intangible assets consisted of the following:
Gross carrying amount net of impairment | Accumulated amortization | Net carrying amount | ||||||||||||||||||||||
December 31, | ||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
(U.S. $ in millions) | ||||||||||||||||||||||||
Product rights | $ | 19,650 | $ | 19,663 | $ | 12,094 | $ | 10,640 | $ | 7,556 | $ | 9,023 | ||||||||||||
Trade names | 621 | 600 | 165 | 126 | 456 | 474 | ||||||||||||||||||
In-process research and development (IPR&D) | 911 | 1,735 | — | — | 911 | 1,735 | ||||||||||||||||||
Total | $ | 21,182 | $ | 21,998 | $ | 12,259 | $ | 10,766 | $ | 8,923 | $ | 11,232 | ||||||||||||
Product rights and trade names
Product rights and trade names are assets presented at amortized cost. Product rights and trade names represent a portfolio of pharmaceutical products from various categories with a weighted average life of approximately 10 years. Amortization of intangible assets amounted to $1,020 million, $1,113 million and $1,166 million in the years ended December 31, 2020, 2019 and 2018, respectively.
As of December 31, 2020, the estimated aggregate amortization of intangible assets for the years 2021 to 2025 is as follows: 2021—$812 million; 2022—$764 million; 2023—$744 million; 2024—$705 million and 2025—$723 million. These estimates do not include the impact of IPR&D that is expected to be successfully completed and reclassified to product rights.
11
9
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
IPR&D
Teva’s IPR&D are assets that have not yet been approved in major markets. Teva’s IPR&D is comprised mainly of various generic products from the Actavis Generics acquisition of $877 million. IPR&D carries intrinsic risks that the asset might not succeed in advanced phases and may be impaired in future periods.
Intangible assets impairment
Impairment of identifiable intangible assets amounted to $1,502 million, $1,639 million and $1,991 million in the years ended December 31, 2020, 2019 and 2018, respectively. These amounts are recorded
in the statement of income (loss) under intangible assets impairment.
Impairments in 2020 mainly consisted of:
| (a) | IPR&D assets of $797 million, mainly due to: (i) $300 million related to generic pipeline products acquired from Actavis Generics resulting from development progress and changes in other key valuation indications (e.g., market size, competition assumptions, legal landscape, launch date) in the United States; (ii) $262 million related to lenalidomide (generic equivalent of Revlimid®), due to modified competition assumptions as a result of settlements between the innovator and other generic filers; (iii) $211 million related to AUSTEDO for the treatment of Tourette syndrome in pediatric patients in the United States following clinical trial results, received in February 2020, which failed to meet their primary endpoints; and |
| (b) | Identifiable product rights of $705 million, mainly due to: (i) $398 million related to updated market assumptions regarding price and volume of products acquired from Actavis Generics that are primarily marketed in the United States; (ii) $165 million in Japan in connection with ongoing regulatory pricing reductions and generic competition; and (iii) $110 million related to a change in the assumptions regarding competition for the expected relaunch of metformin tablets. |
Impairments in 2019 mainly consisted of:
| (a) | Identifiable product rights of $958 million, mainly due to: (i) $647 million due to updated market assumptions regarding price and volume of certain products acquired from Actavis Generics and primarily marketed in the United States, (ii) $128 million related to a decrease in future expected sales in Japan as a result of generic competition, and (iii) $123 million related to the discontinuation of certain products from Actavis Generics’ portfolio in several international markets; and |
| (b) | IPR&D assets of $681 million, due to: (i) $497 million related to various generic pipeline products acquired from Actavis Generics due to development progress and changes in other key valuation indications (e.g., market size, competition assumptions, legal landscape, launch date or discount rate) in the United States (ii) $125 million related to lenalidomide (generic equivalent of REVLIMID ® ), due to modified competition assumptions as a result of settlements between the innovator and other generic filers, and (iii) $59 million related to a change in assumptions concerning the future European market share of a number of pipeline products acquired from Actavis Generics. |
Impairments in 2018 mainly consisted of:
| (a) | Identifiable product rights of $1,068 million, mainly due to: (i) $412 million in connection with updated market assumptions regarding price and volume of products acquired from Actavis Generics currently marketed in the United States and supply constraints; (ii) $290 million in certain international markets, due to a loss of several tenders and termination of products manufacturing lines; and (iii) $222 million in Japan in connection with ongoing regulatory pricing reductions and generic competition. |
1
20
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
| (b) | IPR&D assets of $923 million, mainly related to revaluation of generic products acquired from Actavis Generics due to development progress and changes in other key valuation indications (e.g., market size, legal landscape, launch date or discount rate). |
The fair value measurement of the impaired intangible assets in 2020
is
based
on significant unobservable inputs in the market and thus represents a Level 3measurement within the fair value hierarchy. The discount rate applied ranged from 7.5% to 9%. A probability of success factor of 80% was used in the
majority of
fair value calculation
s
to reflect
inherent regulatory and commercial risk of IPR&D.
NOTE 7—Goodwill:
The changes in the carrying amount of goodwill for the years ended December 31, 2020 and 2019 were as follows:
North America | Europe | International Markets | Other | Total | ||||||||||||||||
(U.S. $ in millions) | ||||||||||||||||||||
Balance as of December 31, 201 8 (1) | $ | 11,098 | $ | 8,653 | $ | 2,479 | $ | 2,687 | $ | 24,917 | ||||||||||
Changes during the period: | ||||||||||||||||||||
Goodwil l disposal | (23 | ) | (5 | ) | — | — | (28 | ) | ||||||||||||
Translation differences | 16 | (112 | ) | 53 | — | (43 | ) | |||||||||||||
Balance as of December 31, 2019 (1) | $ | 11,091 | $ | 8,536 | $ | 2,532 | $ | 2,687 | $ | 24,846 | ||||||||||
Changes during the period: | ||||||||||||||||||||
Goodwill reclassified as assets held for sale | — | (8 | ) | (19 | ) | — | (27 | ) | ||||||||||||
Goodwill impairment | (4,628 | ) | — | — | — | (4,628 | ) | |||||||||||||
Translation differences | 10 | 574 | (151 | ) | — | 433 | ||||||||||||||
Balance as of December 31 , 2020 (1) | $ | 6,473 | $ | 9,102 | $ | 2,362 | $ | 2,687 | $ | 20,624 | ||||||||||
| (1) | Accumulated goodwill impairment as of December 31, 2020, December 31, 2019 and December 31, 2018 was approximately $25.6 billion, $21.0 billion and $21.0 billion, respectively. |
Teva operates its business through three reporting segments: North America, Europe and International Markets. Each of these business segments is a reporting unit. Additional reporting units include Teva’s production and sale of APIs to third parties (“Teva API”) and an
out-licensing
platform offering a portfolio of products to other pharmaceutical companies through its affiliate Medis. The Teva API and Medis reporting units are included under “Other” in the above table. See note 19 for additional segment information.Teva determines the fair value of its reporting units using the income approach. The income approach is a forward-looking approach for estimating fair value. Within the income approach, the method used is the discounted cash flow method. Teva starts with a forecast of all the expected net cash flows associated with the reporting unit, which includes the application of a terminal value, and then applies a discount rate to arrive at a net present value amount. Cash flow projections are based on Teva’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the weighted average cost of capital (“WACC”), adjusted for the relevant risk associated with country-specific and business-specific characteristics. If any of these expectations were to vary materially from Teva’s assumptions, Teva may recognize an impairment of goodwill allocated to its reporting units in the future.
1
2
1
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
First Quarter Developments
During the first quarter of 2020, management assessed developments that occurred during the quarter, including expected effects of the
COVID-19
pandemic on its business, to determine if it was more likely than not that the fair value of any of its reporting units was below its carrying amount. As part of this assessment, management also considered the sensitivity of its conclusions as they relate to changes in the estimates and assumptions used in the latest forecast available for each period.Based on this assessment, management concluded that it was not more likely than not that the fair value of any of the reporting units was below its carrying value as of March 31, 2020 and, therefore, no quantitative assessment was performed.
Second Quarter Developments
Pursuant to Company policy, the Company has historically performed its annual goodwill assessment during the fourth quarter of each year. During the second quarter of 2020, the Company changed its annual impairment assessment date from October 1 to June 30 to more closely align the impairment assessment date with the Company’s long-term planning and forecasting process.
During the second quarter of 2020, Teva conducted a quantitative analysis of all reporting units as part of its annual goodwill impairment test and utilized the assistance of an independent valuation expert. No goodwill impairment charge was recorded during the second quarter of 2020.
As part of the aforementioned analysis, Teva analyzed the aggregated fair value of its reporting units compared to its market capitalization as part of its annual goodwill impairment test, in order to assess the reasonableness of the results of its cash flow projections used for its goodwill impairment analysis. Management noted differences between the market capitalization and management’s internal projections as of the end of the second quarter. As of June 30, 2020, those differences were believed to be attributable to the following:
Management noted a portion of the difference can be attributed to sales projections of AJOVY and AUSTEDO in the International Markets reporting unit. Management continues to believe that the majority of analysts do not focus on these brands in preparing their financial models and, as a result, have not attributed value to the launch potential in this reporting unit.
Management noted an additional difference can be attributed to sales projections of AUSTEDO in the North America reporting unit, resulting in higher fair value as analyzed by management compared to Teva’s market capitalization. Management continues to believe that it has more accurate information based on its knowledge of the market and its growth and therefore no adjustment was incorporated to the fair value.
Management noted that market concerns regarding the uncertainty related to the opioid and price fixing litigation risks are impacting its market capitalization. Management believes that these concerns led to an acute reaction, which resulted in a decline in Teva’s share price. Management believed developments in the opioids case would clarify the outlook with regards to the opioid litigation, when the proposed settlement framework is finalized, which was expected in the near term.
Even if management was to adjust the fair value of the North America reporting unit for any one of the uncertainties noted, the estimated fair value would still exceed its carrying amount. Management also noted that negative results related to all the uncertainties noted may lead to a material goodwill impairment charge.
1
22
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Third Quarter Developments
During the third quarter of 2020, Teva’s share price experienced further decline. Teva analyzed its aggregated internal valuation of its reporting units compared to its market capitalization as part of its goodwill impairment test. Management believed there are similar reconciling factors to those referenced in the second quarter with additional declines occurring due to increased uncertainty related to certain litigation actions in the third quarter and the related uncertainties it added to the existing concerns around financial strength.
During the third quarter of 2020, management noted the following factors that led to an assessment of the North America reporting unit for impairment:
The Company noted a 25% reduction in its market capitalization from the second quarter of 2020 to the third quarter of 2020.
With respect to the opioids litigation, as discussions continue with the group of Attorneys General regarding the nationwide framework and trial dates are postponed largely due to the
COVID-19
pandemic, a resolution of this matter is taking longer than anticipated. Accordingly, the Company was and is currently unable to predict the timing of any final settlement or whether the settlement will be finalized based upon the current settlement framework.On August 25, 2020, the Company was indicted by the U.S. Department of Justice for alleged violations of the Sherman Act.
On August 18, 2020, the Company was sued by the U.S. Department of Justice alleging violations of the federal Anti-Kickback Statute, and asserting causes of action under the federal False Claims Act and state law.
The Company is committed to its projected cash flow targets and management’s views on the litigation exposures have not changed.
However, the developments indicated
the timeframe for resolution will take significantly longer than previously expected which introduces greater uncertainty to a favorable resolution. In addition, management
believed
that analysts
were
unlikely to modify their projections until the Company
could
demonstrate progression on the resolution with respect to some or all of the above legal matters. As such, for purposes of testing the goodwill in the North America reporting unit under ASC 350
, management incorporated these factors into its valuation of the North America reporting unit,
which resulted
in an impairment charge of $4,628 million.
Fourth Quarter Developments
During the fourth quarter of 2020, management assessed developments during the quarter to determine if it was more likely than not that the fair value of any of its reporting units was below its carrying amount.
Based on this assessment, management concluded that it was not more likely than not that the fair value of any of the reporting units was below its carrying value as of December 31, 2020 and, therefore, no quantitative assessment was performed.
Following the goodwill impairment charge recorded in the third quarter of 2020 to the North America reporting unit, the carrying value of the North America reporting unit equaled its fair value as of September 30, 2020. Therefore, if business conditions or expectations were to change materially, it may be necessary to record further impairment charges to the North America reporting unit in the future.
The other reporting units all have fair value in excess of 10% over their book values as of December 31, 2020.
12
3
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
NOTE 8—Leases:
Teva adopted the new accounting standard ASC 842 “Leases” and all the related amendments on January 1, 2019 and used the effective date as Teva’s date of initial application.
The components of operating lease cost for the year ended December 31, 2020 were as follows:
Year ended December 31, 2020 | Year ended December 31, 2019 | |||||||
(U.S. $ in millions) | (U.S. $ in millions) | |||||||
Operating lease cost: | ||||||||
Fixed payments and variable payments that depend on an index or rate | $ | 148 | $ | 166 | ||||
Variable lease payments not included in the lease liability | 4 | 6 | ||||||
Short-term lease cost | 3 | 6 | ||||||
| $155 | $178 | |||||||
Supplemental cash flow information related to operating leases was as follows:
Year ended December 31, 2020 | Year ended December 31, 2019 | |||||||
(U.S. $ in millions) | (U.S. $ in millions) | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | 151 | $ | 169 | ||||
Right-of-use (non-cash): | ||||||||
Operating leases | $ | 211 | $ | 142 | ||||
Supplemental balance sheet information related to operating leases was as follows:
December 31, 2020 | December 31, 2019 | |||||||
(U.S. $ in millions) | (U.S. $ in millions) | |||||||
Operating leases: | ||||||||
Operating lease ROU assets | $ | 559 | $ | 514 | ||||
Other current liabilities | 116 | 118 | ||||||
Operating lease liabilities | 479 | 435 | ||||||
Total operating lease liabilities | $ | 595 | $ | 553 | ||||
December 31, | December 31, | |||||||
2020 | 2019 | |||||||
Weighted average remaining lease term | ||||||||
Operating leases | 7.5 years | 7.5 years | ||||||
Weighted average discount rate | ||||||||
Operating leases | 5.2 | % | 6.0 | % | ||||
12
4
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Maturities of operating lease liabilities were as follows:
December 31, 2020 | ||||
(U.S. $ in millions) | ||||
2021 | $ | 137 | ||
2022 | 119 | |||
2023 | 91 | |||
2024 | 73 | |||
2025 and thereafter | 302 | |||
Total operating lease payments | $ | 722 | ||
Less: imputed interest | 127 | |||
Present value of lease liabilities | $ | 595 | ||
At the end of the third quarter of
2020, after obtaining the right to use the building, Teva began transitioning its corporate headquarters to a consolidated site in Tel-Aviv, Israel. Teva has an operating lease for the office space in Tel Aviv for an initial term of twelve and a half years, with an option for three extensions. Teva estimates that the reasonably certain holding period of the lease for accounting purposes is twelve and a half years. As of September 30,
2020,
74upon initial recognition,
Teva booked $million as operating lease right-of-use and $
66million as operating lease liability.
As of December 31, 2020, Teva’s total finance lease assets and finance lease liabilities were
$29 million and $21million, respectively. The difference between those amounts is mainly due to prepaid payments.
NOTE 9—Debt obligations:
a. | Short-term debt: |
December 31, | ||||||||||||
Weighted average interest rate as of December 31, 2020 | Maturity | 2020 | 2019 | |||||||||
(U.S. $ in millions) | ||||||||||||
Convertible debentures | 0.25% | 2026 | 514 | 514 | ||||||||
Current maturities of long-term liabilities | 2,674 | 1,831 | ||||||||||
Total short term debt | $ | 3,188 | $ | 2,345 | ||||||||
Convertible senior debentures
Teva 0.25% convertible senior debentures, due 2026, principal amount as of December 31, 2020 and 2019 were $514
million. These convertible senior debentures include a “net share settlement” feature according to which the principal amount will be paid in cash and in case of conversion, only the residual conversion value above the principal amount will be paid in Teva shares. Due to the “net share settlement” feature, exercisable at any time, these convertible senior debentures are classified in the Balance Sheet under short-term debt. Holders of the convertible debentures were able to cause Teva to redeem the debentures on February 1, 2021, and $491 million of the convertible debentures were redeemed on such date.
12
5
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
b. | Long-term debt: |
Weighted average interest rate as of December 31, 2020 | Maturity | December 31, 2020 | December 31, 2019 | |||||||||||||
% | (U.S. $ in millions) | |||||||||||||||
Senior notes EUR 1,010 million (1) | 0.38 | % | 2020 | $ | — | $ | 1,131 | |||||||||
Senior notes EUR 1,500 million | 1.13 | % | 2024 | 1,839 | 1,673 | |||||||||||
Senior notes EUR 1,300 million | 1.25 | % | 2023 | 1,595 | 1,451 | |||||||||||
Senior notes EUR 900 million | 4.50 | % | 2025 | 1,107 | 1,008 | |||||||||||
Senior notes EUR 750 million | 1.63 | % | 2028 | 916 | 833 | |||||||||||
Senior notes EUR 700 million | 3.25 | % | 2022 | 861 | 784 | |||||||||||
Senior notes EUR 700 million | 1.88 | % | 2027 | 860 | 782 | |||||||||||
Senior notes EUR 1,000 million | 6.00 | % | 2025 | 1,230 | 1,120 | |||||||||||
Senior notes USD 1,000 million | 7.13 | % | 2025 | 1,000 | 1,000 | |||||||||||
Senior notes USD 3,500 million | 3.15 | % | 2026 | 3,495 | 3,494 | |||||||||||
Senior notes USD 1,475 million | 2.20 | % | 2021 | 1,472 | 1,474 | |||||||||||
Senior notes USD 3,000 million | 2.80 | % | 2023 | 2,996 | 2,995 | |||||||||||
Senior notes USD 2,000 million | 4.10 | % | 2046 | 1,986 | 1,985 | |||||||||||
Senior notes USD 1,250 million | 6.00 | % | 2024 | 1,250 | 1,250 | |||||||||||
Senior notes USD 1,250 million | 6.75 | % | 2028 | 1,250 | 1,250 | |||||||||||
Senior notes USD 844 million | 2.95 | % | 2022 | 853 | 856 | |||||||||||
Senior notes USD 789 million | 6.15 | % | 2036 | 783 | 782 | |||||||||||
Senior notes USD 700 million (2) | 2.25 | % | 2020 | — | 700 | |||||||||||
Senior notes USD 613 million | 3.65 | % | 2021 | 616 | 618 | |||||||||||
Senior notes USD 588 million | 3.65 | % | 2021 | 586 | 587 | |||||||||||
Senior notes CHF 350 million | 0.50 | % | 2022 | 397 | 361 | |||||||||||
Senior notes CHF 350 million | 1.00 | % | 2025 | 398 | 362 | |||||||||||
Total senior notes | 25,490 | 26,496 | ||||||||||||||
Other long-term debt | 1.08 | % | 2026 | 1 | 1 | |||||||||||
Less current maturities | (2,674 | ) | (1,831 | ) | ||||||||||||
Less debt issuance costs | (86 | ) | (103 | ) | ||||||||||||
Total senior notes and loans | $ | 22,731 | $ | 24,562 | ||||||||||||
| (1) | In July 2020, Teva repaid at maturity € 1,010million of its 0.375%senior notes. |
| (2) | In March 2020, Teva repaid at maturity $ 700 million of its 2.25%senior notes. |
Long term debt was issued by several indirect wholly-owned subsidiaries of the Company and is fully and unconditionally guaranteed by the Company as to payment of all principal, interest, discount and additional amounts (as defined), if any.
Long term debt as of December 31, 20192020 is effectively denominated (taking into consideration cross currency swap agreements) in the following currencies: U.S. dollar 66%60%, euro 31%37% and Swiss franc 3%.
Teva’s principal sources of short-term liquidity are its cash on hand, existing cash investments, liquid securities and available credit facilities, primarily its $2.3 billion
unsecured syndicated
revolving credit facility
entered into in April 2019
(“RCF”).
12
6
TEVA
PHARMACEUTICAL
INDUSTRIESLIMITED
Notes to Consolidated Financial Statements—(
Continued
)The RCF agreement provides for two separate tranches, a
$1.15billion tranche A and a
$1.15billion tranche B. Loans and letters of credit will be available from time to time under each tranche for Teva’s general corporate purposes. Tranche A has a maturity date of April 2019, the Company entered into8, 2022, with two one-year extension options, of which $1.065 billion was extended to April 8, 2023. Tranche B has a $2.3 billion unsecured syndicated RCF, which replaced the previous $3 billion revolving credit facility. maturity date of April 8, 2024.
The RCF contains certain covenants, including certain limitations on incurring liens and indebtedness and maintenance of certain financial ratios, including the requirement to maintain compliance with a net debt to EBITDA ratio, which becomes more restrictive over time.
The net debt to EBITDA ratio limit was The RCF can be used for general corporate purposes, including repaying existing debt.
As of December 31, Annual Report
on Formwere
outstanding under the RCF. Based on current and forecasted results, the Company expects that it will not exceed the financial covenant thresholds set forth in the RCF within one year from the date these financial statements are issued.Under specified circumstances, including
non-compliance
with any of the covenants described above and the unavailability of any waiver, amendment or other modification thereto, the Company will not be able to borrow under the RCF. Additionally, violations of the covenants, under the above-mentioned circumstances, would result in an event of default in all borrowings under the RCF and, when greater than a specified threshold amount as set forth in each series of senior notes is outstanding, could lead to an event of default under the Company’s senior notes due to cross acceleration provisions.Teva expects that it will continue to have sufficient cash resources to support its debt service payments and all other financial obligations within one year from the date that these financial statements are issued.
As of December 31, 2019,
2020, the
required annual principal payments of long-term debt, excluding debt issuance cost,
starting2021,202
from
the year 2
, are as follows:December 31, 2019 | ||||
(U.S. $ in millions) | ||||
2021 | $ | 2,679 | ||
2022 | 2,002 | |||
2023 | 4,446 | |||
2024 | 2,923 | |||
2025 and thereafter | 13,131 | |||
| $ | 25,181 | |||
December 31, | ||||
2020 | ||||
(U.S. $ in millions) | ||||
2022 | $ | 2,111 | ||
2023 | 4,591 | |||
2024 | 3,089 | |||
202 5 | 3,735 | |||
| 2026 and thereafter * | 9,804 | |||
| $ | 23,330 | |||
| * | Including $514million convertible notes. See note 9a. |
NOTE 10—Derivative instruments and hedging activities:
activities
:a. | Foreign exchange risk management: |
In 2019,2020, approximately 48% of Teva’s revenues were denominated in currencies other than the U.S. dollar. As a result, Teva is
subject
to significant foreign currency risks.12
7
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
The Company enters into forward exchange contracts, purchases and writes options in order to hedge the currency exposure on balance sheet items, revenues and operating activities.expenses. In addition, the Company takes measures to reduce exposure by using natural hedging. The Company also acts to offset risks in opposite directions among the companies in the Group.subsidiaries within Teva. The currency hedged items are usually denominated in the following main currencies: the British pound (GBP), the euro, (EUR), the Swiss franc, (CHF), the Japanese yen, (JPY),the British pound, the Russian ruble, the Canadian dollar, the Polish zloty, (PLN), the new Israeli shekel (NIS), the Russian ruble (RUB), Canadian dollar (CAD), the Mexican peso (MXN), the Indian rupee (INR) and other European and Latin American currencies.
