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

So good morning, everyone. Thank you for joining this session of the Morgan Stanley Global Healthcare Conference. My name is Thibault Boutherin. I am part of the Pharma Equity Research team based in London. Before we start this session, I just need to refer to important disclosures. Please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative. So for this session, I'm delighted to have with me Richard Francis, CEO of Teva. Thank you for joining us today. So we will shortly start the Q&A. And I invite investors in the room who have any questions to raise their hand for the session, and we'll get a mic to you. But before we start, Richard, we'd like to start with some introductory comments on the current situation and outlook for Teva.

Great. Well, good morning, and thank you, Thibault. Thanks for the opportunity to talk here. So maybe a quick sort of overview of where Teva is right now. We launched the Pivot to Growth strategy in May in New York City, where we outlined how we're going to make Teva strategically perform over the next 5 years to 2027, I think the numbers we gave to. And that will be hinged upon 4 key pillars to get us back to growth because as you know, we've been declining for a number of years and to get us back to growth. And that will be driven by 4 pillars. One of those is to maximize our growth engines around our innovative AUSTEDO, UZEDY and AJOVY, we can talk about those. The second was to step up innovation. We have a pipeline that I think is maybe a bit of a surprise to people from some of the products we have. Obviously, the best is one known as the TL1A, but we have some really exciting assets other than that. So to make sure we drive that innovation through to the market. The third pillar was to make sure we create a generics powerhouse and make sure our generics business performs consistently over time, generating growth on the top line and the bottom line. And the final thing was to focus the business to make sure all the capital is allocated to the right growth engines, which drive the top line and the bottom line. And within that was the announcement that we were going to move TAPI, our API business to a stand-alone business to allow that to benefit from what is a very exciting API market. So that's sort of our strategy and we restarted that journey. We obviously launched it in May. It's a long journey, but I think we've got off to a good start. I think in Q2, people saw that we've started to execute across all of those, particularly pleasant and pleasing to see a stead performing well in the launch of XR and then UZEDY. And then also the fact that we're moving quickly our TL1A through the clinic and olanzapine through the clinic. And we've all completed the separation of TAPI, as a standalone business. So I feel we've made really good progress. But I think for Teva, it's about we've got to consistently execute over this strategy. And I think -- then I think we'll start to get some traction.

Thank you very much. And before we get a bit more growth strategy of the business, I just wanted to ask a typical question around the Inflation Reduction Act reform coming up. Could you just give us your view on the way this reform could potentially impact the generics and biosimilars industry? And I think, in particular, the question for us is, could you potentially encourage litigation settlement between originators and biosimilar companies to allow a progressive introduction of biosimilars in the market ahead of the potential inclusion of the branded drug on the -- just on the price negotiation list.

Yes. It's an interesting topic that's starting to come up. So firstly, I think where Teva is positioned the IRA is -- has interesting ramifications for the business. But if you think about Teva, I sort of segment the business into generics biosimilars and innovative medicine. And when it comes to generating access to afford momentum, I think we've obviously got our generics pillar and our biosimilar pillar, which drive that and are innovative pillar, which maybe is something which is going to probably more be impacted by the IRA. Now how that -- so for me, I think the bigger question, we get sort of focusing on the active, are we getting access to afford medicines in the United States. And I think we can clearly say that when it comes to the generics business, despite the fact that we actually sell them often the lowest prices in the whole of the world, the actual U.S. user, the patients doesn't benefit from those. So there are many things that I think need to be evolved in the pricing system in the United States to make the necessity for things like IRA less important. So -- and I think we see that across all of our businesses. The question you asked is this sort of emerging conversation, which is actually is the -- is this -- does this become an opportunity or an issue for generic biosimilars? Does this become an opportunity or an issue for the innovative companies, as you said, to use biosimilars in a different way? I think you've got to see how this plays out, particularly as we don't really know how the IRA negotiations will go in the first place. And so I think everybody is strategically trying to line up different plans and have contingency plans on top of contingency plan. So it's sort of ever moving. I think for us, because of those 3 businesses, I feel we're well positioned regardless of how the sort of transformed.

Okay. That's very clear. Let's come back on your strategy, you mentioned at the Capital Markets Day and your target 2027. There is still a gap between your expectations and ambitions and consensus. So what do you think today consensus is missing? I think you're forecasting about 1% growth over the next mid 2027 [indiscernible] sure kind of mid-single digit. So what's missing from what consensus you're expecting?

