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TEVA Teva- Pharmaceutical Industries

Filed: 5 Nov 20, 4:09pm
 
 
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 September 30, 2020
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
September
 30, 2020, the registrant had 1,095,971,556 ordinary shares
outstanding.
 
 
 


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. This report on Form
10-Q
contains many of the trademarks and trade names used by Teva in the United States and internationally to distinguish its products and services. Any third-party trademarks mentioned in this report are the property of their respective owners.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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; 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; competition for our specialty products, especially COPAXONE
®
, our leading medicine, which faces competition from existing and potential additional generic versions, competing glatiramer acetate products and orally-administered alternatives; the uncertainty of commercial success of AJOVY
®
or AUSTEDO
®
; competition from companies with greater resources and capabilities; delays in launches of new products and our ability to achieve expected results from investments in our product pipeline; ability to develop and commercialize biopharmaceutical products; efforts of pharmaceutical companies to limit the use of generics, including through legislation and regulations and the effectiveness of our patents and other measures to protect our intellectual property rights;
 
  
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: uncertainty regarding the magnitude, duration, and geographic reach of the
COVID-19
pandemic and its impact on our business, financial condition, operations, cash flows, and liquidity and on the economy in general; our ability to successfully execute and maintain the activities and efforts related to the measures we have taken or may take in response to the
COVID-19
pandemic and associated costs therewith; effectiveness of our restructuring plan announced in December 2017; our ability to attract, hire and retain highly skilled personnel; our ability to develop and commercialize additional pharmaceutical products; compliance with anti-corruption sanctions and trade control laws; manufacturing or quality control problems; interruptions in our supply chain, including due to potential effects of the
COVID-19
pandemic on our operations and business in geographic locations impacted by the pandemic and on the business operations of our suppliers; disruptions of information technology systems; breaches of our data security; variations in intellectual property laws; challenges associated with conducting business globally, including adverse effects of the
COVID-19
pandemic, political or economic instability, major hostilities or terrorism; significant sales to a limited number of customers; our ability to successfully bid for suitable acquisition targets or licensing opportunities, or to consummate and integrate acquisitions; our prospects and opportunities for growth if we sell assets; and potential difficulties related to the operation of our new global enterprise resource planning (ERP) system;
 
  
compliance, regulatory and litigation matters, including: our ability to successfully defend against the U.S. Department of Justice (“DOJ”) criminal charges of Sherman Act violations; increased legal and regulatory action in connection with public concern over the abuse of opioid medications in the U.S. and our ability to reach a final resolution of the remaining opioid-related litigation; costs and delays resulting from the extensive governmental regulation to which we are subject or delays in
 
3

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
 
 governmental processing time due to modified government operations due to the
COVID-19
pandemic, including effects on product and patent approvals due to the
COVID-19
pandemic; the effects of reforms in healthcare regulation and reductions in pharmaceutical pricing, reimbursement and coverage; 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;
 
  
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, 2019, 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)
 
   
September 30,
  
December 31,
 
   
2020
  
2019
 
ASSETS
   
Current assets:
   
Cash and cash equivalents
  $1,827  $1,975 
Accounts receivables, net of allowance for credit losses of $117 million and $135 million as of September 30, 2020 and December 31, 2019
   4,385   5,676 
Inventories
   4,516   4,422 
Prepaid expenses
   895   870 
Other current assets
   423   434 
Assets held for sale
   113   87 
Total current assets
   12,160   13,464 
Deferred income taxes
   509   386 
Other
non-current
assets
   822   591 
Property, plant and equipment, net
   6,152   6,436 
Operating lease
right-of-use
assets
   557   514 
Identifiable intangible assets, net
   9,308   11,232 
Goodwill
   20,228   24,846 
  
 
 
  
 
 
 
Total assets
  $
49,737
 
 
$
57,470
 
LIABILITIES AND EQUITY
  
 
Current liabilities:
  
 
Short-term debt
  $
2,106
 
 
$
2,345
 
Sales reserves and allowances
   4,998   6,159 
Accounts payables
   1,716   1,718 
Employee-related obligations
   601   693 
Accrued expenses
   1,735   1,869 
Other current liabilities
   946   889 
  
 
 
  
 
 
 
Total current liabilities
   12,103   13,674 
Long-term liabilities:
   
Deferred income taxes
   874   1,096 
Other taxes and long-term liabilities
   2,181   2,640 
Senior notes and loans
   23,515   24,562 
Operating lease liabilities
   472   435 
  
 
 
  
 
 
 
Total long-term liabilities
   27,042   28,733 
  
 
 
  
 
 
 
Commitments and contingencies
, see note 10
  
Total liabilities
   39,145   42,407 
  
 
 
  
 
 
 
Equity:
   
Teva shareholders’ equity:
   
Ordinary shares of NIS 0.10 par value per share; September 30, 2020 and December 31, 2019: authorized 2,495 million shares; issued 1,202 million shares and 1,198 million shares, respectively
   57   56 
Additional
paid-in
capital
   27,403   27,312 
Accumulated deficit
   (11,096  (6,956
Accumulated other comprehensive loss
   (2,643  (2,312
Treasury shares as of September 30, 2020 and December 31, 2019 — 106 million ordinary
 s
hares
   (4,128  (4,128
  
 
 
  
 
 
 
   9,593   13,972 
  
 
 
  
 
 
 
Non-controlling
interests
   999   1,091 
  
 
 
  
 
 
 
Total equity
   10,592   15,063 
  
 
 
  
 
 
 
Total liabilities and equity
  $
49,737
 
 
$
57,470
 
  
 
 
  
 
 
 
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
  
Nine months ended
 
   
September 30,
  
September 30,
 
   
2020
   
2019
  
2020
  
2019
 
Net revenues
  $3,978   $4,093  $12,206  $12,420 
Cost of sales
   2,126    2,264   6,528   6,841 
  
 
 
   
 
 
  
 
 
  
 
 
 
Gross profit
   1,852    1,830   5,678   5,579 
Research and development expenses
   258    240   704   778 
Selling and marketing expenses
   605    595   1,815   1,908 
General and administrative expenses
   279    285   846   873 
Intangible assets impairments
   509    177   1,278   1,206 
Goodwill impairment
  
4,628
   
0
   
4,628
   
0
 
Other assets impairments, restructuring and other items
   (98   160   404   263 
Legal settlements and loss contingencies
   21    468   10   1,171 
Other income
   (8   (14  (30  (29
  
 
 
   
 
 
  
 
 
  
 
 
 
Operating (loss) income
   (4,342   (81  (3,978  (591
Financial expenses, net
   117    211   565   635 
  
 
 
   
 
 
  
 
 
  
 
 
 
Income (loss) before income taxes
   (4,459   (292  (4,543  (1,226
Income taxes (benefit)
   16    11   (147  (159
Share in (profits) losses of associated companies, net
   (136   4   (135  8 
  
 
 
   
 
 
  
 
 
  
 
 
 
Net income (loss)
   (4,340   (307  (4,261  (1,076
Net income (loss) attributable to
non-controlling
interests
   10    7   (121  33 
  
 
 
   
 
 
  
 
 
  
 
 
 
Net income (loss) attributable to Teva
   (4,349   (314  (4,140  (1,108
  
 
 
   
 
 
  
 
 
  
 
 
 
Earnings (loss) per share attributable to ordinary shareholders:
      
Basic
  $(3.97  $(0.29 $(3.78 $(1.02
  
 
 
   
 
 
  
 
 
  
 
 
 
Diluted
  $(3.97  $(0.29 $(3.78 $(1.02
  
 
 
   
 
 
  
 
 
  
 
 
 
Weighted average number of shares (in millions):
      
Basic
   1,096    1,092   1,095   1,091 
  
 
 
   
 
 
  
 
 
  
 
 
 
Diluted
   1,096    1,092   1,095   1,091 
  
 
 
   
 
 
  
 
 
  
 
 
 
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
  
Nine months ended
 
   
September 30,
  
September 30,
 
   
2020
  
2019
  
2020
  
2019
 
Net income (loss)
  
$
(4,340
 
$
(307
 
$
(4,261
 
$
(1,076
Other comprehensive income (loss), net of tax:
  
 
 
 
Currency translation adjustment
  
 
70
 
 
 
(138
 
 
(348
 
 
(5
Unrealized gain (loss) from derivative financial instruments
  
 
9
 
 
 
87
 
 
 
46
 
 
 
124
 
Unrealized gain from
available-for-sale
securities
  
 
0
 
 
 
(2
 
 
0
 
 
 
(1
Unrealized loss on defined benefit plans
  
 
0
 
 
 
0
 
 
 
0
 
 
 
(1
Total other comprehensive income (loss)
  
 
79
 
 
 
(53
 
 
(302
 
 
117
 
Total comprehensive income (loss)
  
 
(4,261
 
 
(360
 
 
(4,563
 
 
(959
Comprehensive income (loss) attributable to
non-controlling
interests
  
 
27
 
 
 
7
 
 
 
(92
 
 
56
 
Comprehensive income (loss) attributable to Teva
  
$
(4,288
 
$
(367
 
$
(4,471
 
$
(1,015
  
 
 
  
 
 
  
 
 
  
 
 
 
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
  
Additional
paid-in

capital
  
Retained
earnings
(accumulated
deficit)
  
Accumulated other
comprehensive
(loss)
  
Treasury
shares
  
Total Teva
shareholders’
equity
  
Non-controlling

interests
  
Total
equity
 
  
(U.S. dollars in millions)
 
Balance at June 30, 2020
  1,202   57   27,374   (6,747  (2,703  (4,128  13,852   972   14,824 
Net Income (loss)
              (4,349          (4,349  10   (4,340
Other comprehensive income
 
(loss)
                  61       61   18   79 
Issuance of Shares
  *   *                   *       * 
Stock-based compensation expense
          29               29       29 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at September 30, 2020
  1,202  $57  $27,403  $(11,096 $(2,643 $(4,128 $9,593  $999  $10,592 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
*
Represents an amount less than $0.5 million.
 
  
Teva shareholders’ equity
       
  
Ordinary shares
                      
  
Number of
shares (in
millions)
  
Stated
value
  
Additional
paid-in

capital
  
Retained
earnings
(accumulated
deficit)
  
Accumulated other
comprehensive
(loss)
  
Treasury
shares
  
Total Teva
shareholders’
equity
  
Non-controlling

interests
  
Total
equity
 
  
(U.S. dollars in millions)
 
Balance at June 30, 2019
  1,198   56   27,258   (6,752  (2,312  (4,128  14,122   1,128   15,251 
Net Income (loss)
     (314    (314  7   (307
Other comprehensive income (loss)
      (53   (53      (53
Issuance of Shares
 * *                 * 
Stock-based compensation expense
    35      35    35 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at September 30, 2019
  1,198  $56  $27,293  $(7,066 $(2,365 $(4,128 $13,790  $1,134  $14,925 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
*
Represents an amount less than $0.5 million.
 
  
Teva shareholders’ equity
       
  
Ordinary shares
                      
  
Number of
shares (in
millions)
  
Stated
value
  
Additional
paid-in

capital
  
Retained
earnings
(accumulated
deficit)
  
Accumulated other
comprehensive
(loss)
  
Treasury
shares
  
Total Teva
shareholders’
equity
  
Non-controlling

interests
  
Total
equity
 
  
(U.S. dollars in millions)
 
Balance at December 31, 2019
  1,198   56   27,312   (6,956  (2,312  (4,128  13,972   1,091   15,063 
Net Income (loss)
     (4,140    (4,140  (121  (4,261
Other comprehensive income (loss)
      (331   (331  29   (302
Issuance of Shares
  4   *       *    * 
Stock-based compensation expense
    91      91    91 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at September 30, 2020
  1,202  $57  $27,403  $(11,096 $(2,643 $(4,128 $9,593  $999  $10,592 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
*
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 shareholders’ equity
       
  
Ordinary shares
                      
  
Number of
shares (in
millions)
  
Stated
value
  
Additional
paid-in

capital
  
Retained
earnings
(accumulated
deficit)
  
Accumulated other
comprehensive
(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 
Net Income (loss)
     (1,108    (1,108  33   (1,076
Other comprehensive income (loss)
      94    94   23   117 
Issuance of shares
  2   *      *   * 
Issuance of Treasury
shares
    (8    14   6    6 
Stock-based compensation expense
    99      99    99 
Transactions with non-controlling interest
         (8  (8
Other
    (8     (8   (8
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at September 30, 2019
  1,198  $56  $27,293  $(7,066 $(2,365 $(4,128 $13,790  $1,134  $14,925 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
*
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)
 
   
Nine months ended
 
   
September 30,
 
   
2020
  
2019
 
Operating activities:
   
Net income (loss)
  
$
(4,261
 
$
(1,076
Adjustments to reconcile net income (loss) to net cash provided by operations:
  
 
Depreciation and amortization
  
 
1,162
 
 
 
1,306
 
Impairment of long-lived assets and assets held for sale
  
 
6,314
 
 
 
1,302
 
Net change in operating assets and liabilities
  
 
(1,627
 
 
(784
Deferred income taxes – net and uncertain tax positions
  
 
(656
 
 
(652
Stock-based compensation
  
 
91
 
 
 
99
 
Net loss (gain) from investments and from sale of long lived assets
  
 
(232
 
 
10
 
Research and development in process
  
 
40
 
 
 
0  
 
Other items
  
 
54
 
 
 
5
 
  
 
 
  
 
 
 
Net cash provided by operating activities
  
 
885
 
 
 
210
 
  
 
 
  
 
 
 
Investing activities:
  
 
Beneficial interest collected in exchange for securitized accounts receivables
  
 
1,102
 
 
 
1,108
 
Purchases of property, plant and equipment
  
 
(402
 
 
(406
Proceeds from sale of long lived assets
  
 
54
 
 
 
167
 
Other investing activities
  
 
(32
 
 
56
 
  
 
 
  
 
 
 
Net cash provided by investing activities
  
 
722
 
 
 
925
 
  
 
 
  
 
 
 
Financing activities:
  
 
Repayment of senior notes and loans and other long-term liabilities
  
 
(1,871
 
 
(1,715
Net change in short-term debt
 
 
115
 
 
 
96
 
Tax withholding payments made on shares and dividends
  
 
0  
 
 
 
(52
Other financing activities
  
 
(4
 
 
(14
  
 
 
  
 
 
 
Net cash used in financing activities
  
 
(1,760
 
 
(1,685
  
 
 
  
 
 
 
Translation adjustment on cash and cash equivalents
  
 
5
 
 
 
9
 
  
 
 
  
 
 
 
Net change in cash and cash equivalents
  
 
(148
 
 
(541
Balance of cash and cash equivalents at beginning of period
  
 
1,975
 
 
 
1,782
 
  
 
 
  
 
 
 
Balance of cash and cash equivalents at end of period
  
$
1,827
 
 
$
1,241
 
  
 
 
  
 
 
 
Non-cash
financing and investing activities:
  
 
Beneficial interest obtained in exchange for securitized accounts receivables
  
$
1,055
 
 
$
1,123
 
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:
 
 
a.
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, 2019, as filed with the Securities and Exchange Commission (“SEC”). Amounts as of December 31, 2019 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.
In the process of preparing the consolidated financial statements, management makes estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues and expenses and related disclosure of contingent assets and liabilities. The inputs into Teva’s judgments and estimates also consider the economic implications of the
COVID-19
pandemic on its critical and significant accounting estimates, most significantly in relation to sales, reserves and allowances, IPR&D assets, marketed product rights and goodwill, all of which will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning the
COVID-19
pandemic and the actions taken to contain or treat it, as well as the economic impact on Teva’s employees, third-party manufacturers and suppliers, customers and markets. All estimates made by Teva related to the impact of the
COVID-19
pandemic within its financial statements may change in future periods. Actual results could differ from those estimates.
The results of operations for the nine months ended September 30, 2020 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.
 
 
b.
Significant accounting policies
Change in the annual goodwill assessment date
The Company has historically performed its annual goodwill assessment during the fourth quarter of each year. During the second quarter of 2020, the Company decided to change the date of its annual impairment assessment from October 1 to June 30. The change was made to more closely align the impairment assessment date with the Company’s long-term planning and forecasting process. See note 6.
Recently adopted accounting pronouncements
In March 2020, the FASB issued ASU
2020-04
“Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The guidance applies only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This guidance is effective for all entities as of March 12, 2020 through December 31, 2022. There was no impact to the Company’s consolidated financial statements for the period ended September 30, 2020 as a result of adopting this standard update. The Company will continue to evaluate this guidance to determine the impact it may have in the future on its consolidated financial statements.
In April 2019, the FASB issued ASU
2019-04
“Codification Improvements to Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 825).” This ASU provides clarifications of three topics related to financial instruments accounting. Teva adopted the provisions of this update as of January 1, 2020 with no material impact on its consolidated financial statements.
In November 2018, the FASB issued 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. Teva adopted the provisions of this update as of January 1, 2020 with no material impact 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. Teva applied the guidance prospectively to all implementation costs incurred after the date of
adoption. Teva adopted the provisions of this update as of January 1, 2020 with no material impact on its consolidated financial statements.
11

TEVA PHARMACEUTICAL INDUSTRIES
LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
In August 2018, the FASB issued ASU
2018-13
“Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” This guidance removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Certain disclosures required by this guidance must be applied on a retrospective basis and others on a prospective basis. Teva adopted the provisions of this update as of January 1, 2020 with no material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU
2016-13
“Financial Instruments—Credit Losses—Measurement of Credit Losses on Financial Instruments.” This guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Teva adopted the provisions of this update as of January 1, 2020 with no impact on its consolidated financial statements.
Recently issued accounting pronouncements, not yet adopted
In August 2020, the FASB issued ASU
2020-06
“Debt – Debt with Conversion and Other Options (Subtopic
470-20)
and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40).” This guidance simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The amendments to this guidance are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
In December 2019, the FASB issued ASU
2019-12
“Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes” (the “update”). The amendments in this update simplify the accounting for income taxes by removing the following exceptions in ASC 740: (1) exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items; (2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) exception to the general methodology for calculating income taxes in an interim period when a
year-to-date
loss exceeds the anticipated loss for the year.
In addition, the update also simplifies the accounting for income taxes in certain topics as follows: (1) requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a
non-income-based
tax; (2) requiring that an entity evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; (3) specifying that an entity can elect (rather than be required to) allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; and (4) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements.
 
 
c.
Revision of Previously Reported Consolidated Financial Statements
In connection with the preparation of Teva’s consolidated financial statements for the fiscal year ended December 31, 2019, Teva determined that in the full years and interim periods of fiscal years 2017 and 2018, and the first three quarters of fiscal year 2019, it had an immaterial error in the presentation of distribution revenues from its Israeli distribution business. This business is part of the International Markets reporting segment and facilitates distribution of Teva and third party products to pharmacies, hospitals and other organizations in Israel.
Specifically, the Company concluded that it presented revenues from its Israeli distribution business on a gross basis, although it should have reported such revenues on a net basis. Because Teva has no discretion in establishing prices for any specified goods or services, limited inventory risk and is not primarily responsible for contract fulfillment, Teva does not meet the criteria for reporting revenues from such business as a principal (on a gross basis), as opposed to as an agent (on a net basis).
The Company evaluated the cumulative impact of this item on its previously issued annual financial statements for 2017 and 2018, and the interim financial statements for 2017, 2018 and the first three quarters of 2019, and concluded that, for the reasons mentioned below, the revisions were not material, individually or in the aggregate, to any of its previously-issued interim or annual financial statements. Teva has revised its presentation of net
revenue and cost of sales in the historical consolidated financial statements to reflect the change in this item, as described in more detail below.
 
12

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
The impact of this revision is a decrease in net revenues with an offsetting decrease in cost of sales. There is no impact on gross profit, operating income or earnings per share. In addition, there is no impact on Teva’s balance sheet or statement of cash flows for the related periods.
The following table summarizes the impact of the revision on net revenues and cost of sales in the consolidated statements of income for the relevant periods:
 
       
Net revenues
   
Cost of sales
 
       
As reported
   
Adjustment
  
As revised
   
As reported
   
Adjustment
  
As revised
 
       
(U.S. $ in millions)
 
2019
   Q1    4,295    (146  4,149    2,440    (146  2,293 
   Q2    4,337    (159  4,177    2,443    (159  2,284 
   Q3    4,264    (171  4,093    2,435    (171  2,264 
                            
  
 Total
 
 
 
12,896
 
 
 
(477
)
 
 
12,420
 
 
 
7,318
 
 
 
(477
)
 
 
6,841
 
 
13

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE 2 – Certain transactions:
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.
Alvotech Partnership
In August 2020, Teva entered into an exclusive partnership agreement with biopharmaceutical company Alvotech for the commercialization in the U.S. of five biosimilar product candidates. The initial pipeline for this partnership contains biosimilar candidates addressing multiple therapeutic areas. Under this agreement, Alvotech will be responsible for the development, registration and supply of the biosimilar product candidates and Teva will exclusively commercialize the products in the United States. The agreement includes an upfront payment payable by Teva, which was paid in the third quarter of 2020. Additional development and commercial milestone payments of up to $490 million, as well as royalty payments,
may be
payable by Teva over the next few years. Teva and Alvotech will share profit from the commercialization of the biosimilars.
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 intellectual property and resolves Alder’s opposition to Teva’s European patent with respect to anti-calcitonin gene-related peptide (CGRP) antibodies, including the withdrawal of Alder’s appeal before the European Patent Office. Under the terms of the agreement, Alder will receive a non-exclusive license to Teva’s anti-CGRP antibodies patent portfolio to develop, manufacture and commercialize eptinezumab in the United States and worldwide, excluding Japan and Korea. Teva received a
 
$25 
million upfront payment that was recognized as revenue during the first quarter of 2018, and a
$25 
million milestone payment in March 2020 that was recognized as revenue in the first quarter of 2020. The agreement stipulates additional development and commercial milestone payments to Teva of up to
$150 
million, as well as future royalties.
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. There are no further plans in this indication following clinical trial results received in February 2020, which failed to meet their primary endpoints.
Otsuka
On May 12, 2017, Teva entered into a license and collaboration agreement with Otsuka Pharmaceutical Co. Ltd. (“Otsuka”), providing Otsuka with an exclusive license to conduct phase 2 and 3 clinical trials for AJOVY in Japan and, if approved, to commercialize the product in Japan. Otsuka paid Teva an upfront payment of $50 
million in consideration for the transaction. Results for these trials were received in January 2020 indicating that primary and secondary endpoints were achieved and that no clinically significant adverse events were observed in subjects. In the third quarter of 2020, Otsuka submitted an application to obtain manufacturing and marketing approval for AJOVY in Japan and, as a result, paid Teva a milestone payment of $15 million. Teva may receive additional milestone payments upon achievement of certain revenue targets. Otsuka will also pay Teva royalties on AJOVY sales in Japan.
Celltrion
In October 2016, Teva and Celltrion, Inc. (“Celltrion”) entered into a collaborative agreement to commercialize TRUXIMA
®
and HERZUMA
®
, two biosimilar products for the U.S. and Canadian markets. Teva paid Celltrion
$160 
million, of which Teva received an aggregate credit of
$60 
million as of September 30, 2020. Teva and Celltrion share the profit from the commercialization of these products. These two products, TRUXIMA and HERZUMA, were approved by the FDA in November and December 2018, respectively and were launched in the United States in November 2019 and March 2020, respectively.
Regeneron
In September 2016, Teva and Regeneron Pharmaceuticals, Inc. (“Regeneron”) entered into a collaborative agreement to develop and commercialize Regeneron’s pain medication product, fasinumab. Teva and Regeneron share 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 and additional payments for achievement of development milestones in an aggregate amount of $120 million were paid during 2017 and 2018. The agreement stipulates additional development and commercial milestone payments of up to $2,230 million, as well as future royalties.
14

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
Tel-Aviv
Headquarters Lease Agreement
At the end of the third quarter of 2020, after obtaining the right to use the building, Teva began transitioning its corporate headquarters to a consolidated site in Tel-Aviv, Israel. Teva has an operating lease for the office space in Tel Aviv for an initial term of twelve and a half years, with an option for three extensions. Teva estimates that the reasonably certain holding period of the lease for accounting purposes is twelve and a half years. As of September 30, 2020, Teva booked
 
$74 million as operating lease
right-of-use
and $66 million as operating lease liability.
Assets and Liabilities Held For Sale:
Certain assets of Teva’s business venture in Japan
Teva operates its business in Japan, which is part of Teva’s International Market segment, through a business venture with The Takeda Pharmaceutical Company Limited (“Takeda”), in which Teva owns a 51% stake and Takeda owns the remaining 49%.
During the second quarter of 2020, Teva and Takeda decided to sell the majority of the business venture’s generic and operational assets. The purchase agreement was signed in July 2020 and Teva expects this transaction to close by early 2021. The closing of the transaction is subject to customary closing conditions.
Teva is accounting for the business venture assets and liabilities to be sold as held for sale and determined that the fair value less cost to sell did not exceed the carrying value, resulting in an impairment charge of $261 million in other assets impairments, restructuring
and
other items recognized in the second quarter of 2020.
Teva determined that the sale of this portion of the Teva-Takeda business venture, whether pending or completed, does not constitute a strategic shift for Teva, and does not and will not have a major effect on its operations and financial results. Accordingly, the operations associated with the transactions are not reported as discontinued operations.
Assets held for sale include the Teva-Takeda business venture assets that are held for sale and other manufacturing assets that are expected to be sold within the next year.
The table below summarizes all Teva assets included as held for sale as of September 30, 2020 and December 31, 2019:
 
   
September 30,
   
December 31,
 
   
2020
   
2019
 
   
(U.S. $ in millions)
 
Inventories
   160    0   
Property, plant and equipment, net and others
   239    98 
Goodwill
   27    0   
Adjustments of assets held for sale to fair value
   (313   (11
  
 
 
   
 
 
 
Total assets of the disposal group classified as held for sale in the consolidated balance sheets
  $113   $87 
  
 
 
   
 
 
 
 
15

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE 3 – Revenue from contracts with customers:
Disaggregation of revenue
The following table disaggregates Teva’s revenues by major revenue streams. For additional information on disaggregation of revenues, see note 15.
 
