Teva Pharmaceutical Industries Limited (NYSE:TEVA) Q1 2023 Earnings Call Transcript

Teva Pharmaceutical Industries Limited (NYSE:TEVA) Q1 2023 Earnings Call Transcript May 10, 2023

Teva Pharmaceutical Industries Limited misses on earnings expectations. Reported EPS is $0.4 EPS, expectations were $0.56.

Operator: Hello, and welcome to the Q1 2023 Teva Pharmaceutical Industries Limited earnings conference call. My name is Alex. I’ll be coordinating the call today. [Operator instructions]. I’ll now hand over to your host, Ran Meir, SVP of Investor Relations. Please go ahead.

Ran Meir: Thank you, Alex. Thank you, everyone, for joining us today. We hope you have had an opportunity to review our press release, which was issued earlier this morning. A copy of this press release, as well as a copy of the slides being presented on this call, can be found on our website at tevapharm.com. Please review our forward-looking statement on Slide No. 2. Additional information regarding these statements and our non-GAAP financial measures is available on our earning release and in our SEC Forms 10-K and 10-Q. To begin today’s call, Richard Francis, Teva’s CEO, will provide an overview of Teva’s Q1 2023 results and business performance, recent events, and priorities going forward. Our CFO, Eli Kalif, will follow up by reviewing the financial results in more detail, including our 2023 financial outlook.

Joining Richard and Eli on the call today are Sven Dethlefs, Teva’s head of North America business; and Dr. Eric Hughes, our head of R&D and chief medical officer. They will be available during the question-and-answer session that will follow the presentation. Please note that today’s call will run approximately one hour. And with that, I will now turn the call over to Richard. Richard, if you would, please?

Richard Francis: Thank you, Ran. And good morning and good afternoon, everyone. Thank you also for joining us today. Now before I start getting to the Q1 results, I thought I’d just take a bit of time to give you my thoughts and impressions of the last few months I’ve had at Teva. Now in short, impressed by many of the things I’ve seen and discovered while being around the world talking to many of our people, and it’s because of this that I think we have real opportunity for the company, and maybe the company is underappreciated currently. Now let me go into sort of four areas I’d like to focus on here. Now I know most of you think of us as a generics company. And in truth, we are more than that. We have an emerging innovative business, primarily driven by AUSTEDO and AJOVY, but recently about to be supported by UZEDY, our long-acting schizophrenia product, and this is gonna fuel continued growth going forward.

And already, this is 10% of our total revenue. We also have a biosimilar portfolio, which I’ll talk a bit about later, which is an opportunity to benefit from $4 billion of brand value coming off patent in the next few years. Second, our pipeline. Now I definitely know this is not fully known and understood. But I can tell you, we have some exciting assets here. And as I sort of dug deeper, I’ve seen some unique capabilities in our R&D organization, particularly when it comes to antibody design and formulation expertise. And as we go through our pipeline, I think you’ll see that we have a balanced risk profile on many of our assets. Now coming to our core business, our core generics business. This is a strong global business. And what I’ve discovered, this is more than the U.S. In fact, 60% of our business is outside the U.S., in Europe, and emerging markets.

And this is a strong business and that it generates significant cash, which obviously we’re currently using to pay down debt. Now then moving on to our people, which is probably what inspired me the most. We’ve got a great group of people here at Teva and a great culture, the real can-do attitude, and this is something we’re gonna leverage as we move forward with Teva on our new strategy for growth. Now that said, we have some headwinds and some short-term challenges, which we’ll discuss today, particularly around our cost of goods, but we have plans to deal with these going forward. And because of that, we are reaffirming our guidance for 2023. Now moving on to the next slide. I would just like to invite everybody to our investor day, which we’re gonna hold in New York next week, where we’re gonna introduce our new strategy for growth at Teva.

Now this strategy will be built on some of the strong foundations that I described in the previous slide, and I’ve been working hard with the executive management team here at Teva, along with many others in the company, to really challenge ourselves to look at how we can, with the changing market, unlock and create real value for Teva going forward. I’m excited about the outcome. We have made some clear choices in this strategy, some clip prioritization. And we have a focused company going forward, where the capital allocation will follow this. So as I said, please join us next week where we unveil a new chapter to Teva. Now moving on to Q1 performance. Let’s start with revenues. Our revenues for Q1 versus Q1 2022 were $3.7 billion, up 4%.