So I don't think in a way that is missing in anything. I think the investor community and the analyst community know Teva's business well. The reason why I think there's a different projection of the future is because I think there's a credibility issue maybe for Teva because of the past. So I think when I think about a pivot to growth strategy and I look at it and what we're going to do with our generics business, what we do with our biosimilars, our innovative business. I think when I speak to people, they understand it. It's very clear what we're trying to do in each of those businesses. But I think we've just got to perform. We've just got to deliver. And when we deliver, I think people are going to start to do different financial forecasts, they'll value our innovative business differently, they'll value our biosimilars, they'll our generics business. They'll be able to model it better on the top line, on a margin and on EBITDA. But -- so for me, I think it's -- for me to say people are missing something when they're so focused on the business and so smart, I think would be unfair. I think what it is -- I think people get what we're trying to do, we're just going to do it. And if we do it, I would anticipate and expect everybody to start modeling it the way we model it. Our Pivot to Growth strategy, we didn't [ throw ] expectations lightly. So we modeled this in great detail across our business, I believe it's fundamentally achievable. so I think that's what needs to happen. So quarter 2 was a good move in the right direction. I think people started talking about the innovative business for the first time. I think people are talking about pipeline -- innovative pipeline for the first time, which I don't think has ever been valued. I mean no one values our pipeline right now. I accept that. But I think going forward, that will change. And as that changes, I think the difference in the outlook of the consensus may be in the long term and ours will narrow. But that's our job; deliver, execute and then educate.

Understood. And let's spend a little bit of time on your key growth driver of Teva, mostly for tardive dyskinesia. You have this very ambitious $2.5 billion target by 2027. So if you could just come back on your strategy to accelerate the sales of these key products, how far are you into the implementation of this strategy and kind of when do you expect to see the inflection to grow to reach the result target?

Yes. So look, you said very ambitious target. So obviously, you've clearly laid out your point of view on that. But look, going back to what we as a team did, I didn't pick $2.5 billion on the back of a napkin, I didn't just sort of guesstimate that. I went into great detail. I've been in the biotech business a long time and I went through many patient modeling in detail myself to understand what could be done. So look, I believe this can absolutely be done. The question is why do people not believe going back to consistent theme here, maybe of credibility, believe that. So firstly, I reiterate, there's nearly 800,000 people suffering from tardive dyskinesia. There was literally a drop in the ocean of people on therapy. So there's a huge unmet medical need, which is probably the very distressing condition. It's not something you can live with or you want to live with. So once you get on medication, it's literally a life-changing experience. So for us, we see a great opportunity to help that. We have one competitor in the market. So I think that also is a benefit, not because there's lack of competition, but we have also a share of voice, and they have a share of voice, which encourages more patients to come in. Now to the second part of your question, what have we done to change that direction. So we put literally -- when I arrived, I think in February, we put more resources into AUSTEDO immediately and significant resources to allow us to have more sales force. But then we've also started to address some of the things which are needed in specialty pharmacy U.S., which is around patient services. It's around how you impact conversion rate from a script to getting on therapy and working through insurance, through compliance, through making sure on the right dose, we're making on titration. So just to give some examples, so we've increased the sales force, created more focus, that's one. Second thing, we've improved our targeting of physicians because it's the marketplace where patients appear is something which we probably haven't done the best work than in the past. The second thing is we've put more effort and money into our patient services. So when patients get a prescription, we make sure they get the coverage and they get on it, we used to have a dropout out there. And then we started to make sure we launched the titration packet, titration pack, which can be prescribed by a physician, which is really important, because not all physicians want a titration pack in the office for many reasons. So there's a big amount that we exclude, so now they can write it, which means when you titrate, you end up on the right dose, the right efficacy which patient wants, which allows us to sound that would be longer, so adds to compliance. So if you do all those things, and we've started -- we've done all of those as well as working with specialty pharmacy, we didn't do. They all start to have traction. Now that traction is going to take probably 6 to 12 months to become optimal because even a sales force, you hire them. I've done that many times. They're not really hitting performance for 6 months, it takes some time. So we're starting to see some of that come through and some will come in through, but I think it will be in a great place at the end of maybe in Q2 next year, but that's investment, but it's quite precise in how we've allocated it.

That's very clear. Your other growth driver AJOVY injectables for migraine. So if you can come back on -- we have a quite a good growth globally actually with this product. So what are the key growth drivers for the drug in the future? And how do you think also in particular, the increasing competition from the overall anti-migraine side of the market?

