ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

We are a global pharmaceutical company, committed to helping patients around the world to access affordable medicines and benefit from innovations to improve their health. Our mission is to be a global leader in generics, specialty medicines and biopharmaceuticals, improving the lives of patients.

We operate worldwide, with headquarters in Israel and a significant presence in the United States, Europe and many other markets around the world. Our key strengths include our world-leading generic medicines expertise and portfolio, focused specialty medicines portfolio and global infrastructure and scale.

Teva was incorporated in Israel on February 13, 1944 and is the successor to a number of Israeli corporations, the oldest of which was established in 1901.

Our Business Segments

We operate our business through three segments: North America, Europe and International Markets. Each business segment manages our entire product portfolio in its region, including generics, specialty and OTC products. This structure enables strong alignment and integration between operations, commercial regions, R&D and our global marketing and portfolio function, optimizing our product lifecycle across therapeutic areas.

In addition to these three segments, we have other activities, primarily the sale of API to third parties, certain contract manufacturing services and an

out-licensing

platform offering a portfolio of products to other pharmaceutical companies through our affiliate Medis.

The

COVID-19

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.

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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 minimal delays in clinical trials due to cessation or slow-downs of recruitment for patient studies and suspended regulatory inspections, delays in regulatory approvals of new products due to reduced capacity or

re-prioritization

of regulatory agencies and delays 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.

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 are still not experiencing material delays in development, production and distribution of medicines or disruptions in our supply chains; however, longer term effects cannot be predicted at this time and would depend on the duration and severity of the pandemic and the restrictive measures put in place to control its impact. In the first quarter of 2020, we experienced increasing demand for certain medicines, as would be expected during a global crisis of this nature. We saw a compensating effect with lower demand for certain medicines during the second quarter of 2020 and continuing slightly lower demand due to less physician and hospital activity in certain regions and for certain medicines in the second half of 2020. Although no one can predict future demand for pharmaceutical products, market dynamics or the scope or duration of the financial and other challenges arising from the pandemic, it is possible that we will continue to see variable demand in 2021, but we do not currently anticipate a material negative impact on our 2021 financial results due to the ongoing global pandemic.

Highlights

Significant highlights of 2020 included:

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Alvotech Partnership

In August 2020, we entered into a partnership agreement with biopharmaceutical company Alvotech for the exclusive commercialization in the U.S. of five biosimilar product candidates. The initial pipeline for this partnership contains biosimilar candidates addressing multiple therapeutic areas. Under this agreement, Alvotech is responsible for the development, registration and supply of the biosimilar product candidates and Teva will exclusively commercialize the products in the United States. We paid an upfront payment in the third quarter of 2020 that was recorded as R&D expenses. During the fourth quarter of 2020, we accrued additional amounts due to the high probability that additional milestone payments will be paid in 2021. Additional development and commercial milestone payments of up to $450 million, as well as royalty payments, may be payable by Teva over the next few years. Teva and Alvotech will share profit from the commercialization of these biosimilars.

Results of Operations

The discussion that follows includes a comparison of our results of operations and liquidity and capital resources for fiscal years 2020 and 2019. For a comparison of our results of operations and financial condition for fiscal years 2019 and 2018, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2019 Annual Report on Form

10-K,

filed with the SEC on February 21, 2020.

Segment Information

North America Segment

The following table presents revenues, expenses and profit for our North America segment for the past two years:

Year ended December 31,

(U.S. $ in millions / % of Segment Revenues)

Other (income) expense (10 ) § (14 ) §

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* 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 2020 were $8,447 million, a decrease of $95 million, or 1%, compared to 2019, mainly due to a decline in revenues from COPAXONE, BENDEKA/TREANDA and certain other specialty products, partially offset by higher revenues from AUSTEDO, AJOVY and our U.S. generics business. 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 past two years:

(U.S. $ in millions)

Generic products

revenues in our North America segment (including biosimilars) in 2020 increased by 1% to $4,010 million, compared to 2019, mainly due to higher revenues from TRUXIMA (the biosimilar to Rituxan

), our ProAir authorized generic and new generic product launches, partially offset by lower revenues from other generic products.

Among the most significant generic products we sold in North America in 2020 were TRUXIMA, albuterol sulfate inhalation aerosol (our ProAir

authorized generic), emtricitabine and tenofovir disoproxil fumarate tablets (the generic equivalent of Truvada

), epinephrine injectable solution (the generic equivalent of EpiPen

and EpiPen Jr.

) and lidocaine transdermal patch (the generic equivalent of Lidoderm Patch

For more information on our generic products, including biosimilars, see “Item 1—Business—Our Product Portfolio and Business Offering—Generic Medicines.”

In 2020, we led the U.S. generics market in total prescriptions and new prescriptions, with approximately 348 million total prescriptions (based on trailing twelve months), representing 9.6% of total U.S. generic prescriptions according to IQVIA data.

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AJOVY

revenues in our North America segment in 2020 increased by 45% to $134 million, compared to 2019, mainly due to growth in volume. In 2020, AJOVY’s exit market share in the United Stated in terms of total number of prescriptions was 20%, compared to 17% in 2019.

For more information on AJOVY, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines—AJOVY.”

AUSTEDO

revenues in our North America segment in 2020 increased by 55% to $637 million, compared to 2019. This increase was mainly due to growth in volume.

For more information on AUSTEDO, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines—AUSTEDO.”

BENDEKA

and

TREANDA

combined revenues in our North America segment in 2020 decreased by 16% to $415 million, compared to 2019, mainly due to the emergence of alternative novel therapies and continued competition from Belrapzo

ready-to-dilute

bendamustine hydrochloride product from Eagle).

