Teva Pharmaceutical Industries Limited (TEVA) Earnings Call Transcript & Summary

Good morning again, everybody. This is David Common, and I'm very happy to start off our Tuesday sessions with Teva Pharmaceuticals, returning for another conference appearance. For this presentation, we have Eli Kalif. He's going to step us through slides. I think we're apt to use the entire 35 minutes. So I'm going to go off-camera for the slide presentation, leave it to Eli. And if you have follow-up questions, as you know, Kevin Mannix in Investor Relations is always available, as am I. So again, thank you, Eli, for doing this with us, and over to you.

Thank you, David. Welcome, everyone, to this call, and thank you for your interest in Teva. I will review some of our key business highlights and then will review as well financials. If we can go to Slide #3, please. We are very pleased, 2020, especially given the uncertainty that was created by the global pandemic. Despite these challenges, the efforts of our employees around the world allowed us to meet the 5 main components of our 2020 outlook as well as they continued to make the progress towards our long-term financial targets. And what we have seen here in this slide, we can see actually, the revenue came in around $16.7 billion, the non-GAAP operating income at $4.4 billion and the non-GAAP EBITDA at $4.9 billion. The non-GAAP EPS came in slightly above our guidance at $2.57, and the free cash flow came in at $2.1 billion. Overall, on the business side, a lot of great and important things happened to us this year. I think, overall, worth to mention in 2020 is the COVID-19 pandemic and the successful navigation through the pandemic and a company that actually -- or is able to protect our employees, to secure our entire supply chain and to cause the really, really minimal disruption, I would say; and also continuing R&D programs and manufacturing and distribution locations. If we're actually looking on the right side and talking about most of our elements on our products. Overall, I think that if we look on the AUSTEDO, we can see that AUSTEDO yet actually keeps growing very strongly. We had 65% increase over 2019. I will elaborate this one in more extended way. On AJOVY, we see global sales bolstered by launch of the auto-injector. We speak about it as well. As for TRUXIMA. So with the biosimilar as the really key element in our generic space. And here, we had to prove to ourselves that the launch of TRUXIMA is something that can actually gain for us a good market share. And we believe that, with TRUXIMA, we have proven that we can get the volume share. And we are actually up to 24% now. We see sustainable market share that we can increase. There are like more competition now, and we have 2 competitors and originator, but this is a very good business for us and solid market share that we have already. As we actually move forward to the latest launches in Q4, worth to mention TRUVADA and Atripla. I will say a very, very successful launch of the first versions of the treatments, TRUVADA and Atripla for HIV treatment. So generics version of those products were launched by us in the fourth quarter in the U.S. A very successful generic launch. We have also just launched the U.S. NuvaRing. And we're very happy to have this approval for complex generics. We are also very pleased with the Phase III results from our risperidone LAI. As you know, patients suffering from schizophrenia really need a rather long-acting therapy. This product consider a long-acting product, subcu injected by thin needle. So it's actually improved the convenience and the compliance. Hopefully, we'll get kind of a strong benefit for people suffering from schizophrenia. And last is about the Digihaler portfolio that we launched in the U.S. And this -- I think that in these times [ of health ], we're very, very optimistic on the Digihaler portfolio products and can really help the people that's suffering from asthma and other respi disease to improve treatments and as well as the compliance with their treatment to the benefit of their outcomes. If we go to the next slide. In the next slide, we can actually see the big chart of the revenue during '20. What you can see here, if we compare Q1 '20 to Q1 '19, you can see actually that Europe, in the green layer, get up by approximately $200 million versus a year ago quarter. And this is actually resulting with stockpiling due to the pandemic, driving generics and OTC increase in revenue. And then in the following quarter of Q2, we saw kind of a correction of those 2 elements. But overall, the first half was coming in as we projected the entire first half when we actually went and predict our 2020 numbers. As we move forward with Q3, it's become more, I would say, accelerated. And in Q4, more normalized, according to the great launches that I just mentioned. Overall, if we look on North America, that is kind of a stable of a $2 billion-plus in terms of revenue and as well in Q4 with the launches. And the rest of the world, I would say, it's more or less kind of stable. If we go to Slide #5. So just to elaborate more about AUSTEDO. So keep growing very strongly. As you can see here, we have 65% increase over 2019 in our revenue in 2020. And we also expect to keep on growing strongly, as you will see from our guidance, with