Hello welcome to the Q1 2023 Teva Pharmaceutical Industries Limited earnings conference call. My name is Alex, I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star followed by one on your telephone keypad. If you'd like to withdraw your question, you may press star followed by two. I'll now hand over to your host, Ran Meir, SVP of Investor Relations. Please go ahead.
Thank you, Alex. Thank you everyone for joining us today. We hope you have had an opportunity to review our press release, which was issued earlier this morning. A copy of this press release, as well as a copy of the slides being presented on this call, can be found on our website at tevapharm.com. Please review our forward-looking statements on slide number 2. Additional information regarding these statements and their non-GAAP financial measures is available on our annual release and in our SEC forms 10-K and 10-Q. To begin today's call, Richard Francis, Teva's CEO, will provide an overview of Teva's Q1 2023 results and business performance, recent events and priorities going forward. Our CFO, Eli Kalif, will follow up by reviewing the financial results in more detail, including our 2023 financial outlook.
Joining Richard and Eli on the call today are Sven Dethlefs, Teva's Head of North America Business, and Dr. Eric Hughes, our Head of R&D and Chief Medical Officer. I will be available during this question and answer session that will follow the presentation. Please note that today's call will run approximately 1 hour. With that, I will now turn the call over to Richard. Richard, if you would, please.
Thank you, Ran, good morning and good afternoon, everyone. Thank you also for joining us today. Before I start going into the Q1 results, I thought I'd just take a bit of time to give you my thoughts and impressions of the last few months I've had at Teva. In short, impressed by many of the things I've seen and discovered while been around the world talking to many of our people. It's because of this that I think we have real opportunity at the company, and maybe the company is underappreciated currently. Let me go into sort of four areas I'd like to focus on here. I know most of you think of us as a generics company. In truth, we are more than that.
We have an emerging innovative business primarily driven by AUSTEDO and AJOVY, but recently about to be supported by UZEDY, our long-acting schizophrenia product, and this is gonna fuel continued growth going forward. Already this is 10% of our total revenue. We also have a biosimilar portfolio, which I'll talk a bit about later, which is an opportunity to benefit from $4 billion of brand value coming off patents in the next few years. Second, our pipeline. I definitely know this is not fully known and understood, but I can tell you we have some exciting assets here. As I sort of dug deeper, I've seen some unique capabilities in our R&D organization, particularly when it comes to antibody design and formulation expertise.
As we go through our pipeline, I think you'll see that we have a balanced risk profile on many of our assets. Coming to our core business, our core generics business. This is a strong global business. What I've discovered, this is more than the US. In fact, 60% of our business is outside the US, in Europe and emerging markets. This is a strong business, and that it generates significant cash, which obviously we're currently using to pay down debt. Moving on to our people, which is probably the thing that has inspired me the most. We've got a great group of people here at Teva and a great culture, the real can-do attitude. This is something we're gonna leverage as we move forward with Teva on our new strategy for growth.
That said, we have some headwinds and some short-term challenges which we'll discuss today, particularly around our cost of goods. We have plans to deal with these going forward, and because of that, we are reaffirming our guidance for 2023. Moving on to the next slide. I would just like to invite everybody to our Investor Day, which we're gonna hold in New York next week, where we're gonna introduce our new strategy for growth for Teva. This strategy will be built on some of the strong foundations that I described in the previous slide. I've been working hard with the executive management team here at Teva, along with many others in the company, to really challenge ourselves to look at how we can, with the changing market, unlock the real value for Teva going forward.
I'm excited by the outcome. We have made some clear choices in this strategy, some clear prioritization, and we have a focused company going forward where the capital allocation will follow this. As I said, please join us next week where we unveil the new chapter for Teva. Moving on to Q1 performance. Let's start with revenues. Our revenues for Q1 versus Q1 2022 were $3.7 billion, up 4%. AUSTEDO was up 10%, and AJOVY up 35%, driving that innovative business that I mentioned earlier. In European generics in local currency, we're up 12%. In local currency in international markets, we're up 9%. I think a solid performance for Q1 on the revenue. Taking a look at it from a regional perspective.
