Q1 2022 Teva Pharmaceutical Industries Ltd Earnings Call
Good day, and thank you for standing by and welcome to cover first quarter 2022 financial results Conference call.
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I would now like to hand, the conference over to your first speaker today, Ron Bahia Senior Vice President Investor Relations. Please go ahead Sir.
Thank you on it.
Thank you everyone for joining us today to discuss there, but first quarter 'twenty to 'twenty two financial results.
We hope you have had an opportunity to review our earnings press release, which was issued earlier this morning.
A copy of this press release as well as a copy of the slides being presented on this call can be found on our website at Teva farm dotcom.
Please review our forward looking statements on slide number two.
Additional information regarding these statements and our non-GAAP financial measures is available on our earnings release, and you know a SEC forms 10-K and 10-Q.
To begin today's call of course yields debit CEO will provide an overview of the first quarter performance recent events and priorities going forward.
I was CFO elicker leaf will follow up by reviewing the financial results in more detail, including our 2022 financial outlook.
Joining core and early on the call today is when did lift.
Head of North America commercial.
During the question and answer session that will follow the presentation.
Please note that today's calls will rely on approximately one hour and with that I will now turn the call over to core core. If you would please. Thank you welcome everyone I'm happy to present, a solid first quarter.
This year, we've continued progress on many fronts. If we take a look at the financials then revenues came in at $3 7 billion.
Adjusted EBITDA came in at 1.1 billion.
And I'll get diluted loss per share was 86 cents and non-GAAP diluted EPS came in at 55 cents.
Free cash flow came in at 100, and Syn <unk> million dollars and.
And we are happy to show you that the debt reduction continued and net debt is now reduced to 27 billion.
Our 2022 revenue outlook has been revised slightly downward mainly due to foreign exchange headwinds all the all of the key components as we will show you later.
<unk> reaffirmed on the business side, we were very happy to see continued growth off of a state of prescriptions growing to a new all time high and at the same time. We also saw growth in market share for our other key growth driver Joey.
We saw a strong developments in Europe , and also a nice progress in the U S.
In Europe, our generics and OTC markets recovering following the easing of COVID-19 restrictions. So we saw it come back our volumes and a nice.
Continued strong market position in all key markets.
North American generics were very happy to launch the new generic Revlimid, which did very well and that was partly compensating for the lack of truvada in the triple the sales that we had last year and also a decline in prolia sales.
Our biosimilar pipeline is progressing very nicely. We are excited about biosimilar humira, which we now have a civil intraday of July 2023 for next year and of course, we have their opinion if T approval.
If we move to the next slide then you could see a highlight on the opioid litigation.
As you all know we have settled in Rhode Island in March and we also said in Florida in March.
And then we have Easter and this also changed our accrual on the balance sheet and early cliff will comment a bit on that later.
There are two ongoing trials right now one west Virginia, and one in San Francisco, both a bench trials, which means that the judge presiding over Theres no jewelry.
Our experience with bench trials recently has been positive we had the trial in California in Orange County, where we want a clear victory and there was also a J&J that appeal to the Oklahoma Supreme Court, which was also a bench trial, where there was also a when we are in ongoing negotiations and we are hopeful.
Really that we consider this with a nationwide settlement for all states sometime before the end of this year.
If we go to the next slide and here you can see our revenue development and you can see that in the first quarter. We had two you would see negative developments compared to the first quarter of 'twenty. One one was that the exchange rate between Europe and U S between the euro and the dollar worsened. So there was a significant increase.
In the dollar value in euros and that basically meant that the reported.
Sales in dollars is down in the underlying currencies the sales actually up and we see as I said before a positive development of volumes in the generic space in Europe in the U S. The key difference here is really like I mentioned before that we had truvada in the triple the sales in the first quarter of 'twenty, one and we have had.
Sales in first quarter, 'twenty, two but not to the same extent and in international markets you see a very stable development.
If we go to the next slide and here as I commented on OS data you can see that we have an all time high XI Rx count in the end of the first quarter. If you look at the revenues then we had the usual swing there where the first quarter is always low and there are really two main reasons for it one is the spec buying that we.
See in the fourth quarter due to the fact that we traditionally know shake out price increases in the very first week of the year and the other one is the fact that the donut hole effects reset of patient deductible programs and therefore, we see less demand in the first quarter. We expect the demand of course to swing back office has done.
All years based on the prescriptions and we are still maintaining the outlook for state or for the year of $8 billion in sales.
If we go to the next slide and here you can see a job and are in the U S. You can see that we also there have an all time high of the sheer axis and you can also see that in Europe . We have an all time high of the monthly volume market share, which is now up to 30%.
