Teva Pharmaceutical Industries Limited

Good day and thank you for standing by and welcome to the Terra fourth quarter and full year 2021 financial results conference call. At this time all participants are in a listen only mode. After the speaker presentation there will be a question and answer session. To ask a question during the session you will need to press star and one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star and zero. I would now like to hand the conference over to your speaker today, Ran Mehir, Senior Vice President, Head of Investor Relations. Please go ahead, sir.

Thank you, Annette. Thank you, everyone, for joining us today to discuss David's fourth quarter and full year 2021 financial results. We also have 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 stevofarm.com Please review our forward-looking statements on slide number 2. Additional information regarding these statements and our non-GAAP financial measures is available on our earnings release and in our S&P form 10-K and 10-Q. To begin today's call, for sure, Stevo CEO will provide an overview of the 2021 performance recent events and priorities going forward. Our CSO Eric Kalif will follow up by reviewing the fourth quarter financial results in more detail before providing an overview of Teva's 2022 financial outlook. Joining Cora and Eliyahu on the call today is Van Dietleks, Teva's head of North America Commercial, who will be available during the question and answer session that will follow the presentation. Please know that today's call will run approximately one hour. And with that, I now turn the call over to Cora.

Thank you very much Ron and welcome everybody and thank you for your interest in our company. I'll start by commenting on the 2021 highlights. We came in with revenues at $15.9 billion. We did see some headwinds compared to our initial guidance. Basically coming from COVID that resulted in less volumes in general in the marketplace of generics and OTC both in Europe and U.S. and we also had a bit of headwind from the fact that the US doctors didn't see as many patients as normally, so we saw a slightly slower penetration of some of our products than we predicted from the beginning of the year. But all in all, we are happy with the 15.9 billion that we ended up with as revenues. The adjusted EBITDA came in at 4.9 billion US dollars, which is very much within the guidance. The GAAP diluted EPS came in at 38 cents. The non-debt-valued EPS came in at $2.58, again in the middle of our guidance. Free cash flow at $2.2 billion, also within our guidance. And the debt reduction continues, and the net debt is now reduced down to $20.9 billion. So it won't be long before we get below $20, which is nice. If we look at the business highlights, then of course we have to handle the COVID-19 pandemic, which continues. We were hoping at the beginning of the year that it would be over, but as we all know, it wasn't. It continued. And we did see, of course, a lot of challenges which we overcame operationally. So our whole operations worked out really, really well. I'd like to thank all our employees for a fantastic job all throughout the years. Then we did do a refinancing, which I'll comment on. We saw a nice growth of a Stato, a nice growth of a Jovi. and we are excited about launching Risperidone LAI later this year and I'll comment on all of those in the following slides. So if we go to the next slide please. The number one question I always get from analysts and investors is of course on the litigation side. And as you all know we had legacy opioid litigation dating back to somewhere between 2000 and 2010 and that's a lot of this. More than 3,500 different cases are pending, so to speak. Now, we've been making some progress recently, and if I start with the court decisions, then to be very brief about it, we had a court decision which was a bench trial in Orange County, California, where it basically was stated that if you do everything correct and the prescriptions are correct, the products are in compliance with FDA regulations and and many, many more. And then there was a jury trial in New York where we lost and we were found to be liable. so was actually the state of New York as well. So that was an interesting verdict as a mistrial motion pending due to arguments from the AG at the end of the trial which were not correct. So if we then switch to the settlement front then you all know we had a settlement in Louisiana some time ago and now we've had a settlement in Texas. Both these settlements combine a cash compensation and providing products. In the case of Texas, it's generic Narcan spray, and that's a product you use when you have an overdose situation. So we're very happy about the settlement. We think it's a good way forward. It makes sense for Texas to get some resources to take care of people suffering from substance abuse, and it makes sense to get the generic Narcan spray, which can help people in an overdose situation. I'm always optimistic, as you know, so I'm still optimistic that we can reach a nationwide settlement within the next 12 months. I've said that before. I'm still believing in that, and I think that the Texas settlement will be a good starting point for those ongoing discussions. We move to the next slide, and here you can see our revenues throughout the year, and you'll see that We had a bigger revenue in Q420 than we had in Q421. And the reason for that is really that we launched Truvada Natripla, generic Truvada Natripla, back in Q420. And we didn't have the similar big launch in Q421. Other than that, you could say it's really a very steady business. And you can see from the different components, Europe, international markets, and so on, that they're very steady. and performing quite well. If we go to the next slide. So in the U.S. marketplace, we have two main growth drivers, and that's Osteto and Adobe. And let's look at Osteto first. You can basically see that we continue to increase our script count per quarter. Basically, more and more people are getting on the therapy. And you can see that we also, on an average basis, continue to increase revenues quarter by quarter. It's a little up and down, as you can see. We have some swings here, and that's basically because you see some volatility sometimes with the wholesalers. We did see some, what you call, spec buying in the fourth quarter. That's basically in anticipation of a price increase, which is traditionally taken at the beginning of the year, so early January. Wholesalers sometimes buy product. Of course, to avoid the price increase, and we saw a bit of that. But underlying, there's a very strong correlation between the nice growth in the scripts and patients and the nice growth in revenue. And we