a really good growth in prescriptions, good growth in our sales. And what we always mentioned, that we see AUSTEDO with a really, really huge potential in terms of market share. As we look for the next slide. So on AJOVY trend, it's a bit -- almost like a bit like a kind of a V chart. Stores for AJOVY in the U.S. with a really good launch. And then we lost some competitive power, and that was actually due to the fact that we did not have the auto-injector on time. Our 2 competitors both launched with an auto-injector. We were delayed regulatory-wise. And you saw our NBRx here go from 30% all the way down to around 11%. And then we finally launched our auto-injector, which we think that and believe that it's really a best-in-class, a very high-quality product, really easy to use. So if you actually combine the new and the better device, which then actually mean that we rebound to kind of a better capture rate. With NBRx share around 25%, we can see that we are actually now on track. Now the way that we see that one is really the combination of a better device and the increase in our capture rate with the fact that we do have unbeaten efficacy and we have a longer duration of action than any other competitors. And due to a longer duration of actions, we can offer both quarterly and monthly therapy. So overall, we are very, very quite optimistic about the potential of AJOVY in terms of market share going forward. If we go to the next slide. In the next slide, what we see here is our overall non-GAAP outlook for '21. And I just want to elaborate a bit on our actual and our latest guidance before we went into the actual in 2020. So back in November, we actually went to The Street and lowered the range and actually the midpoint lower by $150 million, we actually put kind of a more narrow guidance to the OP, EBITDA and EPS as well as adjusted a bit the COPAXONE revenue. When we look on actual $16.7 billion, that actually was a bit above our midpoint. And we were -- really had a nice trend on COPAXONE, and we were more or less on the level of the range of AUSTEDO and AJOVY. I think those combination of the 3 products now moving from average of $2.16 billion to $2.3 billion for next year. One thing to remember, and actually on the actual 2020, we did beat the high range on the OP as well on the -- we did beat the high range of the EBITDA, and we actually beat the EPS, as well met our -- a bit higher on our midpoint in terms of our free cash flow. If we look on '21, one element, and this is in the slide, and we elaborated as well in our earnings calls. This is about the divestment in Japan. So the numbers actually in 2020, considering around $240 million in Japan actually divested starting on February 1, which mean on an annual base, we're looking for around $210 million, $220 million, which is less now in terms of revenue versus '21. We're still actually projecting that range on the revenue. And if we look on COPAXONE, we're looking a bit around $1 billion. And the combination of the 3 elements of the specialty product you here, it's around $2.3 billion. As we look at the operating margin, EBITDA and EPS, we actually narrowed the range. And on the midpoint on the OP, I will elaborate more as we speak, heading to our long-term financial target. But actually, the fact that we're able to narrow, as well on the EPS, provide kind of more confidence for us to deliver our outlook. Our free cash flow, we're actually looking on a low range of $2 billion up to EUR 2.3 billion, and CapEx more or less the same as actual of 2020. And we are in the range of between 17% to 18% in terms of tax. I would like to move to Slide #8. So in Slide #8, if you recall, back in February last year, when we went with our earnings for Q4 '19, we start to elaborate more about the entire gross margin improvement program, which this program is actually a long-term program that is the key, actually, element in order for us to achieve our long-term financial targets by end of '23. And when we are looking on those 5 key levers, we need to remember that there is tons of sub projects and programs below across the entire organization in order to support all those elements. And I will elaborate about this one. So the first one related to procurement and cost excellence. This is about how we actually optimize the processes and really consolidate of sourcing with a high level of intelligence as we look on commodities as well as looking on pricing strategy. And the most important thing is how we're able to leverage our integral -- vertical integration kind of API and so on. So this one is actually a really high focus. As we move forward to the next one, the network optimization and restructurings, and we'll elaborate about it with a separate slide later, about our manufacturing trajectory. But this is about really how we're going to drive to a full utilization, and how we're able to have scalable capacity. And this all is about really looking on consolidation of specific product into one location. How we're able to optimize and shorten the time in terms of the supply chain demand into our manufacturing. And how we're able to optimize specific markets that, today, serve with certain manufacturing sites to actually shorten the time, and to be actually very focused on inventories and respond to market. On the third