I've said before that we are expecting to see a third of the market in all our key markets, including Europe and U S. So we are really aiming for at least a 33% market share in both North America, and Europe , and we are slowly getting there which is very very nice.
You can also see here on this sales numbers that the sales in Europe are now getting up and being close to the U S sales and we expect that to continue going forward. So we see very positive both profitability and momentum in Europe .
If you go to the next slide then we had the news here that we communicated some weeks ago that we received a serial on Risperidone L. A I. So we will be answering the questions that we got from FDA. We expect that this could cause a delay of a re filing with some up to six months.
And then probably a six months review period, we still have strong belief in the concept and in the efficacy. So we still believe to get this product approved but it will likely be a delay of up to 12 months on it.
Another thing you can see here is illustrated on the next slide and that's the fact that we have a very broad biosimilar portfolio. We have 13 Biosimilars in development now 70 in house programs and six that we have from partners and of course, we are very excited about the big launch that's upcoming next year the Humira launch we.
Now have a subtle intra date of July 2023, and as you know this is a very good product. Its the high concentration version citrate free an interchangeable. So we're looking forward to that we think we are still seeing very good performance on the once we have launched so trucks EMA is doing are exceeding.
The well in the marketplace still holding on to something like a quarter of the Rituxan market.
And we also happy now that this year, we will see a launch in Europe of a lucentis biosimilar. So all in all its going very well on the biosimilar side and longer term of course, we are aiming for addressing some roughly 80% of the value in biologic products going off patent both in North America and in Europe .
On the next slide you see another important element of our restructuring, which is basically you could say post the patent cliff of Copaxone to get our operating margins back up where it should be and as you know back in 2018, we set a target of 20% and you can see here.
Now that we are getting very close and then just for the record I would like to say, even though the graph could look like it's flattening out then of course, we're not going to stop at 28, we will set new long term targets, which will be an improvement and.
We will communicate those targets within the coming year.
The same goes for the next slide where we have another of our key financial targets shown that's the net debt reduction as you know we have a target to reduce net debt and also they will keep on driving it down and the same goes for the net debt to EBITDA ratio will be setting a new.
For that we have a target for end of 'twenty three below three and we'll be setting a new long term financial targets also for the net debt to EBITDA within the coming year.
Yeah.
On the next page you can see and we're making a little commercial for our upcoming ESG progress report, which will come out in about a weeks time and we've been working very hard on this for a number of years and we are sending some very ambitious targets. We're also making sure that our ESG performance is linked to executive compensation.
Station, we also have a secured now that our.
You can see all financing our debt is linked to sustainability.
Cliff will tell you later on about our new our C. F, which also has a sustainability element and all through we are very happy about our performance and we're also happy that it's been seen outside the company. So we see improved performance on our ESG ratings, which of course is a good sign that we are doing the right thing.
If we go to the next slide then that's a slide that those of you who followed the company you've seen it many times. We've shown since 2018 is our long term financial targets. There's no change here and the only changes sort of the little commercial he also that within the coming year, we will come up with a new long term.
Financial targets, taking us into the next five year period I look forward to that of course and also look forward to meeting these targets at the end of 2023, so with that I'll have the haynesville, which are illegally.
Core and good morning, and good afternoon to everyone.
Again, My review of the first quarter of 2022 financial result on slide 16.
<unk> with our GAAP performance.
Revenues in the first quarter of 2022 were $3 7 billion, a decrease of 8% or 5% in local currency terms compared to the first quarter of 2021. This decrease was mainly due to lower revenues in our North America segment, mainly driven by generic product and co.
Pakistan, partially offset by higher revenue from under and generic product in our Europe segment.
We have been seen generic product launches for Teva towards the end of the first quarter. However, the decrease in our revenues from generic product in North America is still affected by the low number of launches in 2021.
In Q1, 2022, we recorded a GAAP operating loss of $713 million compared to operating income of $434 million in Q1, 2021 GAAP net loss of $955 million compared to a net income of 77 million in Q1, 2021.
Loss per share of 86 cents compared to earning per share of seven in the same period a year ago.
GAAP operating loss net loss and.
Loss per share were mainly driven by higher legal settlement expenses.
Related to an update of the estimated settlement provision recorded in connection with the remaining opioid cases in the first quarter of 2022.
Foreign exchange rate movements during the first quarter of 2022, including hedging effect negatively impacted revenue and GAAP operating income by 133 million and 56 million respectively.
Compared to the first quarter of 2021.
This was a result of impact of the stronger U S dollar, especially versus the euro.
