Teva Pharmaceutical Industries Limited (NYSE:TEVA) Q1 2024 Earnings Call Transcript May 8, 2024

Teva Pharmaceutical Industries Limited misses on earnings expectations. Reported EPS is $-0.12161 EPS, expectations were $0.51. Teva Pharmaceutical Industries Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the First Quarter 2024 Teva Pharmaceuticals Industries Limited Earnings Conference Call. My name is Alex. I'll be coordinating the call today. [Operator Instructions] I'll now hand it over to your host, Ran Meir, Head of Investor Relations. Please go ahead.

Ran Meir: Thank you Alex, and thank you everyone for joining us today. We hope you have had a chance to review our Q1 results press release along with the press release announcing positive Phase 3 results from olanzapine LAI trial, both issued earlier this morning. Copies of these press releases, along with the slides presented during this call, are available on our website at ir.tevapharm.com. Please review our forward-looking statements on Slide #2. Additional information on these statements and our non-GAAP financial measures can be found on our earnings release and in our SEC forms 10-K and 10-Q. To begin today's call, Richard Francis, Teva's CEO, will provide an overview of Teva's first quarter results and business performance, recent events, and our focus and priorities going forward; then, Dr. Eric Hughes, our Head of R&D and Chief Medical Officer, will discuss progress on our innovative pipeline; our CFO, Eli Kalif, will follow up by reviewing the first quarter financial results in more detail.

Please note that today's call will run approximately one hour. And with that, I will turn the call over to Richard. Richard, if you would, please.

Richard Francis: Thank you, Ran, and good morning, everybody. I'm glad you could join us this morning. I'm excited to talk to you about our results for Q1 2024. Just to remind you it's a year today almost since we launched the Pivot to Growth strategy, a strategy designed to get Teva back to growth and I'm pleased to say that this is our fourth quarter in a row of continuous growth. So, the strategy is clearly having some effect and I'll go into a bit of detail as to why that is and what's driving it. But just to remind you a bit about the strategy. It's based on four pillars: step up innovation -- sorry, deliver on our growth engine, step up innovation, create a sustainable generics powerhouse and focus our business. I'll walk you through what we've achieved on each of these areas.

But obviously, we are starting to show that we can really commercialize innovative products. We are starting to show that we can take products through the clinic. And I think we'll talk a bit about olanzapine and the fact that we brought that to the clinic -- through the clinic nine months ahead of schedule. And we're showing good growth in our generics business. And then, I'll finalize with a talk about TAPI and how we've got that back to growth. But before I do that, I wanted to start with some exciting news on olanzapine, our long-acting treatment for schizophrenia which is in the clinic. We had the data readout on the efficacy of this study and it met its primary and secondary endpoints on all dose groups versus placebo. So, we're very excited about this.

And all doses were generally well tolerated, safe and there were no cases of PDSS. Obviously, the full submission of the safety data base will be available in the second half of this year. But this is a really important milestone for ourselves as well as the patients who suffer from this terrible condition. Now, just to reiterate why we are excited about it. If I move on to the next slide and just to sort of coordinate you, on the left hand side of this slide you'll see all molecules that are used to treat schizophrenia. And as you can see the largest of these is olanzapine, which treats moderate to severe. But also you can see on the right-hand side of this slide, there is no effective long-acting treatment of olanzapine. So, there's a significant unmet medical need.

And that's why we're so excited about this product and bringing this to the patients who clearly will benefit from it. So, more news on that from Eric later in the presentation. But now to dive into the results. So, the results, in constant currency, we are up 5% in revenue, up 12% in adjusted EBITDA, 18% in non-GAAP EPS, and our net debt now stands at 3.38. So good start to the year. Because of that, we are reconfirming our 2024 financial outlook. So, let's go into a bit more detail on all of these numbers. So, when it comes to driving this revenue what I'm pleased to say is the fact that we're hitting it in all our business sectors. So, whether it's innovative medicines, whether it's generics or whether it's TAPI API, we're seeing good growth.

And as you can see, AUSTEDO with 67% growth is a really good start to the year, 18% on AJOVY, and our global generics business is growing at a really healthy 9%, and TAPI API is back to growth at 2%. So, let me go into a bit more detail on all of these. So, starting with AUSTEDO. AUSTEDO continues to perform really well. $282 million for quarter one, up 67% versus quarter one 2023, and a good strong TRx growth of 28%. And because of this momentum, we are confirming our guidance of $1.5 billion for 2024. But this momentum gives me more confidence and more excitement around our long-term goal, which is to get to $2.5 billion of revenue by 2027. And I just wanted to use this slide to remind you everybody of the potential we have around this product unfortunately because so many patients are yet to get on treatment.

