Teva Pharmaceutical Industries - Earnings Call - Q2 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to Teva's Second Quarter Financial Results Conference Call. Twenty. I would now like to hand over to your first speaker today, Mr. Kevin Mannix, Senior Vice President, Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, Tracy, and thank you, everyone, for joining us today to discuss Teva's second quarter twenty twenty financial results. On the call with me are Kare Schultz, Teva's Chief Executive Officer Eli Khalif, Chief Financial Officer and Brendan O'Grady, Teva's Head of North America Commercial. We hope you've had an opportunity to review our earnings press release, which was issued earlier this morning. 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.tevapharm.com as well as through our Teva Investor Relations app. Please note that the discussion on today's call includes certain non GAAP measures as defined by the SEC.

Management uses both GAAP financial measures and the disclosed non GAAP financial measures internally to evaluate and manage the company's operations to better understand its business. Further, management believes the inclusion of non GAAP financial measures provides meaningful supplementary information and facilitates analysis by investors in evaluating the company's financial performance, results of operations and trends. A reconciliation of GAAP to non GAAP measures is available in our earnings release and in today's presentation. To begin today's call, Corinelli will provide an overview of the second quarter performance, recent events and priorities going forward. This will be followed by a question and answer session.

Today's call, which will run approximately one hour, is being webcast live and recorded. You'll be able to replay the call and view the transcript on the Teva Investor Relations website. And with that, I'll now turn the call over to Kare Schultz. Kare, if you would, please.

Speaker 2

Thank you, Kevin. Welcome, everybody. I hope you're all safe and healthy. And I'd like to start by commenting a bit on the COVID -nineteen situation. So if I could have the next slide, please.

As you know, Teva is the world's largest manufacturer of pharmaceuticals in volume. And I would like to share with you that our manufacturing organization, our QC, our logistics organization has shown great resilience all over the world in this situation. And despite the challenges of COVID-nineteen, we have been able to stay operational, been able to supply customers, and we are very, very proud about it. The way we've been thinking about it is illustrated on the next slide. We will be focused on three key stakeholders: our patients, our employees and our communities.

And I won't give you all the details. That would take too long. But just reiterate that we've been committed to our patients. We serve around 200,000,000 patients every day. We 've been able to do so with uninterrupted supplies.

Our employees is, of course, our key concern when it comes to safety and protection. And I'm happy to say that due to a lot of measures worldwide, we have been able to avoid any outbreaks of COVID-nineteen related to our facilities. And we've had no facilities that had to be shut down for longer periods of time because of any kind of COVID-nineteen problems. So it has taken a lot of work. It has taken a lot of new precautions, lot of new procedures.

But we are happy to say that we were able to handle this in a good way. We've also tried to support communities and patients the best we could. We've donated products in more than 25 countries. We've donated all kind of different products. And we've made sure to support also locally in our factories to people less fortunate than us.

And this has been done with passion and great effectiveness. And I'm very proud about what all our employees have done. So I would like to share with you my big thanks to all our employees for keeping the business going in a very nice way. I won't tell you all the details about how much we support the health care systems around the world, but I'll just share here a few hard facts. One in every 10 scripts in The U.

S. Are filled with a Teva generic product. We actually manufacture by far the most of all medicines listed on the WHO essential medicines list. We also provide huge savings around the world. And just in The U.

S. Alone more than $41,000,000,000 in savings in 2018 and probably even more so this year. But of course, the most important is to supply high quality medications for patients who need it every day, and we've continued to do so. But now let's move to the financials. Our revenues came in at DKK3.9 billion.

And as I show you in a moment, that's slightly below what we would normally expect. There's a phenomenon here where we saw higher demand in the first quarter of certain generics and OTC products, especially in Europe, and we've seen lower demand in the second quarter, and I'll show you that in a minute. Our non GAAP EBITDA came in at $1,100,000,000 the GAAP EPS at $0.13 and the non GAAP EPS at $0.55 The free cash flow came in just around $600,000,000 And all in all, for the first half, 1,100,000,000.0 has been accumulated in free cash flow. Net debt continues to decline. We are now at $23,900,000,000 And as a side issue, I can tell you that in July, we repaid $1,100,000,000 I'm very happy to reaffirm our outlook.

There will be a slide at the end of the presentation where you'll see all the different details. We are basically reaffirming all the details of our outlook, including the strong growth of our new products, which I'll be commenting on a little bit when I comment on our business update. On the business side, we have a lot of news for you today. Some of them we have reported in the last couple of days. I won't comment on this slide, but there will be a separate slide of each of them in the coming presentation, and I'll comment on them when we get to that.

So if we move to the next slide, then I can show you this phenomenon we've had on the revenues. Really what you should look at is the Q1 twenty twenty and Q2 twenty twenty column and look at the dark green colored part of the bar, which is Europe, we basically had a 200,000,000 swing factor in Europe. So what it means is that in the first quarter, we probably sold CHF 200,000,000 more. We can see now when we analyze due to patient level hoarding and stockpiling of products. And that means in the second quarter, we sold €200,000,000 less.

So if you move that €200,000,000 you get to €1,200,000,000 in each of the two quarters for Europe. And that's why we did comparison to the right, where you can see first half twenty nineteen compared to first half twenty twenty. And what you can see there is we did 2,400,000,000 in 2019 in the first half in Europe, and we did €2,400,000,000 in 2020 in the first half. So basically, a very steady market situation. Now that's basically a reflection that we have some products that are declining, such as COPAXONE.