Yes. So this is a really interesting one where we're seeing good growth. Some of that's been driven by geographical expansions and going to new countries. Some of it's also driven by just our competitiveness within the market. So if you look across many of our markets, we're starting to become the fastest-growing injectable. So we're getting market share back or growing our market share. Part of that is probably driven by some of our competitors may be losing a bit of focus because they've got other portfolio launches to launch. But I think it also is down to our added focus on what we're doing with AJOVY. Now the question is, what could AJOVY be for Teva? And I think we're still evaluating that because I think when we saw the orders come along, there's a lot of the belief that could the orders will just take over. I think you always have done 2 things. One is they grow the whole market because more people will come in to seek help for their migraine. The second thing is the orders are not [indiscernible]. And as I went out to visit physicians, they said, there are some side effects. There's some significant side effects that my patients haven't like, so they moved back to injectable. And then there are some patients who rely actually a lot on an injectable rather than rely on myself with an oral medication. So I think it's starting to settle down. So for me, I think this is actually a growth opportunity. We're in the position of trying to evaluate what that looks like, what type of resources. But I see that as something which may be people have discounted because of the orders coming in, but probably more news to come on that later.

Great. And the next one of your growth driver that everyone is looking very closely is UZEDY, the new injectable drug for schizophrenia. So if you just come back on your launch strategy in the market that's quite competitive. And if you can also come back or maybe some early feedbacks you get from physicians and patients as well.

Yes. So I mean, to remind everybody, this is a $4 billion market. So it's a big market. And you said these our long-acting risperidone. And so the initial feedback has been really positive. And let me explain what I mean by that. So we have obviously gone into hospitals where most of these medications are initiated and spoken to the psychiatrist. And when you think about -- we've developed a product profile which exactly suits what the physician and patient need. In simplistic terms, things like the subcutaneous injection, prefilled syringe can be kept outside the fridge, useful for everybody. I think what's been critical is there is no loading dose. You inject, it gets to therapeutic levels within 6 to 24 hours, and you don't have to supplement that with other oral medications. So when you speak to psychiatrist, they'll say, they'll be very enthusiastic, because they'll say, "if I use one of the alternatives, I'll have to start a loading dose then I'll have to see them in a week or 2 weeks to then increase the dose or see whatever and I need to prescribe them oral supplements in the meantime to manage that ability to be therapeutic. With yours, I don't need to do that." So I think we've developed a very good product profile. What we're working through now is just some of the things you have to do to get a product like this available. So you've got to work through D&T committees and hospitals to make sure it's on the hospital formulary. You're now going to make sure it gets payer access. And we're working through those, making good progress, but we'll also be mindful of this year is about our setup here. We want to make sure people use the product. We got a lot of patients go on it. I mean we're seeing some good access from that point of view. When it comes to access with the big payers, we want to make sure we have the right negotiations to ensure that what we agree on coming through for many years because we see this as being a product which will be a good growth driver for us.

Very well. And in connection with that, your pipeline assets you just mentioned before, the long-lasting injectable version of olanzapine, which is also schizophrenia drug. So if you could kind of define the key characteristic of this product and also how you see the synergies and complementarity with usage as well.

Yes. So olanzapine, which is in Phase III right now, which is recruiting really well, which is -- but maybe another one, I would say people don't -- look at enough. When I came in, obviously, I looked at TL1A. I looked at PD1 -- anti-PD1-IL2, IL15 all the sexy stuff, and I overlooked the olanzapine and then I came back and looked at olanzapine again and the product profile, once again, is really exciting. Based on this technology we have [indiscernible] when you inject, you said olanzapine, the product aggregates incredibly quickly. So once it's subcutaneous, versus the olanzapine product of the market. Now we believe this will significantly reduce or eliminate PDSS, which is a side effect with the long-acting olanzapine injectables have. I mean we truly believe that. Now if that happens, I think we have the first 2 long-acting olanzapine because there is no olanzapine long-acting that's actually used in any quantity. So by definition, there isn't a market. Now as you've seen with risperidone orals and risperidone long-acting, there's a real need for long-acting, the same as for olanzapine. And the complementary you talked about those 2 products for us as they're going to the market, those are 2 well-defined drugs that are used in the treatment of schizophrenia. So -- if mild, moderate, severe, so we think they fit perfectly in a portfolio in a bag. Also, what we're seeing in speaking to psychiatrists at that recent Psychiatric Association meeting a couple of months ago that we have now been perceived as a major plant psychiatry. So I think olanzapine, we've got to get through the Phase III study. I'm cautiously optimistic, but the data has to read out, what I would say is recruiting very fast in Phase III. And things recruit very fast in Phase III because physicians want to be in the study, and they want to be in the study because they see the benefit of getting the product approved. So enthusiasm in the Phase III sites has been very high. So once again, very encouraging.