As you can see, all regions were up in local currency on growth, 2% for North America, 9% for Europe and 8% for international markets. I would keep in mind that our revenues are still affected by the strengthening US dollar, and we did have a negative impact of $128 million in quarter one versus 2022. Moving on to the next slide to talk about AUSTEDO, as part of this innovative portfolio that I talked about. Revenues were $170 million, up 10%. What's particularly pleasing is TRX was up 28% versus last year. I'm very excited about AUSTEDO, particularly because I see this as an untapped opportunity.
We have roughly 800,000 people suffering from this condition and only 120,000 diagnosed and then only 50,000 treated. We have significant opportunity to grow this product and help patients suffering from this condition. On the next slide, you'll see this has been further improved, this patient offering with the launch of AUSTEDO XR. This is the once a day formulation. Now, I think this is the final piece of the puzzle for AUSTEDO, because obviously, as you appreciate, many of these patients are on multiple medications, and us having a once a day offering, I think really offers some advantage for them and strengthens the product offering for those patients and caregivers. Now moving on to another part of our innovative pipeline or, sorry, portfolio is AJOVY.
AJOVY is almost reaching $100 million a quarter, currently sitting at $95 million, up 36% in North America, up 17% in Europe, and up 74% in international markets. Growing across all regions, which we're very pleased about. What I've mentioned before, and I'll reiterate, what I like about AJOVY is the fact that this was not a product we managed to bring to the market first in its category. In fact, in many areas, we were not and we were last. What we've shown with our commercial capability and muscle, that despite this, we can achieve growing market share and a significant position in many of the markets, often number two. I still see growth going forward for AJOVY through geographic expansion and expansion of market share.
The new product to this innovative family is UZEDY risperidone, which was approved about 2 weeks ago. I'm excited about this long-acting risperidone. I was recently on a field ride in the U.S. with some of our sales representatives and speaking to psychiatrists and clinical nurse practitioners actually about AUSTEDO. Many of them were asking when this long-acting risperidone would be available. In discussing with them why they were so enthusiastic about it came back to our patient-friendly profile. The fact that we have rapid absorption within 6-24 hours of administration was important to them. The subQ small needle, lower volume, all of these made it an easy-to-use product for them in this patient population. Keep in mind that the long-acting market is a $4 billion opportunity when it comes to schizophrenia.
With UZEDY, this profile, we think we have real opportunity to generate some revenue going forward. Pivoting back to our generics business. As I mentioned before, we have a big business outside the US, over 60%, and we're seeing continued strong growth in both of these regions. 12% in local currency in Europe and 9% in international markets. This is attributed to our core capabilities. We have a good pipeline. We can regularly launch products into our portfolio. We have a good supply chain, and we have a good commercial infrastructure. I see no reason why we cannot continue to leverage this capability going forward. To move on to our pipeline. You'll notice for this call, I've separated the innovative pipeline from the biosimilar pipeline.
That's really to start to highlight the pipeline and some of the exciting assets we believe we have in it. I'll just call out a few here. olanzapine long-acting, another long-acting medication for people suffering from schizophrenia, which will add to our franchise. ICS-SABA in asthma, which is in Phase 3, and then TL1A in Phase 2. I'll describe these in a bit more detail in a couple of slides, but obviously, looking forward to presenting more depth on our pipeline next week at our strategy day where Dr. Hughes, our head of R&D, will be talking about these in far more detail. Moving on to our biosimilar pipeline and franchise. I think what I've said in the past is you need to have a good pipeline and a good portfolio to succeed in biosimilars and to have a good commercial footprint.