AUSTEDO was up 10%; and AJOVY, up 5%, driving that innovative business that I mentioned earlier. And in European generics, in local currency, we’re up 12%. In local currency and international markets were up 9%. So I think a solid performance for Q1 on the revenue. Now taking a look at it from a regional perspective. As you can see, all regions were up in local currency or growth, 2% for North America; 9%, Europe; and 8%, international markets. Now I would keep in mind that our revenues are still affected by the strengthening U.S. dollar, and we did have a negative impact of $128 million Quarter 1 versus 2022. Now moving on to the next slide to talk about AUSTEDO as part of this innovative portfolio that I talked about. Revenues were $170 million, up 10%.

I was particularly pleased in its TRx, it was up 28% versus last year. Now I’m very excited about AUSTEDO and particularly because I see this as an untapped opportunity. We have 800,000 — roughly 800,000 people suffering from this condition, and only 120,000 diagnosed, and then only 50,000 treated. So we have significant opportunity to grow this product and help patients suffering from this condition. On the next slide, you’ll see this has been further improved, this patient offering, with the launch of AUSTEDO XR. This is the once-a-day formulation. Now I think this is the final piece of the puzzle for AUSTEDO because, obviously, as you appreciate, many of these patients are on multiple medications. And thus, having a once-a-day offering, I think, really offers some advantage for them and strengthens the product offering for those patients and caregivers.

So now, moving on to another part of our innovative pipeline or, say, portfolio is AJOVY. Now AJOVY is almost reaching $100 million a quarter, currently sitting at $95 million. Up 36% in North America, up 17% in Europe, and up 74% in international markets. So we’ve grown across all regions, which we’re very pleased about. And what I’ve mentioned before and I’ll reiterate, what I like about AJOVY is the fact that this was not a product we managed to bring to the market first in its category. In fact, in many areas, we were not, and we were last. But what we’ve shown with our commercial capability and muscle that despite this, we can achieve growing market share in a significant position in many of the markets often number two. So I still see growth going forward with AJOVY to a geographical expansion and expansion of market share.

Now the new product to this innovative family is UZEDY, risperidone, which was board-approved about two weeks ago, and we’re excited about this long-acting risperidone. I was recently on a field right in the U.S. with some of our sales representatives, and speaking to psychiatrists and clinical nurse practitioners actually about AUSTEDO, but many of them were asking when this long-acting risperidone would be available. And in discussing with them why they are so enthusiastic about it, we came back to our patient-friendly profile. The fact that we have rapid absorption within six to 24 hours of administration was important to them. There’s a subcu small needle, lower volume. All of these made it an easy-to-use product for them in this patient population.

Now keep in mind that the long-acting market is a $4 billion opportunity when it comes to schizophrenia. And so with UZEDY profile, we think we have a real opportunity to generate some revenue going forward. Now pivoting back to our generics business. As I mentioned before, we have a big business outside the U.S., over 60%, and we’re seeing continued strong growth in both of those regions, 12% in local currency in Europe, 9% in international markets. And this is attributed to our core capabilities. We have a good pipeline. We can regularly launch products into our portfolio. We have a good supply chain, and we have a good commercial infrastructure. So I see no reason why we can’t continue to leverage this capability going forward. Now to move on to our pipeline.

And you’ll notice for this call, I’ve separated the innovative pipeline from the biosimilar pipeline, and that’s really to start to highlight the pipeline and some of the exciting assets we believe we have it. Now I’ll just call out a few here, olanzapine, long-acting, another long-acting medication for patients, people suffering from schizophrenia, which we’ll add to our franchise; ICS SABA, in asthma, which is in Phase 3; and anti-TL1A in Phase 2. I’ll describe it in a bit more detail in a couple of slides. But obviously, looking forward to presenting more depth in our pipeline next week at our strategy today, where Dr. Hughes, our head of R&D, will be talking about this in far more detail. Now moving on to our biosimilar pipeline and franchise.

I think what I’ve said in the past is you need to have a good pipeline and a good portfolio to succeed in biosimilars and to have a good commercial footprint. I think you can see we have both of those. Now to address a question, which I think is gonna come up today, is about biosimilar Stelara and where we are with that. So maybe I could take a few moments to talk about that. So as many of you know, the FDA issued a CRL to our partner Alvotech, based on certain inspection observations in their facility in Iceland. Now Alvotech is expecting communication from the FDA shortly, assessing their responses for their observations. Now once Alvotech receives communication from the FDA, we will have a better understanding of the timings of a potential launch of biosimilar Humira.

