Teva Pharmaceutical Industries Limited (NYSE:TEVA) Q4 2023 Earnings Call Transcript

Teva Pharmaceutical Industries Limited (NYSE:TEVA) Q4 2023 Earnings Call Transcript January 31, 2024

Teva Pharmaceutical Industries Limited beats earnings expectations. Reported EPS is $1, expectations were $0.75. TEVA isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello and welcome to the fourth quarter and full year 2023 Teva Pharmaceutical Industries earnings conference call. My name is Alex and I’ll be coordinating the call today. If you’d like to ask a question at the end of the presentation, you can press star followed by one on your telephone keypad. If you’d like to remove your question, you may press star followed by two. I’ll now hand it over to your host, Ran Meir, Head of Investor Relations. Please go ahead.

Ran Meir: Thank you Alex. Thank you everyone for joining us today. We hope you’ve 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 this statement and our non-GAAP financial measures is available on our earnings 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 2023 full year results and business performance, recent events, and our focus and priorities going forward, then Dr. Eric Hughes, our Head of R&D and Chief Medical Officer will discuss progress on our innovative pipeline.

Our CFO, Eli Kalif will follow up by reviewing the fourth quarter financial results in more detail before providing an overview of Teva’s 2024 financial outlook. Please note that today’s call will run approximately one hour. With that, I will turn the call over to Richard. Richard?

Richard Francis: Thank you Ran, and welcome everybody. Thank you for joining the call today. 2023 was a transformational year for Teva. We launched our Pivot to Growth strategy to get Teva back to growth and I’m pleased to say it did exactly that. I would like to remind you that the Pivot to Growth strategy was based on four pillars: deliver on our growth engines, step up innovation, genetics powerhouse and focus our business, and we’re delivering on all four of these pillars, as I will go into in the presentation today. Obviously you saw today that we’ve decided to divest our TAPI business, and I’ll go into more detail later in the presentation. Now I’ll walk you through the numbers on this slide. I’m pleased to say, as I said, we got back to growth in Teva.

I would also like to highlight that the numbers include the Sanofi upfront payment as part of this collaboration and we are going to development and commercialization of TL1A. Teva’s growth was 7%, we got to sales revenue of $15.85 billion, or if you take out Sanofi, it would be 3%. Adjusted EBITDA was up 5%, non-GAAP EPS up 2%, and free cash flow up 6%. I’m also pleased to say we made progress on our net debt to EBITDA, and that now stands at 3.45. Now on the next slide, I want to go into a bit more detail as to what was driving this performance. I’m pleased to say that the innovative business performed well. Austedo in particular grew strongly at 28% and Ajovy continues to show impressive performance with an 18% growth. If we go to our generics business, we saw solid performance with Europe growing at 3% and international markets at 14%, and I’m pleased to see the stabilization of our North American generics business as well.

Now turning to a bit more detail on what’s driving behind these numbers, I’ll start with Austedo on the next slide. Austedo hit its $1.2 billion guidance that we gave, in the U.S. up 27%, and strong TRx was contributing to that. I’m pleased with this performance as it shows and clearly highlights the benefits of the additional resources we put behind the brand and the extra capabilities that we’ve built. This gives you more confidence that as we move onto the next slide, that I can reaffirm the guidance for 2027 to hit $2.5 billion. A step in that direction is the guidance we gave you for 2024, which is a $1.5 billion revenue number. It’s worth pointing out and remembering there are significant amount of patients and people suffering from tardive dyskinesia that go undiagnosed, and we launched a direct-to-consumer campaign early in January to help raise awareness and give these people an opportunity to seek health and therapy.

Now moving onto the newest member of our family, Uzedy, we have good growth planned for Uzedy in 2024 and we’re giving guidance of $80 million, and this is possible because of the work we did in 2023, where we drove awareness and access. We’ve made good progress across the commercial payors as well as Medicare and Medicaid and ensuring we’re getting onto formularies in the many hospitals. Awareness is good as [indiscernible] feedback about the product profile and the fact that this fits the patient profile [indiscernible]. I’d also highlight the size of this market is a $4 billion market growing at 6%, so once again I think Uzedy will contribute to growth this year but in the coming years as well. Now to move onto the last member of our innovative portfolio, that’s Ajovy.