For more information on BENDEKA and TREANDA, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines—Oncology.”

COPAXONE

revenues in our North America segment in 2020 decreased by 13% to $884 million, compared to 2019, mainly due to generic competition in the United States.

For more information on COPAXONE, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines—COPAXONE.”

ProAir

(HFA and RespiClick) revenues in our North America segment in 2020 decreased by 12% to $241 million, compared to 2019. In January 2019, we launched our own ProAir authorized generic in the United States, following the launch of a generic version of Ventolin

HFA, another albuterol inhaler. Revenues from our ProAir authorized generic are included in “generic products” above. In 2020, ProAir was the fourth largest short-acting beta-agonist in the market, with an exit market share of 10.2% in terms of total number of prescriptions for albuterol inhalers, compared to 23.3% in 2019. The exit market share including our ProAir authorized generic is 40.1%, making our overall albuterol product the largest in the market, compared to 45.8% in 2019. Generic versions of ProAir were launched in 2020.

For more information on ProAir and our Digihaler portfolio, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines—Respiratory.”

QVAR

revenues in our North America segment in 2020 decreased by 28% to $179 million, compared to 2019. This decrease was mainly due to lower volume. In 2020, QVAR maintained its second-place position in the inhaled corticosteroids category in the United States, with an exit market share of 17.4% in terms of total number of prescriptions, compared to 20.5% in 2019.

Anda

revenues from third parties in our North America segment in 2020 decreased by 2% to $1,462 million, compared to 2019.

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Product Launches and Pipeline

In 2020, we launched the generic version of the following branded products and biosimilars in the United States:

Doxepin tablets, 3 mg & 6 mg Silenor® January $ 50

Deferasirox Tablets, 180mg Jadenu® April $ 53

Romidepsin Injection, 27.5mg/5.5 mL (5mg/mL) (3) (3) April —

Vigabatrin for Oral Solution, USP, 500mg Sabril® May $ 254

Everolimus Tablets, 2.5mg, 5mg & 7.5mg Anfinitor® June $ 401

Imiquimod Cream 3.75% (4) Zyclara® July $ 24

Sildenafil for Oral Suspension Revatio® August $ 121

Tobramycin Inhalation Solution, USP Bethkis® September $ 42

Dimethyl Fumarate Delayed-Release Capsules Tecfidera® September $ 3,788

Methylphenidate Hydrochloride Extended-Release Capsules AptensioXR® October $ 38

Alvimopan Capsules Entereg® December $ 92

Colchicine Tablets, USP Colcrys® December $ 415

(2) Biosimilar.

(4) Authorized generic.

As of December 31, 2020, our generic products pipeline in the United States includes 213 product applications awaiting FDA approval, including 75 tentative approvals. This total reflects all pending ANDAs, supplements for product line extensions and tentatively approved applications and includes some instances where more than one application was submitted for the same reference product. Excluding overlaps, the branded products underlying these pending applications had U.S. sales for the twelve months ended September 30, 2020 exceeding $110 billion, according to IQVIA. Approximately 70% of pending applications include a paragraph IV patent challenge and we believe we are first to file with respect to 80 of these products, or 104 products including final approvals where launch is pending a settlement agreement or court decision. Collectively, these first to file opportunities represent over $78 billion in U.S. brand sales for the twelve months ended September 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.

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In 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.

Eliglustat Capsules, 84mg Cerdela® $ 111

Macitenta Tablets, 10mg Opsumit® $ 590

Pemetrexed Disodium Injection, 100mg vial Alimta® $ 255

Apixaban Tablets, 2.5 mg and 5 mg Eliquisr® $ 11,445

Pirfenidone Tablets Esbriet® $ 540

Micafungin for Injection Mycamine® $ 125

For a description of our specialty product pipeline, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines” above.

North America Gross Profit

Gross profit from our North America segment in 2020 was $4,489 million, an increase of 3% compared to $4,350 million in 2019. This increase was mainly due to higher revenues from AUSTEDO, partially offset by lower revenues from COPAXONE.

Gross profit margin for our North America segment in 2020 increased to 53.1%, compared to 50.9% in 2019. This increase was mainly due to higher revenues from AUSTEDO and a favorable mix of generic products.

North America R&D Expenses

R&D expenses relating to our North America segment in 2020 were $622 million, a decrease of 5% compared to $652 million in 2019.

For a description of our R&D expenses in 2020, see “—Teva Consolidated Results—Research and Development (R&D) Expenses” below.

North America S&M Expenses

S&M expenses relating to our North America segment in 2020 were $1,013 million, a decrease of 1% compared to $1,021 million in 2019.

North America G&A Expenses

G&A expenses relating to our North America segment in 2020 were $443 million, an increase of 1% compared to $439 million in 2019.

North America Other Income

Other income from our North America segment in 2020 was $10 million, compared to $14 million in 2019. Other income in 2020 was mainly comprised of Section 8 recoveries in Canada.

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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 2020 was $2,421 million, an increase of 7% compared to $2,252 million in 2019. This increase was mainly due to higher gross profit margin and lower R&D expenses, as discussed above.

Europe Segment

The following table presents revenues, expenses and profit for our Europe segment for the past two years:

Year ended December 31,

(U.S. $ in millions / % of Segment Revenues)

Other (income) expense (3 ) § (5 ) §

* Segment profit does not include amortization and certain other items.

§ Represents an amount less than 0.5%.