expect revenue, of course, to continue to grow throughout this year. Why can we expect that? Let's look at the next slide. Basically because Osteo is indicated for Huntington's disease career in Huntington's, so involuntary movements in Huntington's, but it's also and other indicators for Tardive Dyskinesia. And Tardive Dyskinesia are these significant involuntary movements that are socially debilitating and that can really be a big problem for the patients suffering from it. There's around 500,000 patients or persons in US suffering from Tardive Dyskinesia. It's underdiagnosed and it's undertreated. is treated as we speak. And of course, we are working to broaden that base, making sure that the benefit of the product will reach more patients. This will drive increased scripts and will, of course, also drive increased revenues for Stevo. So we are also, like I said before, optimistic that we'll see increased patient numbers throughout the current year. If we move to the next slide, then we are looking at Adobe. As you know, Adjovi is preventive therapy for migraine. We are competing with two other products. We have the longest acting product profile, which basically means that our product can be used both monthly and quarterly, which is, of course, a benefit, that flexibility for patients. And the long duration also means that you have a very steady clinical action profile. So good efficacy on the product. We continue to grow scripts in the U.S., as you can see. A lot of users in the US. And we continue also to grow our scripts in EU and also our market share. And here you see that our market share, the last one we had for November, I believe, is now around 28%. And we have changed our ambition. We started out with an ambition some years ago because we launched as number three of having more than 20% share. Then we moved it to 25%. And now we have an ambition of at least having a third of the market, both in US and Europe. We also just launched in Japan with our partner, Otsuka, and we're very happy about the performance of Adobe and confident that the product will keep on increasing revenues in the current year. If we take a look at our pipeline, then we have a lot of exciting products here. There's a very big biopsy portfolio, which I will comment on in just a moment. We have some exciting biopharmaceutical products in development, and then we have The Respiradone LAI which has been filed with FDA and where we are looking forward to getting an approval hopefully in the middle of this year. And let me just talk a little bit more in detail about Respiradone LAI. If we move to the next slide, then Respiradone LAI is for patients with schizophrenia. It's an antipsychotic. And in the phase three trial, it showed phenomenal efficacy. So you see here the risk of relapse was reduced by up to 80% versus placebo, so that's one of the best results you can find for long-acting antipsychotics. So it's a really, really efficacious product, and it's also the easiest product to use. And what do I mean by that? Well, many of the long-acting antipsychotics have what you call intramuscular injection, which means you have a relatively long needle, and you need to make a depot in the muscle tissue. That is relatively painful and complicated so the administration of the products is not that easy. This product you inject subcutaneous with a very small short needle. It's a low volume of injection and you can inject in different places. So it's basically an easy way to get your therapy that is as efficacious if not more efficacious than anything else. So we expect to see a very good launch of this product once we get approval and we're very much looking forward to this and bringing the benefits to the patients suffering from schizophrenia who need stable therapy in order to avoid relapses which can really hurt their cognitive function capability. So let's go to the next slide where I'll give you just a little heads up on our biosimilar portfolio. So we have 13 biosimilars in development. about half of them are in-house programs, half of them are programs that we have in-licensed. It's a very strong portfolio. Roughly, we are addressing some 80% of the value that goes off patent in the coming years. And we believe we can grab a good share of that value. Of course, there are other competitors, but if you look at Truxima, which was the biosimilar, or which is the biosimilar of Ritoxan, our biosimilar, and right now we have a 28% volume market share which we think is very good and it's a nice product for us. It has shown stability in the marketplace also on the pricing so we're very optimistic about the commercial potential of our biosimilar portfolio and it will of course also add increased access for populations around the world just like generic products does So does biosimilar products ensure access to important medicines worldwide. Also in Europe we are launching products now and we'll have a biosimilar that we launched during this year. Now we've also always been focused on our gross margin and operating margin. And I won't go into all the details here. But what I will tell you is it's not a coincidence when you see our margins improving. It's a lot of work by thousands of people in our organization, in our manufacturing organization, in our procurement organization, basically optimizing all the classical elements of manufacturing. And you see some of the headlines here, procurement, network, operational excellence, insurance supply chain, agile operations. So these are all the classical things, and if you're interested in manufacturing optimization, you can rest assured that we're doing all the things that you can do, Thank you very much. Thank you very much. Thank you very much. as a company is created by more than 20 acquisitions over more than 20 years. And that leaves a very complex footprint of offices, of manufacturing sites, of R&D sites. But it also leaves a lot of capabilities. So the trick here is to keep all your capabilities, keep all your operational strength, but consolidate your sites so that you get more efficient. Bigger sites, fewer sites. and here you can see over the last five years how we've gone from 80 manufacturing sites down to around 50 and we have plans to continue this so in the next couple of years we will be divesting or decommissioning probably around another 10 sites so this evolution will continue. The same thing will of course happen for our office sites and our R&D sites. So continued optimization, more to come in the coming years. Now if we take and look at an example here, our European business, then you will notice here that the operating margin is improving. Now the operating margin basically improves for two reasons. One is the gross margin improvements that I just talked