And we have other products that are growing, such as AUSTEDO and AJOVY. And the two are basically balancing each other out right now. And then we make a little bit more money, money because we manage to be more efficient and reduce our cost right now. So talking about the two drivers of sales growth that's compensating for COPAXONE decline. Let's move to the next slide and look at AUSTEDO.

As you can see here AUSTEDO continues to grow very steadily. There are some small variations from quarter to quarter. But basically if you take the graph in the middle, you can sort of make a straight line and then you have the growth track since the launch. And we see that continuing. We see very good prescription numbers.

And as you'll see at the end, we are maintaining our guidance for the year of around $650,000,000 in revenues for AUSTEDO. Nice to note also is that AUSTEDO has been approved in China. That's a unique thing in the sense that it's approved without a Phase III trial because the Chinese authorities realized that this was a drug they would like to have. So we got a regulatory approval without doing a Chinese trial. And we're looking forward to launching AUSTEDO in China.

Of course, in China are always pretty slow because you start in the private market. But nevertheless, it's a good sign that we bring AUSTEDO to other patient populations also outside of U. S. So a very strong growth that continues on AUSTEDO. Now the other growth driver AJOVY is described in the next slide.

And here we have, I would fantastic story, which I have not seen that many times in my thirty years plus in pharmaceuticals. Because we have a situation where we launch a product, and you can see here in the middle with a good NBRx share, you have to consider here that we have three players in the market and there was one company launching significantly before us. And we get a decent start. We've had an aim all the time to have at the end of the day around 25% of the market, which fits with the fact it's a three player market and we are not the first to launch.

Speaker 3

And then we have a negative development with declining NBRx share. And that's mainly a reflection of the fact that we don't have an auto injector. And since this is a very efficacious therapy for chronic migraine and you self inject once a month at home, and we only had a prefilled syringe not an auto injector because we had a delay on the approval of the auto injector. Then what happened was we finally got the approval. And since the product has an excellent efficacy profile and an unbeaten safety profile, you can see here since we got the auto injector, the NBRx share has continued to grow significantly per month and per week.

And I can tell you here that the July numbers are even higher than the June numbers. So we

Speaker 2

are very optimistic about the fact that we are getting back to that natural capture share, natural NBRx level, which would be somewhere between 25,000,000 and $30,000,000 and which would lead to us getting a TRx share in the end of around 25%, which is really what our ambition is for this product. So a very positive story here in The U. S. And I should add also that it's doing well reimbursement in '16 countries. So slowly these numbers will start to add up and you will start to see meaningful double digit numbers in millions of euros and dollars per quarter of European revenue going forward.

So that's very positive. We also have another positive thing, which is our partner Otsuka on AJOVY has filed the product in Japan. And we look forward to the approval and launch in Japan. Now right now, AUSTEDO and AJOVY are the two products that are driving most of the growth. But there are also things to come in the future.

And I have three stories here I would like to share with you. And the first one is fasinumab. And as you know fasinumab has been in development in a partnership with Regeneron for a long time. And Regeneron are conducting the clinical trials. And we just had a readout from Phase III.

And we had an efficacy readout. And we had two Phase III trials. And in those trials, the one milligram monthly dose demonstrated significant improvements in pain and physical function over placebo both at week sixteen and week twenty four respectively. So this is very good clear cut efficacy on the one milligram monthly. The one milligram monthly dose also showed nominal significant benefits in physical function in two trials and pain in one trial when compared to the maximum FDA approved prescription doses of non steroidal anti inflammatory drugs for osteoarthritis.

So that's what you normally call NSAIDs. So what we're talking about here is that when we compare the one milligram monthly against the normal therapy, we also saw improvements. So this is of course very, very positive. In the trial where we had one milligram every two months, there we saw a numerical benefit over placebo, but we did not reach statistical significance. In the initial safety analysis of the Phase III trials, there was an increase in arthropathis reported with fasinumab.

In a subgroup of patients from one Phase III long term safety trial, there was an increase in joint replacement with fasinumab one milligram monthly treatment during the off drug follow-up period. Although this increase was not seen in the other trials to date. So additional longer term safety data from the ongoing trials are being collected and are expected to report it early next year. And then following that, if everything looks good, then you could expect a filing of the product sometime the first half of next year. So that's, of course, something for the future.

And we have the partnership with Regeneron, which means that we are sharing the product in The U. S. And we are going to do the commercialization outside of The U. S. We move to the next slide, then another exciting move here is that we have a vision to be the leader in generics, which we are, but in order to be also to be one of the leaders in biopharmaceuticals, including biosimilars.

And as you know, we are just getting started there. And we have a pipeline with six biosimilars in development. But we would like to have more, you could say, projects in this area. So we just entered into an exclusive strategic partnership for the commercialization of five biosimilar products with Alvetech. And we very much look forward to this.

And we think that our commercial expertise in biosimilars in The U. S. Will be a key player And this combined with Alvetech's strong technology and know how in development of biosimilars. So, this is very exciting for us. It means that we now have more than 10 biosimilars in our development pipeline, which we are very optimistic about.

A last move we've done, which is more like a, I would say, part of being focused and part of optimizing our business also on profitability and future growth is that in Japan, we have a business venture together with Takeda, which we are very happy about and we've done a small change here. We've basically taken a part of the business which are generic products with low profitability and some contract manufacturing operations, so contract manufacturing products that are all manufactured at a manufacturing plant we have in Takayama. And we are planning to sell this to Nichiko, a main player in the generic space in Japan. And they will be taking over these old products. We will keep our new newly launched generics.

