Teva Pharmaceutical Industries Limited (NYSE:TEVA) Q4 2022 Earnings Call Transcript

Teva Pharmaceutical Industries Limited (NYSE:TEVA) Q4 2022 Earnings Call Transcript February 8, 2023

Operator: Welcome to the Teva’s Fourth Quarter and Full Year 2022 Earnings Call. Please be advised that this conference is being recorded. I would now like to hand the conference over to our first speaker today, Ran Meir, Senior Vice President, Head of Investor Relations. Please go ahead.

Ran Meir: Thank you, Nadia. 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 the press release as well as the copy of the slides being presented on this call can be found on our website at tevapharm.com. Please review our forward-looking statements on Slide 2. Additional information regarding these statements and our non-GAAP financial measures is available on our earnings release and in our SEC Form 10-K and 10-Q. To begin today’s call, Richard Francis, Teva’s CEO, will provide an overview of Teva’s 2022 results and business performance, recent events and priorities going forward. Our CFO, Eli Kalif, will follow up for reviewing the financial results in more detail, including our 2022 financial outlook.

Joining Richard and Eli on the call today is Sven Dethlefs, Head of North America business, who 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 welcome, everyone. I’m excited to be here today, and I’d like to start by saying, it was great meeting many of you in San Francisco JPMorgan last month. And I look forward to getting to know Teva shareholders, investors and analysts, so that you can have an open dialogue going forward. I’m excited to be here because there’s a lot of opportunity at Teva. The team has done a tremendous work to get the company back to a solid foundation. And now there’s an opportunity to get back to growth. Before I start my review of Teva’s 2022 results and discuss our guidance for 2023, I would like to update you that I’ve already initiated a strategic review process with my leadership team. Our teams are already hitting the ground running, and we are working hard on analyzing some of the core strategic questions, how the segments we operate are going to evolve over time.

And we understand what options we have. It’s going to be a very clear, purposeful strategy with real intent behind it. Every function, every dollar should follow that strategy going forward. Once the work is down around midyear, I’ll come back with the team and we’ll present that to the market. Now let’s move on to some highlights for 2022. We ended 2022 with revenues of $14.9 billion, and adjusted EBITDA of $4.6 billion. GAAP diluted loss per share was $2.12, and non-GAAP diluted earnings per share was $2.52. You should note that our revenues were still affected by the strengthening of the U.S. dollar during the fourth quarter. And we are, therefore, still seeing significant headwinds from exchange rate movements on our revenues. We had a net impact of $780 million for the full year compared to 2021.

Free cash flow in 2022 was $2.2 billion, and we continue to reduce our debt in accordance with our strategic targets. Net debt is now down to $18.4 billion. Moving to the business overview. AUSTEDO, our leading brand is growing very nicely, up 20% year-over-year, and AJOVY also grew across all three geographies, U.S., Europe and International Markets. I’ll further discuss these two products in a few minutes. We’ve also seen nice growth in our generics and OTC revenues in Europe, reflecting our strong position there and also some successful product launches. We’ve also seen good growth in Generics and OTC in our International Markets through a combination of volume growth as well as price adjustments to address inflation. So good to see 9% growth in Europe and 5% in international in local currency terms.

We’re also excited about the progress we’re making on our pipeline. We recently initiated the Phase 3 trial of subcutaneous long-acting olanzapine for schizophrenia, together with UZEDY, our risperidone long-acting product, which I’ll talk about in a few minutes. We’re developing an exciting franchise for patients suffering from schizophrenia. As for the nationwide opioids litigation settlement, we announced last month that we are moving on with the settlements after receiving broad support from the State Attorney Generals. We already settled with 49 of the 50 states and the sign-on process for the state subdivisions has begun. And given the very positive response from the states, we remain optimistic that the settlements will garner a similar support further.