about, but the other one is as you consolidate your commercial offices, as you consolidate your commercial operation and optimize that, then of course also you could say your commercial cost as percent of sales also comes down. and those two factors have been driving up the operating margin in Europe. You can see here from 25% to 31%, a very, very nice and strong development and again something that will continue to improve mainly now with the contribution from the gross margin because we're getting closer to having optimized the commercial footprint in both Europe, US and international markets. But I've talked a lot about margins. Let's just take a look at the operating margin here. You can see here how we had a bad run down from 28.8 in 2017 down to 24.5 in 2019. That is really driven by this significant drop in compaction revenues as a consequence of the patent expiry on compaction. Now compaction is now down, as you know. This year it will be less than a billion in revenue. So it's not a major factor in our market anymore. And we've been working hard to improve the gross margin, as I told you, and the operating margin. And we set a target five years ago, or actually four years ago, but for the end of 2023, then it will be a five-year target from 18 to 23. And that target is 28%. And as you can see, we are very well on our way to hit that. and I've always said that we won't bring out new targets until we hit our target but it might just be that we get so close that in the later part of this year we will actually share with you future targets so that you don't get the wrong impression that we will be stopping at 28. We will continue to drive up operating margin since that's a key element of Australia and why is it so important? Well, the next slide tells you something about why it's important. It's because we have a starting point with too much debt, so we need to drive down the debt. And the only way to drive down the debt is to generate cash flow and allocate the cash to reducing debt. And the way to generate the cash flow is, of course, to have a high operating margin. So, therefore, the whole thing, of course, fits together. And you see here how we've been taking down debt since 2017 with some roughly $13 billion. In the same period, we have, of course, been paying interest rates, about a billion a year. So you could say that we have paid $17 billion to the bondholders over the last years. This will continue in the coming years. And then, of course, you can all calculate that there will be a nice time when we don't need to allocate all our excess liquidity and cash to bondholders. But we can, at some point in time in the coming years, start allocating cash to the shareholders which will, of course, be a big pleasure to reach that point. Now, on the way to that, we, of course, need to manage our debt and what we call the debt stacks. That's really how much debt you need to repay every year. You need to have a good balance between your operational cash flow and the debt you're paying back every year. And last year, we did a successful refinancing of $5 billion, so basically we We borrowed $5 billion by selling bonds and we repaid debt by $5 billion by checking out existing bonds from the market. All with the purpose of getting a more flat repayment profile so that we are repaying for the next three years what matches our operating cash flow. And that means that liquidity-wise there's a good balance between the liquidity we generate and repaying the bonds over the next three years. Now, we did this in a new fashion. We issued what's called sustainability-linked bonds. And that's a new thing which makes a lot of sense for us because, you know, we are the world's leading generic pharma company. And what do we do? Well, we really supply medicines to hundreds of millions of people in high quality so they can take care of their health issues. How can we do things better for the world? Well, basically by supplying more high-quality medicines at a low cost and many more. And if you look at the sort of targets we set up for these sustainability-linked bonds, then the first target is a classical climate change target. So it's a reduction in greenhouse gases by 2025 and we are well on our way to do that. And actually it's funny because the reduction in greenhouse gases goes hand in hand with improvement of the gross margin. Because the best way to improve your climate footprint is to use less resources. So the more efficient you manufacture, the less resources you use in manufacturing, the less burden you are to the environment, and the better is your gross margin. So the financial targets go hand in hand with the environmental targets. On access, this is a thing we can do better than probably anybody else. We can manufacture the medicines that are on WHO's essential medicines list, really what society needs to have a basic healthcare system. We can ensure that these medicines get regulatory approval in low and middle income countries and then we can ensure that actual volumes of medicines are brought to the patients in these countries all helping the healthcare systems. So that's what we committed to doing and that's what we will be doing in the coming years and reporting on of course so that everybody can see that we meet the targets of these new bonds. Now I talked about the debt maturity profile. Just a quick look here of what we did. So we took out, you could say, bonds, maturities in 22, 23, 24, and we pushed it into 27, 29, and 30. And you can see basically taking the next three years down to around the $2 billion mark. And you can also see here that we will need to do one last refinancing before we get to 25, 26, and 27. probably of around three to four billion. Again, taking those debt stacks to a level of around two by pushing something into 31, 32 and so on. And that will be the last time we need to do that. Then we'll have balance for the rest of the time between the debt repayments, the maturities and our operating cash flow. Now that takes me to my last slide, which is a nice, boring, good slide, which has been there since 2018. it just tells you that we're sticking to our long-term financial targets operating income margin I talked about it already 28% cash to earnings above 80 to secure we have the cash for the debt repayments and net debt of course coming below three times EBITDA by the end of 23 and all this is of course predicated upon what you see here that we're committed to utilizing our cash to pay down debt and we don't plan to raise any equity We think our patient equity holders deserve to see the open amplification go away and the debt come down and get the full value benefits of that when that happens eventually. And with that, I'll hand over to our CFO, Eli Kalif.

