Hello, and welcome to the Q1 2023 Teva Pharmaceutical Industries Limited earnings conference call. My name is Alex. I'll be coordinating the call today. [Operator instructions]. I'll now hand over to your host, Ran Meir, SVP of Investor Relations. Please go ahead.

Thank you, Alex. Thank you, everyone, for joining us today. We hope you have had an opportunity to review our press release, which was issued earlier this morning. A copy of this press release, as well as a copy of the slides being presented on this call, can be found on our website at tevapharm.com. Please review our forward-looking statement on Slide No. 2. Additional information regarding these statements and our non-GAAP financial measures is available on our earning 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 Q1 2023 results and business performance, recent events, and priorities going forward. Our CFO, Eli Kalif, will follow up by reviewing the financial results in more detail, including our 2023 financial outlook. Joining Richard and Eli on the call today are Sven Dethlefs, Teva's head of North America business; and Dr. Eric Hughes, our head of R&D and chief medical officer. They will be available during the question-and-answer session that will follow the presentation. Please note that today's call will run approximately one hour. And with that, I will now turn the call over to Richard. Richard, if you would, please?

Thank you, Ran. And good morning and good afternoon, everyone. Thank you also for joining us today. Now before I start getting to the Q1 results, I thought I'd just take a bit of time to give you my thoughts and impressions of the last few months I've had at Teva. Now in short, impressed by many of the things I've seen and discovered while being around the world talking to many of our people, and it's because of this that I think we have real opportunity for the company, and maybe the company is underappreciated currently. Now let me go into sort of four areas I'd like to focus on here. Now I know most of you think of us as a generics company. And in truth, we are more than that. We have an emerging innovative business, primarily driven by AUSTEDO and AJOVY, but recently about to be supported by UZEDY, our long-acting schizophrenia product, and this is gonna fuel continued growth going forward. And already, this is 10% of our total revenue. We also have a biosimilar portfolio, which I'll talk a bit about later, which is an opportunity to benefit from $4 billion of brand value coming off patent in the next few years. Second, our pipeline. Now I definitely know this is not fully known and understood. But I can tell you, we have some exciting assets here. And as I sort of dug deeper, I've seen some unique capabilities in our R&D organization, particularly when it comes to antibody design and formulation expertise. And as we go through our pipeline, I think you'll see that we have a balanced risk profile on many of our assets. Now coming to our core business, our core generics business. This is a strong global business. And what…

Thank you, Richard, and good morning and good afternoon to everyone. I'll begin my review of our Q1 2023 financial results with Slide 18, starting with our GAAP performance. Revenue in the first quarter of 2023 were $3.7 billion. In dollar terms, they were flat compared to the first quarter of 2022. In local currency terms, revenue increased by 4%. To provide you some color on our revenue performance by region. North America, we had overall solid performance with 2% growth in Q1 2023 compared to the first quarter last year. This growth was mainly driven by higher revenue from certain innovative products, mainly AUSTEDO; and AJOVY; as well as Anda, our distribution business. This was partially offset by lower revenues from our generic business and BENDEKA and TREANDA. Our generic business in North America decreased in Q1 2023, mainly due to increasing competition to parts of our portfolio and timing of certain customer bids. The overall pricing environment in North America generics is stable and in line with historical trends. Revenues in our Europe segment grew strongly by 9% in local currency terms, mainly driven by higher revenue from our generic business, including new product launches. And revenue from our international market segment increased by 8% in local currency terms, mainly due to higher revenues in our generics business coming from price increases, largely as a result of raising costs due to inflationary pressures. Operating income was $2 million in the first quarter of 2023, compared to an operating loss of $730 million in the first quarter of 2022. We had a net loss of $205 million compared to a net loss of $955 million in Q1 2022, and a GAAP loss per share of $0.18 compared to GAAP loss per share of $0.86 in the same period a…

Thank you, Eli. Thanks a lot. So in summary, Today, we are reaffirming our 2023 non-GAAP guidance for the year. We believe the AUSTEDO, AJOVY are gonna continue to drive good growth. With the launch of AUSTEDO once daily, we believe that's gonna add to that. And obviously, as I mentioned, the upcoming commercial launch of AUSTEDO gives opportunity for more growth from our innovative portfolio with strong performance in Europe and international markets in Q1, and we continue to focus on cost discipline and working capital management. And as of next week, I look forward to introducing our new strategic framework and a few priorities to many of you in person. So with that, I'd like to open up to questions. Thank you.