Depending on market conditions, foreign currency risk
is
also managed through the use of foreign currency debt.The Company hedgesmay choose to hedge against possible fluctuations in foreign subsidiaries net assets (“net investment hedge”) and entered into cross currency swaps and forward contracts in the past in order to hedge such an exposure.
Most of the counterparties to the derivatives are major banks and the Company is monitoring the associated inherent credit risks. The Company does not enter into derivative transactions for trading purposes.
b. | Interest risk management: |
The Company raises capital through various debt instruments, including straight notes that bear a fixed or variable interest rate, bank loans securitizations and convertible debentures. In some cases, the Company has swapped from a fixed to a floating interest rate (“fair value hedge”) and from a fixed to a fixed interest rate with an exchange from a currency other than the functional currency (“cash flow hedge”), thereby reducing overall interest expenses or hedging risks associated with interest rate fluctuations.
c. | Derivative instrument disclosure: |
The following table summarizes the notional amounts for hedged items, when transactions are designated as hedge accounting:
December 31, | ||||||||
2019 | 2018 | |||||||
(U.S. $ in millions) | ||||||||
Cross-currency swap—cash flow hedge | $ | — | $ | 588 | ||||
Interest rate swap—fair value hedge | — | 500 | ||||||
Cross-currency swap—net investment hedge | 1,000 | 1,000 | ||||||
December 31, | ||||||||
2020 | 2019 | |||||||
(U.S. $ in millions) | ||||||||
Cross-currency swap , net investment hedge | — | 1,000 | ||||||
d. | Derivative instrument outstanding: |
The following table summarizes the classification and fair valuevalues of derivative instruments:
Fair value | ||||||||||||||||
Designated as hedging instruments | Not designated as hedging instruments | |||||||||||||||
December 31, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | |||||||||||||
Reported under | (U.S. $ in millions) | |||||||||||||||
Asset derivatives: | ||||||||||||||||
Other current assets: | ||||||||||||||||
Option and forward contracts | $ | — | $ | — | $ | 32 | | $ | 18 | |||||||
Other non-current assets: | ||||||||||||||||
Cross-currency swaps—cash flow hedge | — | 58 | — | |||||||||||||
Liability derivatives: | ||||||||||||||||
Other current liabilities: | ||||||||||||||||
Cross-currency swaps—net investment hedge | (22 | ) | — | |||||||||||||
Option and forward contracts | — | — | (41 | ) | (26 | ) | ||||||||||
Other taxes and long-term liabilities: | ||||||||||||||||
Cross-currency swaps—net investment hedge | — | (41 | ) | — | — | |||||||||||
Senior notes and loans: | ||||||||||||||||
Interest rate swaps—fair value hedge | — | (9 | ) | — | — | |||||||||||
Fair value | ||||||||||||||||
Designated as hedging instruments | Not designated as hedging instruments | |||||||||||||||
December 31, 2020 | December 31, 2019 | December 31, 2020 | December 31, 2019 | |||||||||||||
Reported under | (U.S. $ in millions) | |||||||||||||||
Asset derivatives: | ||||||||||||||||
Other current assets: | ||||||||||||||||
Option and forward contracts | $ | 0 | $ | — | $ | 24 | $ | 32 | ||||||||
Liability derivatives: | ||||||||||||||||
Other current liabilities: | ||||||||||||||||
Cross-currency swaps , net investment | 0 | (22) | ||||||||||||||
Option and forward contracts | 0 | — | (79 | ) | (41 | ) | ||||||||||
12
8
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
The table below provides information regarding the location and amount of
pre-tax
(gains) losses from derivatives designated in fair value or cash flow hedging relationships:Financial expenses, net | Other comprehensive income | |||||||||||||||||||||||
Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
2019 | 2018** | 2017** | 2019 | 2018** | 2017** | |||||||||||||||||||
Reported under | (U.S. $ in millions) | |||||||||||||||||||||||
Line items in which effects of hedges are recorded | $ | 822 | $ | 959 | $ | 895 | $ | 160 | $ | (585 | ) | $ | 1,369 | |||||||||||
Cross-currency swaps—cash flow hedge (1) | (2 | ) | (2 | ) | (3 | ) | (33 | ) | (35 | ) | 71 | |||||||||||||
Cross-currency swaps—net investment hedge (2) | (29 | ) | (31 | ) | (13 | ) | (22 | ) | (51 | ) | 97 | |||||||||||||
Interest rate swaps—fair value hedge (3) | 2 | * | (4 | ) | — | — | — | |||||||||||||||||
Financial expenses, net | Other comprehensive income (loss) | |||||||||||||||||||||||
Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
2020 | 2019 | 2018** | 2020 | 2019 | 2018** | |||||||||||||||||||
Reported under | (U.S. $ in millions) | |||||||||||||||||||||||
Line items in which effects of hedges are recorded | $ | 834 | $ | 822 | $ | 959 | $ | (30 | ) | $ | 160 | $ | (585 | ) | ||||||||||
| Cross-currency swaps—cash flow hedge (1) | 0 | (2 | ) | (2 | ) | 0 | (33 | ) | (35 | ) | ||||||||||||||
Cross-currency swaps , net investment hedge (2) | (2 | ) | (29 | ) | (31 | ) | (21 | ) | (22 | ) | (51 | ) | ||||||||||||
| Interest rate swaps—fair value hedge (3) | 0 | 2 | * | 0 | 0 | 0 | ||||||||||||||||||
| * | Represents an amount less than $0.5 million. |
| ** | Comparative figures are based on prior hedge accounting standard. |
The table below provides information regarding the location and amount of
pre-tax
(gains) losses from derivatives not designated as hedging instruments:Financial expenses, net | Net revenues | |||||||||||||||||||||||
Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
2019 | 2018 | 2017 | 2019 | 2018 | 2017 | |||||||||||||||||||
Reported under | (U.S. $ in millions) | |||||||||||||||||||||||
Line items in which effects of hedges are recorded | $ | 822 | $ | 959 | $ | 895 | $ | 16,887 | $ | 18,271 | $ | 21,853 | ||||||||||||
Option and forward contracts (4) | (51 | ) | (12 | ) | 82 | — | — | — | ||||||||||||||||
Option and forward contracts Economic hedge (5) | — | — | — | 14 | (4 | ) | — | |||||||||||||||||
Financial expenses, net | Net revenues | |||||||||||||||||||||||
Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||
2020 | 2019 | 2018 | 2020 | 2019 | 2018 | |||||||||||||||||||
Reported under | (U.S. $ in millions) | |||||||||||||||||||||||
Line items in which effects of hedges are recorded | $ | 834 | $ | 822 | $ | 959 | $ | 16,659 | $ | 16,887 | $ | 18,271 | ||||||||||||
Option and forward contracts (4) | 130 | (51 | ) | (12 | ) | — | — | — | ||||||||||||||||
Option and forward contracts (5) | 0 | — | — | * | 14 | (4 | ) | |||||||||||||||||
| * | Represents an amount less than $0.5 million. |
| (1) | With respect to cross-currency swap agreements, Teva recognized gains which mainly reflect the differences between the fixed interest rate and the floating interest rate. In the fourth quarter of 2019, Teva terminated $588 million in cross-currency swap agreements against its outstanding 3.65% senior notes maturing in November 2021. The settlement of these transactions resulted in cash proceeds of $95 million. The cash flow hedge accounting adjustments of these instruments, which are recorded under senior notes and loans, are amortized under financial |
| (2) | In each of the first and second quarters of 2017, Teva entered into a cross currency swap agreement with a notional amount of $500 million maturing in 2020. These cross currency swaps were designated as a net investment hedge of Teva’s foreign subsidiaries euro denominated net assets, in order to reduce the risk of adverse exchange rate fluctuations. With respect to these cross currency swap agreements, Teva recognized gains which mainly reflect the differences between thefloat-for-float and received. In the first quarter of 2020, these cross-currency swap agreements expired. The settlement of these transactions resulted in |
| (3) | In the fourth quarter of 2016, Teva entered into an interest rate swap agreement designated as fair value hedge relating to its 2.8% senior notes due 2023 with respect to $500 million notional amount of outstanding debt. With respect to this interest rate swap agreement, Teva recognized a loss which mainly reflects the differences between the fixed interest rate and the floating interest rate. In the third quarter of 2019, Teva terminated this interest rate swap agreement. The settlement of these transactions resulted in |
12
9
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
| (4) | Teva uses foreign exchange contracts (mainly option and forward contracts) to hedge balance sheet items from currency exposure. These foreign exchange contracts are not designated as hedging instruments for accounting purposes. In connection with these foreign exchange contracts, Teva recognizes gains or losses that offset the revaluation of the balance sheet items also recorded under financial |
| (5) | Teva entered into option and forward contracts designed to limit the exposure of foreign exchange fluctuations on projected revenues and expenses recorded in euro, the Swiss franc, the Japanese yen, the British pound, the Russian ruble, the Canadian dollar and some other currencies during the |
e. | Amortizations due to terminated derivative instruments: |
Forward starting interest rate swaps and treasury lock agreements
With respect to thethese forward starting interest rate swaps and treasury lock agreements, losses of $29
$31
million, $28
$29
million and $27
$28
million were recognized under financial expenses, net for the years ended December 31, 2020, 2019 and 2018, and 2017, respectively.
Fair value hedge
In the third quarter of 2016, Teva terminated interest rate swap agreements designated as a fair value hedge relating to its 2.95% senior notes due 2022 with respect to $844 million notional amount and its 3.65% senior notes due 2021 with respect to $450 million notional amount. Settlement of these transactions resulted in a gain position of $41 million. The fair value hedge accounting adjustments of these instruments, which are recorded under senior notes and loans, are amortized under financial expenses, net over the life of the debt as additional interest expense.
In the third quarter of 2019, Teva terminated
interest rate swap agreements designated as a fair value hedge relating to its 2.8% senior notes due 2023 with respect to $3,000 million notional amount. Settlement of these transactions resulted in
cash proceeds
of $10$10 million. The fair value hedge accounting adjustments of these instruments, which-net over the life of the debt.
are
recorded under senior notes and loans, are amortized under financial expenses,1
30
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Cash flow hedge
In the fourth quarter of 2019, Teva terminated $588
million cross-currency swap agreements against its
outstanding 3.65%
senior notes maturing in November 2021. Settlement of these transactions resulted in cash proceeds of $95
$95
million. The cash flow hedge accounting adjustments of these instruments, which are recorded under senior notes and loans, are amortized under financialexpenses-net expenses, net over the life of the debt.
With respect to the interest rate swap and cross-currency swap agreements, gains of $6
$3 million, $6 million and $7 $6
million were recognized under financial expenses, net for the years ended December 31, 2020, 2019 and 2018, and 2017, respectively.
f. | Securitization: |
In April 2011, Teva established a trade receivables securitization program to sell trade receivables to BNP Paribas Bank (“BNP”). Under the program Teva (on a consolidated basis) receives as purchase price for the receivables sold by it, an initial cash purchase price and the right to receive a deferred purchase price (“DPP”)., according to the purchase price for the receivables sold by it.
On an individual seller basis, each Teva subsidiary sells receivables to BNP for an amount equal to their nominal amount. BNP then immediately
on-sells
such receivables to a bankruptcy-remote special-purpose entity (“SPE”), for an amount equal to the nominal amount of such trade receivables. The SPE thenon-sells
such receivables to a conduit sponsored by BNP (“the conduit”) for an initial cash purchase price (equal to the nominal amount of such receivables less a discount) and the right to receive a DPP.The SPE is a VIE for which Teva is considered to be the primary beneficiary. The SPE’s sole business consists of the purchase of receivables from Teva subsidiaries and the subsequent transfer of such receivables to the conduit.
Although the SPE is included in Teva’s consolidated financial statements, it is a separate legal entity with separate creditors. The conduit and other designated creditors of the SPE are entitled, both before and upon the SPE’s liquidation, to be paid out of the SPE’s assets prior to the DPP payable to Teva. The assets of the SPE are not available to pay creditors of Teva or its subsidiaries.
This program expires on August 21, 20202021 but can be renewed with consent from the parties to the program up to August 31, 202120, 2022 or any other date agreed between the parties.
Once sold to BNP, the relevant Teva subsidiary as seller has no retained interests in the receivables sold and they are unavailable to the relevant seller should the relevant seller become insolvent. The conduit has all the rights in the securitized trade receivables, including the right to pledge or dispose of such receivables. Consequently, receivables sold under this agreement are
de-recognized
from Teva’s consolidated balance sheet.The portion of the purchase price for the receivables which is not paid in cash by the conduit is a DPP asset. The conduit pays the SPE the DPP from collections received by the conduit from the securitized trade receivables (after paying senior costs and expenses, including the conduit’s debt service obligations), which the SPE then pays to Teva.TheTeva.The DPP asset represents a beneficial interest in the transferred financial assets and is recognized at fair value as part of the sale transaction. The DPP asset is included in other current assets on Teva’s consolidated balance sheet.
Teva has collection and administrative responsibilities for the sold receivables. The fair value of these servicing arrangements as well as the fees earned was immaterial.
1
31
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
DPP asset as of December 31, 2020 and 2019 and 2018 was $250
$266 million and $231 $250
million, respectively.
As of December 31, 20192020 and 2018,2019, the balance of Teva’s securitized assets sold were $690
$734 million and $686 $690
million, respectively.
The following table summarizes the sold receivables outstanding balance net of DPP asset under the outstanding securitization program:
As of and for the year ended December 31, | ||||||||
2019 | 2018 | |||||||
(U.S. $ in millions) | ||||||||
Sold receivables at the beginning of the year | $ | 686 | $ | 799 | ||||
Proceeds from sale of receivables | 4,852 | 5,071 | ||||||
Cash collections (remitted to the owner of the receivables) | (4,849 | ) | (5,151 | ) | ||||
Effect of currency exchange rate changes | 1 | (33 | ) | |||||
Sold receivables at the end of the year | $ | 690 | $ | 686 | ||||
As of and for the year ended December 31, | ||||||||
2020 | 2019 | |||||||
(U.S. $ in millions) | ||||||||
Sold receivables at the beginning of the year | $ | 690 | $ | 686 | ||||
Proceeds from sale of receivables | 4,606 | 4,852 | ||||||
Cash collections (remitted to the owner of the receivables) | (4,607 | ) | (4,849 | ) | ||||
Effect of currency exchange rate changes | 45 | 1 | ||||||
Sold receivables at the end of the year | $ | 734 | $ | 690 | ||||
NOTE 11—Legal settlements and loss contingencies:
Legal settlements and loss contingencies for 20192020 amounted to anexpenseexpenses of $60 million, compared to expenses of $1,178 million compared to and an income
income of $1,208 million in in 2019
2018.
potential settlement of
As of December 31, 2020 and 2019, and 2018, accrued amountsTeva’s provision for legal settlements and loss contingencies ofrecorded under accrued expenses and other taxes and long-term liabilities was $1,625 million and $1,580 million, and $562 million, respectively,were recorded in accrued expenses.respectively.
NOTE 12—Commitments and contingencies:
a. | Commitments: |
Royalty commitments:
The Company is committed to pay royalties to owners of
know-how,
partners in alliances and other certain arrangements and to parties that financed research and development, at a wide range of rates as a percentage of sales or of the gross margin of certain products, as defined in the underlying agreements.Until September 30, 2018, royalty expenses were reported in cost of goods sold if related to the acquisition of a product, and if not, such expenseswere were included in S&M expenses. Commencing October 1, 2018, royalty expenses are retroactively reported entirely under cost of goods sold. Royalty expenses in each of the years ended December 31, 2020, 2019 and 2018 and 2017 were $505 million, $403 million and $536 million, and $956 million, respectively.
Milestone commitments:
Teva has committed to make potential future milestone payments to third parties under various agreements. These payments are contingent upon the occurrence of certain future events and, given the nature of these events,
1
32
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
it is unclear when, if ever, Teva may be required to pay such amounts. As of December 31, 2019,2020, if all milestones and targets, for compounds in phase 2 and more advanced stages of development, are achieved, the total contingent payments could reach an aggregate amount of up to $426$509 million.
b. | Contingencies: |
General
From time to time, Teva and/or its subsidiaries are subject to claims for damages and/or equitable relief arising in the ordinary course of business. In addition, as described below, in large part as a result of the nature of its business, Teva is frequently subject to litigation. Teva generally believes that it has meritorious defenses to the actions brought against it and vigorously pursues the defense or settlement of each such action. Except as described below, Teva does not currently have a reasonable basis to estimate the loss, or range of loss, that is reasonably possible with respect to matters disclosed in this note.
Teva records a provision in its financial statements to the extent that it concludes that a contingent liability is probable and the amount thereof is estimable. Based upon the status of the cases described below, management’s assessments of the likelihood of damages, and the advice of counsel, no provisions have been made regarding the matters disclosed in this note, except as noted below. Litigation outcomes and contingencies are unpredictable, and excessive verdicts can occur. Accordingly, management’s assessments involve complex judgments about future events and often rely heavily on estimates and assumptions. Teva continuously reviews the matters described below and may, from time to time, remove previously disclosed matters that the Company has determined no longer meet the materiality threshold for disclosure.
If one or more of such proceedings described below were to result in final judgments against Teva, such judgments could be material to its results of operations and cash flows in a given period. In addition, Teva incurs significant legal fees and related expenses in the course of defending its positions even if the facts and circumstances of a particular litigation do not give rise to a provision in the financial statements.
In connection with third-party agreements, Teva may under certain circumstances be required to indemnify, and may be indemnified by, in unspecified amounts, the parties to such agreements against third-party claims. Among other things, Teva’s agreements with third parties may require Teva to indemnify them, or require them to indemnify Teva, for the costs and damages incurred in connection with product liability claims, in specified or unspecified amounts.
Except as otherwise noted, all of the litigation matters disclosed below involve claims arising in the United States. Except as otherwise noted, all third party sales figures given below are based on IQVIA (formerly IMS Health Inc.) data.
Intellectual Property Litigation
From time to time, Teva seeks to develop generic versions of patent-protected pharmaceuticals for sale prior to patent expiration in various markets. In the United States, to obtain approval for most generics prior to the expiration of the originator’s patents, Teva must challenge the patents under the procedures set forth in the Hatch-Waxman Act of 1984, as amended. To the extent that Teva seeks to utilize such patent challenge procedures, Teva is and expects to be involved in patent litigation regarding the validity, enforceability or infringement of the originator’s patents. Teva may also be involved in patent litigation involving the extent to which its product or manufacturing process techniques may infringe other originator or third-party patents.
Additionally, depending upon a complex analysis of a variety of legal and commercial factors, Teva may, in certain circumstances, elect to market a generic version even though litigation is still pending. To the extent Teva elects to proceed in this manner, it could face substantial liability for patent infringement if the final court decision is adverse to Teva, which could be material to its results of operations and cash flows in a given period.
13
3
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Teva could also be sued for patent infringement outside of the context of the Hatch-Waxman Act. For example, Teva could be sued for patent infringement after commencing sales of a product. In addition, for biosimilar products, Teva could be sued according to the “patent dance” procedures of the Biologics Price Competition and Innovation Act (BPCIA).
The general rule for damages in patent infringement cases in the United States is that the patentee should be compensated by no less than a reasonable royalty and it may also be able, in certain circumstances, to be compensated for its lost profits. The amount of a reasonable royalty award would generally be calculated based on the sales of Teva’s product. The amount of lost profits would generally be based on the lost sales of the patentee’s product. In addition, the patentee may seek consequential damages as well as enhanced damages of up to three times the profits lost by the patent holder for willful infringement, although courts have typically awarded much lower multiples.
Teva is also involved in litigation regarding patents in other countries where it does business, particularly in Europe. The laws concerning generic pharmaceuticals and patents differ from country to country. Damages for patent infringement in Europe may include lost profits or a reasonable royalty, but enhanced damages for willful infringement are generally not available.
In July 2014, GlaxoSmithKline (“GSK”) sued Teva in Delaware federal court for infringement of a patent expiring in June 2015 directed to using carvedilol in a specified manner to decrease the risk of mortality in patients with congestive heart failure. Teva and eight other generic producers began selling their carvedilol tablets (the generic version of GSK’s Coreg
®
) in September 2007. A jury trial was held and the jury returned a verdict in GSK’s favor finding Teva liable for induced infringement, including willful infringement, and assessing damages of $235.5 million, not includingA hearingOn October 2, 2020, the Court of Appeals for the Federal Circuit overturned the lower court’s ruling and reinstated the jury verdict in adecision. On December 2, 2020,
pre-
or post-judgment interest or a multiplier for willfulness. Following post-trial motions filed by the parties, on March 28, 2018, the district court issued an opinion overturning the jury verdict and instead found no induced infringement by Teva, thereby finding that Teva did not owe any damages; the district court also denied Teva’s motion seeking to overturn the jury verdict with respect to invalidity. The provision that was originally included in the financial statements following the damages verdict in this matter in 2017 was reversed in 2018, following the opinion overturning the verdict as the exposure was no longer considered probable. two-to-one
Teva filed a request for panel and en banc review. On February 9, 2021, the Federal Circuit granted panel rehearing. In its February 9, 2021 order, the Court vacated the October 2, 2020 judgment and scheduled oral argument for February 23, 2021. The Court will hear oral argument only on an appeal filed by both parties was held on September 4, 2019 and Teva awaits the Court’s decision.issue of whether there is enough evidence to support the jury’s verdict of induced infringement during the time period from January 8, 2008 through April 30, 2011 (the “skinny label” period). If the appeal of the district court’s decision isfurther appeals are decided against Teva, the case would be remanded to the district court for it to consider Teva’s other legal and equitable defenses that have not yet been considered by the district court.
In 2014, Teva Canada succeeded in its challenge of the bortezomib (the generic equivalent of Velcade®Velcade®) product and mannitol ester patents under the Patented Medicines (Notice Of Compliance) Regulations (“PM(NOC)PM (NOC)”). At the time of Teva’s launch in 2015, annual sales of Velcade were approximately
million Canadian dollars. Additionally, Teva commenced an action under Section 8 of PM(NOC)PM (NOC) to recover damages for being kept off of the market during the PM(NOC)PM (NOC) proceedings. Janssen and Millennium filed a counterclaim for
infringement of the same two patents as well as a patent covering a process to prepare bortezomib. The product patent expired in October 2015; the other patents expire in January 2022 and March 2025. In 2017, Teva entered into an agreement with Janssen and Millennium which limitslimited the damages payable by either party depending on the outcome of the infringement/impeachment action. As a result, the most Janssen and Millennium could recoverhave recovered is
200 million Canadian dollars plus post-judgment interest. In June 2018, the court ruled that Janssen and Millennium pay Teva
5 million Canadian dollars in Section 8 damages. Janssen and
Millennium filed an appeal,
134
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Millennium applied for leave to appeal to the Canadian Supreme Court. IfOn May 8, 2020, the decisionCanadian Supreme Court denied Janssen and Millennium’s application. This matter is ultimately overturned, Teva could owe the capped damages set forth above. In addition to the potential damages that could be awarded, Teva could be ordered to cease sales of its bortezomib product.now closed.