Thank you, Kaur, and good morning and afternoon to everyone. I'll begin my review of our 2021 financial results with my main focus being on the fourth quarter performance. This will be followed. by an introduction of our 2022 non-GAAP guidance and some of the important assumptions behind it. While most of the discussions around 2022 guidance will come at the end of my presentation, in a few spots along the way, I will touch upon our expectations regarding forward-looking trends to assist you with your modeling. Beginning on slide 23, I would like to start with our Q4 GAAP performance. in the fourth quarter of 2021 were 4.1 billion, a decrease of 8% in both U.S. dollar and local currency terms compared to the fourth quarter of 2020. This decrease was mainly due to a low revenue from generic products in North America and Copaxone, partially offset by high revenues from Mostello and Adobe. As Cor mentioned earlier, our revenue continues to be affected by the ongoing impact of the COVID-19 pandemic on markets, and on customer stocking and purchasing partings. For the sake of year-over-year comparison, I would like to note that Q4 2020 included generic product sales in Japan totaling 73 million and approximately 240 million for the full year of 2020. As we have previously communicated, these products were divested as of February 1st, 2021 along with the manufacturing sites in Japan. As we have discussed in the past, the decrease we are seeing in our revenues from generic products in North America was mainly driven by the fewer generic products launches in 2021 compared to 2020. Foreign exchange rate movements during the fourth quarter of 2021 net of hedging effects negatively impacted revenues by 19 million compared to the fourth quarter of 2020. Gap of earning income was 78 million in Q4 2021 Thank you for joining us today. for the fourth quarter of 2021 were adjusted to exclude these items. In Q4 2021, the liability related to the object litigation was increased by approximately 600 million. Additional notable NAND gap adjustments include amortization of purchased intangible assets totaling 188 million, the majority of which is included in cost of goods sold, and impairment of long-lived assets totaling 183 million. Moving to slide 25, for a review of our non-GAAP performance, I have already discussed our fourth quarter revenues, which total approximately $4.1 billion. And our revenues were $15.9 billion, a decline of 5% compared to 2020. Now, let's move down the P&L and look on the margin. Year-over-year, total non-GAAP gross profit margin improved to 54.2%. Thank you for watching. as well as higher profitability in Europe and international markets partially offset by low revenue from Pakistan due to generic competition. The increase in our NAMGAP gross profit margin was also driven by improved profitability due to our ongoing efforts to optimize our cost of goods sold. Our NAMGAP operating margin was 30.4% versus 25.6% in Q4 2020. This increase was driven mainly by higher gross profit margins mentioned above 2021 NAMGAP operating margin was 27.7% versus 26.3% in 2020. Our NAMGAP financial expenses in 2021 were mainly comprised from interest expenses, where 930 million. Looking ahead to 2022, following our recent refinancing, we expect our finance expenses to increase marginally to an annual run rate of approximately 1 billion. We entered the quarter with a non-GAAP earning per share of 77 cents, compared to 68 cents in Q4 2020, mostly due to a lower spend base. Turning to slide 26, we see that our quarterly spend base declined by approximately 14%. Looking at the year-to-date comparison, our spend base declined 794 million, or 971 million, net of 36%. Most of the annual decrease was due to a lower cost of goods sold, partially related to a lower annual sales, as well as our ongoing efforts to transform our global operational network. Lower operating expenses also contributed to the decline in our spend base, mainly due to the ongoing active management of such expenses. Looking ahead to 2022, we expect the overall spend base to remain below $12 billion, as we continue to focus on our efforts on reducing our cost of goods sold through procurement cost of excellence, network optimization and restructuring, operational and quality excellence, influence supply chain integration, and an agile operating model and organization. This ongoing effort will lead to stabilizing the operating margin above the level of 27% in 2022, with the ultimate goal being 28% operating margin by end of 2023. Turning to free cash flow on slide 27. Our free cash flow in the fourth quarter of 2021 was $716 million, extending the sequential rebound we saw in Q2 and Q3 versus Q1. The full year 2021 free cash flow was $2.2 billion compared to $2.1 billion in 2020. The increase in 2021 resulted mainly from higher cash generated from the investors of business and other assets, partially offset by a lower profit in awesome rate of sequence during 2021. Turning to slide 28. Our cash to earnings for full year 2021 was 77% versus 75% for full year 2020. The increase was mainly driven by higher free cash flow partially offset by higher net income. Turning to slide 29. As called short before, our debt continues to decrease. Our net debt at the end of Q4 2021 Thank you. Our net debt to EBITDA continues to decline, coming in at 4.25 times We are very pleased with the successful refinancing that took place in November 2021. We completed a $5 billion Sustainability Link Bond offering and a $4 billion tender offer. As part of our SLV offering, we have set ambitious KPIs to measure our contribution to social and environmental matters. Our intention is to establish a direct link between our corporate responsibility commitment and our funding strategy. This was a debt-neutral transaction. Esteva has been very clear and consistent with its long-term financial strategy, which includes a commitment to continue deliberating. As Corey explained earlier, looking ahead, we are pleased with our maturity profile for 2022, 2023, and 2024. as it's aligned with our liquidity strategy and help us focus on our long-term financial targets. Now let's turn our attention to our 2022 land gap outlook, which we are introducing for the first time today. Here on slide 30, you will find the five main components of our outlook. Revenue, operating income, EBITDA, earnings per share, and a free cash flow, as well as additional components including expected revenue range Our company worked hard through 2021, navigating the ongoing impact of the pandemic. While we cannot predict the exact magnitude of COVID-19 in 2029, we expect to continue to face somewhat volatile environments with regard to the purchasing patterns of our larger global customers, overall utilization by patients, generic product launches, and foreign exchange effects. With this in mind, We begin 2022 total revenue which we expected to be between $15.6 billion and $16.2 billion. This reduction in revenue guidance compared to 2021 includes the impact of foreign exchange and specifically the impact of the stronger US dollars on our results since approximately 60% of our revenue came from sales denominated in a non-US dollar currency. We have factored into our guidance The continued erosion of global compaction revenue, which we expect to decline during 2022 by approximately 150 million to approximately 850 million. The majority of the decline is expected in the US. The expected ongoing growth of Postedo and Adobe should be greater than the offsetting effect by the decline in compaction sales. We expect continued momentum of Fostedo with its total annual revenue to grow to approximately 1 billion in 2022. Furthermore, Adobe is expected to benefit from continued patient growth in the US, Europe, and international markets. Global sales of Adobe are expected to be approximately 400 million in 2022. With a modest decline expected in our spend base, Our NAND gap operating income is expected to be between 4.2 billion to 4.5 billion. And our NAND gap EBITDA is expected to be between 4.7 billion to 5 billion. Using a share count of approximately 1.1 billion shares, we expected earnings per share to be in the range of $2.40 to $2.60. 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 sales and earnings throughout the year. Based on our expectations today, we expected that the first quarter will be the lowest of the four quarters for sales and earnings, with gradual pickup in the second quarter. Overall, we expect that approximately 45% of our 2022 revenue to be generated in the first half of the year, and approximately 55% in the second half. I hope this color will assist you with your modeling. 2022 free cash flow is expected to be in the range of $1.9 billion to $2.2 billion. Similar to 2021, we expect about one-third of the annual free cash flow to be generated in the first half of 2022 and two-thirds to be generated in the second half of 2022. Lastly, looking at tax, in 2021, our non-gas tax was 16.4%. which was below the 17 to 18 range we originally guided you. As we look ahead to 2022, we expected our tax rate to be in the range of 18 to 19%. This increase is mainly driven by the mix of products year over year as well as other items which carry higher than average tax rate. This concludes my review of several results for the fourth quarter and fiscal year 2021. We will now open the call for questions and answers. Operator, would you please open the call for questions?