one, operational and quality excellence, this is about really, really streamline of operational processes with really proof of the best practices. So that element, in the way that, today, we structured our global operation, it's by technology, which means that we are growing with a main tree, technologies, with the clusters rather than geographic elements. And this is actually creating the leverage of best practices and to make sure that we are actually focusing on specific technology. And all those technology, supported by specific manufacturing, have the same level of best practices and great kind of element of competition inside the company. If we look on the fourth element, the end-to-end supply chain integration, this is really, really how we are actually optimizing our shipping partner. How we're actually looking on our full inventory value chain and have the ability to shorten the turnover and actually providing the better working capital management. And on the last one, it's really about spend base optimization. This is all about agile operating model and organization. And I think all of those one will come into play when I will talk on -- further about our long-term financial targets. So this is -- was about more, I would say, a comprehensive explanation about our program. If we go to the next slide, Slide #9. So when I spoke about, the prior slides, about the network optimization. And what we see actually in this slide is that over the last 3 years, we have gone from around 80 sites to 16 manufacturing sites. But we are not stopping here. And as you can see here in the bottom, we actually have additional 11 sites, where we have announced that they will either divest or get closed. And lately, we actually divest certain countries, like Thailand, Russia, Japan and Serbia, and we will keep doing so. And we're looking on how to, again, optimize the volume, how to be able to make sure that we are really, really supporting our scaling capacity and full utilization. So on that one, we will hear more, I would say, in the coming future as we progress along. I would like to move to Slide #10, please. So this is about our overall spend base. We declined for the third straight year. So on Slide 10, actually, you can see that we had a modest decrease in our spend base in the fourth quarter. But for the full year, it declined by around $474 million. More than half of the annual decrease was due to a lower cost of goods sold, partially related to a lower annual sales as well to our ongoing efforts to transform our global operational network, lower operating expenses and contributed to the actual decline in the spend base. And this is actually due to the ongoing activities management doing now on our OpEx. If we look ahead, in 2021, we expect the overall spend base to continue to decline, but at a more, I would say, gradual pace, mainly due to the efforts to reduce our cost of goods sold, which actually will come from those 5 key levers related to the gross margin improvement plan. I would like to move to Slide #11, please. Yes. So in Slide 11, this is actually where we're showing the operating margin trend. And what you can see here is actually the negative development from '17 to '19, which actually mostly related to the loss of revenue of COPAXONE, which was a really, really profitable, high operating margin product. What you can see is actually the start of the rebounding in 2019, where actually, the company was able to stable the margin and looking now for growth, I would say, post the big restructuring of $3 billion savings in spend base. So if we're moving now from the 24.5% in '19, up to 26.3% in 2020. Now what we put here in '21, it's actually 26.8%. This is based on our midpoint at the guidance. So if you like, you take the $4.45 billion OP over $16.6 billion revenue, and you get this number. Now we need to remember, coming from 24.5% as the baseline in '19, going to 28%, this is about 350 basis points. You would assume that you have around 4 years to reach the target, so kind of less than 1 point a year. What's happened to us moving from '19 to '20, we actually accelerate with the program. And this is due to our efforts to actually manage the very, very resilience of the OpEx base. This is actually coming with effect of contribution of the pandemic due to less, I would say, marketing efforts related to live events as well travels and so on. So we actually get kind of a benefit here. But if you look on the '21, so from 24.5%, up to '21, very close to 27%, which means that we are actually now look like the big acceleration on the program, and we're really, really happy to see that trend and confident on delivering the results. I would like to move to Slide #12. So overall, on Slide #12, Teva free cash flow in Q4 was $471 million versus $974 million in Q4 '19. We need to remember that, year-over-year, the decline versus Q4 '19 was really unusually higher mainly due to a onetime sale of assets as well a $95 million benefit from interest rate swap transactions we had. But for the full year of 2020, free cash flow was around $2.1 billion, a bit higher on the level of a year ago, or flat if you like. But actually, what really, really dominate in '20 versus '19 is our ability to actually minimize the large quarterly swings, meaning stabilized our free cash flow, dollar-wise, that