Teva Pharmaceutical Industries Limited

Thank you to all of you for joining us today. 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, Tevis Chief Executive Officer, will provide an overview of the 2019 performance, recent events, and priorities going forward. Our Chief Financial Officer, Eli Kalif, will follow up by reviewing the fourth quarter financial results in more detail before providing an overview of Tevis 2020 financial outlook. Joining Cor and Eli 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 call will run approximately one hour. And with that, I will now turn the call over to Cor Schultz. Cor, if you would please.

Thanks Kevin. Good morning everybody and thanks for calling in. It's a great pleasure to talk to you about our strong results for 2019. On the financial side, it's worth noticing that we met all the components of our 2019 guidance. Revenues came in at $16.9 billion. And here you should, of course, note that we've changed the way we report the distribution sales that we have in Israel. We as a lead company in Israel from a gross basis to a net basis. And we've done a revision to restate the numbers so that you can see the numbers for 17, 18, 19. This has no impact on any earnings numbers or cash flow numbers. It's simply whether you record the Revenue from distribution in Israel is gross on air. So we met that target for revenues. We met the target for the EBITDA with 4.7 billion and the non-GAAP EPS of $2.40. We're also very pleased that the cash flow came in above $2 billion. Now the key drivers for this were some good business performance. Osteto, as I'm sure you noticed, kept on its rapid growth and has, of course, big continued potential. We launched the Jovi in the EU and got reimbursement in the first countries. We're very excited about that. We're also very excited about the fact that we just got the auto-injector approval in the U.S. We have it in Europe already, so that looks very good also for the future. And then we're very pleased with the way we managed to, I would say, manage the decline of Cotaxone in both U.S. and actually also in Europe. So we saw stable compaction sales at the end of 2019, and we expect to see a modest decline in 2020. In generics, we had many, many launches around the world. Alone in the US, we had nearly 50 launches, including our first big biosimilar launch in the US, Truxima. We're also very happy about the results so far of that launch. We also published our first ever Global Economic Impact Report, Just a couple of highlights. Our products actually help the US healthcare system save 41.9 billion US dollars on a yearly basis. And out of that number, 6 billion US dollars was patient savings where they save on out of public cost. So we think we contribute very well in the US also with direct and indirect 57,000 jobs. Now, if we move to the next slide, then you probably all remember that in 2017, so a bit more than two years ago, two and a half years ago, we had a pretty dramatic situation. We had a debt of $34 billion, and we had Capaxon going off patent worldwide. So we were under a lot of pressure looking at a revenue loss over a couple of years of close to $5 billion. The way to handle that was a restructuring plan that was meant to reduce our spend base by $3 billion Thereby securing cash flow to handle the debt and securing our future earnings. I'm happy to report that we have executed the restructuring plan exactly as we laid it out two and a half years ago. It has not been, you could say, easy on the organization. We've had to close down or divest some 23 manufacturing sites. Some of those are still in process of the final closures. And we've had to close more than 40 offices and laboratories around the world and say goodbye to more than 13,000 employees. Now we managed to do this without hurting our operational capacity in any way. We are still fully operational on all the many, many products we do, 30,000 different products, many, many billions of SKUs per year. And to give you a feel for how complex the restructuring has been, the next slide shows you a map of the world. and you can see that we've been closing down a lot of sites all over in North America, South America, Europe, Middle East, Southeast Asia, Japan. So this has really truly been a great effort and I'd like to thank everybody in the organization for the fantastic job they've done keeping everything going in a nice way, high quality while reducing the spend rates. Now one of the reasons why we had to do this was to handle our debt situation and on the next slide, You can see that we started out when I started in the company back in the end of 2017 with around $34 billion of debt. And I'm happy to report now that we just come just below 25, 24.9. So it's definitely going in the right direction and you should of course expect that this trend will continue in the coming years. Now talking about the debt, we've also had to do a refinancing and we've done that very successfully. in the fourth quarter, and as a consequence of the refinancing, we now have liquidity and projected cash flow to cover the bond repayments due in the next three years. At the same time, we have a situation where our EBITDA is stabilizing, as we said it would. We've before said that the trough year for earnings would be 2019, so that's the bottom of the trough, so to speak, and we've seen that stabilization happening. So when you stabilize your EBITDA and you keep on reducing your debt, then slowly your debt ratio, net debt to EBITDA will