Thank you, ladies and gentlemen. As a reminder, to ask a question, you will need to press star and one on your telephone. To withdraw your question, please press the hash key. To allow everyone opportunity to ask a question, please limit yourself to one question per person with a minimum of one follow-up question. And the first question comes from the line of Uma Rafat from Evacor. Please ask your question. Your line is now open.

Hi, guys. Thanks so much for taking my question. I guess I'm a little confused about the Austedo number reported. It's up 4% in volume quarter over quarter, but sales are up 40%. And it looks like the dollars per Rx are up almost 35% versus Q3. Is there something unique that happened as it relates to inventory and or a favorable gross to net change or reconciliation? That would be very helpful. Also, perhaps on the opioid theme, I noticed the headline you put out to Texas is $225 million, which is really interesting because J&J's headline for the global settlement to Texas was $290 million, meaning you're not so far off versus the headline J&J was able to successfully negotiate. So if you're really tracking as close as you are to the headline numbers versus J&J, presumably that should form the basis for a lot more interest nationwide, especially considering your financial status, and they probably appreciate it. So why aren't we seeing more traction on a potential nationwide settlement? And just finally, just a quick one. I noticed fibromyalgia for CGRP. Did that trial not work? Because I know it wasn't even fully concluded yet.

Thank you, Uma, for those three questions. I'll start from the last one and take the two last ones and then I'll let Sven answer the one about Osteo. So on fibromyalgia, it's correct that we have had a, what do you call it, a futility analysis done and the conclusion of that by the experts who look into it was that it would be futile to continue the trial So we will not be continuing looking into fibromyalgia. So that's absolutely correct. On the opioids piece, you could say that we are still optimistic, as I said, that we can reach a nationwide settlement in the coming 12 months. We have been, of course, in constant dialogue over the last couple of years. And you, of course, remember the initial framework, which was and many more. And I think it's fair to say the reason why it didn't really fly was mainly because the premium lawyers, they basically did not see any fees coming in from the product part and that meant that it was not attractive to them. Whereas the new balance we have in Texas, where you would say we have a third in products, 75 million of generic Narcan spray, which is a very good thing for treatment of opioid overdoses. And then the other two thirds, 150 million in cash over a period of years. I think that's a more appealing scale. So I would agree with you that based on us doing this, there's probably now a higher probability that we can reach a nationwide settlement. And I'll then pass on answering the OSTETO question. Thanks, Kaur.