We’re very pleased with the continued momentum with 18% growth, and you see this growth across all of our regions, and in many geographies we are gaining market share, which shows the true competitiveness of Teva. It is based on this good performance that we’re giving guidance for 2024 of half a billion dollars for Ajovy. Now another aspect of building on our growth engine in our strategy is our biosimilar portfolio, which I’d like to move onto now. I’d just like to highlight the fact that we will be launching five biosimilars in the next four years which have an opportunity to contribute to our top and bottom line growth. When it comes to biosimilar Humira, we are awaiting an FDA inspection result with our partner site–with our partner, Alvotech at their site based in Ireland, and based on a successful outcome here, we aim to launch biosimilar Humira this year.

Now moving onto the second pillar of our Pivot to Growth strategy and our pipeline. My colleague, Eric will walk you through this in greater detail, but once again with this strategy and the focus [indiscernible], we’ve really moved the needle. Olanzapine has completed recruitment of its Phase III study and we expect the results in H2 of this year. ICS/SABA entered the clinic in Q4 of last year, and as you can see, this is an attractive market where we think we have a differentiated product, and there’s only one other competitor. We have good momentum around TL1A and we’re very excited about the partnership we have with Sanofi to really maximize this asset going forward. Now moving onto the third pillar of our strategy, our generics and making this a generics powerhouse.

As I’ve said in the past, this is based on three specific areas we’ll focus on: making sure we have the right portfolio in the market that’s been executed by commercial teams, focusing our pipeline so we can bring high value products that grow the top and bottom line to the market on time more often, and also optimizing our network and actually the efficiency of our network. I’ll talk you through the pipeline [indiscernible] but I wanted to just highlight the work we’ve done on our network. We have closed three sites in 2023, so we continue to rationalize and optimize that, and also we have kicked off an operational excellence plan for 2024, where our aim is to reduce COGS and to allow us to drive gross margin expansion. Now let me talk a bit about the pipeline, because we have made some progress here.

As you can see from this, when it comes to complex generics, I think we’re in a leading position in the U.S. Across multiple technologies and platforms, we have and we can launch complex generic products. We launched 10 between 2022 and 2023, but I’m excited by the 13 that we’ll be launching between ’24 and ’25, and as you can see here highlighted on this slide with the green circles, there’s a number that we’ve already launched. This has an opportunity for us to drive growth and offset some of the price erosion that obviously is there in the U.S. market. Now to move onto the final pillar, focusing on capital. Today, we announced the intention to divest Teva API. This is in line with our Pivot strategy [indiscernible] and this will allow TAPI to realize its full potential in the world API market, which is valued at $85 billion, and subsequently allow Teva to focus its capital on driving the Pivot to Growth strategy, primarily focused on our innovative and generics portfolio.

Moving onto the next slide, we give you a guide to the milestones that we have in 2024. It’s pretty much more of the same – keep executing on the strategy driving our innovative portfolio, as you see that $1.5 billion for Austedo, keep driving the pipeline through the clinic to bring it to market as soon as possible, and work on driving the efficiency in our launches and our manufacturing base in our generics business, and obviously the work we’ll be doing this year to divest TAPI at the end of this year, start of next. Moving onto my final slide, I’d like to announce our Healthy Future plan, which is a continuation of our ESG journey at Teva. Teva is focused on three main areas, and these are divided into Healthy People, and that’s making sure we create access to medicines across the planet, making sure people have the medicines they need at the right time, and also making sure we have an inclusive and diverse culture at Teva.

Secondly, Healthy Planet – this is really about Teva stepping up and helping minimize the impact of global warming with the many initiatives we’ve put in place. Finally, Healthy Business [indiscernible] everything we do at Teva is compliant and of the highest ethical standard. With that, I’ll hand over this portion of the presentation to my colleague, Eric Hughes.