We will keep our complex generic portfolio. We will keep our long listed products and specialty assets. And this transaction we expect will take place at the end of this year. And it will secure future growth of our Japanese business and it will also improve the profitability. The last update I want to give you on the business is on the next slide.

It's about biosimilars. It's about TRUXIMA. As you know, we launched TRUXIMA at the end of last year. And I always said that we thought we could do better than most people have done with biosimilars in The U. S.

Due to our commercial footprint and the fact that we are the biggest volume supplier of pharmaceuticals in The U. S. So we have customer relations to basically nearly everybody. And that's important when you launch a product like a biosimilar such as TruXenia. I'm just happy to report here that one another good thing that has happened is that injection for rheumatoid arthritis has been approved.

And that means that we can keep on growing our TRUXIMA business in The U. S. Nicely going forward. Then we also have a very, very exciting thing that's happened in the, you could say, digital slash product slash respiratory space, which also bodes well for future growth. Now this is the world's first product where we have a asthma or COPD respiratory inhaler that has integrated electronics that measures the actual inhalation, the velocity and volume of your inhalation and can give you a feedback on your smartphone both with regard to the quality of inhalation, with when you did the inhalation, with the dose and so on, but not only can it do it on your smartphone, it can also have the smartphone connected to the cloud and you can then control that that data is handed over to a caregiver, a parent, a doctor.

And it will be possible then to have a, you could say, electronic consultation with your doctor, sharing the data, discussing the data and in that way staying more on top of the therapy. Or for caregivers, parents, they can share with their children, with relatives, you can share with your partner how the disease is evolving, how you're dosing medication. And this is very, very exciting. We just launched the first product ProAir DigiHaler in The U. S.

These are the very first weeks we see a very encouraging take up in the marketplace. We are collaborating with certain healthcare systems on this product as well. So we are very optimistic that this can bring significant clinical benefits and therapeutic benefits to people suffering from asthma and COPD, not S, but longer term, all over the world. So these were some future growth drivers and some current growth drivers.

But let me just round off by saying where is this all going to be from a financial point of view before we slide into the financials. And this slide you've all seen before and expect to see many times again until the 2023. And there's no change to the slide, which is good. Our target for operating income margin is still 28%. We need cash earnings about 80% to pay down debt.

And when we pay down debt and grow EBITDA then the net debt to EBITDA ratio declines. And we have a target of less than 3x at the 2023. And as you know, we are committed to spend all our cash flow on debt reduction. We continue to do so. And we do not have any plans to raise equity.

But with this long term financial targets, I'd like to hand over to Eli Kalif, who will go through the financials.

Speaker 3

Thank you, Kur, and good morning and afternoon to everyone. I hope that everywhere you are in the world that you are safe and healthy. So let's begin with our financial review of the second quarter. We begin on Slide 18 where we highlight Teva GAAP results including GAAP net income of $140,000,000 and earnings per share GAAP basis $0.13 for the 2020. Our year over year improvement in our GAAP result was the result of lower operating expenses including lower impairment items and legal settlement as well as minority and share in profit offset by smaller tax benefits.

Turning to Slide 19, we see impairments, restructuring and other charges which totaled $465,000,000 for the quarter. The main charges in the quarter and the largest was tied to our business in Japan. As previously announced Teva and Takeda have decided to sell the majority of the business ventures, generics and operational assets resulting in impairment charge of $261,000,000 Amortization was $249,000,000 for the second quarter aligned with the range of $250,000,000 to $260,000,000 per quarter that we guided to at the beginning of the year. Turning to Slide 20, we review our non GAAP performance. I want first to start with a complete look at the year over year financial performance and then I would like to touch on the sequential swing in the 2020 in more detail.

Second quarter twenty twenty revenue were approximately $3,900,000,000 down 7% compared to Q2 twenty nineteen. This decrease was mainly due to a lower revenue from generic OTC and Copaxone in all regions and the lower revenue from Qvar and VENDACA Trianda in North America as well as the impact of COVID-nineteen had on certain purchasing patterns, partially offset by higher revenue from AUSTEDO, ANDA and AJOVY in The U. S. The decline also reflects a negative foreign exchange impact of $79,000,000 net of hedging. Non GAAP gross margin came in at 52% for the second quarter versus 52.4 a year ago.

The modest decline in the gross margin was due to a lower gross margin in specialty products coupled with a negative impact from hedging activity partially offset by lower cost of goods sold related to our ongoing network optimizations. Our non GAAP operating margin was 25.3% versus 24.2% a year ago. The increase was driven by lower operating expenses as our overall spend base including COGS was approximately $2,900,000,000 compared to approximately $3,200,000,000 for Q2 twenty nineteen. This result led to a non GAAP EPS of $0.55 which is $05 lower than Q2 twenty nineteen. Now, I would like to touch on the 2020, which was comprised of two very different quarters as purchasing patterns, especially in Europe, were impacted both positively and negatively by COVID-nineteen pandemic.

You will recall that in May, when we presented a very strong first quarter results, we noted that we were experiencing increasing demand of certain medicines as was expected during a global crisis of this nature. Nowhere was this more apparent than in our operating operations where we saw a strong demand for our products, especially generic and OTC. We did however expect that this will reverse in the second quarter results, offsetting the strong first quarter outperformance. As you can see by the results we are reporting today, our assessment was correct. The impact is mainly affected by strong revenues of the pandemic related products and customer stocking in the first quarter at the expense of the second quarter.

