Loading...
Docoh

Teva- Pharmaceutical Industries (TEVA)

Filed: 7 Aug 19, 4:08pm
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM
10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the quarterly period ended
June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
 
(IRS Employer
 Identification Number)
   
5 Basel Street
,
Petach Tikva
, ISRAEL
 
4951033
(Address of principal executive offices)
 
(Zip code)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
+972 (3)
 
914-8171
(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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
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 Rule
12b-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 is a shell company (as defined in Rule
12b-2
of the Act).    Yes  
    
No
  ☒
As of June 30, 2019, the registrant had
1,091,906,300
ordinary shares outstanding.
 
 
 
 
 
 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
INDEX
       
PART I.
    
       
Item 1.   5 
       
   5 
       
   6 
       
   7 
       
   8 
       
   10 
       
   11 
       
Item 2.   46 
       
Item 3.   77 
       
Item 4.   77 
       
PART II.
    
       
Item 1.   78 
       
Item 1A.   78 
       
Item 2.   78 
       
Item 3.   78 
       
Item 4.   78 
       
Item 5.   78 
       
Item 6.   79 
      
  80 
 
 
 
 
 
 
 
 
 
 
2
  
 
 
 
 
 
   
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form
10-Q,
and the reports and documents incorporated by reference in this Quarterly Report on Form
10-Q,
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; competition for our specialty products, especially COPAXONE
®
, our leading medicine, which faces competition from existing and potential additional generic versions and orally-administered alternatives; the uncertainty of commercial success of AJOVY
®
or AUSTEDO
®
; competition from companies with greater resources and capabilities; efforts of pharmaceutical companies to limit the use of generics, including through legislation and regulations; consolidation of our customer base and commercial alliances among our customers; the increase in the number of competitors targeting generic opportunities and seeking U.S. market exclusivity for generic versions of significant products; price erosion relating to our products, both from competing products and increased regulation; delays in launches of new products and our ability to achieve expected results from investments in our product pipeline; our ability to take advantage of high-value opportunities; the difficulty and expense of obtaining licenses to proprietary technologies; and the effectiveness of our patents and other measures to protect our intellectual property rights;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 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: failure to effectively execute our restructuring plan announced in December 2017; uncertainties related to, and failure to achieve, the potential benefits and success of our senior management team and organizational structure; harm to our pipeline of future products due to the ongoing review of our R&D programs; our ability to develop and commercialize additional pharmaceutical products; potential additional adverse consequences following our resolution with the U.S. government of our FCPA investigation; compliance with sanctions and other trade control laws; manufacturing or quality control problems, which may damage our reputation for quality production and require costly remediation; interruptions in our supply chain; disruptions of our or third party information technology systems or breaches of our data security; the failure to recruit or retain key personnel; variations in intellectual property laws that may adversely affect our ability to manufacture our products; challenges associated with conducting business globally, including adverse effects of political or economic instability, major hostilities or terrorism; significant sales to a limited number of customers in our U.S. market; our ability to successfully bid for suitable acquisition targets or licensing opportunities, or to consummate and integrate acquisitions; implementation of a new enterprise resource planning system that, if deficient, could materially and adversely affect our operations and/or the effectiveness of our internal controls; and our prospects and opportunities for growth if we sell assets;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 compliance, regulatory and litigation matters, including: costs and delays resulting from the extensive governmental regulation to which we are subject; the effects of reforms in healthcare regulation and reductions in pharmaceutical pricing, reimbursement and coverage; increased legal and regulatory action in connection with public concern over the abuse of opioid medications in the U.S.; governmental investigations into S&M practices; 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; and environmental risks;
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3
 
 
 
 
 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 Quarterly Report on Form
10-Q
and in our Annual Report on Form
10-K
for the year ended December 31, 2018, 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.
 
4
 
 
 
PART I — FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
 
 
 
 
 
 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in millions, except for share data)
(Unaudited)
         
 
June 
30,
  
December 
31,
 
 
2019
  
2018
 
ASSETS
      
Current assets:
      
Cash and cash equivalents
 
$
2,165
  
$
1,782
 
Trade receivables
  
5,260
   
5,822
 
Inventories
  
4,850
   
4,731
 
Prepaid expenses
  
1,069
   
899
 
Other current assets
  
437
   
468
 
Assets held for sale
  
24
   
92
 
Total current assets
  
13,805
   
13,794
 
Deferred income taxes
  
317
   
368
 
Other
non-current
assets
  
721
   
731
 
Property, plant and equipment, net
  
6,732
   
6,868
 
Operating lease
right-of-use
assets
  
500
   
—  
 
Identifiable intangible assets, net
  
12,435
   
14,005
 
Goodwill
  
24,913
   
24,917
 
Total assets
 
$
59,424
  
$
60,683
 
LIABILITIES AND EQUITY
      
Current liabilities:
      
Short-term debt
 
$
2,771
  
$
2,216
 
Sales reserves and allowances
  
6,054
   
6,711
 
Trade payables
  
1,806
   
1,853
 
Employee-related obligations
  
587
   
870
 
Accrued expenses
  
2,335
   
1,868
 
Other current liabilities
  
899
   
804
 
Total current liabilities
  
14,452
   
14,322
 
Long-term liabilities:
      
Deferred income taxes
  
1,698
   
2,140
 
Other taxes and long-term liabilities
  
1,642
   
1,727
 
Senior notes and loans
  
25,955
   
26,700
 
Operating lease liabilities
  
426
   
—  
 
Total long-term liabilities
  
29,721
   
30,567
 
Commitments and contingencies
, see note
16
      
Total liabilities
  
44,173
   
44,889
 
Equity:
      
Teva shareholders’ equity:
      
Ordinary shares of NIS
0.10
par value per share; June 30, 2019 and December 31, 2018: authorized
2,495
 
million shares; issued
1,198
 
million shares and
1,196
 
million shares, respectively
  
56
   
56
 
Additional
paid-in
capital
  
27,258
   
27,210
 
Accumulated deficit
  
(6,752
)
  
(5,958
)
Accumulated other comprehensive loss
  
(2,312
)
  
(2,459
)
Treasury shares as of June 
30, 2019 and December 31, 2018 —
107
 million ordinary shares and
106
 million ordinary shares, respectively
  
(4,128
)
  
(4,142
)
  
14,122
   
14,707
 
Non-controlling
interests
  
1,128
   
1,087
 
Total equity
  
15,251
   
15,794
 
Total liabilities and equity
 
$
59,424
  
$
60,683
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts may not add up due to rounding.
The accompanying notes are an integral part of the financial statements.
 
5
 
 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(U.S. dollars in millions, except share and per share data)
(Unaudited)
 
Three months ended
June 30,
  
Six months ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
            
Net revenues
 $
4,337
  $
4,701
  $
8,632
  $
9,766
 
Cost of sales
  
2,443
   
2,668
   
4,883
   
5,418
 
                 
Gross profit
  
1,893
   
2,033
   
3,749
   
4,348
 
Research and development expenses
  
276
   
290
   
537
   
607
 
Selling and marketing expenses
  
666
   
682
   
1,313
   
1,420
 
General and administrative expenses
  
296
   
316
   
589
   
645
 
Intangible assets impairment
  
561
   521   
1,030
   
727
 
Goodwill impairment
  
—  
   
120
   
—  
   
300
 
Other assets impairments, restructuring and other items
  
101
   
194
   
103
   
695
 
Legal settlements and loss contingencies
  
646
   
20
   
703
   
(1,258
)
Other income
  
(9
)  
(96
)  
(15
)  
(299
)
                 
Operating income (loss)
  
(644
)  
(14
)  
(510
)  
1,511
 
Financial expenses, net
  
206
   
236
   
425
   
507
 
                 
Income (loss) before income taxes
  
(850
)  
(250
)  
(934
)  
1,004
 
Income taxes
  
(179
)  
(76
)  
(170
)  
(30
)
Share in losses (income) of associated companies, net
  
—  
   
(8
)  
4
   
66
 
                 
Net income (loss)
  
(671
)  
(166
)  
(768
)  
968
 
Net income attributable to
non-controlling
interests
  
18
   
10
   
26
   
24
 
                 
Net income (loss) attributable to Teva
  
(689
)  
(176
)  
(794
)  
944
 
                 
Dividends on preferred shares
  
—  
   
65
   
—  
   
130
 
                 
Net income (loss) attributable to ordinary shareholders
 $
(689
) $
(241
) $
(794
) $
814
 
                 
Earnings (loss) per share attributable to ordinary shareholders:
            
Basic
 $
(0.63
) $
(0.24
) $
(0.73
) $
0.80
 
                 
Diluted
 $
(0.63
) $
(0.24
) $
(0.73
) $
0.80
 
                 
Weighted average number of shares (in millions):
            
Basic
  
1,092
   
1,018
   
1,091
   
1,018
 
                 
Diluted
  
1,092
   
1,018
   
1,091
   
1,020
 
                 
Amounts may not add up due to rounding.
The accompanying notes are an integral part of the financial statements.
 
6
 
 
  
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(U.S. dollars in millions)
(Unaudited)
                 
 
Three months ended
  
Six months ended
 
 
June 30,
  
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
Net income (loss)
 $
(671
) $
(166
) $
(768
) $
968
 
Other comprehensive income (loss), net of tax:
            
Currency translation adjustment
  
86
   
(711
)  
133
   
(472
)
Unrealized gain (loss) from derivative financial instruments
  
(10
)  
100
   
37
   
56
 
Unrealized gain (loss) from
available-for-sale
securities
  
1
   
(1
)  
1
   
(1
)
Unrealized loss on defined benefit plans
  
(1
)  
(2
)  
(1
)  
(1
)
                 
Total other comprehensive income (loss)
  
76
   
(614
)  
170
   
(418
)
                 
Total comprehensive income (loss)
  
(595
)  
(780
)  
(598
)  
550
 
Comprehensive income (loss) attributable to
non-controlling
interests
  
47
   
(51
)  
49
   
46
 
                 
Comprehensive income (loss) attributable to Teva
 $
(642
) $
(729
) $
(647
) $
504
 
                 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts may not add up due to rounding.
The accompanying notes are an integral part of the financial statements.
 
7
 
 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
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 (loss)
  
Treasury
shares
  
Total Teva
shareholders
equity
  
Non-
controlling
interests
  
Total equity
 
 
(U.S. dollars in millions)
 
Balance at March 31, 2018**
  
1,124
   
54
   
3,696
   
23,443
   
(2,688
)  
(1,735
)  
(4,149
)  
18,621
   
1,481
   
20,102
 
Comprehensive income (loss)
              
(176
)  
(554
)     
(730
)  
(51
)  
(780
)
Stock-based compensation expense
           
47
            
47
      
47
 
Dividends to preferred shareholders
        
65
   
(65
)           
—  
   —     
—  
 
                                         
Balance at June 30, 2018
  
1,124
  $
54
  $
3,760
  $
23,426
  $
(2,864
) $
(2,289
) $
(4,149
) $
17,938
  $
1,430
  $
19,368
 
                                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*
Mandatory convertible preferred shares.
 
 
 
 
 
 
 
 
**
Following the adoption of ASU 2016-01, the Company recorded a $5 million opening balance reclassification from accumulated other comprehensive income to retained earnings. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 (loss)
  
Treasury
shares
  
Total Teva
shareholders’
equity
  
Non-
controlling
interests
  
Total equity
 
 
(U.S. dollars in millions)
 
Balance at March 31, 2019
  
1,198
   
56
   
   
27,234
   
(6,063
)  
(2,359
)  
(4,137
)  
14,732
   
1,089
   
15,821
 
Comprehensive income (loss)
                  
(689
)  
47
       
(642
)  
47
   
(595
)
Issuance of Shares
      **                                 
Issuance of Treasury Shares
              
(6
)          
9
   
3
       
3
 
Stock-based compensation expense
              
32
               
32
       
32
 
Other
              
(2
)              
(2
)      
(2
)
Transactions with non-controlling
interests
                                  (8)  (8)
                                         
Balance at June 30, 2019
  
1,198
  $
56
   
  $
27,258
  $
(6,752
) $
(2,312
) $
(4,128
) $
14,122
  $
1,128
  $
15,251
 
                                         
  
  
 
 
 
 
 
 
*
Mandatory convertible preferred shares.
 
 
 
 
 
 
 
 
**
Represents an amount less than 0.5 million.
 
 
 
 
 
 
 
 
Amounts may not add up due to rounding.
The accompanying notes are an integral part of the financial statements.
 
8
 

 
 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
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 (loss)
  
Treasury
shares
  
Total Teva
shareholders’
equity
  
Non-
controlling
interests
  
Total equity
 
 
(U.S. dollars in millions)
 
Balance at December 31, 2017
  
1,124
   
54
   
3,631
   
23,479
   
(3,803
)  
(1,853
)  
(4,149
)  
17,359
   
1,386
   
18,745
 
Cumulative effect of new accounting
standard
              
(5
)  
5
                
Comprehensive income (loss)
               944   (441     503   46   550 
Dividends to preferred shareholders        129
   
(129
)                     
Stock-based compensation expense
           
77
            
77
      
77
 
Transactions with non-controlling interests                            (2)  (2)
                                         
Balance at June 30, 2018
  
1,124
  $
54
  $
3,760
  $
23,426
  $
(2,864
) $
(2,289
) $
(4,149
) $
17,938
  $
1,430
  $
19,368
 
                                         
  
 
 
 
 
 
 
 
 
 
*Mandatory convertible preferred shares.
 
 
 
 
 
 
 
 
 
 
 
 
 
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 (loss)
  
Treasury
shares
  
Total Teva
shareholders’
equity
  
Non-
controlling
interests
  
Total equity
 
 
(U.S. dollars in millions)
 
Balance at December 31, 2018
  
1,196
   
56
   
—  
   
27,210
   
(5,958
)  
(2,459
)  
(4,142
)  
14,707
   
1,087
   
15,794
 
Comprehensive income (loss)
                  
(794
)  
147
       
(647
)  
49
   
(598
)
Issuance of Shares
  
2
    **                                
Issuance of Treasury Shares
  
 
           
(8
)          
14
   
6
       
6
 
Stock-based compensation expense
              
64
               
64
       
64
 
Transactions with
non-controlling

interests
                                  (8)  (8)
Other
              
(8
)              
(8
)      
(8
)
                                         
Balance at June 30, 2019
  
1,198
  $
56
   
—  
  $
27,258
  $
(6,752
) $
(2,312
) $
(4,128
) $
14,122
  $
1,128
  $
15,251
 
                                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*
Mandatory convertible preferred shares.
 
 
 
 
 
 
 
 
**
Represents an amount less than
0.5
 million.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts may not add up due to rounding.
The accompanying notes are an integral part of the financial statements.
 
