Why did Teva's net income fall so sharply in 2006 even though sales rose 60%?

The decline was mainly due to accounting charges tied to the Ivax acquisition, including a $1,295 million write-off of in-process R&D and a $95 million inventory step-up. Other charges included a $50 million litigation settlement portion related to Pfizer and $36 million of impairment charges. Reported net income was $546 million, compared with $1,072 million in 2005. The company's as-adjusted figure, which excludes these items, was $1,867 million.

How did the Ivax acquisition change Teva's financial position?

Teva acquired Ivax for about $7.9 billion, including $3.8 billion in cash and 123 million shares, and consolidated its results from February 1, 2006. Total assets rose to $20,471 million from $10,387 million, goodwill increased to $8,038 million, and long-term debt rose to $4,585 million, funded largely by senior notes and convertible debentures. The filing notes that Ivax units not fully integrated at year-end represented about 18% of consolidated total assets and 22% of net sales.

What are the main sources of revenue and growth drivers for Teva?

Teva's growth came from U.S. generics launched with 180-day exclusivity, including Zocor, Zoloft, Wellbutrin XL and Pravachol, along with the Ivax acquisition. Copaxone, its leading innovative product, had in-market global sales of $1,414 million, up 20%. Sales by geography were North America $5,065 million, Western Europe $2,036 million and International $1,307 million. The filing says U.S. dispensing of generic prescriptions was about 416 million in 2006.

What risks does the filing highlight for investors?

The filing highlights reliance on exclusivity periods for generic launches, intense price erosion and customer consolidation in the U.S., and pending patent litigation. It also cites a dependence on Copaxone, competition from other MS therapies, and the possibility of generic competition if Copaxone's patents are challenged. Other risks include regulatory and product liability exposure, foreign currency risk (over 40% of revenues are from outside the U.S.), and the Ivax integration. Management also said the 2006 U.S. launches were unusually large and are unlikely to repeat at the same level in 2007.

How did Teva's shareholder equity and capital return change?

Shareholders' equity rose to $11,142 million from $6,042 million, largely from shares issued in the Ivax acquisition. The company paid $229 million in dividends in 2006 and spent $234 million to repurchase about 7.3 million shares under a board authorization of up to $600 million approved in November 2006.

TEVA 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 20-F filed February 28, 2007. Cited figures are marked; the original filing is the authoritative source.

Teva Pharmaceutical Industries Limited's 2006 annual report on Form 20-F reports a year transformed by the acquisition of Ivax Corporation, which was consolidated from February 1, 2006.

Net sales rose to $8,408 million^a from $5,250 million in 2005, driven by the Ivax acquisition and several major U.S. generic launches with 180-day exclusivity (Zocor, Zoloft, Wellbutrin XL and Pravachol). However, net income fell to $546 million from $1,072 million, reflecting a $1,295 million write-off of in-process R&D, mainly from the Ivax deal, along with a $95 million inventory step-up, a $50 million litigation charge related to Pfizer and $36 million of impairment charges. Diluted EPS was $0.69 versus $1.59 in 2005.

On an as-adjusted, non-GAAP basis that excludes these items, the company reports net income of $1,867 million^b and diluted EPS of $2.30. The balance sheet expanded sharply. Total assets reached $20,471 million (from $10,387 million), goodwill rose to $8,038 million, and long-term debt grew to $4,585 million, including $2,127 million of senior notes and loans and $2,458 million of convertible senior debentures, largely to finance the acquisition.

Shareholders' equity increased to $11,142 million^c. Operating cash flow was $2,058 million, and free cash flow, as defined by the company, was $1,463 million. Copaxone, the company's leading innovative product, had in-market global sales of $1,414 million in 2006, up 20%.

The company also notes that Azilect, its second innovative product, had worldwide sales of $44 million^d in 2006 after launch in the U.S. in July 2006. The filing highlights concentration risk and regulatory exposure.