[Operator Instructions]. Our first question for today comes from Jason Gerberry from Bank of America. Jason, your line is now open. Please go ahead.

This is Hassan Aftab for Jason. So first one on the anti-TL1A antibody, we saw the preclinical data that you published back in 2018. And from a head-to-head perspective, what do you think drives your confidence that this may compare favorably to maybe Prometheus' or Pfizer's anti-TL1A antibody? And then the second question on biosimilar Humira, we know that the revenue is risk-adjusted in your 2023 guidance. And last quarter, you mentioned that you have some other hedging elements that might allow you to maintain the guidance if the product was delayed. And so can you share what those elements are? Thank you.

I'll hand the first one on anti-TL1A to Eric. So Eric, can you give advice on anti-TL1A and why we're so excited about it?

Yes. Sure. Thank you, Richard. We're very excited about our TL1A program. The potential to bring a new class of biologics to people suffering from inflammatory bowel diseases, very exciting for us. We believe our anti-TL1A antibody is highly differentiated and has the potential to be best-in-class. This is really built on the potency of the antibody and our strategy in the way that we targeted the molecule. We've increased our resources and our efforts to bring this program forward as fast as possible. We understand the interest in this program, and I think we have the best one. So we'll hear more about this next week, as Richard alluded to our new strategy and our pipeline. So we'll talk about that more next week.

Thanks very much, Eric. And on to your second question on biosimilar Humira, you're right, we did risk-adjust it in our forecast because of the uncertainty that we knew existed. What I'd say is the reason why we're maintaining guidance is one that was just adjusted, so it's a relatively small amount. The other is we have our launches of UZEDY and our growing innovative pipeline. So because of that, we feel very clear that keeping guidance is the right thing to do. So hopefully that answers your questions.

Yes. And if I could just ask for a follow-up. Should we expect to see any updates to the long-term 2027 targets at the upcoming R&D Day?

So I suppose you know, there's one thing I could say is I cannot answer that question to make you come to the investor day. We are -- we haven't changed our guidance for 2027, so we're committing to the operating 30% net debt ratio and also the growth.

Thank you. Our next question comes from Umer Raffat of Evercore ISI. Your line is now open. Please go ahead.

Hi, guys. Thanks for taking my question. Maybe if I could spend a quick second on the Phase 3 olanzapine program. Could you speak to what level of alignment you have on FDA on -- what exactly is it that you need to show in your trial to not get the type of black box Lily got on their prior attempt at long-acting Zyprexa? And then secondly, on the risperidone program. I know you've shared commentary a few times, but the question I have is, J&J barely did about $300-ish million from a branded sales perspective on that program. So how much could a sort of follow-on to that risperidone long-acting molecule truly do? What's the true commercial potential look like? Thank you very much.

Thank you, Umer. Thank you for those questions, and I'll hand the first one to Eric again.

Yes. Thank you, Umer, for asking about our olanzapine program. We're very excited about this program. The prospect of bringing another treatment to patients with schizophrenia is really in our wheelhouse, so we're excited by it. The olanzapine long-acting injectable is building upon our formulation technology that we developed for UZEDY. It's really an ingenious formulation that provides a really advantage to both caregivers and patients. It's given subcutaneously. And given the characteristics of the formulation, we really hope to have a favorable safety profile compared to other injections that are available for olanzapine. I think you're referring specifically to the post-injection delirium and sedation that has a black box warning on the intramuscular injection of olanzapine. Now obviously, we've developed our Phase 3 program in conjunction with feedback from FDA. And we're confident in the way that we've designed the study the number of patients and the total number of injections that we'll have what we believe to be a very good safety profile to avoid these side effects. So the study is initiated. I'm very proud to say it's going well, and we're looking forward to the results.