I think you can see we have both of those. To address a question which I think is going to come up today is about biosimilar Humira and where we are with that. Maybe I could take a few moments to talk about that. As many of you know, the FDA issued a CRL to our partner, Alvotech, based on certain re-inspection observations in their facility in Iceland. Alvotech is expecting communication from the FDA shortly, assessing their responses to these observations. Once Alvotech receives communication from the FDA, we will have a better understanding of the timing of a potential launch of biosimilar Humira.
Going back to those promising late-stage assets from our innovative portfolio. I don't want to step on Eric Hughes's toes for next week when we launch the new strategy, the investor day. I'll keep it brief, but maybe just give a slight headline on some of these programs. Olanzapine. We're excited by this because obviously I've mentioned to you already with TEV-749, there's a significant opportunity to move the schizophrenia market to a long-acting therapy. This olanzapine product leverages our BEPO technology with MedinCell, which is the company we work with on TEV-749. I'd like to think this has been proven because of obviously the recent approval of TEV-749. Moving on to ICS/SABA. This clearly leverages our respiratory expertise and our ability to bring complex products to the market.
It brings together 2 well-characterized and well-used products for a subset of the asthma market, which we believe is worth around $2.5 billion, and it will only have 1 competitor. Lastly, moving on to the anti-TL1A asset, which I'm sure you're all familiar with. It seems to be a very hot topic right now. We see this as a good opportunity because it's a validated target, and we see because of the number of indications that it could potentially go after a significant opportunity around $25 billion. We believe we have a best in class profile, but more to come on those assets on the investment day. In closing, I want to talk about an important priority of ours, which is our commitment to ESG, and I just want to take a bit of time to give you an insight into the progress we've made.
Let me just pick a few of these out. When it comes to greenhouse gas emissions, we have a goal of reduce these by 25% by 2025. As you can see, we're closing on that already. Another area of focus has been on compliance and business integrity, and we have met our goal of 100% of all our employees trained in compliant policies. Finally, I can highlight the economic impact we've had. $44 billion in savings from Teva's generic medicines across 21 countries, and we've contributed $20 billion to GDP across 24 countries. I think we've made very good progress with regard to our ESG commitments. With that, I'll hand over to my CFO, Eli.
Thank you, Richard, and good morning and good afternoon to everyone. I'll begin my review of our Q1 2023 financial results with slide 18, starting with our GAAP performance. Revenue in the first quarter of 2023 were $3.7 billion. In dollar terms, they were flat compared to the first quarter of 2022. In local currency terms, revenue increased by 4%. To provide you some color on our revenue performance by region. In North America, we had overall solid performance with 2% growth in Q1 2023 compared to the first quarter last year. This growth was mainly driven by higher revenue from certain innovative products, mainly AUSTEDO and AJOVY, as well as ANDA, our distribution business. This was partially offset by lower revenues from our generics business and BENDEKA and TREANDA.
Our generic business in North America decreased in Q1 2023, mainly due to increasing competition to parts of our portfolio and timing of certain customer bids. The overall pricing environment in North America generics is stable and in line with historical trends. Revenues in our Europe segment grew strongly by 9% in local currency terms, mainly driven by higher revenue from our generic business, including new product launches. Revenues from our international markets segment increased by 8% in local currency terms, mainly due to higher revenues in our generics business coming from price increases, largely as a result of rising costs due to inflationary pressures. Operating income was $2 million in the first quarter of 2023, compared to an operating loss of $713 million in the first quarter of 2022.
We had a net loss of $205 million, compared to a net loss of $955 million in Q1 2022, and a GAAP loss per share of $0.18 compared to GAAP loss per share of $0.86 in the same period a year ago. This improvement in our GAAP operating income, net loss, and net loss per share in the first quarter of 2023 were mainly due to the higher impact of legal settlements and loss contingencies that we had in the first quarter of 2022. Foreign exchange rate movements during the first quarter of 2023, including hedge effects, negatively impacted our revenue and GAAP operating income by $128 million and $32 million respectively compared to the first quarter of 2022.