Now going back to those promising late-stage assets from our innovative portfolio. Now I don’t want to step on Eric Hughes’ toes for next week when we launch the new strategy at the Investor Day, so I’ll keep it brief, but maybe just give a slight headline on some of these programs. So olanzapine. We’re excited by this because, obviously, I mentioned to you already with UZEDY, there’s a significant opportunity to move the schizophrenia market to a long-acting therapy. Now this olanzapine product leverages our deeper technology with MedinCell, which is the company we work with on UZEDY. So I’d like to think this has been proven because of, obviously, the recent approval of UZEDY. Now moving on to ICS SABA. This clearly leverages our respiratory expertise and our ability to bring complex products to the market.

It brings together two well-characterized and well-used products for a subset of the asthma market, which we believe is worth around $2.5 billion, and we will only have one competitor. Then lastly, moving on to the anti-TL1A, asset, which I’m sure you’re all familiar with because it seems to be a very hot topic right now. We see this as a good opportunity because it’s a validated target. And we see, because of the number of indications, that it could potentially go after a significant opportunity around $25 billion. And we believe we have a best-in-class profile, but more to come on those assets on the investment day. In closing, I want to talk about an important priority of ours, which is our commitment to ESG, and I just want to take a bit of time to give you an insight to the progress we’ve made.

So let me just pick a few of these now. When it comes to greenhouse gas initiatives, we have a goal to reduce these to 25% by 2025. As you can see, we’re closing on that already. Another area of focus has been on compliance and business integrity, and we have met our goal of 100% of all our employees trained in compliant policies. Finally, I can highlight the economic impact we’ve had, $44 billion in savings from Teva’s generic medicines across 21 countries, and we’ve contributed $20 billion to GDP across 24 countries. So I think we’ve made very good progress with regard to our ESG commitments. And with that, I’ll hand over to our CFO, Eli.

Eli Kalif: Thank you, Richard, and good morning and good afternoon to everyone. I’ll begin my review of our Q1 2023 financial results with Slide 18, starting with our GAAP performance. Revenue in the first quarter of 2023 were $3.7 billion. In dollar terms, they were flat compared to the first quarter of 2022. In local currency terms, revenue increased by 4%. To provide you some color on our revenue performance by region. North America, we had overall solid performance with 2% growth in Q1 2023 compared to the first quarter last year. This growth was mainly driven by higher revenue from certain innovative products, mainly AUSTEDO; and AJOVY; as well as Anda, our distribution business. This was partially offset by lower revenues from our generic business and BENDEKA and TREANDA.

Our generic business in North America decreased in Q1 2023, mainly due to increasing competition to parts of our portfolio and timing of certain customer bids. The overall pricing environment in North America generics is stable and in line with historical trends. Revenues in our Europe segment grew strongly by 9% in local currency terms, mainly driven by higher revenue from our generic business, including new product launches. And revenue from our international market segment increased by 8% in local currency terms, mainly due to higher revenues in our generics business coming from price increases, largely as a result of raising costs due to inflationary pressures. Operating income was $2 million in the first quarter of 2023, compared to an operating loss of $730 million in the first quarter of 2022.

We had a net loss of $205 million compared to a net loss of $955 million in Q1 2022, and a GAAP loss per share of $0.18 compared to GAAP loss per share of $0.86 in the same period a year ago. This improvement in our GAAP operating income, net loss, and net loss per share in the first quarter of 2023 were mainly due to the higher impact of legal settlement and loss contingencies that we had in the first quarter of 2022. Foreign exchange rate movements during the first quarter of 2023, including hedge effects, negatively impacted our revenue and GAAP operating income by $128 million and $32 million, respectively, compared to the first quarter of 2022. This was a result of the impact of stronger U.S. dollar against other currencies of main markets in which we operate, mainly the euro and other related currencies.

As a reminder, approximately 50% of our revenues in Q1 2023 came from sales denominated in non-U.S. dollar currency. Turning to Slide 19. You can see the total non-GAAP adjustments in the first quarter of 2023 were $661 million compared to $1.564 billion in Q1 2022. A notable non-GAAP adjustment was legal expenses of $233 million, mainly related to estimated provisions recorded in connection with certain litigation cases in the U.S. Other notable adjustments include amortization of purchased intangible assets of $165 million, the majority of which is included in cost of sales and impairments of long-lived assets totaling $188 million. I also want to provide you with an update on the progress with the nationwide opioid litigation settlement.