And that is why we started our direct-to-consumer campaign the start of this year to make those people aware that there is an opportunity to help address this difficult condition and they just need to seek help with their physician. So, very encouraging start to the year with AUSTEDO, and we look forward to that momentum continuing. Now, moving on to the second part of our innovative portfolio, which is AJOVY. Once again, good continued growth of 18%, and we're growing particularly strongly in Europe and International Markets. But what pleases me about this product is we continue to show market share gains both in the U.S., Europe and in International Markets, showing the competitiveness of Teva sales and marketing when we have a product like this.

So, very pleased that. And once again, I'm reconfirming the guidance of $0.5 billion for 2024. Now, moving on to UZEDY, the newest member of our innovative family. So, we launched this product last year and the momentum continues to build. We continue to see good access when it comes to fee for service in Medicaid. We're working with Medicare. The hospitals continue to expand their coverage and we're seeing good order -- reordering from our hospitals. And this is driven by, once again, this very favorable product profile. We recently had the Association of Psychiatrists meeting in the U.S. last week I believe it was, and the feedback continues to be really strong, particularly about this ability to therapeutic doses within 24 hours without any oral supplements.

So, good momentum. And once again, I can confirm that the guidance of $80 million we will be confident to achieving. Now, moving on to a slide which gives me a lot of pleasure to talk about, which is our generics business. Just to sort of orientate you, remember 65% of our business is outside the U.S., and we should continue to see continued good growth in Europe of 5% and International Market of 16%. But I am, I have to say, particularly pleased about the U.S. and the growth of 8% there. Now, I think this highlights, once again, the Pivot to Growth strategy and the focus we've placed on generics business to make sure we can bring products to the market more regularly on time and we have a good supply chain that has good cost of goods. I think this is the start.

We've got work to do, but this is very encouraging and I'm very pleased, and I want to congratulate the team on this. Now, moving on to another part of our business which we're excited about and that's our biosimilar business. We're excited to be in a position in quarter two to be launching our biosimilar Humira and SIMLANDI, and we're getting good interest from the payers, the PBMs and the channel with regard to this. Also pleased with the fact that our biosimilars Stelara is also approved and we'll be launching that in February of 2025. But it is worth pointing out that we have a portfolio of biosimilars and we'll be launching six by 2027. So, this is really an opportunity to support the Pivot to Growth strategy from a biosimilars perspective.

Now, moving on to step up innovation. I won't go into this in great detail because Eric will, but on olanzapine, I've already touched upon. But the one thing I would like to highlight on this slide is the capability build and the execution ability that we have at Teva. Olanzapine was recruited nine months ahead of schedule. TL1A is recruiting incredibly well in UC and CD. And we've got ICS/SABA off to a good start, and that is now supported by the partnership we have with Launch Therapeutics and Abingworth. So, we understand these assets are important to the patients who need them and we're focusing on them and then we're showing that focus can deliver performance. But I want to take it a little minute now to talk to you a bit about our capabilities in CNS.

Because obviously, I do talk a lot about AUSTEDO, UZEDY and AJOVY, and rightly so. And olanzapine will get a lot of attention today, but we are building out a very good pipeline when it comes to CNS. And we'll be giving you more and more information on this as we move forward. But once again, building a real foundation for Teva in CNS. Now, moving on to our final pillar, which is, focus the business around TAPI. Now, we obviously announced at the start of this year that we will be divesting TAPI, our API business. And I'm really pleased to see that the team with this freedom to operate outside of Teva and in the global $85 billion API market, they've really started to deliver, and got off to a good start with a 2% growth. I see this momentum growing and this performance increasing because of the interest we've got from CDMOs. And the interest is based on the fact that we have a broad technology base.

And our credibility of quality and supply reliability is clearly something that they are interested in. So, good news and more to come, I think, on TAPI throughout the year. To close on something that is important to us, which is about how we operate as a company and how we contribute to society. We launched our sustainability goals in 2023. And I just wanted to give you an update of how we progress. So, with regards to healthy people, we launched seven programs to increase access to medicine across the globe. Healthy planet, we have reduced our carbon emissions by 27% versus 2019. And when it comes to how we conduct ourselves in our business being ethical and in compliance, 100% of people have completed their training and that was achieved in 2023.

