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

Welcome to the BofA Global Healthcare Conference. It's my pleasure to be introducing Teva Pharmaceuticals and President and CEO, Richard Francis. My name is Jason Gerberry, I'm a Pharma Analyst at BofA. I'll be joining this presentation via telepresence, unfortunately, but my colleague, Richard Wagner is on-site in person. So the two of us will go through this presentation. So first off, Richard, apologies for not being able to be there in person this year.

That's okay. Good to have you on the screen, Jason.

Great. Well, maybe we can start with a few overarching general questions around Teva's strategy, capital allocation, given the company's recent improvement in its credit profile and overall, just the evolution of the business in the portfolio. So I thought it would be helpful to start with now that Teva has reached investment grade with three credit rating agencies, how does that change the view how the criteria for assets that the company might consider for future BD transactions. I know in the past, there was a laser focus on improving the debt profile. So does this in any way change how you think about maybe capacity? Can the company maybe be more opportunistic on the BD front? So maybe I think that would be a good place to start.

Yes. Okay. Thank you. So the fact that we got a credit rating of investment grade from all three of the credit rating agencies. And we did that to remind people a year ahead of when we said we would. We said we'd do that by the end of '27, so we did that a month or so ago. And an important aspect to which I'm sure everybody knows, but I'm quite proud of, and I know my CFO, Eliyahu Kalif, who sits here is very proud of, is you get a credit rating upgrade, not because you paid down the debt only is because you've actually show a future direction of your EBITDA. And so when you look at net debt to EBITDA and where the company is going, they actually think, okay, it's not that we pay down debt and now what. It's the future of the company looks a lot better. And why does it look a lot better and why is the EBITDA going to grow? And we'll talk a lot about that. So I think that's important for people to understand because I always say that, that metric of investment grade highlights our disciplined capital allocation to pay down debt, but our capital allocation within the [ committee ] to grow our revenue, to grow our show that, that journey of financial stability and I'd argue opportunities there. So that's one point, which I think is important to there's another milestone, another metric that we set out to do and we've done ahead of when we do it, and there's others we can talk about. The other one is to that how do we allocate capital now and do we do BD. And we had four capital allocation criteria, pay down debt, invest in our growth drivers, which is our commercial products, AUSTEDO, you said AJOVY and product launches. Third one was developed our pipeline, which is very exciting and to BD. And the fourth one was return capital to shareholders. So as you've highlighted, pretty much #1 is gone because we have a chunk of that this year and early next year. And as we've also seen, Eli and the team refinanced some of our debt a few weeks ago, and we did that at a really good rate because we're a good company. We're investment grade. So a lot of things have improved in that site, which allows us now to think about how do we want to deploy the capital to those other three areas. And -- so a few things we have. Yes, we are very active in BD. And although we've only done one transaction at [indiscernible] , which I think was a good transaction, and it was very synergistic with what we do. That's based on the fact that we have a very disciplined approach to value and return on that capital. And although we've been in discussions with other assets and companies, we don't feel it's the right price and the right return for us, we won't do it. And we can be disciplined in that one because I think we've come from quite a difficult position, a balance sheet position. And so we're thoughtful. And the second thing is we have a great organic pipeline, which allows us to be choosy about what we bring in. And as you know, we also potentially could be getting an asset [indiscernible] , which is in bankruptcy, and we've been looking at that for some time. So we will do more. We do look at a lot, but if the price is right, we won't do it. And those transactions could get bigger. But we do -- and Eric, -- he's Head of R&D, [indiscernible] is here. We do look at what we're buying and is it better than what we have and, if it is, then we can do it and then we'll have to stop doing something internally. We're very agnostic about where our pipeline comes from. But definitely, we are planning, Jason, for the world where our balance sheet starts to build cash on it because it will very quickly. Just the refinance of the debt, we're probably going to save $400 million of finance expenses next year. So that just shows you the progress that's cash. And so we're planning for what we can look at what size those deals can be in 2 years' time versus now. And so we're planning for them now, hoping to get some good deals, but being mindful of price. We're also planning for what those could look like in 3 or 4 years where our balance sheet is very different. But we have a great pipeline, which we'll talk a lot about. And so it's not in must, its a and/or.

Okay. Great. Maybe as we think about where you will be opportunistic to look to add more substrate, if you will, into the pipeline, are investors right I think that Teva's strategic priority is more on the brand side versus the generic side in terms of where you'd look to support with any BD investment? And within brands, I would imagine the focus remains within your kind of core therapeutic area footprint. But if you could provide any color in terms of how you're thinking about areas where there may be a higher priority to augment?