Product Liability Litigation
Teva’s business inherently exposes it to potential product liability claims. Teva maintains a program of insurance, which may include commercial insurance, self-insurance (including direct risk retention), or a combination of both approaches, in amounts and on terms that it believes are reasonable and prudent in light of its business and related risks. However, Teva sells, and will continue to sell, pharmaceuticals that are not covered by its product liability insurance; in addition, it may be subject to claims for which insurance coverage is denied as well as claims that exceed its policy limits. Product liability coverage for pharmaceutical companies is becoming more expensive and increasingly difficult to obtain. As a result, Teva may not be able to obtain the type and amount of insurance it desires, or any insurance on reasonable terms, in all of its markets.
Teva and its subsidiaries are parties to litigation relating to previously unknown nitrosamine impurities discovered in certain products. The discovery led to a global recall of single and combination valsartan medicines around the world starting in July 2018 and to subsequent recalls on other products. The nitrosamine impurities in valsartan are allegedly found in the active pharmaceutical ingredient (API) supplied by multiple API manufacturers. Teva’s products allegedly at issue in the various nitrosamine-related litigations pending in the United States include valsartan, losartan, metformin and ranitidine. There are currently two Multi-District Litigations (“MDL”) pending in the United States District Courts. One MDL is pending in the United States District Court for the District of New Jersey for valsartan, losartan and irbesartan. The second MDL is pending in the United States District Court for the Southern District of Florida for ranitidine. The lawsuits against Teva in the MDLs consist of individual personal injury and/or product liability claims and economic damages claims brought by consumers and end payors on behalf of purported classes of other consumers and end payors as well as medical monitoring claims. Defendants’ motions to dismiss in the valsartan, losartan and irbesartan MDL were denied in part and granted in part, allowing plaintiffs to file amended complaints. On December 31, 2020, the court in the ranitidine MDL granted the generic defendants’ motion to dismiss on the grounds of preemption and deficient pleading, allowing plaintiffs to
re-plead
certain claims. Certain plaintiffs appealed the decision. In addition to these MDLs, Teva has also been named in a consolidated proceeding pending in the United States District Court for the District of New Jersey brought by individuals and end payors seeking economic damages on behalf of purported classes of consumers and end payors who purchased Teva’s, as well as other generic manufacturers’ metformin products. A motion to dismiss in that consolidated action is pending. Similar lawsuits are pending in Canada and Germany.Competition Matters
As part of its generic pharmaceuticals business, Teva has challenged a number of patents covering branded pharmaceuticals, some of which are among the most widely-prescribed and well-known drugs on the market. Many of Teva’s patent challenges have resulted in litigation relating to Teva’s attempts to market generic versions of such pharmaceuticals under the federal Hatch-Waxman Act. Some of this litigation has been resolved through settlement agreements in which Teva obtained a license to market a generic version of the drug, often years before the patents expire.
Teva and its subsidiaries have increasingly been named as defendants in cases that allege antitrust violations arising from such settlement agreements. The plaintiffs in these cases, which are usually direct and indirect purchasers of pharmaceutical products, and often assert claims on behalf of classes of all direct and indirect purchasers, typically allege that (1) Teva received something of value from the innovator in exchange for an agreement to delay generic entry, and (2) significant savings could have been realized if there had been no settlement agreement and generic competition had commenced earlier. These class action cases seek various forms of injunctive and monetary relief, including damages based on the difference between the brand price and
135
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
what the generic price allegedly would have been and disgorgement of profits, which are automatically tripled under the relevant statutes, plus attorneys’ fees and costs. The alleged damages generally depend on the size of
the branded market and the length of the alleged delay, and can be substantial
substantial—potentially measured in multiples of the annual brand sales
sales—particularly where the alleged delays are lengthy or branded drugs with annual sales in the billions of dollars are involved.
Teva believes that its settlement agreements are lawful and serve to increase competition, and has defended them vigorously. In Teva’s experience to date, these cases have typically settled for a fraction of the high end of the damages sought, although there can be no assurance that such outcomes will continue.
In June 2013, the U.S.U.S. Supreme Court held, in Federal Trade Commission (“FTC”) v. Actavis, Inc. (the “AndroGel case”), that a rule of reason test should be applied in analyzing whether such settlements potentially violate the federal antitrust laws. The Supreme Court held that a trial court must analyze each agreement in its entirety in order to determine whether it violates the antitrust laws. This new test has resulted in increased scrutiny of Teva’s patent settlements, additional action by the FTC and state and local authorities, and an increased risk of liability in Teva’s currently pending antitrust litigations.
®
) were unlawful because they had the effect of excluding generic competition. The In May 2015, Cephalon entered into a consent decree with the FTC (the “Modafinil Consent Decree”) under which the FTC dismissed its claims against Cephalon in the FTC Modafinil Action in exchange for payment of
$1.2 billion (less The settlement fund does not cover any judgments or settlements outside the United States. Under the Modafinil Consent Decree, Teva also agreed to certain injunctive relief with respect to the types of settlement agreements Teva may enter into to resolve patent litigation in the United States for a period of ten years. The remaining balance of the settlement fund after consideration of the settlement with the State of California noted above is approximately
$19 set-offs
for prior settlements) by Cephalon and Teva into a settlement fund.million. In February 2019, in connection with the settlement of other unrelated FTC antitrust lawsuits, as described below, Teva and the FTC agreed to amend certain
non-financial
provisions of the Modafinil Consent Decree and to restart itsten-year
term.Additionally, following an investigation initiated by the European Commission in April 2011 regarding a modafinil patent settlement in Europe, the European Commission issued a Statement of Objections and a Supplementary Statement of Objection in July 2017 and June 2020, respectively, and a final decision against both Cephalon and Teva allegingin November 2020, finding that the 2005 settlement agreement between the parties had the object and effect of hindering the entry of generic modafinil. No finalmodafinil, and imposed fines totaling €60.5 million on Teva and Cephalon. Teva and Cephalon filed an appeal against the decision regarding liability has yet been taken by the European Commission. The sales of modafinilin February 2021. A provision for this matter was included in the European Economic Area during the last full year of the alleged breach amounted to€
Teva and its affiliates have been named as defendants in lawsuits that allege that multiple patent litigation settlement agreements relating to AndroGelIn®1% (testosterone gel) violate the antitrust laws. The first of these lawsuits (the “Georgia AndroGel Litigation”) was filed in January 2009 in California federal court, and later transferred to Georgia federal court, with the FTC and the State of California, filed a complaint for injunctive relief in California federal court alleging thatand later private plaintiffs,
13
6
TEVA PHARMACEUTICAL INDUSTRIES
LIMITED
Notes to Consolidated Financial Statements—(Continued)
challenging a September 2006 patent lawsuitlitigation settlement between Watson Pharmaceuticals, Inc. (“Watson”), from which Teva later acquired certain assets and liabilities, and Solvay Pharmaceuticals, Inc. (“Solvay”) relating to. The second lawsuit (the “Philadelphia AndroGel®1% (testosterone gel) violated the antitrust laws. Additional lawsuits alleging similar claims were later Litigation”) was filed by private plaintiffs (including plaintiffs purporting to represent classes of similarly situated claimants as well as retailer plaintiffs filing separately) and the various actions were consolidatedF
Ta multidistrictSeptember 2014 in federal court in Philadelphia, challenging Teva’s December 2011 patent litigation in Georgia federal court. On February 22, 2019, thesettlement with AbbVie. The FTC stipulated to the dismissal of its claims against Watson,dismiss Teva from both litigations, in exchange for Teva’s agreement to amend the Modafinil Consent Decree, as described above. Teva also settled with most of the retailer plaintiffs in April 2019. On July 16, 2018, the direct purchaser plaintiffs’ motion for class certification in the Georgia AndroGel Litigation was denied and Teva later settled with most of the retailer plaintiffs in December 2019, Teva reached a settlement agreement withthe Georgia AndroGel Litigation as well as the three direct purchasers that had sought class certification. SettlementThese settlement amounts were
C
in paid in full. In addition, on January 7, 2021, Teva settled all claims with the remaining retailer plaintiff in
settlement between Watson and
Solvay,settlement with AbbVie involving AndroGel
between Teva and TriCor
AndroGel
®
$350
million at the time of the earlier Watson/Solvay settlement and approximately
$140 million at the time
Actavislaunched its generic version of AndroGel
®
In December 2011, three groups of plaintiffs sued Wyeth and Teva for alleged violations of the antitrust laws in connection with their settlement of patent litigation involving extended release venlafaxine (generic Effexor XRU.S.U.S. District Court for the District of New Jersey. The plaintiffs claim that the settlement agreement between Wyeth and Teva unlawfully delayed generic entry. In October 2014, the court granted Teva’s motion to dismiss in the direct purchaser cases, after which the parties agreed that the court’s reasoning applied equally to the indirect purchaser cases. Plaintiffs appealed and, in August 2017, the Third Circuit reversed the district court’s decision and remanded for further proceedings. In March 2020, the district court temporarily stayed discovery and referred the case to mediation, and discovery remains stayed. Annual sales of Effexor XR $2.6
®
) entered into in November 2005. The cases were filed by a purported class of direct purchasers, by a purported class of indirect purchasers and by certain chain pharmacies in the ®
were approximately$2.6
billion at the time of settlement and at the time Teva launched its generic version of Effexor XR
®
in July 2010.In February 2012, two purported classes of direct-purchaser plaintiffs sued GSK and Teva in New Jersey federal court for alleged violations of the antitrust laws in connection with their settlement of patent litigation involving lamotrigine (generic Lamictalcertification. On March 18, 2019,certification, but on April 22, 2020, the appeals court grantedThird Circuit reversed that ruling and remanded for further class certification proceedings. The district court’s decision on the defendants’ petitiondirect purchaser plaintiffs’ renewed motion for immediate appellate review and the district court has stayed the litigation pending the outcome of the appeal.class certification remains pending. Annual sales of Lamictal $
®
) entered into in February 2005. The plaintiffs claim that the settlement agreement unlawfully delayed generic entry and seek unspecified damages. In December 2012, the court dismissed the case, but in June 2015, the U.S. Court of Appeals for the Third Circuit reversed and remanded for further proceedings. In December 2018, the district court granted the direct-purchaser plaintiffs’ motion for class ®
were approximately$950
million at the time of the settlement and approximately $
$2.3
billion at the time Teva launched its generic version of Lamictal
®
in July 2008.In April 2013, purported classes of direct purchasers of, and end payers for, Niaspan
®
(extended release niacin) sued Teva and Abbott for violating the antitrust laws by entering into a settlement agreement in April2005, to resolve patent litigation over the product. A multidistrict litigation has been established in the U.S. District Court for the Eastern District of Pennsylvania. Throughout 2015 and in January 2016, several individual direct purchaserdirect-purchaserpurchaser class and, inpurchasers’ class. In August 2019, the district court certified the direct-purchaser class, althoughbut in June 2020, the
opt-out
plaintiffs filed complaints with allegations nearly identical to those of the direct 13
7
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
court has yet to rule ondenied the indirect purchasers’ pendingpurchasers’ motion for class certification.certification without prejudice. On September 4, 2020, the indirect purchasers filed a renewed motion for class certification, which remains pending. In October 2016, the District Attorney for Orange County, California, filed a similar complaint in California state court, which has since been amended, in California state court, alleging violations of state law. Defendants moved to strike the District Attorney’s claims for restitution and civil penalties to the extent not limited to alleged activity occurring in Orange County. The Superior Court denied that motion. The Court of AppealAppeals subsequently reversed the decision and review of the Appellate Court decision is now pending beforein June 2020, the California Supreme Court.Court reversed the Court of Appeals’ decision, allowing the District Attorney’s claims to proceed. Annual sales of Niaspan
®
were approximately$
416million at the time of the settlement and approximately
$1.1 billion at the time Teva launched its generic version of Niaspan
®
in September 2013.®
(lidocaine transdermal patches) violated the antitrust laws. ®
settlement, end-payers
Blue Cross Blue Shield of Michigan and Blue Care Network of Michigan (collectively “BCBSM”) filed their own lawsuit against Watson, and other defendants, in Michigan state ®
settlement. Defendants moved to dismiss that lawsuit ®
settlement, which Since January 2014, numerous lawsuits have been filed in the U.S. District Court for the Southern District of New York by purported classes of end payers direct purchasersdirect-purchasers of, Actos end payer theTeva’s settlement, annual sales of Actos
end-payers
for, and ®
and Actoplus Met (pioglitazone and pioglitazone plus metformin) against Takeda, the innovator, and several generic manufacturers, including Teva, Actavis and Watson. The lawsuits allege, among other things, that the settlement agreements between Takeda and the generic manufacturers violated the antitrust laws. The court dismissed theend-payers’
lawsuits against all defendants in September 2015. On February 8, 2017, the Court of Appeals for the Second Circuit affirmed the dismissal in part and vacated and remanded the dismissal in part with respect to the claims against Takeda. The direct purchasers’ case had been stayed pending resolution of the appeal in the end payer matter and the direct purchasers amended their complaint for a second time following the Second Circuit’s decision, but on October 8, 2019, the district court dismissed, with prejudice, the direct purchasers’ claims against the generic manufacturers (including Teva, Actavis, and Watson). At the time of ®
and Actoplus Met were approximately $
3.7 $
500million, respectively. At the time Teva launched its authorized generic version of
Actos
®
andActoplus Met in August 2012, annual sales of
Actos
®
andActoplus Met were approximately $2.8
$
2.8billion and approximately $430
$
430 million, respectively.
In May 2015, a purported class of end payers for Namenda IRTeva. In November 2019, two additional plaintiffs filed a similar lawsuit ��� purportedly asopt-outsfrom the end payers class – against the same defendants. These lawsuits allege,Teva, alleging, among other things, that the settlement agreements between Forest and the generic manufacturers to resolve patent litigation over Namenda IR
®
(memantine hydrochloride) filed a lawsuit against Forest Laboratories, LLC (“Forest”), the innovator, and several generic manufacturers, including ®
violated the antitrust laws. Teva reached a settlement agreement with these plaintiffs in July 2020, which received preliminary approval on October 13, 2020 and is awaiting final court approval. Annual sales of Namenda IR®
at the time of the patent litigation settlement were approximately$
1.1billion and approximately
$
550million at the time other manufacturers first launched generic versions of
Namenda IR 2015.
®
in July2015.
13
8
TEVA
PHARMACEUTICAL
INDUSTRIES
LIMITEDNotes to Consolidated Financial Statements—(Continued)
In January 2019, generic manufacturer Cipla Limited filed a lawsuit against Amgen, which was later amended to include Teva as a defendant, in Delaware federal court, alleging, among other things, that a January 2, 2019 settlement agreement between Amgen and Teva,
resolving patent litigation over cinacalcet (generic SensiparIn March 2019,On August 14, 2020, Cipla Limited amendedagreed to dismiss its complaint to nameclaims against Teva, as an additional defendant,with prejudice, and putativethose claims have since been dismissed. Putative classes of direct-purchaser andconsolidatedcoordinated in federal court in Delaware) against Amgen and Teva related to the January 2, 2019 settlement. Both Cipla LimitedOn July 22, 2020, a magistrate judge recommended that plaintiffs’ claims be dismissed and on November 30, 2020, the putative class plaintiffs seek damages and injunctive relief anddistrict court overruled the defendants movedmagistrate judge’s recommendation, denied Teva’s motion to dismiss their claims on October 15, 2019. Those motions remain pending.in part, and instructed plaintiffs to file an amended complaint. Annual sales of Sensipar
®
), violated the antitrust laws. end-payer
plaintiffs have also filed antitrust lawsuits (which have since been ®
in the United States were approximately $1.4 billion at the time Teva launched its generic version of Sensipar®
in December 2018, and at the time of the January 2, 2019 settlement.On December 16, 2016, the U.K. Competition and Markets Authority (“CMA”) issued a statement of objections (a provisional finding of breach of the Competition Act) in respect of certain allegations against Allergan, Actavis UK and certain Auden Mckenzie entities alleging competition law breaches in connection with the supply of 10mg and 20mg hydrocortisone tablets in the U.K. On December 18, 2017, the CMA issued a Statement of Draft Penalty Calculation. On March 3, 2017 and February 28, 2019, the CMA issued second and third statements of objections in respect of certain additional allegations relating to the same products and covering part of the same time periods as in the first statement of objections. On February 12, 2020, the CMA issued a supplementary statementSupplementary Statement of objectionsObjections effectively combining the three previously issued statements referenced above.above and a Statement of Draft Penalty Calculation was issued on October 28, 2020. On January 9, 2017, Teva completed the sale of Actavis UK to Accord Healthcare Limited, in connection with which Teva will indemnify Accord Healthcare for potential fines imposed by the CMA and/or damages awarded by a court against Actavis UK in relation to the December 16, 201616, 2016 and March 3, 2017 statements of objections, and resulting from conduct prior to the closing date of the sale. In addition, Teva agreed to indemnify Allergan against losses arising from this matter. Inmatter in the event of any such fines or damages, Teva expects to assert claims, including claims for breach of warranty, against the sellers of Auden Mckenzie. The terms of the purchase agreement may preclude a full recovery by Teva.damages. A liability for this matter has been recorded in purchase accounting related to the acquisition of Actavis Generics.financial statements.
®
in the European Economic Area for the past year were approximately $431 million.opt-out
®
(nebivolol hydrochloride) filed separate complaints in the U.S. District Court for the Southern District of New York against several generic manufacturers, including Teva, Actavis, and Watson, alleging, among other things, that the settlement agreements these generic manufacturers entered into with Forest Laboratories, Inc., the innovator, to resolve patent litigation over Bystolic®
violated the antitrust laws. The cases have been coordinated and remain in their preliminary stages, pending a decision regarding potential transfer. Annual sales of Bystolic®
in the United States were approximately $700 million at the time of Government Investigations and approximately
Litigation Relating to Pricing and Marketing
In 2015 and 2016, Actavis and Teva USA each respectively received subpoenas from the DOJU.S. Department of Justice (“DOJ”) Antitrust Division seeking documents and other information relating to the marketing and
13
9
TEVA
PHARMACEUTICAL INDUSTRIESLIMITED
Notes to Consolidated Financial Statements—(Continued)
pricing of certain Teva USA generic products and communications with competitors about such products. On August 25, 2020, a federal grand jury in the Eastern District of Pennsylvania returned a three count indictment charging T(E.D. Pa.). The indictment alleges Teva USA participated in a conspiracy with certain other generic drug manufacturers to maintain and fix prices, allocate customers, and other alleged antitrust offenses concerning the sale of generic drugs, including Pravastatin, Carbamazepine, Clotrimazole, Etodolac (IR and ER), Fluocinonide (Cream
e
va USA with criminal felony Sherman Act violations. See No.20-cr-200
E-Cream,
Gel, and Ointment), Warfarin, Etodolac (IR), Nadolol, Temozolomide, and Tobramycin. On September 8, 2020, Teva USA pled not guilty to all counts. A tentative trial date is yet to be scheduled. While the Company is unable to estimate a range of loss at this time, a conviction on these criminal charges could have a material adverse impact on the Company’s busin
ess, including monetary penalties and debarment from federally funded health care programs.In May 2018, Teva received a civil investigative demand from the DOJ Civil Division, pursuant to the federal False Claims Act, seeking documents and information produced since January 1, 2009 relevant to the Civil Division’s investigation concerning allegations that generic pharmaceutical manufacturers, including Teva, engaged in market allocation and price-fixing agreements, paid illegal remuneration, and caused false claims to be submitted in violation of the False Claims Act. Teva is cooperating with these subpoena requests.
An adverse resolution of this matter may include fines, penalties, financial forfeiture and compliance conditions.In 2015 and 2016, Actavis and Teva USA each respectively received a subpoena from the Connecticut Attorney General seeking documents and other information relating to potential state antitrust law violations.
Subsequently, on December 15, 2016, a civil action was brought by the attorneys general of twenty states against Teva USA and several other companies asserting claims under federal antitrust law alleging price fixing of generic products in the United States. That complaint was later amended to add new states as named plaintiffs, as well as new allegations and new state law claims, and on June 18, 2018, the attorneys general of 49 states plus Puerto Rico and the District of Columbia filed a consolidated amended complaint against Actavis and Teva, as well as other companies and individuals. On May 10, 2019, most (though not all) of these same attorneys general filed yet another antitrust complaint against Actavis, Teva and other companies and individuals, alleging price-fixing and market allocation with respect to additional generic products. On November 1, 2019, the state attorneys general filed an amended complaint, bringing the total number of plaintiff states and territories to 54. The amended complaint alleges that Teva was at the center of a conspiracy in the generic pharmaceutical industry, and asserts that Teva and others fixed prices, rigged bids, and allocated customers and market share with respect to certain additional products, manyproducts. On June 10, 2020, most, but not all, of which were not previously at issuethe same states, with the addition of the U.S. Virgin Islands, filed a third complaint in the Pennsylvania MDL.District of Connecticut naming, among other defendants, Actavis, but not Teva USA in a similar complaint relating to dermatological generics products. In the various complaints described above, the states seek a finding that the defendants’ actions violated federal antitrust law and state antitrust and consumer protection laws, as well as injunctive relief, disgorgement, damages on behalf of various state and governmental entities and consumers, civil penalties and costs. All such complaints have been transferred to the generic drug multidistrict litigation in the Eastern District of Pennsylvania (“Pennsylvania MDL”). On July 13, 2020, the court overseeing the Pennsylvania MDL chose the attorneys’ general November 1, 2019 complaint, referenced above, along with three complaints filed by private plaintiffs, to proceed first in the litigation as bellwether complaints. Teva moved the court to reconsider that ruling, and the motion was granted on February 9, 2021. As a result, the attorneys’ general November 1, 2019 amended complaint is not expected to be among the bellwether complaints in the Pennsylvania MDL.
Beginning on March 2, 2016, and continuing through December 2020, numerous complaints have been filed in the United States on behalf of putative classes of direct and indirect purchasers of several generic drug products, as well as several individual direct and indirect purchaser
opt-out
plaintiffs. These complaints, which allege that the defendants engaged in conspiracies to fix prices and/or allocate market share of generic products have been brought against various manufacturer defendants, including Teva and Actavis. The plaintiffs generally1
40
TEVA
PHARMACEUTICAL INDUSTRIES LIMITEDNotes to Consolidated Financial Statements—(Continued)
seek injunctive relief and damages under federal antitrust law, and damages under various state laws. On April 6, 2017, these cases were transferred to the Pennsylvania MDL. Additional cases were transferred to that court and the plaintiffs filed consolidated amended complaints on August 15, 2017. On October 16, 2018, theseveraland again on August 24, 2020, certain counties in New York commenced a civil actionactions against many of the defendants in the Pennsylvania MDL, including Teva and Actavis, and the complaints have been transferred to the Pennsylvania MDL. On December 15, 2020, several additional New York counties filed suit in New York state court raising similar allegations. On March 1, 2020, Harris County in Texas filed a complaint against several generic manufacturers including Teva and Actavis in the District Court for the Southern District of Texas, which has been transferred to the Pennsylvania MDL.
court
denied certain of the defendants’ motions to dismiss as to certain federal claims, pending as of that date, and on February 15, 2019, the court granted in part and denied in part defendants’ motions to dismiss as to certain state law claims. On July 18, 2019, and again on May 6, 2020, certain individual plaintiffs commenced a civil action in the Pennsylvania Court of Common Pleas of Philadelphia County against many of the defendants in the Pennsylvania MDL, including Teva and Actavis, but no complaint has been filed in either action and the July 18, 2019 case has been placed in deferred status. On November 13, 2019, In May 2017, a qui tam action was filed against a number of Teva subsidiaries. The qui tam action was unsealed on June 13, 2018 after the government declined to intervene. The relator in the case alleges that Teva violated the False Claims Act by devising and engaging in promotional schemes that violate the Anti-Kickback Statute (“AKS”), resulting in false certifications of compliance with the AKS. Specifically, the relator alleges that Teva paidin-kindremuneration to physicians through reimbursement support and nursing services in order to increase the number of COPAXONE prescriptions. An amended complaint was filed on October 15, 2018. Teva and the DOJ moved to dismiss the case. On November 26, 2019, the court granted the DOJ’s motion to dismiss.