Europe Revenues

Our Europe segment includes the European Union and certain other European countries. Revenues from our Europe segment in 2020 were $4,757 million, a decrease of $38 million, or 1%, compared to 2019. In local currency terms, revenues decreased by 2%, mainly due to price declines for our oncology products as a result of generic competition and a decline in COPAXONE revenues due to competing glatiramer acetate products, partially offset by the launch of AJOVY. Revenues from generic products were flat, due to a decline in doctor and hospital visits by patients resulting in fewer prescriptions during the second half of 2020 due to the

COVID-19

pandemic, partially offset by new generic product launches. The

COVID-19

pandemic caused significant fluctuations in customer stocking throughout 2020, which mostly offset each other by

year-end.

Revenues by Major Products and Activities

The following table presents revenues for our Europe segment by major products and activities for the past two years:

(U.S. $ in millions)

§ Represents an amount less than 0.5%.

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Generic products

revenues in our Europe segment in 2020, including OTC products, increased by 1% to $3,513 million, compared to 2019. In local currency terms, revenues were flat, due to a decline in doctor and hospital visits by patients resulting in fewer prescriptions during the second half of 2020 due to the

COVID-19

pandemic, partially offset by new generic product launches. The

COVID-19

pandemic caused significant fluctuations in customer stocking throughout 2020, which mostly offset each other by

year-end.

AJOVY

revenues in our Europe segment in 2020 were $31 million, compared to $3 million in 2019, mainly due to launches and reimbursements in additional European countries.

For more information on AJOVY, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines—AJOVY.”

COPAXONE

revenues in our Europe segment in 2020 decreased by 7% to $400 million, compared to 2019. In local currency terms, revenues decreased by 9%, mainly due to price reductions resulting from competing glatiramer acetate products.

For more information on COPAXONE, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines—COPAXONE.”

Respiratory products

revenues in our Europe segment in 2020 were $353 million, flat compared to $354 million in 2019. In local currency terms, revenues decreased by 1%.

Product Launches and Pipeline

As of December 31, 2020, our generic products pipeline in Europe included 500 generic approvals relating to 71 compounds in 149 formulations, no EMA approvals received. In addition, approximately 1,105 marketing authorization applications pending approval in 37 European countries, relating to 133 compounds in 270 formulations. No applications are pending with the EMA.

For a description of our specialty product pipeline, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines” above.

Europe Gross Profit

Gross profit from our Europe segment in 2020 was $2,666 million, a decrease of 1% compared to $2,704 million in 2019. This decrease was mainly due to lower revenues from COPAXONE and other specialty products, partially offset by the launch of AJOVY.

Gross profit margin for our Europe segment in 2020 decreased to 56.0%, compared to 56.4% in 2019. This decrease was mainly due to the change in product mix.

Europe R&D Expenses

R&D expenses relating to our Europe segment in 2020 were $247 million, a decrease of 6% compared to $262 million in 2019.

For a description of our R&D expenses in 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 2020 were $830 million, a decrease of 7% compared to $890 million in 2019. This decrease was mainly due to lower marketing and travel costs attributed to restrictions related to the

COVID-19

pandemic.

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Europe G&A Expenses

G&A expenses relating to our Europe segment in 2020 were $261 million, an increase of 9% compared to $239 million in 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 2020 was $1,331 million, an increase of 1% compared to $1,318 million in 2019. The increase was mainly due to lower S&M expenses, as described above.

International Markets Segment

The following table presents revenues, expenses and profit for our International Markets segment for the past two years:

(U.S. $ in millions / % of Segment Revenues)

Other (income) expense (11 ) (0.5 %) (3 ) §

* Segment profit does not include amortization and certain other items.

§ Represents an amount less than 0.5%.

International Markets Revenues

Our International Markets segment includes all countries in which we operate other than those in our North America and Europe segments. The International Markets segment includes more than 35 countries, covering a substantial portion of the global pharmaceutical market. Our key international markets are Japan, Russia and Israel. The countries in our International Markets segment include highly regulated, pure generic markets, such as Israel, branded generics oriented markets, such as Russia and certain Latin American markets, and hybrid markets, such as Japan.

Revenues from our International Markets segment in 2020 were $2,154 million, a decrease of $92 million, or 4%, compared to 2019. In local currency terms, revenues were flat compared to 2019, with higher revenues in most markets offsetting the lower sales in Japan and loss of revenues from divested businesses in Israel. Revenues in 2020 were also impacted by reduced demand for certain products and higher demand for other products, resulting from the impact of the

COVID-19

pandemic. In addition, the

COVID-19

pandemic has led to a decline in doctor and hospital visits by patients resulting in fewer prescriptions during 2020.

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Revenues by Major Products and Activities

The following table presents revenues for our International Markets segment by major products and activities for the past two years:

(U.S. $ in millions)

Generic products

revenues in our International Markets segment in 2020, which include OTC products, decreased by 5% to $1,792 million, compared to 2019. In local currency terms, revenues were flat, mainly due to lower revenues in Japan resulting from regulatory price reductions and generic competition to

off-patented

products, offset by higher revenues in most other markets. Revenues in 2020 were also impacted by reduced demand for certain products and higher demand for other products, resulting from the impact of the

COVID-19

pandemic. In addition, the

COVID-19

pandemic has led to a decline in doctor and hospital visits by patients resulting in fewer prescriptions during 2020.

COPAXONE

revenues in our International Markets segment in 2020 decreased by 16% to $53 million, compared to 2019. In local currency terms, revenues decreased by 4%.

For more information on COPAXONE, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines—COPAXONE.”

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 2020 was $1,096 million, a decrease of 6% compared to $1,167 million in 2019.

Gross profit margin for our International Markets segment in 2020 decreased to 50.9%, compared to 51.9% in 2019. This decrease was mainly due to lower revenues in Japan resulting from regulatory price reductions and generic competition to

off-patented

products.

International Markets R&D Expenses

R&D expenses relating to our International Markets segment in 2020 were $70 million, a decrease of 20% compared to $88 million in 2019.

