Q2 2022 Teva Pharmaceutical Industries Ltd Earnings Call
Good day and thank you for standing by welcome to the second quarter Financial results Conference call. At this time, all participants are in a listen.
The only mode. After the speaker's presentation, there will be a question and answer session.
Quick question during the session you will need to press star one on your telephone you will then hear an ultra magic message Atlassian Johan.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your first speaker today Ron.
Senior Vice President.
Please go ahead.
Thank you Sandra Thank you everyone for joining us today.
We hope you are as an opportunity to review our press release, which was issued yesterday.
Okay.
As well as a copy of the slides being presented on this call can be found on our website.
Dot com.
I'm joined today on the call the call short.
Our CFO <unk> Davis.
And in North America.
We are today quite a busy agenda.
We will start the call with an update on the book achieved an obligation.
This would be followed of course in any review of the second quarter business and financial results as well as the updated outlook for FY 'twenty.
And we will end the presentation part of today's call when the stock is at.
Sure.
You have a new long term financial targets.
Please note that today's call will go on our books.
Eight minutes.
Before we begin please see our forward looking statement disclaimer on slide number two.
Additional information regarding these statements and our non-GAAP financial measures is available on our Angola.
And thank you are there.
Great.
And with that I will now turn the call over to Carl.
Thank you Ron.
Welcome everybody, it's a pleasure to update you on the opioid litigation.
We have seen in our release, we reached an agreement in principle with the working group.
States the tribes and the plaintiff lawyers.
Setting the stage consolidations.
And reached.
Breached.
Sometimes for a nationwide.
We will be paying $4 $25 billion or 13 years. This includes the already settled cases as you've been seeing with Chevron.
States during the last half year.
We paid 100 million tracks also speaker was 18 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 can be used in case of a window.
People survive will.
It will be donating these products over 10 years and there will be the option for states to go for a cash value in stage of the actual product donation.
Of course, we are hopeful that many will accept the duration in that way help combat the opioid.
It's Derek.
We have revised our provision to reflect all of the details of the agreement we have in principle a nationwide Sherman.
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 is that you will need a certain participation from the states and the subdivisions, which will be set forth in the final agreement.
The agreement is also contingent upon us reaching an agreement with Allergan with respect to any indemnification obligations and Aragon, reaching a nationwide opioid settlement.
Whilst the documentation is finalized the nationwide agreement will need to be adopted a sufficient number of players which would then resolve in the vast majority of opioid related claims and litigation by state subdivisions and Aegis American tribes.
States to be settled.
There are no remaining trials currently schedule against us in 2022 with the possible exception of the relief phase of the trial in York Opioid litigation. Additionally, Geneva, New York State and subdivisions are engaged in ongoing settlement negotiations.
We expect that the documentation for the nationwide settlement agreement will be finalized in the coming weeks with the actual nationwide settlement sign on process for state subdivision and drives to follow.
Next slide please let me now turn to the second quarter and the financial highlights.
Revenues came in at $3 8 billion.
Adjusted EBITDA came in at $1 1 billion.
Diluted loss per share was 21 cents and non-GAAP diluted EPS was <unk> 68 states and the free cash flow came in at $301 million, we continued to reduce our debt and the cases have been reduced to 20 billion.
Our 2022 revenue outlook has been revised mainly due to continued foreign exchange headwinds we've seen the dollar appreciate significantly during last year against the euro as much as 14, 15%.
Our guidance for operating income EBITDA, EPS and free cash flow remains unchanged on.
On the business side.
He will comment on our stereo and Adobe in the coming slides, but I'd like to point out that North America generics had a strong quarter with good contribution from the generic version of Revlimid, but also continued strong sales of epipen as well as the Biosimilar <unk>, which is obviously innovation of Rituxan, where we still have a high mark.
Sure.
In Europe , we also saw a very strong.
Volume uptake of both our generics and OTC and we actually saw that the revenue in local currency was up 12%. So we are seeing a we're seeing normalization of volumes. Following the COVID-19 restrictions that have been leases. We also have a biosimilar product launched in the UK.
She wants Lucentis next slide please.
Okay.
If you look at the revenue development here than you need.
We need to be aware that we report this in ongoing currency ongoing realized currencies, which basically means that when you are comparing to Q2 'twenty one.
We do see a decline in U S. Dollar terms had we reported it in the local currencies then the revenue would basically.
Flat and that means that in Europe , we do not see local currency decline rossy small increase and in North America, we see stable revenues as well as international markets. The international box of course, there's been a neck.
Negative influence on our revenues in Ukraine due to the conflict there.
All the revenue in international markets is in line with expectations.
Next slide please.