Teva expects revenue growth to depend on its generic pipeline (162 U.S. product registrations awaiting FDA approval, including 78 Paragraph IV applications), and it notes that 2006's U.S. launches with exclusivity were unusually large and unlikely to repeat at the same scale in 2007. Management also said Ivax units not fully integrated at year-end represented about 18% of consolidated total assets and 22% of net sales, and that Ivax was excluded from the internal control assessment for 2006.

02—Key points

Key Highlights

Net sales grew to $8,408 million in 2006, up from $5,250 million in 2005, driven primarily by the Ivax acquisition and major U.S. generic launches with 180-day exclusivity.
Net income declined to $546 million from $1,072 million, mainly due to a $1,295 million in-process R&D write-off, primarily related to Ivax; as-adjusted net income was $1,867 million, with diluted EPS of $2.30 versus reported $0.69.
Gross profit margin rose to 50.7% from 47.2%, reflecting new U.S. exclusive launches, Copaxone growth and vertical API integration.
Total assets nearly doubled to $20,471 million, with goodwill of $8,038 million and total long-term debt of $4,585 million following the $7.9 billion Ivax acquisition.
Copaxone in-market global sales reached a record $1,414 million in 2006, up 20%; Azilect generated $44 million in worldwide sales after its 2006 launch.
Operating cash flow was $2,058 million; the company reported free cash flow of $1,463 million and repurchased $234 million of shares during 2006.
Management expects fewer large U.S. generic launches in 2007 than in 2006, with 2007 launches weighted toward the second half, and Ivax integration remained incomplete at year-end.

03—Questions

Frequently Asked Questions

Why did Teva's net income fall so sharply in 2006 even though sales rose 60%?
The decline was mainly due to accounting charges tied to the Ivax acquisition, including a $1,295 million write-off of in-process R&D and a $95 million inventory step-up. Other charges included a $50 million litigation settlement portion related to Pfizer and $36 million of impairment charges. Reported net income was $546 million, compared with $1,072 million in 2005. The company's as-adjusted figure, which excludes these items, was $1,867 million.
How did the Ivax acquisition change Teva's financial position?
Teva acquired Ivax for about $7.9 billion, including $3.8 billion in cash and 123 million shares, and consolidated its results from February 1, 2006. Total assets rose to $20,471 million from $10,387 million, goodwill increased to $8,038 million, and long-term debt rose to $4,585 million, funded largely by senior notes and convertible debentures. The filing notes that Ivax units not fully integrated at year-end represented about 18% of consolidated total assets and 22% of net sales.
What are the main sources of revenue and growth drivers for Teva?
Teva's growth came from U.S. generics launched with 180-day exclusivity, including Zocor, Zoloft, Wellbutrin XL and Pravachol, along with the Ivax acquisition. Copaxone, its leading innovative product, had in-market global sales of $1,414 million, up 20%. Sales by geography were North America $5,065 million, Western Europe $2,036 million and International $1,307 million. The filing says U.S. dispensing of generic prescriptions was about 416 million in 2006.
What risks does the filing highlight for investors?
The filing highlights reliance on exclusivity periods for generic launches, intense price erosion and customer consolidation in the U.S., and pending patent litigation. It also cites a dependence on Copaxone, competition from other MS therapies, and the possibility of generic competition if Copaxone's patents are challenged. Other risks include regulatory and product liability exposure, foreign currency risk (over 40% of revenues are from outside the U.S.), and the Ivax integration. Management also said the 2006 U.S. launches were unusually large and are unlikely to repeat at the same level in 2007.
How did Teva's shareholder equity and capital return change?
Shareholders' equity rose to $11,142 million from $6,042 million, largely from shares issued in the Ivax acquisition. The company paid $229 million in dividends in 2006 and spent $234 million to repurchase about 7.3 million shares under a board authorization of up to $600 million approved in November 2006.

04—Continue

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