   
Three months ended September 30, 2020
 
   
North
America
  
Europe
  
International
Markets
   
Other
activities
   
Total
 
   
(U.S. $ in millions)
 
Sale of goods
   1,660   1,116   478    173    3,427 
Licensing arrangements
   17   7   2    1    27 
Distribution
   341   §   9    —      350 
Other
   (1  (8  41    142    174 
  
 
 
  
 
 
  
 
 
   
 
 
   
 
 
 
  $2,017  $1,116  $529   $316   $3,978 
  
 
 
  
 
 
  
 
 
   
 
 
   
 
 
 
 
 
§ Represents an amount less than $1 million.
 
 
  
Three months ended September 30, 2019
 
 
  
North
America
 
  
Europe
 
  
International
Markets
 
  
Other
activities
 
  
Total
 
 
  
(U.S. $ in millions)
 
Sale of goods
   1,674    1,153    511    176    3,514 
Licensing arrangements
   26    7    1    1    36 
Distribution
  
 
351
 
  
 
1
 
  
 
5
 
  
 
—  
 
  
 
357
 
Other
   §    2    48    136    186 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
  $2,051   $1,163   $565   $314   $4,093 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
 
§ Represents an amount less than $1 million.
 
   
Nine months ended September 30, 2020
 
   
North
America
   
Europe
   
International
Markets
   
Other 
activities
   
Total
 
   
(U.S. $ in millions)
 
Sale of goods
   4,943    3,487    1,417    561    10,408 
Licensing arrangements
   59    22    6    3    90 
Distribution
   1,141    3    21        1,165 
Other
   3    9    138    394    543 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
  $6,146   $3,520   $1,582   $957   $12,206 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
16

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
   
Nine months ended September 30, 2019
 
   
North
America
   
Europe
   
International
Markets
   
Other
activities
   
Total
 
   
(U.S. $ in millions)
 
Sale of goods
   4,997    3,586    1,505    566    10,653 
Licensing arrangements
   92    22    3    4    121 
Distribution
  
 
1,080
 
  
 
1
 
  
 
14
 
  
 
—  
 
  
 
1,095
 
Other
   §    2    146    402    549 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
  $6,169   $3,611   $1,668   $972   $12,420 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
 
§ Represents an amount less than $1 million.
The financial data presented in the tables above with respect to prior periods have been revised to reflect a revision in the presentation of net revenues and cost of sales in the consolidated financial statements. See note 1c.
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 accounts 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 80% of the Company’s total SR&A as of September 30, 2020, with the remaining balance primarily in Canada and Germany. The changes in SR&A for third-party sales for the nine months ended September 30, 2020 and 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, 2019
  $87  $2,895  $1,109  $1,342  $637  $176  $6,159  $6,246 
Provisions related to sales made in current year
   285   3,649   566   6,268   299   55   10,837   11,122 
Provisions related to sales made in prior 
period
s
   —      (192  (116  (33  (11  2   (350  (350
Credits and payments
   (298  (4,224  (650  (6,418  (289  (79  (11,660  (11,958
Translation differences
   —      10   4   2      (4  12   12 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at September 30, 2020
  $74   2,138  $913  $1,161  $636  $150  $4,998  $5,072 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
17

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
   
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
   334   4,004   760   7,196   195   308   12,463   12,797 
Provisions related to sales made in
prior periods
   3   (28  (2  (1  23   (7  (15  (12
Credits and payments
   (356  (4,276  (882  (7,299  (251  (295  (13,003  (13,359
Translation differences
   —     (14  (4  (1  (1  1   (19  (19
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balance at September 30, 201
9
  $156   2,692  $1,233  $1,425  $604  $183  $6,137  $6,293 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Allowance for credit losses
Accounts receivable are recognized net of allowance for credit losses. Allowances for credit losses were $117 million and $135 million as of September 30, 2020 and December 31, 2019, respectively. 
NOTE 4 – Inventories:
Inventories, net of reserves, consisted of the following:
   
September 30,
2020
   
December 31,
2019
 
   
(U.S. $ in millions)
 
Finished products
  $2,384   $2,504 
Raw and packaging materials
   1,334    1,183 
Products in process
   635    583 
Materials in transit and payments on account
   163    151 
  
 
 
   
 
 
 
Total
  $4,516   $4,422 
  
 
 
   
 
 
 
NOTE 5 – Identifiable intangible assets:
Identifiable intangible assets consisted of the following:
 
   
Gross carrying amount net of
impairment
   
Accumulated

amortization
   
Net carrying amount
 
   
September 30,
   
December 31,
   
September 30,
   
December 31,
   
September 30,
   
December 31,
 
   
2020
   
2019
   
2020
   
2019
   
2020
   
2019
 
   
(U.S. $ in millions)
 
Product rights
  $19,520   $19,663   $11,665   $10,640   $7,856   $9,023 
Trade names
   609    600    154    126    455    474 
In process research and development
   998    1,735        —      998    1,735 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $21,128   $21,998   $11,819   $10,766   $9,308   $11,232 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
18
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
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 therapeutic categories from various acquisitions with a weighted average life of approximately 12 years.
Amortization of intangible assets was $251 million and $255 million in the three months ended September 30, 2020 and 2019, respectively.
Amortization of intangible assets was $758 million and $823 million in the
nine
months ended September 30, 2020 and 2019, 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 various generic products from the Actavis Generics acquisition of $
964
 million. IPR&D carries intrinsic risks that the asset might not succeed in advanced phases and may be impaired in future periods.
Intangible assets impairments
Impairments of long-lived intangible assets for the three months ended September 30, 2020 and 2019
,
were $509 million and $177 million, respectively.
Impairments in the third quarter of 2020 consisted of:
 
 (a)
IPR&D assets
of $360 
million,
ma
inly
 due to: (i) $262 million related to lenalidomide (generic equivalent of
Revlimid
®
)
due to modified competition assumptions as a result of settlements between the innovator and other generic filers; and (ii) $96 million related to generic pipeline products acquired from Actavis Generics resulting from development progress and changes in other key valuation indications (e.g., market size, competition assumptions, legal landscape, launch date) in the United States; and 
 
 (b)
Identifiable product rights
of $149 
million, due to: (i) $110 million related to a change in the assumptions regarding competition for the
expected relaunch of
metformin tablets; and (ii) $39 million mainly related to updated market assumptions regarding price and volume of products acquired from Actavis Generics that are primarily marketed in the United States.
 
 
Impairments in the third quarter of 2019 consisted of:
 
 
(a)
Identifiable product rights of $99 million, mainly due to supply challenges in connection with products primarily marketed in Hong Kong; and
 
 
(b)
IPR&D assets of $78 million, mainly
 
du
e
 to 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.
Impairments of long-lived intangible assets for the nine months ended September 30, 2020 and 2019, were $1,278 million and $1,206 million, respectively.
Impairments in the first nine months of 2020 consisted of:
 
 (a)
IPR&D assets of $708 million,
mainly
due to: (i) $262 million related to lenalidomide (generic equivalent of Revlimid
®
) due to modified competition assumptions as a result of settlements between the innovator and other generic filers; (ii)
$211 million related to AUSTEDO for the treatment of Tourette syndrome in pediatric patients in the United States following clinical trial results
,
received in February 2020, which failed to meet their primary endpoints; and
(iii) $213
 million related to generic pipeline products acquired from Actavis Generics resulting from development progress and changes in other key valuation indications (e.g., market size, competition assumptions, legal landscape, launch date) in the United States; and
 
 (b)
Identifiable product rights of $570 million, mainly due to: (i) $271 million
related
 to updated market assumptions regarding price and volume of products acquired from Actavis
Generics
that are
 primarily marketed in the United States;
 (ii) $165 million in Japan in connection with ongoing regulatory pricing reductions and generic
competition; and (iii) $110 million related to a change in the assumptions regarding competition for the
expected relaunch of
metformin
tablets
.
Impairments in the first nine months of 2019 consisted of:
 
 
(a)
Identifiable product rights of $667 million, mainly due to updated market assumptions regarding price and volume of products acquired from Actavis Generics and primarily marketed in the United States; and
 
 
19

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
 
(b)
IPR&D assets of $539 million: (i) $355 million of various generic pipeline products acquired from Actavis Generics due to development progress and changes in other key valuation indications (e.g., market size, competition assumptions, legal landscape, launch date or discount rate) in the United States, (ii) $125 million related to lenalidomide (generic equivalent of Revlimid
®
) due to modified competition assumptions as a result of settlements between the innovator and other generic filers; and (iii) $59 million related to a change in assumptions concerning the future market share of a number of products within Teva’s Actavis Generics pipeline in Europe.
The fair value measurement of the impaired intangible assets in the first nine months of 2020 is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. The discount rate applied ranged from 7.5% to 9%. A probability of success factor of 80% was used in the fair value calculation to reflect inherent regulatory and commercial risk of IPR&D.
 
20

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE 6 – Goodwill:
The changes in the carrying amount of goodwill for the period ended September 30, 2020 were as follows:
 
   
North America
  
Europe
  
International
Markets
  
Other
   
Total
 
 
 
(U.S. $ in millions)
 
 
 
 
 
Balance as of December 31, 2019 (1)
  $11,091  $8,536  $2,532  $2,687   $24,846 
Changes during the period:
       
Goodwill reclassified as assets held for sale
   —     (8  (19  —      (27
Goodwill impairment
  
(4,628
)  
—  
   —     
—  
   
(4,628
)
Translation differences
   (10  253   (206  —      37 
  
 
 
  
 
 
  
 
 
  
 
 
   
 
 
 
Balance as of
S
eptember
 30, 2020 (1)
  $6,453  $8,781  $2,307  $2,687   $20,228 
  
 
 
  
 
 
  
 
 
  
 
 
   
 
 
 
 
(1)
Accumulated goodwill impairment as of September 30, 2020 and December 31, 2019 was approximately $25.6 
billion and $21.0
billion
, respectively.
Teva operates its business through three reporting segments: North America, Europe and International Markets. Each of these business segments is a reporting unit. Additional reporting units include Teva’s production and sale of APIs to third parties (“Teva API”) and an
out-licensing
platform offering a portfolio of products to other pharmaceutical companies through its affiliate Medis. The Teva API and Medis reporting units are included under “Other” in the above table. See note 15 for additional segment information.
Teva determines the fair value of its reporting units using the income approach. The income approach is a forward-looking approach for estimating fair value. Within the income approach, the method used is the discounted cash flow method. Teva starts with a forecast of all the expected net cash flows associated with the reporting unit, which includes the application of a terminal value, and then applies a discount rate to arrive at a net present value amount. Cash flow projections are based on Teva’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the weighted average cost of capital (“WACC”), adjusted for the relevant risk associated with country-specific and business-specific characteristics. If any of these expectations were to vary materially from Teva’s assumptions, Teva may record an impairment of goodwill allocated to these reporting units in the future.
First Quarter Developments
During the first quarter of 2020, management assessed developments that occurred during the quarter, including expected effects of the
COVID-19
pandemic on its business, to determine if it was more likely than not that the fair value of any of its reporting units was below its carrying amount. As part of this assessment, management also considered the sensitivity of its conclusions as they relate to changes in the estimates and assumptions used in the latest forecast available for each period.
Based on this assessment, management concluded that it was not more likely than not that the fair value of any of the reporting units was below its carrying value as of March 31, 2020 and, therefore, no quantitative assessment was performed.
Second Quarter Developments
Pursuant to Company policy, the Company has historically performed its annual goodwill assessment during the fourth quarter of each year. During the second quarter of 2020, the Company changed its annual impairment assessment date from October 1 to June 30 to more closely align the impairment assessment date with the Company’s long-term planning and forecasting process.
During the second quarter of 2020, Teva conducted a quantitative analysis of all reporting units as part of its annual goodwill impairment test and utilized the assistance of an independent valuation expert. No goodwill impairment charge was recorded during the second quarter of 2020.
As part of the aforementioned analysis, Teva analyzed the aggregated fair value of its reporting units compared to its market capitalization as part of its annual goodwill impairment test, in order to assess the reasonableness of the results of its cash flow projections used for its goodwill impairment analysis. Management noted differences between the market capitalization and management’s internal projections as of the end of the second quarter. As of June 30, 2020, those differences were believed to be attributable to the following:
 
 
 
Management noted a portion of the difference can be attributed to sales projections of AJOVY and AUSTEDO in the International Markets reporting unit. Management continues to believe that the majority of analysts do not focus on these brands in preparing their financial models and, as a result, have not attributed value to the launch potential in this reporting unit
 
21

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
 
 
Management noted an additional difference can be attributed to sales projections of AUSTEDO in the North America reporting unit, resulting in higher fair value as analyzed by management compared to Teva’s market capitalization. Management continues to believe that it has more accurate information based on its knowledge of the market and its growth and therefore no adjustment was incorporated to the fair value.
 
 
 
Management noted that market concerns regarding the uncertainty related to the opioid and price fixing litigation risks are impacting its market capitalization. Management believes that these concerns led to an acute reaction, which resulted in a decline in Teva’s share price. Management believed developments in the opioids case would clarify the outlook with regards to the opioid litigation, when the proposed settlement framework is finalized, which was expected in the near term.
Even if management was to adjust the fair value of the North America reporting unit for any one of the uncertainties noted, the estimated fair value would still exceed its carrying amount. Management also noted that negative results related to all the uncertainties noted may lead to a material goodwill impairment charge.
Third Quarter Developments
During the third quarter of 2020, Teva’s share price experienced further decline. Teva analyzed its aggregated internal valuation of its reporting units compared to its market capitalization as part of its goodwill impairment test. Management believes there are similar reconciling factors to those referenced in the second quarter with additional declines occurring due to increasing uncertainty related to certain litigation actions in the third quarter and the related uncertainties it added to the existing concerns around financial strength.
During the third quarter of 2020, management noted the following factors that led to an assessment of the North America reporting unit for impairment:
 
 
 
The Company noted a 25% reduction in its market capitalization from the second quarter of 2020 to the third quarter of 2020.
 
 
 
With respect to the opioids litigation, as discussions continue with the group of Attorneys General regarding the nationwide framework and trial dates are postponed largely due to the
COVID-19
pandemic, a resolution of this matter is taking longer than anticipated. Accordingly, the Company is currently unable to predict the timing of any final settlement or whether the settlement will be finalized based upon the current settlement framework.
 
 
 
On August 25, 2020, the Company was indicted by the U.S. Department of Justice for alleged violations of the Sherman Act.
 
 
 
On August 18, 2020, the Company was sued by the U.S. Department of Justice alleging violations of the federal Anti-Kickback Statute, and asserting causes of action under the federal False Claims Act and state law.
The Company is committed to its projected cash flow targets and management’s views on the litigation exposures have not changed. However, recent developments indicate the timeframe for resolution will take significantly longer than previously expected which introduces greater uncertainty to a favorable resolution. In addition, management believes that analysts are unlikely to modify their projections until the Company can demonstrate progression on the resolution with respect to some or all of the above legal matters. As such, for purposes of testing the goodwill in the North America reporting unit under ASC 350, management has incorporated these factors into its valuation of the North America reporting unit, resulting in an impairment charge of $4,628 million.
Teva does not believe there has been a triggering event related to the other reporting units. The other reporting units all have fair values in excess of 10% over their book values.
 
22

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE 7 – Debt obligations:
a. Short-term debt:
 
       
September 30,

2020
   
December 31,

2019
 
   
Weighted average interest
 
rate as of September 30,
 
2020
  
Maturity
 
          
(U.S. $ in millions)
 
Revolving Credit Facility
  
LIBOR+1.75
%
     
$
117
  
$
 
Convertible
 
senior
 
debentures
   0.25  2026    514    514 
Current maturities of long-term liabilities
 
   1,474    1,831 
  
 
 
   
 
 
 
Total short-term debt
 
  $2,106   $2,345 
  
 
 
   
 
 
 
Convertible senior debentures
Teva’s 0.25% convertible senior debentures due 2026, with $514 million principal amount outstanding as of
September
 30, 2020 and December 31, 2019, include a “net share settlement” feature according to which the principal amount will be paid in cash and in case of conversion, only the residual conversion value above the principal amount will be paid in Teva shares. Due to the “net share settlement” feature, exercisable at any time, these convertible senior debentures are classified in the Balance Sheet under short-term debt. Holders of the convertible debentures will be able to cause Teva to redeem the debentures on February 1, 2021.
 
Long-term debt:
 
   
Weighted average interest
rate as of September 30,
2020
  
Maturity
   
September 30,
2020
   
December 31,
2019
 
          
(U.S. $ in millions)
 
Senior notes EUR 1,010 million (1)
   0.38  2020        1,131 
Senior notes EUR 1,500 million
   1.13  2024    1,755    1,673 
Senior notes EUR 1,300 million
   1.25  2023    1,522    1,451 
Senior notes EUR 1,000 million
   6.00  2025    1,174    1,120 
Senior notes EUR 900 million
   4.50  2025    1,057    1,008 
Senior notes EUR 750 million
   1.63  2028    874    833 
Senior notes EUR 700 million
   3.25  2022    822    784 
Senior notes EUR 700 million
   1.88  2027    821    782 
Senior notes USD 3,500 million
   3.15  2026    3,495    3,494 
Senior notes USD 1,475 million
   2.20  2021    1,474    1,474 
Senior notes USD 3,000 million
   2.80  2023    2,996    2,995 
Senior notes USD 2,000 million
   4.10  2046    1,986    1,985 
Senior notes USD 1,250 million
   6.00  2024    1,250    1,250 
Senior notes USD 1,250 million
   6.75  2028    1,250    1,250 
Senior notes USD 1,000 million
   7.13  2025    1,000    1,000 
Senior notes USD 844 million
   2.95  2022    855    856 
Senior notes USD 789 million
   6.15  2036    783    782 
Senior notes USD 700 million (2)
   2.25  2020        700 
Senior notes USD 613 million
   3.65  2021    616    618 
Senior notes USD 588 million
   3.65  2021    587    587 
Senior notes CHF 350 million
   0.50  2022    381    361 
Senior notes CHF 350 million
   1.00  2025    381    362 
     
 
 
   
 
 
 
Total senior notes
 
   25,078    26,496 
Other long-term debt
   1.13  2026    1    1 
Less current maturities
 
   (1,474   (1,831
Less debt issuance costs
 
   (89   (103
  
 
 
   
 
 
 
Total senior notes and loans
 
  $23,515   $24,562 
  
 
 
   
 
 
 
 
(1)
In July 2020, Teva repaid at maturity
1,010 million of its 0.375% senior notes.
(2)
In March 2020, Teva repaid at maturity $700 million of its 2.25% senior notes.
23

TEVA PHARMACEUTICAL INDUSTRIES
LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
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 September 30, 2020 is effectively denominated in the following currencies: 63% in U.S. dollar, 34% in euro and 3% in Swiss franc.
Teva’s principal sources of short-term liquidity are its cash on hand, existing cash investments, liquid securities and available credit facilities, primarily its $2.3 billion unsecured syndicated revolving credit facility entered into in April 2019 (“RCF”).
The RCF agreement provides for two separate tranches, a $1.15 billion tranche A and a $1.15 billion tranche B. Loans and letters of credit will be available from time to time under each tranche for Teva’s general corporate purposes. Tranche A has a maturity date of April 8, 2022, with two
one-year
extension options, of which $1.065 billion was extended to April 8, 2023. Tranche B has a maturity date of April 8, 2024.
The RCF contains certain covenants, including certain limitations on incurring liens and indebtedness and maintenance of certain financial ratios, including the requirement to maintain compliance with a net debt to EBITDA ratio, which becomes more restrictive over time. The net debt to EBITDA ratio limit is 5.75x in the third and fourth quarters of 2020 and declines to 5.50x in the first and second quarters of 2021, and continues to gradually decline over the remaining term of the RCF.
The RCF can be used for general corporate purposes, including repaying existing debt. As of September 30,
2020
, €
100 million was
outstanding under the RCF. As of the date of this
Quarterly Report on Form 10-Q
, €270 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 these financial statements are issued.
Under specified circumstances, including
non-compliance
with any of the covenants described above and the unavailability of any waiver, amendment or other modification thereto, the Company will not be able to borrow under the RCF. Additionally, violations of the covenants, under the above-mentioned circumstances, would result in an event of default in all borrowings under the RCF and, when greater than a specified threshold amount as set forth in each series of senior notes is outstanding, could lead to an event of default under the Company’s senior notes due to cross acceleration provisions.
Teva expects that it will continue to have sufficient cash resources to support its debt service payments and all other financial obligations within one year from the date that these financial statements are issued.
NOTE 8 – Derivative instruments and hedging activities:
a. Foreign exchange risk management:
In the first nine months of 2020, approximately 48% of Teva’s revenues were denominated in currencies other than the U.S. dollar. As a result, Teva is subject to significant foreign currency risks.
The Company enters into forward exchange contracts, purchases and writes options in order to hedge the currency exposure on balance sheet items, revenues and expenses. In addition, the Company takes measures to reduce exposure by using natural hedging. The Company also acts to offset risks in opposite directions among the companies within Teva. The currency hedged items are usually denominated in the following main currencies: the Russian ruble, the euro, the Swiss franc, the Japanese yen, the British pound, the Canadian dollar, the Polish zloty, the Indian rupee and other European and Latin American currencies.
Depending on market conditions, foreign currency risk is also managed through the use of foreign currency debt.
In the past, the Company hedged against possible fluctuations in foreign subsidiaries’ net assets (“net investment hedge”) and from time to time enters 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.
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 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.
 
24
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
c. Derivative instruments notional amounts
The following table summarizes the notional amounts for hedged items, when transactions are designated as hedge accounting:
 
   
September 30,
   
December 31,
 
   
2020
   
2019
 
   
(U.S. $ in millions)
 
Cross-currency swap
net investment hedge
  $—     $1,000 
  
 
 
   
 
 
 
d. Derivative instrument outstanding:
The following table summarizes the classification and fair values of derivative instruments:
 
   
Fair value
 
   
Designated as hedging

instruments
   
Not designated as hedging

instruments
 
   
September 30,

2020
   
December 31,

2019
   
September 30,

2020
   
December 31,

2019
 
Reported under
  
(U.S. $ in millions)
 
Asset derivatives:
        
Other current assets:
        
Option and forward contracts
  $0     $—     $36   $32 
Liability derivatives:
        
Other current liabilities:
        
Cross-currency swaps—net investment hedge
   0      (22   0      —   
Option and forward contracts
   0      —      (67   (41
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
(loss)
 
 
  
Three months ended,
 
  
Three months ended,
 
 
  
September 30,

2020
 
  
September 30,
2019
 
  
September 30,

2020
 
  
September 30,
2019
 
Reported under
  
(U.S. $ in millions)
 
Line items in which effects of hedges are recorded
  
$
117
 
  
$
211
 
  
$
79
 
  
$
(53
Cross-currency swaps—cash flow hedge (1)
  
 
0  
 
  
 
(1
  
 
0  
 
  
 
(33
Cross-currency swaps—net investment hedge (2)
  
 
0  
 
  
 
(7
  
 
0  
 
  
 
(39
Interest rate swaps—fair value hedge (3)
  
 
0  
 
  
 
*
 
  
 
0  
 
  
 
0  
 
 
*
Represents an amount less than $0.5 million.
 
