Welcome to the Teva's Second Quarter Financial Results Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ran Meir, Senior Vice President, Head of Investor Relations. Please go ahead.

Thank you, Sandra. Thank you, everyone, for joining us today. We hope you have had an opportunity to review our press release, which was issued yesterday. 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 tevapharm.com. I am joined today on the call by Kare Schultz, Teva's CEO; Eli Kalif, our CFO; and Sven Dethlefs, Teva's Head of North America Commercial. We have today quite a busy agenda. We will start the call with an update from Kare on the progress achieved on the opioid litigation front. This will be followed by Kare’s and Eli’s review of the second quarter business and financial results as well as the updated outlook for 2022. And we will end the presentation part of today's call with a strategy update from Kare and discussion of our new long-term financial targets. Please note that today's call will run approximately 70 minutes. Before we begin please see our forward-looking statements disclaimer on Slide number 2. Additional information regarding these statements and our non-GAAP financial measures is available on our earnings release and our SEC Forms, 10-K and 10-Q under risk factors. And with that, I will now turn the call over to Kare. Kare, if you would please.

Thank you, Ran. Welcome everybody. It's a pleasure to update you on the opioid litigation. As you have seen in our release, we reached an agreement in principle with the working group of both the states, the tribes and the plaintiff lawyers representing the States and subdivisions and reached financial terms for a nationwide opioids settlement. We will be paying $4.25 billion over 13 years. This includes the already settled cases. As you've been seeing we've settled number of states during the last half year. We'll be paying $100 million for the Tribes, but also spread over 13 years. As you've seen in the settlements we've been doing on a state by state basis so far, we have also committed to donate generic version of Narcan, which is a product that could be used in case of overdosing to help people survive. We'll be donating these products over 10 years and there will be the option for states to go for a cash value instead of the actual product donation. Of course, we are hopeful that many will accept the donation and in that way help combat the opioid epidemic. We have revised our provision to reflect all the details of the agreement we have in principle on a nationwide settlement. The agreement is contingent upon final documentation among the working group and us. And of course like other big nationwide agreements is also predicated upon it that you will need a certain participation from the states and the subdivisions, which will be set forth in the final agreement. Agreement is also contingent upon us reaching an agreement with Allergan with respect to any indemnification obligations, and Allergan reaching a nationwide opioids settlement. Once the documentation is finalized, the nationwide agreement will need to be adopted by a sufficient number…

Thank you, Kare, and good morning and good afternoon to everyone. I will begin my review of the second quarter of 2022 financial results on Slide 15, starting with our GAAP performance. Revenues in the second quarter of 2022 were $3.8 billion representing a decrease of 3% compared to Q2 2021. In local currency terms, revenue increased by 1% compared to the second quarter of 2021. This increase was mainly due to higher revenues from generic products in Europe and North America, partially offset by lower revenue from COPAXONE and BENDEKA/TREANDA in North America. We saw higher demand for generic and OTC products in Europe, mainly resulting from the removal of restrictions related to the COVID-19 pandemic, together with higher revenue from generic product launches. The increase in generics revenue in North America was mainly related to the revenue from the generic version of revenues. In Q2 2022, we're recorded a GAAP operating loss of $949 million compared to operating income of $582 million in Q2 2021, GAAP net of $232 million compared to the net income of $207 million in Q2 2021 and a GAAP loss per share of $0.21 compared to the earnings per share of $0.19 in the same period a year ago. The significant year-over-year decline was mainly driven by goodwill impairment charges, which I will discuss in the next slide. It was also driven by higher legal settlement expenses related to an update of the estimated settlement provision recorded in connection with the remaining opioid cases as Kare just mentioned. Foreign exchange rate movements during the second quarter of 2022, net of hedging effects, negatively impacted revenue and GAAP operating income by $162 million and $6 million respectively, compared to the second quarter of 2021. This was a result of the impact of stronger U.S.…