Moving on to the next slide to look at our revenue and how it’s developing. Overall, you’ll see a fairly stable business with the portfolio of products and geographical spread that are well balanced. I’d like to point out that in 2022, Q4 was the strongest quarter in terms of revenue, similar to previous years. If you exclude the impact of FX, revenues in Q4 2022 were actually up 1% compared to the fourth quarter of 2021. So in local currency terms, we had a nice single-digit growth in both Europe and International Markets. Moving to the next slide and expand on the comment I just made on Europe. It’s a market that I’m very positive about. Europe is good, stable business to Teva. In markets like Europe, if you have a good pipeline, good go-to-market model, the business is predictable and it can drive continued growth.

And we believe we have all of those elements in our European business. We have a good portfolio, good pipeline and strong leadership in many of the markets. And this also supports a good margin profile, as you can see from the slide. And this is all playing out well. As you can see, revenues grew in Europe in the fourth quarter, 4% in local currency terms, which we’re very pleased about. Now moving on to AUSTEDO on next slide. Quarter four was a record quarter for AUSTEDO as we continue to see strong growth in both total and new prescriptions. Revenues grew 20% for the full year and 22% in the fourth quarter. I am happy to see strong continued development with nice increases in both revenue and the numbers of prescriptions. So all-in-all, the trajectory looks positive.

And Eli will elaborate on it when he will be talking about our 2023 outlook. Now to better understand the potential of AUSTEDO, I’d like to take a look at the next slide. As you can see, there are approximately 785,000 patients suffering from tardive dyskinesia in the U.S. But unfortunately, only 15% of these patients are diagnosed and then even more disappointing 5% are getting treatment. So clearly, there is a lot of unmet need. And of course, we’re working hard to broaden that base, making sure they can benefit — the benefit of the product reaches more patients who need this therapy. This will drive increased prescriptions and also presents a significant long-term growth potential for AUSTEDO. Now moving on to AJOVY. Full year, our revenues grew more than 20% globally.

This was despite the foreign exchange headwinds we faced in Europe and International Markets. Now I think AJOVY is a great example of Teva’s strong commercial and execution capabilities. As you know, AJOVY was not first-to-market in the U.S. and Europe, but we’re still capturing really strong market share and actually second in Europe. So that’s been very impressive and another proof point to me that the innovative and commercial go-to-market capabilities of Teva are strong. What we’re seeing now in the U.S. is really about slow growth is around the injectable anti-CGRP therapies, and while most of the growth in migraine space is driven by the oral therapies. Outside the U.S., we expect AJOVY to benefit from continued patient growth and launches in additional countries in Europe and International Markets.

Now moving on to the pipeline, the next slide, please. In my six weeks at Teva, I’ve met with R&D teams. And I have to say that I’m very impressed with the capabilities and the people we have. I was also pleasantly surprised by our innovative pipeline. We plan on sharing more details on it when we discuss our updated strategy throughout mid-year. Now let me highlight a couple of exciting assets that are under regulatory review. Firstly, our biosimilar to Humira is expected to launch in July 2023, pending FDA approval, which I’ll talk about in a bit more detail in a few minutes. I’m also happy that the FDA has accepted for review the BLA for our biosimilar Stelara, and we anticipate that the review will be completed in the second half of this year.

Moving to our innovative medicines pipeline. As I said before, we are building a strong foundation for the schizophrenia franchise. UZEDY, an important product for patients suffering from schizophrenia which I will elaborate on in the next slide; and olanzapine long-acting, another exciting prospect in the treatment of schizophrenia, we recently moved into a Phase 3 trial. Both olanzapine and UZEDY represent complementary approaches to schizophrenia patient management by addressing unmet needs in the long-acting market. And together with the AUSTEDO, which treats tardive dyskinesia, a side effect for schizophrenia treatment. We’re building a strong franchise for schizophrenia therapies. So moving on to the next slide to talk about UZEDY. As you know, we have resubmitted the file to the FDA for review and expect to have a decision in the first half of this year.