 
25

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
   
Financial expenses, net
   
Other comprehensive income (loss)
 
   
Nine months ended,
   
Nine months ended,
 
   
September 30,

2020
   
September 30,
2019
   
September 30,

2020
   
September 30,
2019
 
Reported under
  
(U.S. $ in millions)
 
Line items in which effects of hedges are recorded
  $565   $635   $(302  $117 
Cross-currency swaps
cash flow hedge (1)
   0      (2   0      (49
Cross-currency swaps
net investment hedge (2)
   (2   (22   (21   (46
Interest rate swaps—fair value hedge (3)
   0      2    0      0   
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 months ended,
 
  
Three months ended,
 
 
  
September 30,

2020
 
  
September 30,
2019
 
  
September 30,

2020
 
  
September 30,
2019
 
Reported under
  
(U.S. $ in millions)
 
Line items in which effects of hedges are recorded
  
$
117
 
  
$
211
 
  
$
(3,978
  
$
(4,093
Option and forward contracts (4)
  
 
40
 
  
 
(35
  
 
—  
 
  
 
—  
 
Option and forward contracts economic hedge (5)
  
 
—  
 
  
 
—  
 
  
 
3
 
  
 
(4
 
 
  
Financial expenses, net
 
  
Net revenues
 
 
  
Nine months ended,
 
  
Nine months ended,
 
 
  
September 30,

2020
 
  
September 30,
2019
 
  
September 30,

2020
 
  
September 30,
2019
 
Reported under
  
(U.S. $ in millions)
 
Line items in which effects of hedges are recorded
  
$
565
 
  
$
635
 
  
$
(12,206
  
$
(12,420
Option and forward contracts (4)
  
 
78
 
  
 
(42
  
 
—  
 
  
 
—  
 
Option and forward contracts Economic hedge (5)
  
 
—  
 
  
 
—  
 
  
 
(37
  
 
—  
 
 
(1)
With respect to cross-currency swap agreements, Teva recognized gains which mainly reflect the differences between the fixed interest rate and the floating interest rate. In the fourth quarter of 2019, Teva terminated $588 million in cross-currency swap agreements against its outstanding 3.65% senior notes maturing in November 2021. The settlement of these transactions resulted in cash proceeds of $95 million. The cash flow hedge accounting adjustments of these instruments, which are recorded under senior notes and loans, are amortized under financial expenses, net over the life of the debt as additional interest expense.
(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. In the first quarter of 2020, these cross-currency swap agreements expired. The settlement of these transactions resulted in cash proceeds of $3 million.
(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
 
26

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
 interest rate. In the third quarter of 2019, Teva terminated this interest rate swap agreement. The settlement of these transactions resulted in a gain position of $10 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.
(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.
(5)
Teva entered into option and forward contracts designed to limit the exposure of foreign exchange fluctuations on projected revenues and expenses recorded in euro, the British pound, the Russian ruble and some other currencies during the period for which such instruments are transacted. These derivative instruments do not meet the criteria for hedge accounting, however, they are accounted for as an economic hedge. These derivative instruments, which may include hedging transactions against future projected revenues and expenses, are recognized on the balance sheet at their fair value on a quarterly basis, while the foreign exchange impact on the underlying revenues and expenses may occur in subsequent quarters. Changes in the fair value of the derivative instruments are recognized in the same line item in the statements of income as the underlying exposure being hedged. In the first nine months of 2020, the positive impact from these derivatives recognized under revenues was $37 million, partially offset by a $3 million negative impact recognized under cost of sales. The cash flows associated with these derivatives are reflected as cash flows from operating activities in the consolidated statements of cash flows.
e. Amortizations due to terminated derivative instruments:
Forward starting interest rate swaps and treasury lock agreements
In 2015, Teva entered into forward starting interest rate swaps and treasury lock agreements to protect the Company from interest rate fluctuations in connection with a future debt issuance the Company was planning. These forward starting interest rate swaps and treasury lock agreements were terminated in July 2016 upon the debt issuance. The termination of these transactions resulted in a loss position of $493 million, which was recorded in other comprehensive income (loss) and is amortized under financial expenses, net over the life of the debt.
With respect to these forward starting interest rate swaps and treasury lock agreements, losses of $8 million and $7 million were recognized under financial expenses, net for the three months ended September 30, 2020 and 2019, respectively, and losses of $23 million and $22 million were recognized under financial expenses, net for the nine months ended September 30, 2020 and 2019, respectively.
Fair value hedge
In the third quarter of 2016, Teva terminated interest rate swap agreements designated as a fair value hedge relating to its 2.95% senior notes due 2022 with respect to $844 million notional amount and its 3.65% senior notes due 2021 with respect to $450 million notional amount. Settlement of these transactions resulted in a gain position of $41 million. The fair value hedge accounting adjustments of these instruments, which are recorded under senior notes and loans, are amortized under financial expenses, net over the life of the debt as additional interest expense.
In the third quarter of 2019, Teva terminated $500 million interest rate swap agreements designated as a fair value hedge relating to its 2.8% senior notes due 2023 with respect to $3,000 million notional amount. Settlement of these transactions resulted in cash proceeds of $10 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.
Cash flow hedge
In the fourth quarter of 2019, Teva terminated $588 million cross-currency swap agreements against its outstanding 3.65% senior notes maturing in November 2021. Settlement of these transactions resulted in cash proceeds of $95 million. The cash flow 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.
With respect to the interest rate swap and cross-currency swap agreements, gains of $1 million and $3 million were recognized under financial expenses, net for the three months ended September 30, 2020 and 2019, respectively, and gains of $3 million and $6 million were recognized under financial expenses, net for the nine months ended September 30, 2020 and 2019, respectively.
 
27
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE 9 – Legal settlements and loss contingencies:
In the third quarter of 2020, Teva recorded
expenses
 of $21 million in legal settlements and loss contingencies, compared to
 
expenses of 
 $468 million in the third quarter of 2019. The expense in the third quarter of 2020 was mainly due to
 
settling in part antitrust claims challenging a patent settlement agreement
, partially offset by proceeds received following a settlement of an action brought against the sellers of Auden McKenzie (an acquisition made by Actavis Generics). The expense in the third quarter of 2019 was mainly related to an increase in the estimated settlement provision recorded in connection with the opioid cases.
In the first nine months of 2020, Teva recorded
expenses
 of $10 million in legal settlements and loss contingencies, compared to
 
expenses of 
$1,171 million in the first nine months of 2019. The expense in the first nine months of 2020 was mainly related to an increase of a reserve for certain legal expenses and settlement contributions related to product liability claims in the United States and partially settling antitrust claims challenging a patent settlement agreement, partially offset by proceeds received following a settlement of the FCPA derivative proceedings in Israel and settlement of an action brought against the sellers of Auden McKenzie (an acquisition made by Actavis Generics).The expense in the first nine months of 2019 was mainly related to an estimated settlement provision recorded in connection with the opioid cases.
As of September 30, 2020 and December 31, 2019, Teva’s provision for legal settlements and loss contingencies recorded under accrued expenses
and other taxes and long-term liabilities
 
was $1,624 million and $1,580 million, respectively.
 
28
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE 10 – 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.
Teva records a provision in its financial statements to the extent that it concludes that a contingent liability is probable and the amount thereof is estimable. Based upon the status of the cases described below, management’s assessments of the likelihood of damages, and the advice of counsel, no provisions have been made regarding the matters disclosed in this note, except as noted below. Litigation outcomes and contingencies are unpredictable, and excessive verdicts can occur. Accordingly, management’s assessments involve complex judgments about future events and often rely heavily on estimates and assumptions. Teva continuously reviews the matters described below and may, from time to time, remove previously disclosed matters that the Company has determined no longer meet the materiality threshold for disclosure.
If one or more of such proceedings described below were to result in final judgments against Teva, such judgments could be material to its results of operations and cash flows in a given period. In addition, Teva incurs significant legal fees and related expenses in the course of defending its positions even if the facts and circumstances of a particular litigation do not give rise to a provision in the financial statements.
In connection with third-party agreements, Teva may under certain circumstances be required to indemnify, and may be indemnified by, in unspecified amounts, the parties to such agreements against third-party claims. Among other things, Teva’s agreements with third parties may require Teva to indemnify them, or require them to indemnify Teva, for the costs and damages incurred in connection with product liability claims, in specified or unspecified amounts.
Except as otherwise noted, all of the litigation matters disclosed below involve claims arising in the United States. Except as otherwise noted, all third party sales figures given below are based on IQVIA (formerly IMS Health Inc.) data.
Intellectual Property Litigation
From time to time, Teva seeks to develop generic versions of patent-protected pharmaceuticals for sale prior to patent expiration in various markets. In the United States, to obtain approval for most generics prior to the expiration of the originator’s patents, Teva must challenge the patents under the procedures set forth in the Hatch-Waxman Act of 1984, as amended. To the extent that Teva seeks to utilize such patent challenge procedures, Teva is and expects to be involved in patent litigation regarding the validity, enforceability or infringement of the originator’s patents. Teva may also be involved in patent litigation involving the extent to which its product or manufacturing process techniques may infringe other originator or third-party patents.
Additionally, depending upon a complex analysis of a variety of legal and commercial factors, Teva may, in certain circumstances, elect to market a generic version even though litigation is still pending. To the extent Teva elects to proceed in this manner, it could face substantial liability for patent infringement if the final court decision is adverse to Teva, which could be material to its results of operations and cash flows in a given period.
Teva could also be sued for patent infringement outside of the context of the Hatch-Waxman Act. For example, Teva could be sued for patent infringement after commencing sales of a product. In addition, for biosimilar products, Teva could be sued according to the “patent dance” procedures of the Biologics Price Competition and Innovation Act (BPCIA).
The general rule for damages in patent infringement cases in the United States is that the patentee should be compensated by no less than a reasonable royalty and it may also be able, in certain circumstances, to be compensated for its lost profits. The amount of a reasonable royalty award would generally be calculated based on the sales of Teva’s product. The amount of lost profits would generally be based on the lost sales of the patentee’s product. In addition, the patentee may seek consequential damages as well as enhanced damages of up to three times the profits lost by the patent holder for willful infringement, although courts have typically awarded much lower multiples.
Teva is also involved in litigation regarding patents in other countries where it does business, particularly in Europe. The laws concerning generic pharmaceuticals and patents differ from country to country. Damages for patent infringement in Europe may include lost profits or a reasonable royalty, but enhanced damages for willful infringement are generally not available.
 
In July 2014, GlaxoSmithKline (“GSK”) sued Teva in Delaware federal court for infringement of a patent expiring in June 2015 directed to using carvedilol in a specified manner to decrease the risk of mortality in patients with congestive heart failure. Teva and eight other generic producers began selling their carvedilol tablets (the generic version of GSK’s Coreg
®
) in September 2007. A jury trial was held and the jury returned a verdict in GSK’s favor finding Teva liable for induced infringement, including willful infringement, and assessing damages of $235.5 million, not including
pre-
or post-judgment interest or a multiplier for willfulness. Following post-trial motions filed by the parties, on March 28, 2018, the district court
29

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
issued an opinion overturning the jury verdict and instead found no induced infringement by Teva, thereby finding that Teva did not owe any damages; the district court also denied Teva’s motion seeking to overturn the jury verdict with respect to invalidity. The provision that was originally included in the financial statements following the damages verdict in this matter in 2017 was reversed in 2018, following the opinion overturning the verdict as the exposure was no longer considered probable. On October 2, 2020, the Court of Appeals for the Federal Circuit overturned the lower court’s ruling and reinstated the jury verdict in a
two-to-one
decision. Teva intends to file a request for en banc review. If further appeals are decided against Teva, the case would be remanded to the district court for it to consider Teva’s other legal and equitable defenses that have not yet been considered by the district court.
In 2014, Teva Canada succeeded in its challenge of the bortezomib (the generic equivalent of Velcade
®
) 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 limited the damages payable by either party depending on the outcome of the infringement/impeachment action. As a result, the most Janssen and Millennium could have recovered is 200 million Canadian dollars plus post-judgment interest. In June 2018, the court ruled that Janssen and Millennium pay Teva 5 million Canadian dollars in Section 8 damages. Janssen and Millennium filed an appeal, which was denied by the appellate court on November 4, 2019. On January 3, 2020, Janssen and Millennium applied for leave to appeal to the Canadian Supreme Court. On May 8, 2020, the Canadian Supreme Court denied Janssen and Millennium’s application. This matter is now closed.
Product Liability Litigation
Teva’s business inherently exposes it to potential product liability claims. Teva maintains a program of insurance, which may include commercial insurance, self-insurance (including direct risk retention), or a combination of both approaches, in amounts and on terms that it believes are reasonable and prudent in light of its business and related risks. However, Teva sells, and will continue to sell, pharmaceuticals that are not covered by its product liability insurance; in addition, it may be subject to claims for which insurance coverage is denied as well as claims that exceed its policy limits. Product liability coverage for pharmaceutical companies is becoming more expensive and increasingly difficult to obtain. As a result, Teva may not be able to obtain the type and amount of insurance it desires, or any insurance on reasonable terms, in all of its markets.
Teva and its subsidiaries are parties to litigation relating to previously unknown nitrosamine impurities discovered in certain products. The discovery led to a global recall of single and combination valsartan medicines around the world starting in July 2018. The nitrosamine impurities in valsartan are allegedly found in the active pharmaceutical ingredient (API) supplied by multiple API manufacturers. Teva’s products allegedly at issue in the
various nitrosamine-related litigations
 pending in the United States include valsartan, losartan, metformin and ranitidine. There are currently two Multi-District Litigations (“MDL”) pending in the United States District Courts. One MDL is pending in the United States District Court for the District of New Jersey for valsartan, losartan and irbesartan. The second MDL is pending in the United States District Court for the Southern District of Florida for ranitidine. The lawsuits against Teva in the MDLs consist of individual personal injury and/or product liability claims and economic damages claims brought by consumers and end payors on behalf of purported classes of other consumers and end payors as well as medical monitoring claims with respect to the New Jersey MDL. In addition to these MDLs, Teva has also been named in a consolidated proceeding pending in the United States District Court for the District of New Jersey brought by individuals and end payors seeking economic damages on behalf of purported classes of consumers and end payors who purchased Teva’s, as well as other generic
manufacturers
’ metformin products.
Similar
lawsuits
are
pending in Canada and Germany.
Competition Matters
As part of its generic pharmaceuticals business, Teva has challenged a number of patents covering branded pharmaceuticals, some of which are among the most widely-prescribed and well-known drugs on the market. Many of Teva’s patent challenges have resulted in litigation relating to Teva’s attempts to market generic versions of such pharmaceuticals under the federal Hatch-Waxman Act. Some of this litigation has been resolved through settlement agreements in which Teva obtained a license to market a generic version of the drug, often years before the patents expire.
Teva and its subsidiaries have increasingly been named as defendants in cases that allege antitrust violations arising from such settlement agreements. The plaintiffs in these cases, which are usually direct and indirect purchasers of pharmaceutical products, and often assert claims on behalf of classes of all direct and indirect purchasers, typically allege that (1) Teva received something of value from the innovator in exchange for an agreement to delay generic entry, and (2) significant savings could have been realized if there had been no settlement agreement and generic competition had commenced earlier. These class action cases seek various forms of injunctive and monetary relief, including damages based on the difference between the brand price and 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.
 
30
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
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 (“FTC”) v. Actavis, Inc. (the “AndroGel case”), that a rule of reason test should be applied in analyzing whether such settlements potentially violate the federal antitrust laws. The Supreme Court held that a trial court must analyze each agreement in its entirety in order to determine whether it violates the antitrust laws. This new test has resulted in increased scrutiny of Teva’s patent settlements, additional action by the FTC and state and local authorities, and an increased risk of liability in Teva’s currently pending antitrust litigations.
Beginning 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 with allegations that the settlement agreements entered into between Cephalon, Inc., now a Teva subsidiary (“Cephalon”), and various generic pharmaceutical companies in late 2005 and early 2006 to resolve patent litigation involving certain finished modafinil products (marketed as PROVIGIL
®
) were unlawful because they had the effect of excluding generic competition. The cases also allege that Cephalon improperly asserted its PROVIGIL patent against the generic pharmaceutical companies. 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 plaintiffs in such cases, except for an action brought by the State of Louisiana. The settlement with the State of California that was reached in 2019 received final court approval in June 2020. All settlements entered into in connection with the above proceeding are covered by the settlement fund explained below.
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. Under the Modafinil Consent Decree, Teva also agreed to certain injunctive relief with respect to the types of settlement agreements Teva may enter into to resolve patent litigation in the United States for a period of ten years. The remaining balance of the settlement fund after consideration of the settlement with the State of California noted above is approximately $19 million. In February 2019, in connection with the settlement of other unrelated FTC antitrust lawsuits, as described below, Teva and the FTC agreed to amend certain
non-financial
provisions of the Modafinil Consent Decree and to restart its
ten-year
term.
Additionally, following an investigation initiated by the European Commission in April 2011 regarding a modafinil patent settlement in Europe, the European Commission issued a Statement of Objections and a Supplementary Statement of Objection in July 2017 and June 2020, respectively, 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 liability 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 breach amounted to €46.5 million.
Teva and its affiliates have been
named
as defendants in lawsuits that allege that multiple patent litigation settlement agreements relating to AndroGel® 1% (testosterone gel) violate the antitrust laws. The first of these lawsuits (the “Georgia AndroGel Litigation”) was filed in 
 January 2009 
 in California federal court, and later transferred to Georgia federal court, with 
the FTC and the State of California
, and later private plaintiffs, challenging
a September 2006 patent
 litigation 
settlement between Watson Pharmaceuticals, Inc. (“Watson”), from which Teva later acquired certain assets and liabilities, and Solvay Pharmaceuticals, Inc. (“Solvay”)
. The second lawsuit (the “Philadelphia 
 AndroGel
 Litigation”) was 
  filed by
 
the FTC 
 in 
September 2014 
in federal court 
in Philadelphia, challenging Teva’s December 2011 patent litigation settlement with AbbVie. The FTC 
 stipulated to
 
dismiss Teva from both litigations,
 in exchange for Teva’s agreement to amend the Modafinil Consent
 
Decree, as described above. On July 16, 2018, the direct purchaser plaintiffs’ motion for class certification
 
 
in the Georgia AndroGel Litigation 
was denied and 
 
Teva
later settled 
with
 
most of the retailer plaintiffs in the Georgia AndroGel Litigation as well as 
the three direct purchasers that had sought class certification. Settlement amounts were paid in full. In  August 2019, certain other direct-purchaser plaintiffs (who would have been members of the direct purchaser class
 in the Georgia AndroGel Litigation
, had it been certified) filed their own claims in
 the 
federal court in Philadelphia
 (where the Philadelphia AndroGel Litigation has been pending),
 challenging (in one complaint) both the September 2006 settlement between Watson and Solvay
, and the 
December 2011 settlement
between Teva and 
AbbVie.
 
Those claims remain pending. 
Annual sales of AndroGel
®
1% were approximately $350 million at the time of the
earlier Watson/Solvay 
settlement and approximately $140 million at the time Actavis launched its generic version of AndroGel
®
1% in November 2015. A provision for
 these matters 
 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
31

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
settlement agreement between Wyeth and Teva unlawfully delayed generic entry. In October 2014, the court granted Teva’s motion to dismiss in the direct purchaser cases, after which the parties agreed that the court’s reasoning applied equally to the indirect purchaser cases. Plaintiffs appealed and, in August 2017, the Third Circuit reversed the district court’s decision and remanded for further proceedings. In March 2020, the district court temporarily stayed discovery and referred the case to mediation. 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 district court granted the direct-purchaser plaintiffs’ motion for class certification, but on April 22, 2020, the Third Circuit reversed that ruling and remanded for further class certification proceedings. 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 purchasers’ class. In August 2019, the district court certified the direct-purchaser class, but in June 2020, the court denied the indirect purchasers’ motion for class certification. In October 2016, the District Attorney for Orange County, California, filed a similar complaint in California state court, which has since been amended, 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 Appeals subsequently reversed the decision and in June 2020, the California Supreme Court reversed the Court of Appeals’ decision, allowing the District Attorney’s claims to proceed. 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.
Beginning in 2013, several putative class actions were filed 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. The cases were consolidated as a multidistrict litigation in federal court in California and were settled in 2018. The FTC also filed suit to challenge the Lidoderm
®
settlement, although in February 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. In July 2019, Teva also settled a complaint brought by the State of California. On September 16, 2019,
end-payers
Blue Cross Blue Shield of Michigan and Blue Care Network of Michigan filed their own lawsuit against Watson, and other defendants, in Michigan state court. Defendants moved to dismiss that lawsuit on June 5, 2020, and those motions were granted in part and denied in part on October 16, 2020. On January 24, 2020, the State of Mississippi filed a complaint against Teva and Watson in Mississippi state court, which it subsequently amended on June 12, 2020. Teva and Watson have moved to dismiss that amended complaint, and their motion remains pending.
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-payers’
lawsuits against all defendants in September 2015. On February 8, 2017, the Court of Appeals for the Second Circuit affirmed the dismissal in part and vacated and remanded the dismissal in part with respect to the claims against Takeda. The direct purchasers’ case had been stayed pending resolution of the appeal in the end payer matter and the direct purchasers amended their complaint for a second time following the Second Circuit’s decision, but on October 8, 2019, the district court dismissed, with prejudice, the direct purchasers’ claims against the generic manufacturers (including Teva, Actavis, and Watson). At the time of Teva’s 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 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, alleging, among other things, that the settlement agreements between Forest and the generic manufacturers to resolve patent litigation over Namenda IR
®
violated the antitrust laws. Teva reached a settlement agreement with these plaintiffs in July 2020, which
is awaiting final court approval.
 
Annual sales of Namenda IR
®
at the time of the patent litigation 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.
 
32
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
In January 2019, generic manufacturer Cipla Limited filed a lawsuit against Amgen
, which was later amended to include Teva as a defendant,
in Delaware federal court, alleging, among other things, that a January 2, 2019 settlement agreement between Amgen and Teva, resolving patent litigation over cinacalcet (generic Sensipar
®
), violated the antitrust laws. 
On August 14, 2020,
 Cipla Limited
agreed to dismiss 
 its
claims against 
 Teva
, with prejudice
, and
those claims have since been dismissed. Putative 
 classes of direct-purchaser and
end-payer
plaintiffs have also filed antitrust lawsuits (which have since been consolidated in federal court in Delaware) against Amgen and Teva related to the January 2, 2019 settlement.
 
On July 22, 2020, a magistrate judge recommended that plaintiffs’ claims be dismissed. Plaintiffs have objected to the magistrate judge’s recommendation of dismissal, and those objections remain pending before the district court.
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.
On December 16, 2016, the U.K. Competition and Markets Authority (“CMA”) issued a statement of objections (a provisional finding of breach of the Competition Act) in respect of certain allegations against Allergan, Actavis UK and certain Auden Mckenzie entities alleging competition law breaches in connection with the supply of 10mg and 20mg hydrocortisone tablets in the U.K. On March 3, 2017 and February 28, 2019, the CMA issued second and third statements of objections in respect of certain additional allegations relating to the same products and covering part of the same time periods as in the first statement of objections. On February 12, 2020, the CMA issued a Supplementary Statement of Objections effectively combining the three previously issued statements referenced
above and a Statement of Draft
Penalty
Calculation
was issued on October
28
, 2020
. On January 9, 2017, Teva completed the sale of Actavis UK to Accord Healthcare Limited, in connection with which Teva will indemnify Accord Healthcare for potential fines imposed by the CMA and/or damages awarded by a court against Actavis UK in relation to the December 16, 2016 and March 3, 2017 statements of objections, and resulting from conduct prior to the closing date of the sale. In addition, Teva agreed to indemnify Allergan against losses arising from this matter in the event of any such fines or damages. A liability for this matter has been recorded in the financial statements.
In October 2019, the European Commission commenced an inspection of Teva and subsequently requested information for purposes of investigating whether Teva may have abused a dominant position in the Multiple Sclerosis field, dating back to at least 2014. No formal proceedings have been initiated. Annual sales of
COPAXONE
®
in the European Economic Area for the past year were approximately $431 million.
On September 1, 2020 and October 20, 2020, two separate plaintiffs purporting to represent a putative class of direct purchasers of Bystolic
®
(nebivolol hydrochloride) filed separate complaints in the U.S. District Court for the Southern District of New York against several generic manufacturers, including Teva, Actavis, and Watson, alleging, among other things, that the settlement agreements these generic manufacturers entered into with Forest Laboratories, Inc., the innovator, to resolve patent litigation over Bystolic
®
violated the antitrust laws. Several other putative classes of both direct purchaser and end payer plaintiffs have also filed related complaints, although to date, none of these other complaints name Teva, Watson, or Actavis as defendants. The cases remain in their preliminary stages, pending decisions regarding potential transfer, consolidation, appointment of lead counsel for the putative class, and the filing of a single consolidated complaint on behalf of all plaintiffs. Annual sales of Bystolic
®
in the United States were approximately $700 million at the time of Watson’s 2013 settlement with Forest.
 