In December 2016, Teva resolved certain claims under the U.S. Foreign Corrupt Practices Act (“FCPA”) with the SEC and the DOJ. The settlement included a fine, disgorgement and prejudgment interest, a three-year deferred prosecution agreement (“DPA”) for Teva and the retention of an independent compliance monitor for a period of three years. If, during the term of the DPA, the DOJ had determined that Teva had committed a felony under federal law, provided deliberately false or misleading information or otherwise breached the DPA, Teva could have been subject to prosecution and additional fines or penalties, including the deferred charges. In November 2019, Teva’s independent compliance monitor certified that Teva’s compliance program is reasonably designed and implemented to prevent and detect violations of anti-corruption laws. In February 2020 the term of the monitorship provided for by the DPA and Teva’s consent judgement with the SEC expired. Upon completion of this term,expired and on March 4, 2020, following Teva’s Chief Compliance Officer submitted a certification to the SEC confirming that Teva has complied with the monitorship requirements. Also, in February 2020, Teva’s CEO and CFO submitted certifications to the DOJ confirming that Teva hashad complied with its disclosure obligations under the DPA. Under the terms of the DPA, upon receipt of these certifications, and satisfactory completion of all other requirements, the DOJ is expected to movefiled a motion to dismiss the information filed against Teva.
Teva at the time the DPA was entered into. On July 21, 2020, the information was dismissed.Opioids Litigation
Since May 2014, more than 2,0003,000 complaints have been filed with respect to opioid sales and distribution against various Teva affiliates, along with several other pharmaceutical companies, by a number of cities, counties, states, other governmental agencies, tribes and private plaintiffs (including various putative class actions of individuals) in both state and federal courts. Most of the federal cases have been consolidated into a multidistrict litigation in the Northern District of Ohio (“MDL Opioid Proceeding”) and many of the cases filed in state court have been removed to federal court and consolidated into the MDL Opioid Proceeding. Two cases that were included in the MDL Opioid Proceeding were recently transferred back to federal district court for additional discovery,(N.D. Ill.) and City and County of San Francisco v. Purdue Pharma L.P. et al., No.(N.D. Cal.). Other cases remain pending in various states. In some jurisdictions, such as Illinois, New York, Pennsylvania, South Carolina, Texas, Utah and Utah,West Virginia, certain state court cases have been transferred to a single court within their respective state court systems for coordinated pretrial proceedings. Absent resolutions, trials are expected to proceed in several states in 2020. A court in New York has set a date, for a liability trial only, to start in March 2020. A court in California also set a date for a trial to start in June 2020. Complaints asserting claims under similar provisions of different state law, generally contend that the defendants
pre-trial
proceedings and trial. Those cases are: City of Chicago v. Purdue Pharma L.P. et al., No.14-cv-04361
18-cv-07591-CRB
1
4
1
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
allegedly engaged in improper marketing and distribution of opioids, including ACTIQ350700 complaints have named Anda, Inc. (and other distributors and manufacturers) alleging that Anda failed to develop and implement systems sufficient to identify suspicious orders of opioid products and prevent the abuse and diversion of such products to individuals who used them for other than legitimate medical purposes. Plaintiffs seek a variety of remedies, including restitution, civil penalties, disgorgement of profits, treble damages, attorneys’ fees and injunctive relief. Certain plaintiffs assert that the measure of damages is the entirety of the costs associated with addressing the abuse of opioids and opioid addiction and certain plaintiffs specify multiple billions of dollars in the aggregate as alleged damages. The individual personal injury plaintiffs further seek An adverse resolution
®
and FENTORA®
. The complaints also assert claims related to Teva’s generic opioid products. In addition, over 950 personal injury plaintiffs, including various putative class actions of individuals, have asserted personal injury and wrongful death claims in over 600 complaints, nearly all of which are consolidated in the MDL Opioid Proceeding. Furthermore, approximately non-economic
damages. In many of these cases, plaintiffs are seeking joint and several damages among all defendants.Absent resolutions, trials are expected to proceed in several states in 2021, unless postponed as a result of any of these lawsuits or investigations may involve large monetary penalties, damages, and/or other forms of monetary andnon-monetarythe COVID-19 pandemic.relief and could have a material and adverse effect on Teva’s reputation, business, results of operations and cash flows.
In May 2019, Teva settled the Oklahoma litigation brought by the Oklahoma Attorney General (State of Oklahoma, ex. rel. Mike Hunter, Attorney General of Oklahoma vs. Purdue Pharma L.P., et. al.) for $85
$85 million. The settlement did not include any admission of violation of law for any of the claims or allegations made. As the Company demonstrated a willingness to settle part of the litigation, for accounting purposes, management considered a portion of opioid-related cases as probable and, as such, recorded an estimated provision in the second quarter of 2019. Given the relatively early stage of the cases, management viewed no amount within the range to be the most likely outcome. Therefore, management recorded a provision for the reasonably estimable
minimum amount in the assessed range for such opioid-related cases in accordance with Accounting Standards Codification 450 “Accounting for Contingencies.”
On October 21, 2019, Teva reached a settlement with the two plaintiffs in the MDL Opioid Proceeding that was scheduled for trial for the Track One case, Cuyahoga and Summit Counties of Ohio. Under the terms of the settlement, Teva will provide the two counties with opioid treatment medication, buprenorphine naloxone (sublingual tablets), known by the brand name Suboxone
®
, with a value of $25 million at wholesale acquisition cost and distributed over three years to help in the care and treatment of people suffering from addiction, and a cash payment in the amount of $20 million, to be paid in 4 payments over three years.
Also on October 21, 2019, Teva and certain other defendants reached an agreement in principle with a group of Attorneys General from North Carolina, Pennsylvania, Tennessee and Texas for a nationwide settlement framework.framework (the “framework”). The framework is designed to provide a mechanism by which the Company attempts to seek resolution of remaining potential and pending opioid claims by both the U.S. states and political subdivisions (i.e., counties, tribes and other plaintiffs) thereof. Under this agreement,framework, Teva would provide buprenorphine naloxone (sublingual tablets) with an estimated value of up to approximately
$23 billion at wholesale acquisition cost over a ten year period. In addition, Teva would also provide cash payments of up to $250 million over a ten year period.As of January 2021, the Company continues to negotiate the terms and conditions of the framework. The Company cannot predict if the nationwide settlement framework will be finalized.
1
42
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Separately, on April 27, 2018, Teva received subpoena requests from the United States Attorney’s office in the Western District of Virginia and the Civil Division seeking documents relating to the manufacture, marketing and sale of branded opioids. In August 2019, Teva received a grand jury subpoena from the United States Attorney’s Office for the Eastern District of New York for documents related to the Company’s anti-diversion policies and procedures and distribution of its opioid medications, in what the Company understands to be part of a broader investigation into manufacturers’ and distributors’ monitoring programs and reporting under the Controlled Substances Act. In September 2019, Teva received subpoenas from the New York State Department of Financial Services (NYDFS) as part of an industry-wide inquiry into the effect of opioid prescriptions on New York health insurance premiums. The CompanyFollowing a Statement of Changes and Notice of Hearing filed by the NYDFS, a hearing is cooperating with NYDFS’s inquiry and producing documentscurrently scheduled to take place in response to the various subpoenas and requests for information.June 2021. Currently, Teva cannot predict how the nationwide settlement framework agreement (if finalized) will affect these investigations.investigations and administrative actions. In addition, a number of state attorneys general, including a coordinated multistate effort, have initiated investigations into sales and marketing practices of Teva and its affiliates with respect to opioids. Other states are conducting their own investigations outside of the multistate group. Teva is cooperating with these ongoing investigations and cannot predict their outcome at this time.
In addition, several jurisdictions and consumers in Canada have initiated litigation regarding opioids alleging similar claims as those in the United States. The cases in Canada are likely tomay be consolidated and are in their early stages.
Shareholder Litigation
On November 6, 2016 and December 27, 2016, two putative securities class actions were filed in the U.S. District Court for the Central District of California against Teva and certain of its current and former officers and directors. After those twoThose lawsuits were consolidated and transferred to the U.S. District Court for the District of Connecticut the court appointed the Ontario Teachers’ Pension Plan Board as lead plaintiff (the “Ontario
Teachers Securities Litigation”). The lead plaintiff then filed a consolidated amended complaint. On April 3, 2018, the court dismissed the case without prejudice. The lead plaintiff filed a second amended complaint on June 22, 2018, purportedly on behalf of purchasers of Teva’s securities between February 6, 2014 and August 3, 2017. On September 25, 2019, the court denied in substantial part and granted in part the defendants’ motions to dismiss. On December 13, 2019, the lead plaintiff in that action filed an amended complaint, purportedly on behalf of purchasers of Teva’s securities between February 6, 2014 and May 10, 2019. The amended complaint asserts that Teva and certain of its current and former officers and directors violated federal securities and common laws in connection with Teva’s alleged failure to disclose pricing strategies for various drugs in its generic drug portfolio and by making allegedly false or misleading statements in certain offering materials issued during the class period.materials. The amended complaint seeks unspecified damages, legal fees, interest, and costs. Also on December 13,In July 2017, August 2017, and June 2019, lead plaintiff and the defendants filed a joint motion to consolidate with the Ontario Teachers Securities Litigation relatedother putative securities class actions against Teva and its current and former officers and directors that are pending in the District of Connecticut. That motion is pending before the court.
“opt-out”
of “opt-out”
cases for pretrial purposes. The case is now in discovery. Pursuant to that consolidation order, plaintiffs in several of the“opt-out”
cases filed amended complaints on May 28, 2020. On January 22, 2021, the Court dismissed the“opt-out”
plaintiffs’ claims arising from statements made prior to the five year statute of repose, but denied Teva’s motion to dismiss their claims under Israeli laws. The Ontario Teachers Securities Litigation plaintiffs filed a Motion for Class Certification and Appointment of Class Representatives and Class Counsel on June 19, 2020, which the defendants opposed. That motion On August 21 and 30, 2017, Elliot Grodko and Barry Baker filedSeptember 23, 2020, a putative securities class actionsaction was filed in the U.S. District Court for the Eastern District of Pennsylvania purportedly on behalf of purchasers of Teva’s securities between November 15, 2016 and August 2, 2017 seeking unspecified damages, legal fees, interest, and costs. The complaints allege thatagainst Teva and certain of its current and former officers violated the federal securities laws and Israeli securities laws by making false and misleading statements in connection with Teva’s acquisition and integrationalleging, among other things, violations of Actavis Generics. On November 1, 2017, the court consolidated the Baker and Grodko cases. On April 10, 2018, the court granted Teva’s motion to transfer the consolidated action to the District of Connecticut where the Ontario Teachers Securities Litigation is currently pending. On December 13, 2019, the defendants filed a motion to consolidate this action with the Ontario Teachers Securities Litigation. That motion remains pending.
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Section 10(b) of the Securities and Exchange Act of 1934 and SEC RuleBetweenThe complaint, purportedly filed on behalf of persons who purchased or otherwise acquired Teva securities between October 29, 2015 and August 2018 and July 2019, sixteen complaints were filed against18, 2020, alleges that Teva and currentcertain of its former officers violated federal securities laws by allegedly making false and former officermisleading statements regarding the commercial performance of COPAXONE, namely, by failing to disclose that Teva had caused the submission of false claims to Medicare through Teva’s donations to bona fide independent charities that provide financial assistance to patients, which allegedly impacted COPAXONE’s commercial success and director defendants seekingthe sustainability of its revenues and resulted in the above referenced August 2020 False Claims Act complaint filed by the DOJ. The securities class action complaint seeks unspecified compensatory and rescissory damages, legal fees, costsinterest, and expenses.costs. The allegationscase is in these complaints are substantially similarits preliminary stages. Motions for the appointment of lead plaintiff and selection of counsel were filed in late November 2020 and remain pending. A motion to the allegationsapprove a securities class action was also filed in the Ontario Teachers Securities Litigation, but haveCentral District Court in Israel, which has been brought on behalf of plaintiffs that have “opted out” ofstayed pending the putative classU.S. litigation, with similar allegations to those made in the Ontario Teachers Securities Litigation. The plaintiffs in these“opt-out”casesabove complaint filed their complaints in the Court of Common Pleas of Montgomery County, Pennsylvania, the U.S. District Court for the Eastern District of Pennsylvania and the U.S. District Court for the District of Connecticut. Teva and the current and former officer and director defendants filed motions or stipulations to transfer the cases filed in Pennsylvania to the U.S. District Court for the District of Connecticut, where the Ontario Teachers Securities Litigation is pending. To date, all such cases have been transferred to the District of Connecticut, except the case that is currently pending in the Court of Common Pleas of Montgomery County, Pennsylvania. On December 13, 2019, the defendants filed motions to consolidate all such cases in the District of Connecticut with the Ontario Teachers Securities Litigation. Those motions remain pending.On June 21, 2019, the Employees’ Retirement System of the City of St. Petersburg, Florida filed a putative securities class action in the U.S. District Court for the Eastern District of Pennsylvania purportedly on behalf of purchasers of Teva’s securities between August 4, 2017 and May 10, 2019 seeking unspecified damages, legal fees, interest, and costs. On October 8, 2019, the court granted Teva’s motion to transfer the litigation to the U.S. District Court for the District of Connecticut where the Ontario Teachers Securities Litigation is pending. On December 13, 2019, the defendants filed a motion to consolidate this action with the Ontario Teachers Securities Litigation. That motion remains pending.Pennsylvania.159
10b-5.
Motions to approve derivative actions against certain past and present directors and officers have been filed in IsraelIsraeli Courts alleging negligence and recklessness with respect to the acquisition of the Rimsa business, and the acquisition of Actavis Generics.Generics and the patent settlement relating to LidodermpatentU.S. and EU settlement agreements, opioids, and the U.S. price-fixing investigations. Motionsinvestigations and allegations related to approve securities class actions against Teva and certain of its current and former directors and officers were filed in Israel based on allegations of improper disclosure of the above-mentioned pricing investigation, as well as lack of disclosure of negative developmentsDOJ’s complaint regarding Copaxone patient assistance program in the generic sector,U.S. In October 2020, Teva filed a notice with the Tel Aviv District Court to settle the derivative proceeding with regard to the acquisition of Actavis Generics and two related actions, including price erosionthe derivative proceedings related to allegations in connection with respect to Teva’s products. Otherthe Lidoderm
The parties have reached a settlement which was approved by the Tel Aviv District Court on April 6, 2020.®
. Motions for document disclosure prior to initiating derivative actions were filed with respect to several ®
patent settlement agreement. Various motions were filed in Israel to approve a derivative action, discovery and a class action related to claims regarding Teva’s above-mentioned FCPA resolution with the SEC and DOJ.Environmental Matters
Teva or its subsidiaries are party to a number of environmental proceedings, or have received claims, including under the federal Superfund law or other federal, provincial or state and local laws, imposing liability for alleged noncompliance, or for the investigation and remediation of releases of hazardous substances and for natural resource damages. Many of these proceedings and claims seek to require the generators of hazardous wastes disposed of at a third party-owned site, or the party responsible for a release of hazardous substances that impacted a site, to investigate and clean the site or to pay or reimburse others for such activities, including for oversight by governmental authorities and any related damages to natural resources. Teva or its subsidiaries have received claims, or been made a party to these proceedings, along with others, as an alleged generator of wastes that were disposed of or treated at third-party waste disposal sites, or as a result of an alleged release from one of Teva’s facilities or former facilities.
Although liability among the responsible parties, under certain circumstances, may be joint and several, these proceedings are frequently resolved so that the allocation of
clean-up
and other costs among the parties reflects the relative contributions of the parties to the site conditions and takes into account other pertinent factors. Teva’s potential liability varies greatly at each of the sites; for some sites the costs of the investigation,clean-up
and natural resource damages have not yet been determined, and for others Teva’s allocable share of liability has not been determined. At other sites, Teva has taken an active role in identifying those costs, to the extent they are identifiable and estimable, which do not include reductions for potential recoveries ofclean-up
costs from insurers, indemnitors, former site owners or operators or other potentially responsible parties. In addition, enforcement proceedings relating to alleged violations of federal, state, commonwealth or local requirements at some of Teva’s facilities may result in the imposition of significant penalties (in amounts not14
4
TEVA PHARMACEUTICAL INDUSTRIES
LIMITED
Notes to Consolidated Financial Statements—(Continued)
expected to materially adversely affect Teva’s results of operations) and the recovery of certain costs and natural resource damages, and may require that corrective actions and enhanced compliance measures be implemented.implem
e
nted.Other Matters
On February 1, 2018, former shareholders of Ception Therapeutics, Inc., a company that was acquired by and merged into Cephalon in 2010, prior to Cephalon’s acquisition by Teva, filed breach of contract and other related claims against the Company, Teva USA and Cephalon in the Delaware Court of Chancery. Among other things, the plaintiffs allege that Cephalon breached the terms of the 2010 Ception-Cephalon merger agreement by failing to exercise commercially reasonable efforts to develop and commercialize CINQAIR
®
(reslizumab) for the treatment of eosinophilic esophagitis (“EE”). The plaintiffs claim damages of at least $200 million, an amount they allege is equivalent to the milestones payable to the former shareholders of Ception in the event Cephalon were to obtain regulatory approval for EE in the United States ($150 million) and Europe ($50 million). Defendants moved to dismiss the complaint and on December 28, 2018, the court granted the motion in part and dismissed all of plaintiffs’ claims, except for their claim against Cephalon for breach of contract. Trial in this matter is currently scheduled for October 2021
.
NOTE 13—Income taxestaxes:
a. | Income (loss) before income taxes: |
Year ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Parent Company and its Israeli subsidiaries | $ | 947 | $ | 542 | $ | 1,022 | ||||||
Non-Israeli subsidiaries | (5,353 | ) | (1,807 | ) | (3,618 | ) | ||||||
| $ | (4,406 | ) | $ | (1,265 | ) | $ | (2,596 | ) | ||||
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Parent Company and its Israeli subsidiaries | $ | 542 | $ | 1,022 | $ | 1,451 | ||||||
Non-Israeli subsidiaries | (1,807 | ) | (3,618 | ) | (19,830 | ) | ||||||
| $ | (1,265 | ) | $ | (2,596 | ) | $ | (18,379 | ) | ||||
b. | Income taxes: |
Year ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(U.S. $ in millions) | ||||||||||||
In Israel | $ | 60 | $ | 107 | $ | 131 | ||||||
Outside Israel | (228 | ) | (385 | ) | (326 | ) | ||||||
| $ | (168 | ) | $ | (278 | ) | $ | (195 | ) | ||||
Current | $ | 182 | $ | 885 | $ | 700 | ||||||
Deferred | (350 | ) | (1,163 | ) | (895 | ) | ||||||
| $ | (168 | ) | $ | (278 | ) | $ | (195 | ) | ||||
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(U.S. $ in millions) | ||||||||||||
In Israel | $ | 107 | $ | 131 | $ | 96 | ||||||
Outside Israel | (385 | ) | (326 | ) | (2,029 | ) | ||||||
| $ | (278 | ) | $ | (195 | ) | $ | (1,933 | ) | ||||
Current | $ | 885 | $ | 700 | $ | 373 | ||||||
Deferred | (1,163 | ) | (895 | ) | (2,306 | ) | ||||||
| $ | (278 | ) | $ | (195 | ) | $ | (1,933 | ) | ||||
14
5
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
2019 | 2018 | 2017 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Income ( L oss) before income taxes | $ | (1,265 | ) | $ | (2,596 | ) | $ | (18,379 | ) | |||
Statutory tax rate in Israel | 23.0 | % | 23.0 | % | 24.0 | % | ||||||
Theoretical provision for income taxes | $ | (291 | ) | $ | (597 | ) | $ | (4,411 | ) | |||
Increase (decrease) in effective tax rate due to: | ||||||||||||
The Parent Company and its Israeli subsidiaries - Mainly tax benefits arising from reduced tax rates under benefit programs | (44 | ) | (134 | ) | (253 | ) | ||||||
Non-Israeli subsidiaries, including impairments (*) | (115 | ) | 381 | 3,817 | ||||||||
U.S. Tax Cuts and Jobs Act effect | 97 | (1,061 | ) | |||||||||
Increase (decrease) in other uncertain tax positions—net | 172 | 58 | (25 | ) | ||||||||
Effective consolidated income taxes | $ | (278 | ) | $ | (195 | ) | $ | (1,933 | ) | |||
2020 | 2019 | 2018 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Income (Loss) before income taxes | $ | (4,406 | ) | $ | (1,265 | ) | $ | (2,596 | ) | |||
Statutory tax rate in Israel | 23.0 | % | 23.0 | % | 23.0 | % | ||||||
Theoretical provision for income taxes | $ | (1,013 | ) | $ | (291 | ) | $ | (597 | ) | |||
Increase (decrease) in the provision for income taxes due to: | ||||||||||||
The Parent Company and its Israeli subsidiaries - Mainly tax benefits arising from reduced tax rates under benefit programs | (183 | ) | (44 | ) | (134 | ) | ||||||
Non-Israeli subsidiaries, including impairments * | 1,369 | (115 | ) | 381 | ||||||||
U.S. Tax Cuts and Jobs Act effect | 97 | |||||||||||
Increase (decrease) in other uncertain tax positions—net | (341 | ) | 172 | 58 | ||||||||
Effective consolidated income taxes | $ | (168 | ) | $ | (278 | ) | $ | (195 | ) | |||
| * | In non-Israeli subsidiaries that did0t have a corresponding tax effect. |
The effective tax rate is the result of a variety of factors, including the geographic mix and type of products sold during the year, different effective tax rates applicable to
non-Israeli
subsidiaries that have tax rates different than Teva’s average tax rates, the impact of impairment, restructuring and legal settlement charges and adjustments to valuation allowances on deferred tax assets on such subsidiaries.In 2020, Teva released a valuation allowance on its deferred tax assets in one jurisdiction and recorded a valuation allowance in another jurisdiction, with both adjustments reflecting changes in the business forecasts of profitability in these jurisdictions. The net effect of these adjustments did not materially impact Teva’s effective tax rate for 2020.
