Q2 2019 Earnings Call
In the interest of time, please limit yourself to two questions. Each I must advise you that this conference is being recorded today Wednesday, the seventh of August 2019, and I would now like turn the conference over to your first speaker today, Kevin Mannix Senior Vice President head of Investor Relations. Please go ahead Sir.
Thank you guys and good morning, everyone. Thank you for joining us today to discuss our second quarter and 29, Chief financial results. We hope you've had an opportunity to review our earnings press release, a copy of the release as well as the copy of the slides being presented on this call can be found on our website at www Dot Teva farm dot com as well as through the Havent Investor Relations App.
Please note that the discussion on today's call includes certain non-GAAP measures as defined by the FCC management uses both GAAP financial measures and the disclosed non-GAAP financial measures internally to evaluate and manage the company's operations to better understand its business. Further management believes the inclusion of non-GAAP financial measures provides meaningful supplementary information and facilitates analysis by investors in evaluating the company's financial performance results of operations and trends.
A reconciliation of GAAP to non-GAAP measures is available in our earnings release and in today's presentation to begin today's call for shelf that was chief Executive Officer, and Mike One click Tevas Chief Financial Officer will review the second quarter results question answer session will follow the presentation and joining core and Mike on the call today is Brendan O'grady Kevin's head of North America, commercial and with that ill now turn the call over to core or if you would please.
Thank you and good morning, everybody thanks for calling in.
We have very nice quarterly results that we would like to present too we have seen revenues of $4.34 billion.
Which was in line with our expectations. We saw it gets diluted loss per share of 63 cents and non-GAAP diluted EPS of 60 cents.
And we saw our non-GAAP EBITDA of 1.14 fueling.
Free cash flow was 2.17 billion.
And basically we are seeing what we also saw last quarter a stable North American generics business is of course supported by.
Long list of new launches and the ongoing effects of this portfolio optimization that we initiated some.
One and a half years ago. We also see a continued strong growth of our state of having sales of 96 million in the second quarter up 30% over the first quarter and continuing.
Good trend, we are satisfied with the trx share on a job and we are very happy about the launches that we are undertaking right now in Europe .
On the restructuring plan, we see a spend based reduction completely in line with our plans, which basically means that we will achieve the two year target of 3 billion reduction compared to 2017, and we also see a small reduction this quarter.
And just for information, we did make a scheduled reduction in the gross debt by paying down $1.6 billion in in July .
And as you can see we are reaffirming the 2019 financial guidance and this goes of course for all elements of the guidance.
If we go to.
The historical development of revenue and profitability I'd, just like to remind you of the situation in late 17, when I joined where we saw generic competition coming in on a complexion and we basically knew that revenues were going to fall roughly $4 billion on a yearly basis and that's also what you see you see the quarterly revenue coming down from selling the $5.3 billion to $4.3 billion, but you also see now the beginning of the trough as have been calling it the trough of 19, we just basically where the revenue stabilizes you also see that the gross margin that was coming down is also stabilizing now.
Just above 50% and the operating margin.
Stabilizing now around 23%, which is of course, not our long term target our long term target as I'll get back to is 27%. So we still need to see improvements there.
Talking about the trough, let's look at the operating profit.
If we look at that in the same historical period. Then you also see the very.
Thank you think of the revenues declining and office only being able to take down the cost.
Quarter by quarter, but still the FICC now is that we are stabilizing the operating profit at around roughly 1 billion per quarter and you see that.
Net income is around 650 million right now and that results of course in the earnings per share stabilizing right right now around 60 cents. Now. This is as I've said before this is what we expect to be the trough year, it's not that there will be a dramatic turnaround in the coming years, but the trend lines will slowly change and we will start to see moderate increase in revenues and moderate increases in EPS going forward, but just to remind everybody. This year will be the lowest year in terms of operating profit and also on terms of average earnings per share.
So just to give you a little bit of color on this space.
Reduction this is a massive undertaking is the whole organization, reducing by more than 10000 people in a very short time span. This is divesting or closing some 20 factories around the world. So a major undertaking and I'm happy to see that everything is being executed according to plan and the simple math of the spin phase in the first half is that we spent 6.6 billion, which basically means that.
Yearly equivalence is 13.2 and our targets as you know is 13.3, which is a $3 billion less than the actual spend we head into 2017 and this of course includes everything so there is nothing excluded or any any tweaks. There. So is it really.
Nice development and we can see that everybody's executing according to the plan.
Now if we move on to the drivers of future growth.
Then we have two main drivers and Joe and I was too and we.
Very happy about the strong launch Weve head of Adobe, we still had above 20%.
Trx share in us and we have just started the launches in Europe , we've seen a moderate decline in the empiric share. We think it's related to a couple of factors one being the fact that we've stopped this full pay down on old scripts, which means that some scripts, where we are not covered actually do get declined at the pharmacy level and we also see that in some cases.
Patients do prefer a auto injector and therefore of course, we are.
Great eagerly waiting the approval and launch of our own auto injector for at least.
If we turn to our Seo.
Then we continue to see very very strong growth of stable. Both in terms of prescriptions and in terms of sales of course, there is always some quarterly variances.
We think that the numbers, we see a very much a reflection of the true situation in the marketplace.
Well covered by basically all health plans and the gross to net situation is also very stable. So so this is really exciting for us. If you think about the patient numbers. Here. Then the script is we have right now is equivalent to a little more than 8000 patients on on the drug and its a combination of Huntington's Korea and Taiwan at this condition and as I've said before our estimates are that is around 500000 people in the us suffering from Todd. This can Asia. So in that sense. You can see we are only scratching the surface with this therapy for the moment and we have very very good reception.
