Okay. I think we've started. Good morning, everyone. My name is Thibault Boutrin. I am a Co-Head of the European Equity Research Pharma team based in London. Before we start this session, I need to refer to important disclosures. Please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosure. If you have any questions, please reach out to your Morgan Stanley sales representative. For this session on Teva Pharmaceutical Industries, I am delighted to have with me Richard Francis, CEO of Teva. Thank you very much for joining us today. We'll go on Q&A. Before that, Richard, do you want to start with some introductory comments on the situation and the outlook at Teva?
Thank you. Thank you for having me, Joseph. Appreciate it, as always. Thank you, everybody, for turning up. I'll be quite brief so we can get into questions. Just over two years ago, maybe two and a half years ago, we launched the Pivot to Growth strategy, which was a strategy we launched in New York to get the company back to growth after five years of decline. I think it's fair to say that strategy created a smile on many people's faces. Two and a half years later, 10 quarters of consecutive growth. The transition from a pure-play generics company to a biopharmaceutical company, I think, is well on track and gaining momentum. We've done that through consistently executing on our four pillars, which is driving our innovative business, our growth engines, Austedo, Ajovy, and Uzedy, which I'm sure we'll talk about.
The great work we've done on our pipeline, a really, really high-quality pipeline, and Dr. Eric Hughes is with me here today, accelerating that through the clinic. We'll be submitting olanzapine to the FDA this year, and we will have an ability to conclude our asthma study end of this year. We've got great recruitment on Emerson and MSA, and we had a great readout of our ICS-SABA combination in our phase two study. Considering a company that was considered a pure-play generic, that feels like not a pure-play generic company type pipeline. We executed on that. Our generics business, after a bit of volatility, we turned to stability, actually, to growth across all of our regions. Then focus the capital. You know, we're a company that believes in ruthless capital allocation and making sure we think about that internally.
We have to do that because we don't want to grow our cost base. We want to prioritize so we make sure our capital gets allocated for things that are going to drive shareholder value. We think about that very seriously. Two and a half years on, we're in a position that we just had our 10th quarter of consecutive growth. I think probably the one thing I'll end with, the second quarter of 2024 was probably the most important in my view. The reason why is because our generics business, because it had a big comparison year, the prior year, declined 2% after many quarters of growth. As I said, a big comparison year. If you look at the performance of the P&L, we grow our gross margin, we grow our EBITDA, we grow our operating margin, we grow our EPS. How do we do that?
We did that because we've moved the company to have a big innovative portfolio, an ever-growing innovative, and that changes the fundamental of the economics. The proof to the pudding, although I don't know what that saying is here, but the evidence is if you have a generics business of the size we do, declined 2%, and yet you can grow all of those metrics, that shows the innovative portfolio has reached a critical mass that actually is delivering on the promise. That's my opening remarks. That's where we are today. Super excited. Got a great team. We're excited about the next few years ahead, which is all about accelerating our growth, accelerating the transition to a biopharmaceutical company, and we'll probably talk a bit more about that.
Yeah, absolutely. Amazing. Thank you. Before we start digging a bit in this, maybe we can touch very quickly on a couple of key U.S. policy points. If you can start on tariff, if you can tell us a little bit about how to think about Teva's exposure to potential U.S. tariff on pharma, is there a scope for generics to be excluded from this based on your discussions? Is there anything that would make you reconsider your manufacturing footprint in terms of the U.S.?
Firstly, I think we're in a very strong position from our manufacturing footprint. We have nine sites in the U.S. I think we're the largest generic manufacturer, one of the largest in the U.S. already. Our innovative lead product, Austedo, is manufactured in Florida. I think from that, we're in a very strong position. From a supply chain, our supply chain is pretty much Canada, Europe, and Israel. We don't really have a supply chain that goes into China and a minimal amount in India. I think on a high macro level, we're well positioned in the tariffs. To your question of will generics be in or out, and do we have to onshore more generics? I'll go back to we have a good footprint in the U.S. from a generic manufacturing.
As we work through the T3-2 discussions, I think generics is being seen as something which needs to be potentially looked at differently because of the value the U.S. already has from a generics point of view. The generics market has the lowest price in the world, and I think that is looking to be protected. As I said, in Q1, we've mitigated the 10%. We'll see where it plays out. What happened in Europe doesn't really necessarily change that trajectory for us. If there are tariffs imposed on some countries, like India, of the scale that we talked about, maybe there's an opportunity there. I think the question you've asked is, can we handle where they are? The answer is yes.
