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

[Audio Gap] in your healthcare conference in Las Vegas. I'm pleased to be introducing our next company presenter, Teva Pharmaceuticals. We've got CEO, Richard Francis, and Eric Hughes, Head of Global R&D. My name is Jason Gerberry. I cover SMID-cap biotech and specialty pharma and so gentlemen, thanks for joining.

Richard, maybe I'll start with a high-level point. You came on board, you had a Capital Markets Day in May of last year, emphasizing sort of a Pivot to Growth, your predecessor put out a lot of fires, stabilize the base. Then you come in, now that things were -- the foundation was stabilized and you're looking to drive that Pivot to Growth, where do you see since, kind of, laying out that edict about a year ago, the company having progressed? Maybe you just want to highlight those key points and then we'll go from there.

Okay. So firstly, thank you, Jason, for having us, appreciate it. So yes, it was a year ago, almost -- I think it was last week that we launched the Pivot to Growth strategy. I think it can -- it's fair to say that it was received with a huge amount of skepticism after 5 or 6 years of decline. But in the Pivot to Growth, we laid out some very clear guidance as to why we're going to grow and what it was going to take, and we'll talk about that today, but it was around driving our innovation in our branded business to drive our pipeline. Eric is going to talk a bit about that, getting our generics business back to stability and growth, and then allocating our capital to do those things in a very efficient way, so we can manage the bottom line and obviously service the debt. So -- and I say it was met with a lot of skepticism because I think that the way you introduced it, which I would appreciate, did make it, sort of, sound like it was destiny, but I can tell you, the last year has been a lot of hard work because to do all those things in parallel has taken a huge amount of focus by the organization, and I think the organization has really benefited from having a clear strategy of what we're going to do, where we're going to focus, what we're not going to do and where we're not going to allocate capital. And I think maybe a year on, I think the reason why there's a lot less skepticism and maybe some enthusiasm bubbling up is because our products, which we've launched are innovative ones AUSTEDO grew 67% in Q1, UZEDY's on a good momentum and AJOVY's going to hit 0.5 billion this year, step up innovation. Eric, I think announced the olanzapine study, which we'll talk about, the TL1A, recruitment is going really well. We're in the clinic with ICS/SABA. We're talking about IL-15 now. And then generics, I mean, everybody, as much I keep telling people, I think the generics is a good business because of the volatility in the past, I think people were skeptical. And now we've seen that all our regions grew, and we grew that business globally at 8%. And so I think what's happened is we focused on those 3 key pillars, and we've executed, and I think one of the things that I wanted to get the company known for is we do what we say we're going to do. And I think that's where we are. And I think there's opportunity for this for a lot more, we'll talk a bit about that. But I think we've come a long way in a year. And obviously, the final piece was to focus on the capital will be going to obviously divest TAPI, our API business. We're in the process of doing that, and we hope to close on that in the first half of next year. So I think we've shown we can do a lot of things in parallel, and we can do them well. Now we've just got to keep doing them and continue to do that over the coming years.

Yes. I think investors have gotten to your point about AJOVY is that a better line of sight on growth drivers. At that Capital Markets Day, you talked about maybe pairing back certain generic R&D spend, using that to fund the innovative side of the house. You've done a few financing type of deals to spare the P&L. Those are my words, not yours. But -- so how important is it for you that you can, kind of, show investors that low- to mid-single-digit top line growth, but also pair that with EBITDA growth. Because I think that's probably one of the fundamental debates right now around Teva's, what is the right multiple and there's this wide chasm if you look at the peer group. And so it seems like EBITDA growth would be an important component of that, if you're going to drive the next leg of growth from a stock perspective.

Yes. I mean, look, maybe I can help on the debate. It's a higher multiple, okay? But why is it a higher multiple? So to touch on the point you raised, which are good areas of debate. I think we've shown with four quarters, we've grown the top line in four quarters, which by the way, hasn't been done for a very, very long time. And I think the fact that, that has been well received, but not maybe significantly is because I think we've shown people we can do that and people expect us to do that, which is good that we've managed to get some people to believe that in a year. But going back to some of the things that we talked about -- you talked about there, the financing and how do we grow the bottom line. I think to start with that bottom line question first, we've committed to the 30% operating margin in 2027. What I've continuously said is we're not going to do that in a linear way. It's going to be slowing and it's going to gain momentum. Why is that? Well, that's because we're investing in so many things now because we have so many opportunities. We have AUSTEDO, UZEDY, that's just been launched. We have AJOVY, we have in Phase III, ICS/SABA, we have TL1A in a very accelerated Phase II, and we have olanzapine just concluding its Phase III. We want to move those -- all of those assets. We want to invest as optimally as we can because that creates long-term value. And we don't want to hedge and just edge them along because we're trying to be so conscientious about hitting an operating margin, which I believe we're going to hit absolutely in 2027. So for that, we sort of spur for riches, so we want to invest in them, that does put pressure on the EBITDA, that does put pressure on the operating margin in the short term, but this is a plan in 2027. So I don't even think 2027 is that far out. So I think what I'd like people to take is we are financially very, very aware of what we're doing, we're in the weeds of it. And so what we've done is based on that strategy of invest in the things that are going to drive value in the short, but definitely the medium and long term. And to do that, do that thoughtfully in a way that allows us still to service our debt very well because we want to get that down. And so that's the way to think about it, very committed, I believe the 30% is absolutely achievable. But that's how we need to think about it. And I do understand people want us to grow EBITDA and EPS and we will, but it just won't be as fast in the short term because we have the opportunities in front of us.

