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

Thank you, everyone, for joining us. Again, I'm Chris Schott from JPMorgan, and it's my pleasure to be hosting this conversation with Richard Frenchis, CEO of Teva. It's obviously been a really amazing story the last few years as you've transformed the company. So we're going to just kick off some bigger picture questions, and then we'll dig into some details on the product portfolio pipeline, and we'll leave a few minutes for questions at the end. So with that, Richard, maybe just a bigger picture question. I think you're coming up on your fourth year as CEO of Teva. There's obviously been a lot of progress across the portfolio. Can you talk about the biggest changes you've seen at the organization as you've kind of transformed the company and just how you think about the positioning of the company going forward?

Well, firstly, thanks, Chris, for hosting. I appreciate it and giving the early session in. That's a pretty -- that's a question we could spend 45 minutes talking about, but I'll try to make it as succinct as possible. And I think if I just make some sort of simple headlines is, so when we started this -- and probably the reason you didn't cover us back then was we are a pure-play generics company, and you probably had big question marks as well. And with Pivot, we said we're going to become a world-class biopharma company. Now that seemed like a hard leap of faith for anybody to believe. But when you think about what we've done, it's really been focused on accelerating our innovative business and stabilizing our generics business and fundamentally changing our portfolio. And it comes down to the 4 pillars we have, deliver on our growth engines, step up innovation, create generics powers and focus the business. And so the biggest change has been by taking a pure-play generics company and making it now a very credible and one of, I think, the most exciting biopharma companies. But to do that substance. And so deliver on our growth engines, all the products we have in the market right now are growing at double digit. Our innovative business grew 40% in Q2 and a lot of long-term potential growth there. Step up innovation, Ericghedhead of R&D. When we people didn't think we could do R&D, we now have. I think one of the most attractive and I would say, good risk profile late-stage pipelines out there. And our generics business, not only do we stabilize it, we grew it, and we've changed the portfolio with biosimilars there very quickly. And then the final part was focus the business, that capital allocation. And I think what the conversations we have is about where do you allocate capital, where is the best return short, medium and long term. And if you look at this transition over the last 4 years, we haven't changed our OpEx as a percentage of revenue at all throughout that period really, which means we've had to reallocate capital to do all those things that I've said because it takes money to launch innovative products, it takes money to put things through the clinic. So I think the biggest change has been the strategy, but the execution of the strategy quarter-on-quarter, which I think is one of the things we have to show people is a strategy which is very detailed was still questioned that we've executed. And I'd like to think we've become known as a company that does what it says. And we're quite transparent about what we want to do, so we can be measured against it, which is a bit uncomfortable. But I think if anybody reads to any transcripts, we're super consistent. And we know that when people don't believe the targets we have, we know we have to achieve them to get belief. But now I think we have that momentum.

In terms of where we are in that journey, do you feel like you've got the right people in place and the right assets in place that we think of this as more a sustained growth story from here? Or are we still kind of in the transition process, I guess, for the organization?

I think it's more the former. I mean it's quite extraordinary. So I've been doing pharma for 35 years. And when I look at what Teva has in front -- what we have in front of us now from an innovative pipeline, it's extraordinary. And I sort of pinch myself sometimes. What I mean by that? Well, we have 2 kids who got TL1A, which we now have in 4 indications in the clinic -- well, 2 indications in the clinic, about 2 more about to go in. So we have a pipeline in a product, which I've never had, by the way. I've heard other CEOs talk about it. And then we have anti-IL-15, which we've shown some data in celiac disease and vitiligo. And we know there's 2 other indications we can go to. So that's another pipeline of product. So we have 2 products which are pipeline of product, but then we have our late-stage olanzapine, pipe, dar. So we have -- and I think you mentioned that we basically have a launch every year for the next 5 years and then probably a launch every 18 months. for the considerable future. So for me, it is exactly what you said. I think we just have a story now where if we can keep executing, I'd even argue to plus or minus, we will still keep growing this company top and bottom line, which means we keep creating value for shareholders. And I think that part is clearer than it's ever been. So we were talking before and people say to me, have I missed the boat? And I say, absolutely not. You haven't because you missed the good upside, but those are really hard yards, all that transformation we had -- now it's really hard, but it's execution of things we know are really good, and we know we will create value. We know are coming. We know olanzapine is coming, new EPi coming. diary is coming is coming, NTR15 is coming. So we know those companies go to execute. So for me, hard work still, but probably a far clearer line of sight to that continued growth story.