For a description of our R&D expenses in 2020, see “—Teva Consolidated Results—Research and Development (R&D) Expenses” below.

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International Markets S&M Expenses

S&M expenses relating to our International Markets segment in 2020 were $427 million, a decrease of 11% compared to $481 million in 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 2020 were $136 million, flat compared to $138 million in 2019.

International Markets Profit

Profit of our International Markets segment consists of gross profit less R&D expenses, S&M expenses, G&A expenses and any other income related to this segment. Segment profit does not include amortization and certain other items.

Profit from our International Markets segment in 2020 was $474 million, an increase of 2% compared to $464 million in 2019. This increase was mainly due to higher revenues in most markets and lower S&M expenses, partially offset by lower sales in Japan, 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 2020 were $1,302 million, flat compared to 2019. In local currency terms, revenues decreased by 1%.

API sales to third parties in 2020 were $774 million, an increase of 3% in both U.S. dollar and local currency terms.

Teva Consolidated Results

Revenues

Revenues in 2020 were $16,659 million, a decrease of 1%, in both U.S. dollar and local currency terms, compared to 2019, mainly due to a decline in revenues from certain oncology products, COPAXONE and certain respiratory products, partially offset by higher revenues from AUSTEDO and AJOVY. The decline in revenues was also affected by reduced demand for certain products resulting from the impact of the

COVID-19

pandemic. See “—North America Revenues,” “—Europe Revenues,” “—International Markets Revenues” and “—Other Activities” above.

Exchange rate movements during 2020, including hedging effects, negatively impacted revenues by $33 million, compared to 2019.

Gross Profit

Gross profit in 2020 was $7,726 million, an increase of 3% compared to 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.”

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Gross profit as a percentage of revenues was 46.4% in 2020, compared to 44.6% in 2019.

This increase in gross profit as a percentage of revenues was mainly due to higher profitability in North America, resulting from higher revenues from AUSTEDO and AJOVY, higher gross profit margin in our U.S. generics business, partially offset by a decline in COPAXONE revenues due to generic competition.

Selling and Marketing (S&M) Expenses

S&M expenses in 2020 were $2,498 million, a decrease of 4% compared to 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 15.0% in 2020, compared to 15.5% in 2019.

Research and Development (R&D) Expenses

Our R&D activities for generic products in each of our segments include both (i) direct expenses relating to product formulation, analytical method development, stability testing, management of bioequivalence and other clinical studies and regulatory filings; and (ii) indirect expenses, such as costs of internal administration, infrastructure and personnel.

Our R&D activities for specialty and biosimilar products in each of our segments include costs of discovery research, preclinical development, early- and late-clinical development and drug formulation, clinical trials and product registration costs. These expenditures are reported net of contributions received from collaboration partners. Our spending takes place throughout the development process, including (i) early-stage projects in both discovery and preclinical phases; (ii) middle-stage projects in clinical programs up to phase 3; (iii) late-stage projects in phase 3 programs, including where a new drug application is currently pending approval; (iv) post-approval studies for marketed products; and (v) indirect expenses, such as costs of internal administration, infrastructure and personnel.

Net R&D expenses for 2020 were $997 million, a decrease of 1% compared to 2019.

In 2020, our R&D expenses were primarily related to specialty product candidates in the pain, neuropsychiatry and respiratory therapeutic areas, with additional activities in selected other areas and generic products including biosimilars.

Our lower R&D expenses in 2020, compared to 2019, resulted primarily from project milestone timing and pipeline optimization.

R&D expenses as a percentage of revenues were 6.0% in both 2020 and 2019.

General and Administrative (G&A) Expenses

G&A expenses in 2020 were $1,173 million, a decrease of 2% compared to 2019.

G&A expenses as a percentage of revenues were 7.0% in 2020, flat compared to 2019.

Identifiable Intangible Asset Impairments

We recorded expenses of $1,502 million for identifiable intangible asset impairments in 2020, compared to expenses of $1,639 million in 2019. See note 6 to our consolidated financial statements.

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Goodwill Impairment

We recorded a goodwill impairment charge of $4,628 million related to our North America reporting unit in the year ended December 31, 2020. No goodwill impairment charge was recorded in 2019. See note 7 to our consolidated financial statements.

Other Asset Impairments, Restructuring and Other Items

We recorded expenses of $479 million for other asset impairments, restructuring and other items in 2020, compared to expenses of $423 million in 2019. For further details, as well as a description of significant regulatory and other events, see note 15 to our consolidated financial statements.

Legal Settlements and Loss Contingencies

In 2020, we recorded an expense of $60 million in legal settlements and loss contingencies, compared to $1,178 million in 2019. The expenses in 2020 were mainly related to a fine imposed by the European Commission in relation to a 2005 patent settlement agreement and an increase of a reserve for certain product liability claims in the United States, partially offset by proceeds received following a settlement of the FCPA derivative proceedings in Israel and settlement of an action brought against the sellers of Auden McKenzie (an acquisition made by Actavis Generics). The expenses in 2019 were mainly related to an estimated provision recorded in connection with potential settlement of the opioid cases.

Other Income

Other income in 2020 was $40 million, compared to $76 million in 2019. See note 16 to our consolidated financial statements.

Operating Income (Loss)

Operating loss was $3,572 million in 2020, compared to operating loss of $443 million in 2019.

Operating loss as a percentage of revenues was 21.4% in 2020, compared to 2.6% in 2019. The increase in operating loss in 2020 was mainly due to goodwill impairment charges, partially offset by lower provisions in connection with legal settlements and loss contingencies, as well as higher profit in our North America segment.

Financial Expenses, Net

Financial expenses were $834 million in 2020, compared to $822 million in 2019.