Okay. I guess the core component of Pivot to Growth is, sort of, the stabilization of the generics business and as we think about maybe this business, say, the U.S. generics business, how much of this is just U.S. pricing perhaps moderating in terms of the rate of erosion and getting some benefit on REVLIMID on a year-on-year basis versus the ability to execute on a new product portfolio. I think at the Capital Markets Day, you talked about being better at taking advantage of these complex higher value products, right? So that would probably encompass HUMIRA, Sandostatin LAR and Korlym, these types of products, like -- so that's more of a future outlook type of thing for second half, but maybe if you can help us get a better feel for what's going on in the generics.

So look, it's a good question because I think the generics -- the U.S. generics business, sort of, it has more share of voice than maybe it should. Let me explain why. 65% of our generics business is ex U.S. and it grows at mid-single digit or double digit, so that's a good business. Now the U.S., I can understand, has attracted a bit of attention because it's been volatile. And that volatility is, I think, concern people. Now what we've said is to reduce that volatility to get it back to consistent and consistent growth. We need to launch more products on time than we had in the past, and we need to supply that market better both in making sure we supply things on time in full and have better cost of goods. Those things we're working on, and we've been working on pretty hard in the last year. I think we're starting to see a bit of traction. Those two things don't happen within a year because you're changing manufacturing base, SKUs. And in the pipeline, Eric can talk a bit about what we've done to make sure we launch our generics more effectively on time. But we definitely have made progress. So the U.S. to me is a business, which has stabilized and will be stabilized going forward. And the question is, what's the growth that we can attribute to that over time, and the way we do that is we keep launching our complex generics on time more often. We keep improving our manufacturing and supply base. And those are the fundamental basic things we need to do and that's not rocket science, but to do it on the scale we're doing it, we've got to get a lot better than we were and we are, but we still have a lot of opportunity to get better. But maybe Eric can talk a bit about the pipeline and why we are getting better.

Yes. So one of the things, too, is the generics business is a huge business we have with a lot of pipeline products. One of the things we've done, we've focused the groups, we prioritize the programs and it makes a big difference when you have a high-value program and you have people urgently jumping on it when they're coming to the finish line. So that urgency, the kind of focus we give on the high priority program, it's almost like applying like an innovative mindset to the generics group. So that actually makes a huge difference in how we can execute time things and launch on time, first time, first time, right. So I think that makes a big difference.

Yes. And just to pick up, we got 13 complex generics being launched this year and next year and probably a similar amount we'll publicize that for '26 and '27, but the ones in '26 and '27 should come to the market more optimally than the ones we're working on this year because we're going to get better. And so we've got a lot in our pipeline. We've never had an issue with our pipeline that we've had an issue in executing our pipeline.

So you mentioned earlier deserving of a higher multiple, I think, getting to investment grade, getting the leverage down, probably will it impact that for you guys. And so you've gotten the leverage down to about 3.45, I believe, on the last quarter update. Talk about the TAPI divestiture, right? Because when we think about this business, a, what are the variables that sort of gate transaction, and when we think about the multiples out there, it's difficult to find multiples. I simplistically tell people they're not going to sell it for a multiple less than they trade at. So I'm just kind of curious if you can maybe address those points.