As a reminder, approximately 50% of our revenues come from sales denominated in non U S dollar currency.
Turning to slide 17.
You can see that the net non-GAAP adjustment in the first quarter of 2022, where $1.564 billion versus $621 million in Q1 2021.
non-GAAP operating income net income and earnings per share for the first quarter of 2022 were adjusted to exclude these items.
non-GAAP adjustments include legal settlement of 1.124 billion, mainly due to an update of the estimated opioid settlement provision mentioned above.
Amortization of purchased intangible assets totaling 200 million. The majority of which is included in cost of goods sold and impairment of long lived assets totaling $165 million.
Moving to slide 18 for a review of our non-GAAP performance.
I've already discussed our first quarter revenue, which totaled approximately $3 7 billion now lets move down to the P&L and look on the margin.
Despite the 7% quarter over quarter decline in non-GAAP gross profit our total non-GAAP gross profit margin improved to 54, 2% compared to 53 put 8% in Q1 2021 the increase in non-GAAP gross profit margin was mainly driven by our continuous efforts to improve our cost of goods.
Old network consolidation activities as well as the change in product portfolio mix in our international market segments, partially offset by unfavorable mix of generic products in our North America segment, and the lower revenues from Copaxone.
Our non-GAAP operating margin was 27, 7% versus 27, 1% in Q1 'twenty one.
This increase was driven mainly by higher gross profit margin mentioned above and lower operating expenses, which I will discuss in the next slide.
We ended the quarter with a non-GAAP , earning per share of 55 cents compared to 63 cents in Q1 2021, mostly due to lower revenue, which were negatively impacted by $133 million from exchange rate fluctuation.
Turning to slide 19.
We see that our quarterly spend base declined by $257 million.
Or 183 million net of ethics, most of the decrease was due to a lower cost of goods sold partially related to lost hills as well through our ongoing efforts to transform our global operational network.
Lower operating expenses also contributed to the decline in our spend base, mainly due to the ongoing active management of such expenses.
We expected the overall annual spend base to remain below 12 billion as we continued to focus our efforts on reducing and optimizing our cost of goods sold.
These ongoing efforts are expected to help us partially mitigate the global macroeconomic headwinds, including inflation and higher cost of flavor and eventually lead to stabilize our operating margin above the level of 27% in 2022 which is the ultimate goal of 28% operating margin by end of 2023.
<unk>.
Turning to free cash flow on slide 20.
Our free cash flow in the first quarter of 2022 was 117 million Teva free cash flow tends to face headwinds at the start of the year due to unusual timing of annual bonus payments out of the first quarter.
In addition, we faced challenges due to the timing of certain items related to our working capital as a result of operational ramp ups in relation to our annual production plan too.
Today, we are reaffirming our 2022 free cash flow guidance, which we provided in February our 2022 free cash flow is expected to be in the range of $1 9 billion to $2 2 billion, we expect our free cash flow to pick up during the next three quarters as we continue to drive working capital improvements.
We remain on track to achieve our objective of 80% or greater free cash flow conversion by the end of 2023 as part of our long term financial targets.
On to slide 21.
Our net debt at the end of Q1 2022 was $20 7 billion.
Compared to $20 9 billion at the end of 2021.
A decrease in our gross net debt was mainly due to exchange rate fluctuation.
Our net debt to EBITDA.
Slightly increased coming in for 29 ratio times of Q1, 2022. However, we expect it to be further decline as we continue to make progress towards our 2023 target of being below three times by the end of this year.
Debt reduction continues to be our primary focus and menus of cash upcoming maturities include $1 4 billion in 2022, which will be covered by our liquidity and expected cash flow generation.
I would like to inform you that we recently entered into an unsecured syndicated sustainability linked revolving credit facility of $1 8 billion, replacing our existing facility. It is linked to sustainable performance targets and reinforced our continued intention to establish a direct link between our corporate responsibility commit.
And our funding strategy.
So now turning to our non-GAAP financial outlook for 2022 on slide 22.
While we have experienced some recovery.
In many countries and products from effect of the global pandemic. We are unfortunately also being a strong foreign exchange headwinds affect our result at.
At current rates, we expect foreign exchange to have unfavorable impact on revenue. Therefore, we believe at this time it is prudent to adjust our guidance range for our full year revenue from the original range of $15 6 billion to $16 2 billion to the new range of $15 4 billion to $16 billion.
This lowered the midpoint of our range by $200 million.
The new range includes an adjustment to our full year expectation for global sales of Copaxone for which we are lowering our guidance by 100 million to 750 million due to increase in generic competition in the United States and the availability of alternative therapies as well as continue effect of foreign exchange fluctuation.