Now, with that, I'll conclude my section, and I'd like to hand over to Eric Hughes, Head of R&D. Over to you, Eric.

Eric Hughes: Thank you, Richard. As Richard mentioned, we're very excited that today we announced the positive primary endpoint readout of our olanzapine LAI program. It also met its secondary endpoints -- key secondary endpoints. And I thought I'd start off today by describing and reminding you of the study design and where we are in executing the study today. Remember, the study has an eight-week period. It's a randomized placebo-controlled study with three dose arms. And today we are talking about the primary readout at the end of that eight weeks. The study also includes a 48-week follow-up for safety that is now being executed with our full randomized patient size of about 675 subjects, slightly over-enrolled. So, it's important to note that second half of the study will be read out for -- in the second half of this year.

So, when it comes to the primary efficacy endpoints, we are very excited to see that we met clinical significance and statistical significance on our primary endpoint using the PANSS score. You can see that the score was between 9.7 points and 11.3 points in change from the baseline score. That's the change from baseline to week eight. So, right where we expected the efficacy to be and clearly efficacious on all three dose groups. Importantly, we are also up to about 80% of our total target injections at this point and we see no PDSS. So, the injections were well-tolerated throughout the study. I should mention that the key secondary endpoints include the clinical global impressions for schizophrenia scale and the personal and social performance scale, which both, for all doses, achieved clinical significance.

I would like to also say that this study illustrates our ability to execute and accelerate our programs in the innovative space. We brought this study out, up by nine months. So, a real good job by the clinical team. Moving on to AUSTEDO. We continue to do great work, informing our patients and our investigators about TD. We are running a study, a real-world observational study called IMPACT-TD. And this is something that we're very proud of, where it's looking at both the patient voice and the caregiver perspective on what the impact of tardive dyskinesia is. This study is the largest study for tardive dyskinesia ever, and it includes a wide range of ages, race and ethnicity, severities and their baseline movements, and their treatment experience.

And it's being run in 23 states in the United States. As I mentioned, we're developing a scale that really is measuring both what the patients' thoughts and what the caregivers see when it comes to tardive dyskinesia. So, understanding tardive dyskinesia is our goal and educating our patients and caregivers is our mission. The first set of data will be announced or presented at the Psych Elevate meeting later this month. Now, moving on to asthma. Asthma is a significant patient population. It's a very important chronic illness in the U.S. and around the world. And the majority of these patients use rescue inhalers. There still is over 10 million asthma exacerbations every year. And we've learned now that combination rescue inhalers are what's needed.

And in fact, the guidelines in providing -- the GINA guidelines have changed to the point where that's the recommendation for asthma exacerbation. That's the combination of both a beta agonist and a steroid. And that's why we're excited about our program, TEV-'248. This is a combination rescue inhaler using Albuterol and Fluticasone, two well-known medications by our treating physicians. And the important thing is that this is a differentiated device. It's a dry powder inhaler. And that's important for when it comes to taking care of pediatric patients and that's what we're targeting in this study. We're excited that we started our Phase 3 study at this point. Enrollment is going well. But it's great to have collaborated with Launch Therapeutics.

It will help to accelerate the program even further and importantly get those patients in the pediatric population going in the study. So, very exciting to be delivering in the future a new treatment for asthmatic exacerbations in accordance with the GINA guidelines. Moving on to my last topic, the anti-IL15 program. This is a very important program, because our first indication we'll be taking this compound into is celiac disease. Now, IL15 is a key cytokine in the pathology of celiac disease. When these patients eat gluten, it causes inflammatory reaction that releases IL15 and activates intraepithelial lymphocytes. It's a large patient burden in the U.S., about 2 million patients. Only about half of those patients are diagnosed. But the important thing to remember is that 50% of these patients still have symptoms even while taking a gluten-free diet, 20% of these patients never even respond to a gluten-free diet, and 50% of these patients still want treatment beyond a gluten-free diet.

So, that's why I'm excited about our anti-IL15 program. I've shown you before that we have a very potent antibody that rapidly reduces free IL15 levels and keeps those levels suppressed up to almost 80 days. We're exploring the compound in celiac patients right now. We're enrolling a patient by the end of -- study by the end of this year. Looking at a celiac challenge study, where we give a single dose of TEV-'408, and then two weeks later, start a gluten-free diet for 14 weeks. So, we're very encouraged to see the results of this study hopefully soon. And the important part about the study is really focused on the symptoms of the patients, really, are we impacting what they feel when they eat gluten-containing food? So, we think we have a potentially differentiated product.