Among specialists and among patients.
The drag on our business.
If we go to the next slide is really the development in comparison, there's nothing new here and you can see we had a pretty linear volume decline, which has been more or less stable of course again here. We had some quarterly variations and Thats of course, because we have a volume decline and we had increased rebating over time in order to maintain this volume and that means that the quarters can go up and down due to various rebates rebate accruals and so on but if you really look at the underlying.
Trend then you can see that we are sort of having.
Using half of that of the value of the business on a yearly basis and that's also what we are expecting for this year. So we are still expecting to have revenue of around $800 million in the us. This year and then of course, which we don't show here on this slide which you can see in our numbers, we had a really stable situation in Europe with a moderate decline we had a win with the European patent office. So that we are more optimistic now about maintaining a solid compaction business in Europe .
Now with all the operational elements performing well everything being on track it is of course.
I would say interesting and to some extent frustrating that we have seen a significant drop in the share price and the market capitalization of the company.
And for me personally being many years in the industry and having a very strong commitment to compliance believing that compliance.
All elements and at all levels of the business is a prerequisite for having a successful pharmaceutical business. It is.
Maybe especially annoying to be involved in two legacy.
Legal situations as you all know we involve in a opioid litigation and we are involved in.
Investigations on allocations of price fixing.
We do of course in these situations always assess what is in the best interest of the company our shareholders.
And we act upon that we have of course done extensive.
Documents research.
Discovery together with external law firms and so far with all the evidence that we have in our hands, we deny any liabilities. It because we have not seen any evidence of us having any misconduct in the opioid situation or any misconduct in the price.
Pricing area. So we will continue to defend ourselves and we do not see the opioid situation, which is a very tragic situation than us we do not see that as a situation that will be solved by litigation. We think there is a more systemic need for change, which is the way to improve that situation for patients going forward.
On the pricing.
We do collaborate of course with the few Jay in their criminal investigation.
We have been collaborating with them since.
2016, and as I said in our discovery process, we have not found any documentation that's sort of.
Substantiates the allegations so we continue to defend ourselves denying these.
Allegations.
Now if we look at the business going forward and our financial.
Targets for the business going forward.
Then I'll just like to repeat these we have talked about that before.
But just so that everybody knows what our long term plan is.
And one key element is as I said in the beginning to improve the operating margin.
Now that happens by a lot of elements. One element is of course that you optimize your product portfolio. The gross margin on the product you're selling you optimize the manufacturing cost of the product to sell and you make sure that you have a.
Good and strong overall market development as I showed you earlier, we delivered 23% right now and we want to improve that.
Up to the level of 27%.
The cash earnings.
Is quite simple because we need the cash in order to reduce our debt.
And of course, we have a long term plan to keep on reducing our debt. The simple math is that right now we probably have net earnings up some 650 million per quarter, that's 2.6 billion a year.
80% of that Thats, roughly just around $2 billion. So.
You see we also guiding $1.6 billion to $2 billion on the cash flow. So we really.
Aiming at getting to that level, where we on a consistent basis generate most of the result of this cash that will always be quarterly fluctuations with big balance sheet.
As ours of course ever quarterly fluctuations, but on a yearly basis, it's very important that we meet this target of the same cash earnings and that this important because we need to reduce the debt as you know our net debt to EBITDA ratio right. Now is about five and we really want to get it below threex and the only way to do that as generate cash and payback. The date. So we will continue to.
Use all cash flows to really pay down debt and.
I also stated many times, we do not plan to raise equity we plan to continue to use cash to reduce the outstanding debt and we think thats the best way to create value for our long term shareholders now.
With these financial targets I'd like to turn it over to Mike who will go through the financials in detail.
Thank you Lauren good morning, everyone as always we will start with a review of our gas performance on slide 15.
However, posted a quarterly GAAP loss of $689 million and a loss per share on a GAAP basis of 63 cents for the second quarter of 2019.
As we will detail on the next slide the GAAP results were mainly impacted by legal settlements and impairment items.
So turning to slide 16 in the second quarter, we experienced non-GAAP adjustments amounting to an impact of 1.3 million on that income. These adjusted consisted primarily of 646 million provision for legal settlements. This was mainly related to opioid litigation as well as the impairment of intangible assets and product rights amounting to $460 million and amortization charges of $285 million for the quarter similar to what we had in Q1 of 2019.
So now turning to our non-GAAP performance on slide 17, which shows a solid performance for the quarter quarterly revenues were $4.3 billion, a decrease of $364 million or 8% nominal 5% net of FX compared to the second quarter of 2018.
The decrease was mainly due to generic competition for copaxone as well as the decline in revenues from trend of Bendeka Proair lower revenues in Europe , and a decline in Japan. This was partially offset by higher revenues from a stable as jovi too far and our end of business in the U.S.
Compared to Q2 2018, we experienced a negative FX impact of $125 million net of FX revenues in Q2 2019 decreased by $240 million.
Gross margin was 50.5% compared to 49.7% for the same period in 2018.
The improved gross margin was driven by improved profitability of our north American generic business and to a lesser extent by the discontinuation of our Odisi joint venture, which had a part of its profit share recorded previously against cost of goods sold.
This improvement was partially offset by the decline in sales of compacts.
Operating income for the quarter declined by 18% compared to the same period in 2018.
The decrease was mainly attributable to the decline in Copaxone and other specialty brands as well as lower income other income which declined by $106 million. This was mainly due to legal recovery of lost profits that we booked in Q2 of 2018, which did not repeat.