Eric Hughes: Thank you Richard. Moving onto the slide for Ajovy, we know physicians choose Ajovy because of its safety and efficacy, as well as its convenient auto-injector, monthly dosing [indiscernible]. But today, I’m excited to show you recent data that we’ve produced from two real world evidence studies, PEARL and FINESSE, showing the durability of Ajovy. Migraine is a chronic disease and having durability of response is very important, and what we can see in this study is that the days that you’re free of migraines had been maintained for two years after starting Ajovy – this is very important, and this translates not only to just a simple reduction in monthly migraines but it really is eight full days for some patients to achieve a day without migraines, so each month a patient gets back about a week of their life without migraines, so very important.

Moving onto our slide for Uzedy, as Richard mentioned, we are very excited to get the approval last year and launch Uzedy, and we’re also happy to show more durability of Uzedy as well. Here, following up on subjects from our pivotal study, we show that the quality of life in patients not only are maintained up to 56 weeks but also slightly improved, so this is very important as well for patients with schizophrenia, because we had patients with long durations of disease and short durations of disease, but we can show here that with a long acting injectable, we can actually not only maintain but improve their quality of life. This is important for a long acting injectable because we believe this is important to maintain the exposure in the patient’s blood to the risperidone, so we think this is very important and we’re happy to see this durability of response.

Moving on to Austedo, one of the things that’s important for Austedo, and as Richard mentioned, there is very much room to grow and access patients who have tardive dyskinesia, and one of the things we need to do is make sure it’s as easy and convenient to use Austedo as possible. We know in real world evidence that only about 50% of our patients without a titration pack can achieve the dose range that is necessary to get good [indiscernible], so we ran a study of [indiscernible] and we were pleased to see that 78% of the subjects finished the titration pack and were 97% adherent. This is important because getting to the titration pack easily and simply for patients gets those patients up into the right dose range, that makes sure that we get our patients the right efficacy, and we hope this translates into durability and adherence for long term treatment, so very important and we’re glad to see this works so well for our patients.

Finally, I just want to review our milestones in the R&D organization. We are doing well in our enrollment for our Phase II study of TL1A, and it’s accelerating. We’re looking forward to that Phase II interim analysis in the second half of 2024. We are fully enrolled in our olanzapine LAI Phase III globally and will be having our full clinical package of efficacy and safety in the second half of 2024. Our anti-IL15 program is finishing up its Phase I SAD/MAD study in healthy volunteers, and we’ll present that data in the second half of this year, and we’ll also finish enrollment in our proof of concept study in celiac patients by the end of this year. We’re excited to look forward to the first-in-human dosing of our anti-PD1 IL2 program the first half of this year, and finally we’re actively enrolling our Phase III study in ICS/SABA and looking forward to those results in the second half of 2026.

With that, I’ll pass it off to Eli Kalif.

Eli Kalif: Thank you Eric, and good morning and good afternoon to everyone. I’ll begin a review of our 2023 financial results with a main focus being on fourth quarter performance. This will be followed by our non-GAAP outlook for 2024 and some of the important assumptions behind it. Beginning on Slide 24, I would like to remind everyone that in October 2023, Teva entered into an exclusive collaboration with Sanofi to develop and commercialize Teva’s anti-TL1A asset. As per the terms of the collaboration agreement, Teva received an upfront payment of $500 million in the fourth quarter of 2023 which was recognized as license arrangement revenue. This upfront payment had a positive contribution of $500 million to both our revenue and free cash flow.

After adjusting for certain transaction-related costs, this payment had a positive contribution of approximately $430 million. Now throughout the presentation, I will be discussing our results for the quarter and for the full year 2023 as reported. Also, I want to draw your attention to the disclosure we included in the press release this morning regarding a revision to certain GAAP financial metrics in 2022 and 2023 to correct errors related to contingent consideration liability. This revision did not impact our non-GAAP results for either year. Now starting with our Q4 GAAP performance, revenue in the fourth quarter of 2023 was $4.5 billion, an increase of 15% in U.S. dollars and 14% in local currency terms compared to the fourth quarter of 2022.