This was a result of the impact of stronger US dollar against other currencies of main markets in which we operate, mainly the euro and other related currencies. As a reminder, approximately 50% of our revenues in Q1 2023 came from sales denominated in a non-US dollar currency. Turning to slide 19. You can see that total non-GAAP adjustments in the first quarter of 2023 were $661 million compared to $1,764 million in Q1 2022. A notable non-GAAP adjustment was legal expenses of $233 million, mainly related to estimated provisions recorded in connection with certain litigation cases in the U.S. Other notable adjustments include amortization of purchase intangible assets of $165 million, the majority of which is included in cost of sales, and impairment of long-lived assets totaling $188 million.
I also want to provide you with an update on the progress with the nationwide opioid litigation settlement. During the previous quarter, we had confirmed a high level of state participation, 49 out of 50 states. Based on a strong state participation, we decided to move ahead to the next phase with the subdivision participation, which I'm happy to report is also going very well. To date, we have confirmed participation from over 99% of the litigating subdivisions from those participating states. With the level of broad support we have seen by the states and subdivisions, we expect to move forward favorably in the process, and we anticipate making the first settlement payment in the second half of 2023. Moving to slide 20 for a review of our non-GAAP performance.
I've already discussed our first quarter revenue, which totaled approximately $3.7 billion and represented a growth of 4% in local currency terms compared to a first quarter of 2022. Now, let's move down the P&L and look at the margin. I would like first to drill down and analyze our gross profit performance this quarter. Our non-GAAP gross profit margin was 49.1% in Q1 2023, compared to 54.2% in Q1 2022. The decrease in non-GAAP gross profit margin was driven by two main factors: our portfolio mix and the macroeconomic factors. Our first quarter came in with a different and unfavorable portfolio mix than we expected.
While we continue our solid growth in our key focus area, including AUSTEDO, AJOVY, and our generic business in Europe and international markets, this is being offset by margin-dilutive growth of other business and lower contribution from our legacy brands. As we progress through the year, we anticipate a shift towards a more balanced and normalized portfolio mix in the coming quarter, mainly driven by growth in AUSTEDO and AJOVY. As for the impact of the macroeconomic factors, I already mentioned on our previous earnings calls, we faced inflationary pressures in the second half of 2022, and much of that impact from last year was held in our inventory and sold this quarter. This resulted in a higher COGS in Q1 of this year.
We also had some unfavorable impact from hedging activities which impacted our gross margin, with the majority of the impact in our European and international market segments. Going forward in 2023, we expected improvement on certain elements of the inflationary pressures, including on cost of energy and freight. We also expected a sequential improvement in our COGS, driven by certain measures we are taking in our supply chain. Our non-GAAP operating margin in Q1 2023 was 21.4% versus 27.7% in Q1 2022. This decrease was mainly driven by the lower gross profit margin, as I just mentioned, as well as the higher other income in the first quarter of 2022, which mainly included one-time settlement proceeds in our international market segment.
We ended the quarter with a non-GAAP earnings per share of $0.40 compared to $0.55 in Q1 2022, mainly due to the lower gross profit, which I referred to a moment ago. Let's take a look at our spend base on slide 21. As you can see, our quarterly spend base increased by $229 million or $224 million on a local currency basis. Most of this increase was due to a higher cost of goods sold related to the factors I described earlier, as well as the higher other income in the first quarter of 2022, which mainly included settlement proceeds in our international market segment. Our next slide, 22, shows how we have been transforming our global manufacturing and operating footprint over the last five years to consolidate our sites to get more efficient.
Here you can see over the last 5 years, we have gone from 80 manufacturing sites down to around 52 sites, and we have plans to continue this progress. By the end of 2023, we expect to close or divest 3 additional sites, with plans already in place to close or divest 4 additional sites beyond 2023.This evolution will continue as we drive ongoing optimization of our operations for efficiencies and improving margins. Turning to free cash flow on slide 23. Our free cash flow in the first quarter of 2023 was $41 million. Teva's free cash flow tends to face headwinds at the start of the year due to the unusual timing of annual bonus payments paid out in the first quarter.