These declines were partially offset by our ongoing cost reduction program.
non-GAAP earnings per share in the quarter was 60 cents 18 cents lower than the same period a year ago. The decrease was mainly due to lower operating profit, partially offset by lower finance expenses.
We will dig deeper into the trends in revenue and cash flows later in the presentation.
So turning to slide 18, we've been highlighting for several quarters now included in our 2019 guidance provided in February the impact of the stronger US dollar on our results as approximately 50% of our revenue come from sales denominated in non US dollar currencies, we see that exchange rate movements. During the second quarter of 2019 had a negative impact of $125 million on revenue, while the impact on operating profit was smaller at $47 million.
The main currencies relevant to our operations that decreased the most in value against the US dollar for the Euro UK pound and Russian ruble, we do expect that the U.S. dollar will remain strong for the remainder of this year.
Turning to slide 19.
I'd like to highlight some of the revenue trends, we have seen throughout the different segments and regions.
Starting with North America, I'd first like to highlight our North American generic business, which continued its solid performance, reaching sales of $946 million in the quarter supported by a diverse portfolio and further stabilization of the business.
Cuba are also continues to perform well in the second quarter was $60 million in revenue.
We do see sales of three end of Bendeka that are in line with the trend. We saw in the first quarter of 2019, the decline versus second quarter of 2018 was mainly due to increased competition of another vendor must in solution known as the big bag.
Revenues in Europe declined by 6% compared to the first quarter, mainly due to lower sales of generics, including Odisi products that are stronger in the first quarter due to the cough and cold season.
Our international markets were down 6% compared to the second quarter of 2018, mainly due to FX sequentially from Q1 sales were up 11% due to stronger performance of generics and a seasonal impact that we see in these markets.
Lastly, other sales were up 6% compared to Q2 of 18 and 8% sequentially. This line primarily consists of sales of eight.
The third parties and certain contract manufacturing services. The increases are primarily due to stronger sales in our APC business.
Turning to slide 20, pre cash for the quarter was $116 million a decrease of $192 million versus the first quarter of 2019, primarily to the expected accounts receivable working capital drag that I described back in February when we provided our 2019 guidance the effect of this drag with us, especially seen in Q2 as accounts receivable working capital declined from an inflow of 206 million in Q1 to an outflow of $286 million in Q2, a swing of nearly $500 million between the quarters.
On slide 21, we present, a bridge between Q2, EBITDA and the free cash flow and here you can see the overall working capital effect I described we do expect free cash flow to improve significantly in the second half of the year, mainly due to the receivable drags dissipating the annual bonus payments of $390 million in the first half not repeating and inventories coming down due to normal seasonality.
Turning to slide 22, we ended the second quarter with a net debt.
Of $26.6 billion and a net debt to EBITDA ratio of 5.72.
As you May recall during April we also entered into a 2.3 billion unsecured syndicated revolving credit facility, which replaced the previous 3 billion revolving credit facility that we have this new rcs can be used for general corporate purposes, including repay existing debt as of June 32019, no amounts are understand outstanding under the our CF and as of today, we have 500 million outstanding under the RCM.
So now returning to our financial outlook for 2019 on slide 23.
Today, we are reaffirming all aspects of our annual guidance that were first presented in February and reaffirmed in may including earnings per share in the range of $2.20 to $2, a 50 cents and free cash flow for $1.6 billion to $2 billion for the year.
Where we end up in the ranges of the full year will depend on the performance of the branded products, especially copaxone a jovi, the timing of generic launches foreign exchange rates, especially the euro and our expense management.
At this point I would like to to address second.
Press release that you may have seen this morning.
For personal reasons I have decided to resign from Teva and relocate.
My family. This is a very very difficult decision for me, but.
As many of you know when you when you move to a new country.
It's always a challenge and when family issues come up that make it difficult to sustain that sometimes you have to make a decision that's in the best interest for your family.
This decision has no no real influence from the situation of Teva, we do have our business challenges, but I am really convinced that the employees management and board of this company are doing the right things to address this challenge to put have on a solid footing and allow us to grow in the future I am fully committed to the next three months was accompanied through the earnings call on November seven 2019 for the third quarter and I will do everything to support core the board and the company and finding and training my replacement. So I wanted everyone to know that this is really a personal decision.
And it's been a difficult one for me, but one that I really felt the estimate.
Yeah and on that note I'd just like to.
Thanks, Mike for his tremendous efforts in all with a very very good working relationship. We've had since I started that Teva, it's been a real Felicia two weeks ago, with Mike and I wish Mike and his family.
All the base.
The future and we will still be working together for the next few months. So it's a little early to say goodbye to Mike, but you will get a chance if you want to do that.
After the third quarter, so with that we will move into the queue and eight.
Thank you, ladies and gentlemen, as a reminder.
Im wondering if youd like to ask a question. Please remember to limit yourselves to two questions per person.
Your first question comes the line of Sandoz Stanicky from RBC capital markets. Please ask your question.
Great. Thanks, very much core just because it seems to be the primary issue and the stock I appreciate the comments around the.
Opioid situation in last quarter and May you made some comments that you wouldn't be surprised at this one so the Supreme Court and then the next month Teva in June settled the Oklahoma case so.
What is the stance here are you open to more broad settlements and as you.
Callout exploring alternatives to litigation is that what you mean, there im just trying to get a sense of how the strategy going forward then I have one follow up.
Okay. Thank you for that question.
In any specific.