That's very clear. Maybe just on MSN, you know, a potential pricing policy in the U.S. One of the pushes of this administration is to encourage pharma companies to create direct-to-consumer cash pay channels. Is it something that you could explore? Is it something that you think would be a threat to branded, or could it be even considered for generics?
Yes, we are considering it. I mean, the dynamics are changing. I think the supply chain in the U.S. creates opportunity to retain more value if you go direct to the patient and also help the patient as well. We're pursuing all of those. I think from an MFM point of view, we're in a unique position because, as I sort of try and describe to people, we are a biotech company with a biotech pipeline deeper than a biotech pipeline, broader than a biotech pipeline, and with three products on the market. Yet because of where we are in our evolution, we haven't really launched these outside the U.S. From an MFM point of view, we now can strategically plan what we want to do, when we want to do it, at what price we want to do it.
We're not in that maybe more difficult position that some of my colleagues are because of just the nature of our maturity as a biopharma company.
That's very clear. Turning onto the business, I mean, Austedo, obviously, biggest growth driver. Before we spend some time on the trend, there's a big focus on what could happen in November with the announcement of the IRA price negotiation. If you could just tell us how advanced you are in the negotiation process, do you have an idea of where we could get an update on this? Maybe starting here.
Yeah. Just to be consistent, I'm not going to talk about the IRA in any shape or form because we're having negotiations. What I would remind everybody is when we launched the pivot to growth strategy in 2023, when we put $2.5 billion out there as a target for 2027, we had put in an impact from the IRA. I just tell you that to know that we didn't exclude it. That's the IRA. Fortunately, say nothing. I hope you'll respect that. I understand why. On Austedo, the trends, I think, are really positive, as you've seen in the over, I suppose, the last 10 quarters. We continue to drive really good prescription growth. I think we're starting to see the benefit of some of the programs we've put around adherence and compliance, a titration pack.
All of that is helping more patients stay on therapy, but it's also helping more patients with the introduction of XR once a day and upon the more optimal dose. As you've seen over the last two quarters, we've shown that the average milligrams per patient is going up, which is good because that leads to a more optimal dose, which leads to a better outcome for the patient. Also, from a point of view, from a revenue trajectory, it's also advantageous as well.
That's clear. You mentioned your own initiatives and all the sort of commercial initiatives that have delivered on growth. Can you talk a little bit about the sort of competitive landscape, market share within the indications where Austedo is approved?
I don't really talk about the competitive landscape too much because there's, you know, 650,000 patients yet to go on treatment. For me, this is less about who you're competing against and more about how do we make sure patients who are undiagnosed get diagnosed, physicians who don't know how to diagnose are educated to diagnose. If you think about that unmet need, it's just huge. For me, this is not about gaining market share. It's about making sure we get the right number of patients to come in. We convert those patients from script to on drug. We titrate them. We get them to the optimal dosage for them to have their condition managed. We retain them on therapy to help them benefit for that for years. This is one of those unique markets.
I've been in the industry 30 years where often a question like market dynamics, competitive market share is important. This one, it really isn't because there's so many patients who are yet to go on treatment. I think that's what makes me confident that not just in the $2.5 billion in 2027, but we've said it's going to do over $3 billion. It will because our job is to help those people who are not on therapy get on therapy. Other people in the market can also help create that noise, that share of voice that attracts more people, people suffering from this condition into the market. It helps educate physicians to identify those patients.
That's very clear. The $3 billion target you just mentioned, is this U.S. only, or are you starting to include some ex-U.S. contribution into that target?
Yeah, within that, it's minimal ex-U.S. just because of the fact that one is around a bit around timing and price. As with the previous question around MFN, I think we've got to be, we want to be very thoughtful about how we, where we launch, and what price we launch. It's a small amount of the $3 billion. I'd like to think it could be an opportunity going forward, but that comes down to how we can price it in the other markets that we're looking to launch in.