The increase was mainly driven by the upfront payment that I just mentioned, the sale of certain product rights in Europe segment, continued strong growth in Austedo, and higher revenue from generics products in international markets. This was partially offset by lower revenue from generics products and our distribution business in North America and from Copaxone. In Q4 2023, we reported GAAP operating income of $765 million compared to an operating loss of $940 million in the same quarter last year. The increase in operating income was mainly due to goodwill impairment charges in the fourth quarter of 2022 and higher gross profit for this year, partially offset by higher impairment, restructuring and other items in the fourth quarter of 2023.

We had net income of $461 million and a GAAP earnings per share of $0.41, which was higher than last year mainly driven by higher operating income, as I just explained. Turning to Slide 25, you can see the non-GAAP adjustments in the fourth quarter of 2023. A notable adjustment this quarter included a contingent consideration expense of $408 million mainly related to the change in the estimated future royalty payments in connection with generics revenue. Now moving to Slide 26 for a review of our non-GAAP performance, as I mentioned earlier, our fourth quarter revenues were approximately $4.5 billion, our annual revenue in 2023 were $15.8 billion, an increase of 6% in U.S. dollars or 7% in local currency terms compared to 2022. Excluding the contribution from the upfront payment regarding our anti-TL1A collaboration, our revenue growth in 2023 was 3%.

Now let’s move down the P&L, starting with the gross profit margin. Our non-GAAP gross profit margin was 68.2% compared to 54.2% in Q4 2022. The increase in our gross margin was mainly due to the upfront payment, as I just mentioned, and a favorable portfolio mix as well as the sale of certain product rights in Europe as part of our portfolio rationalization. This was partially offset by higher costs related to inflationary and other macroeconomic pressures. Excluding the impact of the upfront payment, our non-GAAP gross profit margin would have been consistent with levels of Q3. This was slightly below our expectation mainly due to timing effects related to a certain element of our costs associated with inventory consumption, our portfolio mix, and better than expected performance of our low margin distribution business, as well as an unfavorable impact from hedging activities.

Overall, we saw sustainable improvement in our gross profit margin since the first quarter of 2023 with stabilization of the margins in the second half of 2023. Going forward in 2024, we expect our gross margin to continue to improve driven by continuous improvement in our portfolio mix, with strong growth in our innovative portfolio as well as continuation of the optimization program we have initiated. We expect that our non-GAAP gross profit margin to be between 53% to 54% in 2024 full year. Similar to 2023, we expect gross margin to gradually improve throughout this year. Moving to the non-GAAP operating margin in Q4 2023, which was 34.7% compared to 29.1% in Q4 2022, this decrease was mainly driven by higher non-GAAP gross profit margin, as I just explained, as well as lower operating expenses as a percentage of revenue.

On an absolute basis, our higher operating expenses this quarter were related to higher investment in R&D and sales and marketing in line with our Pivot to Growth strategy, partially offset by efficiencies in [indiscernible]. We ended the quarter with earnings per share of $1 compared to $0.71 in Q4 2022, mainly driven by higher operating income. Turning to free cash flow on Slide 27, our free cash flow in the fourth quarter of 2023 was $1.5 billion compared to $1.1 billion in Q4 2022. In addition to the [indiscernible] driven by [indiscernible] items partially offset by sale of accounts receivable under our U.S. secured facility in the fourth quarter of 2022. During the fourth quarter of 2023, we also initiated the first payment of the nationwide settlement in connection with the opioid litigation that increased our total payment of legal settlements by approximately $244 million compared to Q4 2022.

Overall, the full year of 2023 free cash flow was $2.4 billion compared to $2.2 billion in 2022. Turning to Slide 28, we continue to make strong progress in terms of reducing our debt. Our net debt at the end of Q4 2023 was $16.6 billion compared to $18.4 billion at the end of 2022. Our gross debt was $19.8 billion compared to $21.1 billion at the end of 2022. The decrease in our gross debt was mainly due to $1.6 billion senior notes repaid at maturity, partially offset by $202 million of exchange rate fluctuations. During Q4 2023, we repaid the full $500 million under our $1.8 billion revolving credit facility, and as of December 31 and as of today, there is no amount outstanding under the revolver. As a result, our net debt to EBITDA also improved, coming in at 3.45 times for Q4 2023.