Litigation situation, we tried to assess whats in the best interest of the shareholders and the company and the specific analysis of the situation in Oklahoma is what led to our settlement in that connection we did not make any wrong doing or any responsibility. We still believe that the right solution to the opioid issue, it's not through litigation, we still it deny any wrong doing we don't think we broke any low or did anything wrong.
But it is a very serious issue of course fixing and lots of people in a very negative way and it does make sense for society to take action and improve the situation going forward and we will.
Take the stance that we have not done anything wrong.
That we would like to participate if there is a way in a holistic way to improve the situation add to the benefit of the American people going forward what kind of.
Solution that might be it's too early to speculate.
Okay.
That's helpful and then secondly.
On agility came in light of consensus can you just.
Hey, confirm if the 150 million in revenue our sales outlook for the year still stands and maybe just talk about the competitive dynamics and where you think gross to net is settling out at thanks.
Yeah, So maybe I'll give a brief comment and then.
Britain and can give some more some more color to it overall I'm very happy about the launch of a Joe we are above 20% Trx and we think that that's a very nice and good start there some swings right now among all the three competitors on the sales we book the quarter simply for reasons that we have a lot of the I guess all of US coupons pay downs lot of elements going into the gross to net.
Which are more complicated in the early phases, then it will be one Michael the market settles down. So we are in the face of it we see increasing the ratio of scripts that gets paid for therefore, improving the gross to net.
And we also in the face of course have continued roll out to more and more toxic dose and so on.
Maybe bring in you can give a few more comments.
Sure happy to core so.
If you look at the less market. The TRP market is a very competitive we're not surprising with three launching so close together, we've taken a little bit different approach and I think some of our competitors have weve tried to focus on profitability for the asset. So we approach payers in a very specific way.
And we've grown our coverage to about 70% acceptable coverage, which we think is is.
A good to achieve our financial goals, we added Aetna as.
On the preferred formulate July 1st we continued to build formulary access.
And we're in negotiations now for for 2020. So we think we'll have the access that we need to to get to our financial goals as Corey mentioned, we stopped.
Doing the copay Buydown plans ahead, Joel the exclusion list or and then DC block that impact that are new to brand share.
Due to the overwhelming demand that we've seen.
We actually sacrifice some samples in Q2 to make sure that we had ample trade stock. So as a result of doing both of those things it impacted our new to brand share.
We expect our new to brand share to recover.
In the in the second half of the year and of course, we're anxiously awaiting the approval of our auto injection device.
And the launch of that device, which we expect in the next six months that will be a second stimulus really a second phase of our launch and we expect a significant boost to our new to brand and our Trx share as a result of that as the pattern.
As I think about it.
I won't really comment on that because I think every every every company probably has their own.
On gross and out there but.
It is it's stable at this point and then I'd just like to be very specific in answering your questions about $150 million.
I think it's likely that we will be slightly shy of the 150 million on Adobe on the other hand, I think then on Australia, where we set a target of 350 will probably be significantly above that so all in all you would say new product sales, where we were estimating half a billion will probably be slightly above the.
New product sales target for the year.
Okay, Great. That's helpful. Thanks, Cory thanks.
Thank you. Our next question comes from the line of our cash Calabi from Wolfe Research. Please ask your question.
Hey, thanks, so much so.
Number one we noticed that you took a 646 million payment first legal settlements and loss contingencies that was specifically related to opioid related matters can you help us contextualize like we're seeing headlines that like distributors are proposing a $10 billion settlement and today.
You are taking a relatively small legal fee for opioid related matters. Why why is there. This kind of disconnect and why do you have this confidence that the settlement amount will be kind of in the $600 million range and on the multi billion dollars range and.
Maybe just on DG RP for for 2020 consensus numbers are near 300 million, which imply a pretty significant script acceleration and you were mentioning that maybe 2019 numbers may come in a little lower.
How much do you think long term wall Street models need to come down on CRP and how big is kind of the E U opportunity for this class and for Adobe. Thanks, So much.
So I think Mike will address the first question and then I'll take the second.
Yes, so let's be clear that what we have in our Q2 is an accrual.
Which is related.
The 646 is related mainly to opioids you do have the 85 million settlement for Oklahoma, There and based on the settlement for Oklahoma, what it does from from a purely technical accounting perspectives that.
Once you've settled one of these cases, you do show a disposition at least to consider other settlements. So we went through a very thorough process of trying to normalize first the Oklahoma settlement as being the first one there is usually a premium attached to that.
And then see with all of the other cases.
What from from a range of possibilities, we could have in terms of future settlements, it's a pretty wide range and what happens in terms of accounting is if you have a range and you have no point on that range. That's.
Thats more likely than any other which we don't know at this point, we don't have enough information based on current situation to know where this is going to go you end up booking the low end of the range and Thats what weve done. So at this point as you saw from cores presentation, you know we still don't.
See that we have a huge.
Liability in this case in terms of causing this academic but we do know that there is a lot of cases going on and there is a likelihood that some of these could settle in the future. So thats, where the number comes up the number that you see externally is everyone speculation nobody actually has something concrete.
At this point other than speculation of rumors that they hear about different.
Competitors might be interested in or extrapolations of the two small data points you have being our settlement in Oklahoma and produce settlement in Oklahoma. So there is a very complicated and that's how we ended up with the numbers that we have.
Thank you Mike on the CGP market.
Our revenues in 2020, it's too early to give a firm guidance, but the simplistic math is this we have around 10000 normalized scripts per week right now and Thats out there is sitting in the market. So very simplistic assumption is a year from now it might be around 20000, if you move to slide 20000 per week with a cross price of 575 with a significant.
Cross unit deduction and I'm sure you can do the math and you'll probably get through a number which is pretty close to the overall number you mentioned.