That's very clear. And just once, I want to check if there's any question in the room from anyone. That's fine. We'll move on to business development. So you indicated at the Capital Markets Day that you are not ready to get back to business development, which Teva has been kind of avoiding for some years. So if you can just remind us your priorities in terms of therapeutic categories, asset maturities and also how you think about the balance between continuing to progress in deleveraging versus accelerating inorganic growth.

Okay. Yes, I'll -- so firstly, you sort of made a comment that Teva wasn't interested in the past. It kind of -- if you look at our balance sheet, there's no way we can really be too active and we have probably other things to focus on. So we're now focused actively on BD. We've hired Angus Grant, who I think many of you will know as, I suppose, I hope, he doesn't mind me calling him, a veteran of the industry. And with his experience in the innovative side of the business, we're clearly making a statement that we're looking to in-license or to BD in innovative area. Now at the start because of the financial limitations, we have that will be in licensing. And I think we -- because of our portfolio, which is exciting in innovation, it's not huge. So we can add things in here with creating synergies, but not diluting our impact of our share of voice. The areas we're going to go after are the areas of CNF and immunology because that's where we're playing right now. So that's our main focus right now. Now those are 2 massive areas, so it doesn't really sort of narrow or remit too much. That said, I'm also somebody who in the past has moved outside. I want to be very disciplined, but if a good opportunity comes along, we'd look at it. I think at Biogen, when I was there, we did hemophilia, which turned out to be very financially positive execution. But with neurology and immunology, I think we covered most spaces, and so we're actively there, and we'll see how that plays out. And also, our financial situation changes very quickly over the next few years very quickly. And so we need to get ourselves ready for doing acquisitions because when we're in a position to do them, we don't want to start looking for targets then. We want to be looking for targets now and understanding how the landscape evolves and then we'll be acquiring them.

That's very clear. And thinking about capital allocation from where you see it between your businesses and geography. So when you invest in the business, you mentioned your business line, generics, biosimilars, specialty care, but also you have your geographies in North America, Europe, rest of the world, how are you kind of thinking about capital allocation in this context?

So that's a real key element of the strategy. So -- it's very, very clear in the company now how we allocate capital. So capital goes, first and foremost, innovation, right? And -- because it's the biggest growth driver on top and bottom line, and then we'll allocate capital to biosimilars and generics. Now that doesn't mean we start biosimilars and generics. We think about how we allocate capital and how we prioritize. So one of the things we did in the Pivot to Growth strategy, which we believe -- I'll go back and say, we made a statement in the Pivot to Growth, that we're going to create a generics powerhouse. That's not an ambiguous title. That's not a loose title. So what is a powerhouse? A powerhouse is something that grows top of bottom line consistently. That is a big statement when it comes to generics. To do that, what are we doing? This goes back to our capital allocation question. We're going to take our pipeline, which is huge. And we're not going to go after 80-plus percent of generics for the patented products that are going to come off patent, we're going to reduce that to 16%. So we're going to do less, but we're going to bring them to market quicker, more consistently which creates more value. That requires less money. That requires less capital. And then in manufacturing, we're going to actually remove products from our portfolio because they are either not profitable or massively dilutive, but they create complexity on manufacturing. And we're going to reduce that, allowing us to make more of the things that make us money, and we just continue to reduce our management factoring footprint, less cost so once again, still driving that more efficient capital allocation. So that's how we're thinking about capital allocation. And the good thing is the team across the world feel that. So whether it's those particular businesses or geographies, they know it and they feel it and we make decisions which are category. So we take stuff away and we allocate it here. Hence, the reason why you've seen, despite this investment of AUSTEDO and other things, investment in TL1A, investment in olanzapine at least for the first half of the year, we haven't changed our operating expenditure versus last year because we reallocated it. And that's what we want to keep doing. Obviously, as our topline growth, which I believe it will, many people are still evaluating that. Then if we keep allocating as a percentage of sales or R&D for sales and marketing, then obviously, those will be allowed us to grow. But we're -- that's how we're thinking about capital allocation, and that's how we're thinking about being very cost conscious about our cost base.