For our 2022 financials operating income EBITDA earnings per share and free cash flow. We are reaffirming the range provided in February .
We expect a gradual pick up in the second quarter. Following the first quarter, which is expected to be the lowest of our four quarters for sales and margin.
We still expect that approximately 45, 45% of our 2022 cells will be generated in the first half of year and approximately 55% in the second half.
As discussed earlier, we also still expect continued impact of foreign exchange fluctuations on our results.
This concludes my review of <unk> results for the first quarter of 2022.
We'll now open the call for questions and answer operator would you. Please open the call for questions.
Thank you.
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And the first question comes from line of Bajaj Pablo from Barclays. Please ask your question. Your line is now open.
Hi, good morning, and thanks for taking the question the biology from Barclays.
Firstly on global opioid settlement.
I Couldnt help notice that seem to call out a more specific timeline. This time around for the first time, stating that you expect to see a settlement by the end of the year. So could you give some incremental color around the progress that you are seeing at least to the extent that is disclosed and what role will that stay.
Tape settlements of play as you go towards that date and secondly on Biosimilar Humira can you give me, though we have thoughts on the relevance of the high concentration into Changeability and impact on shared that I mean that you expect with or without this interchange ability. Thank you.
Thank you Bill Archie I didn't that was a small thing on your opioid question, where the sound just dropped out so I got it that you wanted some more color on it but there was some specific element you asked about which I couldn't hear you.
You seem to have been mentioning a more specific timeline for the first time, stating that you expect some progress by the end of the year. So it was asking what on what drove that and what color you could provide further on it. Thank you.
Okay. Thank you very much so I'll take the first question and then spin can count on Humira in the U S and those elements. So on the opioids you can see that we had been doing a number of settlements on a state by state basis, So far and you can see that there are some common elements there.
And all the settlements, which.
You could say two main elements. One is it's a combination of product that can benefit people suffering from substance abuse. So we have products in there and you can also see that we're paying over a longer period of time and of course. The reason why we need to pay over a longer period of time is due to our balance sheet and the debt. We just talked about so the AUM.
And the way it's possible for us to do it is if we spread out the payments and the other thing is of course, we can bring value to the table due to the fact that we are one of the biggest manufactures of generics in the world if not the biggest and also in North America, we have a generic narcan, which can be used to help people.
The overdose. So we're very happy about those settlements and in conjunction with that we also of course also have ongoing negotiations.
Negotiations on a nationwide settlement and we also believe we're getting closer there. So I'm slightly more optimistic on the time schedule now and that's why I hope that we will see a nationwide settlement before the end of this year.
So when will you address the Biosimilar Humira question, yes.
Yes, Thank you Bob.
So on the Biosimilars for Europe , we have now clear situation due to the settlement between <unk> and SCE concerning.
Launch of this product. So we will give the second wave in July of 2023 of them with our product formulation.
The product features themselves.
Say.
Every single feature in itself is of course, not every size effect, but it is the whole package of a product.
Makes it attractive so it sidetracked creates a change a boat and its high concentration and it also has an attractive auto injector and what we know with the payer discussions is that payers very well of course.
Analyze the features of each product offering coming to the market in July next year, and we believe that the total package.
The offer is highly attractive could provide us market access that is one aspect of the product features. The second one is of course to create pull through in the market. Once you have the product in the market because this product launch will behave is not like a classical generic.
Launched in the U S. But it has more features of a European branded generic launch and where we know that the products.
Teach us.
The attractiveness of the package is quite important so we are quite happy with the alphatec.
We arrived Biosimilar that he was off next year.
Yeah.
Thank you for the questions.
Thank you and the next question comes from the line of.
David <unk> from Piper Sandler. Please ask your question. Your line is now open.
Hey, thanks.
So I wanted to get.
Hum.
Additional thoughts from your core regarding.
Business development, and M&A, and specifically the extent to which Youre prioritizing. The addition of brand assets and to that end can you talk about your financial wherewithal.
I do.
Consequential M&A, how large of a transaction can you contemplate.
Both now and also in the context of.
The global settlement being a factor in it so I wanted to get your thoughts there.
And then as a corollary to that is it fair to say that you're going to look for neuroscience focused assets or are you looking at other therapeutic vertical. Thank you.
Thank you for those two questions I'll answer both of them. So first of all of course, it will be nice to do some.
Some interesting M&A, but you got to look at our balance sheet, and we don't really have any cash or significant debt capacity on our balance sheet. So that's not really going to happen in terms of any major transactions for the next several years, what you will see us doing with which is what we have been doing.