Sterno continues to grow very nicely, we see a continuous growth in the Trs and the patient numbers on the revenue side, we have some quarterly ups and downs as we've always had but we are happy about the revenue in the second quarter and we can reconfirm our outlook for the full year, where we expect.
To sell $1 billion.
Next slide please.
Joey is also doing very fine you can see here how the scripts continue to grow in the U S. And you can also see how the market share in Europe continues to grow we now have a market share of 30 in Europe .
And we have a mall or a third of the markets. We are now number two in the European market coming from a late launch position as number three we strongly believe that the efficacy and safety of Adobe is very very good also compared to competition.
And we are optimistic about the future sales growth.
Is she product.
Next slide please.
The margin continues to evolve, possibly along with our operational plans to optimize manufacturing optimize our commercial operation you see here that the first half year margin is above the first half year margin last year and the reason why we have a difference between the first half year margin.
In the full year margin is that we always had a strong fourth quarter in terms of revenue for a lot of practical reasons and that means that we still expect to see an uptick for the full year compared to the first half and means that we are on our way to hit the long term financial targets for 2023.
Of 28% operating margin next slide please.
The net debt as I alluded to earlier continues to decline and are down to $20 billion of course, we won't stop here, we will continue to drive down debt and I'll be commenting later on what our long term target would be for the tech development.
We are very committed to our patients as you know we serve around 200 million patients every day, but we also try to so these are the privileged people around the world with medicine business, what we can do to help people and here you can see some examples around the world.
We support.
Honorable groups with mental health with oncology treatment.
Africa, North America, Europe , and if you're interested in this then there's a lot more information on all these programs on our website as part of our ESG reporting where you could also see all the things we're doing to meet the targets we've set for our bonds our sustainability linked bonds, we've got targets both for.
Access and for clients.
With this I'll hand over to Elliot police, who will comment on the numbers for the second quarter.
Thank you Cor and good morning, and good afternoon to everyone. I'll begin my review of the second quarter of 2022 financial result 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.
Local currency.
Revenue increased by 1% compared to the second quarter off but you can do on.
This increase was mainly due to higher revenue from generic products in Europe , and North America, partially offset by lower revenue from Copaxone and <unk> in North America.
We saw higher demand for generic and OTC product in Europe, mainly resulting from the removal of restrictions related to the COVID-19 pandemic together with a higher revenue from generic product launches.
The increase in generic revenue in North America was mainly related to the revenue from the generic version of revenue mix.
In Q2, 2022, we recorded a GAAP operating loss of $949 million compared to operating income of $582 million in Q2, 2021 GAAP net loss of $232 million compared with a net income of $207 million in Q2, 2021, and the GAAP loss per.
Share of 21% compared to the earnings per share of 9% and 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 obfuscated Cort 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 a stronger U S dollar, especially versus the euro.
In the second quarter of 2022, approximately 47% of our revenue come from sales denominated in non U S dollar currency.
Turning to slide 16.
You can see that the net net non-GAAP adjustment in the second quarter of 2022 were $986 million versus 444 million in Q2, 2021.
The majority of this amount was a result of a 745 million goodwill impairment charge that was booked through our international market and Teva API reporting unit due to increased discounts and contrary premium rate.
Additional notable non-GAAP adjustments include legal settlement of $729 million, mainly due to an update of the estimated Apis settlement provision.
In Q2 2022, according to the agreement in principles that Gordon mentioned, the overall op at provision was updated with Triple 2 billion to reflect the discounted cash flow for all elements of the nationwide legal settlement on the assumption that we finalize the relevant outstanding time and get a full participation.
non-GAAP adjustments also include amortization of purchased intangible assets totaling $212 million. The majority of which is included in cost of goods sold.
Spending tax effect include a portion of realization of losses related to an investment in our one of our U S subsidiaries.
Moving to slide 17.
For a review of our non-GAAP performance I've.
I've already discussed our second quarter revenue, which totaled approximately $3 8 billion now lets move down to P&L and look at the margin.
Our non-GAAP gross profit margin improved to 54, 4% compared to 53, 3% in Q2 'twenty one.
Despite the 1% quarter over quarter decline in non-GAAP gross profit being quickly non-GAAP gross profit margin was mainly driven by a favorable mix of products in our Europe segment, and the positive impact of hedging activities, partially offset by lower revenue from Copaxone and the change.
And the mix of product in our North America segment.
Our non-GAAP operating margin in Q2, 2022 was 26, 9% versus 26, 4% in Q2 2021.
This increase was driven mainly by lower spend base, which I will discuss in the next slide.
We ended the quarter with a non-GAAP earnings per share of 68 cents compared to 59 days in Q2, 2021, mostly due to lower financial expenses and income taxes.
Now, let's take a look to our spend based on slide 18.
We see that our quarterly 10 base declined by 110 million, although it increased by $41 million net of ethics.