9
 

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in millions)
(Unaudited)
         
 
 
 
 
 
         
 
Six months ended
June 30,
 
 
2019
  
2018
 
Operating activities:
      
Net income (loss)
 $
(768
) $
968
 
Adjustments to reconcile net income (loss) to net cash provided by operations:
      
Net change in operating assets and liabilities
  
(1,056
)  
(1,268
)
Impairment of long-lived assets
  
1,097
   
980
 
Depreciation and amortization
  
893
   
986
 
Deferred income taxes – net and uncertain tax positions  
(362
)  
(489
)
Stock-based compensation
  
64
   
77
 
Other items  
11
   
44
 
Net gain from sale of long-lived assets and investments
  
6
   
(88
)
Goodwill impairment
  
—  
   
300
 
Impairment of equity investment
  
—  
   
94
 
In process Research and development  
—  
   
54
 
         
Net cash provided by (used in) operating activities
  
(115
)  
1,658
 
         
Investing activities:
      
Beneficial interest collected in exchange for securitized trade receivables
  
746
   
970
 
Purchases of property, plant and equipment
  
(237
)  
(299
)
Proceeds from sales of business, investments and long-lived assets  
134
   
841
 
Other investing activities  
59
   
(11
)
Purchases of investments and other assets
  
(1
)  
(56
)
         
Net cash provided by investing activities
  
701
   
1,445
 
         
Financing activities:
      
Repayment of senior notes and loans and other long-term liabilities
  
(157
)  
(6,289
)
Tax withholding payments made on shares and dividends
  
(52
)  
(22
)
Other financing activities
  
(13
)  
(10
)
Net change in short-term debt
  
(2
)  
(261
)
Proceeds from senior notes and loans, net of issuance costs
  
—  
   
4,435
 
         
Net cash used in financing activities
  
(224
)  
(2,147
)
         
Translation adjustment on cash and cash equivalents
  
21
   
(58
)
         
Net change in cash and cash equivalents
  
383
   
898
 
Balance of cash and cash equivalents at beginning of period
  
1,782
   
963
 
         
Balance of cash and cash equivalents at end of period
 
$
2,165
 
 
$
1,861
 
         
Non-cash
financing and investing activities:
      
Beneficial interest obtained in exchange for securitized trade receivables
 $
770
  $
968
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts may not add up due to rounding.
The accompanying notes are an integral part of the financial statements.
 
10
 

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – Basis of presentation:
The accompanying unaudited consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements. In the opinion of management, the financial statements reflect all recurring adjustments necessary to fairly state the financial position and results of operations of Teva. The information included in this Quarterly Report on Form
10-Q
should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Form
10-K
for the year ended December 31, 2018, as filed with the Securities and Exchange Commission (“SEC”). Amounts as of December 31, 2018 were derived from the audited balance sheet at that date, but not all disclosures required by generally accepted accounting principles in the United States (“U.S. GAAP”) are included. Certain comparative figures have been reclassified to conform to current presentation. The results of operations for the six months ended June 30, 2019 are not necessarily indicative of results that could be expected for the entire fiscal year. 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.
Note 2 – Significant accounting policies:
Recently adopted accounting pronouncements
In June 2018, the FASB issued ASU
2018-07
“Improvement to Nonemployee Share-Based Payments Accounting.” This guidance simplifies the accounting for
non-employee
share-based payment transactions. The amendments specify that ASC 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. Teva adopted the provisions of this update as of January 1, 2019 with no material impact on its consolidated financial statements.
In August 2017, the FASB issued ASU
2017-12
“Derivatives and Hedging—Targeted Improvements to Accounting​​​​​​​ for Hedging Activities.” This guidance expands and refines hedge accounting for both
non-financial
and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. Teva adopted the provisions of this update as of January 1, 2019 with no material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU
2016-02
“Leases.” The guidance establishes a
right-of-use
model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. 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.
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. 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 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 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 and
non-lease
components 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.
The adoption of this standard has a material effect on Teva’s financial statements. The most significant impact is reflected in: (i) 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
have material impact on
the retained earnings), and (ii) the requirement to provide significant new disclosures regarding Teva’s leasing activities and to enable users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. However, the adoption of this standard does not have a material impact on Teva’s consolidated statements of income and consolidated statements of cash flows. Also, the Company’s accounting for finance leases remained substantially unchanged. See note 20 for further discussion.
 
11
 

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
Recently issued accounting pronouncements, not yet adopted
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 for three topics related to financial instruments accounting. The guidance will be effective for fiscal years beginning after December 15, 2019. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In November 2018, the FASB issued ASU
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) adds
unit-of-account
guidance 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 beginning after December 15, 2019. Early adoption is permitted and should be applied retrospectively. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In August 2018, the FASB issued ASU
2018-15
“Intangibles—Goodwill and
other—Internal-use
software (Subtopic
350-40):
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 obtain
internal-use
software. The guidance will be effective for fiscal years beginning after December 15, 2019, although early adoption is permitted. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
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. The guidance will be effective for fiscal years beginning after December 15, 2019, although early adoption is permitted. The Company is currently evaluating this guidance to determine the impact it may have 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. The guidance will be effective for the fiscal year beginning on January 1, 2020, including interim periods within that year. Teva is currently evaluating the potential effect of the guidance on its consolidated financial statements.
Reclassifications of prior periods
During the fourth quarter of 2018, the Company changed its accounting policy for the presentation of royalty payments to third parties that are not involved in the production of products. Teva previously accounted for royalty payments to such third parties as S&M expenses. Royalties paid to a party that is involved in the production process are classified as cost of sales. The Company believes this change in accounting policy is preferable in order to be aligned with industry practice of classifying all royalty payments related to currently marketed products in cost of sales. The Company now reports all royalty payments as cost of sales. The Company has retrospectively adjusted prior periods to reflect this change and the impact of the change for the first and second quarters of 2018 was an increase in cost of sales of $33 million and $28 million, respectively, with a corresponding decrease in S&M expenses.
NOTE 3 – Certain transactions:
Business acquisitions:
Actavis Generics and Anda acquisitions
On August 2, 2016, Teva completed the 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 completed 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.
 
12
 

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
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, two 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. 
Assets and Liabilities Held For Sale:
The table below summarizes the major classes of assets and liabilities included as held for sale as of June 30, 2019 and December 31, 2018:
 
June 30, 
2019
  
December 31, 
2018
 
 
(U.S. $ in millions)
 
Property, plant and equipment, net
 $
30
  $
92
 
Goodwill
  
   
51
 
Adjustments of assets held for sale to fair value
  
(6
)  
(51
)
         
Total assets of the disposal group classified as held for sale in the consolidated balance sheets
 $         
24
  $                 
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.
Eli Lilly and Alder BioPharmaceuticals
In December 2018, Teva entered into an agreement 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 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 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. The agreement stipulates additional milestone payments to Teva of up to $175 million, as well as future royalties.
 
13
 

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
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
over-the-counter
(“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 United States. Nuvelution will fund and manage clinical development, driving all operational aspects of the phase 3 program, and Teva will lead the regulatory process and be responsible for commercialization. Upon and subject to U.S. Food and Drug Administration (“FDA”) approval of AUSTEDO for the treatment of Tourette syndrome, Teva will pay Nuvelution a
pre-agreed
amount as compensation for their contribution to the partnership.
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. 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.
Attenukine
TM
In December 2016, Teva entered into a license agreement for research, development, manufacture and commercializing of Attenukine technology with a subsidiary of Takeda Pharmaceutical Company Ltd. (“Takeda”). Teva received a $30 million upfront payment. The agreement stipulates additional milestone payments to Teva of up to $280 million, as well as future royalties.
Celltrion
In October 2016, Teva and Celltrion, Inc. (“Celltrion”) entered into a collaborative agreement to commercialize Truxima
®
and Herzuma
®
, two biosimilar products in development 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. Teva and Celltrion will share the profit from the commercialization of these products.
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 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​​​​​​​.
  
14
 

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE 4 – Inventories:
Inventories, net of reserves, consisted of the following:
 
June 30,
  
December 31,
 
 
2019
  
2018
 
 
(U.S. $ in millions)
 
Finished products
 $
2,643
  $
2,665
 
Raw and packaging materials
  
1,393
   
1,328
 
Products in process
  
638
   
590
 
Materials in transit and payments on account
  
176
   
148
 
         
Total
 $
4,850
  $
4,731
 
         
NOTE 5 – Property, plant and equipment:
Property, plant and equipment, net, consisted of the following:
 
June 30,
  
December 31,
 
 
2019
  
2018
 
 
(U.S. $ in millions)
 
Machinery and equipment
 $
5,713
  $
5,691
 
Buildings
  
3,092
   
3,143
 
Computer equipment and other assets
  
2,129
   
2,097
 
Payments on account
  
526
   
514
 
Land
  
370
   
351
 
         
  
11,830
   
11,796
 
Less—accumulated depreciation
  
(5,099
)  
(4,928
)
         
Total $
6,732
  $
6,868
 
         
NOTE 6 – Identifiable intangible assets:
Identifiable intangible assets consisted of the following: 
 
Gross carrying amount 
net of impairment
  
Accumulated amortization
  
Net carrying amount
 
 
June 30,
  
December 31,
  
June 30,
  
December 31,
  
June 30,
  
December 31,
 
 
2019
  
2018
  
2019
  
2018
  
2019
  
2018
 
 
(U.S. $ in millions)
 
Product rights
 $
19,995
  $
20,361
  $
10,043
  $
9,565
  $
9,952
  $
10,796
 
Trade names
  
604
   
606
   
109
   
91
   
496
   
515
 
In process research and development
  
1,988
   
2,694
   
   
   
1,988
   
2,694
 
                         
Total
 
$
22,587
 
 
$
23,661
 
 
$
10,152
 
 
$
9,656
 
 
$
12,435
 
 
$
14,005
 
                         
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 12 years.
Amortization of intangible assets amounted to $285 million and $302 million in the three months ended June 30, 2019 and 2018, respectively.
Amortization of intangible assets amounted to $568 million and $612 million in the six months ended June 30, 2019 and 2018, respectively.
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 the following acquisitions and related assets: various generic products (Actavis Generics) – $1,730 million; various generic products (Rimsa) – $47 million; and AUSTEDO – $211 million. IPR&D carries intrinsic risks that the asset might not succeed in advanced phases and may be impaired in future periods.
In the three months ended June 
30
,
2019
, Teva reclassified $19 million of products from IPR&D to product rights following regulatory approval.
 
In the first six months of 2019, Teva reclassified 
$
256
 
million of products from IPR&D to product rights following regulatory approval,
mainly $
174
 
million in connection with methylphenidate ER.
Intangible assets impairment
Impairments of long-lived intangible assets for the three months ended on June 
30, 
2019 and
2018 were $561 million and $521 million, respectively. Impairments in the
second
quarter of
2019 consisted of:
a) 
Identifiable product rights of $365 million, mainly due to updated market assumptions regarding price and volume of products acquired from Actavis Generics and primarily marketed in the United States.
 
15
 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
b)
IPR&D assets of $196 million, mainly due to: (i) $137 million of 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 and (ii)
$59 
 
million related to a change in the assumption of the future market share of few products within Teva’s Actavis Generics related pipeline in Europe.
Impairments of long-lived intangible assets for the six months ended on June 
30
,
2019
and
2018
were $1,030 million and $727 million, respectively. Impairments in the first six months of
2019
consisted of:
a)    
Identifiable product rights of $569 million, mainly due to updated market assumptions regarding price and volume of products acquired from Actavis Generics and primarily marketed in the United States.
b) 
IPR&D assets of $461 million, due to: (i) $277 million of
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 and (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 (iii) $59 million related to a change in
the
assumption of the future market share of few products within Teva’s Actavis
Generics related pipeline in Europe.
 
NOTE 7 – Goodwill:
The changes in the carrying amount of goodwill for the period ended June 30, 2019 were as follows:
    
 
North

America
  
Europe
  
International

Markets
  
Other
  
Total
 
 
(U.S. $ in millions)
    
Balance as of January 1, 2019 
(1)
 $
11,098
  $
8,653
  $
2,479
  $
2,687
  $
24,917
 
                     
Changes during the period:
               
Goodwill disposal
  
(23
)  
(5
)  
   
   
(28
)
Goodwill adjustments
 
 
(13
)
 
 
 
 
 
 
 
 
 
 
 
(13
)
Translation differences
  
16
   
(32
)  
53
   
   
37
 
                     
Balance as of June 30, 2019 
(1)
 $
11,078
  $
8,616
  $
2,532
  $
2,687
  $
24,913
 
                     
 
(1)Accumulated goodwill impairment as of June 30, 2019 and January 1, 2019 was approximately $21.0 billion.
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
. 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. See note
17
.
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 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 could face impairment of goodwill allocated to these reporting units in the future.
During the first quarter of 2019, 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. This includes the International Markets, Medis and Europe reporting units, which had headroom
��
of 6% or less as of December 31, 2018.
As part of this assessment, the Company 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. In addition, Teva analyzed the aggregate fair value of its reporting units, calculated as part of the annual goodwill impairment test performed in the fourth quarter of 2018, compared to its market capitalization. Despite the decrease in share price during the first quarter of 2019 compared to the average share price used to assess the reasonableness of the results of the cash flow projections used for the goodwill impairment analysis in the fourth quarter of 2018, management believed that its fair value assessment was reasonably supported by Teva’s market capitalization. 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, 2019 and, therefore, no quantitative assessments were performed.
 
16
 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
In the second quarter of 2019, the Company completed its long-range planning (“LRP”) process. The LRP is part of Teva’s internal financial planning and budgeting processes and is discussed and reviewed by Teva’s management and its board of directors. Certain events and changes in circumstances, reflected in the LRP, indicated that it was more likely than not that the carrying value of certain reporting units may exceed their fair value. The following analysis was performed based upon the June 30, 2019 assessment:
International Markets
Management noted a further decrease in the profitability projections in the Japanese market related to new price regulation and further generic competition. Consequently, management conducted a quantitative​​​​​​​ analysis to its International Markets reporting unit, which resulted in no impairment.
The percentage difference between estimated fair value and estimated carrying value for the International Markets reporting unit is 4%.
The Company used a terminal growth rate of 2.3% and a discount rate of 10.74%. If Teva holds all other assumptions constant, a reduction in the terminal value growth rate of 0.4% or an increase in discount rate of 0.3% would result in an impairment related to its International Markets reporting unit.
North America
Management believes that the sharp decline in the Company’s share price, which commenced
May 2019
, was mainly a result of events related to increased publicity surrounding certain litigations in the United States. Management considered the sharp decline in share price as an indication that it was more likely than not that the carrying value of its North America reporting unit exceeded its fair value.
Consequently, management conducted a quantitative analysis to its North America reporting unit, which resulted in no impairment.
The percentage difference between estimated fair value and estimated carrying value for the North America reporting unit is 9%.
The Company used a terminal growth rate of 2.0% and a discount rate of 10.0
%.
If Teva holds all other assumptions constant, a reduction in the terminal value growth rate
of
0.9% or an increase in discount rate
of
0.6% would result in an impairment related to its North America reporting unit.
 