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.
In 2015 and 2016, Actavis and Teva USA each respectively received subpoenas from the U.S. Department of Justice (“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.
 On August 25, 2020, a federal grand jury in the Eastern District of Pennsylvania returned a three count indictment charging Teva USA with criminal felony Sherman Act violations. See No. 20-cr-200 (E.D. Pa.). The indictment alleges Teva USA participated in a conspiracy with certain other generic drug manufacturers to maintain and fix prices, allocate customers, and other alleged antitrust offenses concerning the sale of generic drugs, including Pravastatin, Carbamazepine, Clotrimazole, Etodolac (IR and ER), Fluocinonide (Cream E-Cream, Gel, and Ointment), Warfarin, Etodolac (IR), Nadolol, Temozolomide, and Tobramycin. On September 8, 2020, Teva USA pled not guilty to all counts. A tentative trial date is yet to be scheduled. While the Company is unable to estimate a range of loss at this time, a conviction on these criminal charges could have a material adverse impact on the Company’s business, including monetary penalties and debarment from federally funded health care programs. 
In May 2018, Teva received a civil investigative demand from the DOJ Civil Division, pursuant to the federal False Claims Act, seeking documents and information produced since January 1, 2009 relevant to the Civil Division’s investigation concerning allegations that generic pharmaceutical manufacturers, including Teva, engaged in market allocation and price-fixing agreements, paid illegal remuneration, and caused false claims to be submitted in violation of the False Claims Act. An adverse resolution of this matter may include fines, penalties, financial forfeiture and compliance conditions.
TEVA
PHARMACEUTICAL
INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
In 2015 and 2016, Actavis and Teva USA each respectively received a subpoena from the Connecticut Attorney General seeking documents and other information relating to potential state antitrust law violations. Subsequently, on December 15, 2016, a civil action was brought by the attorneys general of twenty states against Teva USA and several other companies asserting claims under federal antitrust law alleging price fixing of generic products in the United States. That complaint was later amended to add new states as named plaintiffs, as well as new allegations and new state law claims, and on June 18, 2018, the attorneys general of 49 states plus Puerto Rico and the District of Columbia filed a consolidated amended complaint against Actavis and Teva, as well as other companies and individuals. On May 10, 2019, most (though not all) of these attorneys general filed yet another antitrust complaint against Actavis, Teva and other companies and individuals, alleging price-fixing and market allocation with respect to additional generic products. On November 1, 2019, the state attorneys general filed an amended complaint, bringing the total number of plaintiff states and territories to 54. The amended complaint alleges that Teva was at the center of a conspiracy in the generic pharmaceutical industry, and asserts that Teva and others fixed prices, rigged bids, and allocated customers and market share with respect to certain additional products. On June 10, 2020, most, but not all, of the same states, with the addition of the U.S. Virgin Islands, filed a third complaint in the District of Connecticut naming, among other defendants, Actavis, but not Teva USA in a similar complaint relating to dermatological generics products. In the various complaints described above, the states seek a finding that the defendants’ actions violated federal antitrust law and state antitrust and consumer protection laws, as well as injunctive relief, disgorgement, damages on behalf of various state and governmental entities and consumers, civil penalties and costs. All such complaints have been transferred to the generic drug multidistrict litigation in the Eastern District of Pennsylvania (“Pennsylvania MDL”). On July 13, 2020, the court overseeing the Pennsylvania MDL chose the attorneys’ general May 10, 2019 complaint, referenced above, along with three complaints filed by private plaintiffs, to proceed first in the litigation as bellwether complaints.
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 and indirect purchaser
opt-out
plaintiffs. These complaints, which allege that the defendants engaged in conspiracies to fix prices and/or allocate market share of generic products have been brought against various manufacturer defendants, including Teva and Actavis. The plaintiffs 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. On July 18, 2019, and again on May 6, 2020, certain individual plaintiffs commenced a civil action in the Pennsylvania Court of Common Pleas of Philadelphia County against many of the defendants in the Pennsylvania MDL, including Teva and Actavis, but no complaint has been filed in either action and the July 18, 2019 case has been placed in deferred status. On November 13, 2019,
and again on August 24, 2020, certain
 counties in New York
commenced civil actions 
 against many of the defendants in the Pennsylvania MDL, including Teva and Actavis, and the
complaints have
 been transferred to the Pennsylvania MDL. On March 1, 2020, Harris County in Texas filed a complaint against several generic manufacturers including Teva and Actavis in the District Court for the Southern District of Texas. This complaint largely mirrors certain allegations in the complaints in the Pennsylvania MDL and has been transferred to the Pennsylvania MDL. There is also one similar complaint brought in Canada, which alleges that the defendants engaged in conspiracies to fix prices and/or allocate market share of generic drug products to the detriment of a class of private payors. The action is in its early stages.
In
March 2017, Teva received a subpoena from the U.S. Attorney’s office in Boston, Massachusetts requesting documents related to Teva’s donations to patient assistance programs.
 
Subsequently, in August 2020, the U.S. Attorney’s office in Boston, Massachusetts brought a civil action in the U.S. District Court for the District of Massachusetts alleging violations of the federal Anti-Kickback Statute, and asserting causes of action under the federal False Claims Act and state law. It is alleged that Teva caused the submission of false claims to Medicare through Teva’s donations to bona fide independent charities that provide financial assistance to patients. An adverse judgment may involve damages, civil penalties and injunctive remedies. On October 19, 2020, Teva filed a motion to dismiss the complaint which is pending.
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. In February 2020 the term of the monitorship provided for by the DPA and Teva’s consent judgement with the SEC expired and on March 4, 2020, following Teva’s certification to the SEC and the DOJ confirming that Teva had complied with its disclosure obligations under the DPA, the DOJ filed a motion to dismiss the information filed against Teva at the time the DPA was entered into. On July 21, 2020, the information was dismissed.
Opioids Litigation
Since May 2014, more than 3,000 complaints have been filed with respect to opioid sales and distribution against various Teva affiliates, along with several other pharmaceutical companies, by a number of cities, counties, states, other governmental agencies, tribes and private plaintiffs (including various putative class actions of individuals) in both state and federal courts. Most of the federal cases have been consolidated into a multidistrict litigation in the Northern District of Ohio (“MDL Opioid Proceeding”) and many of the cases filed in state court have been removed to federal court and consolidated into the MDL
 
34

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
Opioid Proceeding. Two cases that were in the MDL Opioid Proceeding were recently transferred back to federal district court for additional discovery,
pre-trial
proceedings and trial. Those cases are: City of Chicago v. Purdue Pharma L.P. et al., No.
14-cv-04361
(N.D. Ill.) and City and County of San Francisco v. Purdue Pharma L.P. et al., No.
18-cv-07591-CRB
(N.D. Cal.). Other cases remain pending in various states. In some jurisdictions, such as Illinois, New York, Pennsylvania, South Carolina, Texas, Utah and West Virginia, certain state court cases have been transferred to a single court within their respective state court systems for coordinated pretrial proceedings. 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, over
950
 personal injury plaintiffs, including various putative class actions of individuals, have asserted personal injury and wrongful death claims in over 600 complaints
, nearly all of which are consolidated in the MDL Opioid Proceeding
. Furthermore, approximately 700 complaints have named Anda, Inc. (and other distributors and manufacturers) alleging that Anda failed to develop and implement systems sufficient to identify suspicious orders of opioid products and prevent the abuse and diversion of such products to individuals who used them for other than legitimate medical purposes. Plaintiffs seek a variety of remedies, including restitution, civil penalties, disgorgement of profits, treble damages, attorneys’ fees and injunctive relief. Certain plaintiffs assert that the measure of damages is the entirety of the costs associated with addressing the abuse of opioids and opioid addiction and certain plaintiffs specify multiple billions of dollars in the aggregate as alleged damages.
 
The individual personal injury plaintiffs further seek non-economic damages.
In many of these cases, plaintiffs are seeking joint and several damages among all defendants.
Absent resolutions, trials are expected to proceed in several states in 2021. A court in New York had set a date, for a liability trial only, to start in March 2020. However, that trial has been postponed due to the impact of
the
 
COVID-19
 pandemic and rescheduled to begin in the first quarter of 2021
. It is difficult to predict when or if trials will occur in 2020 given the current impact of
the
 
COVID-19
pandemic
 
on the United States and the U.S. judicial system.
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. As the Company demonstrated a willingness to settle part of the litigation, for accounting purposes, management considered a portion of opioid-related cases as probable and, as such, recorded an estimated provision in the second quarter of 2019. Given the relatively early stage of the cases, management viewed no amount within the range to be the most likely outcome. Therefore, management recorded a provision for the reasonably estimable minimum amount in the assessed range for such opioid-related cases in accordance with Accounting Standards Codification 450 “Accounting for Contingencies.”
On October 21, 2019, Teva reached a settlement with the two plaintiffs in the MDL Opioid Proceeding that was scheduled for trial for the Track One case, Cuyahoga and Summit Counties of Ohio. Under the terms of the settlement, Teva will provide the two counties with opioid treatment medication, buprenorphine naloxone (sublingual tablets), known by the brand name Suboxone
®
, with a value of $25 million at wholesale acquisition cost and distributed over three years to help in the care and treatment of people suffering from addiction, and a cash payment in the amount of $20 million, to be paid in 4
payments over three years.
Also on October 21, 2019, Teva and certain other defendants reached an agreement in principle with a group of Attorneys General from North Carolina, Pennsylvania, Tennessee and Texas for a nationwide settlement framework (the “framework”). The framework is designed to provide a mechanism by which the Company attempts to seek resolution of remaining potential and pending opioid claims by both the U.S. states and political subdivisions (i.e., counties, tribes and other plaintiffs) thereof. Under this framework, Teva would provide buprenorphine naloxone (sublingual tablets) with an estimated value of up to approximately $23 billion at wholesale acquisition cost over a ten year period. In addition, Teva would also
provide cash payments of up to $250 million over a ten year period.
 As of October 2020, the Company continues to negotiate the terms and conditions of the framework. 
The Company cannot predict if the framework will be finalized
 
with its current terms and obligations. The
 Company considered a range of potential settlement outcomes. The current provision is a reasonable estimate of the ultimate costs if the nationwide settlement framework is finalized in its current form. However, if not finalized in its current form for the entirety of the cases, a reasonable upper end of a range of loss cannot be determined. An adverse resolution of any of these lawsuits or investigations may involve large monetary penalties, damages, and/or other forms of monetary and
non-monetary
relief and could have a material and adverse effect on Teva’s reputation, business, results of operations and cash flows.
Separately, on April 27, 2018, Teva received subpoena requests from the United States Attorney’s office in the Western District of Virginia and the Civil Division seeking documents relating to the manufacture, marketing and sale of branded opioids. In August 2019, Teva received a grand jury subpoena from the United States Attorney’s Office for the Eastern District of New York for documents related to the Company’s anti-diversion policies and procedures and distribution of its opioid medications, in what the Company understands to be part of a broader investigation into manufacturers’ and distributors’ monitoring programs and reporting under the Controlled Substances Act. In September 2019, Teva received subpoenas from the New York State Department of Financial Services (NYDFS) as part of an industry-wide inquiry into the effect of opioid prescriptions on New York health insurance premiums. The Company is cooperating with NYDFS’s inquiry and
producing
 
35
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
documents in response to the various subpoenas and requests for information. Currently, Teva cannot predict how the nationwide settlement framework agreement (if finalized) will affect these investigations
 
and
administrative actions
. In addition, a number of state attorneys general, including a coordinated multistate effort, have initiated investigations into sales and marketing practices of Teva and its affiliates with respect to opioids. Other states are conducting their own investigations outside of the multistate group. Teva is cooperating with these ongoing investigations and cannot predict their outcome at this time.
In addition, several jurisdictions in Canada have initiated litigation regarding opioids alleging similar claims as those in the United States. The cases in Canada
may
 be consolidated and are in their early stages.
Shareholder Litigation
On November 6, 2016 and December 27, 2016, two putative securities class actions were filed in the U.S. District Court for the Central District of California against Teva and certain of its current and former officers and directors. Those lawsuits were consolidated and transferred to the U.S. District Court for the District of Connecticut (the “Ontario Teachers Securities Litigation”). On December 13, 2019, the lead plaintiff in that action filed an amended complaint, purportedly on behalf of purchasers of Teva’s securities between February 6, 2014 and May 10, 2019. The amended complaint asserts that Teva and certain of its current and former officers and directors violated federal securities and common laws in connection with Teva’s alleged failure to disclose pricing strategies for various drugs in its generic drug portfolio and by making allegedly false or misleading statements in certain offering materials. The amended complaint seeks unspecified damages, legal fees, interest, and costs. In July 2017, August 2017, and June 2019, other putative securities class actions were filed in other federal courts based on similar allegations, and those cases have been transferred to the U.S. District Court for the District of Connecticut. Between August 2017 and June 2020, nineteen complaints were filed against Teva and certain of its current and former officers and directors seeking unspecified compensatory damages, legal fees, costs and expenses. The similar claims in these complaints have been brought on behalf of plaintiffs, in various forums across the country, who have indicated that they intend to
“opt-out”
of the plaintiffs’ class if one is certified in the Ontario Teachers Securities Litigation. On March 10, 2020, the Court consolidated the Ontario Teachers Securities Litigation with all of the above-referenced putative class actions for all purposes and the
“opt-out”
cases for pretrial purposes. The case is now in discovery.
 
Pursuant to that consolidation order, plaintiffs in several of the
“opt-out”
cases filed amended complaints on May 28, 2020. On July 8, 2020, Teva and other defendants moved to dismiss certain of the claims brought by certain of the
“opt-out”
plaintiffs. Those motions are pending. The Ontario Teachers Securities Litigation plaintiffs filed a Motion for Class Certification and Appointment of Class Representatives and Class Counsel on June 19, 2020, which the defendants opposed. That motion is pending. Motions to approve securities class actions were also filed in the Tel Aviv District Court in Israel with similar allegations to those made in the Ontario Teachers Securities Litigation.
On September 23, 2020, a putative securities class action was filed in the U.S. District Court for the Eastern District of Pennsylvania against Teva and certain of its former officers alleging, among other things, violations of Section 10(b) of the Securities and Exchange Act of 1934 and SEC Rule
10b-5.
The complaint, purportedly filed on behalf of persons who purchased or otherwise acquired Teva securities between October 29, 2015 and August 18, 2020, alleges that Teva and certain of its former officers violated federal securities laws by allegedly making false and misleading statements regarding the commercial performance of COPAXONE, namely, by failing to disclose that Teva had caused the submission of false claims to Medicare through Teva’s donations to bona fide independent charities that provide financial assistance to patients, which allegedly impacted COPAXONE’s commercial success and the sustainability of its revenues and resulted in the above referenced August 2020 False Claims Act complaint filed by the DOJ. The securities class action complaint seeks unspecified damages, legal fees, interest, and costs. The case is in its preliminary stages. A motion to approve a securities class action was also filed in the Central District Court in Israel, with similar allegations to those made in the above complaint filed in the U.S. District Court for the Eastern District of Pennsylvania.
Motions to approve derivative actions against certain past and present directors and officers have been filed in Israeli Courts alleging negligence and recklessness with respect to the acquisition of the Rimsa business, the acquisition of Actavis Generics and the patent settlement relating to Lidoderm
®
. Motions for document disclosure prior to initiating derivative actions were filed with respect to several U.S. and EU settlement agreements,
opioids,
 the U.S. price-fixing investigations
 and
 allegations
 
related
to 
 the
DOJ’s complaint regarding Copaxone patient assistance program 
  in the
U.S. In October 2020, Teva filed a notice with the Tel Aviv District Court to settle the derivative proceeding with regard to the acquisition of Actavis Generics and two related actions,
 including
 
the
derivative proceedings related to allegations in connection with the Lidoderm® patent settlement agreement. 
Various motions were filed in Israel to approve a derivative action, discovery and a class action related to claims regarding Teva’s above-mentioned FCPA resolution with the SEC and DOJ. The parties have reached a settlement which was
approved
by the Tel Aviv District Court on April 6, 2020.
 
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
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
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. Trial in this matter is currently scheduled for October 2021.
NOTE 11 – Income taxes:
In the third quarter of 2020, Teva recognized a tax
expense
of $16 million, on
pre-tax
loss of $4,459 million. In the third quarter of 2019, Teva recognized a tax
expense
of $11 million, on
pre-tax
loss of $292 million. Teva’s tax rate for the third quarter of 2020 was mainly affected by
the goodwill impairment charge that does not have a corresponding tax effect and
other changes to tax positions and deductions.
In the first
nine
months of 2020, Teva recognized a tax benefit of $147 million, on
pre-tax
loss of $4,543 million. In the first
nine
months of 2019, Teva recognized a tax benefit of $159 million, on
pre-tax
loss of $1,226 million. Teva’s tax rate for the first
nine
months of 2020 was mainly affected by 
the goodwill impairment charge that does not have a corresponding
tax 
 effect 
and other changes to tax positions and deductions.
The statutory Israeli corporate tax rate is 23% in 2020. 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, as well as infrequent or discrete items.
Teva filed a claim seeking the refund of withholding taxes paid to the Indian tax authorities in 2012. Trial in this case is scheduled to begin in
November
2020. A final and binding decision against Teva in this case may lead to an
 asset write off o
f $140 million.
The Israeli tax authorities issued tax assessment decrees for 2013-2016, challenging the Company’s positions on several issues. 
In September 2020, Teva commenced proceedings protesting
 
the 
2013-2016 decrees
at
 the Central District Court in Israel. The Company believes it has adequately provided for these items, however, an adverse result could be material.
 
37
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE 12 – Other assets impairments, restructuring and other items:
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2020
   
2019
   
2020
   
2019
 
   
(U.S. $ in millions)
   
(U.S. $ in millions)
 
Impairments of long-lived tangible assets (1)
  
$
56
 
  
$
28
 
  
$
408
 
  
$
96
 
Contingent consideration
  
 
(179
  
 
51
 
  
 
(96
  
 
4
 
Restructuring
  
 
9
 
  
 
61
 
  
 
82
 
  
 
140
 
Other
  
 
15
 
  
 
21
 
  
 
10
 
  
 
24
 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  
$
(98
  
$
160
 
  
$
404
 
  
$
263
 
  
 
 
   
 
 
   
 
 
   
 
 
 
 
(1)
Including impairments related to exit and disposal activities
Impairments
Impairments of tangible assets for the three months
ended September
 
30, 2020 and
2019 were $56 million and $28 million, respectively. The impairment for the three months ended September 30, 2020 was mainly related to the intention to sell certain assets
in
Teva’s
International
Markets
 
and Europe segments
.
Impairments of tangible assets for the nine months ended September 30, 2020 and 2019 were $408 million and $96 million, respectively. The impairment for the nine months ended September 30, 2020 was mainly related to the intention to sell certain assets from Teva’s business venture in Japan and plant rationalization. See note 2.
Teva may record additional impairments in the future, to the extent it changes its plans on any given asset and/or the assumptions underlying such plans, as a result of its plant rationalization plan.
Contingent consideration
In the three months ended September 30, 2020, Teva recorded an
income
of $179 million for contingent consideration, compared to an expense of $51 million in the three months ended September 30, 2019.
The income in the third quarter of 2020 was mainly related to a change in the future
royalty payments to Allergan in connection with lenalidomide (generic equivalent of Revlimid
®
), which was part of the Actavis Generics acquisition.
In the nine months ended September 30, 2020, Teva recorded an income of $96 million for contingent consideration, compared to an expense of $4
 
million in the nine months ended September 30, 2019. The income in the first nine months of 2020 was mainly related to a change in the future
royalty payments to Allergan in connection with lenalidomide (generic equivalent of Revlimid
®
), which was part of the Actavis Generics acquisition, partially offset by the change in the estimated future royalty payments to Eagle in connection with expected future bendamustine sales.
Restructuring
In the three months ended September 30, 2020, Teva recorded $9 million of restructuring expenses, compared to $61 million in the three months ended September 30, 2019.
In the nine months ended September 30, 2020, Teva recorded $82 million of restructuring expenses, compared to $140 million in the
nine
months ended September 30, 2019.
The expenses for the three and nine months ended September 30, 2020 were primarily related to residual expenses of the restructuring plan announced in 2017 and other network consolidation
activities
.
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 September 30,
 
   
2020
   
2019
 
   
(U.S. $ in millions)
 
Restructuring
    
Employee termination
  $3   $49 
  
 
 
   
 
 
 
Other
   7    11 
  
 
 
   
 
 
 
Total
  $9   $61 
  
 
 
   
 
 
 
 
38

TEVA PHARMACEUTICAL INDUSTRIES
LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
   
Nine months ended September 30,
 
   
2020
   
2019
 
   
(U.S. $ in millions)
 
Restructuring
    
Employee termination
  $39   $105 
  
 
 
   
 
 
 
Other
   43    34 
  
 
 
   
 
 
 
Total
  $82   $140 
  
 
 
   
 
 
 
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, 2020
  $(208  $(7  $(215
Provision
   (39   (43   (82
Utilization and other*
   145    43    188 
  
 
 
   
 
 
   
 
 
 
Balance as of September 30, 2020
  $(102  $(7  $(109
  
 
 
   
 
 
   
 
 
 
 
 
*
Includes adjustments for foreign currency translation.
Significant regulatory and other events
In July 2018, the FDA completed an inspection of Teva’s manufacturing plant in Davie, Florida in the United States, and issued a 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 contained four additional enumerated concerns related to production, quality control, and investigations at this site. Teva has been working diligently to address the FDA’s concerns in a manner consistent with current good manufacturing practice (cGMP) requirements, and to address those concerns as quickly and as thoroughly as possible. An FDA follow up inspection occurred in January 2020, resulting in some follow up findings, and Teva received a letter from the FDA dated April 24, 2020 notifying that the site continues to be classified as OAI. If Teva is unable to remediate the findings to the FDA’s satisfaction, it may face additional consequences. These would potentially include delays in FDA approval for future products from the site, financial implications due to loss of revenues, impairments,
inventory write-offs,
customer penalties, idle capacity charges, costs of additional remediation and possible FDA enforcement action. Teva expects to generate approximately $150 million in revenues from this site in 2020, assuming remediation or enforcement does not cause any unscheduled slowdown or stoppage at the facility, however delays in FDA approvals of future products from the site may occur.
In July 2018, Teva announced the voluntary recall of valsartan and certain combination valsartan medicines in various countries due to the detection of trace amounts of a previously unknown nitrosamine impurity called NDMA found in valsartan API supplied by Zhejiang Huahai Pharmaceuticals Co. Ltd. (“Huahai”). Since July 2018, Teva has been actively engaged with global regulatory authorities in reviewing its sartan and other products to determine whether NDMA and/or other related nitrosamine impurities are present in specific products. Where necessary, Teva has initiated additional voluntary recalls. In December 2019, Teva reached a settlement with Huahai resolving its claims related to certain sartan API supplied by Huahai. Under the settlement agreement, Huahai agreed to compensate Teva for some of its direct losses and provide it with prospective cost reductions for API. The settlement does not release Huahai from liability for any losses Teva may incur as a result of third party personal injury or product liability claims relating to the sartan API at issue. In addition, multiple lawsuits have been filed in connection with this matter, which may lead to additional customer penalties, impairments and litigation costs.
In the second quarter of 2020, Teva’s operations in its manufacturing facilities in Goa, India were temporarily suspended due to a water supply issue. During the third quarter of 2020, Teva completed the first step of remediation of this issue and restarted supply from its Goa facilities. The impact to Teva’s financial results for the nine months ended September 30, 2020 was immaterial, however, if the full remediation takes longer than expected there may be further loss of sales, customer penalties or impairments to related assets.
 