December 31, | ||||||||
2019 | 2018 | |||||||
(U.S. $ in millions) | ||||||||
Long-term deferred tax assets (liabilities)—net: | ||||||||
Inventory related | $ | 144 | $ | 113 | ||||
Sales reserves and allowances | 198 | 199 | ||||||
Provision for legal settlements | 260 | 42 | ||||||
Intangible assets (*) | (1,733 | ) | (2,282 | ) | ||||
Carryforward losses and deductions and credits (**) | 1,689 | 1,340 | ||||||
Property, plant and equipment | (170 | ) | (167 | ) | ||||
Deferred interest | 648 | 391 | ||||||
Provisions for employee related obligations | 106 | 102 | ||||||
Other | 122 | 123 | ||||||
1,264 | (139 | ) | ||||||
Valuation allowance—in respect of carryforward losses and deductions that may not be utilized (**) | (1,974 | ) | (1,633 | ) | ||||
| $ | (710 | ) | $ | (1,772 | ) | |||
c. | Deferred income taxes: |
December 31, | ||||||||
2020 | 2019 | |||||||
(U.S. $ in millions) | ||||||||
| Long-term deferred tax assets (liabilities), net: | ||||||||
Inventory related | $ | 212 | $ | 144 | ||||
Sales reserves and allowances | 173 | 198 | ||||||
Provision for legal settlements | 235 | 260 | ||||||
Intangible assets (*) | (1,064 | ) | (1,733 | ) | ||||
Carryforward losses and deductions and credits (**) | 2,176 | 1,689 | ||||||
Property, plant and equipment | (142 | ) | (170 | ) | ||||
Deferred interest | 527 | 648 | ||||||
Provisions for employee related obligations | 107 | 106 | ||||||
Other | 54 | 122 | ||||||
| 2,278 | 1,264 | |||||||
Valuation allowance—in respect of carryforward losses and deductions that may not be utilized | (2,547 | ) | (1,974 | ) | ||||
| $ | (269 | ) | $ | (710 | ) | |||
| (*) | The decrease in deferred tax liability is mainly due to impairment and amortization. |
14
6
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
| (** | The amounts are shown after reduction for unrecognized tax benefits of $ 2020 and2019 , respectively. |
2021 -2022 —$2023 -2029— 2029 —$2030 and thereafter—$ |
The deferred income taxes are reflected in the balance sheets among:
December 31, | ||||||||
2019 | 2018 | |||||||
(U.S. $ in millions) | ||||||||
Long-term assets—deferred income taxes | 386 | 368 | ||||||
Long-term liabilities—deferred income taxes | (1,096 | ) | (2,140 | ) | ||||
| $ | (710 | ) | $ | (1,772 | ) | |||
December 31, | ||||||||
2020 | 2019 | |||||||
(U.S. $ in millions) | ||||||||
Long-term assets—deferred income taxes | 695 | 386 | ||||||
Long-term liabilities—deferred income taxes | (964 | ) | (1,096 | ) | ||||
| $ | (269 | ) | $ | (710 | ) | |||
d. | Uncertain tax positions: |
The following table summarizes the activity of Teva’s gross unrecognized tax benefits:
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Balance at the beginning of the year | $ | 1,072 | $ | 1,034 | $ | 734 | ||||||
Increase related to prior year tax positions, net | 23 | 76 | 56 | |||||||||
Increase related to current year tax positions | 246 | 11 | 26 | |||||||||
Decrease related to settlements with tax authorities and lapse of applicable statutes of limitations | (118 | ) | (49 | ) | (56 | ) | ||||||
Liabilities assumed in acquisitions | — | — | 273 | |||||||||
Other | — | — | 1 | |||||||||
Balance at the end of the year | $ | 1,223 | $ | 1,072 | $ | 1,034 | ||||||
Year ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Balance at the beginning of the year | $ | 1,223 | $ | 1,072 | $ | 1,034 | ||||||
Increase (decrease) related to prior year tax positions, net | (238 | ) | 23 | 76 | ||||||||
Increase related to current year tax positions | 10 | 246 | 11 | |||||||||
Decrease related to settlements with tax authorities and lapse of applicable statutes of limitations | (105 | ) | (118 | ) | (49 | ) | ||||||
Other | (2 | ) | — | — | ||||||||
Balance at the end of the year | $ | 888 | $ | 1,223 | $ | 1,072 | ||||||
Uncertain tax positions, mainly of a long-term nature, included $164$173 million,$131 $164 million and $$131112million as of December 31, 2020, 2019 2018 and 2017,2018, respectively. The total amount of interest and penalties reflected in the consolidated statements of income was a net increase of $33$ year a net increase of$19 million for the year ended December 31, 2018 and a net2018in, respectivelycrease of $29 million for the year ended December 31, 2017.. Substantially all the above uncertain tax benefits, if recognized, would reduce Teva’s annual effective tax rate. Teva does not expect uncertain tax positions to change significantly over the next 12 months, except in the case of settlements with tax authorities, the likelihood and timing of which is difficult to estimate.
include
accrued potential penalties and interest of 9 million, $
33 millionand $19 million
for theyears
ended December 31, 2020, 2019 e. | Tax assessments: |
Teva files income tax returns in various jurisdictions with varying statutes of limitations.
Teva
and its subsidiaries in Israel have received final tax assessments through tax year 2007.In 2013, Teva settled the 2005-2007 income tax assessment with the Israeli tax authorities, paying $213$213 million. No further taxes are due in relation to these years. Certain guidelines which were set pursuant to the agreement reached in relation to the 2005-2007 assessment have been implemented in the audit of tax years 2008-2011, and are reflected in the provisions.
141627
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
The Israeli tax authorities issued tax assessment decrees for 2008-2012 and a tax assessment for 2013-2016, challenging the Company’s positions on several issues. Teva has protested the 2008-2012 and 2013-2016 decrees before the Central District Court in Israel and challenged the tax assessment for 2013-2016 as well.Israel. The Company believes it has adequately provided for these items, such that anyhowever, adverse results would have an immaterial impact on Teva’s financial statements.could be material.
In the United States, Teva has one tax issue in dispute for the 2009-2011 audit cycle, which is currently in litigation. The 2012-2014 audit cycle is ongoing, with an assessment report expected to be received in 2020.2021. Additionally, Teva’s U.S. subsidiaries have multiple audit cycles open. The Company believes it has adequately provided for these items and that any adverse results would have an immaterial impact on Teva’s financial statements.
Teva filed a claim seeking the refund of withholding taxes paid to the Indian tax authorities in 2012. Trial in this case is scheduled to begin in July 2020.$146$141 million.
March 2021
. A final and binding decision against Teva in this case may lead to an impairment in the amount of The Company’s subsidiaries in Europe have received final tax assessments mainly through tax year 2014.
f. | Basis of taxation: |
The Company and its subsidiaries are subject to tax in many jurisdictions, and estimation is required in recording the assets and liabilities related to income taxes. The Company believes that its accruals for tax liabilities are adequate for all open years. The Company considers various factors in making these assessments, including past history, recent interpretations of tax law, and the specifics of each matter. Because tax regulations are subject to interpretation and tax litigation is inherently uncertain, these assessments can involve a series of complex judgments regarding future events.
Incentives Applicable until 2013
Under the incentives regime applicable to the Company until 2013, industrial projects of Teva and certain of its Israeli subsidiaries were eligible for “Approved Enterprise” status.
Most of the projects in Israel have been granted Approved Enterprise status under the “alternative” tax benefit track which offered tax exemption on undistributed income for a period of two to ten years, depending on the location of the enterprise. Upon distribution of such exempt income, the distributing company is subject to corporate tax at the rate ordinarily applicable to the Approved Enterprise’s income.
Amendment 69 to the Investment Law
Pursuant to Amendment 69 to the Investment Law (“Amendment 69”), a company that elected by November 11, 2013 to pay a corporate tax rate as set forth in that amendment (rather than the tax rate applicable to Approved Enterprise income) with respect to undistributed exempt income accumulated by the company up until December 31, 2011 is entitled to distribute a dividend from such income without being required to pay additional corporate tax with respect to such dividend. A company that has so elected must make certain qualified investments in Israel over the five-year period commencing in 2013. Teva invested the entire required amount in 2013.
During 2013, Teva applied the provisions of Amendment 69 to certain exempt profits Teva accrued prior to 2012. Consequently, Teva paid $577 million in corporate tax on exempt income of $9.4 billion. Part of this income was distributed as dividends during 2013-2018, while the remainder is available to be distributed as dividends in future years with no additional corporate tax liability.
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Incentives Applicable starting 2014:
The Incentives Regime – Amendment 68 to the Investment Law
Under Amendment 68 to the Investment Law, which Teva started applying in 2014, upon an irrevocable election made by a company, a uniform corporate tax rate will apply to all qualifying industrial income of such company (“Preferred Enterprise”), as opposed to the previous law’s incentives, which were limited to income from ApprovedEnterprises during the benefits period. Under the law, when the election is made, the uniform tax rate for 2014 until 2016 was 9% in areas in Israel designated as Development Zone A and 16% elsewhere in Israel. The uniform tax rate for Development Zone A, as of January 1, 2017, is 7.5% (as part of changes enacted in Amendment 73, as described below). The profits of these “Preferred Enterprise” will be freely distributable as dividends, subject to a 20% or lower withholding tax, under an applicable tax treaty. Certain “Special Preferred Enterprises” that meet more stringent criteria (significant investment, R&D or employment thresholds) will enjoy further reduced tax rates of 5% in Zone A and 8% elsewhere. In order to be classified as a “Special Preferred Enterprises,” the approval of three governmental authorities in Israel is required.
The New Technological Enterprise Incentives Regime – Amendment 73 to the Investment Law
Since 2017, a portion of the Company’s taxable income in Israel is entitled to a preferred 6% tax rate under Amendment 73 to the Investment Law as it pertains to Special Preferred Technological Enterprises.
The new incentives regime applies to “Preferred Technological Enterprises” or “Special Preferred Technological Enterprises”.Enterprises.” A “Preferred Technological Enterprise” is an enterprise that meet certain conditions, including, inter alia:
| a. | Investment of at least 7% of income, or at least NIS 75 million (approximately |
| b. | One of the following: |
| a. | At least 20% of the workforce (or at least 200 employees) are employed in R&D; |
| b. | A venture capital investment approximately equivalent to at least |
| c. | Growth in sales or workforce by an average of 25% over the three years preceding the tax year. |
A “Special Preferred Technological Enterprise” is an enterprise that meets, inter alia conditions 1 and 2 above, and in addition has total annual consolidated revenues above NIS 10 billion (approximately $2.9 billion).
Preferred Technological Enterprises are subject to a corporate tax rate of 7.5% on their income derived from intellectual property in areas in Israel designated as Zone A and 12% elsewhere, while Special Preferred Technological Enterprises are subject to 6% on such income. The withholding tax on dividends from these enterprises is 4% to foreign companies (or a lower rate under a tax treaty, if applicable).
Income not eligible for Preferred Technological Enterprise benefits is taxed at the regular corporate tax rate, which is 23%, or the preferred tax rate, as the case may be.
The Parent Company and its Israeli subsidiaries elected to compute their taxable income in accordance with Income Tax Regulations (Rules for Accounting for Foreign Investors Companies and Certain Partnerships and Setting their Taxable Income), 1986. Accordingly, the taxable income or loss is calculated in U.S. dollars. Applying these regulations reduces the effect of U.S. dollar – dollar—NIS exchange rate on the Company’s Israeli taxable income.income
.
9
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Non-Israeli
subsidiaries are taxed according to the tax laws in their respective country of residence. Certain manufacturing subsidiaries operate in several jurisdictions outside Israel, some of which benefit from tax incentives such as reduced tax rates, investment tax credits and accelerated deductions.U.S. Tax reform
On December 22, 2017, the U.S. enacted the Tax Cuts and Jobs Act (the “Act”), which among other provisions, reduced the U.S. corporate tax rate from 35% to 21%, effective January 1, 2018, and imposed a
one-time
deemed repatriation tax based on the post-1986 earnings and profits of the Company’s U.S. owned foreign subsidiaries.The year ended December 31, 2017 includes abenefit of $1.2 billion recorded tore-measurecertain of the Company’s U.S. deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future.
one-time
one-time
deemed repatriation taxes liability. During 2018, Teva completed its analysis of the impacts of the Act and recorded an additional expense of $97 million, pursuant to guidance issued by the U.S. Department of Treasury and revisions to the Company’s estimates since the assessment date.NOTE 14—Equity:
a. | Ordinary shares and ADSs |
As of December 31, 20192020 and 2018,2019, Teva had approximately 1.2 billionordinary shares issued. Teva ordinary shares are traded on theshare.share
Tel-Aviv
Stock Exchange and on the New York Stock Exchange, in the form of American Depositary Shares (“ADSs”), each of which represents one ordinary .
b. | Mandatory convertible preferred shares |
On December 17, 2018, the mandatory convertible preferred shares automatically converted into ordinary shares at a ratio of 1 mandatory convertible preferred share to 16 ADSs, and all of the accumulated and unpaid dividends on the mandatory convertible preferred shares were paid in ADSs, at a ratio of 3.0262 ADSs per mandatory convertible preferred share, all in accordance with the conversion mechanism set forth in the terms of the mandatory convertible preferred shares.
Teva’s
As a result of this conversion, Teva issued 70.6 million ADSs.
c. | Stock-based compensation |
Stock-based compensation plans are comprised of employee stock options, RSUs, PSUs, and other equity-based awards to employees, officers, directors and directors.consultants of the Company and its affiliates. The purpose of the plans is to enable(a) attract, retain, motivate, and reward such individuals, and (b) promote the creation of long-term value for shareholders of the Company to attract and retain qualified personnel and to motivateby closely aligning the interests of such persons by providing themindividuals with equity participation inthose of the Company.
shareholders.On June 29, 2010, the Teva 2010 Long-Term Equity-Based Incentive Plan was approved by Teva’s shareholders, under which 70 million equivalent share units, including options exercisable into ordinary shares, RSUs and PSUs, were approved for grant. The 2010 Plan expired on June 28, 2015 (except with respect to awards outstanding on that date), and no additional awards under the 2010 Plan may be made.
On September 3, 2015, the Teva 2015 Long-Term Equity-Based Incentive Plan was approved by Teva’s shareholders, under which 43.7 million equivalent share units, including options exercisable into ordinary shares, RSUs and PSUs, were approved for grant.
1
50
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
On April 18, 2016, Teva’s shareholders approved an increase of an additional 33.3 million equivalent share units to the share reserve of Teva’s 2015 Long-Term Equity-Based Incentive Plan, so that 77 million equivalent share units, including options exercisable into ordinary shares, RSUs and PSUs, are approved for grant.
On July 13, 2017, Teva’s shareholders approved an increase of an additional 65
million equivalent share units to the share reserve of Teva’s 2015 Long-Term Equity-Based Incentive Plan, so
that 142 million equivalent share units, including options exercisable into ordinary shares, RSUs and PSUs, are approved for grant.
The 2015 Plan expired on June
30
, 2020 (except with respect to awards outstanding on that date), and no additional awards under the 2015 Plan may be made.On June 11, 2020, the Teva 2020 Long-Term Equity-Based Incentive Plan was approved by Teva’s shareholders and became effective on July 1, 2020. Under the plan, 68 million shares, including options exercisable into ordinary shares, RSUs and PSUs, were approved for grant.
As of December 31, 2019, 62.7 2020, 74
million equivalent share units
shares remain available for future awards.awards under the 2020 Long-Term Equity-Based Incentive Plan.
In the past, Teva had various employee stock and incentive plans under which stock options and other share-based awards were granted. Stock options and other share-based awards granted under such prior plans continue in accordance with the terms of the respective plans.
The vesting period of the outstanding options RSUs and PSUsRSUs is generally from 1 to 4 years from the date of grant. The vesting period of PSUs is generally 3 years from the date of grant. The rights of the ordinary shares obtained from the exercise of options, RSUs or PSUs are identical to those of the other ordinary shares of the Company. The contractual term of these options is primarily for seven years in prior plans and ten years for options granted under the 2010 and 2015 plans described above.years.
Status of options
A summary of the status of the options granted by Teva as of December 31, 2020, 2019 2018 and 2017,2018, and changes during the years ended on those dates, is presented below (the number of options represents ordinary shares exercisable in respect thereof).
Year ended December 31, | ||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||
Number (in thousands) | Weighted average exercise price | Number (in thousands) | Weighted average exercise price | Number (in thousands) | Weighted average exercise price | |||||||||||||||||||
Balance outstanding at begin n ing of year | 48,393 | $ | 38.62 | 43,121 | $ | 44.32 | 32,789 | $ | 50.71 | |||||||||||||||
Changes during the year: | ||||||||||||||||||||||||
Granted | — | — | 12,401 | 19.12 | 15,467 | 32.08 | ||||||||||||||||||
Exercised | (11 | ) | 16.99 | (84 | ) | 17.01 | (7 | ) | 17.44 | |||||||||||||||
Forfeited | (8,318 | ) | 42.12 | (7,040 | ) | 39.38 | (4,953 | ) | 47.92 | |||||||||||||||
Expired | — | — | (5 | ) | 50.65 | (175 | ) | 59.81 | ||||||||||||||||
Balance outstanding at end of year | 40,064 | 37.90 | 48,393 | 38.62 | 43,121 | 44.32 | ||||||||||||||||||
Balance exercisable at end of year | 26,601 | 43.41 | 24,086 | 46.89 | 19,129 | 47.94 | ||||||||||||||||||
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Weighted average fair value | — | $ | 7.4 | $ | 5.7 | |||||||
Year ended December 31, | ||||||||||||||||||||||||
2020 | 2019 | 2018 | ||||||||||||||||||||||
Number (in thousands) | Weighted average exercise price | Number (in thousands) | Weighted average exercise price | Number (in thousands) | Weighted average exercise price | |||||||||||||||||||
Balance outstanding at beginning of year | 40,064 | $ | 37.90 | 48,393 | $ | 38.62 | 43,121 | $ | 44.32 | |||||||||||||||
Changes during the year: | ||||||||||||||||||||||||
Granted | — | — | — | — | 12,401 | 19.12 | ||||||||||||||||||
Exercised | — | — | (11 | ) | 16.99 | (84 | ) | 17.01 | ||||||||||||||||
Forfeited | (3,610 | ) | 40.24 | (8,318 | ) | 42.12 | (7,040 | ) | 39.38 | |||||||||||||||
Expired | (1,220 | ) | 49.35 | — | — | (5 | ) | 50.65 | ||||||||||||||||
Balance outstanding at end of year | 35,234 | 37.27 | 40,064 | 37.90 | 48,393 | 38.62 | ||||||||||||||||||
Balance exercisable at end of year | 28,556 | 40.56 | 26,601 | 43.41 | 24,086 | 46.89 | ||||||||||||||||||
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
The weighted average fair value of options granted during
these
years was generally estimated by using the Black-Scholes option-pricing model as follows:Year ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Weighted average fair value | — | — | $ | 7.4 | ||||||||
The fair value of these options was estimated on the date of grant, based on the following weighted average assumptions:
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Dividend yield | — | 0 | % | 3.7 | % | |||||||
Expected volatility | — | 40 | % | 29 | % | |||||||
Risk-free interest rate | — | 2.6 | % | 2.1 | % | |||||||
Year ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
Expected volatility | — | — | 40 | % | ||||||||
Risk-free interest rate | — | — | 2.6 | % | ||||||||
Expected term | — | — | 5 years | |||||||||
The expected term was estimated based on the weighted average period for which the options granted are expected to be outstanding, taking into consideration the current vesting of options and the historical exercise patterns of existing options. The expected volatility assumption used is based on a blend of the historical and implied volatility of the Company’s stock. The risk-free interest rate used is based on the yield of U.S. Treasuries with a maturity closest to the expected term of the options granted. The dividend yield assumption reflects the expected dividend yield based on historical dividends and expected dividend growth.
The following tables summarizeinformation asas ofDecember 31, 20192020 regarding the number of ordinary shares issuable upon (1) outstanding options and (2) vested options:
(1) Number of ordinary shares issuable upon exercise of outstanding options | (1) Number of ordinary shares issuable upon exercise of outstanding options | (1) Number of ordinary shares issuable upon exercise of outstanding options | |||||||||||||||||||||||||||
Balance at end of period (in thousands) | Weighted average exercise price | Weighted average remaining life | Aggregate intrinsic value (in millions) | Balance at end of period (in thousands) | Weighted average exercise price | Weighted average remaining life | |||||||||||||||||||||||
Number of shares | $ | Years | $ | Number of shares | $ | Years | |||||||||||||||||||||||
Lower than $15.01 | 592 | 11.40 | 7.85 | — | 592 | 11.40 | 6.84 | ||||||||||||||||||||||
$15.01 - $25.00 | 10,938 | 18.94 | 8.13 | — | 10,087 | 18.93 | 7.12 | ||||||||||||||||||||||
$25.01 - $35.00 | 7,914 | 34.62 | 7.16 | — | 7,221 | 34.61 | 6.16 | ||||||||||||||||||||||
$35.01 - $45.00 | 5,511 | 40.59 | 2.49 | — | 5,216 | 40.66 | 1.46 | ||||||||||||||||||||||
$45.01 - $55.00 | 10,328 | 50.74 | 4.53 | — | 7,895 | 51.06 | 4.10 | ||||||||||||||||||||||
$55.01 - $65.00 | 4,781 | 59.20 | 5.31 | — | 4,223 | 59.26 | 4.30 | ||||||||||||||||||||||
Total | 40,064 | 37.90 | 5.89 | — | 35,234 | 37.27 | 5.07 | ||||||||||||||||||||||
(2) Number of ordinary shares issuable upon exercise of vested options | |||||||||||||
Range of exercise prices | Balance at end of period (in thousands) | Weighted average exercise price | Weighted average remaining life | ||||||||||
Number of shares | $ | Years | |||||||||||
Lower than $15.01 | 394 | 11.40 | 6.84 | ||||||||||
$15.01 | 5,431 | 18.81 | 7.09 | ||||||||||
$25.01 | 5,423 | 34.61 | 6.16 | ||||||||||
$35.01 | 5,216 | 40.66 | 1.46 | ||||||||||
$45.01 | 7,895 | 51.06 | 4.10 | ||||||||||
$55.01 | 4,197 | 59.28 | 4.30 | ||||||||||
Total | 28,556 | 40.56 | 4.65 | ||||||||||
152
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
(2) Number of ordinary shares issuable upon exercise of vested options | ||||||||||||||||
Balance at end of period (in thousands) | Weighted average exercise price | Weighted average remaining life | Aggregate intrinsic value (in millions) | |||||||||||||
Number of shares | $ | Years | $ | |||||||||||||
Lower than $15.01 | 197 | 11.40 | 7.85 | — | ||||||||||||
$15.01 - $25.00 | 3,211 | 18.57 | 8.05 | — | ||||||||||||
$25.01 - $35.00 | 3,983 | 34.61 | 7.16 | — | ||||||||||||
$35.01 - $45.00 | 5,511 | 40.59 | 2.49 | — | ||||||||||||
$45.01 - $55.00 | 9,165 | 50.43 | 4.32 | — | ||||||||||||
$ 55.01 - $65.00 | 4,534 | 59.37 | 5.27 | — | ||||||||||||
Total | 26,601 | 43.41 | 5.00 | — | ||||||||||||
The aggregate intrinsic value in the above tables represents the total$9.8 $ 9.65
on December 31, pre-tax
intrinsic value, based on the Company’s closing stock price of in-the-money.