Remaining reporting units
After assessing the totality of relevant events and circumstances, Teva determined that it is not more likely than not that the fair value of its remaining reporting units is less than their carrying amount.
The percentage difference between estimated fair value and estimated carrying value for the Europe, Medis and TAPI reporting units is 22%, 45% and 15%, respectively.
Market Capitalization
Teva analyzed the aggregate fair value of its reporting units as compared to its market capitalization in order to assess the reasonableness of the results of its cash flow projections used for its goodwill impairment analysis.
During the second quarter of 2019, Teva noted its market capitalization was significantly below management’s assessment of the aggregate fair value of its reporting units. Management analyzed the difference and the underlying factors:
 Based on research analysts’ reports reviewed by management and responses from certain analysts to Teva’s inquiries, management noted a gap in the sales projections of AJOVY in the Europe and International Markets reporting units. Management concluded that the majority of analysts do not focus on these markets in preparing their financial models and, as a result, have not attributed value to the launch potential in these reporting units. Management believes that its fair value assessment relies on more accurate information and therefore no adjustment was incorporated to the fair value.
 Management also noted a difference with regard to sales projections of AUSTEDO in North America resulting in higher fair value as analyzed by management compared to Teva’s market capitalization. Management believes that it has more accurate information based on its knowledge of the market and its growth through the remainder of 2019 and therefore no adjustment was incorporated to the fair value.
 Management believes that the remaining difference in fair value is attributable to market concerns regarding certain litigation risks, namely from the opioid and price fixing litigations, and concern surrounding the company’s cash flow and overall liquidity. Management believes that these concerns led to an acute reaction, which resulted in further decline in the share price. Although ultimately the outcome of the relevant cases will not be known in the near term, developments in these cases, likely to occur through the end of 2019, are expected to clarify the outlook with regards to the opioid litigation, which may result in a share price recovery. Consequently, management believes that this disparity results from a market value not reflective of the underlying fair value of its reporting units and therefore it would be inappropriate to record an impairment charge in the second quarter of 2019 related thereto.
 
17
 
 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
Management will continue to monitor business conditions and potential events or circumstances that could have a negative effect on the estimated fair value of the Company.
Based on assumptions in place at this time, if Teva’s share price does not recover in the near term, this may lead to a goodwill impairment charge of up to an aggregated amount of approximately $5,000 million in its North America and International Markets​​​​​​​ reporting units. Future impairment charges, if any, reflecting conditions at that time may be materially different.
 
NOTE 8 – Earnings (Loss) per share:
Basic earnings and loss per share are computed by dividing net results 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 the diluted loss per share for the three months ended June 30, 2019 and 2018, no account was taken of the potential dilution of 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.
Additionally, in the three months ended June 30, 2018, no account was taken of the potential dilution by the mandatory convertible preferred shares, amounting to 63 million shares (including shares that were issued due to unpaid dividends until that date), since they had an anti-dilutive effect on loss per share.
On December 17, 2018, the mandatory convertible preferred shares automatically converted into ADSs and all of the accumulated and unpaid dividends on the mandatory convertible preferred shares were paid in ADSs. As a result of this conversion, Teva issued 70.6 million ADSs in December 2018.
 
In computing the diluted loss per share for the six months ended June 30, 2019, no account was taken of the potential dilution by 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 earnings per share for the six months ended June 30, 2018 take into account the potential dilution that could occur upon the exercise of options and non-vested RSUs granted under employee stock compensation plans, using the treasury stock method.
Additionally, in the six months ended June 30, 2018, no account was taken of the potential dilution by the mandatory convertible preferred shares, amounting to 65 million shares (including shares that were issued due to unpaid dividends until that date), since they had an anti-dilutive effect on loss per share.
 
18
 
 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 9 – 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 17.
 
Three months ended June 30, 2019
 
 
North America
  
Europe
  
International
Markets
  
Other 
activities
  
Total
 
 
(U.S. $ in millions)
 
Sale of goods
  
1,686
   
1,173
   
526
   
204
   
3,588
 
Licensing arrangements
  
35
   
10
   
2
   
1
   
48
 
Distribution
  
351
   
§
   
164
   
—  
   
515
 
Other
  
—  
   
§
   
49
   
137
   
186
 
                     
 $
2,071
  $
1,183
  $
741
  $
342
   
4,337
 
                     
§ Represents an amount less than $1 million.
 
 
Three months ended June 30, 2018
 
 
North America
  
Europe
  
International
Markets
  
Other
activities
  
Total
 
 
(U.S. $ in millions)
 
Sale of goods  1,913   1,317   573   186   3,989 
Licensing arrangements  30   8   1   2   41 
Distribution  320   3   154   —     477 
Other  —     —     61   133   194 
                     
 $2,263  $1,328  $789  $321  $4,701 
 
 
 
Six months ended June 30, 2019
 
 
North America
  
Europe
  
International
Markets
  
Other 
activities
  
Total
 
 
(U.S. $ in millions)
 
Sale of goods
  
3,324
   
2,433
   
994
   
390
   
7,141
 
Licensing arrangements
  
65
   
15
   
2
   
3
   
85
 
Distribution
  
729
   
§
   
315
   
—  
   
1,044
 
Other
  
—  
   §   97   
264
   
362
 
                     
 $
4,118
  $
2,448
  $
1,409
  $
657
  $
8,632
 
                     
§ Represents an amount less​​​​​​​ than $1 million.
 
Six months ended June 30, 2018
 
 
North 
America
  
Europe
  
International
Markets
  
Other activities
  
Total
 
 
(U.S. $ in millions)
 
Sale of goods
  
4,081
   
2,746
   
1,092
   
365
   
8,284
 
Licensing arrangements
  
62
   
18
   
21
   
4
   
105
 
Distribution
  
651
   
6
   
307
   
—  
   
964
 
Other
  
—  
   
—  
   
119
   
294
   
413
 
                     
 $
4,794
  $
2,770
  $
1,539
  $
663
  $
9,766
 
                     
 
19
 
 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
Variable consideration
Variable consideration mainly includes sales reserves and allowances (“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.
SR&A to U.S. customers comprised approximately 83% of the Company’s total SR&A as of June 30, 2019, with the remaining balance primarily in Canada and Germany.
The changes in SR&A for third-party sales for the six months ended June 30, 2019 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 
SR&A
  
Total
 
 
(U.S.$ in millions)
 
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  229   2,651   548   4,822   148   213   8,427   8,656 
Provisions related to sales made in prior periods  —     7   —     (5)  3   (4)  1   1 
Credits and payments  (242)  (2,975)  (739)  (4,936)  (196)  (206)  (9,052)  (9,294)
Translation differences  —     4   —     2   2   4   12   12 
                                 
Balance at June 30, 2019 $162  $2,693  $1,170  $1,413  $595  $183  $6,054  $6,261 
                                 
NOTE 10 – Accumulated other comprehensive loss:
The components of, and changes within, accumulated other comprehensive losses 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
 
 
(U.S. $ in millions)
 
Balance as of December 31, 2017*
 $
(1,316
) $
1
  $
(442
) $
(91
) $
(1,848
)
Other comprehensive income (loss) before reclassifications
  
(495
)  —     
42
   
—  
   
(453
)
Amounts reclassified to the statements of income
  
—  
   (1  
14
   1   
14
 
                     
Net other comprehensive income (loss) before tax
  
(495
)  
(1
)  
56
   
1
   
(439
)
Corresponding income tax  —     —     —     (2)  (2)
Net other comprehensive income (loss) after tax**
  
(495
)  
(1
)  
56
   
  (1
  
(441
)
                     
Balance as of June 30, 2018
 $
(1,811
) $
—  
  $
(386
) $
(92
) $
(2,289
)
                     
 
*Following the adoption of ASU
2016-01,
the Company recorded a $
million opening balance reclassification from accumulated other comprehensive income to retained earnings.
**Amounts do not include a $
23
 million gain from foreign currency translation adjustments attributable to
non-controlling
interests.
 
20
  

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
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 December 31, 2018
 $
(2,055
) $
1
  $
(327
) $
(78
) $
(2,459
)
                     
Other comprehensive income (loss) before reclassifications
  
111
   
—  
   
22
   
—  
   
133
 
Amounts reclassified to the statements of income
  
—  
   
—  
   
15
   
—  
   
15
 
                     
Net other comprehensive income (loss) before tax
  
111
   
—  
   
37
   
—  
   
148
 
Corresponding income tax  —     —     —     (1)  (1)
                     
Net other comprehensive income (loss) after tax*
  
111
   
—  
   
37
   
(1
)  
147
 
                     
Balance as of June 30, 2019
 $
(1,944
) $
1
  $
(290
) $
(79
) $
(2,312
)
                     
 
*Amounts do not include a $
24
 million gain from foreign currency translation adjustments attributable to
non-controlling
interests.
NOTE 11 – Debt obligations:
  
a. Short-term debt:
 
Weighted average interest rate as of
June 30, 2019
  
Maturity
  
June 30,
2019
  
December 31,
2018
 
     
(U.S. $ in millions)
 
Bank and financial institutions
  
4.25
%    $
1
  $
2
 
Convertible debentures
  
0.25
%  
2026
   
514
   
514
 
Current maturities of long-term liabilities
  
2,256
   
1,700
  
          
Total short-term debt
 $
2,771
  $
2,216
  
          
   
21
 

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
Long-term debt:
                 
 
Weighted average interest
rate as of June 30, 2019
  
Maturity
  
June 30,
2019
  
December 31,
2018
 
      
(U.S. $ in millions)
 
Senior notes EUR 1,660 million
  
0.38%
   
2020
  $
1,886
  $
1,897
 
Senior notes EUR 1,500 million
  
1.13%
   
2024
   
1,697
   
1,707
 
Senior notes EUR 1,300 million
  
1.25%
   
2023
   
1,472
   
1,480
 
Senior notes EUR 900 million
  
4.50%
   
2025
   
1,023
   
1,029
 
Senior notes EUR 750 million
  
1.63%
   
2028
   
846
   
850
 
Senior notes EUR 700 million
  
3.25%
   
2022
   
796
   
801
 
Senior notes EUR 700 million
  
1.88%
   
2027
   
794
   
798
 
Senior notes USD 3,500 million
  
3.15%
   
2026
   
3,493
   
3,493
 
Senior notes USD 3,000 million
  
2.20%
   
2021
   
2,998
   
2,997
 
Senior notes USD 3,000 million
  
2.80%
   
2023
   
2,994
   
2,993
 
Senior notes USD 1,556 million (1)
  
1.70%
   
2019
   
1,556
   
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
   
858
   
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
   
619
   
621
 
Senior notes USD 588 million
  
3.65%
   
2021
   
587
   
587
 
Senior notes CHF 350 million
  
0.50%
   
2022
   
359
   
356
 
Senior notes CHF 350 million
  
1.00%
   
2025
   
359
   
356
 
Fair value hedge accounting adjustments
          
9
   
(9
)
                 
Total senior notes
  
28,313
   
28,483
  
Other long-term debt
  
1.15%
   
2026
   
1
   
12
 
Less current maturities
  
(2,256
)  
(1,700
) 
Derivative instruments
  
(9
)  
9
  
Less debt issuance costs
  
(94
)  
(104
) 
                 
Total senior notes and loans
 $
25,955
  $
26,700
  
          
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)During the first six months of 2019, Teva repurchased and canceled approximately $144 million principal amount of its $1,700 million 1.7% senior notes due in July 2019. In July 2019, Teva repaid at maturity $1,556 million of its 1.7% 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, if any.
Long-term debt as of June 30, 2019 is effectively denominated (taking into consideration cross currency swap agreements) in the following currencies: U.S. dollar 62%, euro 35% 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 revolving credit facility (“RCF”).
In April 2019, the Company entered into a $2.3 
billion unsecured syndicated RCF, which replaced the previous
$3 
billion revolving credit facility. 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 is 6.25x through December 31, 2019, gradually declines to 5.75x in the third and fourth quarters of 2020, 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 June 30, 2019, no amounts were outstanding under the RCF. As of the date of this report, $500 million was 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 that these financial statements are issued.
 
22
 
 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
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.
NOTE 12 – Fair value measurement:
Teva’s financial instruments consist mainly of cash and cash equivalents, investment in securities, current and non-current receivables, short-term debt, current and non-current payables, contingent consideration, senior notes and loans, convertible senior debentures and derivatives.
The fair value of the financial instruments included in working capital and non-current receivables and payables approximates their carrying value. The fair value of loans and bank facilities approximates their carrying value, since they bear interest at rates close to the prevailing market rates.
Financial instruments measured at fair value
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.
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.
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.
There were no transfers between Level 1, Level 2 and Level 3 during the first six months of 2019.
 
23
 

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
Financial items carried at fair value as of June 30, 2019 and December 31, 2018 are classified in the tables below in one of the three categories described above:
 
June 30, 2019
 
 
Level 1
  
Level 2
  
Level 3
  
Total
 
 
(U.S. $ in millions)
 
Cash and cash equivalents:
            
Money markets
 $
401
  $
—  
  $
—  
  $
401
 
Cash, deposits and other
  
1,764
   
—  
   
—  
   
1,764
 
Investment in securities:
            
Equity securities
  
48
   
—  
   
—  
   
48
 
Other, mainly debt securities
  
5
   
—  
   
13
   
18
 
Derivatives:
            
Asset derivatives—options and forward contracts
  
—  
   
14
   
—  
   
14
 
Asset derivatives
—interest rate and
 cross-currency swaps
  
   
   
85
   
—  
   
85
 
Liability derivatives—options and forward contracts  
—  
   
(55
)  
—  
   
(55
)
Liability derivatives—interest rate and cross-currency swaps  
—  
   
(37
)  
—  
   
(37
)
Contingent consideration*
  
—  
   
—  
   
(403
)  
(403
)
                 
Total
 $
2,218
  $
7
  $
(390
) $
1,835
 
                 
 
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—interest rate and cross-currency swaps  
—  
   
58
   
—  
   
58
 
Liability derivatives—options and forward contracts  
—  
   
(26
)  
—  
   
(26
)
Liability derivatives—interest rate and cross-currency swaps  
—  
   
(50
)  
—  
   
(50
)
Contingent consideration*
  
—  
   
—  
   
(507
)  
(507
)
                 
Total
 $
1,835
  $
—  
  $
(497
) $
1,338
 
                 
 
*Contingent consideration represents liabilities recorded at fair value in connection with acquisitions.
Teva determined the fair value of the liability 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.
The contingent consideration is evaluated quarterly, or more frequently, if circumstances dictate. Changes in the fair value of contingent consideration are recorded in earnings.
Significant changes in unobservable inputs, mainly the probability of success and cash flows projected, could result in material changes to the contingent consideration liability.
 