Thank you, Eli. It's a pleasure to share with you our strategy update and our new long-term financial targets. If we start by looking along the background for our current targets, then they were set as you know, developed by management and the board at the end of 2017, beginning of 2018 in order to create a five-year outlook for how to stabilize the business. In the meantime, the opioid litigation grew in complexity and size, but I'm very happy that we today can announce the agreement in principle, which basically is the beginning of putting this behind us. We've also in those five years, had a huge debt to handle, and we've been paying it down consistently, as you've seen in all our presentations. Also today, actually from a cash point of view, the last four years, we've paid $18 billion to the bond holders in the form of debt reduction and interest payments. And of course, we will continue to do so which means that we will now be taking the debt below $20 billion and we'll continue to see reduction of it. The way we've done it is of course, partly by a very strong focus on cash flow and optimizing the business. And if you compare to 2017, then the annual spend base is down by nearly $5 billion on an annual basis. And we've been able to generate consistently more than $2 billion in cash every year. And we expect to continue to do so going forward. The way we've done it is really by optimizing the business. From the beginning, we have created a unified organization structure. It's the one set concept we call it basically meaning that everybody works together in order to optimize these synergies in the organization between generics, OTC, specialty,…

Thank you. Thank you. And the first question comes from the line of Balaji Prasad from Barclays. Please go ahead. Your line is open.

Hi. Good morning everyone and thanks for taking the question. Kare, firstly, congratulations on getting the settlement in place. So I'm curious to know what are the next steps and timelines for the settlement specifically focusing on the caveat with Allergan and is there a time limit by when the Allergan settlement needs to happen? And could – if it doesn't, there is – is there a chance that the current settlement could be rendered mode? And you could also just speak about the longer term growth that you're guiding to. We have now almost been in a condition to think of Teva's generics growth as flattish centered around a $4 billion size. So as we look out to the longer term, generics growth of 4% plus. Is it fair to assume that Teva can deliver growth equal to or greater than this longer term generics market growth? Thank you.

Thanks for those two questions. Let me start by the opioid settlement. So our expectation for the timing is that in the coming weeks, the agreement in principle will be finalized in actual wording. And as you know the mechanics is actually that is an agreement for the states and the subdivisions to enter into an agreement because the way it works is that you agree on all the terms and how to do it. And then you ask all the states and the subdivisions to sign up to this agreement. And then of course they get included and they get the money and the product and so on. And the way it typically has been working, if you look at J&J and the three big distributors, how they did it, and we will do it very similarly, then it works the way that – I would say a clock start, and then you have some months where people can opt in. And then after those months have passed, you have an evaluation, you have enough participation for this to be meaningful. We would definitely expect to have that given all the information we have from both states and plaintiffs' lawyers and given what we saw with J&J and the three distributors. And then once that gets done then state by state, subdivision by subdivision, you sign and you start implementing. And that means that the actual implementation will start sometime next year. In terms of Allergan, of course, the assumption here is that there will be an agreement where they will be also taking part in that. And I think that's by far the most likely and of course also the best for everybody involved. In terms of the growth rate, then you're absolutely right that sort of a…

Thank you. We will now take the next question. And the next question comes from the line of Nathan Rich from Goldman Sachs. Please go ahead. Your line is open.

Great, thanks, and good morning. I wanted to follow up on the long-term targets, a similar question, Kare, of what you had just were speaking to, but I was wondering if you could help us think about the main building blocks underlying the guidance for mid single digit constant currency revenue growth. And you put revenue growth as sort of the last factor on those, that term target slide. So, I guess, how important is achieving that to reaching the other targets on the slide? And if I could maybe ask a follow up on your assumptions on the R&D and pipeline, it looks like you narrowed your focus on the specialty pipeline and reduce some of the programs that you had ongoing. Could you maybe just talk about the areas of focus going forward and any new run rate for R&D spending as a percent of revenue as we think about the long-term targets? Thank you.