Got it thanks, so much.
Europe also.
So yes in Europe , we are having the first launch as we speak and.
In Europe , so far we're seeing a.
I would say positive pricing environment, which means that we've seen prices, which similar to.
US which is normally not the case in Europe , and we see very good reception in the first conscious.
It's too early to say what the long term potential will be theoretically of course, the prevalence of migraine is identical in Europe and us. The population is bigger in Europe are there more hurdles to reimbursement so.
Long term you could speculate that the potential is roughly.
The same size in Europe .
In the us, but due to the way reimbursement works, where its country by country negotiations you typically have a slow slower ramp up of volumes in Europe , because you sort of get approval for reimbursement country by country and this is a process that can take anywhere from one month to three four years.
Great. Thanks.
Thank you next question comes the line of David Amsellem from Piper. Please ask your question.
David.
Hi can you hear me.
Yes, Sir.
Okay, sorry, sorry about that.
So just couple of quick ones. One I may have missed this earlier, but can you comment on Forteo and.
As we're getting into the fall and any thoughts on contribution and then further afield, except the competition.
So thats number one and then secondly on mosquito.
I'm trying to get a sense of.
How you think.
Penetration.
Will evolve you know this is a fairly untapped market and I guess the question is as the footprint to book and Grace and a steep growth do you expect more.
Restrictive control on the part of payers as as the limit to class grows here and no longer term will you have to contract more aggressively does it become more of a zero sum game between years.
And there are credit so help us understand your long term thinking there. Thanks.
Sure. So I'll take the Forteo question first and then I'll work and to offset so in regards to Forteo I'm not going to really comment on specific product launches for the rest of.
2019.
To date, we've launched 27 X. I think maybe 28, we launched the Diack last night.
So thats launching today.
So I think it's 20 generic launches year to date, we have another 12 to 15.
So that will bring our number into the into the 40 ish range for the rest of the year. So we're right on plan, where we want to be with new product launches in generics the only ones that I that I will specifically comment on his restasis that gets asked quite often we're ready to go we're awaiting word from the FDA that could be eminent.
We'll wait and see.
The update can be unpredictable, so you never really know.
And the other one is at the Pan Junior.
And juniors eminent we will be launching that within the next couple of weeks and we'll have that in the channel four for the back to school season. So that's kind of how generic to look for the rest of the year in regards to loss data as Corey mentioned it is a very big market in TD. There's about 500000 patients. We have just scratched the surface I think you can see from from the uptake Aceto continues to enjoy there continues to be acceptance in the market and we're quite pleased with the product's performance.
I think that in regards to payers, we have very good formulary access among payers.
With a stable gross to net and I think that.
The dynamics will allow us set up to continue to grow in both tardive dyskinesia in huntingtons disease without any significant controls going forward.
Thank you.
Thank you next question comes the line of Elliot Wilbur from Raymond James Please ask your question.
First question for core going back to the company's longer term or.
I guess objective target margin of around 27% given where you are currently 23% seems like the leverage with respect to.
Additional.
Cuts from X gene eight R&D or obviously not what they were over the past couple of years. It really has to come as a result of product mix benefit or continued plant rationalization and just trying to think about sort of a timeline with respect to that target. I mean is it reasonable to assume kind of a 50 to 75 basis point improvement in gross margin over the next several years or do you think that's a range you could actually do better than.
Then one to ask a question of Mike with respect to obviously you reiterated the free cash flow expectations for the year, but wanted to confirm in fact that to your capex objectives or are still the same thanks.
So.
You are absolutely correct that in order to achieve the improvement on the operating margin. The majority of that improvement will not come from a reduction in R&D and <unk>.
As Ginny, we can still maybe optimize a little bit, but that's really not where it's going to come from it has come from the combination as you said yourself product mix, where the growth almost they do and and Joe We will help us.
And then continued improvement all the manufacturing costs, making manufacturing more efficient now you're not going to do a big splash restructuring, but we will do ongoing optimization of our manufacturing footprint.
I said before and I'll repeat now that once the restructuring program is fully executed which will be at the end of this year.
And we will share with you our longer term plans for how to optimize manufacturing going forward.
And in terms of how much can this combination of product mix and manufacturing auction my decision how much can that generate in term of improvements in operating margin and in terms of improvements in gross margin. Then it's my experience from having done all are long term projects of a similar nature that you can achieve somewhere between 50 and 100 basis points per year. It doesn't come in early because you do have some step changes when you change your manufacturing footprint or when you launch products in more markets and so on but my expectation would be that we will be able to improve the margins in that range of between 50, and 100 basis points per year going forward and it's a long term commitment where you keep on doing this it's thousands of different activities and changes you do.
But it's a sustainable improvement methodology and I believe that we will be able to do that going forward.
Yes, so in terms of free cash flow.
Clearly, we need to ramp up in the second half we did see the first half was burdened by.
Bonus payments in the first and second quarter as well as an accounts receivable drag and also on the.
Seasonality of inventory, we tend to stock up a little bit in the first half and then it will decline in the second half, which is a cash paid and that's usually due to the plant shutdowns towards the end of the year. So we are still on track with the with our expectations for free cash flow, but we do have to ramp it up quite a bit in the second half in terms of capex will probably be a little bit.
Lower than than our original expectations I think we expected 650 ish in the in the beginning of the year, we'll probably closer to 600. So some of that will contribute to a better cash flow in the second half.
Sufficient.
Thank you next question comes line of Gregg Gilbert from Suntrust. Please ask your question.
Thanks, I'll ask my two right up front first.