Our free cash flow for Q1 2023 was also impacted by lower profit and changes in working capital items, including an increase in accounts receivable net of SR&A, partially offset by an increase in accounts payable. Today, we are reaffirming our 2023 free cash flow guidance, which we provided in February. Our 2023 free cash flow is expected to be in the range of $1.7 billion-$2.1 billion. We expect our free cash flow to pick up during the next three quarters as we see a ramp-up in our profitability and as we continue to drive working capital improvements. Turning to slide 24. Our net debt at the end of Q1 2023 was $18.5 billion, compared to $18.4 billion at the end of 2022.
Our gross debt was $20.7 billion compared to $21.2 billion at the end of 2022. The decrease in our gross debt was mainly due to $646 million senior notes repaid at maturity, partially offset by exchange rate fluctuation of $176 million. Our net debt to EBITDA slightly increased, coming at 4.25 times for Q1 2023, mainly due to a lower EBITDA. Looking at slide 25. Debt reduction continued to be our focus. As you can see, we have made significant progress in the last six years to reduce the level of debt on our balance sheet, and we expect this progress to continue and our net debt further decline as we work towards our long-term financial target of being 2 times net debt to EBITDA by end of 2027.
Turning to slide 26, which represents our upcoming update maturities. During the 1st quarter of 2023, we successfully refinanced approximately $2.5 billion of our debt through sustainability-linked senior notes. This was done to mainly address the 2023, 2024, and 2025 maturities and to align our near-term debt maturities with our free cash flow guidance for this year. These notes are linked to sustainability performance targets and reinforce our continuing intention to establish a direct link between our corporate responsibility commitments and our funding strategy. We combine this recent issuance with our previous SLB bonds financing of $5 billion, Teva is now the second-largest corporate SLB issuer worldwide and the largest in the pharmaceutical industry.
Given the interest rate environment, this will result in a higher financial expenses for the remainder of the year, which was already accounted for in our 2023 annual guidance that we provided in February. Now, let's turn our attention to our 2023 non-GAAP outlook on slide 27. As we guided in February when we provided our full-year outlook, we had expected Q1 to be the lowest of the four quarters, both in terms of revenues and margins. For full year of 2023, we continue to expect our revenues to be between $14.8 billion-$15.4 billion. We are also reaffirming our 2023 non-GAAP outlook for operating income, EBITDA, earnings per share, and free cash flow as provided in February.
We continue to expect a gradual pickup in margin in the second quarter with a further progress in the second half of the year. Our company is fully engaged in navigating and addressing the ongoing impact of the macroeconomic headwinds. The inflationary pressures that we saw in the second half of last year continue to have an impact in 2023. As indicated, we are working around certain measures to offset the collective increase in our cost of goods sold. In the coming quarter of 2023, we expect a gradual increase in our gross margin with improvement in our portfolio mix. As I mentioned earlier, as well as easing of inflationary pressures, including the cost of energy and freight. We expect to continue our ongoing efforts to drive improvements in our operating expenses.
With that, this concludes my review of Teva results for the first quarter of 2023. Now I will hand it back to Richard for a summary.
Thank you, Eli. Thanks for that. In summary, Teva, we are reaffirming our 2023 non-GAAP guidance for the year. We believe AUSTEDO and AJOVY are gonna continue to drive good growth. With the launch of AUSTEDO once daily, we believe that's gonna add to that. Obviously, as I mentioned, the upcoming commercial launch of UZEDY gives opportunity for more growth from our innovative portfolio. With strong performance in Europe and international markets in Q1. We continue to focus on cost discipline and working capital management. As of next week, I look forward to introducing our new strategic framework and key priorities to many of you in person. I say with that, I'd like to open up to questions. Thank you.