 
24
 

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
The following table summarizes the activity for those financial assets and liabilities where fair value measurements are estimated utilizing Level 3 inputs:
 
Six months ended
June 30, 2019
 
 
(U.S. $ in millions)
 
Fair value at the beginning of the period
 $
(497
)
Revaluation of debt securities
  
3
 
Adjustments to provisions for contingent consideration:
   
Actavis Generics transaction
  
101
 
Eagle transaction
  
(54
)
Settlement of contingent consideration:
   
Eagle transaction
  
57
 
     
Fair value at the end of the period
 $
(390
)
     
Financial instruments not measured at fair value
Financial instruments measured on a basis other than fair value mostly consist of senior notes and convertible senior debentures and are presented in the table below in terms of fair value:
 
Fair value*
 
 
June 30,
2019
  
December 31,
2018
 
      
 
(U.S. $ in millions)
 
Senior notes included under senior notes and loans
 $
22,770
  $
23,560
 
Senior notes and convertible senior debentures included under short-term debt
  
2,719
   
2,140
 
         
Total
 $
25,489
  $
25,700
 
         
 
*The fair value was based on quoted market price.
NOTE 13 – Derivative instruments and hedging activities:
a.
Foreign exchange risk management:
In the first six months of 2019, approximately 49% 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.
The Company enters into forward exchange contracts, purchases and writes options in order to hedge the currency exposure on balance sheet items. 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. The currency hedged items are usually denominated in the following main currencies: the new Israeli shekel (NIS), the euro (EUR), the Swiss franc (CHF), the Japanese yen (JPY), the British pound (GBP), the Canadian dollar (CAD), the Polish zloty (PLN), 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 hedges against possible fluctuations in foreign subsidiaries net assets (“net investment hedge”) and entered into cross-currency swaps and forward contracts 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.
 
25
 

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
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 instruments notional amounts
The following table summarizes the notional amounts for hedged items, when transactions are designated as hedge accounting:
         
 
June 30,
2019
  
December 31,
2018
 
 
(U.S. $ in millions)
 
Cross-currency swap—cash flow hedge
 $
588
  $
588
 
Cross-currency swap—net investment hedge
  
1,000
   
1,000
 
Interest rate swap—fair value hedge
  
500
   
500
 
         
 $
2,088
  $
2,088
 
         
 
 
 
 
 
 
 
 
d.
Derivative instrument outstanding:
 
 
 
 
The following table summarizes the classification and fair values of derivative instruments:
                 
 
Fair value
 
 
Designated as hedging
instruments
  
Not designated as hedging
instruments
 
 
June 30,
2019
  
December 31,
2018
  
June 30,
2019
  
December 31,
2018
 
Reported under
 
(U.S. $ in millions)
 
Asset derivatives:
            
Other current assets:
            
Option and forward contracts
 $
—  
  $        
—  
  $  
14
  $        
18
 
Other
non-current
assets:
            
Cross-currency swaps—cash flow hedge
  
76
   
58
   —     
—  
 
Senior notes and loans:
                
Interest rate swaps—fair value hedge  9   —     —     —   
                 
Liability derivatives:
            
Other current liabilities:
            
Option and forward contracts
  
   
—  
   
(55
)  
(26
)
Cross-currency swaps—net investment hedge
  
(37
)  
—  
   —     —   
Other taxes and long-term liabilities:
            
Cross-currency swaps—net investment hedge
  
   
(41
)  
—  
   
—  
 
Senior notes and loans:
            
Interest rate swaps—fair value hedge
  
   
(9
)  
—  
   
—  
 
 
 
 
 
 
 
 
 
 
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
 
 
Three month ended,
  
Three month ended,
 
 
June 30,
2019
  
June 30,
2018**
  
June 30,
2019
  
June 30,
2018**
 
Reported under
 
(U.S. $ in millions)
 
Line items in which effects of hedges are recorded
 $206  $236  $(76) $614 
Cross-currency swaps—cash flow hedge (1)  (1)  *   4   (28)
Cross-currency swaps—net investment hedge (2)  (7)  (9)  14   (59)
Interest rate swaps—fair value hedge (3)  1   *   —     —   
 
 
 
 
 
 
 
 
 
*Represents an amount less than $0.5 million.
 
 
 
 
 
 
 
 
 
 
 
 
 
**Comparative figures are based on prior hedge accounting standard.
 
 
 
 
 
26
 
 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
 
 
 
 
 
                 
 
Financial expenses, net
  
Other comprehensive income
 
 
Six month ended,
  
Six month ended,
 
 
June 30,
2019
  
June 30,
2018**
  
June 30,
2019
  
June 30,
2018**
 
Reported under
 
(U.S. $ in millions)
 
Line items in which effects of hedges are recorded
 $
425
  $
507
  $
(170
) $
418
 
Cross-currency swaps—cash flow hedge (1)
  
(1
)  (1  
(15
)  
(11
)
Cross-currency swaps—net investment hedge (2)
  
(15
)  
(16
)  
(6
)  
(29
)
Interest rate swaps—fair value hedge (3)
  
1
   
*
   
—  
   
—   
 
 
 
 
 
 
*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
 
 
Three month ended,
  
Three month ended,
 
 
June 30,
2019
  
June 30,
2018
  
June 30,
2019
  
June 30,
2018
 
Reported under
 
(U.S. $ in millions)
 
Line items in which effects of hedges are recorded
 $
206
  $
236
  $
(4,337
) $
(4,701
)
Option and forward contracts (4)
  
34
   
(24
)  
—  
   
—   
 
Option and forward contracts Economic hedge     —     4
 
 
 
(1
)
    
 
Financial expenses, net
  
Net revenues
 
 
Six month ended,
  
Six month ended,
 
 
June 30, 
2019
  
June 30, 2018
  
June 30,
2019
  
June 30,
2018
 
Reported under
 
(U.S. $ in millions)
 
Line items in which effects of hedges are recorded
 $
425
  $
507 
  $
(8,632
) $
(9,766
)
Option and forward contracts (4)
  
(7
)  
(5
)  
—  
   
—   
 
Option and forward contracts Economic hedge  —     —     4
 
 
 
(1
)
 
 
 
 
 
 
  
 
 
 
 
(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.
(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 the
float-for-float
interest rates paid and received. No amounts were reclassified from accumulated other comprehensive income into income related to the sale of a subsidiary.
(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.
  
(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 expenses—net.
e.
Matured forward starting interest rate swaps and treasury lock agreements:
  Commencing in the third quarter of 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).
 
27
 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
Certain of the forward starting interest rate swaps and treasury lock agreements matured during the first half of 2016. In July 2016, in connection with the debt issuances, Teva terminated the remaining forward starting interest rate swaps and treasury lock agreements. The termination of these transactions resulted in a loss position of $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) will be amortized under financial
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.
With respect to the forward starting interest rate swaps and treasury lock agreements,
losses of $7 million were recognized under financial expenses, net for the three months ended June 30, 2019 and 2018, and losses of $15 million and $14 million were recognized under financial expenses, net for the six months ended June 30, 2019 and 2018.
In the third quarter of 2016, Teva terminated interest rate swap agreements designated as 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.
With respect to the interest rate swap agreements, gains of $
2 million were recognized under financial expenses, net for the three months ended June 30, 2019 and 2018, and gains of $3 million were recognized under financial expenses, net for the six months ended June 30, 2019 and 2018. 
  
NOTE 14 – Other assets impairments, restructuring and other items:
 
Three months ended
June 30,
  
Six months ended
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(U.S. $ in millions)
 
Impairments of long-lived tangible assets (1) $48  $27  $68  $253 
Contingent consideration  24   47   (47)  55 
Restructuring  47   107   79   354 
Other  (18)  13   3   33 
                 
Total $101  $194  $103  $695 
 
(1)Including impairments related to exit and disposal activities
Impairments
Impairments of property, plant and equipment for the three months ended on June 30, 2019 and 2018 were 
$
48
 
million and $27 million, respectively.
Impairments of property, plant and equipment for the six months ended on June 30, 2019 and 2018 were $68 million and $253 million, respectively.
As a result of Teva’s plant rationalization acceleration in connection with the two-year restructuring plan announced in December 2017, to the extent the Company changes its plans on any given asset and/or the assumptions underlying such plans, there may be additional impairments in the future.
Contingent consideration
In the three months ended June 30, 2019, Teva recorded
an expense of 
$24 million for contingent consideration, compared to an expense of $47 
million in the three months ended June 30, 2018. The expenses in the second quarter of 2019 mainly related to an increase in the expected future royalty payments to Eagle Pharmaceuticals, Inc. due to the orphan drug status granted to BENDEKA and the expected royalty payments in connection with lenalidomide (generic equivalent of Revlimid
®
) which was part of the Actavis acquisition.
In the six months ended June 30, 2019, Teva recorded $47 million of contingent consideration income, compared to $55 million expense in the six months ended June 30, 2018. The income in the first six months of 2019 mainly related to the decrease in the expected royalty payments in connection with lenalidomide (generic equivalent of Revlimid
®
) which was part of the Actavis acquisition.
 
Restructuring
In the three months ended June 30, 2019, Teva recorded $47 million of restructuring expenses, compared to $107 million in the three months ended June 30, 2018.
28
 
 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
In the six months ended June 30, 2019, Teva recorded $79 million of restructuring expenses, compared to $354 million in the six months ended June 30, 2018.
Since the announcement of its restructuring plan, Teva reduced its global headcount by approximately 11,145 full-time-equivalent employees.
 
During the three months ended June 
30
,
2019
and
2018
, Teva recorded impairments of property, plant and equipment related to restructuring costs of $21 million and $8 million, respectively.
During the six months ended June 
30
,
2019
and
2018
, Teva recorded
impairments
of property, plant and equipment related to restructuring costs of $21 million and $155 million, respectively.
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:
 
Three months ended June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions)
 
Restructuring
      
Employee termination
 $
36
  $
90
 
Other
  
11
   
17
 
         
Total
 $
47
  $
107
 
         
    
 
Six months ended June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions)
 
Restructuring
      
Employee termination
 $
56
  $
318
 
Other
  
23
   
36
 
         
Total
 $
79
  $
354
 
         
 
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, 2019
 $
(204
) $
(29
) $
(233
)
Provision
  
(56
)  
(23
)  
(79
)
Utilization and other*
  
67
   
45
   
112
 
             
Balance as of June 30, 2019
 $
(193
) $
(7
) $
(200
)
             
 
*Includes adjustments for foreign currency translation.
Significant regulatory events
In July 2018, the FDA completed an inspection of Teva’s manufacturing plant in Davie, Florida in the United States, and issued a Form
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 contains four enumerated concerns related to production, quality control, and investigations at this site. Teva is working diligently to remediate the FDA’s concerns in a manner consistent with current good manufacturing practice (CGMP) requirements, and to address those concerns as quickly and as thoroughly as possible. If Teva is unable to remediate the warning letter findings to the FDA’s satisfaction, it may face additional consequences, including 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. Teva expects to generate approximately $142 million in revenues from this site for the remainder of 2019, assuming remediation or enforcement does not cause any unscheduled slowdown or stoppage at the facility.
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 impurity called NDMA found in valsartan API supplied to Teva by Zhejiang Huahai Pharmaceutical. Since July 2018, Teva has been actively engaged with regulatory agencies around the world in reviewing its valsartan and other sartan products for NDMA and other related impurities and, where necessary, has initiated additional voluntary recalls. The impact of this recall
as of June 30, 2019
on Teva’s financial statements was $55 million, primarily related to inventory reserves
 and returns
. Teva expects to continue to experience loss of revenues and profits in connection with this matter. In addition, multiple lawsuits have been filed in connection with this matter, for which litigation costs are currently being incurred. Teva may also incur additional customer penalties, impairments and litigation costs going forward. 
 
29
 

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 15 – Legal settlements and loss contingencies:
In the second quarter of 2019, Teva recorded an expense of $646 million in legal
 settlements and loss contingencies
, compared to $20 million in the second quarter of 2018. The expense in the second quarter of 2019 was mainly related to the $85 million settlement paid in the opioid litigation brought by the Oklahoma Attorney General and an estimated provision made
for
certain other opioid cases.
In 
the first six months of 2019
, Teva recorded
 
an expense of $703 million
 in legal settlements and loss contingencies
, compared to income of $1,258 million in the first six months of 2018. The expense in the first six months of 2019
 
was mainly
 
related to the
$85 million settlement paid in the opioid litigation brought by the Oklahoma Attorney General and an estimated provision made for certain other opioid cases
.
As of June 30, 2019 and December 31, 2018, Teva’s provision for legal settlements and loss contingencies recorded under accrued expenses was $1,149 million and $562 million, respectively. 
NOTE 16 – Commitments and 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.
For income tax contingencies, see note 15 to Teva’s Annual Report on Form
10-K
for the year ended December 31, 2018.
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.
 
30
 

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
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 including
pre-
or post-judgment interest. 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. On May 25, 2018, both parties filed an appeal. A hearing is scheduled for September 4, 2019. If the appeal of the district court’s decision is 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. The provision that was included in the financial statements for this matter was reversed as the exposure is no longer considered probable.
In 2014, Teva Canada succeeded in its challenge of the bortezomib (the generic equivalent of Velcade
®
) product and mannitol ester patents under the Patented Medicines (Notice Of Compliance) Regulations (“PM(NOC)”). At the time of Teva’s launch in 2015, annual sales of Velcade were approximately 94 million Canadian dollars. Additionally, Teva commenced an action under Section 8 of PM(NOC) to recover damages for being kept off of the market during the 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 limits the damages payable by either party depending on the outcome of the infringement/impeachment action. As a result, the most Janssen and Millennium could recover 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, and oral argument in that
 appeal is scheduled for September 
9
,
2019
. If the decision is overturned on appeal, 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.
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. Teva appealed this decision and, in May 2017, the Federal Circuit Court of Appeals reversed the district court’s ruling and found the asserted patents invalid. In January 2018, full appellate review of that decision was denied. Helsinn filed an appeal with the
U.S.
Supreme Court, which was granted. On January 22, 2019, the Supreme Court affirmed the appellate court’s decision finding the asserted patent invalid. Helsinn has no further opportunity to appeal this patent decision. Separately, in October 2014, Helsinn filed an additional claim on later-acquired patents. On January 30, 2018, the
district court
denied Helsinn’s request for a preliminary injunction based on these later acquired patents. Teva launched its generic palonosetron IV solution after obtaining final regulatory approval on March 23, 2018. If Teva ultimately loses the case on the later-acquired patents discussed above, Teva may be ordered to cease sales of its generic product and/or pay damages to Helsinn. Aloxi
®
annual U.S. sales as of November 2017 were $459
 million.
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 may seek U.S. Supreme Court review of this decision. If Teva ultimately loses this case, Teva may be ordered by the court to cease sales of its generic product and/or pay damages to Janssen. Annual U.S. sales of Zytiga at the time of generic entry were about $
1.3
 billion.
  
31
  

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
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.
 
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 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—potentially measured in multiples of the annual brand 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.
Supreme Court held, in Federal Trade Commission 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.
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 alleges 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 PROVIGIL
®
) were unlawful because they had the effect of excluding generic competition. The case also alleges 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 approved by the court on November 7, 2016, and on July 23, 2019, reached a settlement with the State of California, which is pending court approval.
 
