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

Good morning, everyone. My name is Balaji Prasad. I'm the senior analyst for the Barclays Specialty Pharmaceuticals coverage. For the next session of the day at the Barclays Annual Healthcare Conference, I have the pleasure of hosting Teva and Eli Kalif, the Chief Financial Officer from Teva. Eli, thank you so much for joining us today. It's a pleasure to have you here.

Thank you for having me. Really excited to be here.

Yes. It's a very interesting phase for Teva now with the CEO change and everything else. But considering that you had your earnings call recently, why don't you start with a couple of recaps from the earnings call and then we can get into Q&A.

Yes. So yes, we're really excited to have Richard with us. I think over the last several years, the company really focused on how to be able to stabilize the optimization to make sure that our capital allocation really focused on serving the debt and keeping our restructuring capabilities, taking a lot of cost out of the system. And with the coming of new CEO, Richard Francis, and his well-experienced record, we see ourselves now positioned into growth. And what does it mean in that we initiated already in the last 2 months an ongoing strategic review. That strategic review is going with several work streams and sprints that we go across the company with dedicated teams. That's going through any assets, any operations, any portfolio that we can think about thinking about growth, what type of activities we want to focus on, what type of activities we want to stop to focus on and everything is how we envision our working capital is -- our capital allocation in the future in order to drive growth. So I think that comment from the earnings, one of the most major elements was our offering that we did in the last weeks. We actually offer $1 billion on SFB bonds. We offset that deal to $2.5 billion with the tendering of the same $2.5 billion. We announced yesterday on the tendering finalization really [indiscernible] (00:03:51) fact that we have kind of a clean runway for the next 3 years with an average $1.6 billion, $1.7 billion debt stake for '23, '24 '25 that enable us to secure liquidity, which means that's going to be paid from our organic free cash flow and really having us focus in on our strategy on growth.

Thanks for that recap, Eli. As I said, I think the task for Teva has clearly cut out. So you have the growth mandate that Richard will be driving and then you have the capital allocation thoughts and priorities, which you have been not getting very well over the last couple of months, especially. So maybe starting with Richard and how should we think about his top priorities in the near term and then the major focus items of priorities for the longer term? And what does the growth mandate for Richard translate into for Teva?

Yes. I think if you're looking first of all on our existing portfolio, if you think about generics, yes, we have in the U.S. generics as all the rest of the players. We see some kind of stabilization in terms of the pricing. But we're also looking on the ex U.S. generics. If you think about it, more than 60% from our generics is ex U.S., It's around $5 billion just ex U.S. They're super stable, really predictable growing nicely in terms of the margin. So this one we'll keep a focus. On the U.S. generics we'll be focusing more as we speak on complex generics, everything related to inhalers, patches, all type of injectables. And we truly believe that the value is there, although it's taking a lot of time, unfortunately, to get the right approval on time. But we've demonstrated in the past a few assets that it's worth it. So we keep focusing a lot on this. And I think that if you think about biosimilars, currently, the focus is really to grow those capabilities. We have on our portfolio around 16 assets on biosimilars, 3 already in the market, 5 with a partnership with Alvotech and 8 kind of homegrown, and an integrated R&D organization that gives us the ability to do an innovative R&D on both biosimilars and generics, having the knowledge as well on innovative, we think that we're really positioned well on how we're able to keep -- putting a nice product in the market. So I think it is related to Richard. And I will talk about also on the innovative, I think it's related to Richard. This is having kind of a view on the existing capabilities, understanding where is the tail, where is really those elements that enable in the middle looking onwards on our capital allocation strategy. And for us, in order to create shareholder value, it's about either accretive on our earnings, which in some way will enable us to grow our -- across the earnings multiples and either to create kind of a sustainable growth also to create kind of a more [indiscernible] (00:07:32) business for us. As far as related to innovative, as you know, we truly believe that AUSTEDO is a great asset. And as we speak, we actually announced several weeks ago that AUSTEDO XR is the once daily. It came with the 6, 12 and 24 milligrams and that is additional treatment in terms of our product prospects that we can actually offer now to patients. As you all know, AUSTEDO was like -- around 800,000 suffering in the U.S., only 50% of them diagnosed and only 5% on treatment. So it's really how you're able to get the right treatment and dose properly for the patients on the drug, keep focusing on compliance and adherence and as well really looking on the growth. So we did with AUSTEDO on average like year-over-year around 20%. We're looking on $1.2 billion. Part of the strategic review that we are doing now is all type of abilities to grow organically specific assets. But not only that one. If you're looking at our working capital, we're trying to understand what is actually less accretive, more accretive in terms of cash and how we are actually able even to look on specific assets in the future and to ask ourselves if they are actually incremental into our growth or they can actually -- we can monetize and think about differently on certain assets in the company. So we -- as we speak, we see ourselves coming before the second half of the year somewhere, I believe, very close to our Q1 earnings and to come and explain to the entire world our strategy, where we're focusing and really to put kind of very clear equity story to make sure that people understand exactly where we're yielding, knowing that we'll keep focusing on optimizing, keep serving the debt on the level that we put ourselves at least for the next 3 years when we set that runway now with the latest financing and make sure that our -- both our bondholders, both our shareholders really understanding our able to drive growth.