At our total spend rate for the first half of 2022 it declined by.
$367 million or 142 million net of physics.
We continue with our ongoing efforts to transform our global operational network and ongoing activities under management of operating expenses.
We expect the overall annual spend basis to remain well below 12 billion as we continue to focus our effort on reducing and optimizing our cost of goods sold.
As I mentioned last quarter. These ongoing efforts are expected to continue 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 with the ultimate goal of 28% op.
Margin by the end of 2023.
Turning to free cash flow on slide 19.
Our free cash flow in the second quarter of 2022, let's run in $1 million as I've mentioned in the past there was a big cash flow tends to face headwinds at the start of the year. In addition, we faced challenges due to the timing of certain items related to our working capital as a result of operational ramp up in relation to our annual production plan.
The decrease in our free cash flow in the second quarter of 2022 resulted mainly from lower cash flow from operating activities as well as lower proceeds from sales of assets, which we saw in Q2 2021.
This decrease in cash flow from operating activities was mainly due to payments related to legal settlements in the second quarter of 2022, partially offset by an increase in accounts payable.
Today, we are reaffirming our 2022 free cash flow guidance, which we initially 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 second half of the year as we continue to drive working capital improvement.
We remain on track to achieve our objective of 80% or greater free cash flow conversion by the end of 93 as part of our long term financial targets.
Turning to slide 20.
Our net debt at the end of Q2 2022 with $20 billion.
Compared to $20 9 billion at the end of 2021.
The decrease in our gross debt.
Added to the bond maturity paid in Q2 2022.
As well exchange rate fluctuation, our net debt to EBITDA ratio decreased coming in at four point.
<unk>.
For Q2, 2022 we expect it to further decline as we continue making progress towards our classic 'twenty three targets.
Debt reduction continues to be our primary focus and main use of cash upcoming maturities include $1 1 billion. In the reminder of 2022 out of which 250 million Swiss franc, which equivalent to 2000 and $60 million will be repaid tomorrow at maturity.
So now turning to our non-GAAP financial outlook for 2022 on slide 21.
As you can see.
We continue to see strong foreign exchange headwinds affecting our result at current rate, we still expect foreign exchange fluctuation to have unfavorable impact on revenue and therefore, we believe that consistent with what we had communicated in may at this time. It also prudent to adjust our guidance range for a full year.
Revenue from the previous range of $50 4 billion to $6 billion to the new range of 15 billion to $15 6 billion. This lowers the midpoint of our range by Friday.
The new range includes an adjustment to our full year expectation of globalstar of compartment of which we're lowering our guidance by $50 million to 700 million due to increased generic competition in the United States and the availability of alternative therapies as well as continuing effect of foreign exchange fluctuation.
Our non-GAAP tax rate in the second quarter of 2022 was mainly affected by the amortization of losses related to an investment in one of our U S subsidiary.
This led us to update our non-GAAP tax rate guidance from the previous range of 18% to 19% to the revised range of 13% to 14%.
For other key 2022 financial operating income EBITDA earnings per share and free cash flow. We're reaffirming the range provided in February and we continue to expect a gradual pick up in the second half of the year.
This concludes my review of the results for the second quarter of 2022, and now I will move back to court to discuss our strategy update and our 2027 blocker financial targets over to you for <unk>.
It's a pleasure to share with you our strategy update and our new long term financial targets.
If we start by looking at a little back.
Among the background for our current targets and they were set as you know developed by management and the board at the end of 17 and 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 are also in those five years.
Had a huge debt to haynesville and we've been paying it down consistent beat 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 bondholders 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 low 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 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.
Once you have a concept we call it basically meaning that everybody works together in order to optimize the synergies and the organizational between generics OTC specialty between all the different sites, but it also includes a dramatic reduction of our foot.
Print through consolidation. One example, here is that we've gone from having 80 manufacturing sites to around 53, and we have operational plans for further reductions.
Juicing wherever our seven sites over the coming years. The same kind of numbers you will see if you look at the number of office locations. If you look at the number of R&D sites. So we're so all in all we've had a dramatic consolidation of the business leading to more efficiencies.
Helping us to generate the cash and the earnings every year now.
Now if you look at the next slide you will see that the foundation.
Our business is unchanged compared to how we formulated back in 2018.
Our mission is to be a global leader in generics in Biopharmaceuticals, improving the lives of patients.
And our patient focused like I mentioned earlier is really the key.
You could say if I saw the effort of the company. The key reason why we are here. We are here to help patients with medicines bead generic medicines speed OTC b, new innovative medicines.
And we have a lot of people roughly we support around 200 million patients everyday with all kind of different products.
Again across a very broad geographical range of countries and across a very broad range of products, we have core values, which I won't comment on details, but these are unchanged and they secure that we have high employee retention it secures.