Thank you for those questions. If we take the long-term targets first, and let's say the dynamics between the different targets, then the three targets for margin, cash earnings and debt are not linked to achieving the fourth target. So we will achieve the three targets even if we fail on the fourth target, but we don't plan to fail on any of the targets. We plan to reach all four targets, but the simple answer is we do not need revenue growth in order to reach the three other targets. But, of course, we'd like to have revenue growth because that means that the absolute profit pool and the absolute earnings will be growing more than they will be growing if we just achieve the first three targets. So we are strongly committed to achieving all four targets and the building blocks are quite simple in a way. And what I try to illustrate that there will be growth coming from biosimilars, which will be contributing. There will be growth coming from specialty, not just from AUSTEDO and AJOVY, but also UC which is the brand name for Risperidone LAI, which we still expect to launch first half of next year. So there's the portfolio of specialty products, which will be driving growth, not just in the U.S., but also in Europe, continued growth of AJOVY in Europe is – AJOVY is doing very well in Europe as you see and will continue to do so for many years. So there's a number of growth drivers, which altogether combined with a stable position in traditional generics means that the overall revenue will be grown. Your other question is about R&D and you're absolutely right. We are focusing in our neuroscience and immunology. These are the areas where we have the most expertise historically, and also the area where we have the best quality projects. And you also right that we have closed a couple of projects because we didn't see that – you'd say scientific value is being high enough, value we could give to patients was not high enough and therefore we have stopped these projects. Once we have them showed you, they all need very essential unmet medical needs, which basically means if they succeed, then they have a high chance of being successful. And we will continue to invest in R&D both in generics and biosimilars and specialty. We do not plan to increase the percentage of revenue that we invest in R&D, but we do not plan to reduce it either, which basically means we're growing revenue. You will see that we will be spending a little bit more, but nothing dramatic. Thanks for the questions.

Thank you. We will now take the next question. And the next question comes from the line of Umer Raffat from Evercore. Please go ahead. Your line is open.

Hi, guys. Thanks for taking my question. So look the announced settlement of framework is about $3.5 billion of sort of cash value. And I'm sort of adjusting the drug for the cost of the drug, so $3.5 billion. Separately, we know that on your P&L, you had $2.6 billion charge on an NPV basis, which was implying – and this is out of last quarter, which was implying the equivalent of $3.5 billion to $4 billion in cumulative payments over time. So I guess I'm just a little confused why there's an additional $700 million accounting charge that implies the value, the NPV value higher than sort of what is used then. So I just want to clarify and square that. The other one is the Allergan indemnification, I guess, why hasn't it happened already and where do you stand on that? Thank you very much.

Sure and I'll just give an overall explanation for the accrual we have and then Eli can give you some of the details and then I'll get back to the Allergan thing. The overall accrual includes everything. So – and we won't comment on all the details on the agreement in principle, but you can imagine there is tons of details about the already settled cases, the product volume there, the fees in the different cases for the attorneys, the tribes, the different ways of the payment schedules, the 13 years, the discount rate, all kind of stuff goes into it. But the only thing I can reassure you and maybe Eli will give you some more color to it is that it's very, very comprehensive. It's very, very detailed. It's of course done extraordinarily well also together with our external accounts. So the 3.2 is a very good picture of the net present value of all obligations, including product and everything else being involved here, but Eli maybe you want to give some, some color to it.

Yes. So, Umer, just as a high level, the 4.2 billion that we announced, this one including what you call the cash element there that's around 3.6 billion, and then we have the alternative element on the product to 240 and then there is some elements related to fees. And then on top of this, there is some other elements, which we cannot actually comment – comment again related to Allergan and few other elements that we are considering in our cost. But one thing to understand this is not really evenly straight line, 13 years the same amount each year. We have some amount that kind of front loaded on the six, seven years at the start of the assessment period. And we already have some prior settlement that we commit that need to actually have their own schedule already that we commit. So it's not like kind of a straight line one discount you can drive and get kind of a net clean NPV. And as Kare mentioned, because it's a lot of layers and very sophisticated, the $3.2 billion accrual NPV base is actually considering all the elements considering this level of full participation on the nationwide execution. Yes, and you asked the question on…

If I may just…

Yes.