So just to frame the market landscape, there are approximately 2 million treated schizophrenia patients in the U.S. and approximately 10% of them receive long-acting injectable products. And this long-acting category is growing steadily. In terms of sales, the overall schizophrenia long-acting market in 2021 was estimated to be $4 billion. Now relative to other therapies on the market, UZEDY, our product, will have more patient-friendly injection mechanism, which is subcutaneous, a small needle and is lower volume, and it comes in a ready-to-use prebuilt syringe. Basically, an easy and effective way to get you therapy. And we are very much looking forward to bringing these benefits to the patients who are suffering from schizophrenia, and who need stable therapy to avoid relapses.

Given these profile advantages, we’re happy with UZEDY. We’re targeting about a 20% market share over time. Now let’s talk about Humira, which I know has been getting a lot of attention recently and is the largest product in the history to face biosimilar competition with annual revenues of over $17 billion. Now based on our most recent updates from our partner, Alvotech, we’re preparing for the launch on the 1st of July this year. The FDA has confirmed that the target date for the decision on Alvotech’s application is April 13 of this year. The FDA has also confirmed that the data provided by Alvotech is sufficient to support a determination of interchangeability. And approval, of course, requires a satisfactory outcome from the upcoming facility inspection or reinspection, should I say, which is scheduled for March.

It should be noted that while we are still waiting for the approval in the U.S., Alvotech’s biosimilar of Humira is currently being marketed in 17 countries around the world, including Canada and numerous markets across Europe. Now to be clear, we have risk-adjusted its contribution to our 2023 guidance, similar to the way we risk adjust other significant launches in the U.S. market. That said, we believe biosimilar to Humira, like other biosimilar products will continue to be an important product in our portfolio beyond 2023. Now moving on to the next slide. ESG is everyone’s business at Teva. Let me be clear about that. The Board and the executive management team firmly believe that ESG is critical and inseparable to our long-term sustainability and success.

Photo by The Tonik on Unsplash

Over the last few years, the team has worked hard to lay strong ESG foundations and formalize our ESG strategy. We have set ambitious and meaningful targets that are tied to our business, enhance the reporting and disclosures and strengthen our governance. Our ESG strategy focused on advancing health and equity through our medicines, minimizing the impact of our operations and products on the planet and dedicating the company to quality, ethics and transparency. So now let’s talk about our 2027 long-term targets. First of all, I’d like to say, as I said in the beginning, I do think the management team has done a great job over the last few years to get the company back to a solid foundation. As we define our strategy going forward over the next few months, we will look for the opportunities to prioritize and to reallocate the best position to have long-term growth and success.

We’ll come back and share that with you with our new strategy around midyear. Please stay tuned, I am very much looking forward to it. But with regard to these long-term financial targets, these will remain in place. And with that, I will hand over to Eli to walk you through the financials.

Eli Kalif: Thank you, Richard, and good morning and good afternoon to everyone. I’ll begin my review of our 2022 financial results with my main focus being on the fourth quarter performance. This will be followed by an introduction to our 2023 non-GAAP outlook and some of the important assumptions behind it. Beginning on Slide 16. I would like to start with our Q4 GAAP performance. Revenues in the fourth quarter of 2022 were $3.9 billion, representing a decrease of 5% or an increase of 1% in local currency terms compared to the fourth quarter of 2021. This increase was mainly due to higher revenue from Anda, generic products in our Europe segment, AUSTEDO and AJOVY, partially offset by lower revenue from generics products and certain respiratory products in our North America segment as well as COPAXONE.

In Q4 2022, we recorded a GAAP operating loss of $855 million compared to operating income of $78 million in Q4 2021, with a net loss of $1.2 billion compared to $159 million in Q4 2021 and a GAAP loss per share of $1.10 compared to $0.14 in the same period a year ago. GAAP operating loss, net loss and loss per share were mainly due to goodwill impairment charges in the fourth quarter of 2022, partially offset by lower legal settlement and loss contingencies. The goodwill impairment charges were mainly related to exchange rate fluctuations in our International Markets and updated projections in our Teva’s API business. The strengthening of the U.S. dollar versus other currencies during the fourth quarter of 2022, including hedging effects, negatively impacted our revenue and GAAP operating income by $270 million and $132 million, respectively, compared to the fourth quarter of 2021.

