Teva Pharmaceutical Industries Limited

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to today's Teva Pharmaceutical Industries Limited fourth quarter 2018 results conference call. At this time all participants are in a listen only mode. There will be a presentation followed by a question and answer session at which time if you wish to ask a question please press star 1 on your phone and wait for your name to be announced. I must remind you that this conference is being recorded today, Wednesday the 13th of February 2019. And I would now like to hand the conference over to your first speaker today, Mr. Kevin Mannix, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Operator. Thank you, everyone, for joining us today to discuss SEVIT's fourth quarter and full year 2018 financial results. We hope you've had an opportunity to review our earnings 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 www.tevafarm.com as well as through our Teva Investor Relations app. Please note that the discussion on today's call includes certain non-GAAP measures as defined by the SEC. Management uses both GAAP financial measures and the disclosed non-GAAP financial measures internally to evaluate and manage the company's operations to better understand its business. Further, management believes the inclusion of non-GAAP financial measures provides meaningful supplementary information and facilitates analysis by investors in evaluating the company's financial performance, results of operations, and trends. A reconciliation of GAAP to non-GAAP measures is available in our earnings release and in today's presentation. To begin today's call, Cora Schultz, Tevis Chief Executive Officer, will provide an overview of the 2018 performance, recent events, and priorities going forward. Our Chief Financial Officer, Mike McClellan, will follow by reviewing the fourth quarter financial results in more detail before providing an overview of Tevis 2019 financial outlook. Joining CORE and Mike on the call today is Brendan O'Grady, Tevis Head of North America Commercial, who will be available during the question and answer session that will follow the presentation. Please note that today's earnings call will run approximately one hour. And with that, I'll now turn the call over to CORE. CORE, if you would, please.

Welcome, everybody, and thanks for listening in. In 2018, we did meet or exceed all the components of our 2018 financial guidance. This meant that our revenues came in at $18.9 billion and we did see a stabilization of the quarterly sales between the third and the fourth quarter. Our non-GAAP EPS came out at $2.92 versus the original guidance which was significantly lower. The free cash flow also met the guidance and came in at $3.7 billion. As you all know, it's important that we keep generating cash in order to serve the debt that is still significant. We deployed a new and unified and simplified organizational structure as a way to reduce the spend base and still keep a very efficient commercial organization, manufacturing organization, and R&D organization. We did see a reduction of the spend base of 2.2 billion in 2018. and we also saw a reduction of the net debt by 14% down to $27.1 billion. In the United States, we launched Adobe. We had approval, we had launch, and we are seeing a very, very strong development in the marketplace that we are very satisfied with. We're also seeing continuous strong growth of Osteto, the drug that's being used in Huntington's disease and Tardive Dyskinesia. and it continues to gain momentum quarter by quarter. On Copaxone, we did see a decline as expected, but we are maintaining a high volume share in the US and European markets. And in the North American generic market, we did see revenue stabilizing, which is significant since we have had a significant decline in the overall North American generic market over the last five years. and we talked about this already after the third quarter that we were seeing a stabilization. I mentioned it in January at J.P. Morgan and I can confirm it again today that we are seeing a stabilization in the total revenues at around the level of roughly one billion US dollars per quarter for our North American generic revenues. If we take a look at the spend base, then you probably all remember that a bit more than a year ago when we announced the restructuring plan, we made it very simplistic. We said, what was the total spent we had in 2017? We're going to reduce that with $3 billion, and we will do it no matter what happens to exchange rates, comparators, all kinds of details to make it simple. Now, we're well on the way to do that. We had a gross reduction of $2.3 billion, and then we had $0.1 billion. Thank you very much. employees since we started the restructuring plan. We've also been reducing the manufacturing footprint and in 2018 we have been closing seven manufacturing facilities and 11 more will be closed or divested in 2019. If we take a look at the net debt, there's been a couple of significant movements. First of all, as you probably remember, last spring we did a new issuance. We used the proceeds from the new issuance and from our cash flow to pay down all term loans, meaning that we don't have any term loans, any bank loans right now. And we also moved some of the bonds into a longer maturity. The net effect of all of this was a reduction of the debt by 4.4%. If we now turn to, you could say, the future growth drivers, then adjovi is, of course, a key driver. As you all know, adjovi is a drug in a new class of drugs that treat chronic migraine with fantastic clinical efficacy, basically reducing the number of migraine days on average by 50%. in some cases up to 75 to 100% reduction of migraine days. So this is really a fantastic offering to patients. First time in 20 years that there's a real new therapy for migraine. We are in this class together with two competitors and we are very satisfied with the patient capture we see. We see that we roughly now capture around 30% of new to brand patients. and we hope of course to be able to maintain this level going forward. A lot of new prescribers are coming every month and we expect to grow the prescriber base on a steady basis over the coming years. So Adobe is very important