If I may just clarify the announced amount is $3.6 billion, which is the cash element if I may. The NPV of what's on the P&L is $3.4 billion. So does that mean that the announced cash amount $3.6 billion is actually higher than $3.6 billion, it's closer to $4 billion of cash based on some of these other elements, “that you just mentioned”?

The announced is $4.2 billion, up to $4.2 billion in cash, which considering the cash element $3.6 billion, plus the potential convert from product to cash 20%, and then additional speed element insight, right? So if actually no one in theory getting the product, we actually took it to up to $4.2 billion. Now there are few other elements that we consider from what we call risk assessment and estimation in order to grow and that's actually on top of it, right. And we already consider what we paid. And what I'm trying to tell you is that, because it's not the straight line and the NPV is really getting different than the straight line NPV, because we have upfront payments, you actually get kind of more cash on the NPV top right. So that's what I try to frame.

Thank you for that.

Okay, thanks for the question with regard to Allergan, then we don't have any further comments to that, but we expect to see them as part of the final settlement.

Thank you.

Thanks for the questions.

We'll now take the next question. Please stand by. And the next question comes the line of Jason Gerberry from Bank of America. Please go ahead your line is open.

Hey guys. Good morning. Thanks for taking my questions. So, my question has to do with sort of the comprehensiveness of the deal as we know it today, when the J&J deal, I think, it got announced in second half of 2021, and then like 120 days later, I think, it was finalized, 90% of litigants had agreed, all the allocations were sorted out. So should we think about this deal as like on a similar trajectory and that most of the states and subdivisions have already sort of sorted out the allocations via the J&J deal. So I'd almost think this could happen sooner. And then can you give any color on how many states have agreed for this working group dynamic? Just curious if you can shed any more light on that. Thanks.

Yes, so the short answer is, I think, the situation is very similar. So all the details of course have been worked out. There is a ton of details on percentages, and states, and subdivisions and all that stuff, as I'm sure you know. And all those details have basically been worked out because it doesn't make sense to agree on a number if you haven't agreed on all the other details. So, that's all been done. And in terms of timing, we are estimating that the timing would again be similar. So we are estimating that within the coming weeks, we'll finalize say the wording of the settlement. But then as you rightly alluded to you have the process where people opt in states and subdivisions, and the understanding between the parties is of course, that by far the majority of states and subdivisions will update, that's the whole point of all the negotiations and obscuring that you have, and a nationwide settlement in principle. So we are very optimistic that we will see a very high participation rate probably similar to what you saw with J&J. And some of the states that were hold out on the J&J and the free distributors we have actually already settled. As you know, we have settled West Virginia, we have settled Rhode Island, we have settled Florida, so Texas, so we are quite optimistic that we will, at the end of the day, see relatively few opt outs.

Got it. Thank you.

Thanks. Thanks for the question.

Thank you. We will take the next question. And it's coming from the line of Ashwani Verma from UBS. Please go ahead. Your line is open.

Hi, thanks for taking my question. So on the opioid side so just to follow-up on Jason's question here we saw in the media news that there are like 12 AGs that actively participated in the negotiation for this in-principle agreement. I'm just curious to understand the level of motivation for the remaining 35 or so AGs, like what gives you the confidence that they can join hands in the coming weeks? And why did they not participate in the negotiations in the first day? So that's the first question. And just second. So Kare just wanted to ask you now that we are presumably nearing the closing of a chapter on opioids and embarking on the next phase of the story, can we assume that you'd be part of that at Teva? We know that your current contract expires in November, 2023, and we still haven't seen anything on the extension front. I remember the last one year extension was granted like two-year prior to the expiration, but this time the window is closing. So anything that you can comment on there will be really helpful. Thanks.