32
 

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
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 set-offs for
prior settlements) by Cephalon and Teva into a settlement fund. The settlement fund does not cover any judgments or settlements outside the United States. Under the Modafi
n
i
l 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. In
February 2019
, in connection with the settlement of other unrelated
FTC 
a
ntitrust lawsuits, as described below, Teva and the FTC agreed to amend certain provisions of the Modafinil Consent Decree and to restart its ten-year term.
Additionally, following an investigation initiated by the European Commission in April 2011
reg
arding a modafinil patent settlement in Europe, the European Commission issued a Statement of Objections in July 2017 against both Cephalon and Teva alleging that the 2005 settlement agreement between the parties had the object and effect of hindering the entry of generic modafinil. No final decision regarding infringement has yet been taken by the European Commission. The sales of modafinil in the European Economic Area during the last full year of the alleged infringement amounted to EUR 46.5
 million.
In January 2009, the FTC and the State of California filed a complaint for injunctive relief in California federal court alleging that a September 2006 patent lawsuit settlement between Watson Pharmaceuticals, Inc. (“Watson”), now a Teva subsidiary, and Solvay Pharmaceuticals, Inc. (“Solvay”) relating to AndroGel
®
1% (testosterone gel) violated the antitrust laws. Additional lawsuits alleging similar claims were later 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 consolidated in a multidistrict litigation in Georgia federal court. On July 16, 2018, the direct purchaser plaintiffs’ motion for class certification was denied. As a result, the three direct purchasers that had sought class certification can proceed as individual plaintiffs, but any other member of the proposed direct purchaser class will need to file a separate, individual lawsuit if it wishes to participate in the litigation. On February 22, 2019, the FTC stipulated to the dismissal of its claims against Watson, in exchange for Teva’s agreement to amend the Modafinil Consent Decree, as described above. Teva settled with most of the retailer plaintiffs in April 2019. Trial on the remaining private plaintiffs’ claims has been scheduled to begin in February 2020. Annual sales of AndroGel
®
1% were approximately 
$
350
 million at the time of the settlement and approximately $
140
 million at the time Actavis launched its generic version of AndroGel
®
1% in November 2015. A provision for this case was included in the financial statements.
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 XR
®
) 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 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. Annual sales of Effexor XR
®
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 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 court granted the direct-purchaser plaintiffs’ motion for class certification. On March 18, 2019, the appeals court granted the defendants’ petition for immediate appellate review and the district court has stayed the litigation pending the outcome of the appeal. Annual sales of Lamictal
®
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 April 2005 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 purchaser opt-out plaintiffs filed complaints with allegations nearly identical to those of the direct purchaser class and, in December 2018, both the direct-purchaser class plaintiffs and indirect-purchaser class plaintiffs filed motions for class certification, which remain pending. In October 2016, the District Attorney for Orange County, California, filed a similar complaint, 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 Appeal subsequently reversed the decision and review of the Appellate Court decision is now pending before the California Supreme Court. Annual sales of Niaspan
®
were approximately $416 million at the time of the settlement and approximately $1.1 billion at the time Teva launched its generic version of Niaspan
®
in September 2013.
 
33
 

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
In November 2013, a putative class action was 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 Lidoderm
®
(lidocaine transdermal patches) violated the antitrust laws. Additional lawsuits containing similar allegations followed on behalf of other classes of putative direct purchaser and end-payer plaintiffs, as well as retailers acting in their individual capacities, and those cases were consolidated as a multidistrict litigation in federal court in California. On February 21, 2017, the court granted both the indirect purchaser plaintiffs’ and the direct purchaser plaintiffs’ motions for class certification. Teva settled the multidistrict litigation with the various plaintiff groups in the first quarter of 2018 and a provision was included in the financial statements. The FTC also filed suit to challenge the Lidoderm
®
settlement, initially bringing antitrust claims against Watson, Endo and Allergan 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. On July 23, 2019 Teva and the State of California reached a settlement agreement.
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 the
opt-out
direct purchaser plaintiffs, and with two of the
opt-out
end payer plaintiffs. A provision with respect to the settlements was included in the financial statements. 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.
Opt-outs
from the end payer class have also appealed certain aspects of the court’s approval order to the U.S. Court of Appeals for the Second Circuit. Those appeals remain pending. Annual sales of Aggrenox
®
were approximately $340 million at the time of the settlement and approximately $455 million at the time Teva launched its authorized generic version of Aggrenox
®
in July 2015.
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 for, and direct purchasers of, Actos
®
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 the end payer 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. Defendants moved to dismiss the direct purchasers’ complaint, and that motion remains pending. At the time of the settlement, annual sales of Actos
®
and Actoplus
Met were approximately $3.7 billion and approximately $500 million, respectively. At the time Teva launched its authorized generic version of Actos
®
and Actoplus Met in August 2012, annual sales of Actos
®
and Actoplus Met were approximately $2.8
 billion and approximately $430 million, respectively.
In September 2014, the FTC sued AbbVie Inc. and certain of its affiliates (“AbbVie”) as well as Teva in the U.S. District Court for the Eastern District of Pennsylvania alleging that they violated the antitrust laws when they entered into a 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 $448
 million 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.
 
34
 

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
In May 2015, a purported class of end payers for Namenda IR
®
(memantine hydrochloride) filed a lawsuit against Forest Laboratories, LLC (“Forest”), the innovator, and several generic manufacturers, including Teva. The lawsuit alleges, among other things, that settlement agreements between Forest and the generic manufacturers to resolve patent litigation over Namenda IR
®
violated the antitrust laws. Annual sales of Namenda IR
®
at the time of the settlement were approximately $1.1 billion and approximately $550 million at the time other manufacturers first launched generic versions of Namenda IR
®
in July 2015.
On December 16, 2016, the U.K. Competition and Markets Authority (“CMA”) issued a statement of objections (a provisional finding of infringement 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. No final decision regarding infringement of competition law has yet been issued. On March 3, 2017, the CMA issued a second statement of objections in respect of certain additional allegations (relating to the same products and covering part of the same time period as in the first statement of objections) against Actavis UK, Allergan and certain Auden Mckenzie entities. On February 28, 2019, the CMA issued a third statement of objections with allegations of additional infringements relating to the supply of 10mg and 20mg hydrocortisone tablets in the U.K against certain Auden Mckenzie entities and others. On January 9, 2017
, Teva completed the sale of Actavis UK to Accord Healthcare Limited, pursuant to 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 
18
,
2017
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, pursuant to the agreement the parties entered into on January 
31
,
2018
. See note
3
. 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. A liability for this matter has been recorded in purchase accounting related to the acquisition of Actavis Generics.
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. Annual sales of Intuniv
®
were approximately 
$
335
 million at the time of the settlement and approximately $
327
 million at the time Actavis launched its generic version of Intuniv
®
in 2014.
In January 2019, generic manufacturer Cipla Limited filed a lawsuit against Amgen 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 Sensipar
®
), violated the antitrust laws. In March 2019, Cipla Limited amended its complaint to name Teva as an additional defendant, and putative classes of direct-purchaser and end-payer plaintiffs have also filed antitrust lawsuits in U.S. federal district court against Amgen and Teva related to the January 2, 2019 settlement. Both Cipla Limited and the putative class plaintiffs seek damages and injunctive relief. Annual sales of Sensipar
®
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.
Government Investigations and Litigation Relating to Pricing and Marketing
Teva is involved in government investigations and litigation arising from the marketing and promotion of its pharmaceutical products in the United States. Many of these investigations originate through what are known as
qui tam
complaints, 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 its 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, the majority of which was paid in December 2018. Teva accepted the settlement while denying any liability with respect to the claims made by the state. Pending the final settlement payment, the Illinois litigation is stayed. In August 2013, judgment was entered 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 Actavis subsidiaries 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.
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.
 
35
 

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
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. Trial is scheduled to commence on August 19, 2019 and a provision was included in the 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. Both motions are pending.
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 paid in-kind remuneration 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. These motions are pending.
Since May 2014, approximately 2,000 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 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. Complaints asserting claims under similar provisions of different state law, generally contend that the defendants allegedly engaged in improper marketing and distribution of opioids, including ACTIQ
®
and FENTORA
®
. The complaints also assert claims related to Teva’s generic opioid products. In addition, approximately 350 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. In many of these cases, plaintiffs are seeking joint and several damages among all defendants. 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 reputation, business, results of operations and cash flows. On October 5, 2018, the magistrate judge in the MDL Opioid Proceeding issued a Report & Recommendation rejecting the first motion to dismiss, except for the common law public nuisance claim, which was dismissed. On December 19, 2018, the District Court overruled defendants’ objections to the Report & Recommendation. On April 1, 2019, the magistrate judge in the MDL Opioid Proceeding issued two Report & Recommendations in which he recommended that the court grant in part and deny in part pending motions to dismiss of the manufacturer, distributor, pharmacy, and generic manufacturing defendants. Specifically, the magistrate judge recommended that The Muscogee (Creek) Nation’s Lanham Act claim be dismissed as to all defendants, and that its claims against the generic manufacturers are partially preempted; he recommended that the motions to dismiss be denied as to the remaining claims. The magistrate judge also recommended that the Blackfeet Tribe of the Blackfeet Indian Reservation’s federal common law public nuisance and Montana Unfair Trade Practices and Consumer Protection Act claims be dismissed, and that its claims against the generic manufacturers are partially preempted; he recommended that the motions to dismiss be denied as to the remaining claims. On June 13, 2019, the District Court adopted the two Report & Recommendations in all respects except those regarding the plaintiffs’ negligence per se claims, for which the District Court overruled the Report & Recommendation and held that Plaintiffs cannot state a claim for negligence per se pursuant to the statutes that the plaintiffs identified. Motions to dismiss in additional similar cases remain pending. Discovery in the MDL Opioid Proceeding for the first track of cases is closed and motions for summary judgment were filed in June 2019. Trial is scheduled for October 2019. Other cases remain pending in various states. In some jurisdictions, such as Illinois, New York, Pennsylvania, South Carolina, Texas and Utah, certain state court cases have been transferred to a single court within their respective state court systems for coordinated pretrial proceedings. Trials are expected to proceed in several states in 2020.
 
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
million. The settlement did not include any admission of violation of law for any of the claims or allegations made. Management believes that the Oklahoma settlement amount is not likely indicative of the settlement of the other opioid-related litigation due to a variety of distinguishing factors. There is a wide range of potential outcomes given the state governments, subdivisions and other private party suits have made claims for large recoveries, the breadth of the litigation, novel legal theories and numerous defenses raised versus Teva’s willingness to potentially settle for a small fraction of such claimed amounts. 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. Given the relatively early status 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 April 27, 2018, Teva received subpoena requests from the DOJ seeking documents relating to the manufacture, marketing and sale of opioids. Teva is complying with this subpoena. In addition, a number
of
 
36
 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
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 the outcome at this time.
In addition, several jurisdictions in Canada have initiated litigation regarding opioids alleging similar claims as those in the United States. The cases in Canada are likely to be consolidated and are in their early stages.
On June 21
,
2016
, Teva USA received a subpoena from the DOJ Antitrust Division seeking documents and other information relating to the marketing and pricing of certain Teva USA generic products and communications with competitors about such products. Actavis received a similar subpoena in
June 2015
. Teva and Actavis are cooperating with the DOJ subpoena requests. On July 
12
,
2016
, Teva USA received a subpoena from the Connecticut Attorney General seeking documents and other information relating to potential state antitrust law violations. In
2015, Actavis received a similar subpoena from the Connecticut Attorney General.
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 and Teva, plus other companies and individuals, alleging price-fixing and market allocation as concerns additional generic products. The 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, many of which were not previously at issue in the Pennsylvania MDL. 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”).
Beginning on March 
2
,
2016
, 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 purchaser
opt-out
plaintiffs. These complaints, whi
ch 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 generally 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
, the court denied certain of the defendants’ motions to dismiss as to certain federal claims, and on February 
15
,
2019
, the court granted in part and denied in part defendants’ motions to dismiss as to certain state law claims. Teva and Actavis deny having engaged in any conduct that would give rise to liability with respect to the above-mentioned complaints.
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 this subpoena.
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. Teva is cooperating in responding to the subpoena.
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 (approximately three years unless extended), the DOJ determines that Teva has committed a felony under federal law, provided deliberately false or misleading information or otherwise breached the DPA, Teva could be subject to prosecution and additional fines or penalties, including the deferred charges. Following the above resolution with the SEC and DOJ, Teva has had requests for documents and information from various Russian government entities. In addition, on January 14, 2018, Teva entered into an arrangement for the Contingent Cessation of Proceedings pursuant to the Israeli Securities Law with the Government of Israel that ended the investigation of the Israeli government into the conduct that was subject to the FCPA investigation, and provided a payment of approximately $22 million.
 
37
 
 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
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 C
alifornia against Teva and certain of its current and former officers and directors. After those two 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
. The second complaint asserts that Teva and certain of its current and former officers and directors violated federal securities 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. The second complaint seeks unspecified damages, legal fees, interest,
and costs. Teva and the current and former officer and director defendants filed motions to dismiss the second complaint on September 
14
,
2018. Those motions are pending before the court.
On July 17
,
2017
, a lawsuit was 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 lawsuit seeks unspecified damages, legal fees, interest and costs.
The complaint alleges that Teva failed to maintain adequate financial controls based on the facts underpinning Teva’s FCPA DPA 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 litigation to the U.S. District Court for the District of Connecticut where the Ontario Teachers Securities Litigation is pending. On February 
12
,
2018, the district court stayed the case pending resolution of the motions to dismiss filed in the Ontario Teachers Securities Litigation described above.
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 that Teva and certain of its current and former officers violated the federal securities laws 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 August 
30
,
2017
, the court entered an order deferring all deadlines pending the resolution of the motions to dismiss filed in the Ontario Teachers Securities Litigation described above.
 
On August 
21
and
30
,
2017
, Elliot Grodko and Barry Baker filed putative securities class actions 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 that 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 integration 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.
Between August 2018 and June 2019, fourteen complaints were filed against Teva and current and former officer and director defendants seeking unspecified compensatory and rescissory damages, legal fees, costs and expenses. The allegations in these complaints are substantially similar to the allegations in the Ontario Teachers Securities Litigation, but have been brought on behalf of plaintiffs that have “opted out” of the putative class in the Ontario Teachers Securities Litigation. The plaintiffs in these “opt-out” cases 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 or will file 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. The cases filed in, or transferred to, Connecticut have been or will request to be stayed pending resolution of the motions to dismiss filed in the Ontario Teachers Securities Litigation described above. 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. The complaint alleges similar claims to the Ontario Teachers Securities Litigation described above.
Motions to approve derivative actions against certain past and present directors and
officers
have been filed in Israel alleging negligence and recklessness with respect to the acquisition of the Rimsa business and the acquisition of Actavis Generics. Motions for document disclosure prior to initiating derivative actions were filed with respect to executive compensation, several patent settlement agreements, opioids and the U.S. price-fixing investigations. Motions 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 developments in the generic sector, including price erosion with respect to Teva’s products. Other 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.
   