It's a high affinity anti IL15, it suppresses free IL15 rapidly, and it has low immunogenicity to-date. So, on my final slide, I just want to talk about, we're achieving our milestones and accelerating them where we can. We've shown that our olanzapine LAI today has achieved its primary endpoint. We'll be curious or hopeful to see the final set of the safety data on our injections the second half of this year. Our anti-TL1A program is right on target. The enrollment is going very well for both ulcerative colitis and Crohn's disease, and we'll be looking for that interim analysis in the second half of this year. I just mentioned our anti-IL15 program enrolling our celiac patients this year in our proof of concept study. I'm very excited for the end of this month or the next month where we see the first patient in our anti-PD1-IL2 program in oncology.

And finally, we're enrolling our Phase 3 study now and working to accelerate our program for our dual action rescue inhaler for asthma. So, a lot coming and we're looking forward to keeping you updated. So, with that, I'm going to pass it off to Eli, and take it away.

Eli Kalif: Thank you, Eric, and good morning and good afternoon to everyone. I'll begin my review of our Q1 2024 financial results with Slide 29 starting with our GAAP performance. Revenue for first quarter of 2024 were $3.8 billion, an increase of 4% in U.S. dollars and 5% in local currency terms compared to the first quarter of 2023. The increase was mainly driven by broad-based growth from generics products across all our segments globally, including strong contribution from generics revenue made in the U.S., continued strong growth in AUSTEDO as well as AJOVY in our Europe and International Market segments. This was partially offset by lower revenue from COPAXONE as well as from Anda, our distribution business in the U.S. In Q1 2024, we recorded a GAAP operating loss of $218 million compared to an operating loss of $13 million in the same quarter last year.

The increase in operating loss was mainly due to higher impairment of tangible assets and other items, as well as higher sales and marketing expenses in the first quarter of 2024, partially offset by higher gross profit, lower legal settlement and loss contingencies and lower intangible asset impairment in the first quarter of 2024. As part of Teva's Pivot to Growth strategy, we have decided to divest our generics business in Japan, which is part of Teva's International Market segment. The assets and liabilities in relation to this business were classified as held for sale in the first quarter of 2024 and resulted in an impairment charge of approximately $600 million this quarter. We currently expect the business to be sold within the next year.

Moving to GAAP net loss, which was $139 million and GAAP loss per share that was $0.12 this quarter compared to a loss per share of $0.20 in Q1 last year. The lower GAAP net loss was mainly due to higher net loss related to a non-controlling interest which resulted from higher tangible assets impairment related to the business that was classified as held for sale. Turning to Slide 30, you can see that total non-GAAP adjustments in the first quarter of 2024 were $688 million compared to $661 million in Q1 2023. A notable non-GAAP adjustment include legal expenses of $106 million mainly related to estimated provisions recorded in connection with the certain litigation cases in the U.S. Other notable adjustments include amortization, purchase intangible assets of $152 million, the majority of which is included in cost of sales, and as I just mentioned, the impairment of tangible assets of approximately $600 million related to the business held for sale.

Now moving to Slide 31 for a review of our non-GAAP performance. As I mentioned earlier, our first quarter revenues were approximately $3.8 billion, an increase of 4% in U.S. dollars or 5% in local currency terms compared to Q1 of last year. Our non-GAAP gross profit margin was 51.4% compared to 49.1% in Q1 2023. This increase in our gross margin was mainly driven by improvement in our portfolio mix, including strong continued growth in AUSTEDO as well as decrease in our operational costs. As expected and in line with the normal seasonality and revenue progression between the quarters, we started the year with a lower non-GAAP gross profit margin. For the full year of 2024, we continue to expect our non-GAAP gross margin to be between 53% to 54%.

Our gross margins will gradually improve as we progress throughout the year driven by continuous improvement in our portfolio mix with a strong growth in our innovative portfolio and continuation of the ongoing cost optimization program. Moving to non-GAAP operating margin in Q1 2024, which was 23.4% compared to 21.4% in Q1 2023. This increase was mainly driven by higher non-GAAP gross margin, as I just explained. This was partially offset by higher sales and marketing expenses as a percentage of revenue, reflecting our increased investments to support our key growth engines, including promotional activities related to AUSTEDO, in line with our Pivot to Growth strategy. We ended the quarter with a non-GAAP earnings per share of $0.48 compared to $0.40 in Q1 2023, mainly driven by higher operating income.