Okay, that's very clear. If we can turn on your schizophrenia franchise, you had an initial guidance for Uzedy, I think, some time back, which was $400 to $800 million. Your 2025 guidance this year is around $200 million. You are very well on track to do it some more. Then we issued a new guidance, which is $1.5 to $2 billion, and that's grouping Uzedy and your pipeline asset olanzapine. Should we think that your previous guidance on Uzedy still stands, or could it be a bit more fluid between the two products?
Yeah. Look, I think what we've done with Uzedy has created a lot of excitement around our schizophrenia franchise. Uzedy, as you say, we've upped the guidance to $200 million this year. The team is doing a phenomenal job. It's a great product, great product profile. There's a huge unmet need in long-acting schizophrenia. Because of the technology we have, this drug can be injected and people reach therapeutic dose in 24 hours. That's critical because when you have an episode, you either hospitalize or, and so the question is how quickly can you go home? That's about reaching therapeutic level. The competitive products take up to a week to two weeks, and you have to have other therapies added to try and balance. We don't have that. Uzedy has really taken off, and it's a great team launching it. There's a lot of optimism around that.
I think that optimism quite rightly has seeped into olanzapine, which one could argue is an even bigger opportunity. If you think about it, Respiro though, and our long-acting Uzedy and olanzapine, if you think about the patient population schizophrenia, that covers about 75%. It covers right from mild to severe. With our two products, we can treat 75% of people who suffer from schizophrenia with a long-acting. I think that is really exciting. I understand the optimism. I'm pleased that people are questioning the $1.5 to $2 billion because I think that speaks to the change in perception about Teva Pharmaceutical Industries and how we can execute commercialized products in what is a very competitive market, as well as the product profile. I like that because it's taken a bit of time to get traction there, and we probably deserve it.
That said, there's a thoughtful approach we have to thinking about how we guide, how we manage our P&L over time. I think we'll still want to see, I want to see how it plays out a bit longer with Uzedy. What I will say is we're going to launch olanzapine at the end of next year or quarter four, and we're going to launch it well because we're planning to launch it well. Maybe when we come back next year, you can ask me the same question, and maybe I'll give a slightly different answer, but let's wait till then.
Let's follow up with that. Just to finish on schizophrenia and these two assets, is there a notable difference in profitability between the two? I think you had a deal with Royalty Pharma and olanzapine some time ago. Is there a meaningful difference in profitability?
No, look, I think this is a bigger question, actually, or a bigger answer I'm going to give you than you probably expected. When we arrived at the pivot to growth strategy, we saw our pipeline, and there's a question of how can we prosecute that really, really quickly with the finances that we have, the balance sheet we have. We got creative. We did some partnerships, some financing partnerships, which meant we could go full on and allow us to accelerate our pipeline quicker through the clinic. Now, your question is, does that affect the profitability as we come to market of these two assets? It hasn't at all. They're a very good financing deal. They don't impact our profitability, and there's no real meaningful difference. I would say, you know, olanzapine has a significant unmet medical need. There's, I think, bigger expectations around that.
From a profitability point of view, there isn't. I'm going to give you another data, which you haven't asked for, but I think is relevant. If you think about where we were in quarter two, we're at 54% gross margin, thereabouts. Our innovative portfolio is all way above that in the 90s. What we're talking about is we're talking about a complete change in the profitability and the P&L of Teva. If we're thinking about our innovative portfolio, as that grows, our gross margin can only go up. As that gross margin goes up, it flows down right through the P&L. I know that's a lot bigger answer to what is the profitability difference between Uzedy and olanzapine. There isn't really any difference, but it sort of would be immaterial anyway because the profitability of those products is so different to where we sit now. It's just upside.
Perfect. Actually, last one on olanzapine. When you think about the launch, is it just about replicating the playbook that you had with Uzedy, or is there something fundamentally different and specific about that asset that makes it different when you think about commercialization?
Yeah, there are some things that our playbook will take and we'll use and some things that are different. The playbook is we have a team out there with the payers, with the physicians who know everybody, have been having conversations with them. My expectation is when we launch olanzapine, those relationships, that understanding of who we are, who they are, what their unmet need is, whether they're a payer, whether they're a physician, whether they're a pharmacy, D&T committee, we know far better than we did with Uzedy. I think we'll have not a standing start. We'll have a running start. That said, I do caution everybody to say that the one thing that we do think about carefully is access. We will not give access at any cost. We think we have a significant product that can help a lot of patients who need a long-acting olanzapine.