We.
Our lives in an ethical way and secure that we stay in compliance.
If we move to the next slide.
You can see here that our strategic focus is really.
To continue to be leaders in generics.
To build a uniquely strong position biosimilar.
And in specific areas to continue to drive our specialty business with new innovative products and with further penetration of the great products that we have already launched.
Yeah.
If we talk about the generics and look at the next Slide then you can always debate, what's the sort of fundamental business model of generics and the fundamental business model is of course very very simple.
Innovative products are developed over time, they launched some of your successful eventually the patent expires and you get generic competition. So you would say what feeds the generic market.
Is the value of products going off patent.
This is a very simple overview showing you how many products went off patent in the year of 17 to 21, so in a five year period.
Roughly 110 billion and you can see the mix between small molecules and biologics 86 billion small molecules 25 billion in biologics and.
And you've heard me say, many many times that there's a gradual shift in the marketplace, where more and more new innovative therapies are biologics and therefore, that's also a gradual shift in which products go off patent and this is very clearly illustrated here. This is the IQ we have forecast for the next five years So 22.
26, and you can see here that we are talking about nearly 200 billion going off patent and now it is like 120 small molecules 70 biologics. So the biologics are getting close to being 50% of what goes off patent if you do a projection for the out it gets a little more.
Uncertain, how revenues will actually be of a different product, but might predict news. If you can do the next five years, you will be close to 50 50 between small molecules and biologics and the value will be even bigger than it is for this five year period. So the short message here. It is this safety appears.
To be made in.
Small molecules going off patent heavy generic version is being launched but also in biologics going off patent and had a biosimilar because if we just look at the next slide and this is another way to look at it. This is the sort of a prediction for the total generic market worldwide and you can see it's a huge market.
It is predicted to grow around 4% on an annual basis.
Now if you look at the next slide.
We try to get a picture here of why we are the leading generic company in the world.
And what you need to do to stay with you think company and of course, one of the things you need to do you need to address by far the majority of the 400 billion that's going off patent over the next 10 years and you do that by having a lot of projects of course, so we have more than 1000 projects covering 80% of what's going off patent and that's really our guidance.
Internally, we can't cover everything that would be too many products too many projects, but we want to cover 80% of the world value going after it.
That means you need to have a full range of technologies. Some are assembled some very complex technologies, including things such as inhalers patches long acting injectables sterile injectables all kind of different.
Technology platforms put doing pharmaceutical products. It also means that you need to be fast because a lot of the value is by being first to file in the U S and by launching early in Europe . So that you get a good market share in a good position within the generic space for whatever product that goes off Pat.
Sure.
And it also in order to be profitable means that you need to continue to optimize your manufacturing footprint and your R&D footprint and we're doing that our global integration scalability you need to make sure that you have efficient factories that can produce for the whole world now we have all these elements we are.
Continuing to improve them and I'm, 100% confident that we will stay the world leader in generics also going forward.
Now a new thing in the marketplace over the last five years is really the growth of Biosimilars.
And this will continue to grow strongly and it's very simple why is it growing because more and more biologics are going off patent. So as you saw before when more and more products go off patent and of course, that's more and more business to be had by the communist and in this case its biosimilar products.
And we of course see that it's growing all over the world, including North America, and we recently saw how strong that market segment is without big success with trucks, EMA, where we gain something around 25% volume share and saw very strong revenues.
Already now accumulated more than $1 billion in revenues off of truck shipments.
Now if we move to the next slide you can see that some other skills that you need in order to be a leader in biosimilars, but in a ways. It's not radically different it's technologically little bit different because you need of course again.
At the same strong portfolio is typically less.
Products this projects because each product in the biosimilar space or in the biopharmaceutical space are typically pick up.
So you have biologics products to date patented products that wholesale 510, 15 20 billion on a worldwide basis and therefore, we had the same philosophy, we want to cover 80% of the value going off patent, but you can typically do that with less projects. The projects are somewhat more car.
So you need you can see a different set of technologies, we had all those technologies.
Full.
Well you chain in house, we're expanding significantly in Germany.
Our capabilities here, our volume capacity. So we're very very focused for this going forward. There is a huge overlap between the practicalities of doing.
New patented <unk>.
The weighted.
Pharmaceuticals, and doing Biosimilars the whole she would say value chain of the actual manufacturing is actually safe.
The future demand will be strong and we believe we are very well positioned to become a leader in biosimilars both in U S Europe and in the rest of the world.
Now, let's take a look at our specialty pipeline.
We have a focused specialty pipeline, we have two areas, where we focused the most that's in neuroscience and immunology.
And I won't go into details about the project to date that would take too long, but within the coming year. We will plan to have an R&D day, where our new head of R&D as well as members of management.