Thanks, Eric. So maybe I'll start by answering your question. But I'll also ask Sven, our head of North America, to come in because, obviously, it's his team launching risperidone, long-acting UZEDY. So I think we think because of the favorable patient profile we have with the product and the feedback we've got from the physicians and then the clinical nurse practitioners already in the unmet medical need, we think we can make some inroads based on the product characteristics I just laid out. So we see the opportunity differently. We think this has an opportunity to catch between -- to grow between 10% to 20% of that $4 billion market, but I'll maybe give the call to Sven to add a bit more flavor to that.

Yes. Thank you, Richard. And thank you, Umer, for the question. So there are about 1.6 million treated schizophrenia patients in the U.S. 10 of them, as we know, receive long-acting injectable products. The category itself is growing at around about 4% to 5% per year. So it's always good to launch a new franchise into a growing category. We actually believe that we can compete with UZEDY across the LAI spectrum, which means that we do not see UZEDY being limited to the risperidone molecule alone. And the main reason that we believe that is that the product profile makes it ideal for the use in the hospital setting, where the majority of the new patients get initiated with LAIs. Among the many key attributes in patients' convenience, it's subcutaneous. It has several injection site options, short and narrow needle, small injection volume. We're actually most excited about the pharmacokinetic aspects of the product. And especially here, the therapeutic levels that can be reached within 24 hours, which is quite important for emergency treatment in hospitals. And we have, as compared to other drugs in the category, no oral supplementation or a loading dose. So you can discharge the patient right after first treatment in U.S. sales that you have here at therapeutic levels for one or two months. And for that reason, we believe we have a highly competitive product in the LAI category. And as I said, we believe we can compete here across all molecules and to set a new standard for LAI treatment.

Thank you, Sven. Thank you, Umer. Thank you for the question. Next question.

Thank you. Our next question comes from Balaji Prasad from Barclays. Your line is now open. Please go ahead.

A couple for me. Firstly, on biosimilar Humira. I want to understand how much of a setback did Alvo's CRL posed you in your discussions with the PBMs. What is the total of the negotiations now? And is it fair to assume that 2023 is not the focus of your PBM discussions? One. Two, could you also clarify about the legal settlements that you are taking the provision for? What litigations are these related to? And lastly, if you could just maybe comment further on UZEDY and the market potential for this that you see currently? Thanks.

So as you know the PBM, Sven, I'll hand that one to you.

So of course, we had intense discussions with all major customers, PBMs, and all the downstream customers for Humira this year. And of course, changed the situation because our customers had to prepare for the market entry at -- happening end of June and July 1. So now, we received the CRL. That is, of course, transparent and known to all our customers. And we now have to wait for the outcome of the FDA discussions that Alvotech has concerning the approvability of the biosimilar BLA and also of the interchangeable BLA, and then we will see how we take it forward with the PBMs.

Thanks, Sven. And the legal settlement, Eli?

Thanks, Balaji, for the question. Yeah. So we had some few adjustments on -- mainly on two cases. One, we're actually progressing on the patient assistance program on COPAXONE with the DOJ. And currently, our estimation are around $100 million. This is what we're actually working on and trying to settle it. So this one -- this quarter, we actually at this launch. And the other element that we're actually looking now is kind of a tiny element related to the HIV and the reverse payment we're actually participating with Gilead. And this is $50 million, and the rest is kind of mostly about the timing and other elements relating to a very certain molecule, but that's the high level.

Thanks, Eli. And then on the UZEDY, allow me to clarify what Sven said and I said earlier, we think this is a great opportunity based on the product profile we have, the very patient-friendly profile. It's a $4 billion market. Based on what we understand about the needs of the patient and the physician feedback, we think we have a very good solution when it comes to our long-acting formulation. We see ourselves getting to between 10% and 20% of the market. We'll see how that plays out. I think one thing I would say when it comes to the schizophrenia market, and maybe Sven can add a bit of flavor of this is it will take a bit of time. This is a secondary care. This is in hospitals, as Sven alluded to, so there's a bit of time to get on by -- to get into those hospitals, to get into those departments and outpatient clinics to make sure it's ready and available for when these patients come in. So there is a bit of setting up the system to make sure that happens. But once that's in place, we see this product having a good trajectory. I don't know whether you want to add anything to that, Sven.