Still, when we compare the first half of the year to the 2019, we see just slight impact of COVID-nineteen on our top line which declined just one percent. Furthermore, we saw 8% increase in EBITDA and 10% increase in both net income and EPS. Free cash flow for the first half actually doubled compared to last year. These strong results are mainly due to cost reductions reductions and efficiency measures that the company implemented in 2018 and 2019. In addition, we are also benefiting from stricter management of quarterly cash flow fluctuations resulting in a greater linearity in our cash conversion trends.

Turning to Slide 21, I'd like to highlight just a few of the revenue trends where we've been seen throughout the different segments and regions with my main focus always being on the sequential trends. In the 2020, we experienced increasing demand of certain medicines as it was expected during the global crisis of this nature. We saw a compensating effect lower demand for certain medicines during the 2020. We start with North America, where our generic business generated $923,000,000 in sales, which was sequential drop of 3% from the first quarter. In the absence of any major launches in the second quarter, sales were supported by the strength of Truxima, our biosimilar for Rituxan, our ProAir HFA authorized generic of our own specialty product and our generic equivalents of EpiPen and EpiPen Jr.

Looking at our specialty products, both AUSTEDO and COPAXONE bounced back nicely compared to the first quarter. While we begin to see the early positive signs of the introduction of the auto injector device for AJOVY, we expect AJOVY sales to continue to grow as the launch of the auto injector continues. Turning to Europe, as I mentioned, this was the region that benefits significantly from COVID-nineteen effect on the purchasing patterns in the first quarter. The significant purchases were more than reversed in the second quarter as demand for certain products declined. The pandemic effect also led to a decline in doctor visits by patients resulting in fewer new prescriptions during the 2020.

Furthermore, our specialty portfolio saw a price decline for oncologic products as a result of a generic competition as well as decline in COPAXONE revenue due to competing glutamate estate products, which were partially offset by new launches of generic products. Our international market segment was lower by almost 14% compared to the 2020 or 2% in local currency terms. The decrease was mainly related to the effect of the COVID-nineteen pandemic. Now let's take a look at our spend base on Slide 22. As you know, the cost reduction plan that was introduced at the 2017 led to an overall reduction in our spend base of more than $3,000,000,000 to the 2019 total of $12,700,000,000 Since the start of the year, our spend base has continued to decline due to a number of factors which I highlight in the Q1 call and that continue to impact our spend base.

The most significant decline this quarter versus Q1 is our cost of goods sold, which is certainly attributable to the reduced top line as well as our ongoing efforts to improve our gross margin through the transformation of our network. Looking at the operating expenses, we are always mindful of our spending and continue actively control it, especially in the face of COVID-nineteen pandemic. Selling and marketing and G and A both saw significant decline for the second straight quarter. All of these gave us total spend base of approximately $6,000,000,000 for the 2020 and expected our full year spend base to be lower than our full year 2019 total. Turning to Slide '23, we see our free cash flow for the quarter came in at $582,000,000 compared to $168,000,000 in Q2 twenty nineteen.

The increase resulted mainly from the higher cash flow generated from operating activities. This brings our total free cash flow generation for the 2020 to more than $1,100,000,000 This was an unusually strong start of the year, especially given first half performance, which are usually impacted by annual incentive payments to our employees. Based on the first two quarters and our outlook for the remainder of the year, we are now not changing our free cash flow guidance for 2020 which is in the range of $1,800,000,000 to $2,200,000,000 Continuing our review of cash on Slide '24, you can see our strong cash conversion for the first half of the year came in at 79% versus 40% for the 2019. Cash conversion is one of our key long term financial targets and we are targeting at least 80% for Teva cash conversion. As Kare described, since the long term financial targets were introduced in 2018, a high level of cash conversion is especially important for Teva as we focus on our main goal of reducing our significant debt load.

Teva is focused on ensuring that our cash conversion continues to improve each year. There are many touch points within the organization that we are focusing on that will enable us to achieve these long term targets including the active management of our working capital and the improvement of our growth and operating margin. These efforts are especially reflected in the cash conversion for the 2020. Now turning to our debt development on Slide 25. As I just mentioned, our main focus from the start has been to reduce the company's significant debt load, including the net reduction of $400,000,000 in the second quarter.

The company has reduced its net debt by more than $10,000,000,000 in the last three years. There is still a lot of work to do and I'm pleased to report that this work continue in July with an additional repayment of $1,100,000,000 that is not affected in the quarters and totals. Our net debt to EBITDA ratio fell for a fourth straight quarter dropping to 4.9 times. As we noted last November following our successful financing and again on our fourth quarter calls in February, we have liquidity and cash flow to cover bond repayments for the years 2021 and 2022 before looking refinancing at 2023 maturities. Turning to our outlook for 2020 on Slide '26.

As I mentioned last quarter, we are operating in a unique environment created by the COVID-nineteen pandemic. As you can see, based on our financial results for the first two quarters of the year, the pandemic had a significant effect on the purchasing patterns of our large global customers and overall utilization of by patients, which has led to a swing in our results. Still our team has done a very good job in managing through the pandemic and its effect staying focused on driving forward including the growth of our two key specialty assets Ostetto and AJOVY. Based on the results of the first half twenty twenty as well as what we have seen in the first month of the third quarter, we are reframing our annual financials outlook that was first presented in February and reaffirmed in May, including total revenue of $60,600,000,000 to $17,000,000,000 earnings per share in the range of $2.3 to $2.55 and free cash flow between $1,800,000,000 to $2,200,000,000 We will continue to monitor and analyze the current and potential impact of COVID-nineteen on our business. Where we end up in each of the guiding range will depend performance of all the three regions including the normalization of purchasing patterns and patient demand, the timing of generic launches, the continuation of the growth of AUSTEDO and AJOVY and foreign exchange rates.