During the previous quarter, we had confirmed a high level of state participation, 49 out of 50 states. Based on a strong state participation, we decided to move ahead to the next phase with the subdivision participation, which I’m happy to report is also going very well. To date, we have confirmed participation from over 99% of the litigating subdivision from those participating states. Overall, with the level of broad support we have seen by the states and subdivisions, we expect to move forward firmly in the process, and we anticipate making the first settlement payment in the second half of 2023. Now moving to Slide 20 for a review of our non-GAAP performance. I’ve already discussed our first quarter revenue, which totaled approximately $3.7 billion and represented a growth of 4% in local currency terms compared to the first quarter of 2022.

Now let’s move down the P&L and look at the margin. I would like first to drill down and analyze our gross profit performance this quarter. Our non-GAAP gross profit line was 49.1% in Q1 2023, compared to 54.2% in Q1 2022. The decrease in non-GAAP gross profit margin was driven by two main factors: our portfolio mix and the macroeconomic factors. Our first quarter came in with a different and unfavorable portfolio mix than we expected. While we continue our solid growth in our key focus area, including AUSTEDO, AJOVY, and our generic business in Europe and international markets, this is being offset by margin diluted growth of Anda business and lower contribution from our legacy brands. As we progress through the year, we anticipate a shift toward a more balanced and normalized portfolio mix in the coming quarter, mainly driven by growth in AUSTEDO and AJOVY.

As for the impact of the macroeconomic factors, I already mentioned on our previous earnings call, we faced inflationary pressures in the second half of 2022, and much of that impact from last year was held in our inventory and sold this quarter. This resulted in a higher cost of goods sold in Q1 of this year. In addition, we also had some unfavorable impacts from hedging activities, which impacted our gross margin, with the majority of the impact in our European and international market segment. Going forward in 2023, we expected improvement on certain elements of the inflationary pressures, including on cost of energy and freight. In addition, we also expected a sequential improvement in our COGS driven by certain measures we are taking in our supply chain.

Our non-GAAP operating margin in Q1 2023 was 21.4% versus 27.7% in Q1 2022. This decrease was mainly driven by the lower gross profit margin, as I just mentioned, as well as the higher other income in the first quarter of 2022, which mainly included one-time settlement proceeds in our international market segment. We ended the quarter with a non-GAAP earnings per share of $0.40 compared to $0.55 in Q1 2022, mainly due to the lower gross profit, which I referred to a moment ago. Now let’s take a look at our spend base on Slide 21. As you can see, our quarterly spend base increased by $229 million or $324 million on a local currency basis. Most of this increase was due to a higher cost of goods sold related to the factors I described earlier as well as the higher other income in the first quarter of 2022, which mainly includes settlement proceeds in our international market segment.

Our next slide, 22, shows how we have been transforming our global manufacturing and operating footprint over the last five years to consolidate our sites with more efficiency. And here, you can see, over the last five years, we have gone from 80 manufacturing sites down to around 52 sites, and we have plans to continue this progress. By the end of 2023, we expect to close or divest three additional sites, with plans already in place to close or divest four additional sites beyond 2023. So this evolution will continue as we drive ongoing optimization of our operations for efficiencies and improving margins. Turning to free cash flow on Slide 23. Our free cash flow in the first quarter of 2023 was $41 million. Teva’s free cash flow tends to face headwinds at the start of the year due to the unusual timing of annual bonus payments paid out in the first quarter.

In addition, our free cash flow for Q1 2023 was also impacted by lower profit and changes in working capital items, including an increase in accounts receivable, net of SR&A, partially offset by an increase in accounts payable. Today, we are reaffirming our 2023 free cash flow guidance, which we provided in February. Our 2023 free cash flow is expected to be in the range of $1.7 billion to $2.1 billion. We expect our free cash flow to pick up during the next three quarters as we see a ramp-up in our profitability and as we continue to drive working capital improvement. Turning to Slide 24. Our net debt at the end of Q1 2020 was $18.5 billion compared to $18.4 billion at the end of 2022. Our gross debt was $20.7 billion compared to $21.2 billion at the end of 2022.