be declining. And that's what we're seeing. It peaked in Q2 of 19 at 5.72 and it's been declining and it's now come down to 5.32 at the end of 2019. And this ratio will keep on improving, meaning that it will keep declining in the coming years. Talking about the debt, we have a slide here showing you the debt structure, and what you can see here is that the next three years, we have debt stacks of around two billion, which basically means, as I said before, that we can handle these with the liquidity we have on hand right now, and with the cash flow that we expect to be generating. The debt stack in 23 will call for some refinancing, so sometime in 22, you should expect that we'll do refinancing similar to the one that we just executed to handle that situation. Now, you could say the restructuring is now over and done with, and so what's next? So the next phase will be dominated by two elements. One is a continued improvement of our manufacturing cost, the gross margin, improving the gross margin, and the other is securing growth in the top line, growth in revenues. and if we move to the next slide then I'd like to address the Gross Margin Improvement Program that we just initiated and that will be running over the coming years. Now the program has five key levers and these are not new for manufacturing optimization but they are all levers where we have not taken the full advantage of these levers in the past and that's what we're going to do in the coming years. So due to the fact that we have a very widespread manufacturing network and very many products, we can still improve on our procurement cost excellence. And this is what we're going to be doing by consolidating things, getting a better overview of the situation, and making sure that we get all the procurement benefits around the world. Now we can also still improve our network. We had around 80 manufacturing sites when I started. and you will see this happening in the future, year by year. But there's another way to optimize than just consolidate manufacturing sites, and that is to optimize each and every site on their own, basically making sure that the manufacturing volumes you have match your capabilities, that you utilize your manpower, your equipment to the full. and in the restructuring we really focused a lot on sort of optimizing the network footprint, closing sites and moving things so that we can consolidate our volumes. Now in the coming years we will also be very focused on optimizing each and every manufacturing site for better efficiency, better ratio between output and cost and we are very convinced that this is something we can do successfully. Then given the fact that we still have around 60 manufacturing sites worldwide and we sell billions of products every year, 30,000 different products, then of course the whole supply chain optimization is very important. And we are working hard to reach a situation where we have global systems that cover our entire supply chain and that will be the basis for continuous optimization of the supply chain. And then last but not least, We need to have an agile operating model and organization, and I'm happy to inform you that the new head of our manufacturing organization, Eric Tapie, has yesterday reorganized his organization to have a more technology-focused setup where we ensure that all the best practices can be implemented in a fast and consistent way across the world. Some of you who are thinking more about the investment in Teva might say, okay, this is very nice, all textbook stuff about optimizing manufacturing, but what does it really mean to the P&L? And if you look at the next slide, you can see here the operating margin expansion that we're projecting, and you will notice that the target is 28% in non-GAAP operating margin at the end of 2023. Now there's really nothing new to this because this is our long-term financial target that we already communicated in 2018. So what we're doing now is part of the plan from the beginning. And the reason why it's not the 27% you heard in 2018 is simply that the change of the reporting from gross to net on the Israeli distribution lifts up mathematically this percentage by 0.9 percentage point. So that's why we've revised the target from 27% to 28%. So this is our commitment that we will aim at reaching 28% operating margin at the end of 2023. So that's on the cost side, you could say. Then on the revenue side, I just explained that we need some strong growth and we need some strong growth drivers. So here we have two key products that are very important. One is Osteto and the other one is Adobe. And I'll talk a little bit about both of those. If we move to Osteto first, then before I get into the sort of new things that we're looking at in our clinical development, I'd just like to say that we have performance of Osteto in 2019. We keep on accumulating the patient basis and that of course helps a lot of patients. It is also a good contribution to our revenue growth. Right now we have around 9,000 patients on a daily basis using Osteto and if you think about the growth potential, you will know that in charted dyskinesia there is only Osteto and one other competing product that has been approved within the last couple of years as the first product ever. for this indication. So for the first time ever there's a way to treat tardive dyskinesia. It's our estimate that there's around 500,000 patients suffering from tardive dyskinesia in the United States alone. And that of course puts into perspective