There is not a long-acting olanzapine used in the market right now. There's a big unmet need, and we think that what we're offering deserves a fair price. We'll hold for that. That may be something we'll have to work with. That said, we know these payers now. We can have those conversations. I think there is a playbook there that we should use, and our team is getting better every quarter. I think that gives me optimism. I think the big difference versus Uzedy is Uzedy, there are many long-acting risperidones, both generic and branded. Olanzapine, there is only one long-acting that has no market share because of a side effect, and there's a big unmet need. I'd finish with when you have severe schizophrenia, efficacy is the most important, and efficacy comes with compliance, and compliance comes with using a long-acting.
I really have quite a bit of excitement about what olanzapine can do for the schizophrenia community, particularly those severe patients. I'll remind you, both products, that's 75% of the patient population we will cover. It'll be very synergistic because we don't really have much to add to our infrastructure to make that happen.
That's very clear. I want to turn to another sort of late-stage pipeline asset that you have, your dual-action rescue inhaler, the ICS-SABA combination. You have a $1 billion target ambition for this product. AstraZeneca, I think, is first with a product already on the market with the same mechanism. They're currently annualizing around $170 million after 18 months. Consensus is just about $1 billion for the AstraZeneca drug. If you could give us some elements that you're confident in your $1 billion target for the ICS-SABA. Maybe start there.
Yeah. Maybe I believe more in AstraZeneca, Pascal, than the analysts do. There are 10 million patients who should be on a combination. That's by the guidelines. If it gets to $1 billion, that means very few of those 10 million are on treatment that the guidelines have suggested. In respiratory, people follow the guidelines. That said, it takes time. The guidelines are out. There was no product until those guidelines. Now there is, and I think it takes a bit of time. I've seen that in many therapeutic areas for the physicians' prescribing habits to catch up with the guidelines. I have no doubt that will happen. The other reason why we're confident is, don't forget, with AstraZeneca, they don't have a pediatric indication. We will have a pediatric indication.
There's a 25% of the population which can't go on for those therapies right now, which will be allowed to go on for those therapies. I think we have a real opportunity there. As much as we've accelerated the phase three study of DARI, which will finish this year, which is very fast, we probably won't be able to get that to the market before 2027. It gives AstraZeneca still more time to create that market. If you look at actually the prescription volume, rather less than the revenue, prescription volume is pretty significant. Once again, that just builds a momentum. I remain confident about the $1 billion. You've given me a chance to mention something else, which you didn't ask me, but I'll answer. It goes back to that.
The reason why you got the $1 billion is I presented a slide which has shown all of our pipeline assets, which are olanzapine, and till IL-15, PD-1, IL-2. If you go through all of those, Emerson, Peak Sales total between $11 billion and $13 billion. Every one of them is going to be above $1 billion. We can debate whether it's going to happen, but isn't that just incredible that Teva, who's considered a pure-play generics company, now has a pipeline which we can see as having Peak Sale of potentially $11 billion to $13 billion? That's not taking into account other indications for till 1A asset or till IL-15, which we currently have in celiac disease and vitiligo.
Perfect. That's clear. If we can spend a bit of time on Austedo, until 1A, we had great, you know, I think very impressive phase two data so far. We're waiting for a little bit more for maintenance phase two data. I think later this year on 26. If you could just tell us what you're expecting to learn or what the data could bring on top of what we have.
I haven't seen the data, so I can't really... I'll tell you what I think. I hope that what we saw in the phase two readout, which was based on, you know, we had... Obviously, you can't compare, but everybody compared. The phase two readout to the Kidtu showed both encros and UC was excellent efficacy data. I think myself and Dr. Eric Hughes and a volunteer has been really consistent, and we believe that because it's more potent, it has more specificity, and it has lower neutralizing antibodies. If we know those to be true, and if those play out as they did in our initial findings from our phase two, then I think we're optimistic about how it's going to look. We'll see with the data.
I would remind everybody that in UC and CD, the results of phase two is quite indicative of what's going to happen in phase three. I think we have a high probability of success, and we have a high belief that we are going to end up with the Till 1A that has the best profile, efficacious. We're entering phase three in the coming actually coming weeks. We'll start recruiting on that, and the proof of the pudding will be when we actually produce those results, which will hopefully be in a few years.