The total intrinsic value of options exercised during the years ended December 31, 2019 2018 and 20172018 was immaterial, based on the Company’s average stock price of
$11.50 and $25.62,$20.92, for the years then ended, respectivelyrespectively.. No options were exercised during 2020.
Status of
non-vested
RSUs and PSUsThe following table summarizes information about the number of RSUs and PSUs issued
granted
and outstanding:Year ended December 31, | ||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||
Number (in thousands) | Weighted average grant date fair value | Number (in thousands) | Weighted average grant date fair value | Number (in thousands) | Weighted average grant date fair value | |||||||||||||||||||
Balance outstanding at beginning of year | 10,403 | $ | 20.93 | 7,468 | $ | 27.95 | 4,636 | $ | 45.15 | |||||||||||||||
Granted | 9,303 | 15.36 | 5,900 | 18.80 | 5,461 | 20.10 | ||||||||||||||||||
Vested | (2,435 | ) | 30.24 | (1,638 | ) | 37.30 | (1,884 | ) | 39.63 | |||||||||||||||
Forfeited | (1,294 | ) | 18.74 | (1,327 | ) | 32.50 | (745 | ) | 42.84 | |||||||||||||||
Balance outstanding at end of year | 15,977 | 16.49 | 10,403 | 20.93 | 7,468 | 27.95 | ||||||||||||||||||
Year ended December 31, | ||||||||||||||||||||||||
2020 | 2019 | 2018 | ||||||||||||||||||||||
Number (in thousands) | Weighted average grant date fair value | Number (in thousands) | Weighted average grant date fair value | Number (in thousands) | Weighted average grant date fair value | |||||||||||||||||||
Balance outstanding at beginning of year | 15,977 | $ | 16.49 | 10,403 | $ | 20.93 | 7,468 | $ | 27.95 | |||||||||||||||
Granted | 10,848 | 11.42 | 9,303 | 15.36 | 5,900 | 18.80 | ||||||||||||||||||
Vested | (4,324 | ) | 19.49 | (2,435 | ) | 30.24 | (1,638 | ) | 37.30 | |||||||||||||||
Forfeited | (1,781 | ) | 18.18 | (1,294 | ) | 18.74 | (1,327 | ) | 32.50 | |||||||||||||||
Balance outstanding at end of year | 20,720 | 13.81 | 15,977 | 16.49 | 10,403 | 20.93 | ||||||||||||||||||
The Company expenses compensation costs2018 and 2017,2018, the Company recorded stock-based compensation costs as follows:
are
based on the grant-date fair value. For the years ended December 31, 2020, 2019 Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Employee stock options | $ | 46 | $ | 74 | $ | 64 | ||||||
RSUs and PSUs | 73 | 81 | 69 | |||||||||
Total stock-based compensation expense | 119 | 155 | 133 | |||||||||
Tax effect on stock-based compensation expense | 14 | 18 | 24 | |||||||||
Net effect | $ | 105 | $ | 137 | $ | 109 | ||||||
Year ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Employee stock options | $ | 30 | $ | 46 | $ | 74 | ||||||
RSUs and PSUs | 99 | 73 | 81 | |||||||||
Total stock-based compensation expense | 129 | 119 | 155 | |||||||||
Tax effect on stock-based compensation expense | 14 | 14 | 18 | |||||||||
Net effect | $ | 115 | $ | 105 | $ | 137 | ||||||
RSUs
/PSUs amounted to million, respectively. This cost is expected to be recognized over a weighted average period of approximately 1.9 1.1years and
2.5 years, respectively.
d. | Dividends |
Teva has not paid dividends on Teva ordinary shares or ADSs since December 2017.
15
3
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
e. | Accumulated other comprehensive s |
The components of accumulated othercomprehensive loss attributable to Teva are presented in the table below:
Net Unrealized Gains/(Losses) | Benefit Plans | |||||||||||||||||||
Foreign currency translation adjustments | Available- for- sale securities | Derivative financial instruments | Actuarial gains/(losses) and prior service (costs)/credits | Total | ||||||||||||||||
Balance, January 1, 201 7 | (2,592 | ) | (7 | ) | (479 | ) | (81 | ) | (3,159 | ) | ||||||||||
Other comprehensive income/(loss) before reclassifications | 1,075 | 64 | (167 | ) | (3 | ) | 969 | |||||||||||||
Amounts reclassified to the statements of income | 378 | (66 | ) | 27 | (5 | ) | 334 | |||||||||||||
Net other comprehensive income/(loss) before tax | 1,453 | (2 | ) | (140 | ) | (8 | ) | 1,303 | ||||||||||||
Corresponding income tax | 5 | — | (2 | ) | 3 | |||||||||||||||
Net other comprehensive income/(loss) after tax* | 1,453 | 3 | (140 | ) | (10 | ) | 1,306 | |||||||||||||
Balance, December 31, 2017 | (1,139 | ) | (4 | ) | (619 | ) | (91 | ) | (1,853 | ) | ||||||||||
Cumulative effect of new accounting standard ** | — | 5 | — | — | 5 | |||||||||||||||
Other comprehensive income/(loss) before reclassifications | (739 | ) | (1 | ) | 87 | 4 | (649 | ) | ||||||||||||
Amounts reclassified to the statements of income | 1 | 28 | 13 | 42 | ||||||||||||||||
Net other comprehensive income/(loss) before tax | (739 | ) | — | 115 | 17 | (607 | ) | |||||||||||||
Corresponding income tax | — | — | (4 | ) | (4 | ) | ||||||||||||||
Net other comprehensive income/(loss) after tax* | (739 | ) | — | 115 | 13 | (611 | ) | |||||||||||||
Balance, December 31, 2018 | (1,878 | ) | 1 | (504 | ) | (78 | ) | (2,459 | ) | |||||||||||
Other comprehensive income/(loss) before reclassifications | 84 | (1 | ) | 54 | (11 | ) | 126 | |||||||||||||
Amounts reclassified to the statements of income | 30 | (10 | ) | 20 | ||||||||||||||||
Net other comprehensive income/(loss) before tax | 84 | (1 | ) | 84 | (21 | ) | 146 | |||||||||||||
Corresponding income tax | — | — | — | 1 | 1 | |||||||||||||||
Net other comprehensive income/(loss) after tax* | 84 | (1 | ) | 84 | (20 | ) | 147 | |||||||||||||
Balance, December 31, 2019 | (1,794 | ) | — | (420 | ) | (98 | ) | (2,312 | ) | |||||||||||
Net Unrealized Gains/(Losses) | Benefit Plans | |||||||||||||||||||
Foreign currency translation adjustments | Available- for-sale securities | Derivative financial instruments | Actuarial gains/(losses) and prior service (costs)/credits | Total | ||||||||||||||||
(U.S. $ in millions) | ||||||||||||||||||||
Balance as of January 1, 2018 | $ | (1,139 | ) | $ | (4 | ) | $ | (619 | ) | $ | (91 | ) | $ | (1,853 | ) | |||||
Cumulative effect of new accounting standard** | — | 5 | — | — | 5 | |||||||||||||||
Other comprehensive income/(loss) before reclassifications | (729 | ) | (1 | ) | 87 | 4 | (639 | ) | ||||||||||||
Amounts reclassified to the statements of income | — | 1 | 28 | 13 | 42 | |||||||||||||||
Net other comprehensive income/(loss) before tax | (729 | ) | — | 115 | 17 | (597 | ) | |||||||||||||
Corresponding income tax | (10 | ) | — | — | (4 | ) | (14 | ) | ||||||||||||
Net other comprehensive income/(loss) after tax* | (739 | ) | — | 115 | 13 | (611 | ) | |||||||||||||
Balance as of December 31, 2018 | (1,878 | ) | 1 | (504 | ) | (78 | ) | (2,459 | ) | |||||||||||
Other comprehensive income/(loss) before reclassifications | 100 | (1 | ) | 54 | (11 | ) | 142 | |||||||||||||
Amounts reclassified to the statements of income | — | — | 30 | (10 | ) | 20 | ||||||||||||||
Net other comprehensive income/(loss) before tax | 100 | (1 | ) | 84 | (21 | ) | 162 | |||||||||||||
Corresponding income tax | (16 | ) | — | — | 1 | (15 | ) | |||||||||||||
Net other comprehensive income/(loss) after tax* | 84 | (1 | ) | 84 | (20 | ) | 147 | |||||||||||||
Balance as of December 31, 2019 | (1,794 | ) | — | (420 | ) | (98 | ) | (2,312 | ) | |||||||||||
Other comprehensive income/(loss) before reclassifications | (190 | ) | — | 22 | (7 | ) | (175 | ) | ||||||||||||
Amounts reclassified to the statements of income | — | — | 35 | (12 | ) | 23 | ||||||||||||||
Net other comprehensive income/(loss) before tax | (190 | ) | — | 57 | (19 | ) | (152 | ) | ||||||||||||
Corresponding income tax | 65 | — | — | 1 | 66 | |||||||||||||||
Net other comprehensive income/(loss) after tax* | (125 | ) | — | 57 | (18 | ) | (86 | ) | ||||||||||||
| Balance as of December 31, 2020 | $ | (1,919 | ) | — | $ | (363 | ) | $ | (117 | ) | $ | (2,399 | ) | |||||||
| * | Amounts do not include foreign currency translation adjustments attributable to non-controlling interests of $56 million gain in2020 , $14 million gain inmillion gain in |
| ** | Following the adoption of ASU 2016-01, the Company recorded a $5million opening balance reclassification from accumulated other comprehensive income to retained earnings. |
15169
4
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
NOTE 15—Other assets impairments, restructuring and other items:
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Impairment of long-lived tangible assets | $ | 139 | $ | 500 | $ | 544 | ||||||
Contingent consideration (see note 2 0 ) | 59 | 57 | 154 | |||||||||
Acquisition, integration and related costs | — | 13 | 105 | |||||||||
Restructuring | 199 | 488 | 535 | |||||||||
Venezuela deconsolidation charge (see note 1) | — | — | 396 | |||||||||
Other | 26 | (71 | ) | 102 | ||||||||
Total | $ | 423 | $ | 987 | $ | 1,836 | ||||||
Year ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Impairment of long-lived tangible assets (1) | $ | 416 | $ | 139 | $ | 500 | ||||||
Contingent consideration (see note 2) | (81 | ) | 59 | 57 | ||||||||
Restructuring | 120 | 199 | 488 | |||||||||
Other | 24 | 26 | (58 | ) | ||||||||
Total | $ | 479 | $ | 423 | $ | 987 | ||||||
| (1) | Including impairments related to exit and disposal |
Following Teva’sannounced in December 2017described below, and its ongoing plant rationalization efforts, the Company may change its current plans with respect to any given asset and/or the assumptions underlying such plans. Consequently, additional impairments may be recorded in the future.
two-year
restructuring plan, Impairments
Impairments of tangible assets for the years ended on December 31, 2020, 2019 and 2018 and 2017 were $139
$416 million $500$544 $500
,
$139 million and million, respectivelyrespectively. The impairment for the year ended December 31, 2020 was mainly related to the.sale of certain assets from Teva’s business venture in Japan
, which was completed on February 1, 2021, as well as
plant rationalization. See note 2.Contingent consideration
In 2019,2020, Teva recorded $59 an income of
$81
million offor contingent consideration, expenses, compared to $57an expense of
$59 millionin 2018 and 2017,$57respectively.The expensesmillion in 2019 and 2018 respectively. The income in 2020 was mainly related to a change in the future royalty payments to Allergan in connection with lenalidomide (generic equivalent of Revlimidwere®), which was part of the Actavis Generics acquisition, partially offset by the change in the estimated future royalty payments to Eagle in connection with expected future bendamustine sales. The
and $154 million
expense
in 2019was
mainly relatedto a change in the estimated future royalty payments from Eagle in connection with bendamustine sales and an increase in the expected future royalty payments to Eagle due to the orphan drug status granted to BENDEKA
®
, offset by the change in future royalty payments in connection with lenalidomide (generic equivalent of Revlimid
®
), which was part of the Actavis Generics acquisition.
Restructuring
In 2019,2020, Teva recorded $199 $120
million of restructuring expenses, compared to
$199 million in 2019 and $488 million in 2018 and $535 million in 2017.2018. The expenses in 20192020 were primarily related to headcount reductions across all functions, as part2017.2017
residual expenses
of the restructuring plan announced in and other network consolidation impacts.
In December 2017, Teva announced a comprehensive
two-year
restructuring plan intended to reduce its cost base by $3 billion, unify and simplify its organization and improve business performance, profitability, cash flow generation and productivity. This plan achieved its goals, including a total cost base reduction of $3 billion by the end of 2019. Teva is continuing to evaluate opportunities to further optimize its manufacturing and supply network to achieve additional operational efficiencies.15170
5
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
The following tables provide the components of costs associated with Teva’s restructuring plan, including other costs associated with Teva’s restructuring plan and recorded under different items:
Year ended December 31, | ||||||||||||
201 9 | 201 8 | 201 7 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Restructuring | ||||||||||||
| $ | 159 | $ | 410 | $ | 443 | |||||||
40 | 78 | 92 | ||||||||||
Total | $ | 199 | $ | 488 | $ | 535 | ||||||
Year ended December 31, | ||||||||||||
| 2020 | 2019 | 2018 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Restructuring | ||||||||||||
Employee termination | $ | 71 | $ | 159 | $ | 410 | ||||||
Other | 49 | 40 | 78 | |||||||||
Total | $ | 120 | $ | 199 | $ | 488 | ||||||
The following table provides the components of and changes in the Company’s restructuring accruals:
Employee termination costs | Other | Total | ||||||||||
(U.S. $ in millions) | ||||||||||||
Balance as of January 1, 201 8 | $ | (294 | ) | $ | (17 | ) | $ | (311 | ) | |||
Provision | (410 | ) | (78 | ) | (488 | ) | ||||||
Utilization and other* | 500 | 66 | 566 | |||||||||
Balance as of December 31, 201 8 | $ | (204 | ) | $ | (29 | ) | $ | (233 | ) | |||
Provision | (159 | ) | (40 | ) | (199 | ) | ||||||
Utilization and other* | 155 | 62 | 217 | |||||||||
Balance as of December 31, 201 9 | $ | (208 | ) | $ | (7 | ) | $ | (215 | ) | |||
Employee termination costs | Other | Total | ||||||||||
(U.S. $ in millions ) | ||||||||||||
Balance as of January 1, 2019 | $ | (204 | ) | $ | (29 | ) | $ | (233 | ) | |||
Provision | (159 | ) | (40 | ) | (199 | ) | ||||||
Utilization and other* | 155 | 62 | 217 | |||||||||
Balance as of December 31, 2019 | $ | (208 | ) | $ | (7 | ) | $ | (215 | ) | |||
Provision | (71 | ) | (49 | ) | (120 | ) | ||||||
Utilization and other * | 164 | 49 | 213 | |||||||||
Balance as of December 31, 2020 | $ | (115 | ) | $ | (7 | ) | $ | (122 | ) | |||
| * | Includes adjustments for foreign currency translation. |
Significant regulatory and other events
In July 2018, the FDA completed an inspection of Teva’s manufacturing plant in Davie, Florida in the United States, and issued a Formfindings.findings and Teva received a letter from the FDA dated April 24, 2020 notifying it that the site continues to be classified as OAI. If TevaitTeva may face additional consequences. These would potentially include delays in FDA approval for future products from the site, financial implications due to loss of revenues, impairments, inventory write offs,write-offs, customer penalties, idle capacity charges, costs of additional remediation and possible FDA enforcement action. Teva expects to generate approximately $230
$190 FDA-483
to the site. In October 2018, the FDA notified Teva that the inspection of the site is classified as “official action indicated” (OAI). On February 5, 2019, Teva received a warning letter from the FDA that contained four additional enumerated concerns related to production, quality control and investigations at this site. Teva has been working diligently to address the FDA’s concerns in a manner consistent with current good manufacturing practice (cGMP) requirements as quickly and as thoroughly as possible. An FDA follow up inspection occurred in January 2020, resulting in some follow up is
unable to remediate the findings to the FDA’s satisfaction, million in revenues from this site in 2020,2021, assuming remediation or enforcement does not cause any unscheduled slowdown or stoppage at the facility, or preventhowever, delays in FDA approvals of newfuture products from the site.site may occur.
In July 2018, Teva announced the voluntary recall of valsartan and certain combination valsartan medicines in various countries due to the detection of trace amounts of a previously unknown nitrosamine impurity called NDMA found in valsartan API supplied to it by Zhejiang Huahai PharmaceuticalPharmaceuticals Co., Ltd. (“Huahai”). Since July 2018, Teva has been actively engaged with global regulatory agencies around the worldauthorities in reviewing its sartan and other
15
6
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
products to determine whether NDMA and/or other related nitrosamine impurities are present in specific products. Where necessary, Teva has initiated additional voluntary recalls. The aggregate direct impact of this
In the second quarter of 2020, Teva’s operations in its manufacturing facilities in Goa, India were temporarily suspended due to a water supply issue. During the second half of 2020, Teva expects additional expenseshas completed partial remediation of this issue and has restarted limited supply from its Goa facilities. The impact to Teva’s financial results for the twelve months ended December 31, 2020 was immaterial, however, if the full remediation takes longer than expected there may be further loss of revenues and profits in connection with this matter going forward.sales, customer penalties or impairments to related assets.
NOTE 16
16—Other income:
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Gain on divestitures, net of divestitures related costs (1) | $ | 50 | 67 | 1,083 | ||||||||
Section 8 and similar payments (2) | 5 | 195 | 83 | |||||||||
Gain ( on sale of assetsloss) | (1 | ) | 9 | 11 | ||||||||
Other, net | 22 | 20 | 22 | |||||||||
Total other income | $ | 76 | $ | 291 | $ | 1,199 | ||||||
Year ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Gain on divestitures, net of divestitures related costs (1) | $ | 8 | 50 | 67 | ||||||||
Section 8 and similar payments (2) | — | 5 | 195 | |||||||||
Gain (loss) on sale of assets | 11 | (1 | ) | 9 | ||||||||
Other, net | 20 | 22 | 20 | |||||||||
Total other income | $ | 40 | $ | 76 | $ | 291 | ||||||
| (1) | Mainly related to the divestment of several activities in the International Markets segment. |
| (2) | Section 8 of the Patented Medicines (Notice of Compliance) Regulation relates to recoveries of lost revenue related to patent infringement proceedings in Canada. |
NOTE 17—Financial expenses,
net:
Year ended December, 31 | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Venezuela devaluation (1) | $ | — | $ | — | $ | 42 | ||||||
Interest expenses and other bank charges | 881 | 920 | 875 | |||||||||
Income from investments | (41 | ) | (39 | ) | (84 | ) | ||||||
Foreign exchange (gains) losses — net | (15 | ) | 13 | 65 | ||||||||
Other, net (2) | (4 | ) | 65 | (3 | ) | |||||||
Total finance expense—net | $ | 822 | $ | 959 | $ | 895 | ||||||
Year ended December, 31 | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Interest expenses and other bank charges | 963 | 881 | 920 | |||||||||
Income from investments (1) | (104 | ) | (41 | ) | (39 | ) | ||||||
| Foreign exchange (gains) losses, net | (26 | ) | (15 | ) | 13 | |||||||
Other, net (2) | — | (4 | ) | 65 | ||||||||
| Total finance expense, net | $ | 834 | $ | 822 | $ | 959 | ||||||
| (1) | In 2020, Income from investments comprised mainly of revaluation gain of Teva’s investment in American Well Corporation (“American Well”). See note |
| (2) | In 2018, |
151727
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
NOTE 18—Earnings (loss) per share:
The net income (loss) attributable to Teva and the weighted average number of ordinary shares used inloss earnings (loss) per share for the years ended December 31, 2020, 2019 2018 and 20172018 are as follows:
the
computation of basic and diluted2019 | 2018 | 2017 | ||||||||||
(U.S. $ in millions, except share data) | ||||||||||||
Net income (loss) used for the computation of diluted loss per share | $ | (999 | ) | $ | (2,399 | ) | $ | (16,525 | ) | |||
Weighted average number of shares used in the computation of basic loss per share | 1,091 | 1,021 | 1,016 | |||||||||
Add: | ||||||||||||
Weighted average number of shares used in the computation of diluted loss per share | 1,091 | 1,021 | 1,016 | |||||||||
Year ended December, 31 | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(U.S. $ in millions, except share data) | ||||||||||||
Net income (loss) used for the computation of basic and dilutedearnings (loss) per share | (3,990 | ) | $ | (999 | ) | $ | (2,399 | ) | ||||
Weighted average number of shares used in the computation of basic earnings (loss) per share | 1,095 | 1,091 | 1,021 | |||||||||
Weighted average number of shares used in the computation of diluted earnings (loss) per share | 1,095 | 1,091 | 1,021 | |||||||||
Basic earnings and loss per share are computed by dividing net resultsincome (loss) attributable to Teva’s ordinary shareholders by the weighted average number of ordinary shares outstanding (including fully vested restricted share units (“RSUs”)) during the period, net of treasury shares.
In computing dilutivediluted loss per share for the years ended December 31, 2020, 2019 and 2018, and 2017,no account was taken of the potential dilution ofthat could occur upon the assumed exercise of employee stock options, RSUs and PSUs, amounting to
104 million, 113 million
loss
per share.Additionally, in computing dilutive and for the year ended December 31, 2017, no account was taken of the potential dilution of the mandatory convertible preferred shares amounting to
diluted loss
per share for the period between January 1, 2018 and December 17, 2018,74 million and 59 million weighted average shares, respectively, since they had an anti-dilutive effect on loss per share.
Basic and diluted loss per share was $3.64 for the year ended December 31, 2020, compared to basic and diluted loss per share of $0.91 and $2.35 for the years ended December 31, 2019 and December 31, 2018, respectively.
NOTE 19
19—Segments:
Teva operates its business and reports its financial results in
3
segments:| (a) | North America segment, which includes the United States and Canada. |
| (b) | Europe segment, which includes the European Union and certain other European countries. |
| (c) | International Markets segment, which includes all countries other than those in the North America and Europe segments. |
In addition to these three segments, Teva has other sources of revenues included in other activities, 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 its affiliate Medis.Teva’s Chief Executive Officer (“CEO”), who is the chief operating decision maker (“CODM”), reviews financial information prepared on a consolidated basis, accompanied by disaggregated information about
revenues and contributed profit by the three identified reportable segments, namely North America, Europe and International Markets, to make decisions about resources to be allocated to the segments and assess their performance.
performance
.15
8
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Segment profit is comprised of gross profit for the segment less R&D expenses, S&M expenses, G&A expenses and other income related to the segment. Segment profit does not include amortization and certain other items.
Teva manages its assets on a company basis, not by segments, as many of its assets are shared or commingled. Teva’s CODM does not regularly review asset information by reportable segment and, therefore, Teva does not report asset information by reportable segment.