Financial expenses in 2020 were mainly comprised of interest expenses of $963 million, partially offset by gains on revaluations of marketable securities of $85 million (see note 20 to our consolidated financial statements) as well as a gain of $26 million resulting from our hedging and derivatives activities. Financial expenses in 2019 were mainly comprised of interest expenses of $881 million.

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The following table presents a reconciliation of our segment profits to Teva’s consolidated operating income (loss) and to consolidated income (loss) before income taxes for the past two years:

Year endedDecember 31,

(U.S.$ in millions)

International Markets profit 474 464

Total reportable segments profit 4,225 4,034

Profit (loss) of other activities 163 108

Amounts not allocated to segments:

Other asset impairments, restructuring and other items 479 423

Goodwill impairment 4,628 —

Gain on divestitures, net of divestitures related costs (8 ) (50 )

Other R&D expenses (income) 37 (15 )

Costs related to regulatory actions taken in facilities 23 45

Legal settlements and loss contingencies 60 1,178

Other unallocated amounts 219 252

Consolidated operating income (loss) (3,572 ) (443 )

Financial expenses, net 834 822

Consolidated income (loss) before income taxes $ (4,406 ) $ (1,265 )

Tax Rate

In 2020, we recognized a tax benefit of $168 million, or 4%, on a

pre-tax

loss of $4,406 million.

In 2019, we recognized a tax benefit of $278 million, or 22%, on a

pre-tax

loss of $1,265 million. Our tax rate for 2020 was lower than in 2019, mainly due to goodwill impairments that did not have a corresponding tax effect.

The statutory Israeli corporate tax rate was 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 nonrecurring items with no corresponding tax effect, or with a tax rate that is different from the Israeli tax rate.

Share In (Profits) Losses of Associated Companies, Net

Share in profits of associated companies, net was $138 million in 2020, compared to share in losses of $13 million in 2019. Our share in profits of associated companies, net in 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 20 to our consolidated financial statements).

Net Income (Loss) Attributable to Teva

Net loss was $3,990 million in 2020, compared to a net loss of $999 million in 2019.

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Diluted Shares Outstanding and Earnings (Loss) Per Share

The weighted average diluted shares outstanding used for the fully diluted share calculation for 2020 and 2019 was 1,095 million and 1,091 million shares, respectively.

In computing diluted loss per share for the twelve months ended December 31, 2020 and 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 $3.64 for the year ended December 31, 2020, compared to diluted loss per share of $0.91 for the year ended December 31, 2019.

Share Count for Market Capitalization

We calculate share amounts using the outstanding number of shares (i.e., excluding treasury shares) plus shares that would be outstanding upon the exercise of options and vesting of RSUs and performance share units (“PSUs”) and the conversion of our convertible senior debentures, in each case, at period end.

As of December 31, 2020 and 2019, the fully diluted share count for purposes of calculating our market capitalization was approximately 1,117 million and 1,108 million, respectively.

Impact of Currency Fluctuations on Results of Operations

In 2020, approximately 48% of our revenues were denominated in currencies other than the U.S. dollar. Since our results are reported in U.S. dollars, we are subject to significant foreign currency risks. Accordingly, changes in the rate of exchange between the U.S. dollar and local currencies in the markets in which we operate (primarily the euro, Israeli shekel, Japanese yen, British pound, Russian ruble, Canadian dollar, Swiss franc, Indian rupee and Polish zloty) impact our results.

During 2020, the following main currencies relevant to our operations decreased in value against the U.S. dollar (each on an annual average compared to annual average basis): the Argentinian peso by 33%, the Brazilian real by 23%, the Turkish lira by 18%, the Chilean peso by 11% and the Russian ruble by 10%. The following main currencies relevant to our operations increased in value against the U.S. dollar: the Swiss franc by 6%, the Israeli shekel by 4%, the Swedish krona by 3%, the Japanese yen by 2% and the euro by 2%.

As a result, exchange rate movements during 2020, including hedging effects, negatively impacted overall revenues by $33 million and negatively impacted our operating income by $56 million in comparison with 2019. In 2020, the positive hedging impact recognized under revenues was $15 million, partially offset by a positive impact of $1 million recognized under cost of sales, in comparison with 2019. Hedging transactions against future projected revenues and expenses are recognized on the balance sheet at their fair value on a quarterly basis, while the foreign exchange impact on the underlying revenues and expenses may occur in subsequent quarters. See note 10 to our consolidated financial statements.

Commencing in the third quarter of 2018, the cumulative inflation in Argentina exceeded 100% or more over a

3-year

period. Although this triggered highly inflationary accounting treatment, it did not have a material impact on our results of operations.

Liquidity and Capital Resources

Total balance sheet assets were $50,640 million as of December 31, 2020, compared to $57,470 million as of December 31, 2019.

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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 $662 million as of December 31, 2020, compared to $74 million as of December 31, 2019.

Cash investment in property, plant and equipment in 2020 was $578 million, compared to $525 million in 2019. Depreciation was $537 million in 2020, compared to $609 million in 2019.

Cash and cash equivalents and short-term and long-term investments, as of December 31, 2020, were $2,478 million, compared to $2,033 million as of December 31, 2019. This increase was mainly due to cash flow generated during the year, partially offset by debt repayments as discussed below.

Our cash on hand that is not used for ongoing operations is generally invested in bank deposits, as well as liquid securities that bear fixed and floating rates.

Our principal sources of short-term liquidity are our cash on hand, existing cash investments, liquid securities and available credit facilities, primarily our $2.3 billion unsecured syndicated revolving credit facility entered into in April 2019 (“RCF”).