So, Uma, in the second half of 2021, we had a 63% higher script count for OSTETO than in the first half of 2021. So we had a very good trajectory. Actually, December was our strongest month in the year and it also saw the strongest step up So in context of that, we also know that the Q4 quarter is always the strongest one for Assetto. We have spec buying by the wholesalers as Core alluded to earlier due to the price increase that we took for January 2022. And that was one factor. The second one, as I explained, was the script count. And we saw a slight improvement in daily dose per patient, but also contributed to a strong quarter for in last year. Thank you.

Thank you. And the next question comes from the line of Ronny Gahl from Bernstein. Please ask your question. Your line is now open.

Good morning, everybody. Thank you for taking my questions. If I don't mind, quick three ones. One, with Sparadon LAI, do you own this royalty-free or is there some string that comes out of that? Second, can you give us a feel for the backfill margins in your partnerships? Thank you very much, Ronnie. I think I need you just to repeat

The first question about research on LAI, what is this specific question?

Do you own royalty on this or do you own it royalty free?

Okay, so this product is developed by us based on in-license technology from Vencel. They have a prolongation technology that we're using for this product and we also have philanthropy and LAI in development using the same technologies. and we are paying a small royalty on the product. It's not diluted to our margins when we launched Respiradone LAI. The product, we expect the overall margin of Respiradone LAI to be good and healthy. So we are very optimistic about the fact that we can grab a reasonable volume share and also market share in value. of the long-acting segment, simply by offering a more convenient and better dosing with unbeaten efficacy. So I guess that covers the first two questions, because that was also the question about the margin. And please correct me if I'm wrong there, Ronny.

Yeah, the second question was around the biosimilar partnership margins. Is this clearly what you alluded to as margin?

So no, they're not. It's basically so that... Thank you very much. Thank you very much. Thank you. can match the overall margins we have. Then the last question on the interest rate. First, I'll just note that all our debt is based on bonds that have been sold in the marketplace. So they are not really in any way influenced by any moves in interest rates. So the simple question is that all the $20 billion of debt we have, the interest rate is locked. so there's no effect of interest rates going up and down over the coming years which means we can predict our finance costs extremely precise. The only swing factor is in a way the exchange rate between dollars and euros because some of the debt is in euros and of course there's a conversion there into dollars which can affect both the size of the net debt whether the euro goes up and down versus the dollar and also a little bit the size of the yearly interest rate payments but other than that it's very very predictable due to the fact that it's all locked in and we don't have any variable interest rate on any of our data. Thank you for the questions.

Thank you. And the next question comes from the line of Elliot Wilber from Raymond James. Please ask your question. Your line is now open.

Thanks. Good morning, good afternoon. First question perhaps for Eli. In light of the strong gross margin performance The roughly 180 basis point year-over-year improvement. Could you just provide us with some color or insight into expected gross margin trends in 2022? Just trying to get a little bit better sense of the ongoing benefit from manufacturing rationalization versus the lighter top line outlook and probably what is going to be a more favorable mix impact. Follow-up question for CORE on ASTETO trends. Obviously, this is going to be the key growth driver within the branded segment for the next several years. The TD population remains very under-penetrated, under-captured. I know you guys have initiated some patient activation efforts to capture more of that market, and we're starting to see some incremental gains there, but perhaps slower than expected. The question really is, if you look at external expectations, Eliyahu Sharon Kalif

Yes, thanks Eliyahu for the question. And so, you know, just back a bit to the preparing marks of CORE, you saw how we're getting reduced mostly our manufacturing sites. And as CORE mentioned, we still, on top of the 50 that we're able to be in that position, we have more planned around that one, which means that the core manufacturing cost is going to reduce as well in 2022. So when we are doing our kind of remodeling, we're not really heavily considering on getting a benefit on a mix of products, which means that in 2022, we're most likely going to talk between 50 to 100 additional benefit points on our gross margin.

Thank you, Eliyahu. Yeah, we keep on pushing, and you should expect also longer term that we'll keep on pushing the gross margin up by classical consolidation, optimization, rationalization, Now onto Osteto 5 to 7 years out. As you probably know, I never give peak sales on any product because there are so many assumptions. People always forget the assumptions and just think about the number. But I love to discuss what we think will happen with Osteto over the coming years. And we think that Osteto will keep on growing nicely, basically due to the clinical benefits of the product and the large unmet medical needs that you alluded to yourself that I also showed on a slide. If you want to think about it conceptually, then we will probably get more patients and there's also a chance we'll keep them longer and they'll be titrated faster. So we will see growth, which this year we're estimating that it will be growing 200 million. I don't see any reason why that absolute growth should slow down over the coming years. And then you can do your own math and see what peak sales you get to five to seven years out. But I do agree with you. That number is higher than 1.3 billion for sure. But maybe Sven, you can just comment on what are we seeing in terms of plans to optimize both titration and product presentation and so on on a scale.