Thank you. So, with regards to the participation, again, I would compare to what happened with the distributors and with J&J. It's quite normal that the, you would say negotiation group is a subset of the children on both states. So there is no indication in that number of states being directly involved. There is no indication that the other states would not end up participating. It's very, very likely, like I said before, that we will end up with a very high participation rate just as it happened to distributors and J&J and some of the hold-up states that they saw, as I said before, we have already settled with those. So we are quite optimistic that this will be a settlement where nearly everybody will join in. With regard to my situation, it's actually correct, as you say, that the contract I have expires end of 2023. And with regards to the future, I don't really have any comments to that right now as of today. But thanks for the question.

Thank you. We'll now take the next question. And the next question comes on the line of Elliot Wilbur from Raymond James. Please go ahead your line is open.

Thanks. Good morning. Just want to shift gears here and focus on a couple of the key revenue drivers in the North American business. First, specifically, AUSTEDO and thinking about trends in terms of new patient activation or new patient starts have been relatively strong, implying a fairly good return on your DTC investment earlier this year also seeing a competitor put more money into the market, which seems to be expanding overall patient volume. Curious how you are thinking about incremental investment behind AUSTEDO over the next 12 to 18 months, either DTC or possibly even an expansion of your sales force. And then as a follow-up, want to focus specifically on North American generics, maybe just get your latest read in terms of key trends, such as price erosion, volume trends, what we're seeing in terms of new product approval flow still seems to be relatively difficult to get complex generics out of the FDA. But wondering if you are getting any indications that we may be approaching an inflection point in terms of starting to see approval flow pick up. But just general outlook on North American generics for the second half of the year. Thanks.

Yes. Thank you for those two questions. I'll give a very brief answer and then I'll hand it over to Sven to give the detailed answers. We're very happy about the progress on scripts with AUSTEDO and patient. So, that looks good. And we also happy about the performance of generics in North America here in the second quarter, heading in North America, combined with the biosimilars around a $1 billion. So that looks good. But for more details over to Sven.

Yes. Thank you, Eli. So for AUSTEDO we had strong TRx growth of 27% in the first half of this year versus last year. And also the new patients are developing strongly the NRx grew 32% in the same period. So we are definitely achieving our goal in terms of patient activation and that was one of the key objectives for this year. For that reason, we are also confident that we achieved our sales target that we set for ourselves in the second half of the year. As to your question about our marketing investments, we have achieved our goals of patient activation in the first half of this year. And we've also seen that we significantly increased the prescriber base, which speaks to the fact that the TV campaign was actually effective. We're now focusing our investments on downstream activities, on sales, on the titration management, on patient adherence and we believe we have a significant potential in that area. And we already did these investments in terms of salesforce expansion and other activities. So we are fully on top on the AUSTEDO development. On generics, our expectation is that the level of generic price erosion is trending back towards historic rates. We expect to see an incremental stabilization especially for the segment of base generics in the second half of this year. It does not mean that we don't have price erosion, we just have stable price erosion, and we do not expect an additional acceleration for our portfolio. So we're concerning our own development, of course, the most significant factor for business stability is the rate of new product launches and the gradual shift to high barrier generics, which have a more sustainable pricing profile. And these are products like EpiPen, the patches we have, the inhaler we launched and long-term – and other long-term injectables. They are more durable than the base generics business. And what we see here is that of course, you're right, the FDA is currently seeing significant barriers for complex generic approvals for that reason some of our approvals that we expected for this year are now happening next year. But overall we believe that especially in 2023 we see two elements that we get to a higher rate of product approvals. And we will also have with Humira biosimilar launch, I think for our generics business and inflection point for the future, because we have other biosimilars lined up after that, so that we are optimistic about the outlook of our North American generics business.

Thank you.

Thanks for the questions.

Thank you. We will now take the next question. And the next question comes from the line of Gary Nachman from BMO Capital Markets. Please go ahead. Your line is open.