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 fourth quarter of 2020 and declines to 5.50x in the first and second quarters of 2021, 5.00x in the third and fourth 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 December 31, 2020 and as of the date of this Annual Report on Form

10-K,

no amounts were outstanding under the RCF. Based on current and forecasted results, we expect that we will not exceed the financial covenant thresholds set forth in the RCF within one year from the date the financial statements are issued.

Under specified circumstances, 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.

2020 Debt Balance and Movements

As of December 31, 2020, our debt was $25,919 million, compared to $26,908 million as of December 31, 2019.

This decrease was mainly due to senior notes repaid at maturity with cash generated during the year, 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.

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During 2020 we borrowed up to €270 million from our RCF, which was fully repaid before year end.

Our debt as of December 31, 2020 was effectively denominated in the following currencies: 65% in U.S. dollars, 32% in euros and 3% in Swiss francs.

The portion of total debt classified as short-term as of December 31, 2020 was 12%, compared to 9% as of December 31, 2019, due to a reclassification of upcoming maturities in 2021.

Our financial leverage was 70% as of December 31, 2020, compared to 64% as of December 31, 2019.

Our average debt maturity was approximately 5.8 years as of December 31, 2020, compared to 6.4 years as of December 31, 2019.

On February 1, 2021, $491 million of our 0.25% convertible senior debentures, due 2026 were redeemed by holders. See note 9 of our consolidated financial statements.

2019 Debt Balance and Movements

During the first quarter of 2019, we repurchased and canceled approximately $126 million principal amount of our $1,700 million 1.7% senior notes due July 2019.

During the second quarter of 2019, we repurchased and canceled approximately $18 million principal amount of our $1,574 million 1.7% senior notes due July 2019.

In July 2019, we repaid at maturity our $1,556 million 1.7% senior notes.

In November 2019, we completed debt issuances for an aggregate principal amount of $2,102 million, comprised of $1,000 million principal amount of 7.125% senior notes due 2025, and €1,000 million principal amount of 6.0% senior notes due 2025. See note 9 to our consolidated financial statements.

In November 2019, we completed a debt tender offer, which resulted in a debt decrease of $1,525 million from our 2.2% $3,000 million senior notes due in July 2021.

In December 2019, we partially redeemed €650 million of our 0.375% €1,660 million senior notes due in July 2020.

During 2019, we borrowed up to $500 million from our RCF, which was fully repaid before 2019

year-end.

Total Equity

Total equity was $11,061 million as of December 31, 2020, compared to $15,063 million as of December 31, 2019. This decrease was mainly due to a net loss of $4,099 million (primarily due to the goodwill impairment charge), partially offset by $129 million stock-based compensation expenses and $57 million in unrealized profit associated with hedging activities.

Exchange rate fluctuations affected our balance sheet, as approximately 56% of our net assets (including both

non-monetary

and monetary assets) were in currencies other than the U.S. dollar. When compared to December 31, 2019, changes in currency rates had a negative impact of $69 million on our equity as of December 31, 2020, mainly due to the change in value against the U.S. dollar of: the Russian ruble by 20%, the euro by 9%, the Chilean peso by 6%, the Mexican peso by 5%, the Japanese yen by 5%, the British pound by 4%, the Polish zloty by 2% and the Canadian dollar by 2%. All comparisons are on a

year-end

basis.

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Cash Flow

We seek to continually improve the efficiency of our working capital management. From time to time, as part of our cash management activities, we may make decisions in our commercial and supply chain activities which may drive an acceleration of receivable payments from customers or deceleration of payments to vendors, having the effect of increasing or decreasing cash from operations in an individual period. Such decisions had no material impact on our 2020 operating cash flow measurement, but may impact

quarter-to-quarter

results.

Cash flow generated from operating activities in 2020 was $1,216 million, compared to $748 million in 2019. The increase was mainly due to higher profit in our North America segment during 2020.

During 2020, we generated free cash flow of $2,110 million, which we define as comprising $1,216 million in cash flow generated from operating activities, $1,405 million in beneficial interest collected in exchange for securitized accounts receivables and $67 million in proceeds from sale of property, plant and equipment and intangible assets, partially offset by $578 million in cash used for capital investments. During 2019, we generated free cash flow of $2,053 million, comprised of $748 million in cash flow generated from operating activities, $1,487 million in beneficial interest collected in exchange for securitized accounts receivables and $343 million in proceeds from sale of property, plant and equipment and intangible assets, partially offset by $525 million in cash used for capital investments. The increase in 2020 resulted mainly from higher cash flow generated from operating activities, partially offset by less cash generated from sales of assets and higher capital investments.

Dividends

We have not paid dividends on our ordinary shares or ADSs since December 2017.

Commitments

In addition to financing obligations under short-term debt and long-term senior notes and loans, debentures and convertible debentures, our major contractual obligations and commercial commitments include royalty payments, contingent payments pursuant to acquisition agreements and participation in joint ventures associated with R&D activities.

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 with Regeneron in the global commercial rights of this product (excluding Japan, Korea and nine other Asian countries), 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 fasinumab phase 3 clinical trial results, see “Item 1—Business—Our Product Portfolio and Business Offering—Specialty Medicines” above.

In October 2016, we entered into an exclusive partnership with Celltrion to commercialize TRUXIMA

and HERZUMA

, two of Celltrion’s biosimilar products in development for the U.S. and Canadian markets. We paid

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Celltrion $160 million, of which we received an aggregate credit of $60 million as of December 31, 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.

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 annual budgets are prepared on a non-GAAP basis; and

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;

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• expenses related to our equity compensation;

• significant one-time financing costs and valuation gains or losses;

• unusual tax items;

• other awards or settlement amounts, either paid or received;

• corresponding tax effects of the foregoing items.