As you could see.
The early stage in licensing of interesting assets that we can take through development on our own or together with a partner and that we will continue to do of course, but you will not see us doing any major M&A transactions, we simply do not have the balance sheet for that as we speak and that's with.
Or without an opioid settlement you could say M&A based on you.
You could see campus will be sent share capital is the theoretical option not with our current ratios that would be value destroying for the shareholders, but potentially in the future. If the share price improves then of course that is a theoretical opportunity, but cash based acquisitions no.
You will not see in the coming years then.
What areas do we want to do in these early stage in licensing well, we basically focus on neuroscience immunology. Those are the two areas, where we have the most knowledge and that's where we have our current portfolio. We have 15 very exciting biopharmaceutical projects.
Right now in the clinic.
And then those will be there so that we will be focusing on in some of the recent deals. We've done with early stage assets have also been in those areas. So we'll continue down that path. Thank you for the questions.
Thank you and the next line. The next question comes from the line of Omar.
<unk> <unk> from Evercore ISI. Please ask your question. Your line is now open.
Hi, This is Eric speaking for Humira.
Can you hear me just wanted to make sure I have been having audio issues.
We can hear you great.
I just had one quick question on opioids Hertz.
We've been seeing a lot more of the states from the that opted out of the nationwide settlement, reaching agreement on a state by state basis are.
These states requiring more cash per capita compared to those numbers and the agreements from your perspective.
Just one follow up.
So no that's not the case if you look at you could say, Texas and Florida.
Of course, it's a all the all the deals are slightly different but the key elements.
That of course, we see products in there, we see cash and there we see a long payment period in there and that's what we've been saying from the beginning if you. If you want to think philosophically about what has changed.
Then compared to the nationwide settlement, whereas before all the big companies, the three big distributors and J&J they offered cash only.
And we offered basically product only in a little bit of cash and then now we've adjusted it and of course it goes hand in hand, with the fact that we have the capability now of paying slightly more cash than we put some years ago, we've stabilized the business.
And if you sort of look.
Look at what we're doing right now with the individual states that we're settling this is very much in line with what we would hope to do on a nationwide basis.
Got it and just a follow up on the Adobe and offset to that we saw in the U S.
Seems like consensus is expecting a bit more than what was actually reported.
Do you think consensus numbers need to rebase or.
Do you think the U S market has drivers that aren't being accounted for.
No I don't think so I think actually the consents.
Consensus numbers for the U S are pretty close on a full year basis to our consensus numbers, So and where we are reconfirming. Those is correct that if you look at the quarters. As I showed you then we had this big swing always between fourth quarter first quarter due to the spec buying in the donut hole and we are also seeing that this year.
But we are reconfirming, our outlook of a billion so and that is the way I remember it from different consensus as I've seen that's pretty close to the consensus in the marketplace.
Got it thank you.
Thanks for the questions. Thank you and the next question comes from the line of Chris Scott from J P. Morgan. Please ask your question. Your line is now open.
Alright, great. Thanks, just two for me.
I guess first on the next set of guidance targets I know you're going to give that later this year, but it seems like the past five years, where it kind of stabilizing the business really focused on margin improvement I guess high level. As you think about kind of post 2023 does the focus pivot more to top line growth or is it still going.
We are very margin centric story.
You are asking for basically a bit of a preview of how to think about kind of longer term.
I know, we'll get more details later this year, but any color there would be appreciated and then the second one for me was on the quarterly revenue progression you are talking about this kind of 45 55 split for the year, we're saying, it's a bit more backend loaded than we typically see.
I guess, how much of that ramp is tied to products, where you have full.
Full clarity on approval and a more commercial execution related versus how much of that is tied to assets, where maybe youre still waiting for approval I'm trying get a sense of just the the risk tied to FDA or regulatory on getting to that second half rep. Thanks, so much.
Yeah. Thanks for those questions, Chris So I'll give it a shot at both of them and then spent and can give you. Some additional color to the last one so if you think about.
What we will be communicating in terms of long term guidance later in sometime in the coming year. Then you should really think about it is explaining is the same plus more I would say so.
So we will not get away from the fact that we need to keep on.
Generating cash and we need to keep on reducing our debt I think that's pretty obvious to anybody who is who is looking at the business. We also want to secure that the business is sustainable so as I said before we also want to give a target for continued margin improvement, but you're also right that of course, we would also.
To see the business returning into a growth mode with increasing revenues. So I think you should expect a you could see more of the same with an addition.
It would be the way I would phrase it by now and then of course I look forward to communicating the specifics.