I think, Richard, you covered everything. As you said, we are prepared for launch. It will happen in the next days. We have a dedicated sales team, both in the field, but also for hospital coverage. We're working through the hospital listing, getting reimbursement in all places. And then we believe, of course, the molecule itself is well-known, the efficacy is well-established. That's clear. And I think we can communicate our product attributes also in a very clear and compelling way. We've done extensive market research to prepare for this launch. So I believe we will have a good uptake. Although you have to see that in schizophrenia in these indications, you typically have a slower development, like in other indications. But I think we are well-prepared here.

Thank you. Our next question comes from Ash Verma of UBS. Ash, your line is now open. Please go ahead.

So I have to -- one, just on biosimilar Stelara, are you planning to pursue interchangeability here as this can be an important feature in this self-administered market? And I think Amgen has already filed for interchangeability. And the resolution on the Iceland manufacturing side is still going on. And we understand, I think Stelara is also coming from that site. So can the Stelara launch timeline get impacted here? That's my first one. And then second, so for the free cash flow guidance that you provided, how confident are you on the reform outlook here? I mean, typically, gross margin improvements can be gradual, and this level of EBITDA deterioration in 1Q. Can you reach the free cash flow guide on gross margin improvement alone? Or do you think you need to cut some opex as you progress in the year? Thank you.

Thank you, Ash. Thanks for your question. I think on the Stelara one, Sven, if you'd like to give the answer. And then Eli, going on to the free cash flow.

Yes. On Stelara, of course, we are also preparing for this launch. Our launch is, of course, dependent on FDA approval, but also on clearance of all the patent aspects around it with J&J. Like for our biosimilar license applications, the site inspection will be part of the review process. So the Iceland from Alvotech will be inspected for approval of this drug. Concerning your question about interchangeability, we are still looking into that aspect of the drug. We will also see now, of course, with the market formation from Humira, how our customers look at interchangeability. But we believe we will have a competitive offering when we come to market with Stelara.

Eli, for the cash flow.

Hello, Ash, thanks for the question. It's Eli. Yes. So it's a fair question, and I will split it to two. First of all, what we see in the P&L. And I look earlier in the guidance for the year, I said that the consensus now is really close to $15 billion. We are well-seated in terms of revenue. And we are in the range, and very well set there, which means that we are growing in our innovative. And we'll see more growth also on our generics as well on outside of the U.S., European, and international markets. That's going to help us this year in terms of free cash flow. The gross margin will pick up gradually. But currently, we don't see now any departure from our view on the range on the free cash flow. The second part of it is the working capital element. We actually have a certain enhancement in place in the last year or so, and it's mostly about our optimizations on inventories and supplier base. So we will see from there also a certain level of benefit helping us to support our working capital and free cash flow. So the answer is that we are in the guidance.

Thank you. Our next question comes from Nathan Rich of Goldman Sachs. Nathan, your line is now open. Please go ahead.

Great. Thanks for the questions. Maybe just following up on the last one. Eli, how much of the gross margin pressure was mix-related versus inflation-related? And can you maybe just talk about the level of visibility you have into inflationary pressure, given there seems to be some lead time there, just in terms of confidence of that kind of easing as the year progresses? And then I'd be curious how AUSTEDO compared to your expectations for the quarter. I know there's some seasonality to sales, but revenue per script looked lower than we expected. So can you just expand on what drove that in the context of your full-year expectations? And how do you think the once-daily dosing improves your positioning with physicians going forward? Thanks for the questions.

Thank you, Nathan. So handing the first one to Eli.