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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:

GAAP Excluded for non-GAAP measurement Non-GAAP

Other income (40 ) (8 ) (31 )

Legal settlements and loss contingencies 60 60 —

Other asset impairments, restructuring and other items 479 416 120 (81 ) 24 —

Intangible assets impairment 1,502 1,502 —

Share in profits (losses) of associated companies, net (138 ) (134 ) (4 )

Net income (loss) attributable to non-controlling interests (109 ) (177 ) 68

The

non-GAAP

diluted weighted average number of shares was 1,099 million for the year ended December 31, 2020.

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GAAP Excluded for non-GAAP measurement Non-GAAP

Legal settlements and loss contingencies 1,178 1,178 —

Other asset impairments, restructuring and other items 423 139 199 59 26 —

Intangible assets impairment 1,639 1,639 —

Share in profits (losses) of associated companies, net 13 — 13

Net income (loss) attributable to non-controlling interests (2 ) (82 ) 80

The

non-GAAP

diluted weighted average number of shares was 1,094 million for the year ended December 31, 2019.

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Non-GAAP

Tax Rate

Non-GAAP

income taxes for 2020 were $577 million on

non-GAAP

pre-tax

income of $3,470 million.

Non-GAAP

income taxes in 2019 were $597 million on

non-GAAP

pre-tax

income of $3,317 million. The

non-GAAP

tax rate for 2020 was 17%, compared to 18% in 2019.

Trend Information

The following factors are expected to have a significant effect on our 2021 results:

• continued success of our specialty products AUSTEDO and AJOVY;

• ability to successfully execute key generic launches in a timely manner;

• ability to successfully develop and launch new biosimiliar products;

• our disciplined cash management and debt repayment schedule;

• continued efforts towards achieving our long-term financial goals.

For additional information, please see “Item 1—Business” and elsewhere in this Item 7.

Aggregated Contractual Obligations

The following table summarizes our material contractual obligations and commitments as of December 31, 2020:

Payments Due by Period

Total Less than1 year 1-3 years 3-5 years More than5 years

(U.S. $ in millions)

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The total gross amount of unrecognized tax benefits for uncertain tax positions was $888 million at December 31, 2020. Payment of these obligations would result from settlements with tax authorities. Due to the difficulty in determining the timing and magnitude of settlements, these obligations are not included in the table above. Correspondingly, it is difficult to ascertain whether we will pay any significant amount related to these obligations within the next year.

We have committed to make potential future milestone payments to third parties under various agreements. These payments are contingent upon the occurrence of certain future events and, given the nature of these events, it is unclear when, if ever, we may be required to pay such amounts. As of December 31, 2020, if all milestones and targets, for compounds in phase 2 and more advanced stages of development, are achieved, the total contingent payments could reach an aggregate amount of up to $509 million.

We have committed to pay royalties to owners of

know-how,

partners in alliances and other certain arrangements and to parties that financed research and development, at a wide range of rates as a percentage of sales or of the gross margin of certain products, as defined in the underlying agreements.

Due to the uncertainty of the timing of these payments, these amounts, and the amounts described in the previous paragraph, are not included in the table above.

Off-Balance

Sheet Arrangements

Except for securitization transactions, which are disclosed in note 10 f to our consolidated financial statements, we do not have any material

off-balance

sheet arrangements.

Critical Accounting Policies

For a description of our significant accounting policies, see note 1 to our consolidated financial statements.

The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in certain circumstances that affect the amounts reported in the accompanying consolidated financial statements and related footnotes. Actual results may differ from these estimates. We base our judgments on our experience and on various assumptions that we believe to be reasonable under the circumstances.

Of our policies, the following are considered critical to an understanding of our consolidated financial statements as they require the application of the most subjective and complex judgment, involving critical accounting estimates and assumptions impacting our consolidated financial statements. We have applied our policies and critical accounting estimates consistently across our businesses.

The significant accounting estimates relate to the following:

• Revenue Recognition and SR&A in the United States

• Income Taxes

• Contingencies

• Goodwill

• Identifiable Intangible Assets

• Restructuring Costs

Revenue Recognition and SR&A in the United States

Our gross product revenues are subject to a variety of deductions which are generally estimated and recorded in the same period that the revenues are recognized, and primarily represent chargebacks, rebates and

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sales allowances to wholesalers, retailers and government agencies with respect to our pharmaceutical products. Those deductions represent estimates of rebates and discounts related to gross sales for the reporting period and, as such, knowledge and judgment of market conditions and practice are required when estimating the impact of these revenue deductions on gross sales for a reporting period.

Historically, our changes of estimates reflecting actual results or updated expectations, have not been material to our overall business. Product-specific rebates, however, may have a significant impact on year-over-year individual product growth trends. If any of our ratios, factors, assessments, experiences or judgments are not indicative or accurate predictors of our future experience, our results could be materially affected. The sensitivity of our estimates can vary by program, type of customer and geographic location. However, estimates associated with governmental allowances, U.S. Medicaid and other performance-based contract rebates are most at risk for material adjustment because of the extensive time delay between the recording of the accrual and its ultimate settlement, an interval that can generally range up to one year. Because of this time lag, in any given quarter, our adjustments to actual can incorporate revisions of several prior quarters. See also “Revenue recognition” in note 1 to the consolidated financial statements.

Income Taxes

The provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws in the jurisdictions in which we operate. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws.

Accounting for uncertainty in income taxes requires that it be more likely than not that the tax benefits recognized in the financial statements be sustained based on technical merits. The amount of benefits recorded for these positions is measured as the largest benefit more likely than not to be sustained. Significant judgment is required in making these determinations.