Great. Thanks for that comprehensive overview, Eli. So let's start with maybe picking each one of these, the biosimilars business. So when we hosted the lunch with you and Richard and Sven a couple of weeks ago, he was speaking about his belief in the opportunity and it's going to be a meaningful one. And it's also interesting for me when we think about 2020 where Teva literally had like what we knew was 2 assets, which are already commercialized. You didn't seem to have a pipeline. And then the Alvotech partnership happened. All of a sudden, you're like looking into -- you have a ringside view into Humira, Stelara, potentially KEYTRUDA and all. So biosimilars, as we think about this, starting with this year and then your own internal programs too, so what size or shape could this take over the longer run in a couple of years from now? How big can the biosimilar option would be for Teva?

Yes. So if you try to kind of look broadly about the biosimilars in the last 5 years, and there was around $25 billion worth of biological assets that went out of that. In the next 5 years, that number is more than doubled, it's around a bit above $70 billion. Now if you have currently the existing platform on generics and the existing capabilities, you want to make sure that you have a really deep portfolio and you capture enough percentage from the outer patent. And that was the strategy. So as I mentioned -- as you mentioned, with the Alvotech, we did kind of a catch-up into the market with 5 assets. We have some HERZUMA, TRUXIMA with Celltrion. We have initiated also earlier last year, LUCENTIS, and this one is mainly in Europe and also in Canada. And we have kind of 8 homegrown assets in different phases. And part of -- our Investor Day and our strategy review, we're going to expose part of them to explain our capabilities and our technologies in order to support those launches. But we think that biosimilars is the new generics because more and more biological go out of patent. And it's kind of for us due to the capital allocation restrictions that existed over several years, we're looking on this type of deal with Alvotech, where the partners have the ability to manufacture the developments. And we're actually creating kind of a win-win situation and leveraging our go-to-market capabilities, in that case, exclusivity in the U.S. So we see that one keeps growing. And we're looking on that one, I will say, more focus. We really believe that as much as we're able to build our capabilities, and it's not only in terms of how we're able to contract, launch and develop, it's also how you're able to manufacture and how you're able to source and how you're able to be less dependent and have more flexibility. We also need to remember that those partnership most likely doing kind of a profit share, which is a bit lower gross margin. The homegrown, it's higher gross margin. So you're actually trying to build kind of a flexible, I would say, platform in the biosimilars in order to be able to act on any movement from the revenue mix, so your profitability will align as well.

Understood. Maybe starting with biosimilar Humira. I think that's going to be probably a critical point in terms of how market views your biosimilar capability coming next with Stelara potentially and all. So I wish we had Alvotech here and I wish the inspection had been over, but it's not. So the inspection is still ongoing. Alvotech's being also inspected for pre-approval inspection for biosimilar Stelara. So -- which takes time and they couldn't come to the conference. But I know you are still [indiscernible] (00:14:07) away from them, but I want to understand your level of confidence on, on-time launch in July with Humira and your ability to supply. How should we think about it?