Great. I know this is a transition year of sorts, 2026 with generic Revlimid. When you think about the growth profile of Teva 2027 plus, like how should we think about the growth for the business from here?

Yes. I think it's -- so it's a growth business. So we'll keep growing. And I think we've talked about around the mid-single digit. I think we talked about in our Capital Markets Day. But I don't think that really tells the whole story. Growth is one. But -- but what I've realized and if anybody is new to the Teva story, the thing to focus on is a weird line in our P&L, which is gross margin. If you look at the gross margin. So when I started, the gross margin was 48%. It's now 20% to 55%. Now the reason why that's maybe this area of opportunity is because when we talk about revenue growth, gross margin, but if your revenue growth is fundamentally driven by an innovative portfolio, which is gross margin in the 90% and you keep managing your OpEx in a disciplined way, then you have to grow your EBITDA, then you have to grow your EPS and you have to grow your cash flow, which I think are not as good on the finance as you are, Chris. So that means you create shareholder value. And so I really mean that. And so for me, the growth story is one on revenue. But how does that translate to creating value for shareholders? Well, -- it's because we're going to change the gross margin. We're going to change the operating margin. We're going to change our cash flow and EPS. And we talked about that for 2030. I mean here's an interesting stat I quickly read up on this morning. I think our innovative sales at the end of 2022 were $1.2 billion, right? We're sort of -- are you tracking at $1. a quarter now. That's a fundamental change in a very short period of time. And that's just going to be magnified as we go forward. So the revenue growth is one, but the type of revenue we're growing, I think, is a really exciting... And it seems like there's a number of companies, I think, have attempted to transition that you've now done. And does seem like when I look at where you were on margins and when I look at like a full biopharma company, there's a long way to go, and that seems like that's -- exactly exciting growth story. And that's why I think sometimes people forget because you're so you're just not used to looking at -- when I was at Biogen, I can't remember. I think the margin was ridiculous like 98%, right? So we just thought that was the norm. So here, the weakness is actually our strength. It's our secret sauce because if we can be disciplined in what we do, how we allocate capital and keep launching, keep growing, and we're very good at commercializing products. To your point, the 55% becomes a 60. The 60% becomes a 65%, then we'll talk about where it hits the ceiling, but it's a long way away. Yes, absolutely. Speaking of targets you put out there, can you just talk about on the operating margin front, progress you're making? I know at the time, it seemed like a very kind of aggressive target you have for 2027, you're a long way there. But just where are we in that journey? And how do I think about the second part of that question, the cadence of operating margin expansion as we look beyond 2027? Yes.

So 2027, we said we're going to do 30% operating margin. We said you say everybody couldn't quite back in the math on that. And it was hard to back in the math. But there's probably 2 key areas which have made it a high degree of confidence we know it's going to happen despite leading generic Revlimid, which I think we should get a bit of credit for is the portfolio once again has changed dramatically.