Deferred taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and tax bases of assets and liabilities under the applicable tax laws. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In the determination of the appropriate valuation allowances, we have considered the most recent projections of future business results and prudent tax planning alternatives that may allow us to realize the deferred tax assets. Taxes which would apply in the event of disposal of investments in subsidiaries have not been taken into account in computing deferred taxes, as it is our intention to hold these investments rather than realize them.

Deferred taxes have not been provided for

tax-exempt

income, as the Company intends to permanently reinvest these profits and does not currently foresee a need to distribute dividends out of these earnings. Furthermore, we do not expect our

non-Israeli

subsidiaries to distribute taxable dividends in the foreseeable future, as their earnings and excess cash are used to pay down the group’s external liabilities, while we expect to have sufficient resources in the Israeli companies to fund our cash needs in Israel. In addition, the Company announced a suspension of dividend distribution on ordinary shares and ADSs in 2017. An assessment of the tax that would have been payable had the Company’s foreign subsidiaries distributed their income to the Company is not practicable because of the multiple levels of corporate ownership and multiple tax jurisdictions involved in each hypothetical dividend distribution.

For a discussion of the valuation allowance, deferred tax and valuation allowance estimates see notes 1 and 13 to our consolidated financial statements.

U.S. Tax Cuts and Jobs Act

We accounted for the tax effects of the Tax Cuts and Jobs Act, enacted on December 22, 2017, on a provisional basis in our 2017 consolidated financial statements. We completed our accounting analysis in the

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fourth quarter of 2018, within the one year measurement period from the enactment date. See note 13 to our consolidated financial statements for additional information.

Contingencies

From time to time, Teva and/or its subsidiaries are subject to claims for damages and/or equitable relief arising in the ordinary course of business. In addition, in large part as a result of the nature of its business, Teva is frequently subject to litigation, governmental investigations and other legal proceedings. Except for income tax contingencies or contingent consideration acquired in a business combination, Teva records a provision in its financial statements to the extent that it concludes that a contingent liability is probable and the amount thereof is estimable. When accruing these costs, Teva will recognize an accrual in the amount within a range of loss that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, Teva accrues for the minimum amount within the range. Teva records anticipated recoveries under existing insurance contracts at the gross amount that is expected to be collected when they are considered virtually certain to occur.

Teva reviews the adequacy of the accruals on a periodic basis and may determine to alter its provisions at any time in the future if it believes it would be appropriate to do so. As such accruals are based on management’s judgment as to the probability of losses and, where applicable, actuarially determined estimates, accruals may materially differ from actual verdicts, settlements or other agreements made with regards to such contingencies. Litigation outcomes and contingencies are unpredictable and excessive verdicts can occur. Accordingly, management’s assessments involve complex judgments concerning future events and often rely heavily on estimates and assumptions.

Goodwill

Goodwill reflects the excess of the consideration transferred, including the fair value of any contingent consideration and any

non-controlling

interest in the acquiree, over the assigned fair values of the identifiable net assets acquired. Goodwill is not amortized, and is assigned to reporting units and tested for impairment at least annually, in the second quarter of the fiscal year.

We perform an impairment test annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. The provisions of the accounting standard for goodwill allow us to first assess qualitative factors to determine whether it is necessary to perform the next goodwill impairment quantitative test.

Examples of events or circumstances that may be indicative of impairment include, but are not limited to: macroeconomic and industry conditions, overall financial performance and adverse changes in legal, regulatory, market share and other relevant entity specific events.

The Company estimates the fair values of all reporting units using a discounted cash flow model which utilizes Level 3 unobservable inputs. Key estimates include the revenue growth rates and operating margins taking into consideration industry and market conditions, terminal growth rate and the discount rate. The discount rate used is based on the WACC, adjusted for the relevant risk associated with country-specific and business-specific characteristics.

The carrying value of each reporting unit is determined by assigning the assets and liabilities, including the existing goodwill, to those reporting units.

When necessary, we record charges for impairments of goodwill for the amount by which the carrying amount exceeds the fair value of these assets.

See note 7 and note 19 to our consolidated financial statements for further details on the goodwill impairments recognized in 2020 and 2018, and Teva’s operating and reporting segments.

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Identifiable Intangible Assets

Identifiable intangible assets are comprised of definite life intangible assets and indefinite life intangible assets.

Definite life intangible assets consist mainly of acquired product rights and other rights relating to products for which marketing approval was received from the FDA or the equivalent agencies in other countries. These assets are amortized using mainly the straight-line method over their estimated period of useful life, or based on economic benefit models, if more appropriate, which is determined by identifying the period and manner in which substantially all of the cash flows are expected to be generated. Amortization of acquired developed products is recorded under cost of sales. Amortization of marketing and distribution rights is recorded under selling and marketing expenses when separable

Impairment of identifiable intangible assets amounted to $1,502 million and $1,639 million in the years ended December 31, 2020 and 2019, respectively. See note 6 to our consolidated financial statements.

The fair value of acquired identifiable intangible assets is determined using an income approach. This method starts with a forecast of all expected future net cash flows associated with the asset and then adjusts the forecast to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams.

Whenever impairment indicators are identified for definite life intangible assets, Teva reconsiders the asset’s estimated life, calculates the undiscounted value of the asset’s or asset group’s cash flows and then calculates, if required, the discounted value of cash flow by applying an appropriate discount rate to the undiscounted cash flow streams. Teva then compares such value against the asset’s or asset group’s carrying amount. If the carrying amount is greater, Teva records an impairment loss for the excess of carrying value over fair value based on the discounted cash flows.

TEVA US Equity

TEVA · 10-K · period ended 2020-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TEVA US Equity☆

TEVA · 10-K · period ended 2020-12-31

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TEVA US Equity