At the same time, we'll continue to manage our overall fund base. And with this, I want to conclude my review for the second quarter results of 2020 financial guidance. We will now open up the call for the questions and answers. Operator, will you please open the call for questions?

Speaker 0

Thank you, Your first question today comes from the line of Gregg Gilbert from Prowse.

Speaker 4

Thank you. Core, putting aside the strong performance for a moment, I wanted to ask you about liability management. Is

Speaker 5

there

Speaker 4

any progress you can discuss around your proposed opioid settlement? And on the price fixing allegations, how do you plan to balance the need to create certainty for long term investors with the desire to achieve your long term deleveraging targets as well as other considerations that we should be aware of? Yes.

Speaker 2

Thank you for that question. So first, on the opioids, we have continued our positive dialogue with the AGs. And we're continuing to refine, you could say, the framework with, of course, the objective to implement it. There has been a significant delay in the process due to COVID-nineteen. It basically is the case for most big settlements like the framework settlement that when you have a lot of parties, need to bring together with a lot of lawyers involved.

Unless there's a triggering event, it doesn't really happen. And we were expecting that triggering event, as some of you probably remember, to be the trial in New York in February, but that got delayed, postponed because of COVID. It's still being postponed. So we don't have a clear timing on that. So I would say a very positive dialogue with the AGs, but no clarity on when exactly the framework will come to fruition.

It is still a very, I think, desirable thing for the framework to get implemented. It does include, as you know from us, donation at the level of CHF 23,000,000,025 billion of products at WAC price, probably half of that net price in a category where the states can alleviate some of the problems about substance misuse and help treat patients better. So we think it's a good thing for the American people if this framework does get implemented. And we are still very optimistic and hopeful it will get implemented. But on the timing, I must admit, I don't really have a good clear answer as to when that might be.

I think it will sort of be once we have clarity legal situation, a major trial in one of the key states and the fact that that is actually progressing then that might result in a clarification on that. On the price action situation, we remain in dialogue with DOJ. We, of course, see a situation where we do not see that the company in any way participated in criminal organized price fixing or creating a cartel or anything like that. So we would like to resolve it together in a positive way with DOJ. And we don't know whether this will be possible.

But that's, of course, the option that we resolve it, which would be nice. And then there's the option that it goes on in the legal system. And we are looking at all options. And we think that we can manage the situation no matter what option and that we have good plans for doing so. But right now, we're still in a dialogue with DOJ.

Speaker 4

Thank you. Thank you for that.

Speaker 0

Thank you. Your next question comes from the line of Ronny Gal from Bernstein.

Speaker 6

Good morning and congratulations on the nice quarter. Two, if I mind, Core, we're seeing some significant cash, CapEx awards from The U. S. Government to companies who are not directly involved historically in the generic industry. And we've not seen, the traditional companies

Speaker 2

that are

Speaker 6

in the industry participating. Now you have both formulation capabilities and significant API capabilities. And I kind of wonder if you can give us an update about that process, your ability to participate in it, your ability to shift manufacturing of API and dosage forms to The U. S. Or Europe as the countries require?

Essentially, you see this as something you will participate in given that apparently it's going forward? Second, in the first half of the year, we have seen on the bulk volume oral products, which we all track to IQVIA, a significant drop in Teva's volumes. And can you just describe to us a little bit the dynamics there and your strategy going forward? Is this a significant segment for you? Something that is nice to have?

How do we think about the progress of your volumes as a kind of a bulk generic supplier to The U. S. Market? So

Speaker 2

just clarify the last question, Ronny, to be absolutely certain what you asked about, you said bulk generics. Were you thinking about API? Or you were thinking what do we just to clarify?

Speaker 6

I meant yes, I meant commodity generics. So fine finished dosage forms, but you just look at the raw volume numbers that we get from IQVIA or Amadeus, and you basically see a significant decline there over the last six months?

Speaker 2

Yes. So let me address both questions. So if we take The U. S. First and the discussions about API and so on that has been going on for a while, but really got more, you could say, at the front page in connection with COVID-nineteen.

So first of all, Teva is a company with a very strong manufacturing base basically in U. S, Europe and I would say, we could call it NATO Allied countries or U. S. NATO Allied countries. So we have a disproportionate large part of our entire manufacturing in countries that are politically aligned with U.

S. And Europe, which, of course, is a good thing from a U. S. Perspective. It's also true that there's been discussions about getting API manufacturing, actual API manufacturing back into The U.

S. It's a fact that it has basically all left The U. S. Within the last thirty years. So there is nothing left, which means that getting it back for real would take probably ten, twenty years and would have to depend on major structural changes in pricing and all these kind of elements, as you can imagine.

Now we are, of course, positive towards any collaboration with the U. S. Government. We have been in dialogue with the U. S.

Government all along and sketched out possibilities on specific products where we might help, also specific products that are related to COVID-nineteen therapies where we might help. So far, hasn't come to anything specific. I would say with regard to what has happened so far, there's probably, without me getting into any details, a mixture of operational and in some cases political agendas that get mixed up here. Teva is not really interested in the political side of it. We are more an operational company.

