Teva Pharmaceutical Industries Limited

Ladies and gentlemen, thank you for standing by and welcome to today's second quarter financial results. At this time, all participants are on 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, you'll need to press star 1 on your telephone. and wait for your name to be announced. In the interest of time, please limit yourself to two questions each. I must advise you that this conference is being recorded today, Wednesday, the 7th of August, 2019. And I would now like to hand the conference over to your first speaker today, Kevin Mannix, Senior Vice President, Head of Investor Relations. Please go ahead, sir.

Thank you, Kaz. And good morning, everyone. Thank you for joining us today to discuss our second quarter 2019 financial results. We hope you've had an opportunity to review our earnings press release. A copy of the 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 the 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, Cor Schultz, Teva's Chief Executive Officer, and Mike McClellan, Teva's Chief Financial Officer, will review the second quarter results. Question-answer session will follow the presentation. And joining CORE and Mike on the call today is Brendan O'Grady, Tevin's head of North America Commercial. And with that, I'll now turn the call over to CORE. CORE, if you would, please.

Thank you, Kevin. Good morning, everybody. Thanks for calling in. We have very nice quarterly results that we would like to present to you. We have seen revenues of $4.34 billion, which was in line with our expectations. We saw a gap diluted loss per share of 63 cents and a non-gap diluted EPS of 60 cents. And we saw a non-gap EBITDA of 1.14 billion. The free cash flow was 0.17 billion. And basically we are seeing what we also saw last quarter, a stable North American generic business. It's of course supported by a long list of new launches and the ongoing effect of the portfolio optimization that we initiated some one and a half years ago. We also see a continuous strong growth of Osteto, having sales of 96 million in the second quarter, up 30% over the first quarter, and continuing a very, very good trend. We are satisfied with the TRX share on Adobe, and we are very happy about the launches that we are undertaking right now in Europe. On the restructuring plan, we see a spend-based reduction completely in line with our plans. which basically means that we will achieve the two-year target of a $3 billion reduction compared to 2017. And we also see a small reduction this quarter of our net debt. And just for information, we did make a scheduled reduction in the gross debt by paying down $1.6 billion in July. And as you can see, we are reaffirming the 2019 financial guidance, and this goes, of course, all elements of the guidance. If we go to the historical development of revenue and profitability, I'd just like to remind you of the situation in late 17 when I joined where we saw generic competition coming in on compaction and we basically knew that revenues were gonna fall roughly four billion on a yearly basis. That's also what you see. You see the quarterly revenue coming down from some 5.3 to 4.3 billion. But you also see now the beginning of the trough, as I've been calling it, the trough of 19, which is basically where the revenue stabilizes. You also see that the gross margin that was coming down is also stabilizing now just about 50%. And the operating margin is stabilizing now around 23%, which is of course not our long-term target. Our long-term target, as I'll get back to, is 27%, so we still need to see improvements there. Talking about the trough, let's look at the operating profit. If we look at that in the same historical period, then you also see the very big effect of the revenues declining and us only being able to take down the cost quarter by quarter, but still the effect now is that we are stabilizing the operating profit at around roughly one billion per quarter. and you see that the net income is around 650 million right now. And that results, of course, in the earnings per share stabilizing right now around 60 cents. Now this is, as I've said before, this is what we expect to be the trough here. It's not that there'll be a dramatic turnaround in the coming years, but the trend lines will slowly change and we'll start to see a moderate increase in revenues and moderate increases in EPS going forward but just to remind everybody, this year will be the lowest year in terms of operating profit and also on terms of average earnings per share. So just to give you a little bit of color on the spent base reduction, this is a massive undertaking. This is the whole organization reducing by more than 10,000 people in a very, very short time span. This is divesting or closing some 20 factories around the world. So a major undertaking, and I'm happy to say that everything is being executed according to plan. And the simple math of the spend base in the first half is that we spent $6.6 billion, which basically means that the yearly equivalent is $13.2 billion, and our target, as you know, is $13.3 billion, which is $3 billion less than the actual spend we had in 2017. and this of course includes everything, so there's nothing excluded or any tricks there. So it's a really nice development and we can see that everybody's executing according to the plan. Now if we move on to the drivers of future growth, then we have two main drivers, Adobe and Osteto, and we are very happy about the strong launch we've had of Adobe. We still have about 20% TRX share in US, and we have just started the launches in Europe. We've seen a moderate decline in the NBRX share. We think it's related to a couple of factors, one being the fact that we've stopped the full pay down