Yes, I think there are three sources for growth for us. One is of course the patient number. We need to activate more patients and improve the diagnosis rate for tartar dyskinesia with our physician group. That's number one. That's what we're already doing with our field force and with our recently launched TB campaign. The second element for growth for us is working better with the patients to reach an optimal titration for dose per day level because that directly correlates with the clinical benefits of this drug. And there we see when you look at the current treatment rates and where the long-term data for this product stands, but there's still an ability to optimize the treatment rate. And the third element is something that we learned, of course, also with our Copaxone franchise is that adherence here is a key element for chronic disease, especially for this patient population. And that's, I think, the third element for growth for us. Thank you for the questions.

Thank you. And the next question comes from the line of Navantai from Sikhi. Please ask your question. Your line is now open.

Hi, good morning. What are your COVID assumptions behind the 2022 guidance? So do you assume a lingering impact on the generics business? And then my second question is on cost. So the midpoint 2022, the down margin will be slightly lower. So can you comment on your SG&A and R&D assumptions for 2022? And then just a quick one on opioids. Thank you for those three questions. I will handle the first and the last and then Hayley will comment on the SG&E piece. So our assumptions for COVID this year is

Thank you very much. Thank you very much. and many more. And we see prescription labels in Europe getting close to what they were in 2019, still a little bit below, but we're optimistic that we will get back to the 19 level and above in terms of the total volumes in the marketplace, not specifically for us, but just in general. So that is really our assumption, but you will see also that we have widened the range on our revenues. because there is of course the risk that we will see some kind of continuing new lockdowns or whatever and we have to be able to manage that within our guidance if that happens. So that's on the COVID piece. Then I'll handle the opioids piece. The way you should think about it when we think about the possibilities of a nationwide settlement is really we are thinking along the lines of the way it was done by J&J and the three big distributors and that is really a formula where you say that it's mainly population based but it's skewed a little bit so that the smaller population states get a slightly higher percentage than the straight out population calculation. What does that mean? It basically means that if you do a straight out population calculation then you would say that with the population in Texas a nationwide settlement would be 12 times the Texas settlement. If you do the percentage that went into the nationwide settlements of J&J, then you would roughly have to multiply it by 16. But it's really population-based. It's not related to anything specific about individual products or anything like that. That's the principle that we expect. If we are successful with a nationwide settlement, that's the principle that we expect will be used there. And then the last question about SDNA, Eliyahu?

Yeah, so thanks, Naveen, for your question. You asked both on R&D and SG&A. So I think that, you know, overall, if you look on the first half of 21 versus the second half of 21, it's more or less the same in terms of dollars. There are some variable elements in between Q4 that we're able, actually, to manage in terms of priorities. Overall, our OPEX went down to 26.5%. and then for the R&D, it's all about prioritization of projects, so nothing there is specific. Thank you for the questions.

Thank you. And the next question comes from the line of Chris Schott from JP Morgan. Please ask your question. Your line is now open.

Great. Thanks so much. Just two for me. First, I just wanted to confirm. I think you mentioned that the first half sales would be 45% of total for the year. Thank you so much.

Thanks for the questions, Chris. I'll comment on the first one and then Sven will comment on the second North American question. So it's correct that it is probably a bit more skewed than what we've seen in other years, but it's very sensitive to when we have launches. And what we're estimating this year, and Sven can comment on some of the North American ones, we are estimating that we will see more launches that will affect the second half, then we will see affect the first half. So we're not really carrying, like we carried Sovarda and Triplett into the first quarter of 2021. If you look at our US generic sales, we still have some of that, you know, tail in the first quarter of last year. We don't have a big launch that we did, you could say fourth quarter of 21 that we're carrying into the first quarter of 22. We do have launches coming up, Respiradone, LAI, and several generic launches. So those will mainly affect the second half. And then we do have the basic seasonality that we've had always, that most pharma companies have, that we have the donor fold and those various things on rebate schemes and so on, that takes down the first quarter and you typically have the reverse thing happening in the fourth quarter. So it's maybe slightly more student than normal, but there's nothing really extraordinary behind it other than our operational plans. And then maybe you can comment on the four billion run rate for U.S. North American. We should just make sure we always make it clear that we're talking about North America, so it's really U.S. and Canada.

Yes, the North American generics sales are reported in three segments, biosimilars, Canada and the U.S. generics business. So in 2020 we were above The $4 billion target is in 2021. We were below the $4 billion target. And I think the two years tell you how it goes. Because in 2020, we had quite a strong biosimilar business and an excellent launch of generics with Truvada and Attripta. And that was absent from 2021. And that gives you an idea how we think about the $4 billion. It's basically in a year where you have a good generics launch, in complex generics with a large originator value to address, or you have to buy a similar launch, we're quite confident that you get to the $4 billion sales.

Thank you. Thank you for the questions.

Thank you. And the next question comes from the line of Gauri Nachman from BM Capital Markets. Please ask your question. Your line is now open.