As part of our capital allocation strategy, we expect our net debt reduction to continue as we continue to progress towards our long term target of two times net debt to EBITDA by end of 2027. Now let’s turn our attention to 2024 non-GAAP outlook. As Richard mentioned, 2023 was a pivotal year for Teva, and through the year our colleagues around the world worked very hard to execute on our Pivot to Growth strategy. We made some deliberate choices and began investing in our growth drivers and our promising pipeline, while also navigating and addressing the impacts of the macroeconomic and geopolitical headwinds. As we move to 2024, we remain focused to continue to execute on our long term strategy. With this in mind, we begin with 2024 total revenue which we expect to be between $15.7 billion and $16.3 billion.

Compared to 2023, this represents a growth of 2% to 6% excluding the $500 million upfront payment received related to our TL1 asset. As Richard mentioned earlier, our revenue growth will be driven by continued strong momentum in our innovative portfolio and stabilized generics business. Coming to our non-GAAP operating profit, we expect our gross margin to gradually improve throughout 2024 as we continue to execute our Pivot to Growth strategy. We’ll also continue to make deliberate investments in our innovative portfolio and progress our key pipeline assets to drive both short and long term growth for the company. With that in mind, we expect our operating expenses to be approximately 27% to 27.5% for the full year, including R&D expenses between 6% to 6.5% of revenue.

As a result, our non-GAAP operating income is expected to be between $4 billion and $4.5 billion, and our non-GAAP adjusted EBITDA is expected to be between $4.5 billion to $5 billion, both growing over 2023 levels excluding the effects of the upfront payment. We expect finance expenses to be approximately $1 billion in 2024, in line with 2023 levels. Looking at our tax rate, we expect our non-GAAP tax rate to be [indiscernible] slightly higher than the 2023 tax rate of 30%, which benefited partially due to intellectual property-related integration plans and carry-forward losses. This brings us to expected non-GAAP earnings per share in the range of $2.20 to $2.50. We expect our 2024 free cash flow to be in the range to $1.7 billion to $2 billion.

[Indiscernible] we do not provide quarterly guidance, but I thought it would be helpful to share how we are thinking about the progression throughout the year. Overall based on our expectations today, we expect revenue and earnings to progress gradually during the year with revenue in the second half of 2024 to be slightly higher than the first half. Our non-GAAP margins are also expected to [indiscernible] throughout the year in line with the revenue trajectory, as well as improvements from our optimization program we have initiated. With that, this concludes my review of Teva’s results for the fourth quarter and fiscal year of 2023, and now I will hand it back to Richard for a summary.

Richard Francis: Thank you Eli. I would like to just reiterate the financial targets to 2027. Revenue growth will be mid single digit, operating margin of 30%, net debt and adjusted EBITDA two times, and cash to earnings ratio of 80%, so reconfirming these as we move forward, as we gain confidence on the Pivot to Growth strategy. Moving onto the final slide, just to reiterate what the Pivot to Growth strategy will do to provide growth. The main is to accelerate growth to return to growth in ’23 to ’24, to accelerate it in ’25 to ’27, and we believe this will be built on the momentum that Eric has in the pipeline and those products coming to the market, and also you’ll start to see the biosimilars gain traction as well, based on my earlier comments.

To me, it’s clear to see that we’re gaining momentum with Pivot to Growth, and now it’s about executing as we did in ’23, in ’24. With that, I’ll hand it over to the Operator to take some questions. Thank you for your attention.

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Q&A Session

Operator: Thank you. [Operator instructions] Our first question for today comes from Glen Santangelo from Jefferies. Your line is now open, please go ahead.

Glen Santangelo: Yes, thanks for taking my questions. Eli, I just wanted to follow up on the guidance, because there’s a couple things that are sticking out to me. It looks like you’re assuming at the midpoint that revenues are going to be up a little bit less than 1%, but you’re assuming EBITDA at the midpoint is down almost 2%. I think if I heard Richard correctly, you’re assuming gross margins are going to be up, perhaps due to product mix, and so it seems like you’re forecasting a much bigger ramp in operating expenses. I wonder if you could just sort of flesh that out a little bit, if it’s coming more in the sales and marketing side or greater R&D spend, and then I maybe have just a quick follow-up. Thanks.