39

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE 13 – 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 diluted loss per share for the three months ended September 30, 2020 and September 30, 2019, no account was taken of the potential dilution that could occur upon the exercise of 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.
In computing diluted loss per share for the nine months ended September 30, 2020 and September 30, 2019, no account was taken of the potential dilution that could occur upon the exercise of 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.
Basic and diluted loss per share was $3.97 for the three months ended September 30, 2020, compared to basic and diluted loss per share of $0.29 for the three months ended September 30, 2019.
Basic and diluted loss per share was $3.78 for the nine months ended September 30, 2020, compared to basic and diluted loss per share of $1.02 for the nine months ended September 30, 2019.
 
40

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE 14 – Accumulated other comprehensive income (loss):
The components of, and changes within, accumulated other comprehensive income (loss) attributable to Teva are presented in the table below:
 
   
Net Unrealized Gains (Losses)
  
Benefit Plans
    
   
Foreign
currency
translation
adjustments
  
Available-for-
sale
securities
   
Derivative
financial
instruments
  
Actuarial gains
(losses) and
prior service
(costs) credits
  
Total
 
   
(U.S. $ in millions)
 
Balance as of December 31, 2019
$(1,794 $—     $(420 $(98 $(2,312
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
Other comprehensive income (loss) before reclassifications
   (377  —      20   —     (357
Amounts reclassified to the statements of income
   —     —      26   —     26 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
Net other comprehensive income (loss) before tax
   (377  —      46   —     (331
  
 
 
  
 
 
   
 
 
  
 
 
  
Net other comprehensive income (loss) after tax*
   (377  —      46   —     (331
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
Balance as of September 30, 2020
  $(2,171 $   $(374 $(98 $(2,643
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
 
*
Amounts do not include a $29 million gain from foreign currency translation adjustments attributable to
non-controlling
interests.
 
   
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
  $(1,878 $1   $(504 $(78 $(2,459
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
Other comprehensive income (loss) before reclassifications
   (28  (1   103   **  74 
Amounts reclassified to the statements of income
   —     —      21   —     21 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
Net other comprehensive income (loss) before tax
   (28  (1   124   **  95 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
Net other comprehensive income (loss) after tax*
   (28  (1   124   (1  94 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
Balance as of September 30, 2019
  $(1,906 $   $(380 $(79 $(2,365
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
 
 
*
Amounts do not include a $23 million gain from foreign currency translation adjustments attributable to
non-controlling
interests.
**
Represents an amount less than $0.5 million.
 
41

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE 15 – 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.
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.
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 from time to time. 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 3 and note 6.
 
a.
Segment information:
 
 
  
Three months ended September 30,
 
 
  
2020
 
 
  
North America
 
  
Europe
 
  
International Markets
 
 
  
(U.S. $ in millions)
 
Revenues
  
$
2,017
 
  
$
1,116
 
  
$
529
 
Gross profit
  
 
1,056
 
  
 
637
 
  
 
275
 
R&D expenses
  
 
155
 
  
 
60
 
  
 
17
 
S&M expenses
  
 
250
 
  
 
200
 
  
 
101
 
G&A expenses
  
 
97
 
  
 
66
 
  
 
33
 
Other income
  
 
(5
  
 
(1
  
 
(1
 
  
 
 
 
  
 
 
 
  
 
 
 
Segment profit
  
$
560
 
  
$
312
 
  
$
125
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
 
  
Three months ended September 30,
 
 
  
2019
 
 
  
North America
 
  
Europe
 
  
International Markets*
 
 
  
(U.S. $ in millions)
 
Revenues
  
$
2,051
 
  
$
1,163
 
  
$
565
 
Gross profit
  
 
1,048
 
  
 
662
 
  
 
295
 
R&D expenses
  
 
156
 
  
 
63
 
  
 
21
 
S&M expenses
  
 
219
 
  
 
206
 
  
 
114
 
G&A expenses
  
 
112
 
  
 
56
 
  
 
32
 
Other (income) expense
  
 
(5
  
 
(4
  
 
(1
 
  
 
 
 
  
 
 
 
  
 
 
 
Segment profit
  
$
565
 
  
$
341
 
  
$
130
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
42

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
   
Nine months ended September 30,
 
   
2020
 
   
North America
   
Europe
   
International Markets
 
   
(U.S. $ in millions)
 
Revenues
  $6,146   $3,520   $1,582 
Gross profit
   3,208    2,009    828 
R&D expenses
   455    180    51 
S&M expenses
   755    590    312 
G&A expenses
   325    184    96 
Other income
   (9   (3   (10
  
 
 
   
 
 
   
 
 
 
Segment profit
  $1,682   $1,058   $378 
  
 
 
   
 
 
   
 
 
 
 
   
Nine months ended September 30,
 
   
2019
 
   
North America
   
Europe
   
International Markets*
 
   
(U.S. $ in millions)
 
Revenues
  $6,169   $3,611   $1,668 
Gross profit
   3,155    2,066    877 
R&D expenses
   497    199    66 
S&M expenses
   756    637    348 
G&A expenses
   342    175    102 
Other income
   (6   (5   (2
  
 
 
   
 
 
   
 
 
 
Segment profit
  $1,566   $1,060   $363 
  
 
 
   
 
 
   
 
 
 
 
*
The data presented for prior periods have been revised to reflect a revision in the presentation of net revenues and cost of sales in the consolidated financial statements. See note 1c.
 
43

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
The following table presents a reconciliation of Teva’s segment profits to its consolidated operating income (loss) and to consolidated income (loss) before income taxes for the three and nine months ended September 30, 2020 and 2019:
 
   
Three months ended
   
Nine months ended
 
   
September 30,
   
September 30,
 
   
2020
   
2019
   
2020
   
2019
 
   
(U.S.
 
$ in millions)
   
(U.S. $ in millions)
 
North America profit
  $560   $565   $1,682   $1,566 
Europe profit
   312    341    1,058    1,060 
International Markets profit
   125    130    378    363 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total reportable segments profit
   997    1,036    3,118    2,989 
Profit of other activities
   28    16    130    92 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total segments profit
   1,025    1,051    3,248    3,081 
Amounts not allocated to segments:
        
Amortization
   251    255    758    823 
Other assets impairments, restructuring and other items
   (98   160    404    263 
Intangible asset impairments
   509    177    1,278    1,206 
Goodwill impairment
  
4,628
   
   
4,628
   
— 
 
Legal settlements and loss contingencies
   21    468    10    1,171 
Other unallocated amounts
   55    73    148    209 
  
 
 
   
 
 
   
 
 
   
 
 
 
Consolidated operating income (loss)
   (4,342   (81   (3,978   (591
  
 
 
   
 
 
   
 
 
   
 
 
 
Financial expenses, net
   117    211    565    635 
  
 
 
   
 
 
   
 
 
   
 
 
 
Consolidated income (loss) before income taxe
s
  $(4,459  $(292  $(4,543  $(1,226
  
 
 
   
 
 
   
 
 
   
 
 
 
b. Segment revenues by major products and activities:
The following tables present revenues by major products and activities for the three and nine months ended September 30, 2020 and 2019:
 
 
North America
 
Three months ended

September 30,
   
2020
   
2019
   
(U.S. $ in millions)
Generic products
  $928   $914
AJOVY
   35    25
AUSTEDO
   168    105
BENDEKA
®
/TREANDA
®
   105    124
COPAXONE
   236    271
ProAir
®
*
   50    71
QVAR
®
   42    60
Anda
   341    351
Other
   113    131
Total
  $2,017   $2,051
 
*
Does not include revenues from the ProAir authorized generic, which are included under generic products.
 
44

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
   
                    
   
                    
 
 
North America
 
Nine months ended
September 30,

 
  
2020
 
  
2019

 
  
(U.S. $ in millions)

Generic products
  
$
2,804
 
  
$
2,826

AJOVY
  
 
98
 
  
 
68

AUSTEDO
  
 
451
 
  
 
276

BENDEKA/TREANDA
  
 
313
 
  
 
371

COPAXONE
  
 
671
 
  
 
753

ProAir*
  
 
175
 
  
 
194

QVAR
  
 
139
 
  
 
183

Anda
  
 
1,141
 
  
 
1,080

Other
  
 
354
 
  
 
417

Total
  
$
6,146
 
  
$
6,169

 
*
Does not include revenues from the ProAir authorized generic, which are included under generic products.
   
                    
   
                    
 
 
Europe
 
Three months ended

September 30,

 
  
2020
 
  
2019

 
  
(U.S. $ in millions)

Generic products
  $824   $836
COPAXONE
   101    106
Respiratory products
   77    87
AJOVY
   8    1
Other
   106    134
Total
  $1,116   $1,163
 
Europe
  
Nine
 months ended 
September 30,
 
   
2020
   
2019
 
   
(U.S. $ in millions)
 
Generic products
  $2,593   $2,599 
COPAXONE
   294    327 
Respiratory products
   263    267 
AJOVY
   17    1 
Other
   352    416 
  
 
 
   
 
 
 
Total
  $3,520 $3,611 
  
 
 
   
 
 
 
 
International Markets
 
Three months ended

September 30,
 
 
  
2020
 
  
2019
 
 
  
(U.S. $ in millions)
 
Generic products
  $429   $474 
COPAXONE
   14    20 
Other
   86    71 
Total
  $529   $565 
 
*
The data presented for prior periods have been revised to reflect a revision in the presentation of net revenues and cost of sales in the consolidated financial statements. See note 1c.
 
45

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
   
                    
   
                    
 
 
International Markets
 
Nine months ended
September 30,
 
 
  
2020
 
  
2019
 
 
  
(U.S. $ in millions)
 
Generic products
  
$
1,304
 
  
$
1,404
 
COPAXONE
  
 
38
 
  
 
46
 
Other
  
 
241
 
  
 
218
 
Total
  
$
1,582
 
  
$
1,668
 
 
*
The data presented for prior periods have been revised to reflect a revision in the presentation of net revenues and cost of sales in the consolidated financial statements. See note 1c.
NOTE 16 – Fair value measurement:
Financial items carried at fair value as of September 30, 2020 and December 31, 2019 are classified in the tables below in one of the three categories of fair value levels:
 
   
September 30, 2020
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(U.S. $ in millions)
 
Cash and cash equivalents:
        
Money markets
  $191   $
 
 
   $
 
 
   $191 
Cash, deposits and other
   1,636    
 
 
    
 
 
    1,636 
Investment in securities:
        
Equity securities*
   20    
 
 
    297    317 
Other, mainly debt securities
   1    
 
 
    9    10 
Derivatives:
        
Asset derivatives—options and forward contracts
   
 
 
    36    
 
 
    36 
Liability derivatives—options and forward contracts
   
 
 
    (67   
 
 
    (67
Contingent consideration**
   
 
 
    
 
 
    (279   (279
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $1,848   $(31  $27   $1,844 
  
 
 
   
 
 
   
 
 
   
 
 
 
 
   
December 31, 2019
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(U.S. $ in millions)
 
Cash and cash equivalents:
    ��   
Money markets
  $577   $—     $—     $577 
Cash, deposits and other
   1,398    —      —      1,398 
Investment in securities:
        
Equity securities
   42    —      —      42 
Other, mainly debt securities
   2    —      12    14 
Derivatives:
        
Asset derivatives—options and forward contracts
   —      32    —      32 
Liability derivatives—options and forward contracts
   —      (41   —      (41
Liability derivatives—interest rate and cross-currency swaps
   —      (22   —      (22
Contingent consideration**
   —      —      (460   (460
  
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $2,019   $(31  $(448  $1,540 
  
 
 
   
 
 
   
 
 
   
 
 
 
 
*
During the third quarter of 2020, Teva recorded a gain of $134 million under share in profits of associated companies, net, reflecting the difference between the book value of Teva’s investment in American Well Corporation (“American Well”) and its fair value as of the date it completed its initial public offering in September 2020. The investment was reclassified from “investment in associated companies” to “investment in marketable securities,” since Teva no longer has significant influence in American Well. On 
September 
30, 2020, Teva recorded an additional gain of $118 million under financial expenses, net, reflecting the revaluation gain of this security as of September 30, 2020.
 
**
Contingent consideration represents liabilities recorded at fair value in connection with acquisitions.
 
46

TEVA PHARMACEUTICAL INDUSTRIES LIMITED
Notes to Consolidated Financial Statements
(Unaudited)
 
Teva determined the fair value of the liabilities for the contingent consideration based on a probability-weighted discounted cash flow analysis. This
 
fair value measurement is based on significant unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. The fair value of the contingent consideration is based on several factors, such as: the cash flows projected from the success of unapproved product candidates; the probability of success of product candidates, including risks associated with uncertainty regarding achievement and payment of milestone events; the time and resources needed to complete the development and approval of product candidates; the life of the potential commercialized products and associated risks of obtaining regulatory approvals in the United States and Europe, and the risk adjusted discount rate for fair value measurement. A probability of success factor ranging from
80
% to
100
% was used in the fair value calculation to reflect inherent regulatory and commercial risk of the contingent payments and IPR&D. The discount rate applied ranged from
7.5
% to
8.5
%. The weighted average discount rate, calculated based on the relative fair value of Teva’s contingent consideration liabilities, was
7.9
%. 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 liabilities.
The fair value measurement of the investment in equity securities is based on a discount rate for fair value measurement, related to restriction of sale of shares, and thus represents a Level 3 measurement within the fair value hierarchy. The discount rate applied for the fair value measurement at September 30, 2020 was 6%.
The following table summarizes the activity for those financial assets and liabilities where fair value measurements are estimated utilizing Level 3 inputs:
 
   
Nine months ended
September 30, 2020
 
   
(U.S. $ in millions)
 
Fair value at the beginning of the period
  $(448
Transfer into Level 3- equity securities
  
179
 
Revaluation of equity securities
  
118
 
Revaluation of debt securities
   (3
Adjustments to provisions for contingent consideration:
  
Actavis Generics transaction
   161 
Eagle transaction
   (65
Settlement of contingent consideration:
  
Eagle transaction
   85 
  
 
 
 
Fair value at the end of the period
  $27 
  
 
  
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 (level 1 inputs):
 
   
Fair value*
 
   
September 30,
   
December 31,
 
   
2020
   
2019
 
   
(U.S. $ in millions)
 
Senior notes included under senior notes and loans
  $22,194   $22,686 
Senior notes and convertible senior debentures included under short-term debt
   1,968    2,318 
  
 
 
   
 
 
 
Total
  $24,162   $25,004 
  
 
 
   
 
 
 
 
*
Based on quoted market price. See note 7 for carrying value.
 
47

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 and OTC products. This structure enables strong alignment and integration between operations, commercial regions, R&D and our global marketing and portfolio function, optimizing our product lifecycle across therapeutic areas.
In addition to these three segments, we have other activities, primarily the sale of API to third parties, certain contract manufacturing services and an
out-licensing
platform offering a portfolio of products to other pharmaceutical companies through our affiliate Medis.
The
COVID-19
Pandemic
As a leading global pharmaceutical company, Teva provides essential medicines to millions of patients around the world every day. Our priorities remain focused on the health and well-being of our employees and on our responsibility to continue to provide our medicines to the nearly 200 million patients who depend on us every day.
Our industry plays a critical role, particularly during such challenging times. We are working with governments to do all they can, in partnership with our industry, to maintain the development, production, supply and distribution of high quality medicines for patients worldwide during this unprecedented global health crisis.
Business Continuity
The supply chain supporting our key products – specialty, generics and API – remains largely uninterrupted, and with adequate product inventory across our network. Additionally, based on analysis of potential scenarios, we currently have inventory and redundancy plans in place to address potential shortfalls, if any. We are closely monitoring the evolving situation in our key manufacturing locations and commercial markets as well as key products, and are accordingly adapting our business continuity plans. All our facilities that research, manufacture, order, pack, distribute and provide critical customer and patient services are currently functioning to meet demand for essential medicines for patients throughout the world.
Teva has worked since the early days of the
COVID-19
pandemic to support efforts of governments and health services to curb the impact of the virus. Our global manufacturing network has been tirelessly focused on securing and scaling production of both API and finished doses for potential treatments that were proven essential or may prove essential in treating the condition nearly everywhere Teva does business. Teva will continue to work with governments and international organizations throughout the world to support emerging needs related to this crisis, while doing everything possible to also continue to supply our vast portfolio of medicines to patients.
R&D and New Launches
We do not expect a material impact on our ongoing clinical research programs and product launches as a result of the
COVID-19
pandemic; however, we have experienced immaterial delays in clinical trials due to cessation or slow-downs of recruitment for patient studies and suspended regulatory inspections, delays in regulatory approvals of new products due to reduced capacity or
re-prioritization
of regulatory agencies and delays in
pre-commercial
launch activities. We may experience further delays if the pandemic continues for an extended period of time. All of our new product launches have been risk-assessed based on upcoming manufacturing and regulatory inspections.
Workforce Policy and Measures
Our employees across all aspects of our business are safeguarding the continuity of our activities and we are committed to supporting their efforts while caring for their personal health and safety. We are enacting appropriate measures to ensure the safe supply and transport of our medicines and APIs, and have established measures intended to ensure our sites remain open, allowing us to maintain our business, R&D and manufacturing operations. We have reduced the number of people in our facilities to enable social distancing. By doing our part to reduce physical proximity to one another, we hope to better protect our overall workforce, and ultimately, the communities in which we live.
 
48

As we work through this health crisis, we continue to adapt our strategy for returning to usual operations at all organizational levels as events develop, under guiding principles to protect our business and maximize organizational productivity and efficiency, while simultaneously ensuring a safe workplace.
Trends
We still have limited insight into the extent to which our business may be impacted by the
COVID-19
pandemic and there are many unknowns facing our industry and society at large. We are still not experiencing material delays in development, production and distribution of medicines or disruptions in our supply chains; however, longer term effects cannot be predicted at this time and would depend on the duration and severity of the pandemic and the restrictive measures put in place to control its impact. In the first quarter of 2020, we experienced increasing demand for certain medicines, as would be expected during a global crisis of this nature. We saw a compensating effect with lower demand for certain medicines during the second quarter of 2020 and continuing lower demand in certain regions and for certain medicines in the third quarter of 2020. Although no one can predict future demand for pharmaceutical products, market dynamics or the scope or duration of the financial and other challenges arising from the pandemic, it is possible that we will continue to see variable demand during the remainder of the year, but we do not currently anticipate a material negative impact on our 2020 financial results due to the ongoing global pandemic.
Highlights
Significant highlights in the third quarter of 2020 included:
 
  
Revenues in the third quarter of 2020 were $3,978 million, a decrease of 3% in both U.S. dollar and local currency terms, compared to the third quarter of 2019, mainly due to lower revenues from generics, OTC and COPAXONE in all regions and lower revenues from QVAR and BENDEKA/TREANDA in our North America segment, as well as reduced demand for certain products resulting from the impact of the
COVID-19
pandemic, partially offset by higher revenues from AUSTEDO and AJOVY.
 
  
Our North America segment generated revenues of $2,017 million and profit of $560 million in the third quarter of 2020. Revenues decreased by 2% compared to the third quarter of 2019, mainly due to a decrease in revenues of COPAXONE and BENDEKA/TREANDA, partially offset by higher revenues from AUSTEDO, generic products and AJOVY. Our North America segment has experienced some reductions in volume due to less physician and hospital activity during the
COVID-19
pandemic, but has also experienced increase in demand for certain products related to the treatment of
COVID-19
and its symptoms. In addition, the ability to promote our new specialty products, primarily AJOVY and AUSTEDO, has been impacted by less physician visits by patients and less physician interactions by our sales personnel. Profit was flat compared to the third quarter of 2019, mainly due to lower revenues, offset by a change in mix of products.
 
  
Our Europe segment generated revenues of $1,116 million and profit of $312 million in the third quarter of 2020. Revenues decreased by 4%, or 7% in local currency terms, compared to the third quarter of 2019. This decrease was mainly due to reduced demand for certain products resulting from the
COVID-19
pandemic. The
COVID-19
pandemic has led to a decline in doctor and hospital visits by patients resulting in fewer prescriptions during the third quarter of 2020. This decrease is also attributed to price declines for oncology products as a result of generic competition and a decline in COPAXONE revenues due to competing glatiramer acetate products. Profit decreased by 8%, mainly due to lower revenues.
 
  
Our International Markets segment generated revenues of $529 million and profit of $125 million in the third quarter of 2020. Revenues decreased by 6%, or 1% in local currency terms, compared to the third quarter of 2019, mainly due to lower sales in Japan resulting from regulatory price reductions and generic competition to
off-patented
products, as well as loss of revenues from the sale of certain assets in the Israeli market, partially offset by higher revenues in other markets. Revenues in the third quarter of 2020 were also impacted by reduced demand for certain products resulting from the impact of the
COVID-19
pandemic. The
COVID-19
pandemic has led to a decline in doctor and hospital visits by patients resulting in fewer prescriptions during the third quarter of 2020. Profit decreased by 4%, mainly due to lower sales in Japan, partially offset by lower S&M expenses.
 
  
Impairments of identifiable intangible assets were $509 million in the third quarter of 2020, compared to $177 million in the third quarter of 2019. Impairment expenses in the third quarter of 2020 comprised of $360 million of IPR&D assets and $149 million of identifiable product rights.
 
  
We recorded a goodwill impairment charge of $4,628 million related to our North America reporting unit in the third quarter of 2020. See note 6 to our consolidated financial statements.
 
49

  
We recorded other asset impairments, restructuring and other items income of $98 million in the third quarter of 2020, compared to expenses of $160 million in the third quarter of 2019. See note 12 to our consolidated financial statements.
 
  
Legal settlements and loss contingencies were $21 million in the third quarter of 2020, compared to $468 million in the third quarter of 2019.
 
  
Operating loss was $4,342 million in the third quarter of 2020, compared to operating loss of $81 million in the third quarter of 2019. The decrease in the third quarter of 2020 was mainly due to the goodwill impairment charge and higher intangible asset impairment charges in the third quarter of 2020, partially offset by lower legal settlements and loss contingencies in the third quarter of 2020.
 
  
Financial expenses were $117 million in the third quarter of 2020, compared to $211 million in the third quarter of 2019. Financial expenses in the third quarter of 2020 were mainly comprised of interest expenses of $241 million, partially offset by gains on revaluations of marketable securities of $124 million (see note 16 to our consolidated financial statements). Financial expenses in the third quarter of 2019 were mainly comprised of interest expenses of $219 million.
 
  
In the third quarter of 2020, we recognized a tax expense of $16 million, on
pre-tax
loss of $4,459 million. In the third quarter of 2019, we recognized a tax expense of $11 million, on
pre-tax
loss of $292 million. Our tax rate for the third quarter of 2020 was mainly affected by the goodwill impairment charge that does not have a corresponding tax effect and other changes to tax positions and deductions.
 
  
Exchange rate movements during the third quarter of 2020, including hedging effects, positively impacted revenues by $14 million and negatively impacted operating loss by $18 million, compared to the third quarter of 2019.
 
  
As of September 30, 2020, our debt was $25,621 million, compared to $26,266 million as of June 30, 2020. This decrease was mainly due to the repayment at maturity of our €1,010 million 0.375% senior notes in July 2020, partially offset by exchange rate fluctuations. As of September 30, 2020, €100 million were outstanding under the RCF. As of the date of this Quarterly Report on Form
10-Q,
€270 million were outstanding under the RCF.
 
  
Cash flow generated from operating activities during the third quarter of 2020 was $307 million, compared to $325 million in the third quarter of 2019. The decrease in the third quarter of 2020 was mainly due to an increase in inventory during the third quarter of 2020, compared to a decrease in inventory in the third quarter of 2019.
 