Brendan you have comment on generic Forteo and new hovering in the past.
Can you comment on that further today or should we read into anything negative that you do not want to comment on those anymore and then for core bigger picture question.
When you took the job you knew you are signing up for a major turnaround there would be painful in many ways.
But I suspect it did not sign up for a massive opioid story that could take years.
To resolve and create investor concern about bankruptcies and stuff like that.
So my question is are you committed to sticking around to see this through and assuming the answer is yes. How are you ensuring that key employees are willing to do the same thanks.
So I'll take the new Marine Forteo question, then I'll, let Corey so quite simply.
We continue to work with the FDA with both new Marine and Forteo.
And just because the unpredictability of when these may get you may get approved Thats like I had mentioned them certainly they could be later this year or they could drag into sometime in 2020. So we don't really know at this point, we continue to work with the FDA and as soon as we get approval. Obviously, we will we'll be ready to launch the products.
And.
You are absolutely right that when I took the job I was fully aware that there was a big challenge on the revenue side, where we would see revenue decline, which we've seen pretty much as it was predicted and then we had to push hard to get approvals. So that we could launch Seo Adobe and so on and start driving growth on products, which is a normal thing, which you know, which also had an industry is a key element of course, so optimizing costs drastically the restructuring program, ensuring launch of new products to drive future sales growth.
It was a key element of it and I think we are succeeding very well there at the same time, there was a huge okay and managing the date and doing the Provo refinancing and so on was also clearly.
Element.
Now in all pharmaceutical companies. There's also an element of litigation and Michael we have been part of civil litigations that Twoq long time.
I remember some broader litigations that went on for probably about 10 years.
In the US. So these things are like you said things that take a long time and when I joined I Didnt know of course that Teva had the long list of potential litigations going forward.
I am surprised as you correctly point out to the political nature of the opioid situation in the us and I'm also surprised about the weight has developed.
I would say I am not the kind of guy who we have a quits.
This the job is done so of course I'll cede through I'll get the job I have a five year contract if I have to see longer I'll do so so for my personal point of view I have this funny thing that I highlighted when it's difficult I've always lagat data when its typical than when it's easy so in that sense I mean, a very heavy situation you can say because it is definitely challenging and difficult when it comes to my colleagues the best way to keep your colleagues is of course to be a good boss and it gives them the chance to work independently and solve their problems and issues and that's what I'm doing and I think it's remarkable that actually apart from.
From Mike who for personal family related reasons.
Our leaving now I had exactly the same management team as I appointed and now nearly two years ago. So I'm not really worried about that I am of course very focused on how to manage.
The complicated legacy litigation is possible way and we will continue to do that to the best of our ability for years to come into the future. So the short version is obviously committed to the company.
Thank you.
Thank you next question comes from the line of Umer Raffat from Evercore. Please ask your question.
Hi, Thanks, so much for taking my question for Mike I want to apologize in advance, but this is a tough one.
I'm sure you both appreciate that a CFO departure.
When cash flows are tough and the company is going through.
Its issues.
Investors won't want exactly fully be satisfied with an explanation that Mike's is looking to relocate with family. So I wanted to give you an opportunity to really address this beyond the prepared remarks in one sense given whatever stands presumably might could be doing this job from anywhere for that matter. So I'm sure you understand why street won't be satisfied with what you guys shared so far and I just wanted to offer an opportunity to explain that beyond and also while we're at it Mike can you go over what percentage of maturities beyond 2019 need to be refinanced and and and what's the incremental financing rate for that thank you very much.
Yes so.
Ill address it it's not prepared remarks.
Hi.
Definitely making a personal decision and you can say you can do your job from anywhere, but you cant do you need to be with your teams.
Unfortunately, you know its a.
Israel is not located that close to to anywhere I need to be and I've been doing this for two years have been commuting most of the time living by myself, either in hotels or an apartment and Israel and it's just not sustainable. So that's the whole story, if you want to read more into it.
I can't stop you from it but that really is the whole story.
When it comes to refinancing the maturities.
Basically we know that when we get to 2021 and 2023.
Those 4 billion debt stacks are probably little more than we're going to be able to generate organically. So we will try to get out in front of those were constantly watching the market to see when when is the right time to refinance without without.
Drastically increasing our interest cost unfortunately in the last eight weeks.
The publicity and the trial by media from both opioids and the price fixing that's had a big effect on our spreads. So we're looking at all the different options that we have we don't want to.
To do anything too hastily that becomes a permanent change in our capital structure or puts us in a bad position in case. Some of these things work themselves out to be more positive than than the the streets and the speculators are currently looking at but it's a it's a very it's a very tense situation. So we are managing it we're in constant discussion with our board with management with our banking partners people watching the market, but in a quantum will probably need to refinance two to 3 billion in the coming years, and then potentially maybe another one to two as we get to the 2023.
Maturities, so that's kind of what we'll be looking at.
We need to find the right approach to do it the most.
Beneficial for the company and hits the market in the right timing with the right story.
And.
If I can just add a little bit because I understand your question about Mike's departure, and I think Mike doesn't really want to want to talk about it in terms of details and I think we should respect his privacy.
He does have a very serious health issue in these close family and the place where it needs to be for that reason, it's not a place where you can function as the CFO of Teva and I think.
It would be respectful not to go into more details, but it's really in that sense. It really two very serious health issue, so not not yet.
Mike, but in his family and with that I think we should move on.
Next question.
Thank you very much.
Thank you. Your next question comes line of Estech, Roger Ballou from Oppenheimer. Please ask your question.
Hi, Thank you for taking my questions.
The first one is.