That's exciting. On the additional indications, we started to see some of your competitors moving to new indications in that mechanism. You have started the study on atopic dermatitis in MASH. How are you thinking about this? When could we hear about your plans for additional indications?
Yeah, I mean, I think this highlights. I mean, we've said we think this is a pipeline in a product, which I know some people, a lot of people can say sometimes, but when you have two other companies going into other indications, I think it just shows it's true. It's a great asset. I remind people that if we just stayed in UC and CD, it's transformative to Teva. It is absolutely transformative. We're not. To answer your question about indications, we've spent the last, since we did the deal with Sanofi, the last year going through all possible indications. By the way, that is a long list, which is exciting. Now we've prioritized it. We want to go into new indications next year, and we will. Whether we'll communicate that like other companies, we may not be as enthusiastic to do that.
At the end of the day, it's the result and the most important, not when you start something, it's where you finish something. Let's see. We are moving into other indications. Once again, for us, and that's transformative for Sanofi. It's a game changer for us. Without taking into account olanzapine, DARI, and Risolmen, and TR15, PD-1, IL-2. These are all in the clinic. It's exciting times. We'll have more trials in the clinic for this next year, which I think, once again, is transformative for Teva. That being we're on a biopharma company. The other thing I'll throw in here is, and the only meaningful LOE we have is in 2042. This is really a growth story that's going to keep playing out.
That's very clear. Can you just, marginally beyond these couple of research assets, talk about how you think about the pipeline, in terms of your, you have a few more assets as well? Also, how you want this pipeline to evolve over time, how business development will play a role in terms of building this, and how you balance this with, obviously, your capital allocation.
Yeah, I mean, I think it all comes down to capital allocation. For us, we spend a lot of time thinking about when we move into the clinic. We really think about that. Eric and his team have created a really clear R&D strategy, which is, generally, we like proven targets, MOAs. They're yet to be maybe perfected, but they're proven from an efficacy. The Till 1A is a great example. JL15 is a great example. PD-1, IL-2 is a great example, which is making the best antibodies. I say that with the level of conservatism I heard you expect from a British guy, but a true belief that we have the best antibodies. The antibody engineering team we have is phenomenal, and that's what we keep doing. That's important because when I look at the pipeline, I get excited about it because it's not moonshots.
I believe all of these things will work with maybe the one exception of Emerson, which is a challenging disease in MSA. The rest, we have a high belief that the POS is high. When we do capital allocation, it's good to allocate capital because we have a good return. When we think about BD, we're going to think about it in the same way. We're not going to be taking high risk on BD, because we have a good organic opportunity to create revenue growth on the top and bottom line as well. When we do BD, we want to have it de-risked. We don't want to take risk because we don't have to take risk. That could change over time, but the risk profile won't change dramatically. We may take things into the clinic that have had their proof of concept. Once again, the target's been validated.
We believe the science is there. That's how we think about BD. When we think about BD, does that help us drive our long-term financial commitments we've made and the ability to keep growing the company, creating shareholder value? If it does, we'll do them. We'll be really thoughtful. You'll probably hear us talk about capital allocation, return on capital deployed more than any other company because we take that very seriously.
Amazing. We should still, I think, spend a little bit of time on generics. If you could talk about the outlook for this business in the next couple of years. The U.S., you know, part of the generic division will be impacted by the loss of heavy Revlimid generic revenues next year. What do you expect from, you know, the Europe and international side? How should you think about the growth potential of this business overall in the next couple of years?
Yeah, I think first, I'd like to point out the fact that we have six minutes to go, and you've asked me about generics for Teva, which is considered a generics company. The times have changed, yeah, because you're doing a good job, and you know what to ask. I think that shows what I've been saying about the transition that's happening. To answer your question, firstly, and to get to the fundamentals, when we lose generic Revlimid, which will be next year, the U.S. business will be 25% of our global generics business. I just want to put that into context, so a frame of reference. I think the generics business in the U.S. has garnered far more attention than it probably should.
It should have less attention going forward, regardless of how it performs, because just from a math point of view, it will have less impact on the business, whether it's doing really well or has a more challenging year. That's one. Now, saying that, I think our generics business is really set up well, and it will keep getting better. We have a great pipeline. We've focused on a massive transformation in our manufacturing network, which allows us to improve cost of goods going forward, which helps us manage the margin going forward. I think we're really set up, and we'll keep executing better on that. How we should think about it, how people should think about it is, you know, a low single-digit growth going forward. Some years we'll do a lot better than that.