So if it makes operational sense, we would love to do more manufacturing in The U. S. But it will take certain structural changes in the marketplace, which we are currently not seeing happening. And therefore, without those changes, you will not see us do a major relocation to The U. S.

But we are open to make any kind of deal on different products. We've offered that as well to the U. S. Government. On the second question, I think the reduction you see in volumes here in the first half in The U.

S, that's mainly related to COVID-nineteen. We can see in our market data that we sort of have the same market share. There's no major change in our market share. So the major change we've seen is a reduced volume being bought by patients in pharmacies both of generics and OTC products in the second quarter of this year. And that's basically related to the lockdown or semi lockdown or fear of going out or whatever you want to call it, which has reduced the volumes patients have been buying.

There is an indication in the latest macro data from the companies that supply such data that this is normalizing. It hasn't completely normalized. But if we look at Europe and The U. S, there's a tendency that it's getting back closer to normal volume levels. It's anybody's guess how the pandemic will evolve the rest of the year.

If it gets a lot worse, then probably we'll see a modification of volumes being lower than they were last year. If the situation continues to improve slowly area by area as it has been doing in Europe, then we'll probably get back to a more normal volume level. So thanks for that question Those two questions actually. Thank

Speaker 0

you. Your next question comes from the line of Nathan Rich from Goldman Sachs.

Speaker 7

Hello. Thanks for the question. Just two on the margins performance and outlook. You've had nice margin performance so far in the year. I think looking at the midpoint of guidance for the back half, sort of implies a 26% EBITDA margin or so kind of down from the 30% level you saw in the first half of the year.

So can you maybe just talk more about kind of your expectations for margin cadence and kind of any factors that we should keep in mind as we think about modeling the back half of the year? And then tied to that, I just wanted to ask one clarification question. Kind of putting together your comments on what you've seen in the first half of the year related to COVID, did you guys kind of have a sense of what the net impact either revenue or EBITDA was from some of the COVID related kind of purchasing dynamics that you've seen so far?

Speaker 2

Yes. So thanks for those two questions. I'll give it a quick answer, and then I'll turn it over to Eli to hear if he wants to say more about the margins. But you're absolutely right that for a number of specific reasons, we saw very high margin in the first quarter, which we also indicated that's not really what's part of our well, it is part of our full year guidance, of course, but we won't maintain that level. And you could say every quarter, you have a couple of swing factors, which might be to the tune of CHF 50,000,000, 100,000,000, could be exchange rates, could be launches of products, could be people either destocking or stocking up and so on.

So you have some swings there. If I give you the big picture, then I would say the big picture is that we're going to hit 28% operating margin at the 2023. That's a firm target, and we are firmly dedicated to that. Now you're probably also right that this year could be around 26%. And there are some swing factors up and down that can affect that and Eli can comment on that.

But I think the most important for you to know is that we'll hit the 28 in 2023. We'll do that by improving at around 100 basis points per year. And we'll do it in a combination of active portfolio management of our in line portfolio, active management of our cost in our manufacturing network and active management of our sales and marketing and G and A cost. So we'll be optimizing the whole thing. And I think it's fair to say that this is something I've done many times before.

So this is something I know can be done. So on the margin, I'm pretty firm on that. On the COVID, that's a little bit of a more tricky question actually because there definitely was a positive effect in the first quarter. There definitely was negative effect in the second quarter. There definitely was probably a wash more or less on the revenue, probably a slight improvement on the cost.

But then we also had associated costs that went up. So if you go to the micro level, for instance, distribution costs have gone up because transportation costs went up. Travel costs have gone down because travel went down. So you have all these swing factors up and down. So I would hesitate to give you a firm number other than saying that in my big picture analysis, just like the half year half year analysis you saw from Eli, I think it's a wash.

I don't think there's a significant effect positive or negative. There's a lot of small effects in both directions. But I think overall, it's a wash. So with that, I'll just let Eli comment a little bit more on the margins for the second half and how he sees the final year operating margin and then say thank you for questions. And then after Eddy's comments, we'll move on to the next.

Speaker 3

Okay. Thanks, Nathan, for the question. So there are kind of a combination of, I would say, main three elements. First of all, we need to actually understand the OpEx. The OpEx for the first half is trending combined R and D, sales and marketing and G and A at the level of around 25% to 25.5%.

And a year ago, it's like 27.7%. So here you have like at least 2%. And we end up 2019 with 51.5% on gross margin and 24.5% on OP. Our planning is to at least top 100 basis point additional one point for both gross margin and OP by end of the year by 2020. What you can see for the first half that we are really on trend on the gross margin.

We're actually yielding to 52.5% which in that area we see it's coming. And we got kind of an upside in Q1 due to economic hedge revaluation mark to market that gives us kind of an upside. So we're currently the first half is accumulated 27%, but we see it actually yielding to the level of 25.5% to 26%. And as you can actually recall from my prepared remarks, mainly you can see that the first half is with $6,000,000,000 spend base and you can actually recall that we're going to do less than last year, which was 12,700,000,000.0 So the numbers for the next half most likely going to trend on the OpEx at the range of around 26%. So with that one, I think that you can understand how we'll look on the dynamics.

Speaker 2

Thank you, Eli. Let's move to the next question.

Speaker 7

Great. Thank you.

Speaker 0

Thank you. Your next question comes from the line of Elliot Wilbur from Raymond James.