So as we keep executing on AUSTEDO, AJOVY,SEDI, we launch olanzapine, these are high-margin products, and we're very good at selling. The portfolio mix changes, which changes the gross margin, which obviously with disciplined OpEx management will hit your OP. That's one. But then the other thing is, as much as we are disciplined on OpEx, we've gone after our cost structure very aggressively in the last 2 years. And by the way, I'm sometimes asked internally, when will the efficiency programs start? And I say they'll never stop I'll never stop because it's about capital allocation. And some things deserve -- give a good return on capital now. But in 3 years' time, there'll be something that we will do more and this can be made more efficient. So ROE, we're saving $700 million of costs after investment by the end of '27, and we're well on track to do that. So portfolio and $700 million of savings gives us a high degree of confidence we're going to hit the OP of 30%. But I think your question, which have been asked more and more is, okay, but what is it going to go going forward. So 2 things I'll say on that. Firstly, when I looked at top pharma, whatever that is, 10, 12 companies, their OP margin, not many were above 30%, which surprised me because they don't have an $8 billion generic business? So I was struggling to understand that. So first up to 30%, I think based on our mix, that's an achievement. Where can it go? We, obviously, can go higher, no question. What we need to manage and what we're thinking about as a team is, do we want to set a target on that? Do we go to give a line of sight? Because one of the questions I'm getting with investors is, we like what we've done with operating margin, but you have a really margin we have a really rich pipeline. -- don't sacrifice the pipeline for short-term operating margin. And I understand that. And I think we're trying to work out how we manage that. At the same time, I've become somebody who realizes that you can't -- you don't want to offer a return to investors in the future because as I sort of say to myself, tomorrow never comes. So you've got to give people return, I think, on a consistent basis, maybe more in the [indiscernible] Teva to keep this belief in momentum. So operating margin will go up. We haven't given target. We're thinking about whether we need to do a new 2027 type of thing for '30, '31, '32. And we're still in that debate.

Yes. And it seems like the story to me becomes more top line at some point as we get through that process. . You mentioned the branded pipeline, and we're going to go through those specific assets in a minute. But broadly speaking, can you talk about the R&D capabilities of the company? Because I know that's 1 thing I get from investors is -- it's a little bit [indiscernible]. -- how does this company go from a generic company to having all these branded assets now. So can you talk a little bit as when you look at that organization, you grow in the organization, the capabilities that are within.

A really good question. And I sort of remind people, which I've always believed is companies don't have capability, people have capability and people happen to be in companies. And so when we're at Teva, I was working, obviously work closely with our [indiscernible], head of R&D. I can remember listing February 2023 said that you show me the pipeline and like how do we have AT1, how do we have it? It's what we do, but they're just not been prosecuted. And Eric, congratulations to him, he built a great capability of both in R&D. And so we had some great talent internally that hadn't been invested in and haven't been given resources. So we resourced that. And then we brought people in from the outside and we now have the capability. So I think our R&D team is world class because they're people are world-class. Despite people were saying, well, Teva, can you do innovative? I do remind people about [indiscernible] and some other things, Teva did, but I understand that muscle maybe atrophied a bit, but we have very talented people. And so then the other thing I'd tell on those 2 things is all our antibodies come out of our R&D facility or research facility in Sydney. And I'd argue that our antibodies, and we'll talk more about this over the next probably 12 to 18 months are by design the best antibodies. And I know that seems extraordinary statement, but I think we're seeing with [indiscernible] data. We'll see that with anti- the data. We have a [indiscernible] and coming to the clinic which I think you'll start to see how cool that is. And then our PD-1 IL-2, which we'll have data at the end of this year, which people say, well, everybody is on PD-1 IL-2 or as simple as that's how you engineer it, the crises the opportunity. I don't know when the results would be. But I think another 1 we showed at our engineering capability, I would say, is probably the best of anybody because people don't spend time in engineering an antibody, they just find a antibody, make it, target something and get efficacy. We spend a lot of time saying what is the optimal way from a manufacturing yield, nutrient antibodies, things that may be seem a bit trivial, but longer term, I think, add real value.

And then you talked about this a little bit, but on that balancing of investment that you have these capabilities, you've got a pipeline that's now maturing I think 1 of the differences, I think, of those top 10 or 12 biopharma companies versus Teva as a percent of revenue that goes into R&D. How do you think about that line item in the P&L trending over time? Is that something you can manage and you'll find resources? Or do we have to think about that as maybe offsetting some of this gross margin expansion over time?