Yes. I think you're broadly right. I mean the capital allocation for in-licensing and BD will be predominantly innovative and it will be predominantly in CNS neurology and more specifically, if we can in -- and around the areas we operate psychiatry, for example, movement disorders, things like that. And then also potentially immunology because of our immunology pipeline that's come through. So you're right there. I would add, though, we have been and we will continue to look at rare disease and rare disease will be more agnostic as to what TA that is in because we think rare disease is an area where it's based on core competencies, pricing, supply chain, go-to-market model. Those things that we think we have. We've built with AUSTEDO, we're going to expand with [indiscernible] , and we think that's we can leverage, but that's to be the right asset, the right price. That's just one nuances. I would say that we still do deploy capital to our generics business. It's born more biosimilars. So you've seen us do deals on biosimilars partnering so that will continue because we're 29 biosimilars now in our pipeline or 15 on market, 14 in our pipeline, and we want to keep expanding that. So we will be allocating capital to that. But the far majority of the capital will be to the innovative side, as you say.

Okay. And you've mentioned a couple of times now, just some of the success stories in terms of drugs that you guys have internally developed via [indiscernible] Or the IL-15 antibody. So how should investors think about Teva's internal drug discovery capability, right? And how do you -- I guess, how do you benchmark productivity of the organization? And the success of this part of your business relative to, say, other established biopharma companies?

So look, I think the difference, I think, with us first is, we think of our R&D as little R, capital D. And so that's differentiated, but let me explain what that means. When we do discovery, we do discovery on things that we believe have a high probability of success in our hands. And so let me explain. So we will not discover a new target. We will not discover a new MOA, we won't do that. What we've done, and you've seen with TL1 and TL1A and anti-IL-5 is we will because of our amazing discovery team that focus on antibodies, we will understand what targets we believe have been validated, but an antibody has even not been optimized to have the maximum equity tolerability and safety, despite people making that antibody. We like that approach. And so productivity-wise, we like the approach because we think we significantly derisk the assets straight away because we know the target is relevant. We know the target works, right? Well, I think our secret sauce is we can then make a TL1A that's better than anybody else's. And I think we've shown that, and we'll make an anti-L15 better than anybody else, and we'll show that. And we'll make it [ T-slipL13-bBR ], and we'll show that Q1 next year. And that's not arrogance, that's because we invest so much time and effort in building capability in antibody engineering, which is something that a lot of people don't do. They discover antibodies and targets, which is great, but we believe the work and the capability we built in developing antibodies that are more sophisticated, can add real value, real value. I think we all saw that already in TL1A. And I think that will start to permeate more as more data comes out. So from a productivity point of view, Eric and I, out of R&D, talk a lot about probability of success. We both don't like taking the [indiscernible] On capital. And so he set up his team in a way that allows us to have significant wins while reducing the risk associated with those. As in, when I came in and spoke to him 4 years ago, TL1A, even I and I'm pretty uneducated in science, new TL1A was an exciting target. We had a really good one. And [indiscernible] We look to realize that. And so okay, yes, these are derisked. Now how do we make the best and can we make the best, now I saw our capability. So that's where our productivity is really good. The other side is on CNS. I think one core aspect to Teva is we know what we don't know. There's a level of humility in the company. So do we think we can discover the new treatment for Alzheimer's and Parkinson's despite how much we desperately want to? No. What do we think other people in academia and biotech around the world could discover some of the trends for CNS and some of the distressing disorders? Yes. Do we look and monitor them and talk to them constantly? Yes, because that's where we think we can leverage that ecosystem, which is so broad and wide, and so many people are trying different things. And then when we think to the same principle, as I mentioned earlier, things are derisked because that MOA, that target, that pathway is validated, we will go in, and we will partner with them. That said, sometimes we are so focused on making sure we have the right risk, as you saw with [indiscernible] Pipeline with Tourette's, we followed that company for two years. And although we saw some really good data in Phase II, we still didn't feel comfortable enough to allocate capital into Phase III. And I think if you put all that together, I never thought about looking at it, but I would say our productivity is very high, but it's based on the fact that we purposely think about probability of success and we purposely think about how do we make sure these assets have a very high likelihood of getting to market. And so I think we've -- but I haven't actually done the answers, but that's how we think about it. So which is why Jason, I think we've ended up in this position where we have this late-stage pipeline that everybody is quite excited about and excited because I think everybody has a view that's quite a lot of it could come to market. And if it does come to market, that could be a meaningful inflection in the growth of Teva, both on the top-bottom line, and so it becomes really material.

Got it. The industry is moving fast, and there's a lot going on. We hear from pharma companies about leveraging AI to get better compounds into the clinic. China is a source of drugs that pharma companies are able to get through structured license transactions with lower upfront cost. So there's favorable trade-offs there, ways to augment the portfolio and the pipeline. Do you see kind of leaning into all those avenues kind of in the future as now that you've kind of transitioned the company through this phase of coming out of like higher leverage and legacy litigation profile into now looking at this as a growth company? I'm kind of curious how you think about the next 5 years and sort of the pipeline of evolution.