Teva’s CEO may review its strategy and organizational structure. Any changes in strategy may lead to a reevaluation of the Company’s segments and goodwill allocation to reporting units, as well as fair value attributable to its reporting units. See note 7.
a. | Segment information: |
Year ended December 31, | ||||||||||||
2020 | ||||||||||||
North America | Europe | International Markets | ||||||||||
(U.S. $ in millions) | ||||||||||||
Revenues | $ | 8,447 | $ | 4,757 | $ | 2,154 | ||||||
Gross profit | 4,489 | 2,666 | 1,096 | |||||||||
R&D expenses | 622 | 247 | 70 | |||||||||
S&M expenses | 1,013 | 830 | 427 | |||||||||
G&A expenses | 443 | 261 | 136 | |||||||||
Other income | (10 | ) | (3 | ) | (11 | ) | ||||||
Segment profit | $ | 2,421 | $ | 1,331 | $ | 474 | ||||||
Year ended December 31, | ||||||||||||
2019 | ||||||||||||
North | Europe | International * | ||||||||||
(U.S. $ in millions) | ||||||||||||
Revenues | $ | 8,542 | $ | 4,795 | $ | 2,246 | ||||||
Gross profit | 4,350 | 2,704 | 1,167 | |||||||||
R&D expenses | 652 | 262 | 88 | |||||||||
S&M expenses | 1,021 | 890 | 481 | |||||||||
G&A expenses | 439 | 239 | 138 | |||||||||
Other income | (14 | ) | (5 | ) | (3 | ) | ||||||
Segment profit | $ | 2,252 | $ | 1,318 | $ | 464 | ||||||
Year ended December 31, | ||||||||||||
2018 | ||||||||||||
North America | Europe | International Markets * | ||||||||||
(U.S. $ in millions) | ||||||||||||
Revenues | $ | 9,297 | $ | 5,186 | $ | 2,422 | ||||||
Gross profit | 4,979 | 2,884 | 1,254 | |||||||||
R&D expenses | 713 | 283 | 96 | |||||||||
S&M expenses | 1,154 | 1,003 | 518 | |||||||||
G&A expenses | 484 | 325 | 153 | |||||||||
Other income | (209 | ) | — | (11 | ) | |||||||
Segment profit | $ | 2,837 | $ | 1,273 | $ | 498 | ||||||
Year ended December 31, | ||||||||||||
2019 | ||||||||||||
North America | Europe | International Markets | ||||||||||
(U.S. $ in millions) | ||||||||||||
Revenues | $ | 8,542 | $ | 4,795 | $ | 2,246 | ||||||
Gross profit | 4,350 | 2,704 | 1,167 | |||||||||
R&D expenses | 652 | 262 | 88 | |||||||||
S&M expenses | 1,021 | 890 | 481 | |||||||||
G&A expenses | 439 | 239 | 138 | |||||||||
Other income | (14 | ) | (5 | ) | (3 | ) | ||||||
Segment profit | $ | 2,252 | $ | 1,318 | $ | 464 | ||||||
Year ended December 31, | ||||||||||||
2018 | ||||||||||||
North America | Europe | International Markets | ||||||||||
(U.S. $ in millions) | ||||||||||||
Revenues | $ | 9,297 | $ | 5,186 | $ | 2,422 | ||||||
Gross profit | 4,979 | 2,884 | 1,254 | |||||||||
R&D expenses | 713 | 283 | 96 | |||||||||
S&M expenses | 1,154 | 1,003 | 518 | |||||||||
G&A expenses | 484 | 325 | 153 | |||||||||
Other income | (209 | ) | — | (11 | ) | |||||||
Segment profit | $ | 2,837 | $ | 1,273 | $ | 498 | ||||||
159
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
| Year ended December 31, | ||||||||||||
| 2017 | ||||||||||||
| North America | Europe | International Markets* | ||||||||||
| (U.S. $ in millions) | ||||||||||||
Revenues | $ | 12,141 | | $ | 5,466 | $ | 2,863 | |||||
Gross profit | 7,322 | 2,887 | 1,433 | |||||||||
R&D expenses | 969 | 390 | 154 | |||||||||
S&M expenses | 1,288 | 1,130 | 672 | |||||||||
G&A expenses | 533 | 354 | 189 | |||||||||
Other income | (92 | ) | (16 | ) | (8 | ) | ||||||
Segment profit | $ | 4,624 | $ | 1,029 | $ | 426 | ||||||
Year ended | ||||||||||||
December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(U.S.$ in millions) | ||||||||||||
North America profit | $ | 2,421 | $ | 2,252 | $ | 2,837 | ||||||
Europe profit | 1,331 | 1,318 | 1,273 | |||||||||
International Markets profit | 474 | 464 | 498 | |||||||||
Total reportable segments profit | 4,225 | 4,034 | 4,608 | |||||||||
Profit (loss) of other activities | 163 | 108 | 115 | |||||||||
Total segments profit | 4,388 | 4,142 | 4,723 | |||||||||
Amounts not allocated to segments: | ||||||||||||
Amortization | 1,020 | 1,113 | 1,166 | |||||||||
Other asset impairments, restructuring and other items | 479 | 423 | 987 | |||||||||
Goodwill impairment | 4,628 | — | 3,027 | |||||||||
Intangible asset impairments | 1,502 | 1,639 | 1,991 | |||||||||
Gain on divestitures, net of divestitures related costs | (8 | ) | (50 | ) | (66 | ) | ||||||
| Other R&D expenses (income) | 37 | (15 | ) | 83 | ||||||||
Costs related to regulatory actions taken in facilities | 23 | 45 | 14 | |||||||||
Legal settlements and loss contingencies | 60 | 1,178 | (1,208 | ) | ||||||||
Other unallocated amounts | 219 | 252 | 366 | |||||||||
Consolidated operating income (loss) | (3,572 | ) | (443 | ) | (1,637 | ) | ||||||
Financial expenses, net | 834 | 822 | 959 | |||||||||
Consolidated income (loss) before income taxes | $ | (4,406 | ) | $ | (1,265 | ) | $ | (2,596 | ) | |||
Year ended | ||||||||||||
December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(U.S. | ||||||||||||
North America profit | $ | 2,252 | $ | 2,837 | $ | 4,624 | ||||||
Europe profit | 1,318 | 1,273 | 1,029 | |||||||||
International Markets profit | 464 | 498 | 426 | |||||||||
Total reportable segments profit | 4,034 | 4,608 | 6,079 | |||||||||
Profit (loss) of other activities | 108 | 115 | (6 | ) | ||||||||
| Total segments profit | 4,142 | 4,723 | 6,073 | |||||||||
Amounts not allocated to segments: | ||||||||||||
Amortization | 1,113 | 1,166 | 1,444 | |||||||||
Other asset impairments, restructuring and other items | 423 | 987 | 1,836 | |||||||||
Goodwill impairment | — | 3,027 | 17,100 | |||||||||
Intangible asset impairments | 1,639 | 1,991 | 3,238 | |||||||||
Gain on divestitures, net of divestitures related costs | (50 | ) | (66 | ) | (1,083 | ) | ||||||
Inve nto —r y St ep up | — | — | 67 | |||||||||
Other R&D expenses | (15 | ) | 83 | 221 | ||||||||
Costs related to regulatory actions taken in facilities | 45 | 14 | 47 | |||||||||
Legal settlements and loss contingencies | 1,178 | (1,208 | ) | 500 | ||||||||
Other unallocated amounts | 252 | 366 | 187 | |||||||||
Consolidated operating income (loss) | (443 | ) | (1,637 | ) | (17,484 | ) | ||||||
Financial expenses, net | 822 | 959 | 895 | |||||||||
Consolidated income (loss) before income taxes | $ | (1,265 | ) | $ | (2,596 | ) | $ | (18,379 | ) | |||
b. | Segment revenues by major products and activities: |
The following tables present revenues by major products and activities for each segment for the year ended December 31, 2020, 2019 2018 and 2017:2018:
North America segment:
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Generic products | $ | 3,963 | $ | 4,056 | $ | 5,203 | ||||||
COPAXONE | 1,017 | 1,759 | 3,116 | |||||||||
BENDEKA/TREANDA | 496 | 642 | 656 | |||||||||
ProAir* | 274 | 397 | 501 | |||||||||
QVAR | 250 | 182 | 313 | |||||||||
AJOVY | 93 | 3 | — | |||||||||
AUSTEDO | 412 | 204 | 24 | |||||||||
Anda | 1,492 | 1,347 | 1,153 | |||||||||
Other | 546 | 708 | 1,175 | |||||||||
Total | $ | 8,542 | $ | 9,297 | $ | 12,141 | ||||||
Year ended December 31, | |||||||||||||
2020 | 2019 | 2018 | |||||||||||
(U.S. $ in millions) | |||||||||||||
Generic products | $ | 4,010 | $ | 3,963 | $ | 4,056 | |||||||
AJOVY | 134 | 93 | 3 | ||||||||||
AUSTEDO | 637 | 412 | 204 | ||||||||||
BENDEKA/TREANDA | 415 | 496 | 642 | ||||||||||
COPAXONE | 884 | 1,017 | 1,759 | ||||||||||
ProAir* | 241 | 274 | 397 | ||||||||||
QVAR | 179 | 250 | 182 | ||||||||||
Anda | 1,462 | 1,492 | 1,347 | ||||||||||
Other | 485 | 546 | 708 | ||||||||||
Total | $ | 8,447 | $ | 8,542 | $ | 9,297 | |||||||
| * | Does not include revenues from the ProAir authorized generic, which are included under generic products. |
160
TEVA PHARMACEUTICAL INDUSTRIES
LIMITED
Notes to Consolidated Financial Statements—(Continued)
Europe segment:
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Generic products | $ | 3,470 | $ | 3,593 | $ | 3,471 | ||||||
COPAXONE | 432 | 535 | 595 | |||||||||
Respiratory products | 354 | 402 | 368 | |||||||||
Other | 539 | 656 | 1,033 | |||||||||
Total | $ | 4,795 | $ | 5,186 | $ | 5,466 | ||||||
Year ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Generic products | $ | 3,513 | $ | 3,470 | $ | 3,593 | ||||||
AJOVY | 31 | 3 | — | |||||||||
COPAXONE | 400 | 432 | 535 | |||||||||
Respiratory products | 353 | 354 | 402 | |||||||||
Other | 459 | 536 | 656 | |||||||||
Total | $ | 4,757 | $ | 4,795 | $ | 5,186 | ||||||
International Markets segment:segment:
Year ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Generic products | $ | 1,893 | $ | 2,022 | $ | 2,370 | ||||||
COPAXONE | 63 | 72 | 91 | |||||||||
Distributio n | 20 | 19 | 17 | |||||||||
Other | 271 | 309 | 385 | |||||||||
Total | $ | 2,246 | $ | 2,422 | $ | 2,863 | ||||||
Year ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(U.S. $ in millions) | ||||||||||||
Generic products | $ | 1,792 | $ | 1,893 | $ | 2,022 | ||||||
COPAXONE | 53 | 63 | 72 | |||||||||
Other | 309 | 291 | 328 | |||||||||
Total | $ | 2,154 | $ | 2,246 | $ | 2,422 | ||||||
Teva revenues from external customers attributed to Israel were less than 5% of the consolidated revenues in the years ended December 31, 2020, 2019 and 2018, respectively.
c. | Supplemental data—major customers: |
The following table represents the percentage of consolidated third party net sales to Teva’s major customers during the years ended December 31, 2020, 2019 and 2018.
Percentage of Third Party Net Sales | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
McKesson Corporation | 12 | % | 13 | % | 12 | % | ||||||
AmerisourceBergen Corporation | 12 | % | 12 | % | 14 | % | ||||||
161
TEVA PHARMACEUTICAL INDUSTRIES
LIMITED
Notes to Consolidated Financial Statements—(Continued)
Most of Teva’s revenues from these customers were in the North America segment.
d. | Property, plant and |
December 31, | ||||||||
2020 | 2019 | |||||||
(U.S. $ in millions) | ||||||||
Israel | $ | 1,611 | $ | 1,670 | ||||
United States | 790 | 864 | ||||||
Croatia | 539 | 517 | ||||||
Germany | 933 | 665 | ||||||
Czech republic | 330 | 343 | ||||||
Hungary | 325 | 330 | ||||||
Ireland | 267 | 271 | ||||||
Other | 1,501 | 1,776 | ||||||
Total property, plant and equipment | $ | 6,296 | $ | 6,436 | ||||
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
NOTE 20 —Fair value measurement:
Financial items carried at fair value as of December 31, 2020 and 2019 are classified in the tables below in one of the three categories described in note 1f:
December 31, 2020 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(U.S. $ in millions) | ||||||||||||||||
Cash and cash equivalents: | ||||||||||||||||
Money markets | $ | 367 | $ | — | $ | — | $ | 367 | ||||||||
Cash, deposits and other | 1,810 | — | — | 1,810 | ||||||||||||
Investment in securities: | ||||||||||||||||
| Equity securities* | 25 | 259 | — | 284 | ||||||||||||
Other, mainly debt securities | 5 | — | 10 | 15 | ||||||||||||
Derivatives: | ||||||||||||||||
| Asset derivatives—options and forward contracts | — | 24 | — | 24 | ||||||||||||
| Liabilities derivatives—options and forward contracts | — | (79 | ) | — | (79 | ) | ||||||||||
| Contingent consideration** | — | — | (268 | ) | (268 | ) | ||||||||||
Total | $ | 2,207 | $ | 204 | $ | (258 | ) | $ | 2,153 | |||||||
December 31, 2019 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(U.S. $ in millions) | ||||||||||||||||
Cash and cash equivalents: | ||||||||||||||||
Money markets | $ | 577 | $ | — | $ | — | $ | 577 | ||||||||
Cash, deposits and other | 1,398 | — | — | 1,398 | ||||||||||||
Investment in securities: | ||||||||||||||||
Equity securities | 42 | — | — | 42 | ||||||||||||
Other, mainly debt securities | 2 | — | 12 | 14 | ||||||||||||
Derivatives: | ||||||||||||||||
| Asset derivatives—options and forward contracts | — | 32 | — | 32 | ||||||||||||
| Liability derivatives—options and forward contracts | — | (41 | ) | — | (41 | ) | ||||||||||
| Liabilities derivatives—interest rate and cross-currency swaps | — | (22 | ) | — | (22 | ) | ||||||||||
| Contingent consideration** | — | — | (460 | ) | (460 | ) | ||||||||||
Total | $ | 2,019 | $ | (31 | ) | $ | (448 | ) | $ | 1,540 | ||||||
During the third quarter of 2020, Teva recorded a gain of $134 million under share in profits of associated companies, net, reflecting the difference between the book value of Teva’s investment in American Well and its fair value as of the date it completed its initial public offering in September 2020. The investment was reclassified from “investment in associated companies” to “investment in marketable securities,” since Teva no longer ha d significant influence in American Well. |
Percentage of Third Party Net Sales | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
McKesson Corporation | 13 | % | 12 | % | 16 | % | ||||||
AmerisourceBergen Corporation | 12 | % | 14 | % | 15 | % | ||||||
December 31, | ||||||||
2019 | 2018 | |||||||
(U.S. $ in millions) | ||||||||
Israel | $ | 1,670 | $ | 1,987 | ||||
United States | 864 | 950 | ||||||
Croatia | 517 | 538 | ||||||
Germany | 665 | 518 | ||||||
Czech republic | 343 | 352 | ||||||
Hungary | 330 | 343 | ||||||
Japan | 177 | 188 | ||||||
Other | 1,870 | 1,992 | ||||||
Total property, plant and equipment | $ | 6,436 | $ | 6,868 | ||||
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
December 31, 2019 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(U.S. $ in millions) | ||||||||||||||||
Cash and cash equivalents: | ||||||||||||||||
Money markets | $ | 577 | $ | — | $ | — | $ | 577 | ||||||||
Cash, deposits and other | 1,398 | — | — | 1,398 | ||||||||||||
Investment in securities: | ||||||||||||||||
Equity securities | 42 | — | — | 42 | ||||||||||||
Other, mainly debt securities | 2 | — | 12 | 14 | ||||||||||||
Derivatives: | ||||||||||||||||
Asset derivatives — options and forward contracts | — | 32 | — | 32 | ||||||||||||
Liabilities derivatives — options and forward contracts | — | (41 | ) | — | (41 | ) | ||||||||||
Liabilities derivatives — interest rate and cross-currency swaps | — | (22 | ) | — | (22 | ) | ||||||||||
Contingent consideration* | — | — | (460 | ) | (460 | ) | ||||||||||
Total | $ | 2,019 | $ | (31 | ) | $ | (448 | ) | $ | 1,540 | ||||||
December 31, 2018 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
(U.S. $ in millions) | ||||||||||||||||
Cash and cash equivalents: | ||||||||||||||||
Money markets | $ | 203 | $ | — | $ | — | $ | 203 | ||||||||
Cash, deposits and other | 1,579 | — | — | 1,579 | ||||||||||||
Investment in securities: | ||||||||||||||||
Equity securities | 51 | — | — | 51 | ||||||||||||
Other, mainly debt securities | 2 | — | 10 | 12 | ||||||||||||
Derivatives: | ||||||||||||||||
Asset derivatives — options and forward contracts | — | 18 | — | 18 | ||||||||||||
Asset derivatives — cross-currency swaps | — | 58 | — | 58 | ||||||||||||
Liability derivatives — options and forward contracts | — | (26 | ) | — | (26 | ) | ||||||||||
Liabilities derivatives — interest rate and cross-currency swaps | — | (50 | ) | — | (50 | ) | ||||||||||
Contingent consideration* | — | — | (507 | ) | (507 | ) | ||||||||||
Total | $ | 1,835 | $ | — | | $ | (497 | ) | $ | 1,338 | ||||||
| Due to management’s intention and ability to sell this security in the next twelve months, the balance as of December 31, 2020 was reclassified to short term investments. |
| ** | Contingent consideration represents liabilities recorded at fair value in connection with acquisitions. |
Teva determined the fair value of the liabilityliabilities for the contingent consideration based on a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of the
contingent consideration is based on several factors, such as: the cash flows projected from the success of unapproved product candidates; the probability of success of product candidates, including risks associated with uncertainty regarding achievement and payment of milestone events; the time and resources needed to complete the development and approval of product candidates; the life of the potential commercialized products and associated risks of obtaining regulatory approvals in the United States and Europe,; and the risk adjusted discount rate for fair value measurement.
A probability of success factor ranging from 80% to 100% was used in the fair value calculation to reflect inherent regulatory and commercial risk of the contingent payments and IPR&D. The discount rate applied ranged from 7.5% to 8.0%. The weighted average discount rate, calculated based on the relative fair value of Teva’s contingent consideration liabilities, was 7.7%.
The contingent consideration is evaluated quarterly, or more frequently, if circumstances dictate. Changes in the fair value of contingent consideration are recorded in earnings.
consolidated statements of income. Significant changes in unobservable inputs, mainly the probability of success and cash flows projected, could result in material changes to the contingent consideration liability.liabilities.
The fair value measurement of the investment in equity securities is based on a discount rate for fair value measurement, related to restriction of sale of shares, and thus represents a Level 2 measurement within the fair value hierarchy. The discount rate applied for the fair value measurement at December 31, 2020 was
4%.The following table summarizes the activity for those financial assets and liabilities where fair value measurements are estimated utilizing Level 3 inputs.inputs.
December 31, 2019 | December 31, 2018 | |||||||
(U.S. $ in millions) | ||||||||
Fair value at the beginning of the period | $ | (497 | ) | $ | (717 | ) | ||
Investment in debt securities | 2 | (8 | ) | |||||
Adjustments to provisions for contingent consideration: | ||||||||
Actavis Generics transaction | 92 | — | ||||||
Labrys acquisition | — | (17 | ) | |||||
Eagle transaction | (151 | ) | (40 | ) | ||||
Settlement of contingent consideration: | ||||||||
Labrys acquisition | — | 151 | ||||||
Eagle transaction | 106 | 134 | ||||||
Fair value at the end of the period | $ | (448 | ) | $ | (497 | ) | ||
December 31, 2020 | December 31, 2019 | |||||||
(U.S. $ in millions) | ||||||||
Fair value at the beginning of the period | $ | (448 | ) | $ | (497 | ) | ||
Transfer into Level 3- equity securities | 179 | |||||||
Revaluation of equity securities | 80 | |||||||
Revaluation of debt securities | (2 | ) | 2 | |||||
Reclassification to Level 2- equity securities | (259 | ) | ||||||
| Adjustments to provisions for contingent consideration: | ||||||||
| Actavis Generics transaction | 156 | 92 | ||||||
Eagle transactio n | (75 | ) | (151 | ) | ||||
| Settlement of contingent consideration: | ||||||||
| Eagle transaction | 111 | 106 | ||||||
Fair value at the end of the period | $ | (258 | ) | $ | (448 | ) | ||
Teva’s financial instruments consist mainly of cash and cash equivalents, investments in securities, current and
non-current
receivables, short-term credit, accounts payable and accruals, loans and senior notes, convertible senior debentures and derivatives.The fair value of the financial instruments included in working capital and
non-current
receivables approximates their carrying value. The fair value of long-term bank loans mostly approximates their carrying value, since they bear interest at rates close to the prevailing market rates.TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Financial instruments not measured at fair value
Financial instruments measured on a basis other than fair value consist of senior notes and convertible senior debentures (see note 9), and are presented in the below table in terms of fair value:
Estimated fair value* | ||||||||
December 31, | ||||||||
2019 | 2018 | |||||||
(U.S. $ in millions) | ||||||||
Senior notes included under long-term liabilities | $ | 22,686 | $ | 23,560 | ||||
Senior notes and convertible senior debentures included under short-term liabilities | 2,318 | 2,140 | ||||||
Fair value at the end of the period | $ | 25,004 | $ | 25,700 | ||||
* The fair value was estimated based on quoted market prices. | ||||||||
Estimated fair value* | ||||||||
December 31, | ||||||||
2020 | 2019 | |||||||
(U.S. $ in millions) | ||||||||
Senior notes included under long-term liabilities | $ | 22,684 | $ | 22,686 | ||||
Senior notes and convertible senior debentures included under short-term liabilities | 3,207 | 2,318 | ||||||
Fair value at the end of the period | $ | 25,891 | $ | 25,004 | ||||
| * | The fair value was estimated based on quoted market prices. |
NOTE 21—Long-term employee-related obligations:
a. | Long-term employee-related obligations consisted of the following: |
December 31, | ||||||||
2019 | 2018 | |||||||
(U.S. $ in millions) | ||||||||
Accrued severance obligations | $ | 76 | $ | 75 | ||||
Defined benefit plans | 165 | 146 | ||||||
Total | $ | 241 | $ | 221 | ||||
December 31, | ||||||||
2020 | 2019 | |||||||
(U.S. $ in millions) | ||||||||
Accrued severance obligations | $ | 82 | $ | 76 | ||||
Defined benefit plans | 192 | 165 | ||||||
Total | $ | 275 | $ | 241 | ||||
As of December 31, 2020 and 2019, and 2018,$82$86 million and $137 $82
Teva
had million, respectively, deposited in funds managed by financial institutionsliability mainly in respect of Israeli employees.liability. Such deposits are not considered to be “plan assets” and are therefore included in long-term investments and receivables.other non-current assets.
and
earmarked by management to cover severance pay Most of the change resulted from actuarial updates, as well as from exiting from several defined benefit plans in several countries.