on all scripts, which means that some scripts where we are not covered actually do get declined at the pharmacy level and we also see that in some cases the patients do prefer an auto-injector and therefore of course we are are eagerly awaiting the approval and the launch of our own auto-injector for Adobe. If we turn to Osteto, then we continue to see very, very strong growth of Osteto, both in terms of prescriptions and in terms of sales. Of course, there's always some quarterly variances, but we think that the numbers we see here are very much a reflection of the true situation in the marketplace. It's well covered by basically all health plans and the gross-to-net situation is also very stable. So this is really exciting for us. If you think about the patient numbers here, then the script we have right now is equivalent to a little more than 8,000 patients on the drug. And it's a combination of Huntington's chorea and tardive dyskinesia. and as I've said before, our estimates are that there's around 500,000 people in the US suffering from tardive dyskinesia. So in that sense you can say we are only scratching the surface with this therapy for the moment and we have very, very good reception among specialists and among patients. The drag on our business, if we go to the next slide, is really the development in Copaxone. There's nothing new here. and you can see we have a pretty linear volume decline which has been more or less stable. Of course again here we have some quarterly variations and that's of course because we have a volume decline and we have increased rebating over time in order to maintain this volume. And that means that the quarters can go a bit up and down due to various rebates, rebate accruals and so on. But if you really look at the underlying trend then you could say that we are sort of halving or losing half of the value of the business on a yearly basis. And that's also what we are expecting for this year. So we are still expecting to have revenue of around 800 million in the US this year. And then of course, which we don't show here on this slide, but which you can see in our numbers, we have a relative stable situation in Europe with a moderate decline. We had a win with the European Patent Office so that we are more optimistic now about maintaining a solid compaction business in Europe. Now with all the operational elements performing well, everything being on track, it is of course I would say interesting and to some extent frustrating that we have seen a significant drop in the share price and the market capitalization of the company. And for me personally, being many years in the industry and having a very strong commitment to compliance, believing that compliance in all elements and at all levels of the business is a prerequisite for having a successful pharmaceutical business. It is maybe especially annoying to be involved in two legacy legal situations. As you all know, we are involved in a opioid litigation and we are involved in Investigations on allegations of price fixing. We do of course in these situations always assess what is in the best interest of the company, our shareholders, and we act upon that. We have of course done extensive documents research discovery together with external law firms and so far with all the evidence that we have in our hands, We deny any liability because we have not seen any evidence of us having any misconduct in the opioid situation or any misconduct in the pricing area. So we will continue to defend ourselves. And we do not see the opioid situation, which is a very tragic situation in the US. We do not see that as a situation that will be solved by litigation. We think there's a more systemic need for change. which is the way to improve that situation for patients going forward. On the pricing, we do collaborate of course with DOJ in their criminal investigation. We have been collaborating with them since 2016. And as I said, in our discovery process, we have not found any documentation that sort of substantiates the allegations. So we continue to defend ourselves denying these allegations. Now, if we look at the business going forward and our financial targets for the business going forward, then I'd just like to repeat these. We have talked about them before, but just so that everybody knows what our long-term plan is. And one key element is, as I said in the beginning, to improve the operating margin. Now, that happens by a lot of elements. One element is, of course, that you optimize Thank you for joining us today. to keep on reducing our debt. The simple math is that right now we're probably having net earnings of some 650 million per quarter. That's 2.6 billion a year. 80% of that, that's roughly just around 2 billion. So as you see, we're also guiding 1.6 to 2 billion on the cash flow. So we're really aiming at getting to that level where we, on a consistent basis, generate most of the result as cash There will always be quarterly fluctuations with a big balance sheet as ours. Of course, there are quarterly fluctuations, but on a yearly basis, it's very important that we meet this target of the 80% cash to earnings. And that is important because we need to reduce the debt. As you know, our net debt to EBITDA ratio right now is above 5, and we really want to get it below 3. And the only way to do that is generate cash and pay back the debt. So we will continue to use all our cash flows to really pay down debt, and as I've stated many times, we do not plan to raise equity. We plan to continue to use cash to reduce the outstanding debt, and we think that's the best way to create value for our long-term shareholders. Now, with these financial targets, I'd like to turn it over to Mike, who will go through the financials in detail.