Richard Francis: I think the question is directed to you.

Eli Kalif: Yes, thanks Glen for the question. First of all, we are looking on the midpoint, which is $16 billion, compared to the numbers we end up ’23 excluding the upfront payment, which means we are looking on 4.3% growth on the midpoint–on the top line. As far as related to some dynamics to the operating margin, we see ourselves keep growing the opex. I mentioned that we are looking on the range between 27% to 27.5%, and that means that R&D between 66.5, stabilization around 6.2% in G&A, and sales and marketing around 14.5%, and that means that part of our growth will enable us to keep investing in the business. For your question, when we line up our guidance, we look on our 2023 excluding the upfront payment.

Glen Santangelo: Hm, okay. Maybe if I could just sort of follow up, because–I just want to make sure I understand the revenue guidance a little bit. You gave us a lot of the pieces, which is helpful. I just want to be clear about what you’re saying in terms of the generics business in 2024. I mean, I can see–you know, you obviously cut the Copaxone assumption a fair amount, but I’m trying to figure out where the rest of the offset is, and I know you have a bunch of big launches on the generics side – you know, Korlym, teriparatide/Forteo. Could you just sort of flesh out a little bit what you’re expecting in that generics business, so just so we’re clear on what you’re saying?

Richard Francis: Hi Glen, it’s Richard here. Thanks for the question. Yes, so once again, just to sort of reiterate, and I think your question is directed at the North American generics business, but just to highlight the fact that our European and international market business, we expect it to continue growing well, in line with what we did in ’23. But to come back to your question about ’24, yes, we do have a number of launches that are coming through. We’re pleased that we’ve made progress on those. I would like to highlight that some of those are coming in with competition as well, which you need to take into account when forecasting, and obviously when we launch products, part of the aim there is to offset some of the price degradation that we see every year in the U.S., and so net-net, we see a stabilization of our North American business going forward.

As we continue to build and improve on our launches and our supply chain, that’s why we believe in the medium to long term, we can drive the business back to growth.

Glen Santangelo: Okay, thank you.

Richard Francis : Thanks for the question.

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

Ash Verma: Yes, thanks for taking my questions. Just to clarify on 2024 guidance, you’re including the partnership accounting here from Sanofi upfront. For 2024, is there any specific amount that you’re expecting to receive? I believe the next set of milestones is on Phase III initiation, which I believe it won’t happen this year. That’s the first one. Then second, just curious on the North American generics, what you print seems like a step down from where the franchise has been run rating at. Is that because there wasn’t any kind of a benefit from generic revlimid, or are we starting to see any change to the price stabilization narrative? Thanks.

Richard Francis: Hi Ash, thanks for those questions. I’ll tackle them. With regard to Sanofi, correct – we will not receive any payments in ’24 and ’25. Based on, as Eric highlighted, a successful interim analysis this year of our Phase II data of TL1A, we’ll move into Phase III in ’25 and that will trigger some milestones from Sanofi, but in ’24, there won’t be anything. To go to your North American generics question, a couple of things, and I’ll try and answer all of your question there. Part of, I think, what you saw was the fact that we don’t really have any significant revenue of revlimid in quarter four, so that’s worth noting. Then if you think about the business, we do have–we have included in there Truxima, which is our biosimilar business, which as you know has performed well and generated good revenue over a number of years, but obviously is declining steadily now.

If you factor those factors in, then I think my comment about we see a stabilization of the North American generics business going forward, I think stands true. Based on the number of launches we have coming out, I think we have the ability to offset a significant amount of the price erosion that we see yearly in the U.S., and so I think the way to think about it is stabilization, but on that quarterly change, it’s really primarily driven by a bit of the portfolio and a bit in relation to our biosimilar single product, Truxima. Hopefully that helps, Ash.