Speaker 8

Thanks. Good morning. Cor, specifically just wanted to ask you a couple of follow-up questions around the fasinumab program in light of the new data. Obviously, replacement signal may be new with respect to fasinumab, but not something that's new to the class. Just wondering how you're thinking about the benefit risk profile now of the product and approvability in light of the new data and whether or not there's any insight that you could share with us with respect to that particular subgroup where the signal was seen on lines such as patient demographics or concomitant medication use or anything there that may help us to sort of put that into a little bit better perspective?

Thanks.

Speaker 2

Yes. Thank you for that question, Elliot. I'm afraid I can't give you that detail yet because the detailed analysis of all those very relevant factors have not been completed yet. And we haven't also got the full sort of long term safety database We haven't got that yet, which we will get at the end of this year.

So the beginning of next year, we'll have that ready for you. So the way I look at it is basically, you could say, in a way unchanged to what I've said in the last two years, which is that I believe that this is a very efficacious product. I think that's confirmed now. The one milligram monthly dosing is definitely very efficacious. I think there is a very low level of safety risk here.

But of course, it remains to be assessed completely once we have the full long term safety. And it remains to be discussed with FDA. But the way I look at it, unless something new pops up in the final analysis, is that it's a from my overall point of view, and I have to say I'm not a clinical expert, right? But I've seen a lot of clinical trials. I think this makes sense.

And it also because the alternative pain medication that people often use does have a risk of misuse, does have a risk of addiction. And this product does not have any risk of addiction. So you could say you need to take the risk benefit in a way, if you look at it holistically and look at the product itself, the strong improvement it has on pain and physical function, which is proven beyond doubt in the clinical trial. And then the associated improvement, which is that you will be avoiding alternative therapies that have a risk of abuse. And in that sense, a commercial point of view, if it does end up getting approved by FDA, then I think it has a strong commercial opportunity here to the benefit of many patients suffering from severe pain.

So thank you for that question, Elliot.

Speaker 0

Thank you. Your next question comes from the line of Gary Nachman, BMO Capital Markets.

Speaker 5

Hey, this is Eli on for Gary. Thanks for taking the question. Just wondering if you could provide some info on what portion of the new AJOVY prescriptions are coming from the auto injector and if you're seeing any migration of existing patients from the syringe to the auto injector?

Speaker 2

Yes. Thank you for that question, Gary. I think I remember the number, but I think maybe I even had it on the slide. So I'm just going to look back to see what we have on the slide. I've got it here.

So yes, it's right here. I think the auto injector is launched, of course, now accounts for 40% of total NBRx and 50% of TRx. So out of the NBRx you're seeing, it's 40%, which roughly if I do just rough math on the curve here without having done it in detail indicates that the growth we are seeing is basically identical to the order injector scripts, but we still have a lot of scripts on the prefilled syringe. So it indicates that we're not seeing a switching, but that we're seeing generation of new scripts, which is very, very positive.

Speaker 5

Okay. Great. And then just a follow-up. You recently announced data for from the Phase IIIb open label focus study. Can you just comment on how you see that contributing to the value of AJOVY versus competitor?

Speaker 2

We I would say, if I look at in general with the focus studies and the long term Phase III programs we have, AJOVY has shown a fantastic main it maintains its efficacy in a really, really strong way. It's well known in many CNS drugs that efficacy wears down over time. That's quite a normal phenomenon. This is not the case with AJOVY. So the long term data, the long term focus data we have indicates that AJOVY keeps on working, sometimes even better, which is maybe just random, right, that you get some results that are slightly better than you had in the previous period.

But it's quite remarkable that the efficacy of AJOVY keeps on working even in long, long term use. And that's, of course, extremely positive because this is a chronic disease. And what you really want is a drug that works well from the beginning, but keeps working. So I think it's very, very positive. I don't have any direct comparison to our competitors because they are not in that trial.

But I can just say that for AJOVY, the results are really, really strong. Thank you for that question.

Speaker 6

Thanks.

Speaker 0

Thank you. Your next question comes from the line of Umer Raffat, Evercore.

Speaker 9

Hi. Thanks so much for taking my question. I have two if I may. First, we saw the U. S.

Government cash outlays to Kodak recently on securing drug supply. I'm curious if Tabak would possibly be in a position to land something similar, especially if it guarantees some sort of supply chain on critical ingredients? And also, Cor, I saw in the press release, there were arthropathies in the osteoarthritis trial. Can you speak to what percentage of that was Type two RPOA?

Speaker 2

Yes. So the first one on U. S. Government and Kodak, I don't really have a comment on that specific deal. What I only know what you also know what we've read in the press that they got a loan of some €750,000,000 and that they would use that to establish API manufacturing in The U.

S. Structurally right now, it's not profitable to do API in The U. S. That's why nobody does it. So unless there are some structural changes, then it's probably going to be a very, very tough challenge even if you get a very cheap loan to make that a positive business venture.

But that remains to be seen. We are very open to doing API manufacturing in The U. S. And we also are open and are in discussion with the U. S.

Government about it. But it has to be sustainable and has to be long term. And hopefully, we can end up working something out like that. But I think a lot of what's happening right now is political and is not really sustainable and operational. But that remains to be seen.

Then I can't comment on the details on the different types of RPOA simply because we haven't had the time. This is hot off the press, you could say, the Phase III readout here. And I haven't had the time to look at all the details. So that will have to wait until we sort of have more time to analyze. That's also why I couldn't ask about the details about do we see any differences in subgroups and so on.