Yes. So a couple of things is, firstly, yes, I think Eric and [indiscernible], Head of M&A BD. They were both in China again in August. So we visit China. We're very agnostic as to where the science is. And I think it's another strength we have because I think people have gone to China, but it's more gone to China because of either failures or because somebody has moved faster, because we have that little our approach, we just follow with great science. And that could be West Coast, East Coast, that could be China, that could be Europe. We don't really care. All we know is we're looking for it. And it doesn't have to be something. And by the way, we're not precious about our own pipeline. The pipeline is what products we bring to market, if it's internal, okay, if it's external, okay, not one is not better than the other, absolutely not. And I think that's another key area, which is a focus. The other thing I would say is, as we look at all of that, don't forget we doesn't really interesting things or [ PD-1, IL-2 ], by the way, we can have data at the end of this year on which will also show our antibody engineering capabilities into an area where people have maybe thought PD-1 L2 is a today, once again, I think it goes back to the quality of the engineering, but I haven't seen the data, we'd have data yet, but let's see. But we did a deal with [indiscernible] To accelerate that. So their work on that study in China. So we think super creatively about how do we get the data, and that's another thing, from a company point of view, we sort of have a mindset like a biotech, which is we need data, and we need it fast and we need it cheap, capital is important. And so how do we data for us [indiscernible] Clinical study is really quickly and effectively so I get to read out. So it works. It doesn't work if it works like accelerate it, and I'll come back to that. But as we think about AI, as we think about all these things, the other thing I'd remind people is we have two assets in our pipeline, Duvakitug and NTR 15. They all are multiple indication assets. So Duvakitug, we now have four indications. We'll probably add another four. I mean we've got a list of 20-plus so maybe more. And then [indiscernible], we have [indiscernible] disease, alopecia will follow then whether we got to [indiscernible] s and some other areas are logical. So suddenly, we have two pipelines -- two2 pipelines and products in a small company, which is game changing. So while we look at all the things around partnerships, opportunity in CNS in different parts of the world, we will constantly do that. But I think people need to recognize we have a very significant pipeline based on two assets also, which have multiple indications, and they are showing to be very safe and tolerable, which allows you to go into other indications. So that makes it very exciting. So I think those are the things that we sort of consider, but I think -- do we consider all those different areas? Absolutely. But we have to balance it with -- we have a pretty good pipeline now. And I remind people that we'll probably have 5 launches in 5 years -- the next 5 years, and we'll probably have a lunch every 12 to 18 months after that, if you believe it [indiscernible] Will work, [indiscernible] Disease will work and the two new indications in Duvakitug, which I think there's a high likelihood they will work because they're validated and actually, Merck have come out with data shows it does work. So those launches are going to happen. And then the final thing I'll say on that is, when you're looking from an investor point of view, we're going to keep launching innovative products, which have 90-plus percent gross margin onto a business currently that has a 55% gross margin. So that work at our debt. It's not hard to work at less than what -- if we're disciplined on OpEx, what will drop to the bottom line. So I gave you more than you asked for that, Jason. But hopefully, it's helpful.

Definitely, definitely. Maybe we'll shift the pipeline and the IL-15 program, which had some interesting data recently. I guess at a high level, you talked about discipline on OpEx on the one hand. But you've also been very creative on how you funded both this and [indiscernible], right, between the partnership with Sanofi, the Royalty Pharma and Blackstone type of transactions for these two assets, and so. It begs the question as the company's financial health improves. And as you move along with the IL-15 program, you said it's a pipeline in a drug, right? Is there a natural inflection point where it makes sense to find a partner for an asset like this and get this through a Phase IIb where you've established dose in a real strong proof of signal that is -- I guess, the registrational endpoint in these populations? Just kind of curious how you're thinking about how you take some of these assets forward within the confines of your kind of current R&D constraint versus perhaps over time, we can see kind of a meaningful step up in R&D investment.