Yes. So Nathan, thanks for the question. So percentage-wise, if you look year-over-year, this is a five-point decrease in gross margin. The first element related to inflationary pressures, this is around 2.5 points, like half of day back. And this is mostly related, as I mentioned in my prepared remarks, the inventory that we received on the second half of 2022 that embedded inflationary cost. And that actually went, and we consumed and sold the group a little this quarter. And that main impact really, it came with across, I would say, across the flavor and other elements related to direct material costs embedded in the cost and pricing, and as well energy and freight. Now, we see freight and energy rebounding. We had a successful hedging program last year on the energy that helped us to secure a certain rate, and we see the benefit this year. We're going to see a very nice benefit as well in freight in terms of the combinations and how we're managing long and short items in order to optimize more on the ocean versus the sea, as well as consolidation of shipments. That's for that element. The other element is around, I would say, the product mix is kind of between 1 to 1.5 points, and the rest is coming really from hedge and FX. So that's how you should frame and think about it, that difference. And as we look forward in terms of -- for your questions about inflationary pressures, some shortages on labor, and that happened in the industry in Q4. Getting more ease now. A lot of other elements starting to rebound. We see it in the pricing. We see it in the -- how we are sourcing. So we believe that this one will get kind of at least half effect throughout the rest of the year. As well, if you look on our product mix and the expected revenue mostly in our innovative portfolio, this one will rebound and give us more accretive margin going forward.

Thanks, Eli. And then to answer your AUSTEDO questions, it's -- Q1 AUSTEDO was in line with our expectations, what we had forecast. As I'm sure you're aware, there is a swing factor between Q4 and Q1, largely because of speculative buying and inventory build that happens. But if you look at the sort of fundamentals, the metrics, the leading indicators, TRx of 28%; and Rx, up 30%. So as I said in my opening remarks, very excited about AUSTEDO and its potential. Then your question about what does once a day do, I think if we had any one slight weakness with AUSTEDO and if there's any one, it was once a day. And now we have that. I think the product profile is very strong and is accepted by our physicians as a favorable product profile. So now, with the once a day, I think that strengthens that. And the other thing is we have -- we allocated resource and capital to AUSTEDO to match the expectations we place on it. We've allocated reasons to make sure that can happen. So I think we're well set for AUSTEDO for the rest of the year. And it's building a bit to Eli question and answer there on margins. I do see with the combination of UZEDY coming, the launch of that, the growth of AUSTEDO, the continued growth of AJOVY, that's gonna change our product mix into the high-margin innovative business. So strong expectations and confident about the AUSTEDO. Thank you for your question.

Thank you. Our next question comes from Chris Schott of JPMorgan. Chris, your line is now open. Please go ahead.

Just two questions for me. I'm just trying to get my hands around the gross margin update. So maybe you can just help us a little bit of what is a reasonable gross margin target for the year when we kind of balance maybe some of the dynamics in 1Q. It's what sounds like kind of gradual improvement for the rest of the year. So is something like 51% or 52% kind of the right ballpark? Or is it gonna bounce back more than that? Just help a little bit just so we don't make more surprises there. And the second question is a bigger picture one. I think you're highlighting kind of pipeline capabilities is one of the underappreciated pieces of the Teva story, and it seems like a number of pipeline assets that you're gonna be talking in more depth next week. How do you think about the overall level of investment that Teva is making in R&D? I know you have kind of a hybrid business between generics and brands. When I think about level of investment as a percent of sales, and it's not a perfect metric, but Teva is kind of at the low end of the industry on that front. And I'm just trying to kind of balance the resources you're allocating to R&D versus the desire to maybe push this pipeline and maximize pipeline value appropriately going forward. Thanks so much.

Thanks for the question, Chris. So Eli, you start on the gross margin then.

Yes. Thanks, Chris, for the question. So yes, as I mentioned, in the second half of '22, most of the impact was actually coming from what we call sustained cost related to inflationary pressures. And now it really depends on the mix that's coming in the quarter, on element that you consume for your inventory. What we see for the rest of the year, I will say that we are at the low of the 53 currently. Considering on rebounding, I would say, at least half of the impact on the inflationary pressures from the reasons that starting from mid of Q2 start to actually to source, as well new inventories that actually embedded a different pricing now as more of the stuff are starting to increase. So I would say you should actually look from low 53.