Management will tell you much more about the projects that we have here, but just as a little T cells. You can see here. We have projects for example in MSA and in Parkinson's disease, an area, where we have a strong tradition with the launch of agile it years ago, and where we really have focused for many many years.
Movement disorders as you know is a key area for US also with a stable in the marketplace. So that's very very exciting.
The exciting projects also in neuroscience and in immunology, we have some very interesting achieved kind projects in oncology, where you as you know you've downregulates the effect of the.
Immune stimulating agent so that it works only in the right spot.
And it means that you overcome some of the safety hurdles. We are working also.
Go with Takeda they are in license a product in that category and that is also doing very well going into phase III. So a lot of exciting things that we will get back to a more detailed sometime during the coming year.
Now, let's move to the next slide because.
As you know I like to sit out long term targets stick to them.
And make it relatively simple because otherwise it gets too confusing and if you've changed your talks all the time. It also gets too confusing and I've been saying the last year that were getting close to the end of 'twenty. Three so it's probably a good idea to share with all of you analysts and investors how do we see the longer term future for Teva and these are the new.
Long term targets for 2027.
There are no really big surprises I would say we will continue to improve the operating margin. We are heading now passed the 28, that's the target for next year hitting for 30%. We continue to take down the debt. So we will hit it going below two at the end of 'twenty seven and we will of course keep strong cash to earnings although.
We cut too.
This.
And we are now also focusing on revenue growth. This basically means that we will ensure that we had a compounded annual growth rate of the revenues in this period in the mid single digits.
And of course that might mean that we will do some small bolt on acquisition of products or will do some geographic expansion of our portfolio and we're very focused on this show that we ensure both their margin strong cash flow this debt and growing revenues. So just to sum it all up on my last slide.
We think we have a very sustainable foundation.
Which means that we can return to growth both on revenue and earnings and thereby increase shareholder value. The reason why we believe in the growth is what I showed you about if there is strong and predictable generic business strong growth in our Biosimilar business based on our pipeline.
And a focused specialty pipeline combined with our sterile and <unk>, which are doing well in the market will continue to drive the margins up.
It's not a miracle is just hard work and we will continue with our solid cash flow generation and thereby reducing our leverage in the years to come.
Thanks for listening in and we will now move on to Q&A.
Thank you.
As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced please.
Please limit to one question and one follow up per person. Please.
Please standby, while we compile the Q&A roster.
Thank you.
And the first question comes from the line of <unk> Prasad from Barclays. Please go ahead. Your line is open.
Hi, good morning, everyone and thanks for taking the question.
Firstly congratulations on.
Getting the settlement in place.
I'm curious to know what are the next steps and timelines for our settlement specifically focusing on the caveat with Allergan and is there a time limit by when the Aragon settlement needs to happen.
And could.
If it doesn't there is is that a chance that the current settlement could be rendered moot.
And you could also just speak about the longer term growth that youre guiding to well know almost been.
Conditions think of Talos generates growth that's 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 can deliver growth equal to or greater than this longer term generates market growth. Thank you.
Thanks for those two questions, let me start by the opioid settlement.
So our expectations for the timing is that in the coming weeks.
An agreement in principle will be finalized in actual wording and as you know the mechanics is actually that is an agreement for the states in the subdivision to antigen agreement because the way. It works is that you agree and 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 in 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, there. It works the way that this is.
You, obviously, a clock stop and then you had some months where people can opt in.
And then after those months had passed you have a devaluation do you have enough participation for this to be meaningful we would definitely expect to have that given.
All the information we have from both the states and platelet 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 in and you start implementing and that means that the actual implementation will start sometime next year.
In terms of allocation of course.
The assumption here is that there will be a agreement where they would be also taking part in that and I think that's by far the most likely and of course also have the best for everybody involved in terms of the growth rate and you're absolutely right that there's sort of a run rate for it for generics and biosimilars in the U S.
<unk> is around.
1 billion a quarter somewhere around 4 billion, but that's of course not our entire business. We also have the specialty business and we also had the generic and Biosimilar business in the rest of the world.
I don't know I don't think that the generic piece. So you would say the ECE generic piece in North America, and Europe will not be growing but the biosimilar piece will be growing significantly and that basically means that you will have a flat, maybe one or 2% growth on the traditional generics, but then youll see.
Some complex generics youll see biosimilars, adding to the growth rate not dramatically, but taking it up into single digit at the same time. We had this dynamic we've discussed so many times that we've had a drag for five years now from Copaxone that went from close to 5 billion now till you just sold in over $700 million.
And we've had the growth of our <unk> and Adobe coming in and if you look at the guidance for this year now you would say for the first time not only are the growth drivers bigger than the detract a so to speak so the combined sales of jewelry and a state of our now bigger than they could declining sales of capacity they've actually reached.