On the revenue side, it's a combination you could say we knew already when we communicated for the full year that we saw some elements in the U S where there were some swing factors between the fourth and the first quarter. So we communicated that we also have a number of launches that we knew would happen that would have a positive effect.
Which you can see date certain and then we have of course, an accumulated effect also of the progress ongoing progress of our state to a job and so on is doing very well as you've seen in Europe , and we see very nice script numbers on a stay at home and then of course, we also have some launches in the U S where we don't have.
The actual approval.
Approval, yet so maybe you can comment on some of the most exciting things that will happen in the rest of the year in the U S.
Yes, Thank you caught so for Dolby.
Expect a steady development.
Based on improved market access and improved market share post I don't see a particular development now with <unk>.
Television campaign.
Patient activation and script count within the quarter from January to March the significant step up in <unk>. So we expect a set up to grow throughout this year towards our guidance targets and generics of course, we had in the first quarter.
The significant step down in Truvada Trippler. We also had as a reminder, last year in Q1.
Loading effect for epipen, because the approval of the Covid vaccine that to an epipen.
Pike Spike that we've seen.
2021, so that didn't repeat in 2022, but for generics at the outlook of course is that we are not independent of the microenvironment in the U S with the price deflation, but we've now launched Revlimid in March 2022, So just four weeks ago and that will continue.
Our revenues for us throughout the year within the settlement framework that we have with BMS and then we have a couple of other products, where we still expect.
Or hope for approval from the FDA in generics.
Most important one process for steel.
It would be also a significant contributor to us in 2013. So the bottom line is that we expect a gradual development throughout the year and the buildup of revenues towards the end of the year.
Thank you for the questions.
Thank you and the next question comes from the line of Elliot Wilbur from Raymond James. Please ask your question. Your line is now open.
Thanks, Good morning, perhaps for early just wanted to ask a question around the operating profit impact from the reduction to your top line guidance, owing to currency, specifically and then thinking about the combined impact of currency assuming that there is.
As one combined with lower expected profit contribution from Capex shown which is not insignificant still trying to think about it.
What some of the potential offsets to those maybe that enabled you to still maintain.
<unk> adjusted EBITDA.
Free cash flow guidance or should we be thinking a little bit more along the lines that these numbers may be a little bit more skewed towards the lower end of the range versus where they they currently stand and then I had a follow up question for your core on the.
The legal settlement provision this quarter, just wanted to get a sense of where or what the current balance sheet accrual is for legal settlements and loss contingencies.
Assuming it's over 3 billion now and just trying to get a sense based on some of the settlements that have been entered into recently, which seem to be along similar lines to what we've seen.
Really over the last last year or so why are we seeing a fairly significant step up in the accrual related to.
Two potential settlements on opioid litigation.
Thanks Elliot So early will talk first about the currency elements.
Thanks for the question so.
So we still stick to what we said in February in terms of the of the margin, which mean that.
According to our long term financial targets with the baseline of 19 onwards to top totaled 350 basis point up to the 28% to O P which.
Which is leading us to drop this year as well like 0.7% a year over year on gross margin and the flow through and we'll be going to the O P.
Part of those I would say elements impacting on revenue as you know we also operating in those countries that actually we are getting kind of less on the expenses. So it's kind of not offsetting all.
All of this one and I would say not a full offset but because of our ongoing activities, mainly on Cogs reduction and we see it quarter over quarter and the fit that will remove a certain fixed cost mainly we'd manufacturing footprint from our portfolio and we see now kind of a benefit that already.
Help us to offset those things so all in all if you look on our current midpoint on the on the new guidance, we should lend at the same more or less margin that we talked already in Q1 around 27, five to 27, 7% for the year.
Thank you Ellie and on the legal provision then the legal provision for the opioid litigation.
Is now at $2 6 billion U S dollars, which is an increase of $1 1 billion versus the last quarter.
And it's really the result of a holistic assessment of.
Whats the effect of the settlements we've done so far what's the most likely outcome based on our current negotiations. So so you should see it as a holistic assessment that we do and of course, there's a lot of detailed factors in there there's products and there are various volumes, there's cash in there over various periods and so on.
So so that's really our best case as we speak.
Thank you for the questions.
Thank you and the next question comes from the line of Ronny Gal from Bernstein. Please ask your question. Your line is now open.
Good morning, everybody and thank you for taking my questions I'll ask two the first about the CRM Risperidone can you just talk a little bit about what the issues here. We started on this in a molecule with known efficacy to the formulation manufacturing.
Lack of preclinical data where the gaps are.
And the second one.
About the material contribution from the legal matter in 2023 is there something going to see or is it more of a 'twenty 'twenty four contribution.