The decrease in our gross debt was mainly due to $646 million senior notes repaid at maturity, partially offset by exchange rate fluctuation of $176 million. Our net debt to EBITDA slightly increased coming at 4.25 turns for Q1 2023, mainly due to lower EBITDA. Looking at Slide 25. Debt reduction continue to be our focus. As you can see, we have made significant progress in the last six years to reduce the level of debt on our balance sheet, and we expect this progress to continue and our net debt further decline as we work toward our long-term financial target of being two times net debt to EBITDA by end of 2027. Turning to Slide 26, which represents our upcoming update maturities. During the first quarter of 2023, we successfully refinanced approximately $2.5 billion of our debt through sustainability-linked senior notes.

This was done to mainly address the ’23, ’24, and ’25 maturities and to align our near-term debt maturities with our free cash flow guidance for this year. These notes are linked to sustainability performance targets and reaffirm our continuing attention to establish a direct link between our corporate responsibility commitments and our funding strategy. If we combine this recent issuance with our previous SLB bond financing of $5 billion, Teva is now the second-largest corporate SLB issuer worldwide and the largest in the pharmaceutical industry. Given the interest rate environment, this will result in a higher financial expenses for the remainder of the year, which was already accounted for in our 2023 annual guidance that we provided in February.

Now let’s turn our attention to our 2023 non-GAAP outlook on Slide 27. As we guided in February, when we provided our full-year outlook, we had expected Q1 to be the lowest of the four quarters. both in terms of revenues and margin. For full year of 2023, we continue to expect our revenues to be between $14.8 billion to $15.4 billion. We are also reaffirming our 2023 non-GAAP outlook for operating income, EBITDA, earnings per share, and free cash flow as provided in February. We continue to expect a gradual pickup in margin in the second quarter with a further progress in the second half of the year. Our company is fully engaged in navigating and addressing the ongoing impact of the macroeconomic headwinds. Inflationary pressures that we saw in the second half of last year continue to have an impact in 2023.

As indicated, we are working around certain measures to offset the collective increase in our cost of goods sold. In the coming quarter of ’23, we expect a gradual increase in our gross margin with improvement in our portfolio mix, as I mentioned earlier, as well as easing of inflationary pressures, including the cost of energy and freight. In addition, we expect to continue our ongoing efforts to drive improvements in our operating expenses. With that, this concludes my review of Teva’s results for the first quarter of 2023, and now I will hand it back to Richard for a summary.

Richard Francis: Thank you, Eli. Thanks a lot. So in summary, Today, we are reaffirming our 2023 non-GAAP guidance for the year. We believe the AUSTEDO, AJOVY are gonna continue to drive good growth. With the launch of AUSTEDO once daily, we believe that’s gonna add to that. And obviously, as I mentioned, the upcoming commercial launch of AUSTEDO gives opportunity for more growth from our innovative portfolio with strong performance in Europe and international markets in Q1, and we continue to focus on cost discipline and working capital management. And as of next week, I look forward to introducing our new strategic framework and a few priorities to many of you in person. So with that, I’d like to open up to questions. Thank you.

Q&A Session

Operator: [Operator Instructions]. Our first question for today comes from Jason Gerberry from Bank of America. Jason, your line is now open. Please go ahead.

Operator: Thank you. Our next question comes from Umer Raffat of Evercore ISI. Your line is now open. Please go ahead.

Operator: Thank you. Our next question comes from Balaji Prasad from Barclays. Your line is now open. Please go ahead.

Operator: Thank you. Our next question comes from Ash Verma of UBS. Ash, your line is now open. Please go ahead.

Operator: Thank you. Our next question comes from Nathan Rich of Goldman Sachs. Nathan, your line is now open. Please go ahead.

Operator: Thank you. Our next question comes from Chris Schott of JPMorgan. Chris, your line is now open. Please go ahead.

Operator: Thank you. Our final question for today comes from David Amsellem of Piper Sandler. David, your line is now open. Please go ahead.

Richard Francis: Thank you, Sven. And thank you again, David, for your question. I think that concludes all the questions we have time for today, so I want to thank everybody again for dialing in and listening in, and the ones who asked the questions for doing so. I’d just like to remind you all of the investor day we have on May 18 in New York next week, starting at 12 p.m. Eastern time, and look forward to seeing some of you in person now and look forward to hearing and seeing you online if you can’t make it in person. Thank you again for your time and attention today and look forward to catching up next week.

Operator: Thank you for joining today’s call. You may now disconnect your lines.