Chile and the launch in the EU, what kind of competitive dynamics anything there that are either similar to like different from the from the us.
Hi, how are you thinking about the ramp in that market.
Yes. So you could say is there a couple of things that are similar in the sense that it's the same free products. It's the same three competitors.
With a little bit of a twist because of course, it's amgen in the U.S. its novartis in Europe , but it's also Lilly and its also US now in Europe the.
Access is different in the sense that you don't have these competitive exits negotiations you basically have a situation where typically those negotiations with the authorities. They decide on a certain price level and thats the price level given to a drug class and that would then be the same typically for these.
Three drops and then you have that you would see more of a similarity in that then you compete on disseminating the clinical information informing talk to us about the opportunities and so on and in that sense, it's quite similar so.
I would expect that longer term, we will see.
Same solid uptake country by country. The hurdle is as I said before.
Before we get to accessing the market the national health authorities, because if you're typically talking about nationalized health systems. So the national health authorities, they need to make up their mind on.
What level and for which population they want to reimburse. This therapy in this case, it's pretty obvious that it's of course people suffering from chronic migraine and it's probably the therapy for migraine, so you're probably talking about this for migraine days.
A month on average.
And we do expect that we will get good access and once you get to exit it will typically be for all three players. So it's a more level playing field in terms of access and then of course, you had the same kind of promotional activity.
Clinical scientific activity as you may have in other markets so our expectation.
In terms of final market share is kind of similar to what it is in the US. So we are expecting in Europe , and us to have somewhere between 20 and 30% market share that's our best guess.
Got you then have add two more quick ones going back to that slide five in your presentation. When you talk about the gross margin improvement.
Just that year over year improvement was related to manufacturing efficiency versus at the product mix or pricing.
And there are there are geographic variability to that improvement and then my last question is on the CFO search have you initiated the search and what kind of timing are you expecting given where you are today.
Yes, so I can't really give you the fine details on the margin development, but I can tell you that we are seeing improvements in the.
Gross margin from manufacturing both in the US, but also in the European market and I can tell you that there is still a drag eliminate coming from the loss of capacity sales and that is of course, some improvement coming from the new launches so I won't get into the final.
So detailed numbers. They of course are relatively small those swings as you can see is not a major change it's more the trend line and it's more the fact that by doing the constant optimization of the portfolio and the manufacturing. We do believe we can do is 50% to 100% 100 basis points per year improvements going forward in terms of the CFO search we had just initiated there and we hope of course to identify somebody so that once we get to the full year reporting in February we will have a new person on board. Mike is here to do the third quarter. So we think we will have a good and solid situation.
Thank you very much.
Thank you next question comes line of Ken Cacciatore from Cowen and company. Please ask your question.
Great. Thanks, Mike I know, we have your next quarter as well, but that started to hear leaving and obviously, hoping all the best for your family.
Core I hate to revisit.
The opioid situation, but just trying to understand if you could help us understand some of the nuances. Besides just that Oklahoma was first there's some some way you can describe why that made more sense.
And how it could be nuanced different from others and then also as part of that.
Obviously, Teva bought cephalon, a while ago. So that brought act tecan fentora. So just trying to understand the differences in the settlement between the generic component that led to these settlements or maybe your exposure versus the brand.
Exposure that you took on with the cephalon acquisition. So maybe we can better understand why a generic quote unquote manufacturer.
Would have reached a settlement as opposed to to continue to fight it would seem if you're just supplying generic drugs and not selling them that you wouldnt want to you would want to continue to litigate, but trying to understand if theres something going on on the branded side that really more Forrester hand. Thank you.
Yes, So let me answer the last part of the question first and then I'll get back to the overall.
The last part of your question is whether there's anything with these brands that were specific in the in the Oklahoma case and made US do the settlement that's not the case at all I can actually tell you anecdotally that in the 10 year period that was discussed in Oklahoma I think we had 247 scripts on all of those two products in Oklahoma. So so that is a non issue whatsoever. However.
I had to step back to the beginning and say this is a political situation. This is a political situation where.
People are pointing to somebody.
Blame for the opioid epidemic in this case, they point to manufacturers and what's different between the Oklahoma Apart from the fact it was the first.
Very few companies were in that case as you know only three companies. The first company had settled so the only two companies live is a local George in Oklahoma is not part of the Federal Court system is a state.
Core the MTO case, which is coming up now is in the federal system, it's like 85% of the volume of.
Plaintiffs so.
From our point of view.
You could say, it's a bit of time to to five or to get a global settlement in the NGL case.
Hi ill then it was in Oklahoma. So it was a specific assessment of the situation that led us to the conclusion that it wasn't the best interest of the company and the shareholders to do the settlement in Oklahoma not because we believe we have done anything wrong whatsoever have any direct responsibility whatsoever and not because there was anything with the two special products, we have which are really to build for terminally ill cancer patients.
Thank you.
Thank you. Your next question comes line of Lee of Abraham from Citi. Please ask your question.
Good morning.
On the legal settlement and contingency charge that you took 646 million.
In your assessment of.
The potential liability that did you include all the opioid cases outstanding or just the state Attorney General cases that did include all the cities and counties.
Native American tribes Tetra, and then secondly, just coming back to Jersey.
Even even if you're going to do slightly shy of $150 million in revenues. This year you still are you still anticipating a significant ramp.
In revenues in the back half of the year. So maybe you can address.
How you get there is it going to be a change in strategy are you going to start a DTC program. What is what is going to get you to.
Significant ramp in the second half thank you.
So thanks Ali I'll take the first one.