The Company expects to expense an approximate contribution of $116 million in 20202021 to pension funds and insurance companies in
connection with
with its severance and pension pay obligations.The main terms of the different arrangements with employees are described in below.
b. | Terms of arrangements: |
Israel
Israeli law generally requires payment of severance pay upon dismissal of an employee or upon termination of employment in certain other circumstances. The Parent Company and its Israeli subsidiaries make ongoing deposits into employee pension plans to fund their severance liabilities. Generally, employees that joined the Company after 2005, have signed an arrangement, pursuant to which such deposits are made in lieu of the Company’s severance liability. Therefore, no obligation is provided for in the financial statements. Severance pay liabilities with respect to employees who were employed by the Parent Company and its Israeli subsidiaries prior to that date, as well as employees who have special contractual arrangements, are provided for in the financial statements based upon the number of years of service and the latest monthly salary of such employees.
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
Europe
Many of the employees in the Company’s European subsidiaries are entitled to a retirement grant when they leave the Company. In the consolidated financial statements, the liability of the European subsidiaries is accrued, based on the length of service and remuneration of each employee at the balance sheet date. Other
employees in Europe are entitled to a pension according to a defined benefit scheme providing benefits based on final or average pensionable pay or according to a hybrid pension scheme that provides retirement benefits on a defined benefit and a defined contribution basis. Independent certified actuaries value these schemes and determine the rates of contribution payable. Pension costs for the defined benefit section of the scheme are accounted for on the basis of charging the expected cost of providing pensions over the period during which the subsidiaries benefit from the employees’ services. The Company uses December 31 as the measurement date for defined benefit plans.
North America
AmericaThe Company’s North American subsidiaries mainly provideprovide various defined contribution plans for the benefit of their employees. Under these plans, contributions are based on specified percentages of pay. Additionally, a multi-employer plan is maintained in accordance with various union agreements.
Latin America
AmericaThe majority of the employees in Latin America are entitled to severance under local law. The severance payments are calculated based on service term and employee remuneration, and accruals are maintained to reflect these amounts. In some Latin American countries it is Teva’s practice to offer retirement health benefits to qualifying employees. Based on the specific plan requirements, benefits accruals are maintained to reflect the estimated amounts or adjusted if future plans are modified.
The Company expects to pay the following future minimum benefits to its employees: $7 million in 2020; $7$13 million in 2021; $7$12 million in 2022; $7$12 million in 2023; $7$11 million in 20242024; $12 million in 2025 and $41 $65
million2025 2026 to2029. 2030. These amounts do not include amounts that may be paid to employees who cease working with the Company before their normal retirement age.
in the aggregate
between2019 | ||||||||||||||||
4th quarter | 3rd quarter | 2nd quarter | 1st quarter | |||||||||||||
(U.S $ in millions except per share amounts) | ||||||||||||||||
Net revenues * | 4,468 | 4,093 | 4,177 | 4,149 | ||||||||||||
Gross profit | 1,958 | 1,830 | 1,893 | 1,856 | ||||||||||||
Net income (loss) | 75 | (307 | ) | (671 | ) | (97 | ) | |||||||||
Net income (loss) attributable to Teva | 110 | (314 | ) | (689 | ) | (105 | ) | |||||||||
Net income (loss) attributable to ordinary shareholders | 110 | (314 | ) | (689 | ) | (105 | ) | |||||||||
Earnings per share attributable to ordinary shareholders: | ||||||||||||||||
Basic | 0.10 | (0.29 | ) | (0.63 | ) | (0.10 | ) | |||||||||
Diluted | 0.10 | (0.29 | ) | (0.63 | ) | (0.10 | ) | |||||||||
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements—(Continued)
2018 | ||||||||||||||||
4th quarter | 3rd quarter | 2nd quarter | 1st quarter | |||||||||||||
(U.S $ in millions except per share amounts) | ||||||||||||||||
Net revenues * | 4,419 | 4,385 | 4,552 | 4,916 | ||||||||||||
Gross profit | 1,971 | 1,977 | 2,033 | 2,315 | ||||||||||||
Net income (loss) | (3,243 | ) | (197 | ) | (166 | ) | 1,134 | |||||||||
Net income (loss) attributable to Teva | (2,886 | ) | (208 | ) | (176 | ) | 1,120 | |||||||||
Net income (loss) attributable to ordinary shareholders | (2,940 | ) | (273 | ) | (241 | ) | 1,055 | |||||||||
Earnings per share attributable to ordinary shareholders: | ||||||||||||||||
Basic | (2.85 | ) | (0.27 | ) | (0.24 | ) | 1.04 | |||||||||
Diluted | (2.85 | ) | (0.27 | ) | (0.24 | ) | 1.03 | |||||||||
NOTE 22—Selected quarterly financial data (unaudited):
The following table summarizes the impact of the revision on net revenuespresents selected unaudited quarterly financial data for 2020 and cost of sales in the consolidated statement of income for the relevant periods:
Net revenues | Cost of sales | |||||||||||||||||||||||||||
As reported | Adjustment | As revised | As reported | Adjustment | As revised | |||||||||||||||||||||||
(U.S. $ in millions) | ||||||||||||||||||||||||||||
2018 | Q1 | 5,065 | (149 | ) | 4,916 | 2,750 | (149 | ) | 2,601 | |||||||||||||||||||
Q2 | 4,701 | (150 | ) | 4,552 | 2,668 | (150 | ) | 2,518 | ||||||||||||||||||||
Q3 | 4,529 | (143 | ) | 4,385 | 2,552 | (143 | ) | 2,409 | ||||||||||||||||||||
Q4 | 4,559 | (141 | ) | 4,419 | 2,588 | (141 | ) | 2,447 | ||||||||||||||||||||
2019 | Q1 | 4,295 | (146 | ) | 4,149 | 2,440 | (146 | ) | 2,293 | |||||||||||||||||||
Q2 | 4,337 | (159 | ) | 4,177 | 2,443 | (159 | ) | 2,284 | ||||||||||||||||||||
Q3 | 4,264 | (171 | ) | 4,093 | 2,435 | (171 | ) | 2,264 | ||||||||||||||||||||
| 2020 | ||||||||||||||||
| 4th quarter | 3rd quarter | 2nd quarter | 1st quarter | |||||||||||||
| U.S $ in millions (except per share amounts) | ||||||||||||||||
Net revenues | 4,454 | 3,978 | 3,870 | 4,357 | ||||||||||||
Gross profit | 2,048 | 1,852 | 1,763 | 2,063 | ||||||||||||
Net income (loss) | 162 | (4,340 | ) | 53 | 25 | |||||||||||
Net income (loss) attributable to Teva | 150 | (4,349 | ) | 140 | 69 | |||||||||||
Net income (loss) attributable to ordinary shareholders | 150 | (4,349 | ) | 140 | 69 | |||||||||||
Earnings per share attributable to ordinary shareholders: | ||||||||||||||||
Basic | 0.14 | (3.97 | ) | 0.13 | 0.06 | |||||||||||
Diluted | 0.14 | (3.97 | ) | 0.13 | 0.06 | |||||||||||
| 2019 | ||||||||||||||||
| 4th quarter | 3rd quarter | 2nd quarter | 1st quarter | |||||||||||||
| U.S $ in millions (except per share amounts) | ||||||||||||||||
Net revenues | 4,468 | 4,093 | 4,177 | 4,149 | ||||||||||||
Gross profit | 1,958 | 1,830 | 1,893 | 1,856 | ||||||||||||
Net income (loss) | 75 | (307 | ) | (671 | ) | (97 | ) | |||||||||
Net income (loss) attributable to Teva | 110 | (314 | ) | (689 | ) | (105 | ) | |||||||||
Net income (loss) attributable to ordinary shareholders | 110 | (314 | ) | (689 | ) | (105 | ) | |||||||||
Earnings per share attributable to ordinary shareholders: | ||||||||||||||||
Basic | 0.10 | (0.29 | ) | (0.63 | ) | (0.10 | ) | |||||||||
Diluted | 0.10 | (0.29 | ) | (0.63 | ) | (0.10 | ) | |||||||||
16
7
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 20192020
(U.S. $ in millions)
Column A | Column B | Column C | Column D | Column E | ||||||||||||||||
Balance at beginning of period | Charged to costs and expenses | Charged to other accounts | Deductions | Balance at end of period | ||||||||||||||||
Allowance for doubtful accounts: | ||||||||||||||||||||
Year ended December 31, 2019 | $ | 232 | $ | (16 | ) | $ | — | $ | (7 | ) | $ | 209 | ||||||||
Year ended December 31, 2018 | $ | 232 | $ | 13 | $ | (9 | ) | $ | (4 | ) | $ | 232 | ||||||||
Year ended December 31, 2017 | $ | 191 | $ | 12 | $ | 51 | $ | (22 | ) | $ | 232 | |||||||||
Allowance in respect of carryforward tax losses and deductions that may not be utilized: | ||||||||||||||||||||
Year ended December 31, 2019 | $ | 1,633 | $ | 555 | $ | — | $ | (214 | ) | $ | 1,974 | |||||||||
Year ended December 31, 2018 | $ | 1,504 | $ | 407 | $ | 5 | $ | (283 | ) | $ | 1,633 | |||||||||
Year ended December 31, 2017 | $ | 1,690 | $ | 173 | $ | 390 | $ | (749 | ) | $ | 1,504 | |||||||||
Column A | Column B | Column C | Column D | Column E | ||||||||||||||||
Balance at beginning of period | Charged to costs and expenses | Charged to other accounts | Deductions | Balance at end of period | ||||||||||||||||
Allowance for doubtful accounts: | ||||||||||||||||||||
Year ended December 31, 2020 | $ | 209 | $ | (11 | ) | $ | 2 | $ | $ | 200 | ||||||||||
Year ended December 31, 2019 | $ | 232 | $ | (16 | ) | $ | — | $ | (7 | ) | $ | 209 | ||||||||
Year ended December 31, 2018 | $ | 232 | $ | 13 | $ | (9 | ) | $ | (4 | ) | $ | 232 | ||||||||
Allowance in respect of carryforward tax losses and deductions that may not be utilized: | ||||||||||||||||||||
Year ended December 31, 2020 | $ | 1,974 | $ | 670 | $ | — | $ | (97 | ) | $ | 2,547 | |||||||||
Year ended December 31, 2019 | $ | 1,633 | $ | 555 | $ | — | $ | (214 | ) | $ | 1,974 | |||||||||
Year ended December 31, 2018 | $ | 1,504 | $ | 407 | $ | 5 | $ | (283 | ) | $ | 1,633 | |||||||||
16
8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Teva maintains “disclosure controls and procedures” (as defined in Rules
13a-15(e)
and15d-15(e)
under the Securities Exchange Act of 1934, as amended) that are designed to provide reasonable assurance that information required to be disclosed in Teva’s reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Teva’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective.After evaluating the effectiveness of our disclosure controls and procedures as of December 31, 2019,2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, Teva’s disclosure controls and procedures were effective at the reasonable assurance level.
Report of Teva Management on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f)
and15d-15(f)
under the Exchange Act, as amended. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of Teva’s internal control over financial reporting as of December 31, 2019.2020. In making this assessment, it used the criteria established in(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on such assessment, management has concluded that, as of December 31, 2019,2020, Teva’s internal control over financial reporting was effective.
Internal Control—Integrated Framework
Attestation Report of the Registered Public Accounting Firm
Our internal control over financial reporting as of December 31, 20192020 has been audited by Kesselman & Kesselman, an independent registered public accounting firm in Israel and a member of PricewaterhouseCoopers International Limited (“PwC”), as stated in their report which is included under “Item 8—Financial Statements.”
Changes in Internal Control over Financial Reporting
During the quarteryear ended December 31, 2019,2020, there were no changes in internal control over financial reporting that materially affected or are reasonably likely to materially affect Teva’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Reference is made to Teva’s 20202021 Proxy Statement, which will be filed no later than 120 days after the close of the registrant’s fiscal year ended December 31, 2019,2020, with respect to Teva’s directors, executive officers and corporate governance, which is incorporated herein by reference and made a part hereof in response to the information required by Item 10.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to Teva’s 20202021 Proxy Statement, which will be filed no later than 120 days after the close of Teva’s fiscal year ended December 31, 2019,2020, with respect to Teva’s executive compensation, which is incorporated herein by reference and made a part hereof in response to the information required by Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Reference is made to Teva’s 20202021 Proxy Statement, which will be filed no later than 120 days after the close of Teva’s fiscal year ended December 31, 2019,2020, with respect to the security ownership of certain beneficial owners and management and related stockholder matters of Teva, which is incorporated herein by reference and made a part hereof in response to the information required by Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Reference is made to Teva’s 20202021 Proxy Statement, which will be filed no later than 120 days after the close of Teva’s fiscal year ended December 31, 2019,2020, with respect to certain relationships and related transactions, and director independence of Teva, which is incorporated herein by reference and made a part hereof in response to the information required by Item 13.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Reference is made to Teva’s 20202021 Proxy Statement, which will be filed no later than 120 days after the close of Teva’s fiscal year ended December 31, 2019,2020, with respect to principal accountant fees and services provided to Teva, which is incorporated herein by reference and made a part hereof in response to the information required by Item 14.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (a) | The following financial statements are filed as part of this Annual Report on Form 10-K: |
page | |||||||
Consolidated Financial Statements: | |||||||
Financial Statement Schedule: | |||||||
Exhibits
The information called for by this Item is incorporated herein by reference to the Exhibit Index in this
Form 10-K.
| 3.1 | ||||
Memorandum of Association (1)(2) | ||||
| 3.2 | ||||
| 3.3 | ||||
| 4.1 | ||||
| 4.2 | ||||
| 4.3 | ||||
| 4.4 | ||||
| 4.5 | ||||
| 4.6 | ||||
| 4.7 | ||||
| 4.8 | ||||
171
| 4.9 | |||||
4.10 | |||||
4.11 | |||||
4.12 | |||||
4.13 | |||||
| 4.22 | |||||
172
| 4.24 | |||||
Other long-term debt instruments: The registrant hereby undertakes to provide the Securities and Exchange Commission with copies upon request. | |||||
| 10.1 | |||||
| 10.2 | |||||
| 10.3 | |||||
| 10.4 | |||||
| 10.5 | ||||
| 10.6 | ||||
| 10.7 | ||||
| 10.8 | Employment Agreement, dated as of May 30, 2013, between Teva Sante and Eric Drapé* | |||
| 10.10 | ||||
| 10.11 | Amendment to Employment Agreement between Teva Pharmaceutical Industries Limited and Eli Kalif, dated as of February 6, 2020 (40) | |||
Teva Pharmaceutical Industries Limited 2015 Long-Term Equity-Based Incentive Plan | ||||
173
| 10.13 | ||||
| 10.14 | ||||
| 10.15 | ||||
| 10.16 | ||||
| 10.17 | ||||
| 10.18 | ||||
| 10.19 | ||||
| 10.20 | ||||
| 10.21 | ||||
| 10.22 | ||||
| 10.23 | ||||
| 10.24 | ||||
| 10.25 | ||||
| 10.26 | ||||
| 10.27 | ||||
| 10.28 | ||||
| 18 | Kesselman & Kesselman Preferability Letter dated August 5, 2020 (58) | |||
| 21 | ||||
| 23 | ||||
| 31.1 | ||||
| 31.2 | ||||
| 32 | ||||
| 101.INS | ||||
Inline XBRL Instance Document (The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document) | ||||
174
| 101.SCH | ||||
Inline XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL | ||||
Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.DEF | ||||
Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 101.LAB | ||||
Inline XBRL Taxonomy Extension Labels Linkbase Document | ||||
| 101.PRE | ||||
Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 104 | ||||
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||
| * | Filed herewith |
| 1. | English translation or summary from Hebrew original, which is the official version. |
| 2. | Incorporated by reference to Exhibit 3.1 to Registration Statement on Form F-1(Reg. No. 33-15736). |
| 3. | Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on December 14, 2018. |
| 4. | Incorporated by reference to Exhibit 8-K filed on |
| 5. | Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed on December 4, 2018. |
| 6. | Incorporated by reference to Exhibit 4.1 to Form 6-K filed on January 31, 2006. |
| 7. | Incorporated by reference to Exhibit 4.2 to Form 6-K filed on January 31, 2006. |
| 8. | Incorporated by reference to Exhibit 4.3 to Form 6-K filed on January 31, 2006. |
| 9. | Incorporated by reference to Exhibit 4.1 to Form 6-K filed on May 4, 2010. |
| 10. | Incorporated by reference to Exhibit 4.1 to Form 6-K filed on November 10, 2011. |
| 11. | Incorporated by reference to Exhibit 4.2 to Form 6-K filed on December 18, 2012. |
| 12. | Incorporated by reference to Exhibit 4.3 to Form 6-K filed on November 10, 2011. |
| 13. | Incorporated by reference to Exhibit 4.4 to Form 6-K filed on November 10, 2011. |
| 14. | Incorporated by reference to Exhibit 4.4 to Form 6-K filed on December 18, 2012. |
| 15. | Incorporated by reference to Exhibit 4.5 to Form 6-K filed on November 10, 2011. |
| 16. | Incorporated by reference to Exhibit 4.6 to Form 6-K filed on November 10, 2011. |
| 17. | Incorporated by reference to Exhibit 4.1 to Form 6-K filed on |
| 18. | Incorporated by reference to Exhibit 4.2 to Form 6-K filed on |
| 19. | Incorporated by reference to Exhibit 4.2 to Form 6-K filed on July 25, 2016. |
| 20. | Incorporated by reference to Exhibit 4.1 to Form 6-K filed on |
Incorporated by reference to Exhibit 4.2 to Form 6-K filed on |
Incorporated by reference to Exhibit 4.2 to Form 6-K |
| Incorporated by reference to Exhibit 4.3 to Form 6-K filed on July 28, 2016. |
Incorporated by reference to Exhibit 4.5 to Form 6-K filed on July 28, 2016. |
Incorporated by reference to Exhibit 4.6 to Form 6-K filed on July 28, 2016. |
Incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed on March 14, 2018. |
Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed on March 14, 2018. |
Incorporated by reference to Exhibit 4.5 to Current Report on Form 8-K filed on March 14, 2018. |
Incorporated by reference to Exhibit 4.6 to Current Report on Form 8-K filed on March 14, 2018. |
Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed on November 25, 2019. |
| Incorporated by reference to Exhibit 4.6 to Current Report on Form 8-K filed on November 25, 2019. |
Incorporated by reference to Exhibit 10-K filed on |
Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed on April 10, 2019. |
Incorporated by reference to Exhibit 10.20 to Annual Report on Form 10-K filed on February 12, 2018. |
Incorporated by reference to Exhibit 8-K filed on |
| Incorporated by reference to Exhibit 10.32 to Annual Report on Form 10-K filed on February 12, 2018. |
Incorporated by reference to Exhibit 10.26 to Annual Report on Form 10-K filed on February 19, 2019. |
Incorporated by reference to Exhibit 10-K filed on |
Incorporated by reference to Exhibit 10.13 to Annual Report on Form 10-K filed on February 21, 2020. |
| 40. | Incorporated by reference to Exhibit 10.32 to Annual Report on Form 10-K filed on February 21, 2020. |
| 41. | Incorporated by reference to Exhibit A to Proxy Statement filed on June 8, 2017. |
175
Incorporated by reference to Exhibit 10.49 to Annual Report on Form 10-K filed on February 12, 2018. |
Incorporated by reference to Exhibit 10.50 to Annual Report on Form 10-K filed on February 12, 2018. |
Incorporated by reference to Exhibit 10.51 to Annual Report on Form 10-K filed on February 12, 2018. |
Incorporated by reference to Exhibit 10.52 to Annual Report on Form 10-K filed on February 12, 2018. |
Incorporated by reference to Exhibit 10.53 to Annual Report on Form 10-K filed on February 12, 2018. |
Incorporated by reference to Exhibit 10.54 to Annual Report on Form 10-K filed on February 12, 2018. |
Incorporated by reference to Exhibit 10.56 to Annual Report on Form 10-K filed on February 12, 2018. |
Incorporated by reference to Exhibit 10-K filed on February 12, 2018. |
| Incorporated by reference to Exhibit 10.60 to Annual Report on Form 10-K filed on February 12, 2018. |
Incorporated by reference to Exhibit |
Incorporated by reference to Exhibit 10.63 to Annual Report on Form 10-K filed on February 12, 2018. |
Incorporated by reference to Exhibit 10.64 to Annual Report on Form 10-K filed on February 12, 2018. |
Incorporated by reference to Exhibit 10-Q filed on November 5, 2020. |
| 55. | Incorporated by reference to Exhibit 10.30 to Annual Report on Form 10-K filed on February |
| 56. | Incorporated by reference to Exhibit 10.31 to Annual Report on Form 10-K filed on February 21, 2020. |
| 57. | Incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q filed on November 5, 2020. |
| 58. | Incorporated by reference to Exhibit 18 to Quarterly Report on Form 10-Q filed on August 5, 2020. |
ITEM 16. FORM
10-K
SUMMARYNone.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TEVA PHARMACEUTICAL INDUSTRIES LIMITED | ||
By: | /s/ Kåre Schultz | ||
Name: | Kåre Schultz | ||
Title: | President and Chief Executive Officer | ||
Dated: | February | ||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each of the undersigned directors and/or officers of Teva Pharmaceutical Industries Limited, a corporation organized under the laws of Israel, hereby constitutes and appoints Kåre Schultz, Eli Kalif, David M. Stark and Deborah A. Griffin, and each of them, his or her true and lawfuland agents, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign, execute and deliver with the U.S. Securities and Exchange Commission any and all amendments to this annual report on Formand agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming that all saidand agents, or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
attorneys-in-fact
10-K,
with all exhibits thereto, and other documents in connection therewith, granting unto saidattorneys-in-fact
attorneys-in-fact
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name | Title | Date | |||||||
By: | /s/ Dr. Sol J. Barer Dr. Sol J. Barer | Chairman of the Board of Directors | February | ||||||
By: | /s/ Kåre Schultz Kåre Schultz | President and Chief Executive Officer and Director | February | ||||||
By: | /s/ Eli Kalif Eli Kalif | Executive Vice President, Chief (Principal Financial Officer) | February | ||||||
By: | /s/ Deborah A. Griffin Deborah A. Griffin | Senior Vice President, Chief (Principal Accounting Officer) | February | ||||||
By: | /s/ Rosemary A. Crane Rosemary A. Crane | Director | February | ||||||
By: | /s/ Amir Elstein Amir Elstein | Director | February | ||||||
177
Name | Title | Date | |||||||
By: | |||||||||
/s/ Jean-Michel Halfon Jean-Michel Halfon | Director | February 10, 2021 | |||||||
| By: | Abbas Hussain | ||||||||
| Director | February 10, 2021 | ||||||||
| By: | /s/ Gerald M. Lieberman Gerald M. Lieberman | Director | February | ||||||
By: | /s/ Roberto A. Mignone Roberto A. Mignone | Director | February | ||||||
By: | /s/ Dr. Perry D. Nisen Dr. Perry D. Nisen | Director | February | ||||||
By: | /s/ Nechemia (Chemi) J. Peres Nechemia (Chemi) J. Peres | Director | February | ||||||
By: | /s/ Prof. Ronit Satchi-Fainaro Prof. Ronit Satchi-Fainaro | Director | February 10, 2021 | ||||||
| By: | Janet Vergis | Director | February | ||||||