And probably my last call my questions I'm going to sneak one in.
Ali if you could tell us what the $2 $6 billion in provision.
For.
The opioid settlement I mean in terms of and.
Discounted dollars essentially there is some discounting assumption thrown in there about how long it will take to pay it but how much is kind of like that.
The non discounted dollar value it represents.
Thank you for those three are Christians, Ronny and good luck in your future career.
And so the first one the CIL.
I can't tell you all the details, but I can tell you it has.
Nothing to do with the you could see efficacy or safety, we have very very good efficacy data very good safety data, we were very confident that the principal works very very well, but it has to do with some details around how you could see the whole execution of the clinical trial.
Those have been done and some details there, which we are confident that we can address and correct and communicate back to FDA within.
Maximum six months and then we expect the review time of six months. So we still have high trust in the fact that we can get the product approved at the end of the day.
And then on Humira.
So when will you handle that question.
Yes, Thank you Corey.
Corporate relations Ronald to neutral.
So the question was if other biosimilar.
Biosimilar becomes a material event for us in 2023 or 2024.
I believe this is dependent on the market exit strategy or payers, how they think about the switch over between FTE through the biosimilar the offering.
That can happen in the summer of 2023, given that there are many available options.
Or it's pushed out to 2024.
Depending on the contracting strategy of the Payors. So of course, we are committed to come to market in 2023 of the summer and also to have a broad offering but I believe payers will look at a couple of factors to come up with that strategy.
Of course, one is the product feature and the reliability of suppliers of all the companies coming to market because that is a significant wider market in the U S and of course that we are able.
To cover 100% of the volume that it will be driven by of course attractive prices and then as I said the experience to create.
Pull through in the market itself. Once you have contracted and I think these four factors.
The market exit strategy overall.
Once we have the contracting right.
That's more with only at that moment, we can say whether it is a material event for us in 2023 all of that in 2024, but it was partially will be one in 2024.
Yeah, no. Thanks for that Anzus win and of course, Ronny I would say I'd be disappointed if its not a material event in 'twenty three because of course, we are aiming at launching for the settlement date and we are happy of course that the Alphatec product is already being sold in Europe .
So it is in the marketplace. So we have.
You could see high confidence that that will work out on the last question to Aly.
Just inspiration.
For you the settlements we've done as you've seen it basically nearly all of them being something like 13, or 15 years payment, but anything you can comment a bit more on the technical details. Yeah. Ronny you can you can understand that it's a it's a very I would say a little detail because there are certain layers on what we already settled.
And in the rest of the things, but all in all it's an average between 13 to 15 years and were using our company work.
And this one is kind of a discounting, but we need to understand that most of the discounting related to the cash and because of those players that were already settled that part of them already happening in the first years and part of the one that we didn't set those for longer years and so it really depend it's not really a pure linear and also any at all.
Understand that embedded as part of the fees as well part of the element of the product so but all in all it's like between 13 to 15 years and discounted the net of $2 six.
Okay. Thank you for the questions.
Yeah.
Thank you and the next question comes from the line of Gary Nachman from BMO.
<unk> capital markets. Please ask your question. Your line is now open.
Hi, good morning.
Or when do you think is the operating margin expanding beyond 28% over time, where all that mostly come from higher margin products greater manufacturing efficiencies lower spend in certain areas.
Just qualitatively, how youre thinking about that and how much higher that could potentially go could it get into the thirty's.
A few years.
And then with that said I'll, just talk a bit more about how youre confident you could get to the full year guidance of $1 billion, where will most of the acceleration come from.
It does seem like it will be challenging at this point thanks.
Thanks for those two questions I'll answer the first one in Sweden will take the second one so the operating margin expansion will primarily come from a combination of gross margin improvement.
And you could see our product portfolio improvement, but it's really the basic product portfolio improvements. So it's also improving the manufacturing cost all product families by consolidation. So it's not that we are expecting you know a major shift, let's say from a generics to our.
Specialty it's more of the fact that we can within all the product groups, we have keep on optimizing and that goes for the manufacturing footprint. As you know last couple of years last four years, we moved from 80 manufacturing sites down to 50 right. Now we are in the process of moving down another 10 sites to around.
140 manufacturing sites and we will keep on optimizing and we will also keep on optimizing our product portfolios. So all in all the majority of the benefit will come from gross margin improvements and there will be limited improvements on you can say the commercial cost structure, because that's relatively new.
<unk> by now and we don't see the same magnitude of improvements. If you then speculate how much improvement can you see then it's my experience that when you haven't reached sort of the world class situation on your manufacturing then you can do something like 50 to 100 basis points per annum, and we will get back.