Turning to Slide 17. You can see that the total non-GAAP adjustment in the fourth quarter of 2022 were $2 billion, and this is versus $1 billion in Q4 2021. The most notable non-GAAP adjustment was a goodwill impairment charges of $1.3 billion, which I just mentioned. Now moving to Slide 18 for a review of our non-GAAP performance. I’ve already discussed our fourth quarter revenues, which totaled approximately $3.9 billion. Annual revenues were $14.9 million, a decrease of 6% or 1% in local currency terms compared to 2021. For the full year, we saw the same trend regarding U.S. dollar appreciation, which including hedging effects negatively impacted revenues by $780 million compared to 2021. Now let’s move down to the P&L and look at the margin.

Our non-GAAP gross profit margin was 54.2% compared to 56.1% in Q4 2021. The decrease in non-GAAP gross profit margin was mainly due to the higher revenue with the lower profitability from the Anda in our North America segment, partially offset by higher revenue from AUSTEDO in our North America segment and a favorable mix of generic products in our Europe segment. Our non-GAAP operating margin in Q4 ’22 was 29.1% versus 30.4% in Q4 ’21. This decrease was mainly driven by a lower gross profit margin, I mentioned above, partially offset by lower operating expenses, which I will discuss in the next slide. 2022 full year non-GAAP operating margin was 27.7%, similar levels as in 2021. We ended the quarter with a non-GAAP earnings per share of $0.71 compared to $0.77 in Q4 2021, mainly due to the negative impact from foreign exchange fluctuations and the lower gross profit, partially offset by lower operating expenses as well as lower tax rate.

Now let’s take a look at our spend base on Slide 19. As you can see, our quarterly spend base declined by $97 million and increased by $38 million net of FX. For the full year 2022, our total spend base declined by $690 million or $174 million net of FX, annual decrease in our spend base was due to a lower cost of goods sold related to a lower annual revenue as well as ongoing active management of operating expenses. Looking ahead to 2023, we expect the overall spend base to remain at the level of $11 billion as we continue with our ongoing efforts to transform our global operational networks and ongoing active management of operating expenses. If you look at Slide 20, we continue our journey to improve margins by reaching 28% operating margin by end of 2023.

Despite of some of the macroeconomic headwinds related to the inflationary pressures, and while we continue to face these pressures, our ongoing efforts to reduce and optimize our cost of goods sold and operating expenses are expected to continue to help us partially mitigate these global macroeconomic headwinds. As Richard mentioned earlier, we continue to target 30% operating margin by end of 2027. Turning to free cash flow on Slide 21. Our free cash flow in the fourth quarter of 2022 was $1.1 billion. The increase in our free cash flow in the fourth quarter of 2022 compared to the fourth quarter of 2021 resulted mainly from the sale of accounts receivable under a U.S. securitization facility entered into November 2022, partially offset by changes in working capital turns.

For the full year 2022, free cash flow was $2.2 billion, an increase of 2% compared to 2021 and on the high end of our 2022 guidance. Free cash flow into 2022 was largely affected by the sale of accounts receivable under a new U.S. securitization facility entered into in November 2022, partially offset by an increase in inventory levels, lower proceeds from divestitures of business and other assets as well as higher payments of legal settlement in connection with opioids litigation. Turning to Slide 22. Our progress continued in terms of reducing down our debt. The net debt at the end of Q4 2022 was $18.4 billion, compared to $20.9 billion at the end of 2021. The decrease in our gross debt in 2022 was mainly due to the debt repayment, partially offset by exchange rate fluctuation.