for future growth and we are very optimistic about the outlook. Another strong driver is Osteto and as I said it's having a high market share in Huntington's disease, in movement disorders in Huntington's, but it's also growing strongly in tardive dyskinesia. We have one competitor that's also in tardive dyskinesia, and this is a new market where there's basically been really no therapy approved before Osteto and the competing product. So here we are sort of opening up a new market, and it's a big market, probably half a million people in the U.S. suffer from tardive dyskinesia. So we do expect the patient numbers to keep on growing over many years, and as a consequence of this, we do expect, of course, also that the revenues of Osteto will keep on growing. In 2018, we exceeded the target we had of $200 million, and we expect this, of course, to keep growing going forward. If we move to The drag we've had on our revenues for the last year. Then all of you know that it's Copaxone that's the key drag and that the drag is coming due to the expiry of the patent and the fact that we have generic competition both on the 20 since a couple of years and now also on the 40 milligram. If you look at the TRX count, You will see that on a sort of moving annual total, we're probably losing around 20% of the scripts. And if you look at the revenue, you can then deduct that we're probably losing on pricing something in the ballpark of 25%, altogether around 45% on an ongoing basis. We expect this to continue at a similar level during 2019. and as a consequence of that we will of course have a reduction in revenue on Copaxone. It's important to say that outside of the US we have a more stable situation. We do have a modest decline in Europe but it's a lot less than what we're seeing in the US and we're very happy to conclude that we still at the end of the year had something like 75% volume share. Of course, this will be somewhat reduced during 2019 and again in 2020. If we look at our focus areas, then a key focus is, of course, to secure the revenue generation. I just explained about Adobe and Osteto. And we have, of course, not removed the resources during the reorganization from those products. which is probably why they're doing so well in the marketplace. It's also important to mention that we are also going to launch ADOE in Europe and that we are also working on broadening the geographical base for STETO. And I think I'll just mention here, talking about Europe, that worth mentioning is where we've had a lot of headwinds in the U.S. the last couple of years on compaction and generics. Actually, Europe had its best year ever in terms of operating profit for Tether in 2018. We're seeing a stabilization of the generic business, but of course, as always, it only stabilizes as long as you execute new launches that offset the price loss you have on old products. But that's what we're seeing right now and what we are striving to maintain. We continue to have a drag on revenue from Copaxone and from the ProAir HFA franchise where we do see authorized generics being launched. On the expense side, we will have to keep on reducing our total spend. That's why we are having plans to meet the target of a three billion reduction versus 2017. We continue to consolidate our manufacturing sites. by closing and divesting some sites and moving production to other sites that continue to be in operation. We do have a lot of sites and we also have sometimes challenges with GMP inspections and making sure that we have perfect compliance and quality, which is of course what we strive for. Right now we have had an inspection last year in a site in Florida, Davie, where we recently got a warning letter which was expected and we're working to rectify it and we don't see it having any short-term negative effect on our business. We are targeting investments in our pipeline. We are targeting investments in biopharmaceuticals and biosimilars and we are constantly optimizing our portfolio of both generic and innovative development projects. On the debt side, We are committed to utilizing our cash to pay down debt and to continue to do so over the coming years. We have 1.7 billion that's scheduled for repayment in 2019, and we will have no liquidity issues with paying down that debt, as we will also not have in the coming years. So basically, we have a financial outlook that is completely in line with the overall plan that we created more than a year ago. This is the trough year, as I've been saying since the beginning of the plan. This is the year where we bottom out on revenue and operating profit. And in 2020, we expect to return to growth and continue to do so in the coming years based on the launches of the new products. We have set out three long-term financial targets. I'd like to explain just briefly why these are the most important targets. for the successful financial performance of our company. First of all, we need to generate solid earnings on a long-term basis, and the only way to do that is to have a strong operating income margin. Right now, we are below the 27%, but in the coming years, we will be improving it. It's a combination of improving, you could say, manufacturing costs for generics by optimizing our manufacturing base and getting the margin lift from launching new and innovative products that typically have a higher margin than generics. When we then generate the income, we need a high level of cash to earnings in order to have the cash to honor our debt. That's why the cash to earnings needs to be above 80, which we will ensure in the coming years. And of course, one of the ways you ensure that is that you don't go out and buy a lot of stuff A lot of things, a lot of companies will be focused on optimizing our own business rather than adding new businesses to it. And as a consequence of these two targets, we will be able to reduce our net debt and we do have a target here that we will have a net debt which will be below three times EBITDA and we expect to reach that within these three to five years. It goes without saying that we are committed to pay down the debt and we do not have any plans to raise equity. Now, having talked about the financial targets, I will now hand over to our CFO, Mike McClellan.