Thank you, Eli. Now moving on to pipeline assets. So if I understand your question correctly, Chris, is do we -- have we allocated enough capital and resources to execute on what we highlight is a good pipeline. It's a great question, and we'll give you a bit more flavor to that next week in New York. But yes, in short, we are. We're making sure we prioritize and allocate capital to where the opportunity is to drive growth and profitable growth. And as Eli alluded to, we have some really exciting assets that we think, to a certain degree, are derisked or validated. So to allocate capital to that seems a very sensible thing to do. So when it comes to that, we are making sure those assets are funded well to go through. And then on our capital markets day, we'll probably give you a better idea of how we're thinking about capital allocation across the two different types of business, you talked about there from our generics pipeline to an innovative pipeline and how we're managing that. So we'll go into more detail next week. So I hope we answer your question, Chris, and thank you for it.

Thank you. Our final question for today comes from David Amsellem of Piper Sandler. David, your line is now open. Please go ahead.

Maybe just expanding upon the last question. In the past, you've talked about 505(b)(2) opportunities, and I guess I wanted to ask about the balance between 505(b)(2) products, brand products, versus new molecular entities and how you're thinking about it. Or maybe asking differently, how far along the innovation spectrum are you looking to go? And then secondly, on AUSTEDO, can you just talk about the mix between tardive and Huntington's chorea and how you're thinking about the potential impact of Ingrezza to the extent that it gets its label expansion for Huntington's?

Thank you, David. Thank you for your question. So if I understood your question correctly is sort of how do we balance that focus for effort resource on pure innovation to 505(b)(2)s., and I think we balance that based on the opportunities that we see that we have already and then going forward, where we apply resource and capital. So I think the 505(b)(2)s, we see as complex generics, they're difficult to make, and so that falls in our wheelhouse nicely. And from an innovative point of view, we're leveraging our capability in neuroscience and immunology with particular focus on this antibody engineering capability we have. So we don't think we have to sacrifice one for the other. I think what it comes down to is how do we reallocate capital from the other aspects, whether 505(b)2 is innovative to mention or we can find the opportunities we have. Right now, we're doing that well. And as you'll see from the strategy next week, we have a clear strategic and operational plan as to how that's gonna be done over the longer term, and so I think that's how we're approaching it now. And then with regard to Huntington's disease, and tardive dyskinesia, and the mix of the Ingrezza with potentially an upcoming label expansion, I'll hand that back to Sven in the U.S.

Yes. Thank you, Richard. So Huntington's disease is around about 50% of our sales. So 85% is the tardive dyskinesia. If you look at the size of the patient population, tardive dyskinesia is, of course, the larger market, which is still significantly underpenetrated and underserved. So that's clearly our strategic focus. For Huntington's disease, of course, we are here well-established because that was the first indication that we launched. We know that the prescribers that treat Huntington's disease are highly scientific. They value the dose options that we provide, the titration ability, and they also value the long-term efficacy data combined with the safety profile that we have. For that reason, we believe that we are highly competitive in this category despite the anticipated label expansion from Neurocrine. On the other hand, also, we now have with AUSTEDO XR, exactly the drug formulation with the once-daily as Richard explained, was missing. We did extensive market research here about the prescriber segments that value these convenience factors. And I think we will have a very competitive product going forward being it now in tardive dyskinesia or in Huntington's disease. So for that reason, we are quite optimistic for the year 2023 and our growth in both categories going forward.

Thank you, Sven. And thank you again, David, for your question. I think that concludes all the questions we have time for today, so I want to thank everybody again for dialing in and listening in, and the ones who asked the questions for doing so. I'd just like to remind you all of the investor day we have on May 18 in New York next week, starting at 12 p.m. Eastern time, and look forward to seeing some of you in person now and look forward to hearing and seeing you online if you can't make it in person. Thank you again for your time and attention today and look forward to catching up next week.

Thank you for joining today's call. You may now disconnect your lines.