Cora, we were previously talking about 2021 as a trough year. Are you confident now that 22 should be a trough here in terms of revenue and EPS, especially if COVID normalizes?

That's first.

Second, on the opioid litigation, if the nationwide settlement ends up being, I guess, you know, one-third product, one-third cash, is that something that you can actually absorb with your balance sheet, that type of mix? It seems like you're sort of going down that path. And then with Risperidone LAI, Just curious, do you have the Salesforce in place to launch this product? Talk about, you know, maybe some pre-launch activities that you're doing and if there'll be any real incremental spend on this for the back half of the year. Thank you.

Thanks for those three questions. I'll address the first two ones and then Sven will address the Respiradone question. I can confirm that I am expecting that 2022 will be the trophy, so to speak, or the combination of 21 and 22, you could say, unfortunately, will be the two trophies. And the reason being that is, of course, that I'm expecting that we will see a normalization of the volumes in Europe and U.S. And what we're talking about is probably that volumes in 21 were, let's say, 4%, something like that, 4% to 5% below what we would have expected if we had seen zero effect of COVID on the volume of doctor visits, hospital visits, and so on for diseases not related to COVID-19. And you combine that, the dynamics of compaction now have come down to around below a billion this year, and it will keep going down, but of course the absolute amount is less and less, and the growth number on the state of Nigeria is getting higher and higher. So I'm confident that that's the case, also because we have a good grip on the margins, as you can see. That means that if we just get a marginal increase on revenues, then we will also see an increase in EPS. So that's with regard to the top year. With regard to the opioids and the balance sheet, then what you have seen in Texas is a payment schedule over 15 years. for the cash component, which is two-thirds of the settlement value. And then we provide products over 10 years, and that's a third of the settlement. And by, you could say, spreading it over many years, we're basically able to manage this within our balance sheet structure. If we were to pay it all tomorrow, that would, of course, not be possible given the debt we have. So it's a way of finding a way to get a settlement that benefits everybody, including the American people, the people suffering from substance abuse. And actually by adding the product component in there, you get the benefit directly to people suffering from substance abuse and having an overdose situation. And you actually have a nice twist to this because the generic Narcan spray product is actually manufactured in the U.S. on a dedicated manufacturing setup that we've created in Salt Lake City, one of our manufacturing plants there. So it's also good for U.S. manufacturing that you have here something that helps the U.S. population being manufactured in the U.S. So I think it's a very good settlement. I hope it can inspire everybody to reach a nationwide settlement, and we will be able to manage that within our balance sheet. Now, the last question on Respiratone, over to you, Sam.

Yes, so the commercial organization is in place, including the sales force, and we finance this by reallocating resources within our budget. And yes, you will see a step up in the SG&A spend when we launch the product.

Thank you very much for the questions.

Thank you. And there is one more question from Jason Garvey from Bank of America. Please ask your question. Your line is now open.

Hey, guys. Thanks for squeezing me in. Just one other follow-up on the opioid front. I think there's a February 25th deadline for final implementation for the J&J distributor side of the equation. So is that too little time for Tevin to negotiate its way into the deal? Or would participation in a global deal have to happen subsequently? I'd imagine their counterparties would love a much bigger top line to announce to its constituents. So I'm just curious if we're too late in the game there. and then ultimately, how do you leverage the existing framework? And then ultimately, when we look at the final opt-in later this month, how much residual litigation burden after the settlement would be unsatisfactory versus how would you characterize true global peace in a global settlement? Thanks.

I mean, of course, at reaching a nationwide settlement within the next 12 months. It's not our aim to join into communication around the settlement that J&J and the free distributors have been reaching. We see that as our settlement will most likely be communicated separately, and it's also different in that we have a product component which nobody else has. So that's how we see that. In terms of how do you get peace, so to speak, how to get a comprehensive, holistic settlement, it's really all about the subdivisions. So if you look at what we did in Louisiana and what we did in Texas, it basically includes all the subdivisions. So if you think about nationwide settlement, you have the same situation for us as you've seen for J&J and the distributors. You need to get into the 90s in terms of how many subdivisions go along with it, because otherwise you would just have too much of a tail of litigation out there. What I've been seeing, and I don't have any insights over and about what's publicly available, is of course that we're seeing increasing participation rates for the J&J and the distributors settlements from the subdivisions and from what I've been reading, we are in the 90s and we're really seeing majority of states and majority of subdivisions going along with this and I think that it just makes sense because it makes sense for the population, it makes sense for the states, it makes sense for the premium lawyers, it makes sense for the companies and I don't see a lot of subdivisions eventually actually trying to go to trial and going up against their states. There's a whole legal twist to this which I won't get into but it's problematic for a county or city to really pursue this once the state has settled and I don't think we'll see much of that. I hope that answers the question. Thank you.

No, it did.

Thank you so much.

Thank you. Please continue with your closing remarks.

So thank you everyone for joining the call. It was a pleasure taking the questions and talking to you. and I wish you all a nice and safe day. Bye bye.

Thank you. That does conclude our conference for today. Thank you for participating. You may all now disconnect.