In a way, it can be all of the above. But maybe I tell you how we think about it at Teva. So we think about capital allocation as firstly, really, really seriously. So we didn't talk about resources. We don't think about -- talk about budget. We talk about capital. So if you get given capital, you have to give a return on the capital. And it's the reason why our efficiency program has been so hard. We've driven that so hard is because we think there are some things we do in the company that don't justify having capital because they are just -- they're low value take. So let's not try to do them exceptionally well, let's just do them enough to help the company operate. But when you think about it, it's interesting, what I said to us is you get capital when you can give a return on it. So right now, if you look at our investment in innovation, if you take into account the partnerships we have and financing with Wartifarme, et cetera, our percentage versus revenue is probably towards the higher end of the industry. You gross it up right? But what I also say is I'm very happy now that this would happen, but just to make my point in a year that we spent nothing on [indiscernible] because if the assets don't deserve the capital, why would you give the capital. And I'd say to Eric all the time, we only give apply capital to assets in our pipeline if we generate thing and give a return. If we don't, there are no pet projects. And the joke we have is if he's not willing to invest his bonus in it, we're not going to invest our capital in it. But I think that's really important because I have been at companies where too much the budgets that budget every year. And I don't believe that should be the case. I think we have a lot of exciting assets, these products in the pipeline. And that's challenged us to say, do we -- do we grow our OpEx base a lot and explain to people what maybe the 30% is hard to do. And we thought, no, we're not going to reneg on our promises. And two, there's capital elsewhere that we can invest in and doing the deals with OrtiPharma Blackstone, 2 things that appealed to me on that, which I didn't fully understand at the time. One is the way they validated the science was brutal I mean that was like a colonoscopy. So when they came on [indiscernible] 5 is great, I guess a wise have good your due diligence. And they take some of the risk which I think is a very sensible thing to do. Same with Blackstone, same with [indiscernible]. So we get validation. We get the capital. And now we can go across all of these indications at speed because another question you could might ask me and probably will is why aren't you diluting your return because you don't own it all. So 2 things I did the analysis, and I realized most of the top 30 drugs in the world have a royalty stream and they weren't invented in big pharma, which is another challenge to why R&D gets so much money -- if things are invented elsewhere. The second thing is go back to my gross margin comment were 55%. So if you give up 2% royalty or 3% royalty makes a difference. But the third thing I said to the team, I said, having 100% of a pie piece of a pie that arrives late across less indications. If you do the analysis and have more indications during the year early, the difference is just jointigastic. So it's just a no-brainer. As far as is the principle we have in R&D. We have a good asset. We move as fast as we possibly can, and we'll work out the finances later. But it's so hard to find good assets in my career to see a pipeline this, we're not going to mess around, get it to market as fast as possible, and maize it, and we'll manage the capital allocation on that journey.

Maybe just pivoting into the branded portfolio. Assetto obviously grown very nicely the last few years. The other questions we get is just how much more room is there for this 1 to continue to grow. So where are we in terms of -- I know there's a you were pushing the dose higher the penetration rate is still low, but just is this still a business that we can think about a lot of growth going forward? .

We can, yes. And the fundamental point is extraordinary, 85 patients with tardive dyskinesia are still not treated. And so there's a huge opportunity to treat more patients. The only things that we feel traction on is, firstly, we have introduced titration for patients so they can titrate easier and helps them end up on more efficacious dose, more sort of in line with the clinical trials. And we put together adherence and compliance programs. And while we've heard about those many times throughout our career, the difference they make are meaningful. So innovation still coming in maybe those patients get on to the up-to milligrams, making sure they adhere to that and the compliance to that. You attack all of those, you can fundamentally keep driving this asset for many years, which is why I say which is in 3 billion peak cells is something that when I look at those elements is very achievable.

Competitive landscape, have you seen any changes at all as you think about your closest competitor here? .