the fact that we have so far gotten to 9,000 patients on Osteto and it just indicates that we believe that this product can keep growing for many years to come. On top of the current indication, in Huntington's disease and entire dyskinesia. We're also working on two new indications. One is very imminent. That's Tourette's syndrome, where we have conducted a three-trial, and the results will be reported in the coming months. So that's very close to being reported. Of course, we hope there will be a positive outcome. We don't know. It's too early to say, but it would be really good for patients if we saw a positive outcome of this trials. We are also doing a phase three trial treating dyskinesia in cerebral palsy. There is no drug really approved for that, so it will be a first if it's possible to show a good clinical effect. These data we will see sometime in 2021, but both these new indications are very exciting and hopefully they succeed to the benefit of patients, but of course also to the benefit of the growth of our state of sales. If we move to Adobe, then we have a lot of regulatory approval activities ongoing. We are in the middle of launching in Europe. We'll be launching our auto-injector soon in Europe. It has been approved. And talking about the auto-injector, we're also very pleased that we've had the auto-injector approved in the United States and we will also in the coming months be launching the auto-injector in the United States. We hope in the migraine indication that we will get back to a capture rate of around 25% based on the fact that we now have a competitive device and we have a very, very competitive clinical profile. We of course also working on bringing Adobe to the rest of the world for instance in Japan where we just had really good clinical results together with our partner Utsuka, the partner for Japan, and then in many other markets. So you will see a lot of launches of Adobe in 2020. In terms of clinical development, if we move to that, then of course we're also working on expanding the clinical indications for Adobe and we're doing some phase two trials where we are expecting results in 2021. One is in post-traumatic headache, a very serious and quite widespread problem for many patients in the US, and of course we hope to be able to show effect there. And the other one in fibromyalgia, which is also a disease that has a big patient population in the US, and a disease where there is really no real good treatment. Now talking about the different Life Cycle Management we're doing on Osteo and Adobe leads me to talk about our total specialty pipeline. And we've not disclosed this before, but we are very happy about our pipeline. As you know, we have a strategy where we want to be leaders in generics and we want to aim for a leading position in biopharmaceuticals. And if you look at the pipeline, you will see that we have a high number of biosimilars in development. and we had one imminent launch in biosimilars. In novel biologics, we have a lot of different things going on. The most exciting short term is the Sinomat that we're developing together with Regeneron and where we hope to see data this year from the phase three trials. And we're very excited about that and it holds a big potential if it succeeds in clinical development. On the small molecule side, we're really not doing a lot of new molecules, but we're doing some exciting long-acting products in different CNS indications. And of course, we do have the lifecycle management that we're doing on Osteo. And then we have a brand new thing, which is, I would say, potentially revolutionary in the respiratory field that we have developed and gotten approval for some very, very sophisticated ventilators, basically respiratory inhalers to treat asthma, and we are working now on launching these products sometime during this year, and we're very excited about that. If we move on to generics, then we are the world leaders in generics, and in order to maintain that position, of course you need to do a lot of generic projects, and we do so more than 1,000, generic products are currently under development. And you'll see here that the big numbers are quite favorable. Between 2020 and 2030, there are some $2,010 billion in originator sales that go off patent. And you'll see that that fits very well with our business where we have around $4 billion in revenue in North America, and we are loading in some $400 or $500 million in new sales every year. which is basically, if you think about the math, it's the 210 billion split out over 10 years. We get some 10 to 12% of that and that's a price discount of some 80% for the generics compared to the originators on average and that ends you up with the 400 to 500 million that we load into the market of new sales every year. We of course also have a strong pipeline of generics in Europe and international markets. and overall we are very confident of maintaining our leadership and also maintaining a good profitability going forward. Now talking about profitability leads me to the long-term financial targets. And as I have already showed you, we have a target by the end of 23 to have a 28% operating income margin. We have a target already today to be above 80% in cash earnings. and we have a target to get our net debt to EBITDA below three times, which we still aim at doing at the end of 2023. And now talking about the financials, I would like to hand over to our new CFO, Eli, who will take you through the finances. Over to you, Eli.