The next slide shows our continuing effort to transform and optimize our global manufacturing and operating footprint to drive efficiencies. During 2023, we closed three sites to bring our total footprint down to 49, and we have plans to continue this progress. By the end of 2025, we expect to close or divest four additional sites with a goal to bring down the total number of sites to between 40 to 42 sites by 2027. So, we are really focused on continuing to optimize our operations to drive efficiencies and improve margins. Turning to free cash flow on Slide 33. Our free cash flow in the first quarter of 2024 was $32 million. As a reminder, Teva's free cash flow tends to face headwinds at the start of the year due to the timing of annual bonus payments paid out in the first quarter of every year.

In addition, our free cash flow for Q1 was also impacted by changes in certain working capital items. Today, we are reaffirming our 2024 free cash flow guidance, which we provided in January. Our 2024 free cash flow is expected to be in the range of $1.7 billion to $2 billion, and we expect it to pick up during the next three quarters driven by ramp up in our profitability, as I mentioned earlier, and as we continue to drive working capital improvement. Turning to Slide 34, our net debt at the end of Q1 2024 was $16.7 billion compared to $16.6 billion at the end of '23. Our gross debt was $19.6 billion compared to $19.8 billion at the end of 2023. The decrease in our gross debt was mainly due to exchange rate fluctuations of $193 million. Our net-debt-to-EBITDA slightly improved coming at 3.38 times for Q1 2024, mainly due to higher EBITDA.

Subsequent to the quarter close, in April 2024, we repaid [$956 million] (ph) of our senior notes at maturity. At the end of March 31 and as of today, there is no amount outstanding under the $1.8 billion revolving credit facility. Last week, Teva entered into an amendment to our revolving credit facility to update the company's maximum permitted leverage ratio under the RCF for a certain period. Under the amendment terms of the RCF, the company's leverage ratio shall not exceed 4 times in '24 and '25 and in the first quarter of '26, 3.75 times in the second, third and fourth quarter of 2026, and 3.5 times in the first quarter of 2027 and onwards. Now, let's turn our attention to our 2024 non-GAAP outlook on Slide 35. As we guided in January, when we initially provided our full year outlook, we had expected our revenue and earnings to progress gradually throughout the year.

That continues to be our expectation as we reported today. For the full year of 2024, we continue to expect our revenue to be between $15.7 billion to $16.3 billion. We are also reaffirming our 2024 non-GAAP outlook for operating income, EBITDA, earnings per share and free cash flow as provided in January. Like I said earlier, our non-GAAP gross margin is expected to be between 53% to 54% for the full year, and we expected the gradual pickup in margins in the second quarter, with a further progress in the second half of the year, in line with the revenue trajectory and the portfolio mix, as well as improvement from our ongoing cost optimization program. In addition, we continue to make deliberate and thoughtful investments in our innovative portfolio and to progress our key pipeline assets to drive both the short- and long-term growth for the company.

Similar to gross margin improvement, we also expected to see leverage in operating expenses as a percentage of revenue in line with the ramp up in the revenue as we progress throughout the year. With this, I conclude my review of Teva's results for the first quarter of 2024. And now, I will hand it back to Richard for a summary.

Richard Francis: Thank you, Eli. Thank you for that. And so, based on what we've told you today, we continue to be confident about hitting our 2027 guidance: 30% operating income margin; net debt, 2 times; and cash-to-earnings, 80%; and a CAGR of mid-single digit. The reason why we remain confident about that I can highlight on the next slide, it comes back to the execution of our strategy. As we laid out over a year ago, we had a plan to return to growth, accelerate growth and sustain growth. As you can see, we've made good progress on return to growth, focusing on our growth engines, our biosimilars and getting our generics business back to performance. To accelerate that we clearly have laid the foundation for that with the olanzapine readout today and our focus on ICS/SABA.

We also have highlighted the number of biosimilars we have coming by 2027. So, I think the momentum we're getting around Pivot to Growth continues to grow and so that we remain optimistic about the future. With that, I welcome to take questions from people on the phone. Thank you.

See also

10 Future Dividend Kings in the Next 5 Years or Less and

Top 20 Coal Exporting Countries in the World.

To continue reading the Q&A session, please click here.