  
During the third quarter of 2020, we generated free cash flow of $506 million, which we define as comprising $307 million in cash flow generated from operating activities, $333 million in beneficial interest collected in exchange for securitized accounts receivables and $9 million in proceeds from sale of property, plant and equipment, partially offset by $143 million in cash used for capital investment. During the third quarter of 2019, we generated free cash flow of $551 million, comprising $325 million in cash flow used in operating activities, $362 million in beneficial interest collected in exchange for securitized accounts receivables and $33 million in proceeds from sale of property, plant and equipment and intangible assets, partially offset by $169 million in cash used for capital investment. The decrease in the third quarter of 2020 resulted mainly from lower cash flow generated from operating activities.
Alvotech Partnership
In August 2020, we entered into an exclusive partnership agreement with biopharmaceutical company Alvotech for the commercialization in the U.S. of five biosimilar product candidates. The initial pipeline for this partnership contains biosimilar candidates addressing multiple therapeutic areas. Under this agreement, Alvotech will be responsible for the development, registration and supply of the biosimilar product candidates and Teva will exclusively commercialize the products in the United States. The agreement includes an upfront payment payable by Teva, which was paid in the third quarter of 2020. Additional development and commercial milestone payments of up to $490 million, as well as royalty payments, may be payable by Teva over the next few years. Teva and Alvotech will share profit from the commercialization of the biosimilars.
 
50

Results of Operations
Comparison of Three Months Ended September 30, 2020 to Three Months Ended September 30, 2019
Segment Information
North America Segment
The following table presents revenues, expenses and profit for our North America segment for the three months ended September 30, 2020 and 2019:
 
   
Three months ended September 30,
 
   
2020
  
2019
 
   
(U.S. $ in millions / % of Segment
Revenues)
 
Revenues
  $2,017    100 $2,051    100
Gross profit
   1,056    52.4  1,048    51.1
R&D expenses
   155    7.7  156    7.6
S&M expenses
   250    12.4  219    10.7
G&A expenses
   97    4.8  112    5.5
Other (income) expense
   (5   §   (5   § 
  
 
 
   
 
 
  
 
 
   
 
 
 
Segment profit*
  $560    27.7 $565    27.5
  
 
 
   
 
 
  
 
 
   
 
 
 
 
*
Segment profit does not include amortization and certain other items.
§
Represents an amount less than 0.5%.
North America Revenues
Our North America segment includes the United States and Canada. Revenues from our North America segment in the third quarter of 2020 were $2,017 million, a decrease of $34 million, or 2%, compared to the third quarter of 2019, mainly due to a decrease in revenues of COPAXONE and BENDEKA/TREANDA, partially offset by higher revenues from AUSTEDO, generic products and AJOVY. Our North America segment has experienced some reductions in volume due to less physician and hospital activity during the
COVID-19
pandemic, but has also experienced increase in demand for certain products related to the treatment of
COVID-19
and its symptoms. In addition, the ability to promote our new specialty products, primarily AJOVY and AUSTEDO, has been impacted by less physician visits by patients and less physician interactions by our sales personnel.
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 September 30, 2020 and 2019:
 
   
Three months
ended

September 30,
   
Percentage
Change
 
   
2020
   
2019
   
2019-2020
 
   
(U.S. $ in millions)
     
Generic products
  $928   $914    2
AJOVY
   35    25    42
AUSTEDO
   168    105    60
BENDEKA/TREANDA
   105    124    (15%) 
COPAXONE
   236    271    (13%) 
ProAir*
   50    71    (30%) 
QVAR
   42    60    (29%) 
Anda
   341    351    (3%) 
Other
   113    131    (14%) 
  
 
 
   
 
 
   
Total
  $2,017   $2,051    (2%) 
  
 
 
   
 
 
   
 
*
Does not include revenues from the ProAir authorized generic, which are included under generic products.
 
51

Generic products
revenues in our North America segment (including biosimilars) in the third quarter of 2020 were $928 million, an increase of 2% compared to the third quarter of 2019, mainly due to higher revenues from TRUXIMA and from our ProAir authorized generic, partially offset by lower volume of other generic products.
Among the most significant generic products we sold in North America in the third quarter of 2020 were TRUXIMA (the biosimilar to Rituxan
®
), epinephrine injectable solution (the generic equivalent of EpiPen
®
and EpiPen Jr.
®
), albuterol sulfate inhalation aerosol (ProAir HFA authorized generic of our specialty product) and lidocaine transdermal patch (the generic equivalent of Lidoderm Patch
®
).
On September 30, 2020, we launched emtricitabine and tenofovir disoproxil fumarate tablets, 200mg/300mg (the generic equivalent of Truvada
®
), and efavirenz, emtricitabine and tenofovir disoproxil fumarate tablets (the generic equivalent for Atripla
®
) for the prevention and treatment of HIV, respectively. We did not recognize revenues for these products in the third quarter of 2020.
In the third quarter of 2020, we led the U.S. generics market in total prescriptions and new prescriptions, with approximately 365 million total prescriptions (based on trailing twelve months), representing 10% of total U.S. generic prescriptions according to IQVIA data.
AJOVY
revenues in our North America segment in the third quarter of 2020 were $35 million, an increase of $10 million, or 42% compared to the third quarter of 2019, mainly due to growth in volume in the third quarter of 2020. AJOVY was approved by the FDA and launched in the United States in September 2018, for the preventive treatment of migraine in adults. On January 27, 2020, the FDA approved an auto-injector device for AJOVY in the U.S., which became commercially available in April 2020. In addition, AJOVY was approved in Canada on April 14, 2020.
AJOVY is also in clinical development to evaluate safety and efficacy in the treatment of fibromyalgia.
AJOVY is protected by patents expiring in 2026 in Europe and in 2027 in the United States. Applications for patent term extensions have been submitted in various markets around the world. An additional patent relating to the use of AJOVY in the treatment of migraine issued in the United States and will expire in 2035. This patent is also pending in other countries. AJOVY will also be protected by regulatory exclusivity for 12 years from marketing approval in the United States and 10 years from marketing approval in Europe.
We 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 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. The litigation in the district court was stayed pending resolution of the IPR petitions. On February 18, 2020, the Patent Trial and Appeal Board issued decisions on the first six IPRs, finding the six patents invalid as being obvious. On April 21, 2020, we filed notices of appeal in connection with these decisions. On March 31, 2020 the Patent Trial and Appeal Board issued a decision upholding the three method of treatment patents and on June 1, 2020, Lilly filed notices of appeal in connection with the decisions on these three patents. The litigation stay ended following the issuance of the most recent IPR decisions, and the parties are proceeding with the litigation. In addition, we have entered into separate agreements with Alder Biopharmaceuticals, Inc. and Lilly, resolving the European Patent Office oppositions that they filed against our AJOVY patents. The settlement agreement with Lilly also resolved Lilly’s action to revoke the patent protecting AJOVY in the United Kingdom.
AUSTEDO
revenues in our North America segment in the third quarter of 2020 increased by 60%, to $168 million, compared to $105 million in the third quarter of 2019. This increase was mainly due to growth in volume in the third quarter of 2020.
In April 2017, AUSTEDO was approved by the FDA and launched 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. In May 2020, AUSTEDO was approved in China for the treatment of chorea associated with Huntington disease and for the treatment of tardive dyskinesia.
AUSTEDO is protected in the United States by five Orange Book patents expiring between 2031 and 2033 and in Europe by two patents expiring in 2029.
BENDEKA
and
TREANDA
combined revenues in our North America segment in the third quarter of 2020 decreased by 15% to $105 million, compared to the third quarter of 2019, mainly due to the emergence of alternative novel therapies and continued competition from Belrapzo
®
(a
ready-to-dilute
bendamustine hydrochloride product from Eagle Pharmaceuticals, Inc. (“Eagle”)).
In July 2018, Eagle prevailed in its suit against the FDA to obtain seven years of orphan drug exclusivity in the United States for BENDEKA. On March 13, 2020, this decision was upheld in the appellate court. On May 27, 2020, the FDA filed a petition for rehearing
en banc,
however the petition was not granted. As things currently stand, drug applications referencing BENDEKA, TREANDA or any other bendamustine product will not be approved by the FDA until the orphan drug exclusivity expires in December 2022. In April 2019, we signed an amendment to the license agreement with Eagle extending
 
52

the royalty term applicable to the United States to the full period for which we sell BENDEKA and increasing the royalty rate. In consideration, Eagle agreed to assume a portion of BENDEKA-related patent litigation expenses. In September 2019, a patent infringement action against four of the five ANDA filers for generic versions of BENDEKA was tried in the United States District Court for the District of Delaware. On April 27, 2020, the District Court upheld the validity of all of the asserted patents and found that all four ANDA filers infringe at least one of these patents. As a result, the ANDA filers should be enjoined until the patents expire in 2031.
Additionally, in July 2018, Teva and Eagle filed suit against Hospira, Inc. (“Hospira”) related to its 505(b)(2) new drug application (“NDA”) referencing BENDEKA in the U.S. District Court for the District of Delaware. Hospira’s
30-month
stay expires in December 2020. On December 16, 2019, the Delaware District Court dismissed the case against Hospira on all but one of the asserted patents, which expires in 2031. Trial against Hospira on that patent is scheduled to begin on November 15, 2021.
We have U.S. Orange Book patents for TREANDA expiring between 2026 and 2031. One 505(b)(2) NDA was filed for a liquid version of bendamustine and 22 ANDAs with paragraph IV certifications were filed for generic versions of the lyophilized form of TREANDA. Between 2015 and 2020, we reached final settlements with all 23 filers, providing for the launch of generic versions of TREANDA prior to patent expiration.
COPAXONE
revenues in our North America segment in the third quarter of 2020 decreased by 13% to $236 million, compared to the third quarter of 2019, mainly due to generic competition in the United States.
The market for MS treatments continues to develop, particularly with the approvals of generic versions of COPAXONE, 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, such as Ocrevus
®
.
ProAir
revenues in our North America segment in the third quarter of 2020 were $50 million, a decrease of 30% compared to the third quarter of 2019. 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 fifth-largest short-acting beta-agonist in the market, with an exit market share of 10.7% in terms of total number of prescriptions for albuterol inhalers during the third quarter of 2020, compared to 23.8% in the third quarter of 2019. The exit market share including our ProAir HFA authorized generic is 36.3%, making our overall albuterol product the second largest in the market, compared to 44.7% in the third quarter of 2019. Generic versions of ProAir HFA from Perrigo Company plc and Lupin Pharmaceuticals, Inc. are currently available in the market.
In July 2020, we announced the launch of
ProAir
®
Digihaler
®
(albuterol sulfate 117 mcg) inhalation powder, which is the first and only digital rescue inhaler with
built-in
sensors which connects to a companion mobile application and provides inhaler use information to people with asthma and COPD. ProAir Digihaler was approved by the FDA on December 21, 2018 for the treatment or prevention of bronchospasm in patients aged four years and older with reversible obstructive airway disease and for prevention of exercise-induced bronchospasm (EIB) in patients aged four years and older.
In September 2020, we announced the launch of
AirDuo
®
Digihaler
®
(fluticasone propionate and salmeterol) inhalation powder and the launch of
ArmonAir
®
Digihaler
®
(fluticasone propionate) inhalation powder, two digital maintenance inhalers for adolescent and adult patients with asthma. AirDuo Digihaler is a prescription medicine used to control symptoms of asthma and to prevent symptoms such as wheezing in people 12 years of age and older. ArmonAir Digihaler is a prescription medicine for the long-term treatment of asthma in patients 12 years and older. AirDuo Digihaler and ArmonAir Digihaler are not used to relieve sudden breathing problems from asthma and will not replace the need for a rescue inhaler.
QVAR
revenues in our North America segment in the third quarter of 2020 decreased by 29% to $42 million, compared to the third quarter of 2019, mainly due to increased price competition and lower volumes. QVAR maintained its second-place position in the inhaled corticosteroids category in the United States, with an exit market share of 19.3% in terms of total number of prescriptions during the third quarter of 2020, compared to 19.9% in the third quarter of 2019.
Anda
revenues in our North America segment in the third quarter of 2020 decreased by 3% to $341 million, compared to $351 million in the third quarter of 2019, mainly due to slightly lower demand. 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.
 
53

Product Launches and Pipeline
In the third quarter of 2020, 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))
*
 
Imiquimod Cream 3.75%
  Zyclara
®
 July  $24 
Sildenafil for Oral Suspension
  Revatio
®
 August  $121 
PEG-3350,
Sodium Sulfate, Sodium Chloride, Potassium Chloride, Sodium Ascorbate, and Ascorbic Acid for Oral Solution
  MoviPrep
®
 August  $10 
Tobramycin Inhalation Solution, USP
  Bethkis
®
 September  $42 
Dimethyl Fumarate Delayed-Release Capsules
  Tecfidera
®
 September  $3,788 
Emtricitabine and Tenofovir Disoproxil Fumarate Tablets, 200mg/300mg
  Truvada
®
 September  $2,872 
Efavirenz, Emtricitabine and Tenofovir Disoproxil Fumarate Tablets
  Atripla
®
 September  $578 
 
*
The figures presented are for the twelve months ended in the calendar quarter immediately prior to our launch or
re-launch.
Our generic products pipeline in the United States includes, as of September 30, 2020, 228 product applications awaiting FDA approval, including 80 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 June 30, 2020 exceeding $115 billion, according to IQVIA. Approximately 69% of pending applications include a paragraph IV patent challenge, and we believe we are first to file with respect to 84 of these products, or 107 products including final approvals where launch is pending a settlement agreement or court decision. Collectively, these first to file opportunities represent over $76 billion in U.S. brand sales for the twelve months ended June 30, 2020, 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 third quarter of 2020, we received tentative approvals for generic equivalents of the products listed in the table below, excluding overlapping applications. A “tentative approval” indicates that the FDA has substantially completed its review of an application and final approval is expected once the relevant patent expires, a court decision is reached, a
30-month
regulatory stay lapses or a
180-day
exclusivity period awarded to another manufacturer either expires or is forfeited.
 
Generic Name
  
Brand Name
 
Total Annual U.S.

Branded Sales at Time

of Launch

(U.S. $ in millions
(IQVIA))
*
 
Apixaban Tablets, 2.5 mg and 5 mg
  Eliquis
®
 $11,445 
Pirfenidone Tabs
  Esbriet
®
 $540 
 
*
The figures presented are for the twelve months ended in the calendar quarter immediately prior to our launch or
re-launch.
 
54

Below is a description of key products in our specialty pipeline as of September 30, 2020:
 
Product
  
Potential
Indication(s)
  
Route of
Administration
  
Development Phase
(date entered phase 3)
  
Comments
CNS, Neurology and
Neuropsychiatry
        
AUSTEDO (deutetrabenazine)  Dyskinesia in cerebral palsy  Oral  3 (September 2019)  
TV-46000
(risperidone LAI)
  Schizophrenia  Subcutaneous  3 (April 2018)  
Migraine and Pain
        
fremanezumab (anti CGRP)  
Post traumatic
headache
  Subcutaneous  2  The clinical trial did not meet its primary endpoint for efficacy and the development for this indication has been discontinued.
  fibromyalgia  Subcutaneous  2  
fasinumab  Osteoarthritis pain  Subcutaneous  3 (March 2016)  Developed in collaboration with Regeneron Pharmaceuticals, Inc. (“Regeneron”). See below table regarding phase 3 clinical trial results.
Respiratory
        
GoResp
®
DigiHaler
®
/ DuoResp
®
DigiHaler
®
  Treatment of asthma in patients aged 12 years and older and COPD  Oral inhalation  Under regulatory review  
Fasinumab
. Results for two phase 3 clinical trials, FACT OA1 and FACT OA2, were released on August 5, 2020, indicating that the
co-primary
endpoints for fasinumab were achieved. Fasinumab 1 mg monthly demonstrated significant improvements in pain and physical function over placebo at week 16 and week 24, respectively. Fasinumab 1 mg monthly also showed nominally significant benefits in physical function in two trials and pain in one trial, when compared to the maximum
FDA-approved
prescription doses of
non-steroidal
anti-inflammatory drugs for osteoarthritis. The FACT OA1 trial included an additional treatment arm, fasinumab 1 mg every two months, which showed numerical benefit over placebo, but did not reach statistical significance. In initial safety analyses from the phase 3 trials, there was an increase in arthropathies reported with fasinumab. In a
sub-group
of patients from one phase 3 long-term safety trial, there was an increase in joint replacement with fasinumab 1 mg monthly treatment during the
off-drug
follow-up
period, although this increase was not seen in the other trials to date. Additional longer-term safety data from the ongoing trials are being collected, and are expected to be reported early next year.
Active treatment of patients with fasinumab, which only involved dosing in an optional second-year extension phase of one trial, has been discontinued following a recommendation from the fasinumab program’s Independent Data Monitoring Committee that the program should be terminated, based on available evidence obtained to date. The core efficacy data has already been obtained to support potential fasinumab regulatory filings. Long-term safety data continues to be gathered, and is expected to be reported in 2021, along with a decision on the program.
North America Gross Profit
Gross profit from our North America segment in the third quarter of 2020 was $1,056 million, an increase of 1%, compared to $1,048 million in the third quarter of 2019.
Gross profit margin for our North America segment in the third quarter of 2020 increased to 52.4%, compared to 51.1% in the third quarter of 2019. This increase was mainly due to the change in mix of products.
North America R&D Expenses
R&D expenses relating to our North America segment in the third quarter of 2020 were $155 million, a decrease of 1%, compared to $156 million in the third quarter of 2019.
For a description of our R&D expenses in the third quarter of 2020, see “—Teva Consolidated Results—Research and Development (R&D) Expenses” below.
 
55

North America S&M Expenses
S&M expenses relating to our North America segment in the third quarter of 2020 were $250 million, an increase of 14%, compared to $219 million in the third quarter of 2019. This increase is mainly due to higher S&M expenses related to AJOVY, AUSTEDO and biosimilars.
North America G&A Expenses
G&A expenses relating to our North America segment in the third quarter of 2020 were $97 million, a decrease of 14%, compared to $112 million in the third quarter of 2019.
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 third quarter of 2020 was $560 million, flat compared to $565 million in the third quarter of 2019, mainly due to lower revenues, offset by a change in mix of products.
Europe Segment
The following table presents revenues, expenses and profit for our Europe segment for the three months ended September 30, 2020 and 2019:
 
   
Three months ended September 30,
   
2020
 
2019
   
(U.S. $ in millions / % of Segment Revenues)
Revenues
  $1,116   100% $1,163   100%
Gross profit
   637   57.1%  662   56.9%
R&D expenses
   60   5.4%  63   5.4%
S&M expenses
   200   17.9%  206   17.7%
G&A expenses
   66   5.9%  56   4.9%
Other (income) expense
   (1  §  (4  §
  
 
 
   
 
 
 
 
   
 
Segment profit*
  $312   28.0% $341   29.3%
  
 
 
   
 
 
 
 
   
 
 
*
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 third quarter of 2020 were $1,116 million, a decrease of 4% or $47 million, compared to the third quarter of 2019. In local currency terms, revenues decreased by 7%, mainly due to reduced demand for certain products resulting from the
COVID-19
pandemic. The
COVID-19
pandemic has led to a decline in doctor and hospital visits by patients resulting in fewer prescriptions during the third quarter of 2020. This decrease is also attributed to price declines for oncology products as a result of generic competition and a decline in COPAXONE revenues due to competing glatiramer acetate products.
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 September 30, 2020 and 2019:
 
   
Three months ended

September 30,
   
Percentage
Change
 
   
2020
   
2019
   
2019-2020
 
   
(U.S. $ in millions)
     
Generic products
  $824   $836    (1%) 
COPAXONE
   101    106    (5%) 
Respiratory products
   77    87    (12%) 
AJOVY
   8    1    NA 
Other
   106    134    (21%) 
  
 
 
   
 
 
   
Total
  $1,116   $1,163    (4%) 
  
 
 
   
 
 
   
 
56

Generic products
revenues in our Europe segment in the third quarter of 2020, including OTC products, decreased by 1% to $824 million, compared to the third quarter of 2019. In local currency terms, revenues decreased by 6% compared to the third quarter of 2019, mainly due to reduced demand for certain products resulting from the
COVID-19
pandemic. The
COVID-19
pandemic has led to a decline in doctor and hospital visits by patients resulting in fewer prescriptions during the third quarter of 2020.
COPAXONE
revenues in our Europe segment in the third quarter of 2020 decreased by 5% to $101 million, compared to the third quarter of 2019. In local currency terms, revenues decreased by 9%, due to price reductions and a decline in volume resulting from competing glatiramer acetate products.
COPAXONE 40 mg/mL is protected by one European patent expiring in 2030. This patent is being challenged in various European 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, but was found invalid following a hearing at the Board of Appeal in September 2020.
Respiratory products
revenues in our Europe segment in the third quarter of 2020 decreased by 12% to $77 million, compared to the third quarter of 2019. In local currency terms, revenues decreased by 15%, mainly due to reduced demand resulting from the impact the
COVID-19
pandemic had on purchasing patterns. The
COVID-19
pandemic led to increased demand in the first quarter and a correlating decrease in the following quarters.
AJOVY
revenues in our Europe segment in the third quarter of 2020 were $8 million, compared to $1 million in the third quarter of 2019.
AJOVY was granted a Marketing Authorization in the European Union by the European Medicines Agency (“EMA”) in a centralized process in April 2019. We commenced launching AJOVY in certain European markets in May 2019 and are moving forward with plans to launch in other European countries. In October 2019, we received approval from the EMA for AJOVY’s auto-injector submission in the European Union and we commenced launch in March 2020. For information about AJOVY patent protection, see “—North America Revenues—Revenues by Major Product” above.
Product Launches and Pipeline
As of September 30, 2020, our generic products pipeline in Europe included 318 generic approvals relating to 58 compounds in 127 formulations, no EMA approvals received. In addition, approximately 1,046 marketing authorization applications pending approval in 37 European countries, relating to 127 compounds in 248 formulations. No applications are pending with the EMA.
For information regarding our specialty pipeline and launches in the third quarter of 2020, see “—North America Segment —Product Launches and Pipeline” above.
Europe Gross Profit
Gross profit from our Europe segment in the third quarter of 2020 was $637 million, a decrease of 4% compared to $662 million in the third quarter of 2019. This decrease was mainly due to lower revenues, as discussed above.
Gross profit margin for our Europe segment in the third quarter of 2020 increased to 57.1%, compared to 56.9% in the third quarter of 2019.
Europe R&D Expenses
R&D expenses relating to our Europe segment in the third quarter of 2020 were $60 million, a decrease of 5% compared to $63 million in the third quarter of 2019.
For a description of our R&D expenses in the third quarter of 2020, see “—Teva Consolidated Results—Research and Development (R&D) Expenses” below.
Europe S&M Expenses
S&M expenses relating to our Europe segment in the third quarter of 2020 were $200 million, a decrease of 3% compared to $206 million in the third quarter of 2019. This decrease was mainly due to lower marketing and travel costs attributed to restrictions related to the
COVID-19
pandemic.
Europe G&A Expenses
G&A expenses relating to our Europe segment in the third quarter of 2020 were $66 million, an increase of 17% compared to $56 million in the third quarter of 2019.
Europe Profit
Profit of our Europe segment consists of gross profit less R&D expenses, S&M expenses, G&A expenses and any other income related to this segment. Segment profit does not include amortization and certain other items.
Profit from our Europe segment in the third quarter of 2020 was $312 million, a decrease of 8%, compared to $341 million in the third quarter of 2019. This decrease was mainly due to lower revenues, as discussed above.
 