That's very clear. I want -- you mentioned biosimilars and you're building a portfolio. You already have a couple of biosimilars in the U.S. market, and you have a few months to come. And we are seeing this interesting change in the industry where we are seeing sort of an innovative deal emerging first between Coherus and the Mark Cuban pharma company, introducing a biosimilar Humira with a very deep price discount. Then CVS partnered with Sandoz to something a little bit similar. So just wanted to have your view on do you think these initiatives are kind of very specific to the biosimilar Humira situation in the U.S., which is kind of a competitive landscape that's particular? Or do you think we're seeing actually a change happening in the U.S. is biosimilar?

So look, I think to touch upon those partner label, I think the things that you described are not new. They've always been done. So I think I don't see that as necessarily something which is surprising or an evolution. It's just what has always happened. And the fact that it's now being applied to biosimilars, I think is what's creating some headlines. The question, I think within the question is, what does this mean for biosimilars? Is there an opportunity? Is this a threat? Or is it somewhere in between? Look, the strategy we've outlined at Teva is we believe having a big portfolio of biosimilars is how you maximize the opportunity with that, at the same time, minimizing the variability that can happen from different biosimilar, but we're doing that primarily through partnering. And we're doing that to partnering, so we don't allocate capital necessary to something that we don't need to allocate because we can partner and allows us to allocate capital to our innovative medicines. That also derisks it from a capital allocation because as this portfolio plays out, then I think what we'll see in biosimilars is some of biosimilars will do incredibly well and others will do less well for various reasons. I think that all make money. And -- but for us, I mean a big portfolio allows us not to be so contingent on this one. I know I'll get questions or at least a day at some point about Humira. Humira is the sort of -- this is the holy grail of biosimilar. And it's a good opportunity, no question. But for Teva, it's part of a portfolio play. And quite close after that is Stelara and then we have other products and for me, it's about how do we make sure they get launched on time. Regardless what that market is hyper competitive or less competitive, as it plays out over the portfolio, we'll have a good revenue stream, a good top line and good bottom line accretive. Some years will grow more than others because we have predictability of when biosimilars actually get to the market and the traction. But when you play it out a portfolio, to me, that's the right strategy. So when it comes to these individual circumstances, I think they've become -- those aren't things that drive strategy more opportunistic.

Understood. That's clear. I just want to spend a little bit of time on U.S. generics pricing, which has been very important for investors through 2022. So basically, we saw this kind of cycle of price deflation that we saw in '17, in '22 and then pricing kind of come back and improve again and we saw it through the end of last year up to now with -- we have much more mild pricing environment in the U.S. I want to have your view on how do you see this evolving in the short term? And do you think we're going to see this deflation cycle coming back in the future? Or has something changed in the industry that could kind of insulate you from this?

So let me be really clear on this. There is no comeback unless some of pricing, I mean, it's economics, supply demand, 3 people, 3 institutions with massive purchasing power. That's here to stay. We simply -- you said it. It's got so double negative, the price reduction has gone better, but it's still a price reduction. So it's -- I think you used the word inflation in that...

The deflation...

Yes, yes. So none of that's going to happen, okay? The only way you get a price increase in genomics if everybody stops supplying it and then potentially you can do something. But that's not a strategy. You don't plan out strategically. Look, to me, generic pricing will always go down. It's in the U.S. always. How fast? It sort of depends on how many people supply. The modeling we've done 5 or 6 people come in, the price crushes, yes. So how do you manage that environment? You don't hope thing is going to get better. You don't hope people are going to be asking for less of a price to be. What you do is you strategically set up to have more launches, more highly profitable launches. And then you need to take out of your portfolio things, which are falling down and going to be dilutive, then the math work out. So you go back to the Pivot to Growth strategy, let's make sure we take our big pipeline and we launch it more consistently on time, every time. And the things that are dilutive in our manufacturing in our portfolio, we keep taking out. So as we launch, we take out, and that gives us a more sustainable business, a better chance to grow. But when I hear the statement around the environment is improving, when we did this strategy, we looked at what generics was going to look like 5, 10, 15 years and how we could be successful. And in no strategy, did we start to play out a scenario where there will be inflation in generics and they would get better, and these repurchases would stop asking for discounts. We never -- that would be unreasonable. Why would that happen? But I think what we put in place with our Pivot to Growth strategy means we can get back to growth even when some of the products have been slashed on price because we'll be launching other products and we'll be improving our portfolio by taking that product and I'm manufacturing because we continue to reduce our complexity and scale will improve from a COGS positioning. And as our COGS improve, we can take price decreases without affecting our gross margin as much. So you put all those together, that I think goes back to what created generics powerhouse that we will be in control of and less relying on the market doing something positive.

Understood. I think we're running out of time. So thank you very much for taking the time to be with us today and for this session.