 
38
   

  
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
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 of clean-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 not 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.
 
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.
NOTE 17 – Segments:
Teva operates its business and reports its financial results in three 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company began reporting its financial results under this structure in the first quarter of 2018. This change was reflected through retroactive revision of prior period segment information.
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.
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.
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.
 
39
 

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
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:
             
 
Three months ended June 30, 2019
 
 
North America
  
Europe
  
International Markets
 
 
(U.S. $ in millions)
 
Revenues
 $
2,071
  $
1,183
  $
741
 
Gross profit
  
1,067
   
674
   
312
 
R&D expenses
  
175
   
70
   
24
 
S&M expenses
  
269
   
216
   
119
 
G&A expenses
  
117
   
70
   
34
 
Other (income) expense  
2
   
1
   
(1
)
             
Segment profit
 $
504
  $
316
  $
136
 
             
    
 
Three months ended June 30, 2018
 
 
North America
  
Europe
  
International Markets
 
 
(U.S. $ in millions)
 
Revenues
 $
2,263
  $
1,328
  $
789
 
Gross profit
  
1,179
   
727
   
328
 
R&D expenses
  
182
   
73
   
25
 
S&M expenses
  
272
   
233
   
130
 
G&A expenses
  
103
   
78
   
37
 
Other (income) 
expense
  
(100
)  
(3
)  
(3
)
             
Segment profit
 $722  $
346
  $139 
             
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
             
 
Six months ended June 30,
 2
019
 
 
North America
  
Europe
  
International Markets
 
 
(U.S. $ in millions)
 
Revenues $4,118  $2,448  $1,409 
Gross profit  2,107   1,404   582 
R&D expenses  340   136   46 
S&M expenses  537   431   234 
G&A expenses  230   119   70 
Other (income) expense  (2)  (1)  (1)
             
Segment profit $1,001  $719  $233 
             
    
 
Six months ended June 30,
 2018
 
 
North America
  
Europe
  
International Markets
 
 
(U.S. $ in millions)
 
Revenues $4,794  $2,770  $1,539 
Gross profit  2,582   1,519   641 
R&D expenses  370   146   49 
S&M expenses  548   483   264 
G&A expenses  229   169   78 
Other (income) expense  (202)  (2)  (11)
             
Segment profit $1,637  $723  $261 
             
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
40
 

  
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
Three months ended
  
Six months ended
 
 
June 30,
  
June 30,
 
 
2019
  
2018
  
2019
  
2018
 
 
(U.S. $ in millions)
  
(U.S. $ in millions)
 
North America profit $504  $722  $1,001  $1,637 
Europe profit  316   346   719   723 
International Markets profit  136   139   233   261 
                 
Total segment profit  956   1,207   1,954   2,621 
Profit of other activities  55   31   76   52 
                 
  1,011   1,238   2,029   2,673 
Amounts not allocated to segments:            
Amortization  285   302   568   612 
Other assets impairments, restructuring and other items  101   194   103   695 
Goodwill impairment     120      300 
Intangible asset impairments  561   521   1,030   727 
(Gain) loss on divestitures, net of divestitures related costs  (9)  10   (9)  (83)
Other R&D expenses  §   —     §   22 
Costs related to regulatory actions taken in facilities  12   4   16   5 
Legal settlements and loss contingencies  646   20   703   (1,258)
Other unallocated amounts  59   81   129   142 
                 
Consolidated operating income (loss)  (644)  (14)  (510)  1,511 
                 
Financial expenses, net  206   236   425   507 
                 
Consolidated income (loss) before income taxes 
$
(850
)
 
$
(250
)
 
$
(934
)
 
$
1,004 
                 
 
§Represents an amount less than $1 million​​​​​​​.
b. Segment revenues by major products and activities:
The following tables present revenues by major products and activities for the three months
and the six months ended June 30, 20
19 and 2018:
  
Three months ended
June 30,
 
  
2019
  
2018
 
  
(U.S. $ in millions)
 
North America
         
Generic products $946  $ 947 
COPAXONE  274    464 
TREANDA/BENDEKA  115    160 
ProAir*  65    115 
QVAR  60    30 
AJOVY  23    —   
AUSTEDO  96    44 
Anda  351    320 
Other  141    183 
Total $2,071  $ 2,263 
 
*Does not include sales of ProAir authorized generic, which are included under generics.
   
 
Six months ended
 
 
June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions)
 
North America
        
Generic prod
uct
s
 
$
1,913
  
$
2,035
 
COPAXONE
  
482
   
940
 
TREANDA/BENDEKA
  
229
   
341
 
ProAir*
  
123
   
245
 
QVAR
  
124
   
137
 
AJOVY
  
43
   
—  
 
AUSTEDO
  
171
   
74
 
Anda
  
729
   
651
 
Other
  
305
   
372
 
Total
 
$
4,118
  
$
4,794
 
 
*Does not include sales of ProAir authorized generic, which are included under generics.
 
41
 
 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial​​​​​​​ Statements
(Unaudited)
 
  
Three months ended 
June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions)
 
Europe
        
Generic products
 
$
844
  
$
907
 
COPAXONE
  
107
   
140
 
Respiratory products
  
89
   
106
 
Other
  
143
   
175
 
Total
 
$
1,183
  
$
1,328
 
 
Six months ended
June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions)
  
Europe​​​​​​​
        
Generic products
 $
1,763
  $
1,904
 
COPAXONE
  
221
   
293
 
Respiratory products
  
181
   
219
 
Other  283   354 
Total  $2,448  $2,770 
 
Three months ended
June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions)
 
International markets
        
Generic products
 $
489
  $
537
 
COPAXONE
  
13
   
22
 
Distribution
  
164
   
154
 
Other
  
75
   
76
 
Total
 $
741
  $
789
 
 
Six months ended
June 30,
  
 
2019
  
2018
 
 
(U.S. $ in millions)
  
International markets
        
Generic products
 $
930
  $
1,025
 
COPAXONE
  
27
   
38
 
Distribution
  
315
   
307
 
Other
  
137
   
168
 
Total
 $
1,409
  $
1,539
 
 
 
A significant portion of Teva’s revenues, and a higher proportion of the profits, come from the manufacture and sale of patent-protected pharmaceuticals. Many of Teva’s specialty medicines are covered by several patents that expire at different times. Nevertheless, once patent protection has expired or has been lost prior to the expiration date as a result of a legal challenge, Teva no longer has patent exclusivity on these products, and subject to regulatory approval, generic pharmaceutical manufacturers are able to produce and market similar (or purportedly similar) products and sell them for a lower price. The launch of generic competition, even in the form of non-equivalent products, can result in a substantial decrease in revenues for a particular specialty medicine in a very short time. Any expiration or loss of such intellectual property rights could therefore significantly adversely affect Teva’s results of operations and financial condition.
NOTE 18 – Other income:
                 
 
Three months ended June 30,
  Six months ended June 30, 
 
2019
  
2018
  2019   2018 
 
(U.S. $ in millions)
  (U.S. $ in millions) 
Gain (loss) on divestitures, net of divestitures related costs (1)
 $
9
   
(10
) $9   83 
Section 8 and similar payments (2)
  
— 
   
95
   —    194 
Gain (loss) on sale of assets
  
(5
)  
1
   (4  9 
Other, net
  
5
   
10
   11   13 
                 
Total other income
 $
9
  $
96
  $ 15   $299 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)Mainly related to the divestment of the women’s health business and the dissolution of PGT in 2018.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2)Section 8 of the Patented Medicines (Notice of Compliance) Regulation relates to recoveries of lost revenue related to patent infringement proceedings in Canada.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
42
 

 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE 19 – Income taxes:
In the second quarter of
2019
, Teva recognized a tax benefit of $179 million, or 21%, on
pre-tax
loss of $850 million. In the second quarter of
2018
, Teva recognized a tax benefit of $76 million, or 30%, on
pre-tax 
loss of $250 million. Teva’s tax rate for the second quarter of
2019
was mainly affected by impairments, amortization and interest disallowance as a result of the U.S. Tax Cuts and Jobs Act.
In the first six months of
2019
, Teva recognized a tax benefit of $170 million, or 18%, on pre-tax loss of $934 million. In the first six months of
2018
, Teva recognized a tax benefit of $30 million on pre-tax income of $1,004 million. Teva’s tax rate for the first six months of
2019
was mainly affected by impairments, amortization and interest disallowance as a result of the U.S. Tax Cuts and Jobs Act.
The statutory Israeli corporate tax rate is 23% in 2019. Teva’s 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.
NOTE 20 – Leases:
Leases 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 six months ended June 30, 2018 and the 12 months ended December 31, 2018, was $90 million and $175 million, respectively. The Company also has capital leases for properties.
Leases 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 ASC 842-10-25-2. 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
right-of-use
(“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. Finance leases of land include long-term leasehold rights in various locations, with useful lives between 30 and 99 years.
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 not recognizing ROU assets or lease liabilities for existing short-term leases of those 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 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 80 years. Some of these agreements include options to extend the leases for up to 15 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.
  
43
  

  
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
 
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.
Teva does not believe the new Lease Standard will have a notable impact on its liquidity. The new standard will have no impact on Teva’s debt-covenant compliance under its RCF.
Teva rents out or subleases certain real estate to third parties, which has an immaterial impact on Teva’s consolidated financial statements.
The components of  operating lease cost for the three months ended and six months ended June 30, 2019 were as follows:
         
 
Three months ended
 June 30,
  
Six months 
ended 
June 30,
 
  2019 
 
(U.S. $ in millions)
 
Operating lease cost:
      
Fixed payments and variable payments that depend
on an index or rate
 $
36
  $
78
 
Variable lease payments not included in the lease liability
  
2
   
4
 
Short-term lease cost
  
1
   
3
 
         
Total operating lease cost
 $
39
  
$
85
 
         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental cash flow information related to operating leases was as follows:
     
 
Six months ended 
 
 
June 30, 
2019
 
 
(U.S. $ in millions)
 
Cash paid for amounts included in the measurement of lease liabilities:
   
Operating cash flows from operating leases
 $
79
 
Right-of-use
assets obtained in exchange for lease obligations
(non-
cash):
   
Operating leases
 $
46
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental balance sheet information related to operating leases was as follows:
     
 
June 30,
 
2019
 
 
(U.S. $ in millions)
 
Operating leases:
   
Operating lease ROU assets
 $
500
 
Other current liabilities
  
120
 
Operating lease liabilities
  
426
 
     
Total operating lease liabilities
 $
546
 
     
 
 
 
 
 
 
 
 
 
  
     
 
June 30, 
2019
 
Weighted average remaining lease term
   
Operating leases
  
7.7 years
 
Weighted average discount rate
   
Operating leases
  
5.9
%
 
 
 
 
 
 
 
 
 
44
 
 
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
Maturities of operating lease liabilities were as follows:
     
 
June 30, 
2019
 
 
(U.S. $ in millions)
 
2019 (excluding the six months ended June 30, 2019)
 $
87
 
2020
  
124
 
2021
  
100
 
2022
  
78
 
2023
  
58
 
2024 and thereafter
  
266
 
     
Total operating lease payments
 $
713
 
     
Less: imputed interest
  
167
 
     
Present value of lease liabilities
 $
546
 
     
    
 
December 31, 
2018
 
 
(U.S. $ in millions)
 
2019
 $
193
 
2020
  
154
 
2021
  
118
 
2022
  
91
 
2023
  
66
 
2024 and thereafter  
283
 
     
Total lease payments
 $
905
 
     
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2019, Teva has additional operating leases for office space, which have yet to commence, with undiscounted future payments of $94 million. These operating leases will commence during fiscal year 2020 with lease terms of 9 to 12 years.
As of June 30, 2019, Teva’s total finance lease assets and finance lease liabilities are $78 million and $27 million, respectively. The difference between those amounts is mainly due to prepaid payments.
 
 
 
 
45
   
 
 
ITEM 2.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 medicines 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 APIs to third parties and certain contract manufacturing services.
In December 2017, we announced a comprehensive restructuring plan intended to significantly reduce our cost base, unify and simplify our organization and improve business performance, profitability, cash flow generation and productivity. This plan is intended to reduce our total cost base by $3 billion by the end of 2019.
Highlights
Significant highlights in the second quarter of 2019 included:
 Revenues in the second quarter of 2019 were $4,337 million, a decrease of 8%, or 5% in local currency terms, compared to the second quarter of 2018, mainly due to generic competition to COPAXONE
®
, as well as declines in revenues from TREANDA
®
/BENDEKA
®
, certain other specialty products in the United States, our Europe segment and Japan, partially offset by higher revenues from AUSTEDO
®
, AJOVY
®
and QVAR
®
in the United States.
 
 
 
 Our North America segment generated revenues of $2,071 million and profit of $504 million in the second quarter of 2019. Revenues decreased by 8% compared to the second quarter of 2018, mainly due to a decline in revenues from COPAXONE, TREANDA/BENDEKA and certain other specialty products, partially offset by higher revenues from our Anda business, QVAR, AUSTEDO and AJOVY. Profit decreased by 30%, mainly due to the changes in revenues described above and the non-recurrence of other income, as well as cost reductions and efficiency measures as part of the restructuring plan.
 
 
 
 Our Europe segment generated revenues of $1,183 million and profit of $316 million in the second quarter of 2019. Revenues decreased by 11%, or 5% in local currency terms, compared to the second quarter of 2018, mainly due to a decline in COPAXONE revenues due to the entry of competing glatiramer acetate products and the termination of the PGT joint venture, partially offset by new generic product launches. Profit decreased by 9%, mainly due to the changes in revenues and the impact of currency fluctuations, partially offset by cost reductions and efficiency measures as part of the restructuring plan.
 
 
 
 Our International Markets segment generated revenues of $741 million and profit of $136 million in the second quarter of 2019. Revenues decreased by 6%, or 2% in local currency terms, and profit decreased by 2% compared to the second quarter of 2018. The decrease in revenues and profit was mainly due to lower sales in Japan resulting from generic competition to off-patent products, partially offset by higher sales in Russia and cost reductions and efficiency measures as part of the restructuring plan.
 
 
 
 Intangible asset impairments were $561 million in the second quarter of 2019, compared to $521 million in the second quarter of 2018. The impairment expenses in the second quarter of 2019 were related to identifiable product rights of $365 million and IPR&D assets of $196 million. The impairments were mainly related to products acquired from Actavis Generics.
 
 
 
 Operating loss was $644 million in the second quarter of 2019, compared to $14 million in the second quarter of 2018. The increase in operating loss was mainly due to lower profit from our operating segments and an increase in legal settlements and loss contingencies expenses.
 
 
 
 Exchange rate movements between the second quarter of 2019 and the second quarter of 2018 negatively impacted revenues by $125 million and operating income by $41 million.
 