57

International Markets Segment
The following table presents revenues, expenses and profit for our International Markets segment for the three months ended September 30, 2020 and 2019:
 
   
Three months ended September 30,
 
   
2020
  
2019**
 
   
(U.S. $ in millions / % of Segment Revenues)
 
Revenues
  $529    100 $565    100
Gross profit
   275    52.0  295    52.2
R&D expenses
   17    3.2  21    3.7
S&M expenses
   101    19.1  114    20.1
G&A expenses
   33    6.3  32    5.6
Other (income) expense
   (1   §   (1   § 
  
 
 
   
 
 
  
 
 
   
 
 
 
Segment profit*
  $125    23.6 $130    23.0
  
 
 
   
 
 
  
 
 
   
 
 
 
 
§
Represents an amount less than 0.5%.
*
Segment profit does not include amortization and certain other items.
**
The data presented for prior periods have been revised to reflect a revision in the presentation of net revenues and cost of sales in the consolidated financial statements. See note 1c to our consolidated financial statements for additional information.
International Markets Revenues
Our International Markets segment includes all countries in which we operate other than those in our North America and Europe segments. The International Markets segment includes more than 35 countries, covering a substantial portion of the global pharmaceutical market. Our key international markets are Japan, Russia and Israel. Countries in our International Markets segment include highly regulated, pure generic markets, such as Israel, branded generics oriented markets, such as Russia and certain Latin America markets and hybrid markets, such as Japan.
On July 30, 2020, we entered into an agreement to sell the majority of the generic and operational assets of our business venture in Japan. We expect this transaction to close by early 2021. The closing of the transaction is subject to customary closing conditions.
Revenues from our International Markets segment in the third quarter of 2020 were $529 million, a decrease of $35 million, or 6%, compared to the third quarter of 2019. In local currency terms, revenues decreased by 1% compared to the third quarter of 2019, mainly due to lower sales in Japan resulting from regulatory price reductions and generic competition to
off-patented
products, as well as loss of revenues from the sale of certain assets in the Israeli market, partially offset by higher revenues in other markets. Revenues in the third quarter of 2020 were also impacted by reduced demand for certain products resulting from the impact of the
COVID-19
pandemic. The
COVID-19
pandemic has led to a decline in doctor and hospital visits by patients resulting in fewer prescriptions during the third quarter of 2020.
The data presented for prior periods have been revised to reflect a revision in the presentation of net revenues and cost of sales in the consolidated financial statements. See note 1c to our consolidated financial statements for additional information.
 
58

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 September 30, 2020 and 2019:
 
   
Three months ended

September 30,
   
Percentage
Change
 
   
2020
   
2019*
   
2019-2020
 
   
(U.S. $ in millions)
     
Generic products
  $429   $474    (10%) 
COPAXONE
   14    20    (27%) 
Other
   86    71    21
  
 
 
   
 
 
   
Total
  $529   $565    (6%) 
  
 
 
   
 
 
   
 
*
The data presented for prior periods have been revised to reflect a revision in the presentation of net revenues and cost of sales in the consolidated financial statements. See note 1c to our consolidated financial statements for additional information.
Generic products
revenues in our International Markets segment in the third quarter of 2020, which include OTC products, decreased by 10% to $429 million, compared to the third quarter of 2019. In local currency terms, revenues decreased by 4%, mainly due to lower sales in Japan resulting from regulatory price reductions and generic competition to
off-patented
products. Revenues in the third quarter of 2020 were also impacted by reduced demand for certain products resulting from the impact the
COVID-19
pandemic. The
COVID-19
pandemic has led to a decline in doctor and hospital visits by patients resulting in fewer prescriptions during the third quarter of 2020.
COPAXONE
revenues in our International Markets segment in the third quarter of 2020 decreased by 27% to $14 million, compared to $20 million in the third quarter of 2019. In local currency terms, revenues decreased by 14%.
AJOVY
. On May 12, 2017, we entered into a license and collaboration agreement with Otsuka Pharmaceutical Co., Ltd. (“Otsuka”) providing Otsuka with an exclusive license to conduct phase 2 and 3 clinical trials for AJOVY in Japan and, once approved, to commercialize the product in Japan. On July 29, 2020, Otsuka submitted an application to obtain manufacturing and marketing approval for AJOVY in Japan. As a result, Otsuka paid Teva a milestone payment of $15 million in the third quarter of 2020, which was recorded as revenue under “Other” in the table above.
International Markets Gross Profit
Gross profit from our International Markets segment in the third quarter of 2020 was $275 million, a decrease of 7% compared to $295 million in the third quarter of 2019.
Gross profit margin for our International Markets segment in the third quarter of 2020 decreased to 52.0%, compared to 52.2% in the third quarter of 2019. This decrease was mainly due to a different portfolio mix.
International Markets R&D Expenses
R&D expenses relating to our International Markets segment in the third quarter of 2020 were $17 million, a decrease of 18% compared to $21 million in the third quarter of 2019.
For a description of our R&D expenses in the third quarter of 2020, 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 third quarter of 2020 were $101 million, a decrease of 11% compared to $114 million in the third quarter of 2019. This decrease was mainly due to lower marketing and travel costs attributed to restrictions related to the
COVID-19
pandemic.
International Markets G&A Expenses
G&A expenses relating to our International Markets segment in the third quarter of 2020 were $33 million, an increase of 6% compared to $32 million in the third quarter of 2019.
International Markets Profit
Profit of our International Markets segment consists of gross profit less R&D expenses, S&M expenses, G&A expenses and any other income related to this segment. Segment profit does not include amortization and certain other items.
 
59

Profit from our International Markets segment in the third quarter of 2020 was $125 million, a decrease of 4%, compared to $130 million in the third quarter of 2019. This decrease was mainly due to lower sales in Japan, partially offset by lower S&M expenses, as discussed above.
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 third quarter of 2020 were $316 million, an increase of 1% compared to the third quarter of 2019. In local currency terms, revenues decreased by 1% compared to the third quarter of 2019.
API sales to third parties in the third quarter of 2020 were $175 million, flat in both U.S. dollar and local currency terms compared to the third quarter of 2019.
Teva Consolidated Results
The
data presented with respect to revenues, gross profit, R&D expenses, S&M expenses, G&A expenses and operating income (loss) for prior periods have been revised to reflect a revision in the presentation of net revenues and cost of sales in the consolidated financial statements. See note 1c to our consolidated financial statements for additional information.
Revenues
Revenues in the third quarter of 2020 were $3,978 million, a decrease of 3% in both U.S. dollar and in local currency terms, compared to the third quarter of 2019. This decrease was mainly due to lower revenues from generics, OTC and COPAXONE in all regions and lower revenues from QVAR and BENDEKA/TREANDA in our North America segment, as well as reduced demand for certain products resulting from the impact of the
COVID-19
pandemic, partially offset by higher revenues from AUSTEDO and AJOVY. See “—North America Revenues,” “—Europe Revenues,” “—International Markets Revenues” and “—Other Activities” above.
Exchange rate movements during the third quarter of 2020, including hedging effects, positively impacted revenues by $14 million, compared to the third quarter of 2019. See note 8d to our consolidated financial statements.
Gross Profit
Gross profit in the third quarter of 2020 was $1,852 million, an increase of 1% compared to the third quarter of 2019. This increase was mainly a result of the factors discussed above under “—North America Gross Profit,” “—Europe Gross Profit” and “—International Markets Gross Profit.”
Gross profit margin was 46.6% in the third quarter of 2020, compared to 44.7% in the third quarter of 2019.
The increase in gross profit margin was mainly due to higher profitability in North America resulting from the change in mix of products as well as operational cost efficiencies and network optimization, partially offset by lower sales of COPAXONE and other specialty products in all segments.
Research and Development (R&D) Expenses
R&D expenses in the third quarter of 2020 were $258 million, an increase of 7% compared to the third quarter of 2019.
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 third quarter of 2020, our R&D expenses related primarily to specialty product candidates in the pain, respiratory and neuropsychiatry therapeutic areas, with additional activities in selected other areas and generic products including biosimilars.
Our higher R&D expenses in the third quarter of 2020, compared to the third quarter of 2019, were mainly due to an upfront payment made in the third quarter of 2020.
R&D expenses as a percentage of revenues were 6.5% in the third quarter of 2020, compared to 5.9% in the third quarter of 2019.
 
60

Selling and Marketing (S&M) Expenses
S&M expenses in the third quarter of 2020 were $605 million, an increase of 2% compared to the third quarter of 2019. 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 15.2% in the third quarter of 2020, compared to 14.5% in the third quarter of 2019.
General and Administrative (G&A) Expenses
G&A expenses in the third quarter of 2020 were $279 million, a decrease of 2% compared to the third quarter of 2019.
G&A expenses as a percentage of revenues were 7.0% in the third quarter of 2020, flat compared to the third quarter of 2019.
Intangible Asset Impairments
We recorded expenses of $509 million for identifiable intangible asset impairments in the third quarter of 2020, compared to expenses of $177 million in the third quarter of 2019. See note 5 to our consolidated financial statements.
Goodwill Impairment
We recorded a goodwill impairment charge of $4,628 million related to our North America reporting unit in the third quarter of 2020. See note 6 to our consolidated financial statements.
Other Asset Impairments, Restructuring and Other Items
We recorded income of $98 million for other asset impairments, restructuring and other items in the third quarter of 2020, compared to expenses of $160 million in the third quarter of 2019. See note 12 to our consolidated financial statements.
Significant regulatory and other 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 contained four additional enumerated concerns related to production, quality control and investigations at this site. We have been working diligently to address the FDA’s concerns in a manner consistent with current good manufacturing practice (cGMP) requirements as quickly and as thoroughly as possible. An FDA follow up inspection occurred in January 2020, resulting in some follow up findings and we received a letter from the FDA dated April 24, 2020 notifying us that the site continues to be classified as OAI. If we are unable to remediate the findings to the FDA’s satisfaction, we may face additional consequences. These would potentially include delays in FDA approval for future products from the site, financial implications due to loss of revenues, impairments, inventory write-offs, customer penalties, idle capacity charges, costs of additional remediation and possible FDA enforcement action. We expect to generate approximately $150 million in revenues from this site in 2020, assuming remediation or enforcement does not cause any unscheduled slowdown or stoppage at the facility, however, delays in FDA approvals of future products from the site may occur.
In July 2018, we announced the voluntary recall of valsartan and certain combination valsartan medicines in various countries due to the detection of trace amounts of a previously unknown nitrosamine impurity called NDMA found in valsartan API supplied by Zhejiang Huahai Pharmaceuticals Co. Ltd. (“Huahai”). Since July 2018, we have been actively engaged with global regulatory authorities in reviewing our sartan and other products to determine whether NDMA and/or other related nitrosamine impurities are present in specific products. Where necessary, we have initiated additional voluntary recalls. In December 2019, we reached a settlement with Huahai resolving our claims related to certain sartan API supplied by Huahai. Under the settlement agreement, Huahai agreed to compensate Teva for some of its direct losses and provide it with prospective cost reductions for API. The settlement does not release Huahai from liability for any losses we may incur as a result of third party personal injury or product liability claims relating to the sartan API at issue. In addition, multiple lawsuits have been filed in connection with this matter, which may lead to additional customer penalties, impairments and litigation costs.
In the second quarter of 2020, our operations in our manufacturing facilities in Goa, India were temporarily suspended due to a water supply issue. During the third quarter of 2020, we have completed the first step of remediation of this issue and have restarted supply from our Goa facilities. The impact to our financial results for the nine months ended September 30, 2020 was immaterial, however, if the full remediation takes longer than expected there may be further loss of sales, customer penalties or impairments to related assets.
Restructuring
In the third quarter of 2020, we recorded $9 million of restructuring expenses, compared to $61 million in the third quarter of 2019. The expenses in the third quarter of 2020 were primarily related to residual expenses of the restructuring plan announced in 2017 and other network consolidation impacts.
 
61

Legal Settlements and Loss Contingencies
In the third quarter of 2020, we recorded expenses of $21 million in legal settlements and loss contingencies, compared to expenses of $468 million in the third quarter of 2019. The expense in the third quarter of 2020 was mainly due to settling in part antitrust claims challenging a patent settlement agreement, partially offset by proceeds received following a settlement of an action brought against the sellers of Auden McKenzie (an acquisition made by Actavis Generics). The expense in the third quarter of 2019 was mainly related to an increase in the estimated settlement provision recorded in connection with the opioid cases.
Other Income
Other income in the third quarter of 2020 was $8 million, compared to $14 million in the third quarter of 2019.
Other income as a percentage of revenues was 0.2% in the third quarter of 2020 compared to 0.3% in the third quarter of 2019.
Operating Income (Loss)
Operating loss was $4,342 million in the third quarter of 2020, compared to operating loss of $81 million in the third quarter of 2019.
Operating loss as a percentage of revenues was 109.1% in the third quarter of 2020, compared to operating loss as a percentage of revenues of 2.0% in the third quarter of 2019. This decrease was mainly due to the goodwill impairment charge and higher intangible asset impairment charges in the third quarter of 2020, partially offset by lower legal settlements and loss contingencies in the third quarter of 2020.
Financial Expenses, Net
Financial expenses were $117 million in the third quarter of 2020, compared to $211 million in the third quarter of 2019. Financial expenses in the third quarter of 2020 were mainly comprised of interest expenses of $241 million, partially offset by gains on revaluations of marketable securities of $124 million (see note 16 to our consolidated financial statements). Financial expenses in the third quarter of 2019 were mainly comprised of interest expenses of $219 million.
The following table presents a reconciliation of our segment profits to our consolidated operating income (loss) and to consolidated income (loss) before income taxes for the three months ended September 30, 2020 and 2019:
 
   
Three months ended

September 30,
 
   
2020
   
2019
 
   
(U.S. $ in millions)
 
North America profit
  $560   $565 
Europe profit
   312    341 
International Markets profit
   125    130 
  
 
 
   
 
 
 
Total reportable segments profit
   997    1,036 
Profit of other activities
   28    16 
  
 
 
   
 
 
 
Total segments profit
   1,025    1,051 
Amounts not allocated to segments:
    
Amortization
   251    255 
Other assets impairments, restructuring and other items
   (98   160 
Intangible asset impairments
   509    177 
Goodwill impairment
   4,628    —   
Legal settlements and loss contingencies
   21    468 
Other unallocated amounts
   55    73 
  
 
 
   
 
 
 
Consolidated operating income (loss)
   (4,342   (81
  
 
 
   
 
 
 
Financial expenses, net
   117    211 
  
 
 
   
 
 
 
Consolidated income (loss) before income taxes
  $(4,459  $(292
  
 
 
   
 
 
 
 
62

Tax Rate
In the third quarter of 2020, we recognized a tax expense of $16 million, on
pre-tax
loss of $4,459 million. In the third quarter of 2019, we recognized a tax expense of $11 million, on
pre-tax
loss of $292 million. Our tax rate for the third quarter of 2020 was mainly affected by the goodwill impairment charge that does not have a corresponding tax effect and other changes to tax positions and deductions.
The statutory Israeli corporate tax rate is 23% in 2020. Our tax rate differs from the Israeli statutory tax rate, mainly due to generation of profits in various jurisdictions in which tax rates are different than the Israeli tax rate, tax benefits in Israel and other countries, as well as infrequent or discrete items.
Share In (Profits) Losses of Associated Companies, Net
Share in profits of associated companies, net in the third quarter of 2020 was $136 million, compared to share in losses of $4 million in the third quarter of 2019. Our share in profits of associated companies, net in the third quarter of 2020 was mainly due to a gain of $134 million reflecting the difference between the book value of our investment in American Well Corporation and its fair value as of the date it completed its initial public offering in September 2020 (see note 16 to our consolidated financial statements).
Net Income (Loss) Attributable to Teva
Net loss was $4,349 million in the third quarter of 2020, compared to net loss of $314 million in the third quarter of 2019. This decrease was mainly due to the goodwill impairment charge and higher intangible asset impairment charges in the third quarter of 2020, partially offset by lower legal settlements and loss contingencies in the third quarter of 2020.
Diluted Shares Outstanding and Earnings (Loss) per Share
The weighted average diluted shares outstanding used for the fully diluted share calculation for the three months ended September 30, 2020 and 2019 was 1,096 million and 1,092 million shares, respectively.
In computing diluted loss per share for the three months ended September 30, 2020 and September 30, 2019, no account was taken of the potential dilution that could occur upon the exercise of options and
non-vested
RSUs granted under employee stock compensation plans, and convertible senior debentures, since they had an anti-dilutive effect on loss per share.
Diluted loss per share was $3.97 in the third quarter of 2020, compared to diluted loss per share of $0.29 in the third quarter of 2019.
Share Count for Market Capitalization
We calculate share amounts using the outstanding number of shares (i.e., excluding treasury shares) plus shares that would be outstanding upon the exercise of options and vesting of RSUs and performance share units and the conversion of our convertible senior debentures, in each case, at period end.
As of September 30, 2020 and 2019, the fully diluted share count for purposes of calculating our market capitalization was approximately 1,118 million and 1,107 million, respectively.
Impact of Currency Fluctuations on Results of Operations
In the third quarter of 2020, approximately 47% of our revenues were denominated in currencies other than the U.S. dollar. Because our results are reported in U.S. dollars, we are subject to significant foreign currency risks. Accordingly, changes in the rate of exchange between the U.S. dollar and the local currencies in the markets in which we operate (primarily the euro, British pound, Japanese yen, new Israeli shekel, Canadian dollar and Russian ruble) impact our results.
During the third quarter of 2020, the following main currencies relevant to our operations decreased in value against the U.S. dollar (each on a quarterly average compared to quarterly average basis): Argentinian peso by 32%, Brazilian real by 26%, Turkish lira by 21%, Russian ruble by 12% and Mexican peso by 12%. The following main currencies relevant to our operations increased in value against the U.S. dollar: Swedish krona by 8%, Swiss franc by 7%, British pound by 5% and the euro by 5%.
As a result, exchange rate movements during the third quarter of 2020, including hedging effects, positively impacted overall revenues by $14 million and negatively impacted our operating loss by $18 million, in comparison with the third quarter of 2019. In the third quarter of 2020, the negative hedging impact recognized under revenues was $8 million, partially offset by a negative impact of $2 million recognized under cost of sales, in comparison with the third quarter of 2019. Hedging transactions against future projected revenues and expenses are recognized on the balance sheet at their fair value on a quarterly basis, while the foreign exchange impact on the underlying revenues and expenses may occur in subsequent quarters. See note 8d to our consolidated financial statements.
Commencing in the third quarter of 2018, the cumulative inflation in Argentina exceeded 100% or more over a three-year period. Although this triggered highly inflationary accounting treatment, it did not have a material impact on our results of operations.
 
63

Comparison of Nine Months Ended September 30, 2020 to Nine Months Ended September 30, 2019
Unless specified otherwise, the factors used to explain quarterly changes on a year-over-year basis are also relevant for the comparison of the results for the nine months ended September 30, 2020 and 2019. Where there are different factors affecting the nine months comparison, we have described them below.
Segment Information
North America Segment
The following table presents revenues, expenses and profit for our North America segment for the nine months ended September 30, 2020 and 2019:
 
   
Nine months ended September 30,
 
   
2020
  
2019
 
   
(U.S. $ in millions / % of Segment Revenues)
 
Revenues
  $6,146    100 $6,169    100.0
Gross profit
   3,208    52.2  3,155    51.1
R&D expenses
   455    7.4  497    8.0
S&M expenses
   755    12.3  756    12.3
G&A expenses
   325    5.3  342    5.5
Other (income) expense
   (9   §   (6   § 
  
 
 
   
 
 
  
 
 
   
 
 
 
Segment profit*
  $1,682    27.4 $1,566    25.4
  
 
 
   
 
 
  
 
 
   
 
 
 
 
*
Segment profit does not include amortization and certain other items.
§
Represents an amount less than 0.5%.
North America Revenues
Our North America segment includes the United States and Canada. Revenues from our North America segment in the first nine months of 2020 were $6,146 million, flat compared to the first nine months of 2019, mainly due to higher revenues from AUSTEDO, Anda and AJOVY, offset by lower revenues from COPAXONE and BENDEKA/TREANDA.
Revenues by Major Products and Activities
The following table presents revenues for our North America segment by major products and activities for the nine months ended September 30, 2020 and 2019:
 
   
Nine months ended September 30,
   
Percentage
Change
 
   
2020
   
2019
   
2019-2020
 
   
(U.S. $ in millions)
     
Generic products
  $2,804   $2,826    (1%) 
AJOVY
   98    68    45
AUSTEDO
   451    276    64
BENDEKA/TREANDA
   313    371    (16%) 
COPAXONE
   671    753    (11%) 
ProAir*
   175    194    (10%) 
QVAR
   139    183    (24%) 
Anda
   1,141    1,080    6
Other
   354    417    (15%) 
  
 
 
   
 
 
   
Total
  $6,146   $6,169    § 
  
 
 
   
 
 
   
 
*
Does not include revenues from the ProAir authorized generic, which are included under generic products.
§
Represents an amount less than 0.5%.
North America Gross Profit
Gross profit from our North America segment in the first nine months of 2020 was $3,208 million, an increase of 2%, compared to $3,155 million in the first nine months of 2019.
 
64

Gross profit margin for our North America segment in the first nine months of 2020 increased to 52.2% compared to 51.1% in the first nine months of 2019.
North America R&D Expenses
R&D expenses relating to our North America segment in the first nine months of 2020 were $455 million, a decrease of 8%, compared to $497 million in the first nine months of 2019.
North America S&M Expenses
S&M expenses relating to our North America segment in the first nine months of 2020 were $755 million, flat compared to $756 million in the first nine months of 2019.
North America G&A Expenses
G&A expenses relating to our North America segment in the first nine months of 2020 were $325 million, a decrease of 5%, compared to $342 million in the first nine months of 2019.
North America Profit
Profit from our North America segment in the first nine months of 2020 was $1,682 million, an increase of 7%, compared to $1,566 million in the first nine months of 2019, mainly due to lower expenses and a change in mix of products, partially offset by lower revenues.
Europe Segment
The following table presents revenues, expenses and profit for our Europe segment for the nine months ended September 30, 2020 and 2019:
 
   
Nine months ended September 30,
 
   
2020
  
2019
 
   
(U.S. $ in millions / % of Segment Revenues)
 
Revenues
  $3,520    100 $3,611    100
Gross profit
   2,009    57.1  2,066    57.2
R&D expenses
   180    5.1  199    5.5
S&M expenses
   590    16.8  637    17.6
G&A expenses
   184    5.2  175    4.8
Other (income) expense
   (3   §   (5   § 
  
 
 
   
 
 
  
 
 
   
 
 
 
Segment profit*
  $1,058    30.1 $1,060    29.4
  
 
 
   
 
 
  
 
 
   
 
 
 
 
*
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 first nine months of 2020 were $3,520 million, a decrease of 3% or $91 million, compared to the first nine months of 2019. In local currency terms, revenues decreased by 2%, compared to the first nine months of 2019, mainly due to a decrease in revenues from COPAXONE and oncology products due to price erosion. Revenues from generic products were flat, due to higher demand for certain products resulting from the
COVID-19
pandemic in the first quarter of 2020, new generic product launches in the first and second quarters of 2020 and reduced demand for certain products resulting from the
COVID-19
pandemic in the second and third quarters of 2020.
Revenues by Major Products and Activities
The following table presents revenues for our Europe segment by major products and activities for the nine months ended September 30, 2020 and 2019:
 
   
Nine months ended

September 30,
 
   
2020
   
2019
 
   
(U.S. $ in millions)
 
Generic products
  $2,593   $2,599 
COPAXONE
   294    327 
Respiratory products
   263    267 
AJOVY
   17    1 
Other
   352    416 
  
 
 
   
 
 
 
Total
  $3,520   $3,611 
  
 
 
   
 
 
 
 
65

Europe Gross Profit
Gross profit from our Europe segment in the first nine months of 2020 was $2,009 million, a decrease of 3% compared to $2,066 million in the first nine months of 2019.
Gross profit margin for our Europe segment in the first nine months of 2020 decreased to 57.1% compared to 57.2% in the first nine months of 2019.
Europe R&D Expenses
R&D expenses relating to our Europe segment in the first nine months of 2020 were $180 million, a decrease of 10% compared to $199 million in the first nine months of 2019.
Europe S&M Expenses
S&M expenses relating to our Europe segment in the first nine months of 2020 were $590 million, a decrease of 7% compared to $637 million in the first nine months of 2019.
Europe G&A Expenses
G&A expenses relating to our Europe segment in the first nine months of 2020 were $184 million, an increase of 5% compared to $175 million in the first nine months of 2019.
Europe Profit
Profit from our Europe segment in the first nine months of 2020 was $1,058 million, flat compared to the first nine months of 2019, mainly due to lower revenues, offset by lower expenses, as discussed above.
International Markets Segment
The following table presents revenues, expenses and profit for our International Markets segment for the nine months ended September 30, 2020 and 2019:
 
   
Nine months ended

September 30,
 
   
2020
  
2019**
 
   
(U.S. $ in millions / % of Segment
Revenues)
 
Revenues
  $1,582    100 $1,668    100
Gross profit
   828    52.3  877    52.6
R&D expenses
   51    3.3  66    4.0
S&M expenses
   312    19.7  348    20.9
G&A expenses
   96    6.1  102    6.1
Other (income) expense
   (10   (0.6%)   (2   § 
  
 
 
   
 
 
  
 
 
   
 
 
 
Segment profit*
  $378    23.9 $363    21.7
  
 
 
   
 
 
  
 
 
   
 
 
 
 
§
Represents an amount less than 0.5%.
*
Segment profit does not include amortization and certain other items.
**
The data presented for prior periods have been revised to reflect a revision in the presentation of net revenues and cost of sales in the consolidated financial statements. See note 1c to our consolidated financial statements.
International Markets Revenues
Our International Markets segment includes all countries other than those in our North America and Europe segments. Revenues from our International Markets segment in the first nine months of 2020 were $1,582 million, a decrease of $86 million, or 5%, compared to the first nine months of 2019. In local currency terms, revenues decreased by 2% compared to the first nine months of 2019, mainly due to lower sales in Japan and loss of revenues from the sale of certain assets in the Israeli market, partially offset by increased revenues in other markets. Revenues in the first nine months of 2020 were also impacted by higher demand for certain products resulting from the
COVID-19
pandemic in the first quarter of 2020 and reduced demand for certain products resulting from the impact of the
COVID-19
pandemic in the second and third quarters of 2020. The revenues in the first nine months of 2020 included $25 million from a positive hedging impact, which are included in “Other” in the table below. See note 8d to our consolidated financial statements.
 