Back to you with some more firm targets in the coming year on what our long term financial targets for the operating margin will be on their state Oh, maybe spend you can give some details on how we see our state of developing and why we are confident that we can meet the $1 billion sales guidance.
Our guidance implies that we have a growth in sales of roundabout, 30% versus 2021, our script count went up in <unk>.
Our quarter by 27%.
Also when you when you harmonize over two quarters the sales eliminate the effect of the spec buying of the donut hole in Q1.
Q4 of last year, we also see that the sales are absolutely on track with round about 32%.
These two quarters for.
For that reason I'm quite confident that it can get to $1 billion sales for both federal.
In North America.
And maybe we should just adding the sort of a known fact that of course, one of the key things driving increased scripts and volume for stereo as tardive dyskinesia. The only two products approved for tardive dyskinesia in the United States. A state is one of them and right now.
Amazing.
That's significantly less than 10% of the population or the patient population suffering from tardive dyskinesia.
Getting therapy, so there's a huge unmet potential among the 500000 people suffering from tardive dyskinesia in the United States. So there's a huge unmet medical need there, which we will be more than happy to of course satisfy.
Thank you for the questions.
Thank you. Thank you and then last question comes from the line of Jason <unk> from Bank of America. Please ask your question. Your line is now open.
Hey, guys. Thanks for taking my question. This is Bob Patel on for Jason Great Barry.
So my first question is on U S. Humira, we're hearing a number of players increasingly talk about the importance of supply commitments in a market like this could you talk about your strategy in the percentage of the market supplier needs to commit to providing the biosimilar too.
And then on generic Revlimid can you speak to the extent that test that could have preferential volume position versus other generics in 2023 or beyond and then finally, if I could fit one last in.
Wondering if you could provide some insight as to why a set of sales are still volatile volatile quarter to quarter and it looks like $154 million last quarter versus Q2. This.
This quarter is it driven by the stocking patterns or phasing on patient assistance program impact. Thank you.
Thank you for those three questions I think that's when we'll do the majority of the of the answers here I'll just say.
That in general when you talk about biosimilar products or for that matter competing biologics and of course, it's always important to have some firm commitments on on supplies and if we look at what we have been competing reasonably with the biosimilar to rituxan without trucks.
<unk>.
Then we have been targeting from the beginning that we would have a double digit volume.
Volume share.
And right now we have around a quarter of the market.
And that's really what we've been going for and you can see some patterns of course in what's realistic to get when you have a multi play a competitive situation and from that you can sort of see talked a range of volumes that you need but I will leave at.
That question in the other two questions for use of influenza.
Yes, the first one most of the supply commitment supply chain question regarding Humira biosimilar, So our partner.
Protect from Iceland.
Through the drug substance manufacturing and also the drug product manufacturing in view of the commercial partner in the U S. This is how it is set up.
<unk> is already approved in <unk>.
The European Union and it would be lost before we come here to the U S market that gives us some confidence that the supply chain reliability should be that we have good understanding about how much volume.
Then supply to the U S market. There's of course also a plan about how volume will be ramped up over time for this product. So we have clarity in that respect.
Well.
And then the volume commitments that we can do it in here for the U S is dependent on oil market excess contracting strategy. So that would be something that is a good balance for the product launch next year, but we are quite confident that we will be in shape for.
This product launch.
So the other question was on your federal sales volatility, we talked about that before of course, we had the.
Binding effect.
Q4 of last year, and then Youll always have inventory.
Let's say.
The action of the Wholesaling channel in Q1. This year have you seen this every year. In addition to this the donut hole effect that comes in in January February .
This year that leads to the sales productivity Costello overall as I said before.
Script count is on track and is actually growing very gradually according to all our fans. So for that reason we are confident that we can reach our sales targets and I think there was a third question, but yeah.
Yeah, there was a revlimid, where we have a volume base.
This settlement and you can correct me, if I'm wrong, so and by the way I remember, there's a volume limitation. This year, but also in 'twenty three and 'twenty four and then in 'twenty five.
No longer the case and there will also be other competitors, which from what I know also have some kind of volume restriction. So we will probably see all out competition in in 'twenty five and we will see some you could say volume limitations for us in 'twenty, three and 'twenty four.
Yes, that's correct.
So thank you for those questions.
Thank you that does conclude our question answer session. Please continue with your closing remarks.
Thank you everyone for listening in it was a pleasure and we will see you next quarter.
Bye bye.
Thank you.
That does conclude our conference call for today. Thank you for participating you may now disconnect.
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