The decrease in our net debt was mainly due to our free cash flow generation during the year. Our net debt-to-EBITDA ratio continued to decrease coming in 4x for Q4 2022. Looking at Slide 23. Debt reduction continues to be our primary focus. As you can see, we have made significant progress in the last six years as we had committed to reduce the level of the debt we had on our balance sheet. During these six years, we’ve paid back approximately $20 billion to our bondholders, including interest payments and we expect our net debt to further decline as we continue to make progress towards 2027 long-term targets. Turning to Slide 24, which represents our upcoming debt maturities. If you recall, we did a 5 billion SLB refinancing to address the ’22, ’23 and ’24 maturities back in November 2021.

We continue to assess market conditions for opportunities to refinance upcoming maturities. Given the interest rate environment, we expect this to result in a higher financial expenses in 2023, which I will discuss in a few moments. Looking at the cash conversion on Slide 25. We established a target of 80% by end of ’23. In 2022, we made further progress on this. As we keep focusing on our net working capital enhancements, our efforts to optimize our working capital turns in light of our revenue mix is key for our liquidity. We’re really happy to see that it came in at 80%, up from 77% in 2021. As Richard mentioned earlier, we’ll continue to manage our business and working capital with a focus on generating cash to earnings at this level. Now let’s turn our attention to our 2023 non-GAAP outlook, which we are introducing for the first time today.

Here in Slide 26, you will find the five main components of our outlook: revenues, operating income, adjusted EBITDA, earnings per share and free cash flow; as well as additional components, including expected revenue range for key products. Our company worked hard throughout 2022, navigating and addressing the ongoing impact of the geopolitical and macroeconomic headwinds. We expect this volatile environment in the markets to continue in 2023 based on leading global financial institutions’ forecast. With this in mind, we begin with 2023 total revenue, which we expect to be between $14.8 billion and $15.4 billion. This is very much in line with our revenue levels in 2022. We expect continued momentum of AUSTEDO with a total annual revenue to grow to approximately $1.2 billion or 24% in 2023.

Furthermore, AJOVY is expected to benefit from continued patient growth in the U.S., Europe and International Markets. Global sales for AJOVY are expected to be approximately $400 million in 2023. We have factored into our guidance the continued erosion of global COPAXONE revenues, which we expect to decline during 2023 to approximately $500 million. The majority of the decline is expected in the U.S. The expected ongoing growth of AUSTEDO and AJOVY is greater than the offset effect by the decline in COPAXONE sales. Our non-GAAP operating income is expected to be between $4 billion and $4.4 billion, and our non-GAAP adjusted EBITDA is expected to be between $4.5 billion and $4.9 billion. As discussed earlier, we continue to explore opportunities to refinance the upcoming debt maturities to align our debt maturity profile for the coming years with our core operational performance.

There could be a meaningful step up in our finance expenses if we were to pursue any refinancing due to the higher interest rate environment. We expect an increase of approximately $100 million reaching $1 billion in 2023. Looking at our tax rate in 2022. Our non-GAAP tax rate was 11.7%. As we look ahead to 2023, we expect our tax rate to be in the range of 14% to 17%. You might recall that our non-GAAP tax rate in 2022 was below our initial guidance as it was mainly affected by realization of the loss related to an investment in our — one of our U.S. subsidiaries. This expected increase in our finance expenses, tax rate expected to have significant impact on our EPS 2023 outlook in comparison to 2022. This brings us to the expected earnings per share in the range of $2.25 to $2.55, using a share count of approximately 1.1 billion shares.

2023 free cash flow is expected to be in the range of $1.7 billion to $2.1 billion. This guidance reflects our expected higher plant expenses, which I have outlined before as well as increased legal expenses related to the nationwide opioids settlement. As you know, we do not provide quarterly guidance, but I thought it would be helpful to share with you how we are thinking about the progression of both revenue and earnings throughout the year. Based on our expectations to date, we anticipate that similar to the progress in 2022, the first quarter will be the last of our four quarters of revenue and earnings with a gradual pickup in the second quarter. I hope this color will assist you with your modeling. This concludes my review of Teva’s results for the fourth quarter and fiscal year 2022.