Some years we won't because you can't predict how many generic launches you're going to have every year across all your markets. We have a very deep pipeline, so I'm confident we'll have a lot. We're going to launch, between 25 and 27, biosimilars, and we have a biosimilar portfolio now that's over 25. The growth potential for our generics business is there. The reason why I give that rather steady forecast is because, you know, we want to manage the business, take into account some of those long-term CAGRs so we can think about how we allocate capital, how we think about optics, how we think about our growth rates. The generics business has been a critical element of this transition because it throws off a huge amount of cash. We use that to pay down debt, and we use that to invest in our innovative pipeline.
It's a really good marriage. I often describe our generics business as our venture capital arm. You know, its job is to feed the other part of our business, and it does that well. Also, the last two years, it's helped grow Teva as well. We've had double-digit growth in our generics business. I think it's gone from being questionable to being seen as an asset and a good foundation for the company.
That's great. Maybe just to follow up on the generics pipeline, there's a lot of, I would say, interest in the GLP-1 generic opportunity. Can you remind us of your stance here? Some of your competitors in generics are gearing to the opportunity in Canada and some access market next year. Could you take part in this?
I just remind everybody, we first launched GLP-1 last year. We launched another GLP-1 last month. We're not talking about what we're going to do. We're actually launching GLP-1s. I think your question is the next wave of GLP-1.
Yeah.
We've done what I think is a very clever capital allocation. We've done a partnership. We did that at the end of last year, where we were about to launch the GLP-1s in the U.S., Europe, and other markets around the world. It's a well-structured deal from a capital allocation perspective because it means we don't have to build manufacturing capability. We don't have to invest in the R&D. That will still be accretive to the gross margin and allow us to benefit from the GLP-1 opportunity. Once again, theme there, thoughtful capital allocation, understanding the growth drivers we have at Teva Pharmaceutical Industries, not wanting to invest a huge amount of capital in manufacturing. We're definitely in that market to play in that market as it emerges over the next few years.
Okay, amazing. Maybe last question, on strategy. A lot of things have changed since you joined Teva. A lot of capital reallocated toward innovation. You started the review of the API business, reassigned commitment to profitability targets, lots of products on the leveraging. How should we think about the next strategic shift for the organization? Is it more of everything you implemented so far, or should we expect a continuation of the organization change?
Yeah, I appreciate the question. Look, when we develop a strategy, the pivot to growth strategy, we have three phases: return to growth, accelerate, and maintain. We're in the acceleration phase now. This strategy, like I was told, a strategy is like a marriage. Yeah, a consultant told me that. I don't know how much it cost me, but he told me that. You should think really carefully before you put a strategy together, and then it should last a long time because if you have to change it, it's probably going to cost you quite a lot of money, which is probably similar to marriage. The pivot to growth strategy is three chapters. We're in the acceleration phase. We mapped this out in 2023, so we knew what the acceleration phase was going to be. We know what the maintain phase is going to be. There is no change.
There's a subtle dip in the execution now. There's ruthless execution on our innovative assets. There's ruthless focus on olanzapine launch. There's ruthless focus on our studies in phase two and phase three to get them through the clinic as fast as possible. We're not having to change and rework something because the idea was we had a 10-year plan, and we wanted to make sure that 10-year plan was robust. Things do slightly deviate. I don't want to say we predicted everything because some things go better, some things go not quite as well as we thought. We're very much on track to hit our financial targets in 2027. Absolutely. That's 30% operating margin, 5% CAGR revenue growth, 80% cash conversion, and net debt/EBITDA of two times. Definitely on track to do that.
I think now people are starting to see the emergence of olanzapine, DARI, and Risolmen, and TR15 without BD. This is a growth company, both on the top line, the gross margin, the EBITDA, and on the operating margin. I think the strategy's doing what it's supposed to do. We're just going to keep executing it. That's what we spend a lot of time at Teva. We just execute. Quarter on quarter, we execute.
Perfect. Yeah, we are at the end of the time. Thank you very much for joining us today and taking part in your concerns.
Thank you. Thank you for your question.