Yes. So I think this comes back to one very, very important principle we have at Teva. And once again, about how we think about assets and R&D is the first important principle is if we have something we believe works, our job is to get it to market as fast as possible. That's the #1 principle. As much as possible in as many indications as possible. When I came here -- and by the way, and we'll work out the financing. It's sort of the crude way I look at it. So if you got it, it works, move fast across every indication, we'll work at the financing, and I'll come back to -- when I came to the company, I remember talking with Eric about these products. And I can remember, speaking to CEOs who are fortunate to have pipelines in one product. And I said to , if there's anything you would have done differently? What would you have done? And they said, if I knew were you now I've done all the indications parallel straightaway. Right now obviously, that's extremely [indiscernible] -- you need to have safety tolerability and play things out. But the principle was there, which just if I knew what I had, I would have just gone even faster and harder. So I remember that. And so for us is, when we go about Duvakitug, 8 indications, 10 indications Il-15, 2 indications, 5 indications says, yes, we're going to do more and we do them fast whether the science is logical, where we have that probability of success rationale, I said at the start. And then we work out of finance. And by the way, working out the financing is the easy part of it. Finding the drug that works is so, so hard, find a drug that works in multiindication is earning this the time it's happened to me in my career. And I'm older than I would like to be. So I recognize and so the finance will work out. And so that's what we do. We think about how do we find it. Now on anti-IL-15, the question is, do we need to find more financing? Well, firstly, we have Royalty Pharma, who I think a really good judge of an asset, with the due diligences they've done and they do. And so I think we're in a good place. I think always the way I think about it is how do we maximize an asset, which is how quickly you bring it to market and then how do you maximize it in the market. And once again, I constantly think about that. And I think, well, is that more financing? Is that more capability? Is it partnerships? And all of those in play, and I see none of those as a weakness. All of them should be in place, a different play for a different time. And if you're constantly flexible and agile on that, I think you'll maximize things. And that's all about how do you maximize create return on the capital to create great shareholder value. So I suppose the punchline is dynamic and fast.

Understood. Okay. So, maybe just thinking about these market opportunities, [indiscernible] And Vitiligo, you guys have put out some peak revenue projections. I think investors struggle to know how big these markets can truly be. I think rightly so, right, because they're just -- there's the lack of advanced therapies. We just don't know how these markets will evolve over time. I would almost characterize your peak sales guidance as a placeholder, a conservative placeholder. So maybe just talk about how you're thinking about both these settings. They are kind of new spaces for advanced therapies. Are there any analogs that gets you excited when you think about like the potential of these different disease areas?

Yes, it's interesting. Just to give you a bit of context of how the narrative changed. So when we went into vitiligo and [indiscernible] disease, it was disease? Is it a disease? Is it druggable? Would take it and pay for it? It's like do people suffer from as many to now [indiscernible] Seems super conservative and come on. Now obviously, [indiscernible] We have over 4 million patients actually, not too dissimilar for [indiscernible], but if you break it down as to how many will be treated. So the rationale for people to challenge us on our peak sales is valid, right? What I did on the pipeline is say that every product in our pipeline has $1 billion of peak of potential sales. Whether some are going to be a lot more, I wasn't trying to make that point. I was trying to say that we have over $13 billion of sales in our pipeline, which I think is highly probable, if you just take $1 billion for each. Now to your point, we're getting challenge on [indiscernible] Be a lot more and Vitiligo could be more than $1 billion. And my answer to that is, as we get closer to market, and we understand product profiles, patient populations, then yes, I agree that the number is wrong, how wrong we can see. But then I'll remind people if we have a 55% gross margin and with the size of the company we are, if [indiscernible] Billion, [indiscernible] $1 billion, Duvakitug in all indications is $1 billion, which is probably all hugely conservative. It's an absolute game changer for us. And so in a way, I like this question because it should bring people back to what if I just model what I think is conservative, it still looks like an amazing outcome from a value creation story. Now will we start to frame a bit more what we think these could -- what could happen in these indications? Absolutely. But we're not in an IPO fundraising event here to try and actually create excitement about it. We're trying to give something which is quite methodical and predictable and say this is what we think. This is how to involve because I think we built a lot of credibility at Teva. And so why we want to get people excited about the future, we want to do that in a way that builds on that credibility and that thoughtfulness. And I feel the time is getting right because now people are challenging to be quite a lot, something in, okay, we need to update and we will do. Whether we'll be seen as ambitious as well people want, will -- we'll see. But then on that, I would say I don't think we -- I think whenever we've commercialized, we have beaten everybody's expectations considerably, even ambitious one. So don't ever think what we say about these rough guidance ever takes away from our desire to do the utmost best we can when we [indiscernible] Drug.

Okay. You mentioned speed earlier in terms of advancing some of these assets. And I wanted to come back to the Celiac time line, 2034 time to a BLA submission. And so as I think about in my mind, at least, like something like an adaptive Phase II/III design and potentially an ability to use gluten challenge in a pivotal study. Like these are factors that could probably shave years off of that development time line. So am I at least conceptually in the right ballpark in terms of thinking about some of the variables as you approach FDA and have a negotiation, not looking for you to front run your development plan and all that. But as I just think about some of the possible swing factors in the development time line, are those two of the major ones?