Look, it's a really competitive market. And so I think we know that the there were 2 of us in it. It's very competitive. What I always say is it's about making sure we capture a good share of the patients coming in, we mobilize those patients to come in. We educate the physicians to identify [indiscernible] dyskinesia. And we keep doing that well that I think because it's something untreated, that everybody can grow. It is competitive. But for us, that's about making sure we perform very well. We're good at operational excellence. We have the right levels of capital deployed to do that. But it's about execution on -- and I think we've shown since the start of pivotal growth, we have executed quarter-on-quarter very well. And that's a muscle that we were very good, but we're not complacent. It's competitive in so we've got to be mindful of that.

Great. Can you just talk a little bit about 2026 results for this one? I know there's been some inventory [indiscernible]. But are you just kind of thinking about underlying growth, what's the trend been for us to?

Yes. So to explain to people tested, there's a bit of puts and takes. So the channel filled up a bit at the end of last year Q4, which you try best to control, but you can't not ship product which we thought everybody should flow out this year. It is lower than I would do if I manage that inventory sorry. And so that's going to make the comparison of Q4 this year and Q4 last year will probably be down with another part of that is -- what's going to go back to wholesalers knowing that we have the IRA 27 discount, I would like to draw down their stock even more, they then take stock at the new price. So those are the things that I think the things to things about is stead the quarter 4 is an interesting quarter that we keep communicating that will be done. Now -- your question is what is the lining TRx and all those things. I think we're still showing them we're very competitive in TRx, very competitive on the milligram growth because that's important. If you look at all our quarterly earnings, the milligram growth is happening, quarter-on-quarter, I think we were up 20% last quarter. And then adherence and compliance is improving. So all of those things that I talked about are all heading in the right direction. And sometimes, I see to the team, I say how can we keep getting better on compliance inherence how commission not quicker. And I forget that you have to do this through all the specialty pharmacies, all the patients. While you can hit some very effectively. There's still a big patient base that hasn't got all of those programs at an optimal level. So the good thing is I could see this having an impact for many years to come.

So your confidence for all of that $3 billion longer-term target seems.

Well, look, I mean, I think we've been talking for quite a few years. I don't put out targets without really having an ability to understand how we're going to deliver them. There's no hope in that. We've got a very structured execution of what is needed to make it happen. Is it hard? Yes. Do we tend to achieve our targets Absolutely. So yes, I have a high degree of confidence.

You mentioned elsewhere in the branded portfolio, AJOVY has been another success story of the company. Can you just talk a little bit about what's enabled Teva to drive the growth here. I mean I typically think about franchises like this that launch and maybe slow a bit, but hard to reinflect you've clearly reinflected it. So what's enabled that and other maybe similar question like what's the path from here for [indiscernible]? .

So [indiscernible] is a great example. I mean it's sort of a bit some similarities to Astero. So ever we had when I comment very few growth opportunities. And 1 thing we're really, really good at is prioritization. The prioritization when it's done really well means you just don't do other things. So really brutal prioritization. So we set a set out has to hit 2.5 billion there's no. Let's not debate it. If you either on the bus, you are off the bus, but once we here and let's make it happen. And the Jovy said, well, this is the twilight of its life. We don't see that look to the markets, and now there's more to come. And by the way it has to do better. And if we're going to be good and innovative, we have to show we can do it across all 3 regions. So part of it is just saying, we have to do better and now let's build a plan should we do better. We didn't allocate a lot more capital. We have a lot more focus, a lot of different expectations, and we worked out what we had to do better. And so what has surprised me though because to your point, you rarely reinvigorate a brand. We've not reinvigorated. We've accelerated it and we continue to. So now, which is extraordinary, we talk about a [indiscernible] being a $1 billion brand. And I think most people can put them. I think we even have to think about what is the long-term target for that because the growth rate you saw in Q2 was extraordinary across all regions. So -- but I think what to do that growth, we have to take market share. We have to grow above the market in every region. So we grow way above the market. I think the market grows at 6%. And as you saw, we're growing at 20% across all of us. So we're taking market share -- and that's just excellent execution against some of the biggest pharma companies out there.