They were where they are twice as big so that means that the simple math you could say if both have a delta of 20% per year or 25%. Then of course now the specialty portfolio that sets will contribute to growth by Adobe and a state of growing and continuing to grow for the next many years you saw for instance on a state of that.
The IP situation looks like it's very safe until the early 2000, but there is so there's a long growth path for stable going forward and so that whole combination means that we are confident that we can achieve single digit growth.
For the questions.
Sure.
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 you know a similar.
Question <unk>.
What you had just we're 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 is sort of the last factor on those that long term target slide. So I guess, how important is achieving that two 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've narrowed your focus on the specialty pipeline and reduce some of the programs that you have 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.
Thank you.
Thank you for those questions if we take.
The long term tax first and the let's say the dynamics between the different targets then.
Sure.
Three targets for margin.
Earnings and debt.
Im not linked to achieving the fourth target.
So we will achieve the three charges, even if we fail on the fourth target.
But we don't plan to fail or any other targets, we plan to each all four targets, but the simple answer is that we.
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 achieved the first three times. So we are strongly committed to achieving all four targets and the building blocks are quite simple in a way and what I tried to illustrate that there will be.
Both coming from Biosimilars, which will be contributing there'll be growth comes in specialty not just from a stereo and a joke, but also you see which is the brand name for Risperidone.
Which we still expect to launch.
First half of next year, so there's a portfolio of specialty products, which will be driving growth not just in the U S. But also in Europe continued growth of Adobe and Europe drove is doing very well in Europe as you'll see and we'll continue to do so for many years. So there's a number of growth drivers, which altogether combined with.
Our 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 immunology. These are the areas, where we have the most.
<unk> achieved historically.
And also the area, where we have the best quality projects and you're also right that we have closed a couple of projects because we didn't see the UPC scientific.
Value is being high enough value, we could give to patients was not high enough and therefore, we have to stop these projects. Once we have them showed you they all meet.
Very essential unmet medical needs, which basically means if they succeed and 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 with growing revenue you will see that we will be spending a lot.
It'll get more but nothing dramatic.
For the questions.
Okay.
Thank you.
We will now take the next question.
And the next question comes from the line of rough thoughts from Evercore. Please go ahead. Your line is open.
Hi, guys. Thanks for taking my question so look.
The announced settlement framework is about $3 5 billion of sort of cash value and I'm sort of adjusting the drug for the cost of the drugs at $3 5 billion separately, we know that on your P&L you had a $2 $6 million charge on an NPV basis, which was implying that this is out of last quarter, which was implying.
The equivalent of three and a half to 4 billion in cumulative payments over time, So I guess I'm just a little confused why theres, an additional $700 million accounting charge that implies the value the MPV value higher than sort of what you said that so I just wanted to clarify and square that a.
The other one is the Allergan indemnification I guess why hasn't that happened already and where do you stand on that thank you very much.
So I'll just give you the overall explanation for the accrual we have and then early can give you some of the details and then I'll get back to the Allegheny.
Overall accrual includes everything so.
And we.
We won't comment on all the details on the agreement in principle, but you can imagine there's tons of details about already settled cases.
Product volume there.
Fees in the different cases for the attorneys the tribes.
Different ways of the payment schedules with 13 years with discount rate all kind of stuff goes into it but the only thing I can reassure you in maybe early will give you some more color to it is that it's very very comprehensive it's very very detailed is of course Tom.
Extraordinary.
Well also together with <unk>.
Total accountants, so the $3 two is it's a very good picture of the net present value of all obligations, including product and everything else being involved here at Ellie maybe you want to get some some color to it so Omar just at a high level the $4 2 billion that we announced this one.
Including political the cash element there.
That's around $3 6 billion and then with the certainty of element on the product to 40, and then some elements related to defeat.
And then on top of this there is some other element, which we cannot actually comment a comment again are related to Oregon and few other element that we are considering and are of course, but one thing to understand this is a not really evenly straight line 13 years.
The same amount each year.
The amount that kind of a frontloaded.
Six seven years at the start of the settlement period, and you know we already have some power settlement that we commit that need to actually have their own schedule already that we can make so it's not kind of a straight line. You know one of these countries you can drive and get kind of form yet.
MTV and as cord mentioned, because it's a lot of layers and very sophisticated the $3 2 billion accrual MTB base is actually considering all the element considering the further full participation on the nationwide execution.
Yes.
To the question on <unk>.
How does that.
Yes.
Yes.
Well, if I may just clarify that.
The announced and the announced amount is $3 6 billion, which is yeah.
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 about three point ticket is actually higher than $3. Six is closer to $4 billion of cash based on some of these other elements quote unquote that you just mentioned.