Thank you, Cor, and good morning and afternoon to everyone. I would like to start by saying that I'm extremely pleased to be here today as part of Stella's team. I will start with a review of our financial results and then we'll follow that with a first look to our 2020 guidance as well as some of the major assumptions behind it. Beginning on slide 20, we start with a review of our GAAP performance. In Q4 2019, we recorded a GAAP operating income of $148 million, a GAAP net income to Teva shareholders of $110 million, and a GAAP earning per share of $0.10. This compares to Q4 2018 when we recorded a gap operating loss of $3.2 billion, a gap net loss to several shareholders of $2.9 billion, and a gap loss per share of $2.85. The year-over-year improvement in the quarterly results was mainly driven by the impact of a non-recurring item, which had a much greater negative effect in Q4 2018 compared to Q4 2019. Turning to slide number 21, we see impairment provisions of $477 million for intangibles in Q4 2019, of which $259 million is U.S. intangible assets related to the acquisitions of Acceleris Generics. This compares to $2.7 billion of Goodwill and $1 billion of intangibles in Q4 2018. Amortization was $290 million for the fourth quarter and we expect 220 run rate should be at the average of 250 and 260 million per quarter. Lastly, the structuring charge of 59 million in the quarter were consistent with the ongoing activities throughout 2019. As we turn to slide 22, we review our NANGA performance. Quarterly revenue were 4.5 billion, up slightly compared to Q4 2018. Revenue were mainly affected by higher revenue from Oseto, Ijobe, Truxima, QVAR, ProAir and ANDA in the US, as well as Europe Generics new product launch and Russia offset by generic competition to Copaxone, as well as decline in revenue from Vendeka, Trianda, Israel and Japan. Compared to Q4 2018, we experienced a negative ethics impact of 470 million. Net of ethics, revenue in Q4 2019 increased by 96 million or 2%. Gross margin for the quarter was 50.6% compared to 52.7% in Q4 2018. The change in gross margin was mainly driven by a decline in share and profit of Compacton in the US as an increase in the less profitable distribution business partially offset by the ramp of Assetto and Adobe as well as an increase in profitability of API and other activities. Operating profit in Q4 2019 was $1.1 billion, a 12% increase compared to Q4 2018. The increase was mainly due to the ongoing cost reduction program, higher revenue for Stevo, and the pro-air family, partially offset by a decline in Copaxone and other specialty brands, mainly Vendeka Trianda. Compared to Q4 2018, we experienced a negative ethics impact of $29 million, that's operating income increased by 144 million or 50% net of ethics. We ended the quarter with a non-GAAP EPS of 62 cents, 18% or 9 cents higher than Q4 2018, mostly due to higher operating profits and lower finance expenses, partially offset by higher tax. Before going further with my review, of the quarter, I would like to take a few minutes to discuss the revision of previously reported consolidated financial statements related to our Israeli distribution business, SLE. This business is part of the international market reporting segment, which facilitates distribution of TEVA and third-party products to pharmacies, hospitals, and other organizations in Israel. In connection with the preparation of TEVA consolidated financial statements for the fiscal year ended December 31, 2019, Stevo determined that in the full years and interim periods of fiscal years 2017 and 2018 and the first three quarters of fiscal year 2019, it had immaterial error in the presentation of distribution revenues from its Israeli distribution business. The company evaluates the cumulative impact of this item on its previously issued annual financial statement for 2017 and 2019 and Dream Financial Statement for 2017 and 2018, the first three quarters of 2018. It concluded that the revisions were not material individually or in aggregate to any of its previously issued interns for annual financial statements. Stevo has revised its presentation of the net revenue and cost of sales in the Historical Consolidated Financial Statement to reflect this item. The impact of this revision is a decrease in the net revenues with an offsetting decrease in the cost of sales. There is no impact on the gross profit, operating income, or earnings per share. In addition, there is no impact on Tevis balance sheet or statement of cash flows for the related period. On slide 24, you can see a very detailed illustration of what changed and what did not due to the revision I just described. Throughout the