Yes. So talking about the next 5 years, more than $70 billion for sure is like the majority of the long-term assets. One of the big one is Humira, as we all know. Amgen already launched, right, in January. Their product and it's really important to understand is low concentration, not interchangeable. Majority of the revenue of Humira is right around 85% is really on high concentration. Our product profile is high-concentration, citrate-free as well interchangeable. And we truly believe that it's super important to get out to get the approval. And as we speak, the patent started on March 6, it's ongoing, with the ultimate goal that the FDA committed to provide their response by April 13. So we'll know in the next [ 2 ] weeks. And what's really important to understand here is that the way that we see it and also with [indiscernible] another player in the end of June and [indiscernible] early July [indiscernible]. Later on the state, we have another fleet. Really understand if our profile currently is uniquely positioned and as long as the innovator still have -- will be on the formulary, which means that [indiscernible] the competitive advantages for Humira that we're going to launch in the U.S. due to the interchangeability. So we're working constantly with the PBMs with the right strategy with them, and also part of them able to understand the entire manufacturing process that have Alvotech, so early, it's just about waiting to the approval and our ability to execute. But we are really lined up with everything that we need.

Understood. So there are 2 comments. One is getting the approval -- inspection approval done. Another part is the formulary discussions which are going on. So can you throw some color on the second part and also help us understand -- I mean, I think most investors understand that the interchangeable high-concentration version is kind of what keeps you in the game despite not having the inspection approval yet. But help us understand how the discussions are evolving and what are you seeing on the ground?

Yes. So first of all, also for the interchangeability, there is no PDUFA date, right? This one is also a condition to the re-inspection, and it's very important to clear. But we -- the way that we see it, we didn't really took in our guidance much. We really derisked the launch for '22. We look in that one more kind of 4, 5 years beyond '23, right? That's the way that we are positioning ourselves. So our discussions with the potential PBMs is super strategic discussion, not just for what we can do in the coming year but how we can position ourselves going forward. And we truly believe that and the way that the market will see through credit kind of many 3 inflection points. First of all, as I mentioned, Amgen, which is a different profile that we have -- that -- with a certain level of acceleration and [indiscernible]. But if we will be able to get the approval on time, I think that will change the dynamics. And that will dictate, I think, different, I will say, strategy to the rest to understand how they can position, mostly related to what you mentioned from our learning with the originator. So we're not thinking about it kind of a '23 game. We are thinking about '24 and beyond. And I cannot provide more details about how this one is progressed, but we are really [indiscernible] there.

Fair enough. In the interest of time, just shifting towards the pipeline on the specialty side. I do want to get your thoughts around the UZEDY opportunity, and are we still on track for a potential action date in August 2023?And just help us understand your market share opportunity and what your goals are there?

Yes. So UZEDY is risperidone. And if you think about this whole entire market landscape, this is about 1.6 million patients, currently only 13% treated with LAI, long-acting injectable. What we offer as part of UZEDY, it's a different profile. It's a more friendly patient profile, which we [ administer ] subcu. It's having a small needle, low volume. It's ready-to-use tech with a pre-built syringe. And that is something that we believe that's going to get a lot of attraction. The total LAI market currently is around $4 billion. So we believe that, that's going to have kind of certain penetration there. As you mentioned, we refiled it back in November. We plan to get the approval by the first half of this year. And the way that we are looking on that one, it's also we started the Phase III in olanzapine, and we plan also to have this one with [indiscernible]. And most likely, somewhere early next year, we're going to see some [indiscernible] results. Those -- both of them creating a nice franchise. Because if you think about it, it's really aligned with what we just said. And as we know, disorder movement with the TD is really common side effect for [indiscernible] treatment of schizophrenia. So with that, you're creating kind of a franchise. And we truly believe that our capabilities in terms of innovation and how we're able to bring innovated product into the market, you think about launching AJOVY and AUSTEDO in the last several years where the company was struggling with [indiscernible] debt restructuring and [indiscernible] and litigation but those 2 products were very successfully in the market where AJOVY was a bit late in the page. With that one, we truly believe that we'll be super successful if we get that product on time and really position that one. Really excited about it. And we think that it's trading, as I mentioned, direct franchise and enable us to position another great 2 assets into growth.