actually translated in a more stabilized cash-to-earnings element. And we're really, really pleased with the efforts that the team is doing around it. And going to the next slide, we can see our cash-to-earnings. And our cash-to-earnings for full year 2020 was 75% versus 79%. And I will say that the free cash flow was the most likely, as I mentioned, a bit unchanged, but the net income was $200 million higher in 2020. And then when it comes to this one, and you want to keep actually the pace on the percentage element, you're actually able to move and keep moving from 78% to 75%, but still actually generating more cash, considering that the net income deviation increased higher than the free cash flow in terms of dollar-wise. So as we look forward into our trajectory, one of the key elements for us in terms of cash-to-earnings is really to reach our 80% goal. I will elaborate on this one more in the coming slide, and to explain how we're actually looking to achieve that target. Going to Slide #14. Yes. So on Slide #14, we can see actually our outstanding debt. Net debt actually declined to $23.7 billion versus $24.9 billion in 2019. This actually reflect a repayment of $1.9 billion during 2020, which was partially offset by $900 million negative foreign exchange impact. And we need to remember that about 1/3 of our debt -- of our gross debt is actually generated by euro, and the erosion of the euro approximately around 10% this year, created that element on the FX. I think that if we look on our net debt-to-EBITDA at the end of 2020, we were able to actually meet what we target to ourselves, to be below 5x. We actually end up 4.8x versus 5.3x at the end of 2019. We're very pleased with the progress we have been making each year to bring our overall debt load lower than the net debt-to-EBITDA ratio closer to our long-term target of under 3x by end of '23. If we can move to Slide #15. In Slide #15, it's kind of a reminder of the way that we look on our debt -- net debt development. So actually, we're trending this one from end of '17 until last quarter. And the majority of the reduction here is actually coming with the -- post of the restructuring. And if you can actually look on going forward from '19 to '20, this is actually how we are able to, a bit more, expand on our free cash flow coming with the first year out of 4 from our long-term financial targets. If we're looking ahead to 2021, it will be another year of debt reduction totaling around $3.2 billion. And this is actually including our 0.25% convertible senior debentures over 2026 that were actually redeemed on February 1, '21, in the amount of around $491 million. And I believe that, looking forward, and as we actually mentioned, we have actively stated several times that our liquidity and expected cash flow would cover bonds repayment for the next 2 years before having the refinancing for later maturities, including for 2023. I would like to move to our next slide, Slide #16. And this is actually the final slide. And I found it to be a final slide in order to actually try to kind of recap and capture the prior slides that we saw and the trends. And we have that slide, as I mentioned, now for several quarters. And very, very important actually for me to explain, about how we see this all trajectory moving forward in order to really, really support the element of getting the net debt-to-EBITDA below 3 and actually have the ability to expand EBITDA. If we're looking actually on the 28% on the margin. So as we move forward, we're working on 2 elements. One, margin-wise, it's actually to really extended margin. Main elements are the 5 key levers on the gross margin improvement plan that I elaborated before, the spend base optimization and actually how we drive to full utilization and scaling on capacity. Those elements, along with our ability to increase our cash-to-earnings percentage on the sustaining and on the growth of the margin, but actually doing it with above 80%, that actually will enable us to really expand the EBITDA. And if we're trying to actually understand the math behind it, right? And if we're actually ending now, we're around $23.7 billion. And we are looking on annual well base around between $2.50 billion to $3 billion in average for the next 3 years, we actually can get a number that's very close to $15 billion, $16 billion of a net debt. And if you actually do the multiple of 3, you're actually kind of lending around $5.5 billion, $5.6 billion on EBITDA. We are at a higher point now to guide this year, we guide higher point around $5.1 billion on the EBITDA, which means that $0.5 billion moving forward, from '22, '23, assuming we actually hit our targets for '21, this all come from the ability to really, really expand the margin. And this is the way we are looking into it. And as we move forward to support our liquidity, so we're looking on really, really consistent debt repayment, really a thoughtful refinancing timing and cost. We're looking at the market all the time and finding the right opportunities to move forward with the refinancing. And as well looking on how we are optimizing our strategic cash as a global company. And I think that this is really conclude our review. And I want to really, really thank you all very much for your interest in Teva. And thank you very much.