presentation, we have noted the revisions in some cases, like we have done here, have presented results both prior to and after the revision in order to assist you in your analysis. Now turning to slide 25, we can see that the fourth quarter was a specially strong one for free cash flow. Debit free cash flow in Q4 2019 was $974 million, an increase of $452 million, or 87%, compared to Q4 2018, and more than $2 billion for the full year 2019, exceeding our annual guidance. The difference compared to post-Q4 2018 was mainly due to the higher net income, focused working capital management, as well as a few one-items, most notably at-the-lease sell and list-back deals. As it relates to the working capital in 2020, I would note that we expect working capital to be neutral to positive source of cash. Generating free cash flow is our greatest focus in order to successfully continue reducing our debt flow, an effort which is highlighted in slide 26. We ended the year with a net debt of just under 25 billion and a net debt to EBITDA ratio of 5.32 times, the second consecutive quarter decline. Our expectation is that by the end of 2020, our net debt to EBITDA ratio will be below five times. As Cora mentioned, in his remarks. Following our successful financing in November, our liquidity and expected cash flow will cover bond repayments for the next three years. Now let's look at the development of 2019 results versus our guidance here on slide 27. We present the full year 2019 performance compared to the original guidance issued at the start of 2019, as well as the revised guidance from November which saw us bring up the bottom end of all of the ranges. Please note that as it relates to revenue, the guidance range are the original range and do not reflect the revision of SLE. To add in your analysis, we are presenting the 2019 sales prior and after the revision. And as I mentioned earlier, there is no further impact on the other metrics you see here, including cash flow. We are very pleased with the overall performance throughout the year, which allow us to meet all of our financial guidance targets. We believe these results provide a strong foundation for us to begin growing from 2020 and beyond. Turning to slide 28, I would like to give you a brief overview of some of the main assumptions for our 2020 financial guidance, which can also be found in this morning's press release. The most notable assumption is our global capacity revenue. which we expect to decline by approximately 300 million versus the full year 2019. The majority of this decline is expected to come mainly in the U.S. but the decline will be offset by the ongoing growth of Aceto and Adobe. We expect continued momentum of Aceto in both Theratitis Kinesia and Huntington's disease and expect its sales to grow to 650 million in 2020. Furthermore, Adobe expected to benefit from continuing patient growth in both US and Europe where we can continue ramp up our initial launch in Germany. Global sales of Adobe are expected to be approximately 250 million. I would like to add that we expect both North America and Europe generics to be relatively stable compared to 2019, benefiting from new launches which help us to offer regular price erosion or losses of exclusivities. In fact, the only real pressure we see is in our international generic where Japan continues to be a drug on our overall region due to the National Health Insurance price revision. A few more items to highlight in our assumptions. Foreign exchange rate movements are expected to have a moderate negative impact on revenue and operating profits versus 2019. Looking at tax, in 2019, Our tax was 18% as we guide last November. You will recall that our 2019 tax was higher than previous years due to the interest expenses disallowance resulting from U.S. tax reform and other changes to the tax position. As we look at 2020, we expect our tax to remain in the 17 to 18% range. So now, turning to our financial outlook for 2020 on slide 29. Based on the assumption I just reviewed, as well as the SLE Revenue Revision. We expect total 2020 revenue to be between 16.6 billion to 17 billion. Nangap Operating Income is expected to be between 4 billion and 4.4 billion, while EBITDA is expected to be between 4.7 billion to 4.9 billion. Using a share count of approximately 1.1 billion shares, we expect earning per share to be in the range of $2.30 to $2.55. Lastly, 22 free cash flow is expected to be at the range of $1.8 billion to $2.2 billion. And this concludes my review and for the fourth quarter results and 2020 financial guidance. We will now open up the call for questions and answers. Operator, will you please open the call for questions?