And now, I will hand it back to Richard for a summary.

Richard Francis: Thanks, Eli. Before moving to the Q&A, I’d just like to summarize some key points. So I’m happy with the progress that has been made so far, and I want to congratulate the entire team, all my colleagues across the globe on a solid Q4 and full year 2022. AUSTEDO and AJOVY continue to drive growth. And as I mentioned before, there is still a large unmet need that will drive growth in the future for AUSTEDO in the U.S. and AJOVY continues to see good traction, particularly in Europe and International Markets. We have strong performance in Europe and International Markets and our European business is steadily growing with leadership positions in most markets. We have an exciting pipeline across innovative medicines, biosimilars and generics.

And these interesting and differentiated assets will set us up for future growth. We remain committed to our long-term financial goals around growth, improving margins and driving down debt. And finally, I look forward to sharing with you sometime in mid-year our updated strategy to ensure how we can position Teva for long-term success. With that, thank you for listening. I’ll now hand you back to the operator for Q&A.

Ran Meir: Nadia, we are ready for the Q&A, please.

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Q&A Session

Operator: Now we’ll start the Q&A session. The first question comes now from the line of Umer Raffat from Evercore ISI.

Umer Raffat : Umer here. A couple of things, if I may. First, on guidance, I think there’s a little bit of confusion on how much Humira is in the number. And I guess, said differently, what people are really focused on is, is it still a growth year off of ’22, if there was no Humira? That was first. Second, I wanted to touch up on the TL1A program a little bit. Could you tell us if the asthma trial was a complete zero? I know it was terminated. And also for the IBD Phase 2 you initiated in August last year, how is the recruiting tracking? And could you be in a position to take an interim analysis on 14-week data perhaps later in 2022, which could inform a more accelerated Phase 3 start, just given how competitive this could get?

Richard Francis: Umer, thanks for the question. So on the guidance, as I mentioned, we do have Humira that is risk adjusted. And I think your question was if we don’t have Humira, will we still be able to drive growth. And I think I’ll have Eli contribute, but what I would say is we have a number of opportunities to drive revenue in 2023. Humira is part of that. But obviously, we also talked about AUSTEDO, we’ve also got UZEDY, and we have other pipeline products that we haven’t highlighted in this call. It is an important part, but we’ve risk adjusted it to take into account the uncertainty. But maybe I’ll let Eli give some more color.

Eli Kalif : Yes, Umer, you see the range that we have there, and you can look on the midpoint versus the ’22 revenue, so you can see kind of a modest increase, and I will say that to echo Richard, what he mentioned, Humira is in the guidance and is risk adjusted. And we have a few others, elements that might potentially hedge that element if it will not come through.

Richard Francis : Thanks, Eli. And then going on to your question on the TL1A. I am sort of glad you put up because I think this highlights some of the interesting assets we do have in our pipeline, which we’ll, as I said, fully discuss in midyear when we do a review of our pipeline and let people see some of the things that I’m excited about. But to try and answer your question, we have initiated a clinical Phase 2 basket trial that started in August of 2022 in ulcerative colitis and Crohn’s disease. So that is underway. I can’t give much more information than that. But as I said, midyear, we’ll probably be able to go into a lot more detail on the clinical development plans for that asset and some of the others.

Operator: And the next question comes from the line of Gary Nachman from BMO.

Gary Nachman : Okay. Great. So Richard, you have a clear strategy of building out your biosimilar capabilities while a competitor decided to sell off its biosimilar

Operator: Gary, your line is open.

Gary Nachman : Yes, can you hear me?

Richard Francis : Hey, Gary. I don’t know what’s going on. Please stick with us.