That settlement is meant to encompass the settlement accrual is meant to accomplish everything and as I described earlier you know it's more of an accounting.
Perspective on a wide range that weve taken a booking there so.
We'll monitor this as we go along and see if theres any change necessary, but given the information we have today and the way we see this this is what weve recorded in Q2.
So I'll take the next question regarding a jovial in the ramp in the second half of the year. So if you look at.
From Q1, Q2 are paid prescriptions increased from 40% to 60%.
We will.
We continue to see that increase during Q3, so it's a mix of transitioning patients from from free coverage to two paid reimbursement as well as continued to gain patients. So as we go through Q3 and we go through Q4, we'll continue to see that dynamic improve as I said, our payer coverage has improved we continue to convert patients. So thats, how we will get to our to our year end number.
Thank you.
Next question.
Thank you next question comes the line of Chris Schott from JP Morgan. Please ask your question.
Great. Thanks, very much I guess my first question was on the North America generic business, you've been sitting at revenue just a little bit of blow about a billion dollars quarter. This year should we think about that kind of billion dollar run rate as a decent run rate for that business going forward or could we actually start to see that number grow overtime as some of these second half opportunities if they come to fruition.
And then my second question was it's a bigger picture one just just thoughts on what we saw with the Upjohn Mylan transaction, a few weeks back and how you think about transformational M&A yet at Teva as you look about your product portfolio and geographic footprint.
Hi, This is a transaction like that if the right opportunity was available something that could make sense for the organization or are you really much more focused on just optimizing the portfolio you have today, thanks very much.
Yes, I'll give it a quick or where the generics and then when you can get some more comments and now I'll end up we've been commenting on the upturn mining thing. So I think the 1 billion a quarter plus minus of course, depending on specific launches and zone is a steady run rate yes.
I don't see a big change that this will improve significantly and I don't see a big risk that it will decline significantly I think we will be at around the 4 billion level.
For the years to come based on our strong portfolio with a lot of the launches coming up it is a fact that launches they move in time, sometimes you launch earlier than you thought sometimes your loans later than you planned but on average when the whole thing is moving its sort of evens out based on how many products you have in the pipeline, how many youre preparing to enter into the marketplace and that combined with the fact that we've seen a relative stabilization of the pricing environment.
It leads me to believe that this 4 billion a year level for North America is.
A sustainable long term level, but Brendan how do you see.
I see it much the same way core I mean, I think if you look at.
The quarters, you see that the North American run rate is anywhere between 900 million and $1.1 billion and that is largely depend upon the new product launches how many launch in a particular year. How many of them are high value launches what that what the what the market looks like when you get there. So we had quarters, where weve been closer to nine we had close of course, we've been closer to 1.1 to its core mentioned, we kind of see this is a sustainable business going forward at around the four 4 billion mark give or take depending upon the launches in any particular here and on the on the off John Mylan merger I would like of course to tuition and good luck with it.
It doesn't really change your operational environment, a lot when you merge and the two parties have of course work took a long time, including on Epipen, and then I would of course wish them. Good luck solving the manufacturing issues, but while they haven't been solved I also just make it little commercial for the generic epipen, which is available in all promises and if it's not there you can just call and then get it so nobody should be short on education. This fall. Thanks to the generic version that remarketing that thing aside we are not really seeking transformational M&A, we're sort of going about as the long term way improving our operational performance.
Year on year working down our debt.
I do.
Recognize this takes time and that the legal overhang now.
Has the risk of it taking longer but it doesnt change the end game. The endgame this had a very strong and sustainable profitable business.
Thank you.
Thank you final question comes the line of David Maris from Wells Fargo. Please ask your question.
Good morning first Mike. Thank you for the candor about your planned departure and please know that we all wish you and your family the best as you get through this.
On the debt side of things.
Do you think you can refinance a significant amount of the debt prior to settlement and if so what do you expect to refinance first and if you wanted to help us understand what the kind of blended rate of the first.
Transfer or stack of debt that you'd like to refinance.
What the blended rate is of that what you expect the current market could be for it that would be that would be helpful.
Thank you.
Okay. Thanks, Thanks for your kind words.
I think.
As long as the overhangs, there is going to be a little trickier with refinancing, but we do think that there are pathways to get the right quantum in the in the right timing to do it.
If you look at our overall cost of debt.
Most of this was borrowed back pre activists acquisition at a very low rates because the company was investment grade at that point and the market was very buoyant. So you'll be looking probably is it taking out some of the 21, maybe even the 23.
And it'll go from the roughly 3% interest rates that you see today.
To anywhere you know 6789, depending on where the market is at the time, we come in and Thats why were we are going to be looking at this very cautiously we don't want to overload the.
The.
The piano with interest expense because of the short term.
Consideration of these litigations, but.
But we will hope that they clear up a little bit in the coming months at least in terms of what the quantum could be.
And whats the timeframe.
I think it's pretty clear that major amounts are going to be expected from the industry that they are going to have to be over a long timeframe.
I don't think any of the players in the industry.
Good good handle large upfront cash amounts and then if it becomes something more attention to two ways they've settled other large product situations, where you've got a future.
Excise tax on these kind of sales or things like that that could also help. So we don't know how this is going to resolve itself. We don't know the quantum.
We will just be looking to tap the markets at the right time to optimize our our situation without trying to explode too much for that.
Great. Thank you very much.
Thank you everybody for calling in this ends our quarterly call.
Thank you that does conclude our conference for today to listen back to the replay of this conference. Please don't seem as they were for full double 330, 0975 and enter the conference I'd eight to 60368, followed by the hash Kate. Thank you for participating you may now disconnect.