 
 
 
 
 
 
 
 
 
 
 
  
46
 

 
 
 As of June 30, 2019, our debt was $28,726 million, compared to $28,624 million as of March 31, 2019. The increase was mainly due to exchange rates fluctuations.
 
 
 
 Cash flow used in operating activities during the second quarter of 2019 was $227 million, compared to cash flow generated from operating activities of $162 million in the second quarter of 2018. The decrease in cash flow in the second quarter of 2019 was mainly due to lower revenues, timing of certain customer payments and credits and payments of U.S. customer rebates paid this quarter, primarily related to managed care and Medicaid.
 
 
 
 Cash flow generated from operating activities in the second quarter of 2019, net of cash received for capital investments and beneficial interest collected in exchange for securitized trade receivables, was $168 million, compared to $559 million in the second quarter of 2018. The decrease in cash flow was mainly due to the reasons mentioned above.
 
 
 
Results of Operations
Comparison of Three Months Ended June 30, 2019 to Three Months Ended June 30, 2018
The following table sets forth, for the periods indicated, certain financial data derived from our financial statements:
             
 
Percentage of Net Revenues
Three Months Ended
June 30,
  
Percentage
Change
 
 
2019
  
2018
  
2019
 -
 2018
 
 
%
  
%
  
%
 
Net revenues
  
100
   
100
   
(8
Gross profit
  
44
   
43
   
(7
Research and development expenses
  
6
   
6
   
(5
Selling and marketing expenses
  
15
   
15
   
(2
General and administrative expenses
  
7
   
7
   
(6
Intangible assets impairment
  
13
   
11
   
8
 
Goodwill impairment
  
—  
   
3
   
(100
Other assets impairments, restructuring and other items
  
2
   
4
   
(48
Legal settlements and loss contingencies
  
15
   
§
   
—  
 
Other income
  
§
   
(2
  
—  
 
Operating income
  
(15
  
§
   
—  
 
Financial expenses, net
  
5
   
5
   
(13
Income (loss) before income taxes
  
(20
  
(5
  
240
 
Income taxes
  
(4
  
(2
  
135
 
Share in losses (income) of associated companies, net
  
§
   
§
   
—  
 
Net income attributable to non-controlling interests
  
§
   
§
   
—  
 
Net income (loss) attributable to Teva
  
(16
  
(4
  
292
 
Dividends on preferred shares
  
—  
   
1
   
(100
Net income (loss) attributable to ordinary shareholders
  
(16
  
(5
  
186
 
 
 
 
 
§Represents an amount less than 0.5%.
 
 
 
Segment Information
North America Segment
The following table presents revenues, expenses and profit for our North America segment for the three months ended June 30, 2019 and 2018:
                 
 
Three months ended June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions / % of Segment Revenues)
 
Revenues
 $
2,071
   
100.0
 $
2,263
   
100.0
%
Gross profit
  
1,067
   
51.5
  
1,179
   
52.1
%
R&D expenses
  
175
   
8.5
  
182
   
8.0
%
S&M expenses
  
269
   
13.0
  
272
   
12.0
%
G&A expenses
  
117
   
5.6
  
103
   
4.6
%
Other (income) expense
  
2
   
§
   
(100
  
(4.4
%) 
                 
Segment profit*
 $
504
   
24.3
 $
722
   
31.9
%
                 
 
 
 
 
*Segment profit does not include amortization and certain other items.
 
 
 
§  Represents an amount less than 0.5%.
 
 
 
 
 
 
 
47
 
 
 
 
 
 
 

 
 
 
North America Revenues
Our North America segment includes the United States and Canada. Revenues from our North America segment in the second quarter of 2019 were $2,071 million, a decrease of $192 million, or 8%, compared to the second quarter of 2018, mainly due to a decline in revenues of COPAXONE, TREANDA/BENDEKA and certain other specialty products, partially offset by higher revenues from our Anda business, QVAR, AUSTEDO and AJOVY.
Revenues by Major Products and Activities
The following table presents revenues for our North America segment by major products and activities for the three months ended June 30, 2019 and 2018:
             
 
Three months ended
June 30,
  
Percentage
Change
 
 
2019
  
2018
  
2019-2018
 
 
(U.S. $ in millions)
   
Generic products
 $
946
  $
947
   
§
 
COPAXONE
  
274
   
464
   
(41
%) 
TREANDA/BENDEKA
  
115
   
160
   
(28
%) 
ProAir*
  
65
   
115
   
(44
%) 
QVAR
  
60
   
30
   
103
AJOVY
  
23
   
—  
   
NA
 
AUSTEDO
  
96
   
44
   
117
Anda
  
351
   
320
   
10
Other
  
141
   
183
   
(23
%) 
             
Total
 $
2,071
  $
2,263
   
(8
%) 
             
 
 
 
 
*Does not include sales of ProAir authorized generic, which are included under generics.
 
 
 
§  Represents an amount less than 0.5%.
 
 
 
Generic products
revenues in our North America segment in the second quarter of 2019 were $946 million flat compared to the second quarter of 2018, mainly due to new generic product launches, offset by market dynamics, including product mix and price erosion in our U.S. generics business.
Among the most significant generic products we sold in North America in the second quarter of 2019 were epinephrine injection (the generic equivalent of EpiPen
®
), solifenacin succinate tablets (the generic equivalent of Vesicare
®
), albuterol sulfate inhalation aerosol (ProAir
®
HFA authorized generic of Teva’s specialty product), amphetamine salt tablets (the generic equivalent of Adderall IR
®
), and lidocaine transdermal patch (the generic equivalent of Lidoderm Patch
®
).
In the second quarter of 2019, we led the U.S. generics market in total prescriptions and new prescriptions, with approximately 404 million total prescriptions (based on trailing twelve months), representing 11% of total U.S. generic prescriptions according to IQVIA data.
COPAXONE
revenues in our North America segment in the second quarter of 2019 decreased by 41% to $274 million, compared to the second quarter of 2018, mainly due to generic competition in the United States.
COPAXONE revenues in the United States were $260 million in the second quarter of 2019.
Revenues of COPAXONE in our North America segment were 69% of global COPAXONE revenues in the second quarter of 2019, compared to 74% in the second quarter of 2018.
COPAXONE global sales accounted for approximately 9% of our global revenues in the second quarter of 2019 and a significantly higher percentage of our profits and cash flow from operations during this period.
The FDA approved generic versions of COPAXONE 40 mg/mL in October 2017 and February 2018 and a second generic version of COPAXONE 20 mg/mL in October 2017 in the United States. Hybrid versions of COPAXONE 20 mg/mL and 40 mg/mL were also approved in the European Union.
COPAXONE 40 mg/mL is protected by one European patent expiring in 2030. This patent is being challenged in various jurisdictions. In October 2017, the U.K. High Court found this patent invalid and our application for permission to appeal this decision was rejected. The patent was upheld by the Opposition Division of the European Patent Office in April 2019.
The market for MS treatments continues to develop, particularly with the approvals of generic versions of COPAXONE discussed above, as well as additional generic versions expected to be approved in the future. 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.
  
48
 

 
 
 
BENDEKA
and
TREANDA
combined revenues in our North America segment in the second quarter of 2019 decreased by 28% to $115 million, compared to the second quarter of 2018, mainly due to lower volumes and lower pricing, resulting partly from the June 2018 launch of a ready-to-dilute bendamustine hydrochloride by Eagle Pharmaceuticals, Inc. (“Eagle”). In July 2018, Eagle, prevailed in its suit in the U.S. district court against the FDA to obtain seven years of orphan drug exclusivity in the United States for BENDEKA. The FDA has appealed the district court’s decision, but barring a reversal by the appellate court, 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 increasing the royalty rate. In addition, Eagle agreed to assume a portion of BENDEKA-related patent litigation expenses.
ProAir
revenues in our North America segment in the second quarter of 2019 decreased by 44% to $65 million, compared to the second quarter of 2018, mainly due to lower volumes as well as lower net pricing. In January 2019, we launched our own ProAir authorized generic in the United States following the launch of a generic version of Ventolin
®
HFA, another albuterol inhaler. Revenues from our ProAir HFA authorized generic are included in “generic products” above. ProAir is the second-largest short-acting beta-agonist in the market, with an exit market share of 25.3% (45.8% including our ProAir HFA authorized generic) in terms of total number of prescriptions for albuterol inhalers during the second quarter of 2019, compared to 44.4% in the second quarter of 2018. In June 2014, we settled a patent challenge to ProAir HFA with Perrigo Pharmaceuticals (“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 Pharmaceuticals, Inc. (“Lupin”), et al. permitting Lupin to launch its generic product on September 23, 2019, or earlier under certain circumstances. To date, no generic competition has been launched.
QVAR
revenues in our North America segment in the second quarter of 2019 increased by 103% to $60 million, compared to the second quarter of 2018, which was a transition period due to the launch of QVAR
®
RediHaler™. QVAR maintained its second-place position in the inhaled corticosteroids category in the United States, with an exit market share of 20.2% in terms of total number of prescriptions during the second quarter of 2019, compared to 24.2% in the second quarter of 2018.
AJOVY
revenues in our North America segment in the second quarter of 2019 were $23 million. AJOVY was approved by the FDA and launched in the United States in September 2018 for the preventive treatment of migraine in adults. In April 2019, the European Medicines Agency (“EMA”) granted a Marketing Authorization for AJOVY in the European Union in a centralized process.
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.
AJOVY is protected by patents expiring in 2026 in Europe and in 2027 in the United States, with possibility for extension in various markets. An additional patent relating to the use of AJOVY in the treatment of migraine is issued in the United States and will expire in 2035. This patent is also pending in other countries. AJOVY is protected by regulatory exclusivity for 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 has also 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, and as a result the litigation in the district court has been stayed pending resolution of the IPRs. In addition, we have entered into separate agreements with Alder Biopharmaceuticals 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.
AUSTEDO
revenues in our North America segment in the second quarter of 2019 increased by 117%, to $96 million, compared to $44 million in the second quarter of 2018.
AUSTEDO was approved by the FDA and launched in April 2017 in the United States for the treatment of chorea associated with Huntington disease. In August 2017, the FDA approved AUSTEDO for the treatment of tardive dyskinesia.
Anda
revenues in our North America segment increased by 10% to $351 million in the second quarter of 2019, compared to the second quarter of 2018, mainly due to higher volumes. 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.
 
49
 

 
 
Product Launches and Pipeline
In the second quarter of 2019, we launched the generic version of the following branded products in North America:
             
Product Name
 
Brand Name
  
Launch
Date
  
Total Annual U.S.
Branded Sales at Time
of Launch
(U.S. $ in millions
(IQVIA))
*
 
Fluoxetine tablets, USP 20 mg
  
—  
   
April
  $
56
 
Testosterone gel, metered 1.62% CIII
  
AndroGel
®  
April
  $
755
 
  
1.62
[CIII]
%
 
      
Solifenacin succinate tablets, 5 mg & 10 mg
  
Vesicare
®  
April
  $
946
 
Ambrisentan tablets, 5 mg & 10 mg
  
Letairis
®  
May
  $
254
 
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 **
  
Aggrenox
®  
June
  $
168
 
Desmopressin acetate injection, USP, 4 mcg/mL**
  
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
  
***
   
June
  $
 —  
 
 
*The figures presented are for the twelve months ended in the calendar quarter immediately prior to our launch or re-launch.
**Product was re-launched.
***  Approved via 515(d)(1)(B)(ii) regulatory pathway for medical devices; not equivalent to a brand product.
Our generic products pipeline in the United States includes, as of June 30, 2019, 256 product applications awaiting FDA approval, including 86 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 March 31, 2019 exceeding $111 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 101 of these products, or 123 products including final approvals where launch is pending a settlement agreement or court decision. Collectively, these first to file opportunities represent over $74 billion in U.S. brand sales for the twelve months ended March 31, 2019, according to IQVIA.
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.
In the second quarter of 2019, 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 a 180-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))*
 
Icatibant injection, 30 mg/3 mL
  
Firazyr
® $
318
 
Sorafenib tablets, 200 mg
  
Nexavar
® $
55
 
 
*For the twelve months ended in the calendar quarter immediately prior to the receipt of tentative approval.
 
50
 
 
Below is a description of key products in our specialty pipeline as of June 30, 2019:
           
Product
 
Potential
Indication(s)
 
Route of
Administration
 
Development Phase
(date entered phase 3)
  
Comments
CNS, Neurology and
Neuropsychiatry
      
AUSTEDO (deutetrabenazine)
 
Tourette syndrome
 
Oral
  
3 (December 2017)
  
Teva and Nuvelution entered into a partnership agreement on September 19, 2017 to develop AUSTEDO for the treatment of tics associated with Tourette syndrome in pediatric patients in the United States. Nuvelution will fund and manage phase 3 clinical development, leading all operational aspects of the program. Teva will lead the regulatory process and be responsible for commercialization.
 
Dyskinesia in cerebral
palsy
 
Oral
  
3 (January 2019)
  
TV-46000 (risperidone LAI)
 
Schizophrenia
 
LAI
  
3 (April 2018)
  
           
Migraine and Pain
      
fremanezumab (anti CGRP) 
Post traumatic
headache
 
Subcutaneous
  
2
  
Fasinumab
 
Osteoarthritis pain
 
Subcutaneous
  
3 (March 2016)
  
Developed in collaboration with Regeneron Pharmaceuticals, Inc. (“Regeneron”).
In August 2018, Regeneron and Teva announced positive topline phase 3 results in patients with chronic pain from osteoarthritis of the knee or hip with the remaining low dose 1mg every month (1mg4W) and 1mg every two months (1mg8W).
Fasinumab is protected by patents expiring in 2028 and 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.
 