They announced a $4 2 billion up to $4 2 billion in cash, which considering the cash element treatment six plus the potential.
Burt from product to catch on to 40, 20% and then additional speed element inside right.
<unk>.
No one in theory getting the product to a tier two to up to $4 2 billion now and a few other element that we consider from what we call a risk assessment in the nation in our account growth and opportunity on top of it right.
And we already considered what we paid and what I'm trying to tell you that because it's not a straight line and the NPV is really getting at.
Different than Redmond, NPV, because if you had upfront payment you have to get kind of more cars on MTV upright.
What I try to frame.
Thank you for that.
Okay. Thanks.
A question with regards to Al again, we don't have any further comments to that but we expect to see.
As part of the year.
And final settlement.
Thank you thanks for the questions.
We will now take the next question.
Please standby.
And the next question comes from the line of Jason <unk> from Bank of America. Please go ahead. Your line is open.
Hey, guys. Good morning, Thanks for taking my questions.
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 the second half 'twenty, one and then like a 120 days later.
It was finalized 90% of litigants had agreed all the allocations were sorted out so should we think about this deal is like on a similar trajectory.
And most of the states in subdivisions have already sort of sorted out the allocations via the J&J deal side almost think this could happen sooner.
Then can you give any color on how many states have agreed to this part of this working group dynamic just curious if you can shed any more light on that thanks.
And so the short answer is I think the situation is very similar so all the details of course had been worked out there's a ton of details on percentages in the states in subdivisions and all that stuff as I'm sure you know it.
And all those details.
I have basically been worked out because it doesn't make sense to agree on a number if you hadn't agreed on all the other details. So 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 will finalize the wording of the settlement, but then as you rightly alluded to you have the process.
We have people opt in states and subdivisions and the understanding between the parties is of course that by far the majority of states in subdivisions will update and Thats. The whole point of open negotiations and help secure that you have.
<unk> wide 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 holdouts on.
The J&J and the three distributors, we have actually already settled as you know we have settled with Virginia, we have set of Rhode Island.
We have settled Florida, so it takes us 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.
We will take the next question.
And it is coming from the line of <unk> <unk> from UBS. Please go ahead. Your line is open.
Hi, Thanks for taking my question so on the opioid side.
Follow up on Jason's question here.
We signed on media knew the data Lake.
That actively participated in the negotiation.
In principle agreement I'm, just curious to understand the level of motivation for the remaining <unk> <unk> like what gives you the confidence that they can join hands in the coming weeks and why did it did not participate in the negotiations and the plus so that's the first question and just a second the call just wanted to ask.
Now that would be I mean, getting the building of a chapter on opioids and embarking on the next phase of the story.
Can we assume that you'll be part of that we know that your current contract expires in November 2023, and we still haven't seen anything on the extension front.
Remember the last one year extension Luganda I'd like to you prior to the explanation, 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 out compared to what happened with the distributors and with J&J is quite normal that the.
I would say negotiation group is a subset of the total number of states. So there's no indication in that number of states being directly involved there's no indication that the other states would not end up participating.
Very very likely it like I said before that we will end up with a very high participation rate.
It happened to distributors and J&J and some of the whole Doc 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.
Nearly everybody will joining with regard to.
My situation is actually correct as you say that the contracts that have expired at the 23.
And with regards to the future I don't really have any comments to that right now as of to date.
Thanks for the question.
Thank you.
We will now take the next question.
And the next question comes from the line of Elliot Wilbur from Raymond James. Please go ahead. Your line is open.
Thanks. Good morning, just wanted to shift gears here and focus on a couple of the key revenue drivers in the North American business first.
Specifically.
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. We've also seen a competitor put more money into the market, which seems to be.
Expanding overall patient volume curious, how youre thinking about incremental investment behind our sterno over the next 12 months to 18 months, either DTC or possibly even an expansion of your sales force and then as a follow up I wanted to focus specifically on North American <unk>.
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 generic out of the FDA, but wondering if you're 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 the North America generics for the second half of the year.
<unk>.
Okay.
Yes. Thank you for those two questions I'll give a very brief answer and then I'll hand, it over to submit to give the detailed answers were very happy about the progress on Scripps with our stereo and patient. So so that looks good and we're also happy about the performance of.
Generics in North America, yet in the second quarter.
Quarter hitting in North America, combined with the Biosimilars around the building so that looks good but for more details over to Spain, yes. Thank you Ed yet so for <unk>, we had strong <unk> growth of 27% in the first half of this year versus last year and also the new patients hefty.
Eloping strongly the Aetna.
<unk> grew 32% in the same periods. 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 achieve our sales target that we set for ourselves in the second half of the year.