That analysis has to follow, and we'll share it with you once we have it. Thanks for the questions.

Speaker 0

Thank you. Your next question comes from the line of Akash Tewari

Speaker 10

Hey guys, thanks so much for taking my questions. So look, there seems to be a big delta between the drugs that are named in the criminal complaints for generic price fixing versus civil complaints. As we size up kind of the potential liability impact, what's more appropriate, I think, just for building up a framework? And there's also admittedly a minority perception that there could be minimal to no DOJ liability for Teva. Is that a reasonable base case assumption for investors?

And then just one question on the Rest of the World business. It's been underperforming for a few years, but consensus keeps modeling this line to kind of stabilize. Over what time frame could Rest of World kind of return to growth for Teva? And how long would kind of the growing pains with the new Japan strategy last? Yes.

Speaker 2

So thanks for those two questions. So if we look at the price fiction first, then there's a criminal side to it, which is something we discussed with the DOJ. There's also a civil side with the DOJ. And then there is a sort of AGMTL side to it, which is also civil. And I think you're referring to the fact that with DoJ on the criminal side, there are allegations I think around 10 products.

And on the civil side, the allegations around 110 products. Now, first of all, it's important to repeat that in our internal investigation where we've been through more than 1,000,000 documents, we don't see any evidence of organized price organized cartel or anything involving a structured approach to this by Teva. Now we do have continued discussions with the DOJ. And I think it's not really possible right now to give you a sort of firm basis for how you should model this. It's an unclarified legal situation.

And as you know, with legal situations, they can develop in all kind of ways in The U. S. And we will do our best, of course, based on the fact that we believe we did nothing wrong to not have a sort of unsurmountable financial damage coming out of this. And there's a lot of tactical elements to that, which I can't really comment on. So I can't really give you a firm answer on that one.

I'm sorry. When it comes to the rest of the world, then you're absolutely right that we've that have been dragging down the total revenue development of the rest of the world or international markets. Actually underlying most of the markets are growing nicely. And the last sort of problem child left you could say in terms of growth has very much been Japan. And with the new restructuring of the business in Japan, we hope to put that behind us, which basically means that I'm optimistic that we will see modest growth in the rest of the world in the years to come.

We don't have anything left that we feel we have to sort of reorganize or clean up or whatever you want to call it. So that part of the restructuring should be done by the deal we're doing in Japan at the end of this year. So thank you for the questions.

Speaker 10

Thanks a

Speaker 2

I think now we are hitting close to the hour. So I guess we have time for one more question.

Speaker 0

Thank you. Your final question comes from the line of Jason Gerberry, Bank of America.

Speaker 11

Hi. This is Ash Verma on for Jason. Just wanted to get a little bit more details on the Alvotec biosimilar partnership. How do you think this positions you to compete in this evolving market? And can you also elaborate on the profile of the programs you will advance?

Are these early or near to market assets? Or do you have any therapeutic focus?

Speaker 2

Thanks for that question. So our collaboration our strategic collaboration with Alvotec involves five biosimilar products that are, you could say, at different stages of development. But they are compared to our own portfolio slightly earlier than our own portfolio. So they hopefully will secure assuming that they all are successful. They will secure that we have a sort of long string of launches over the coming ten years in The U.

S. In the biosimilar space. We do feel that with our commercial presence in The U. S. Where we are the biggest volume supplier of pharmaceuticals that we can handle products in basically all therapeutic categories.

And we are very happy about the development we've seen on TRUXIMA. So we very much look forward to this. I can't comment on which specific products we're talking about, but that will evolve as time goes by. We will, of course, make you aware of that. But I can just say that now we have a portfolio of more than 10 biosimilars in The U.

S. Marketplace. And I think that Brendan and his organization has shown a very good performance on TRUXIMA. And maybe we will end this session with giving the word to Brendan, so you can round it off by just commenting on how you see our performance on TRUXIMA since we launched and going forward and how you see the ALDERTEC deal. So over to you, Brendan, for the final comments.

Speaker 12

Yes. Thanks, Corey. I appreciate the question. I think that if you look at our commercial performance on TRUXIMA, it's been one of the most successful biosimilar launches in the industry. We're up to a 17% weekly new to brand share and mid-20s when you factor in businesses not captured in IQVIA.

So if you look at Teva's commercial footprint, as Cor said earlier in the call, we have a strong footprint with customers on both the generic and specialty side, which I think lends to our capabilities in the biosimilar markets. As we think about the Elvitec deal, I think that, that deal fills a nice gap in our portfolio between the two assets that we currently have and some of our own assets here later on four, five, six years out. So I think it's a great deal for us, a great deal for Elvitec and I think it'll be a nice match of our capabilities. I look forward to commercializing those assets. Thanks, Kory.

Thank you, Brendan.

Speaker 2

So over to you, operator, and thanks for listening in to all of you.

Speaker 0

Thank you.

Speaker 1

Thank you everybody for joining us. Tracy, if you could, please provide the replay information. As usual, we are available to take your calls, and look forward to speaking to you in the coming days and weeks. Thank you.

Speaker 0

Thank you. Ladies and gentlemen, this conference will be available for replay after today's call. You may access the remote replay system at any time by dialing 40330785 and entering the access code 6145548. Those numbers again are zero zero four four three three three three zero zero nine seven eight five and access code 6145548. That does conclude our call for today.

Thank you all for participating, and you may now disconnect.