Chronic lower
back pain
 
Subcutaneous
  
3 (December 2017)
  
Respiratory
      
CINQAIR/CINQAERO
 
Severe asthma with
eosinophilia
 
Subcutaneous
  
3 (August 2015)
  
In January 2018, we announced that the phase 3 study did not meet its primary endpoint. We are reviewing the full data to determine next steps.
ProAir e-RespiClick™
 
Bronchospasm and exercise induced bronchitis
 
Oral inhalation
  
Approved by FDA
(December 2018)
  
AirDuo
®
Digihaler
TM
 
Treatment of asthma in patients aged 12 years and older
 
Oral inhalation
  
Approved by FDA
(July 2019)
  
Oncology
      
Truxima (formerly CT-P10)
 
(biosimilar to
Rituxan
®
US)
   
Approved by FDA
(November 2018)
Approved in
Canada (April
2019)
  
Herzuma (formerly CT-P06)
 
(biosimilar to
Herceptin
®
US)
   
Approved by
FDA (December
2018)
  
 
 
 
 
51
 

 
 
North America Gross Profit
Gross profit from our North America segment in the second quarter of 2019 was $1,067 million, a decrease of 9%, compared to $1,179 million in the second quarter of 2018. The decrease was mainly due to lower revenues from COPAXONE, as well as a decline in sales of certain other specialty products, partially offset by increases in sales of AUSTEDO, QVAR and AJOVY.
Gross profit margin for our North America segment in the second quarter of 2019 decreased to 51.5%, compared to 52.1% in the second quarter of 2018. The decrease was mainly due to lower revenues from COPAXONE and certain other specialty products, partially offset by improved gross profit margin of generic products.
North America R&D Expenses
R&D expenses relating to our North America segment in the second quarter of 2019 were $175 million, a decrease of 4%, compared to $182 million in the second quarter of 2018.
For a description of our R&D expenses in the second quarter of 2019, 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 the second quarter of 2019 were $269 million, a decrease of 1%, compared to $272 million in the second quarter of 2018. The decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan, partially offset by increased expenses related to AJOVY.
North America G&A Expenses
G&A expenses relating to our North America segment in the second quarter of 2019 were $117 million, an increase of 14%, compared to $103 million in the second quarter of 2018. The increase was mainly due to legal expenses, partially offset by cost reductions and efficiency measures as part of the restructuring plan.
North America Other Income (Expense)
Other expenses from our North America segment in the second quarter of 2019 was $2 million, compared to other income of $100 million in the second quarter of 2018. The income in the second quarter of 2018 was mainly due to legal recovery of lost profits, where U.S. patent infringement litigation had previously prevented a product’s sales.
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 the second quarter of 2019 was $504 million, a decrease of 30%, compared to $722 million in the second quarter of 2018. The decrease was mainly due to lower revenues from COPAXONE, as well as a decline in sales of certain other specialty products and the non-recurrence of other income, partially offset by increases in sales of AUSTEDO and QVAR, as well as cost reductions and efficiency measures as part of the restructuring plan.
 
52
 

 
 
ERP Implementation
Teva is in the process of implementing a company-wide enterprise resource planning (“ERP”) system in the U.S. to upgrade certain operational and financial processes. ERP implementation is a complex and time-consuming project. As with any new information system we implement, this application, along with the internal controls over financial reporting included in this process, has required testing for effectiveness and management has made appropriate efforts in this regard. In connection with this ERP implementation, we are updating our internal controls over financial reporting, as necessary, to accommodate modifications to our business processes and accounting procedures. We do not expect that the ERP implementation will have an adverse effect on our business. However, if the design or implementation of our new ERP system is deficient, it could adversely affect our operations, such as manufacturing or distribution, and/or the effectiveness of our internal controls.
Europe Segment
The following table presents revenues, expenses and profit for our Europe segment for the three months ended June 30, 2019 and 2018:
                 
 
Three months ended June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions / % of Segment Revenues)
 
                 
Revenues
 $
1,183
   
100.0
 $
1,328
   
100.0
Gross profit
  
674
   
56.9
  
727
   
54.7
R&D expenses
  
70
   
5.9
  
73
   
5.5
S&M expenses
  
216
   
18.3
  
233
   
17.5
G&A expenses
  
70
   
5.9
  
78
   
5.9
Other (income) expense
  
1
   
§
   
(3
  
§
 
                 
Segment profit*
 $
316
   
26.7
 $
346
   
26.1
                 
 
*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 the second quarter of 2019 were $1,183 million, a decrease of 11% or $145 million, compared to the second quarter of 2018. In local currency terms, revenues decreased by 5%, mainly due to a decline in COPAXONE revenues due to the entry of competing glatiramer acetate products and the termination of the PGT joint venture, partially offset by new generic product launches.
Revenues by Major Products and Activities
The following table presents revenues for our Europe segment by major products and activities for the three months ended June 30, 2019 and 2018:
             
 
Three months ended
June 30,
  
Percentage
Change
 
 
2019
  
2018
  
2018-2019
 
 
(U.S. $ in millions)
   
Generic products
 $
844
  $
907
   
(7
%) 
COPAXONE
  
107
   
140
   
(24
%) 
Respiratory products
  
89
   
106
   
(16
%) 
Other
  
143
   
175
   
(18 
%) 
             
Total
 $
1,183
  $
1,328
   
(11
%) 
             
Generic products
revenues in our Europe segment in the second quarter of 2019, including OTC products, decreased by 7% to $844 million, compared to the second quarter of 2018. In local currency terms, revenues decreased by 1% compared to the second quarter of 2018, mainly due to the loss of revenues from the termination of the PGT joint venture and volume decline due to specific market conditions in various European Union countries, partially offset by new generic product launches.
COPAXONE
revenues in our Europe segment in the second quarter of 2019 decreased by 24% to $107 million, compared to the second quarter of 2018. In local currency terms, revenues decreased by 19%, mainly due to price reductions resulting from the entry of competing glatiramer acetate products.
Revenues of COPAXONE in our Europe segment were 27% of global COPAXONE revenues in the second quarter of 2019, compared to 22% in the second quarter of 2018.
For further information about COPAXONE, see “—North America Revenues—Revenues by Major Product” above.
Respiratory products
revenues in our Europe segment in the second quarter of 2019 decreased by 16% to $89 million, compared to the second quarter of 2018. In local currency terms, revenues decreased by 11%, mainly due to lower sales in the United Kingdom.
Product Launches and Pipeline
As of June 30, 2019, our generic products pipeline in Europe included 384 generic approvals relating to 49 compounds in 101 formulations, and approximately 1,326 marketing authorization applications pending approval in 37 European countries, relating to 144 compounds in 296 formulations in 30 countries.
 
53
 

 
 
For information regarding our specialty pipeline and launches in the second quarter of 2019, see “—North America Segment —Product Launches and Pipeline.”
Europe Gross Profit
Gross profit from our Europe segment in the second quarter of 2019 was $674 million, a decrease of 7% compared to $727 million in the second quarter of 2018. The decrease was mainly due to a decline in COPAXONE revenues and the impact of currency fluctuations, partially offset by new generic product launches.
Gross profit margin for our Europe segment in the second quarter of 2019 increased to 56.9%, compared to 54.7% in the second quarter of 2018. The increase was mainly due to lower cost of goods sold related to the termination of the PGT joint venture and network optimization.
Europe R&D Expenses
R&D expenses relating to our Europe segment in the second quarter of 2019 were $70 million, a decrease of 4% compared to $73 million in the second quarter of 2018.
For a description of our R&D expenses in the second quarter of 2019, see “—Teva Consolidated Results—Research and Development (R&D) Expenses” below.
Europe S&M Expenses
S&M expenses relating to our Europe segment in the second quarter of 2019 were $216 million, a decrease of 7% compared to $233 million in the second quarter of 2018. The decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.
Europe G&A Expenses
G&A expenses relating to our Europe segment in the second quarter of 2019 were $70 million, a decrease of 10% compared to $78 million in the second quarter of 2018. The decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.
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 the second quarter of 2019 was $316 million, a decrease of 9% compared to $346 million in the second quarter of 2018. The decrease was mainly due to lower revenues and the impact of currency fluctuations, partially offset by impact of cost reductions and efficiency measures as part of the restructuring plan.
International Markets Segment
The following table presents revenues, expenses and profit for our International Markets segment for the three months ended June 30, 2019 and 2018:
                 
 
Three months ended June 30,
 
 
2019
  
2018
 
 
(U.S. $ in millions / % of 
Segment Revenues) 
 
                 
Revenues
 $
741
   
100.0
 $
789
   
100.0
Gross profit
  
312
   
42.1
  
328
   
41.5
R&D expenses
  
24
   
3.2
  
25
   
3.2
S&M expenses
  
119
   
16.1
  
130
   
16.4
G&A expenses
  
34
   
4.7
  
37
   
4.7
Other (income) expense
  
(1
  
§
   
(3
  
§
 
                 
Segment profit*
 $
136
   
18.3
 $
139
   
17.6
                 
 
 
 
 
*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 other than those in our North America and Europe segments. Our key international markets are Israel, Japan and Russia. The countries in this category range from highly regulated, pure generic markets, such as Israel, to hybrid markets, such as Japan, to branded generics oriented markets, such as Russia and certain Commonwealth of Independent States (CIS), Latin American and Asia Pacific markets.
 
54
 

 
 
Revenues from our International Markets segment in the second quarter of 2019 were $741 million, a decrease of $48 million, or 6%, compared to the second quarter of 2018. In local currency terms, revenues decreased 2% compared to the second quarter of 2018, mainly due to lower sales in Japan, partially offset by higher sales in Russia.
Revenues by Major Products and Activities
The following table presents revenues for our International Markets segment by major products and activities for the three months ended June 30, 2019 and 2018:
             
 
Three months ended
June 30,
  
Percentage
Change
 
 
2019
  
2018
  
2018-2019
 
 
(U.S. $ in millions)
   
Generic products
 $
489
  $
537
   
(9
%) 
COPAXONE
  
13
   
22
   
(40
%) 
Distribution
  
164
   
154
   
6
%
Other
  
75
   
76
   
(1
%) 
             
Total
 $
741
  $
789
   
(6
%) 
             
 
 
 
Generic products
revenues in our International Markets segment in the second quarter of 2019, which include OTC products, decreased by 9% to $489 million, compared to the second quarter of 2018. In local currency terms, revenues decreased by 4%, mainly due to lower sales in Japan resulting from generic competition to off-patented products, partially offset by higher sales in Russia.
COPAXONE
revenues in our International Markets segment in the second quarter of 2019 decreased by 40% to $13 million, compared to the second quarter of 2018. In local currency terms, revenues decreased by 28%.
For further information about COPAXONE, see “—North America Revenues—Revenues by Major Product” above.
Distribution
revenues in our International Markets segment in the second quarter of 2019 increased by 6% to $164 million, compared to the second quarter of 2018. In local currency terms, revenues increased by 7%.
International Markets Gross Profit
Gross profit from our International Markets segment in the second quarter of 2019 was $312 million, a decrease of 5% compared to $328 million in the second quarter of 2018.
Gross profit margin for our International Markets segment in the second quarter of 2019 increased to 42.1%, compared to 41.5% in the second quarter of 2018. The increase was mainly due to lower cost of goods and portfolio optimization, mainly in Russia and Israel.
International Markets R&D Expenses
R&D expenses relating to our International Markets segment in the second quarter of 2019 were $24 million, a decrease of 6% compared to $25 million in the second quarter of 2018.
For a description of our R&D expenses in the second quarter of 2019, see “—Teva Consolidated Results—Research and Development (R&D) Expenses” below.
International Markets S&M Expenses
S&M expenses relating to our International Markets segment in the second quarter of 2019 were $119 million, a decrease of 8% compared to $130 million in the second quarter of 2018. The decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.
International Markets G&A Expenses
G&A expenses relating to our International Markets segment in the second quarter of 2019 were $34 million, a decrease of 7% compared to $37 million in the second quarter of 2018. The decrease was mainly due to cost reductions and efficiency measures as part of the restructuring plan.
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 the second quarter of 2019 was $136 million, a decrease of 2% compared to $139 million in the second quarter of 2018. The decrease was mainly due to lower sales in Japan resulting from generic competition to off-patent products, partially offset by higher sales in Russia and cost reductions and efficiency measures as part of the restructuring plan.
 
55
 
  
 
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 the second quarter of 2019 were $342 million, an increase of 6% compared to the second quarter of 2018. In local currency terms, revenues increased by 10%, mainly due to higher revenues from API sales to third parties.
API sales to third parties in the second quarter of 2019 were $204 million, an increase of 10%, in both U.S. dollar and local currency terms, compared to the second quarter of 2018.
Teva Consolidated Results
Revenues
Revenues in the second quarter of 2019 were $4,337 million, a decrease of 8%, or 5% in local currency terms, compared to the second quarter of 2018, mainly due to generic competition to COPAXONE, as well as declines in revenues from TREANDA/BENDEKA, certain other specialty products in the United States, our Europe segment and Japan, partially offset by higher revenues from AUSTEDO, AJOVY and QVAR in the United States. See “—North America Revenues,” “—Europe Revenues,” “—International Markets Revenues” and “—Other Activities” above.
Exchange rate movements during the second quarter of 2019 negatively impacted revenues by $125 million compared to the second quarter of 2018.
Gross Profit
Gross profit in the second quarter of 2019 was $1,893 million, a decrease of 7% compared to the second quarter of 2018. The decrease was mainly a result of the factors discussed above under “—North America Gross Profit,” “—Europe Gross Profit” and “—International Markets Gross Profit.”
Gross profit as a percentage of revenues was 43.7% in the second quarter of 2019, compared to 43.2% in the second quarter of 2018.
The increase in gross profit as a percentage of revenues was mainly due to lower amortization expenses and higher profitability in Europe, mainly due to the termination of the PGT joint venture, partially offset by lower profitability in North America, resulting mainly from a decline in COPAXONE revenues due to generic competition.
Research and Development (R&D) Expenses
Net R&D expenses in the second quarter of 2019 were $276 million, a decrease of 5% compared to the second quarter of 2018.
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 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.
In the second quarter of 2019, our R&D expenses were primarily related to generic products in our North America segment, as well as specialty product candidates in the pain, migraine, headache and respiratory therapeutic areas, with additional activities in selected other areas.
Our lower R&D expenses in the second quarter of 2019 compared to the second quarter of 2018 primarily resulted from pipeline optimization and project terminations and related headcount reductions.
R&D expenses as a percentage of revenues were 6.4% in the second quarter of 2019, compared to 6.2% in the second quarter of 2018.
 
56
 

 
 
Selling and Marketing (S&M) Expenses
S&M expenses in the second quarter of 2019 were $666 million, a decrease of 2% compared to the second quarter of 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 15.4% in the second quarter of 2019, compared to 14.5% in the second quarter of 2018.
General and Administrative (G&A) Expenses
G&A expenses in the second quarter of 2019 were $296 million, a decrease of 6% compared to the second quarter of 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.”
G&A expenses as a percentage of revenues were 6.8% in the second quarter of 2019, compared to 6.7% in the second quarter of 2018.
Intangible Asset Impairments
We recorded expenses of $561 million for identifiable intangible asset impairments in the second quarter of 2019, compared to expenses of $521 million in the second quarter of 2018. See note 6 to our consolidated financial statements.
Goodwill Impairment
In the second quarter of 2019, there were no goodwill impairments recorded, compared to a goodwill impairment of $120 million in the second quarter of 2018. The goodwill impairment in the second quarter of 2018 was mainly attributable to goodwill associated with our Rimsa reporting unit (now included in our International Markets reporting unit). See note 7 to our consolidated financial statements.
Other Assets Impairments, Restructuring and Other Items
We recorded expenses of $101 million for other assets impairments, restructuring and other items in the second quarter of 2019, compared to expenses of $194 million in the second quarter of 2018. See note 14 to our consolidated financial statements.
Significant regulatory events
In July 2018, the FDA completed an inspection of our manufacturing plant in Davie, Florida in the United States, and issued a Form FDA-483 to 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 contains four enumerated concerns related to production, q