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 the downstream activities on sales on the titration management on patient materials, and we believe we have a significant potential in that area and we already did these investments in terms of sales force expansion and other activities. So we are fully on top of the standard development.
For the 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 doesn't mean that we don't have price erosion. We just have stable cross erosion and we do not expect them.
Acceleration.
Sure.
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 in the graduate shift to high barrier generics, which have a more stable the pricing profile and these are products like epipen to purchase we have the data, we launched and long term and other long term inject.
<unk> they are more durable than the base generics business.
What we see here is that of course, you are right. The FDA is at currently.
Seeing significant barriers for complex generic approvals for that reason some of our approvals that we expected for this year.
Is it all happening next year, but overall, we believe that especially in 2023, we see two elements.
You get to a higher rate of product approvals and we will also have with the euro biosimilar loans I think for our generics business in 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.
Sure.
Thanks for the questions.
Thank you.
Yes.
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 answering <unk> question and how about just spread out over the next seven years, just wanted to have a better idea on how to model that even.
Even if you can 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 credit 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.
The specialty pipeline that you can highlight I know youll have an R&D day, but just give us some of the key catalysts that you can thank you.
Thank you very much so.
If we take the settlement first then what Andy was alluding to was that there are some current settlements that we have already done with individual states, where we actually paying cash already this year, we have actually already paid cash in the first and second quarter.
If you look from next year and going forward than 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 our marginal it's not it's not dramatic so it's somewhere between three and 400 million.
Per year in the <unk>.
Net cash for all the different elements. So it's not front end 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 so that's really on the settlement then on.
And proceed.
The business development side, we already do small business development deals, where we do bolt ons of individuals.
Products for instance.
As a business development deal Thats behind you.
<unk> launch that we're planning with Biosimilar Humira launch planning for next year deal, we did with Alphatec.
I assume that we just launched in the UK is the biosimilar to Lucentis in the U K Thats also a business development deal. So we do do business development deals and we will continue to do so if you think about when it is there more room significantly more room in the balance sheet to do something slightly bigger than this that will be it.
And of the five year period, because since we're aiming for a net debt to EBITDA below two then if you do sort of the math on a.
Marginally growing EBITDA and therefore.
EBITDA will be growing over that period, a constant declining net debt. Then of course, you hit that around two times net debt to EBITDA you hit that before the end of 2007 and that means when you get close to that or when you get below that and of course, you have some room within these targets to do a little.
More.
But youre still at this size, where it's I would call. It smaller bolt on things you can do in.
There's a lot of opportunities there, there's a lot of companies who develop products and then they don't really have a commercial.
Setup, so they need a partner and we have a good tradition of partnering with many different companies. So we think we can continue to do so and that will be one small element in continuing the growth of our revenues.
With regard to the.
To the pipeline I think there's a lot of exciting things there and I will go into the details now participate that of course next year. The long acting risperidone looks extremely good from a clinical point of view, both the efficacy and safety and it will be a major improvement of lowing acting a psychotics that you can do it's up to you.
Initially and it works for one or two months. So we're so that's going to be really nice to get that finally approved and launched next year.
Thanks for the questions.
Thank you.
We will now take the next question.
Please standby.
And the next question comes from the line of David <unk> from.
Piper Sandler. Please go ahead your line is open.
Thanks, So a couple of questions. So one just thinking.
At a high level about the business.
One of your U S major peers of the address his thoughts.
Les about divestitures and I just wanted to pick your brain core on how youre 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 of the topics that come up.
Comes up quite frequently so how are you thinking about that particularly now that you've gotten the.
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 are you thinking about the ramp in adoption here just your general thoughts there. Thank you.
Thanks for the questions I'll take the first one and then strengthen can take the second one so with regard to divestments, what we've done the last five years as we've really analyzed the entire value chain the entire business and.
And we have sold off those elements.
That we thought had no strategic seen it.
Energy with the rest of the business and we've kept all the elements that we indeed gives us a strong.
Synergistic effect. So we have no plans of divesting any parts of our business. We basically had 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 increased 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 margin improvement free up more and more cash to do what you said acquisitions of.
Branded products either in one or another area.
Have them organically.
You could say that we generate more and more flexibility to do so with the debt reduction and margin improvement.
And then on Humira spend yes. Thank you I think the question was about the expectation for uptake of Euro next year.
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 defined by the contracting strategies of Pbms.
Our customers how they think they would like to boost the biosimilar market versus the offer that they get from Abbvie and that will be a two step approach one that will happen in 2023. It primarily in the summer of 2023, and then you will see a second phase in 2024.
We'll book of contracting will be opened again.
I believe we are the 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 excess approach for next year.
And we I think we know more about that at the end of this year with 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.
Yes.
That does conclude our conference for today. Thank you for participating you may all disconnect speakers. Please standby.
Yes.
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