66

Revenues by Major Products and Activities
The following table presents revenues for our International Markets segment by major products and activities for the nine months ended September 30, 2020 and 2019:
 
   
Nine months ended
September 30,
 
   
2020
   
2019
 
   
(U.S. $ in millions)
 
Generic products
  $1,304   $1,404 
COPAXONE
   38    46 
Other
   241    218 
  
 
 
   
 
 
 
Total
  $1,582   $1,668 
  
 
 
   
 
 
 
 
*
The data presented for prior periods have been revised to reflect a revision in the presentation of net revenues and cost of sales in the consolidated financial statements. See note 1c to our consolidated financial statements for additional information.
International Markets Gross Profit
Gross profit from our International Markets segment in the first nine months of 2020 was $828 million, a decrease of 6% compared to $877 million in the first nine months of 2019.
Gross profit margin for our International Markets segment in the first nine months of 2020 decreased to 52.3%, compared to 52.6% in the first nine months of 2019.
International Markets R&D Expenses
R&D expenses relating to our International Markets segment in the first nine months of 2020 were $51 million, a decrease of 23% compared to $66 million in the first nine months of 2019.
International Markets S&M Expenses
S&M expenses relating to our International Markets segment in the first nine months of 2020 were $312 million, a decrease of 10% compared to $348 million in the first nine months of 2019.
International Markets G&A Expenses
G&A expenses relating to our International Markets segment in the first nine months of 2020 were $96 million, a decrease of 5% compared to $102 million in the first nine months of 2019.
International Markets Profit
Profit from our International Markets segment in the first nine months of 2020 was $378 million, an increase of 4%, compared to $363 million in the first nine months of 2019. This increase was mainly due to lower expenses and a positive hedging impact, partially offset by lower revenues, as discussed above.
Other Activities
Our revenues from other activities in the first nine months of 2020 decreased by 2% to $957 million, compared to the first nine months of 2019. In local currency terms, revenues decreased by 1%.
API sales to third parties in the first nine months of 2020 were $564 million, flat compared to the first nine months of 2019 in both U.S dollar and local currency terms.
Teva Consolidated Results
Revenues
Revenues in the first nine months of 2020 were $12,206 million, a decrease of 2%, or 1% in local currency terms, compared to the first nine months of 2019.
Exchange rate movements during the first nine months of 2020, including hedging effects, negatively impacted revenues by $68 million, compared to the first nine months of 2019. See note 8d to our consolidated financial statements.
Gross Profit
Gross profit in the first nine months of 2020 was $5,678 million, an increase of 2% compared to the first nine months of 2019.
Gross profit margin was 46.5% in the first nine months of 2020, compared to 44.9% in the first nine months of 2019.
 
67

Research and Development (R&D) Expenses
R&D expenses in the first nine months of 2020 were $704 million, a decrease of 9% compared to the first nine months of 2019, mainly due to the life cycle and stage of various projects, partially offset by an upfront payment made in the third quarter of 2020.
R&D expenses as a percentage of revenues were 5.8% in the first nine months of 2020, compared to 6.3% in the first nine months of 2019.
Selling and Marketing (S&M) Expenses
S&M expenses in the first nine months of 2020 were $1,815 million, a decrease of 5% compared to the first nine months of 2019. 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 14.9% in the first nine months of 2020, compared to 15.4% in the first nine months of 2019.
General and Administrative (G&A) Expenses
G&A expenses in the first nine months of 2020 were $846 million, a decrease of 3% compared to the first nine months of 2019.
G&A expenses as a percentage of revenues were 6.9% in the first nine months of 2020, compared to 7.0% in the first nine months of 2019.
Intangible Asset Impairments
We recorded expenses of $1,278 million for identifiable intangible asset impairments, in the first nine months of 2020, compared to expenses of $1,206 million in the first nine months of 2019. See note 5 to our consolidated financial statements.
Goodwill Impairment
We recorded a goodwill impairment charge of $4,628 million related to our North America reporting unit in the first nine months of 2020. See note 6 to our consolidated financial statements.
Other Asset Impairments, Restructuring and Other Items
We recorded expenses of $404 million for other asset impairments, restructuring and other items in the first nine months of 2020, compared to expenses of $263 million in the first nine months of 2019. See note 12 to our consolidated financial statements.
Legal Settlements and Loss Contingencies
In the first nine months of 2020, we recorded expenses of $10 million in legal settlements and loss contingencies, compared to expenses of $1,171 million in the first nine months of 2019. The expense in the first nine months of 2020 was mainly related to an increase of a reserve for certain legal expenses and settlement contributions related to product liability claims in the United States and settling in part antitrust claims challenging a patent settlement agreement, partially offset by proceeds received following a settlement of the FCPA derivative proceedings in Israel and settlement of an action brought against the sellers of Auden McKenzie (an acquisition made by Actavis Generics). The expense in the first nine months of 2019 was mainly related to an estimated settlement provision recorded in connection with the opioid cases.
Other Income
Other income in the first nine months of 2020 was $30 million, compared to $29 million in the first nine months of 2019.
Other income as a percentage of revenues was 0.2% in the first nine months of both 2020 and 2019.
Operating Income (Loss)
Operating loss was $3,978 million in the first nine months of 2020, compared to operating loss of $591 million in the first nine months of 2019.
Operating loss as a percentage of revenues was 32.6% in the first nine months of 2020, compared to operating loss as a percentage of revenues of 4.8% in the first nine months of 2019.
Financial Expenses, Net
Financial expenses were $565 million in the first nine months of 2020, compared to $635 million in the first nine months of 2019. Financial expenses in the first nine months of 2020 were mainly comprised of interest expenses of $722 million, partially offset by gains on revaluations of marketable securities of $118 million (see note 16 to our consolidated financial statements) as well as a gain of $27 million resulting from our hedging and derivatives activities. Financial expenses in the first nine months of 2019 were mainly comprised of interest expenses of $672 million, partially offset by interest income of $36 million.
 
68

The following table presents a reconciliation of our segment profits to our consolidated operating income (loss) and to consolidated income (loss) before income taxes for the nine months ended September 30, 2020 and 2019:
 
   
Nine months ended September 30,
 
   
2020
   
2019
 
   
(U.S. $ in millions)
 
North America profit
  $1,682   $1,566 
Europe profit
   1,058    1,060 
International Markets profit
   378    363 
  
 
 
   
 
 
 
Total reportable segments profit
   3,118    2,989 
Profit (loss) of other activities
   130    92 
  
 
 
   
 
 
 
Total segments profit
   3,248    3,081 
Amounts not allocated to segments:
    
Amortization
   758    823 
Other asset impairments, restructuring and other items
   404    263 
Intangible asset impairments
   1,278    1,206 
Goodwill impairment
   4,628    —   
Legal settlements and loss contingencies
   10    1,171 
Other unallocated amounts
   148    209 
  
 
 
   
 
 
 
Consolidated operating income (loss)
   (3,978   (591
  
 
 
   
 
 
 
Financial expenses, net
   565    635 
  
 
 
   
 
 
 
Consolidated income (loss) before income taxes
  $(4,543  $(1,226
  
 
 
   
 
 
 
Tax Rate
In the first nine months of 2020, we recognized a tax benefit of $147 million, on
pre-tax
loss of $4,543 million. In the first nine months of 2019, we recognized a tax benefit of $159 million, on
pre-tax
loss of $1,226 million. Our tax rate for the first nine months of 2020 was mainly affected by the goodwill impairment charge that does not have a corresponding tax effect and other changes to tax positions and deductions.
Share in (Profits) Losses of Associated Companies, Net
Share in profits of associated companies, net in the first nine months of 2020 was $135 million, compared to share in losses of associated companies, net of $8 million in the first nine months of 2019. Our share in profits of associated companies, net in the first nine months of 2020 was mainly due to a gain of $134 million reflecting the difference between the book value of our investment in American Well Corporation and its fair value as of the date it completed its initial public offering in September 2020 (see note 16 to our consolidated financial statements).
Net Income (Loss) Attributable to Teva
Net loss was $4,140 million in the first nine months of 2020, compared to net loss of $1,108 million in the first nine months of 2019.
Diluted Shares Outstanding and Earnings (Loss) per Share
The weighted average diluted shares outstanding used for the fully diluted share calculation for the nine months ended September 30, 2020 and 2019 was 1,095 million and 1,091 million shares, respectively.
In computing diluted loss per share for the nine months ended September 30, 2020 and September 30, 2019, no account was taken of the potential dilution that could occur upon the exercise of options and
non-vested
RSUs granted under employee stock compensation plans, and convertible senior debentures, since they had an anti-dilutive effect on loss per share.
Diluted loss per share was $3.78 in the first nine months of 2020, compared to diluted loss per share of $1.02 in the first nine months of 2019.
Impact of Currency Fluctuations on Results of Operations
In the first nine months of 2020, approximately 48% of our revenues were denominated in currencies other than the U.S. dollar. Because our results are reported in U.S. dollars, we are subject to significant foreign currency risks and, accordingly, changes in the exchange rate between the U.S. dollar and local currencies in the markets in which we operate (primarily the euro, British pound, Japanese yen, Israeli shekel, Canadian dollar and Russian ruble) impact our results. During the first nine
 
69

months of 2020, the following main currencies relevant to our operations decreased in value against the U.S. dollar: Argentinian peso by 34%, Brazilian real by 23%, Turkish lira by 16%, Chilean peso by 15%, Mexican peso by 12% and Russian ruble by 8% (all compared on a nine-month average basis). The following main currencies relevant to our operations increased in value against the U.S. dollar: Swiss franc by 5%, new Israeli shekel by 3% and Japanese yen by 1%.
As a result, exchange rate movements during the first nine months of 2020 negatively impacted overall revenues by $68 million and our operating loss by $28 million, in comparison to the first nine months of 2019. In the first nine months of 2020, the positive hedging impact recognized under revenues was $36 million, partially offset by a positive impact of $3 million recognized under cost of sales, in comparison to the first nine months of 2019. Hedging transactions against future projected revenues and expenses are recognized on the balance sheet at their fair value on a quarterly basis, while the foreign exchange impact on the underlying revenues and expenses may occur in subsequent quarters. See note 8d to our consolidated financial statements.
Liquidity and Capital Resources
Total balance sheet assets were $49,737 million as of September 30, 2020, compared to $54,991 million as of June 30, 2020.
Our working capital balance, which includes accounts receivables net of SR&A, inventories, prepaid expenses and other current assets, accounts payables, employee-related obligations, accrued expenses and other current liabilities, was $223 million as of September 30, 2020, compared to $209 million as of June 30, 2020.
Cash investment in property, plant and equipment in the third quarter of 2020 was $143 million, compared to $131 million in the second quarter of 2020. Depreciation in the third quarter of 2020 was $130 million, compared to $134 million in the second quarter of 2020.
Cash and cash equivalents and short-term and long-term investments as of September 30, 2020 were $2,155 million, compared to $2,431 million as of June 30, 2020. The decrease in the third quarter of 2020 was mainly due to repayment at maturity of our €1,010 million 0.375% senior notes.
Our cash on hand that is not used for ongoing operations is generally invested in bank deposits as well as liquid securities that bear fixed and floating rates.
Our principal sources of short-term liquidity are our cash on hand, existing cash investments, liquid securities and available credit facilities, primarily our $2.3 billion unsecured syndicated revolving credit facility entered into in April 2019 (“RCF”).
The RCF agreement provides for two separate tranches, a $1.15 billion tranche A and a $1.15 billion tranche B. Loans and letters of credit will be available from time to time under each tranche for Teva’s general corporate purposes. Tranche A has a maturity date of April 8, 2022, with two
one-year
extension options, of which $1.065 billion were extended to April 8, 2023. Tranche B has a maturity date of April 8, 2024.
The RCF contains certain covenants, including certain limitations on incurring liens and indebtedness and maintenance of certain financial ratios, including the requirement to maintain compliance with a net debt to EBITDA ratio, which becomes more restrictive over time. The net debt to EBITDA ratio limit is 5.75x in the third and fourth quarters of 2020 and declines to 5.50x in the first and second quarters of 2021, and continues to gradually decline over the remaining term of the RCF.
The RCF can be used for general corporate purposes, including repaying existing debt. As of September 30, 2020, €100 million was outstanding under the RCF. As of the date of this Quarterly Report on Form
10-Q,
€270 million was outstanding under the RCF. Based on current and forecasted results, we expect that we will not exceed the financial covenant thresholds set forth in the RCF within one year from the date the financial statements are issued.
Under specified circumstances, including
non-compliance
with any of the covenants described above and the unavailability of any waiver, amendment or other modification thereto, we will not be able to borrow under the RCF. Additionally, violations of the covenants, under the 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 our senior notes due to cross acceleration provisions.
We expect that we will continue to have sufficient cash resources to support our debt service payments and all other financial obligations within one year from the date that the financial statements are issued.
Debt Balance and Movements
As of September 30, 2020, our debt was $25,621 million, compared to $26,266 million as of June 30, 2020. This decrease was mainly due to the repayment at maturity of our €1,010 million 0.375% senior notes in July 2020, partially offset by exchange rate fluctuations.
In March 2020, we repaid at maturity our $700 million 2.25% senior notes.
In July 2020, we repaid at maturity our €1,010 million 0.375% senior notes.
 
70

During the third quarter of 2020, we borrowed €200 million under our RCF and repaid €100 million of such borrowings. As of September 30, 2020, €100 million were outstanding under the RCF. As of the date of this Quarterly Report on Form
10-Q,
€270 million were outstanding under the RCF.
Our debt as of September 30, 2020 was effectively denominated in the following currencies: 65% in U.S. dollars, 32% in euros and 3% in Swiss francs.
The portion of total debt classified as short-term as of September 30, 2020 was 8%, compared to 6% as of June 30, 2020.
Our financial leverage was 71% as of September 30, 2020, compared to 64% as of June 30, 2020.
Our average debt maturity was approximately 6.0 years as of September 30, 2020, compared to 6.1 years as of June 30, 2020.
Total Equity
Total equity was $10,592 million as of September 30, 2020, compared to $14,824 million as of June 30, 2020. This decrease was mainly due to net loss of $4,340 million, primarily due to the goodwill impairment charge recorded in the third quarter of 2020.
Exchange rate fluctuations affected our balance sheet, as approximately 54% of our net assets in the third quarter of 2020 (including both
non-monetary
and monetary assets) were in currencies other than the U.S. dollar. When compared to June 30, 2020, changes in currency rates had a positive impact of $70 million on our equity as of September 30, 2020, mainly due to the changes in value against the U.S. dollar of: the Russian ruble by 13%, the British pound by 4%, the Croatian kuna by 2%, the Mexican peso by 3%, the Canadian dollar by 2%, the Polish zloty by 3%, the Chilean peso by 4% and the euro by 4%. All comparisons are on a
quarter-end
to
quarter-end
basis.
Cash Flow
We seek to continually improve the efficiency of our working capital management. From time to time, as part of our cash management activities, we may make decisions in our commercial and supply chain activities which may drive an acceleration of receivable payments from customers or deceleration of payments to vendors, having the effect of increasing or decreasing cash from operations in an individual period. Such decisions had no material impact on our nine month operating cash flow measurement, but may impact
quarter-to-quarter
results.
Cash flow generated from operating activities during the third quarter of 2020 was $307 million, compared to $325 million in the third quarter of 2019. The decrease in the third quarter of 2020 was mainly due to an increase in inventory during the third quarter of 2020, compared to a decrease in inventory in the third quarter of 2019.
During the third quarter of 2020, we generated free cash flow of $506 million, which we define as comprising $307 million in cash flow generated from operating activities, $333 million in beneficial interest collected in exchange for securitized accounts receivables and $9 million in proceeds from sale of property, plant and equipment, partially offset by $143 million in cash used for capital investment. During the third quarter of 2019, we generated free cash flow of $551 million, comprising $325 million in cash flow used in operating activities, $362 million in beneficial interest collected in exchange for securitized accounts receivables and $33 million in proceeds from sale of property, plant and equipment and intangible assets, partially offset by $169 million in cash used for capital investment. The decrease in the third quarter of 2020 resulted mainly from lower cash flow generated from operating activities.
Dividends
We have not paid dividends on our ordinary shares or ADSs since December 2017.
Commitments
In addition to financing obligations under short-term debt and long-term senior notes and loans, debentures and convertible debentures, our major contractual obligations and commercial commitments include leases, royalty payments, contingent payments pursuant to acquisition agreements and participation in joint ventures associated with R&D activities.
In August 2020, we entered into an exclusive partnership agreement with biopharmaceutical company Alvotech for the commercialization in the U.S. of five biosimilar product candidates. The initial pipeline for this partnership contains biosimilar candidates addressing multiple therapeutic areas. Under this agreement, Alvotech will be responsible for the development, registration and supply of the biosimilar product candidates and Teva will exclusively commercialize the products in the United States. The agreement includes an upfront payment payable by Teva, which was paid in the third quarter of 2020. Additional development and commercial milestone payments of up to $490 million, as well as royalty payments, may be payable by Teva over the next few years. Teva and Alvotech will share profit from the commercialization of the biosimilars.
In September 2016, we entered into an agreement to develop and commercialize Regeneron’s pain medication product, fasinumab. We paid Regeneron $250 million upfront and will share equally with Regeneron in the global commercial benefits of this product, as well as ongoing associated R&D costs of approximately $1.0 billion. Additional payments for achievement of development milestones in an aggregate amount of $120 million were paid during 2017 and 2018. The agreement stipulates additional development and commercial milestone payments of up to $2,230 million, as well as future royalties. For information regarding recent fasinumab phase 3 clinical trial results, see “—North America Segment —Product Launches and Pipeline” above.
 
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In October 2016, we entered into an exclusive partnership with Celltrion to commercialize two of Celltrion’s biosimilar products in development for the U.S. and Canadian markets. We paid Celltrion $160 million, of which we received an aggregate credit of $60 million as of September 30, 2020. We share the profit from the commercialization of these products with Celltrion. These two products, TRUXIMA and HERZUMA, were approved by the FDA in November and December 2018, respectively, and were launched in the United States in November 2019 and March 2020, respectively.
We are committed to pay royalties to owners of
know-how,
partners in alliances and certain other arrangements, and to parties that financed R&D at a wide range of rates as a percentage of sales of certain products, as defined in the agreements. In some cases, the royalty period is not defined; in other cases, royalties will be paid over various periods not exceeding 20 years.
In connection with certain development, supply and marketing, and research and collaboration or services agreements, we are required to indemnify, in unspecified amounts, the parties to such agreements against third-party claims relating to (i) infringement or violation of intellectual property or other rights of such third party; or (ii) damages to users of the related products. Except as described in our financial statements, we are not aware of any material pending action that may result in the counterparties to these agreements claiming such indemnification.
2020 Aggregated Contractual Obligations
There have not been any material changes in our assessment of material contractual obligations and commitments as set forth in Item 7 of our Annual Report on Form
10-K
for the year ended December 31, 2019.
Supplemental
Non-GAAP
Income Data
We utilize certain
non-GAAP
financial measures to evaluate performance, in conjunction with other performance metrics. The following are examples of how we utilize the
non-GAAP
measures:
 
  
our management and Board of Directors use the
non-GAAP
measures to evaluate our operational performance, to compare against work plans and budgets, and ultimately to evaluate the performance of management;
 
  
our annual budgets are prepared on a
non-GAAP
basis; and
 
  
senior management’s annual compensation is derived, in part, using these
non-GAAP
measures. While qualitative factors and judgment also affect annual bonuses, the principal quantitative element in the determination of such bonuses is performance targets tied to the work plan, which is based on the
non-GAAP
presentation set forth below.
Non-GAAP
financial measures have no standardized meaning and accordingly have limitations in their usefulness to investors. We provide such
non-GAAP
data because management believes that such data provide useful information to investors. However, investors are cautioned that, unlike financial measures prepared in accordance with U.S. GAAP,
non-GAAP
measures may not be comparable with the calculation of similar measures for other companies. These
non-GAAP
financial measures are presented solely to permit investors to more fully understand how management assesses our performance. The limitations of using
non-GAAP
financial measures as performance measures are that they provide a view of our results of operations without including all events during a period and may not provide a comparable view of our performance to other companies in the pharmaceutical industry.
Investors should consider
non-GAAP
financial measures in addition to, and not as replacements for, or superior to, measures of financial performance prepared in accordance with GAAP.
In arriving at our
non-GAAP
presentation, we exclude items that either have a
non-recurring
impact on the income statement or which, in the judgment of our management, are items that, either as a result of their nature or size, could, were they not singled out, potentially cause investors to extrapolate future performance from an improper base. In addition, we also exclude equity compensation expenses to facilitate a better understanding of our financial results, since we believe that such exclusion is important for understanding the trends in our financial results and that these expenses do not affect our business operations. While not all inclusive, examples of these items include:
 
  
amortization of purchased intangible assets;
 
  
legal settlements and/or loss contingencies, due to the difficulty in predicting their timing and scope;
 
  
impairments of long-lived assets, including intangibles, property, plant and equipment and goodwill;
 
  
restructuring expenses, including severance, retention costs, contract cancellation costs and certain accelerated depreciation expenses primarily related to the rationalization of our plants or to certain other strategic activities, such as the realignment of R&D focus or other similar activities;
 
  
acquisition- or divestment- related items, including changes in contingent consideration, integration costs, banker and other professional fees, inventory
step-up
and
in-process
R&D acquired in development arrangements;
 
72

  
expenses related to our equity compensation;
 
  
significant
one-time
financing costs and devaluation losses;
 
  
unusual tax items;
 
  
other awards or settlement amounts, either paid or received;
 
  
other exceptional items that we believe are sufficiently large that their exclusion is important to facilitate an understanding of trends in our financial results, such as impacts due to changes in accounting, significant costs for remediation of plants, such as inventory write-offs or related consulting costs, or other unusual events; and
 
  
corresponding tax effects of the foregoing items.
The following tables present supplemental
non-GAAP
data, in U.S. dollar, which we believe facilitates an understanding of the factors affecting our business. In these tables, we exclude the following amounts:
 
73

The following table presents the GAAP measures, related
non-GAAP
adjustments and the corresponding
non-GAAP
amounts for the applicable periods:
 
  
Three Months Ended September 30, 2020
 
  
U.S. $ and shares in millions (except per share amounts)
 
  GAAP  Excluded for
non-GAAP
measurement
  Non-GAAP 
     Amortization
of purchased
intangible
assets
  
Legal
settlements
and loss
contingencies
  Goodwill
impairment
  
Impairment
of long
lived
assets
  Other
R&D
expenses
  Restructuring
costs
  
Costs
related to
regulatory
actions
taken in
facilities
  Equity
compensation
  Contingent
consideration
  
Other
non-GAAP

items
  Other
items
  Corresponding
tax effect
    
Cost of sales
  2,126   221        6   7    (2    1,894 
R&D expenses
  258       21     5       233 
S&M expenses
  605   31         8       566 
G&A expenses
  279          10       269 
Other (income) expense
  (8              (8
Legal settlements and loss contingencies
  21    21             —   
Other assets impairments, restructuring and other items
  (98     56    9     (179  15     —   
Intangible assets impairments
  509      509           —   
Goodwill impairment
  4,628     4,628            —   
Financial expenses, net
  117