I'll try as best as I can. So look, I think, firstly, we are making great progress on the debt. I mean, we're doing that regardless of TAPI, and I think people have seen that and seen our discipline at that. So I think people have a very clear line of sight how we get to investment grade in 2x. And now ironically, we're getting challenged as to whether we should get our debt down that low, but it's another question probably. But with regard to TAPI. So TAPI is an excellent business. And the more we've actually focused that business by separating it from a management, has its own CEO, CFO, executive management team, allowing it to operate in the global API market, which is worth $85 billion and growing about 6%, 7%. I think we see huge opportunity. And because of that, there's 2 things which make me think of is going to get a higher multiple, I won't tell you the multiple but a high multiple -- or good multiple is because it has probably one of the best margins in the sector, and it has it because it works across all platforms, all technology platforms, super complex as well as simple and it has a great reputation for supply and quality. And those are things that people want when it comes to API. And so the start of -- sorry, in last year, we started to refocus the business to look externally for business. And already, the traction we have for CDMOs as well as -- actually the pharma companies has increased significantly. So I think, for me, it is a business, which a carve-out that's doing -- I think it's doing okay. It could do a lot better if it was solely focused on doing that. And I think people, strategic buyers as well as nonstrategic buyers should see that. But let's see that -- how that plays out. I don't want to get drawn into, this is the value, this is what it could be. I clearly think it's going to -- it has good value, but we'll see how that plays out. But there were no sort of gating as to this has to happen. This has to happen. That business, and we've gone deep into it. We've set it up to divest. We've done all the work. So we have everything aligned, so I think we're in a position to do well on that, but that's when we'll wait and see.

From a timing standpoint, how important is it to get that business back to top line growth before you choose to sell it so that you can ensure you get fair value? Or is it maybe there's scarcity value in certain of the APIs that you have in the portfolio that make the timing optimal?

So firstly, we're back to growth already. Q1, so great Q1, so we've done that. I mean we're going to accelerate it. I think I can say that we are going to accelerate that throughout the year. And that obviously helps. But I think if you look into the business. It's going to be nice that it's growing because it's going to go show the strategy we put behind TAPI is working. But the quality of our business stands out quite clearly, in my view, so people are going to look to buy that can see the value that, that business could have long term -- medium to long term. And I think the fact that it's growing will help. But I think that just the depth of quality there would probably doesn't need that, but we want to do it because it grows our numbers this year, and we should be doing it, and we can do it.

Yes. Okay. And you mentioned from a capital deployment standpoint, some questions that you get around, do you need to go all the way to 2x, right, versus make some investments in the business. So maybe -- what's your latest thought there in terms of being able to selectively deploy and perhaps bring in some additional assets. Teva was probably arguably underinvested from an R&D standpoint from, say, 2017 to 2022 or do you feel like you have enough on your plate and de-leveraging remains the focus. And if anything, any deal you is going to be light on the upfronts.

So yes, I mean, it's a lot of what you said, actually. We are going to get ourselves down to 2x because we committed to do it. And I don't think Teva should give targets and not stick to them. I don't think we have the credibility to start changing. And so we need to do what we say we're going to do, and we will. We do have actually a really exciting pipeline, this late stage, but other things that are emerging are TL -- IL-15 that Eric spoken about the drug for MSA as well. So I think we have quite a bit, but we are looking and we're looking very hard for other assets to either in-license in because we have a platform that can be leveraged more, and I think we have the ability to do licensing deals even with our current balance sheet. But that will be determined on, they've got to be good assets. We don't really have an appetite for carrying too much risk because of the past and those are hard things to find. And we want them to be accretive to the top and bottom line pretty quickly because we don't want to carry something because we've got enough good stuff in our pipeline to carry. So that just makes it hard. But that's the focus we've had for just under a year and we're building that up. And don't forget the deleverage is going to happen pretty quick. And so it could be accelerated with TAPI, but it is, sort of, picking up momentum as we speak every quarter. So we've got to get prepared for our balance sheet to be in a healthier position to then buy things. They don't want to wait the balance sheet to look good and then we go out and shopping. We're actively shopping now.

Okay. Before we jump to the fun part of the discussion, which is pipeline, just remind us where you are in cleaning up the residual litigation issues or legacy issues. I think there's probably one legal matter of focus, which was the COPAXONE PAP legal matter. So just if you can kind of level set there and sort of what might be a range of outcomes?

So yes, we're at the closing stages of that one. So I think we've already had that in our financials accrued. So I think we're in a good position to be able to close that out. So I feel very good about that. I think that's going to be done in the next -- I suppose, I'm dealing with governments and lawyers. I don't want to be too -- but I think we -- we have everything we need to make that something which is now going to be in our rearview mirror. So maybe that's a quarter or two.

Okay. Well maybe shift...

Now the fun stuff, yes?

Yes, the fun stuff. So you just had a recent olanzapine pipeline update. And I guess as we think about -- I think you guys highlighted it, there's a clear mismatch in terms of LAI share versus oral molecule share for this moleculanzapine, which is -- it seems like the go-to agent for a psychiatrist when schizophrenic patients are, I guess, more symptomatic or more severe in their disease. So -- how are you thinking about just the general value proposition as more data accrue in-house? And when I look at the LAI market, I see a couple of $500 million products and then a monster product in Vegas. So what do you see as like the key variable to being on either side of that spectrum from a product profile standpoint?