Got it. Great. And could you also just take us through the synergies that you expect between these 3 products between subcu olanzapine and UZEDY and AUSTEDO? You also called out the approval of the AUSTEDO XR version.

Yes. So the synergies, it's mostly about go-to-market. It's mostly about the sales force, it's mostly about how you're able to make sure that you have properly dosed the treatment and make sure that you have the right compliance and adherence. And we see ourselves looking on how much we can still more invest in those 2 areas in terms of sales force, in terms of capabilities and initiatives around the sales and marketing. As you mentioned, in terms of the once-daily AUSTEDO, that was kind of another example of our capabilities and how we're able to penetrate. And we're looking also further to different doses, how we can actually be more impact there. But I think it's all about our ability to create those synergies and to make sure that our sales force is enough diverse to able to get the patients on the drug [indiscernible]. So...

Got it. And I think I do want to get some questions on the generics side. The ex U.S. component is probably well understood -- a bit more hazy but also well understood that it's still a growth [indiscernible]. The U.S. component and now that you have Christine Baeder, who is now the Chairman of AAM [indiscernible] Chirag, and he had been kind of leading the charge and pushing back against the PBMs. Christine seems to have the same viewpoint too. So do you kind of see this deadlock breaking on the generics market where the buying pressure -- buy side pressure is going to ease at some point because you called out stability. At any point in the next couple of years, could we see a more balanced structure here on the...

I truly believe it's right. But for us, in terms of financials, it really depends on how much we're able to launch in any given year, right? And if you think about the dynamics in the last, I would say, 2 years heading to this year, we had less, I would say, launches in '21. '22 was really denominated with Revlimid. In '22, we're going to have more share in Revlimid, of course, we cannot expose this one. It's under the [indiscernible] so you will see us selling more, and really excited about this one. We also announced something around that one as well 2 weeks ago about another 2 strengths. So I think it's really about -- yes, there will be -- keep certain level of erosions. But our ability to launch on time, our ability to get [indiscernible] inspection, I also mentioned complex generics, that actually changed really the needle in the coming 2, 3 years. So this is as far on the financials. I think if you think about the economics about this one, we are focusing again currently to capture around 80% more or less from the out of patent. As we speak now, we have more than 900 pending approvals. It's massive, right? And the ability for us to make sure that we are providing the right resolution, the right penetration [indiscernible] not necessarily have the ability to always fight on the right pricing, although if you're first to launch you get some right advantage. But I think what we offer as generics is part of our mission to be committed to be the largest generics. I think this one will be really a game changer to this effect.

Got it. Maybe in the -- we're just out of time, but I'll put in more questions, something that we discussed last evening. As you look at all of these things and the opportunities are clearly evident, and they are much larger than it was 3 years ago, what are the biggest challenges for Teva now? You said the opioids [indiscernible], which is fantastic. The growth opportunity is great. What are the challenges?

I think the challenges is to make sure that we come very clear with the strategic review, we come very clear with what we plan to do and make sure that the entire organization is aligned in an understanding that we're actually moving into kind of growth mode and have the ability to become super clear both to our shareholders, our bondholders, any other stakeholders to explain how we're looking on our capital allocation in terms of growth, knowing that we still carry heavy debt, which means in the next 2 to 3 years, we'll keep allocated from our free cash flow. And we actually already [indiscernible] in this latest refinancing that we're very nicely equipped with $1.7 billion in average to pay the debt, which means that one of the most challenging will be is to make sure people understand how strict our capital allocation, pivoting it in a different way in order to support growth. And as part of those strategic reviews, understanding what we're going to keep doing, what we're going to starting to do and what we're going to obtain. And that will be the challenge in the next 3 years.

So there's a fair bit of change management, organizational management, things that you had to handle.

Yes.

Yes. Okay. Well, we'll all look forward to the strategic review. Eli, thank you for your time and sharing your thoughts. And I wish you a very productive conference.

Thank you very much.

Thank you.

Thanks for everyone for your interest in Teva. Thanks.