Okay. Thanks. Good morning. So back to the proposed settlement how much are the payments front end loaded over the first six years that you highlighted in answerings Umer's question? And how much is spread out over the next seven years? Just want to have a better idea on how to model that, even if you could give us order of magnitude, if you don't want to give us the specifics there? And then on the long-term revenue objective, at what stage will you be able to do business development again, you mentioned as part of revenue growth that'll be one element, where does leverage need to be in order to start doing that? And then just give us any catalyst anytime soon from the specialty pipeline that that you can highlight. I know you'll have an R&D Day but just give us some of the key catalyst if you can? Thank you.

Thank you very much. So if we take the settlement first, then what Eli was alluding to was that there are some current settlements that we have already done with individual states where we are actually paying cash already this year. We have actually already paid cash in the first and the second quarter. If you look from next year and going forward then the variations per year are actually marginal. So you should imagine you take the total amount and divide it by 13, and then the swing factors up and down are marginal. It's not dramatic. So it's somewhere between say $300 million and $400 million per year in net cash for all the different elements. So it's not frontend loaded in that extent, it's just the fact that we have some settlements we already did where we have already paid some money this year, a couple of hundred million so far. So that's really it on the settlement. Then on, you say the business development side we already do small business development deals where we do bolt-ons of individual products. For instance, it's a business development deal that's behind the Humira launch that we are planning – of the biosimilar Humira launch we're planning for next year. The deal we did with Alvotech, the biosimilar we just launched in UK, the biosimilar to Lucentis. In the UK that's also a business development deal. So we do two business development deals and we will continue to do so. If you think about when is there more room, significantly more room in the balance sheet to do something slightly bigger than this that will be at the end of the five-year period. Because since we're aiming for a net debt-to-EBIDA below 2, then if you do sort of the…

Thank you. We will now take the next question. Please stand by. And the next question comes from the line of David Amsellem from Piper Sandler. Please go ahead. Your line is open.

Thanks. So couple of questions. So one just thinking at a high level about the business. One of your U.S. major peers, Viatris, is talked openly about divestitures, and I just wanted to pick your brain Kare on how you're thinking about divestitures particularly as a means to generate proceeds and perhaps then be able to more aggressively pivot towards the acquisition of brand assets. Brand assets being a question and a topic that comes up quite frequently. So how are you thinking about that particularly now that you've gotten the opioid settlement largely behind you? And then secondly, just switching gears to the Humira biosimilar, just latest thoughts on how you're thinking about that, not just in terms of timeline but also how you're thinking about the ramp and adoption here, just your general thoughts there? Thank you.

Thanks for the questions. I'll take the first one and then Sven can continue the second one. So with regards to divestments what we've done in the last five years is we've really analyzed the entire value chain, the entire business, and we have sold off those elements that we thought had no strategic synergy with the rest of the business. And we've kept all the elements that we believe gives us a strong synergistic effect. So we have no plans of divesting any parts of our business. We basically have the plan to integrate and optimize the business we have elected to keep because we believe it all fits very well together. So we will be working like I explained earlier on in the strategy to further optimize, further increase the gross margin, the operating margin and building a strong and stronger foundation. And then we will as a consequence of the debt reduction and the margin improvement free of more and more cash to do what you said, acquisitions of branded products either in one or another area, but it will have organically – you could say that we generate more and more flexibility to do so with the debt reduction and the margin improvement. And then on Humira Sven?

Yes. Thank you. I think the question was about the expectation for uptake of Humira next year. Just as a reminder, Amgen comes in January with their biosimilar and then a whole range of other companies including us in July 2023. I believe the uptake will be largely fined by the contracting strategies of PBMs and our customers; how they think they would like to build the biosimilar market versus the offer that they get from AbbVie. And that will be a two-step approach. One will happen in 2023, primarily in the summer of 2023 and then you receive a second phase in 2024 when the whole book of contracting will be opened again. I believe we are in a good position. We have the best product profile of all companies coming to the market in 2023. And we are already in discussions with all our customers about the access approach for next year. Yes, and I think we know more about that at the end of this year when all the contracting has been done. Thank you.

So thank you very much for all your questions and thank you for listening in and have a nice day. Bye-bye

That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.