Thank you. As a reminder, if you'd like to ask a question, you can press star followed by one on your telephone keypad. If you'd like to withdraw your question, you may press star followed by two. Please ensure you're unmuted locally when asking your question. Our first question for today comes from Jason Gerberry from Bank of America. Jason, your line is now open. Please go ahead.
Hey, guys. Thanks for taking our questions. This is Hassan Aftab for Jason Gerberry. The first one on the anti-TL1A antibody. We saw the preclinical data that you published back in 2018, and from a head-to-head perspective, what do you think drives your confidence that this may compare favorably to maybe Prometheus' or Pfizer's anti-TL1A antibody? The second question on biosimilar Humira. We know that the revenue is risk adjusted in your 2023 guidance. Last quarter you mentioned that you have some other hedging elements that might allow you to maintain the guidance if the product was delayed. Can you share what those elements are? Thank you.
Okay. Thank you. Thank you for your questions. I'm going to hand the first one on TL1A to Eric. Eric, can you get it back on our TL1A, why we're so excited about it?
Yeah, sure. Thank you, Richard. You know, we're very excited about our TL1A program. You know, the potential to bring a new class of biologics to people suffering from inflammatory bowel disease is very exciting for us. We believe our anti-TL1A antibody is highly differentiated and has the potential to be best in class. This is really built on the potency of the antibody and our strategy in the way that we targeted the molecule. We've increased our resources and our efforts to bring this program forward as fast as possible. We understand the interest in this program, I think we have the best one. We'll hear more about this next week as Richard alluded to our new strategy and our pipeline. We'll talk about that more next week.
Thanks very much, Eric. Onto your second question on biosimilar Humira. You're right, we did risk adjust it in our forecast because of the uncertainty that we knew existed. What I say is the reason why we're maintaining guidance is, one, that was just adjusted, so it was a relatively small amount. The other is we have our launches of VYEPTI and our growing innovative pipeline. Because of that, we feel very clear that keeping guidance is the right thing to do. Hopefully that answers your questions.
Yep. If I could just ask 1 follow-up. Should we expect to see any updates to the long-term 2027 targets at the upcoming R&D day?
I suppose there's one thing I could say is I could not answer that question to make you come to the Investor Day. We haven't changed our guidance for 2027, so we're committing to the operating 30%, the net debt ratio, and also the growth.
Thank you.
Thank you. Our next question comes from Umer Raffat of Evercore ISI. Your line is now open. Please go ahead.
Hi, guys. Thanks for taking my question. Maybe if I could spend a quick second on the phase 3 olanzapine program. Could you speak to what level of alignment you have on FDA on what exactly is it that you need to show in your trial to not get the type of black box Lilly got on their prior attempt at long-acting Zyprexa? Secondly, on the risperidone program, I know you've shared commentary a few times, but the question I have is, J&J barely did about $300 million-ish on from a branded sales perspective on that program. How much could a sort of follow on to that risperidone long-acting molecule truly do? What's the true commercial potential look like? Thank you very much.
Thank you. Thank you, Umer. Thank you for those questions. I'll hand the first one to Eric again.
Yeah. Yeah. Thank you, Umer, for asking about our olanzapine program. We're very excited about this program. You know, the prospect of bringing another treatment to patients with schizophrenia is really in our wheelhouse, we're excited by it. You know, the olanzapine long-acting injectable is building upon our formulation technology that we developed for VYEPTI. It's really an ingenious formulation that provides real advantage to both caregivers and patients. You know, it's given subcutaneously, given the characteristics of the formulation, we really hope to have a favorable safety profile compared to other injections that are available for olanzapine. I think you're referring specifically to the Post-injection Delirium and Sedation that has a black box warning on the intramuscular injection of olanzapine.
You know, obviously, we've developed our phase 3 program in conjunction with feedback from FDA, and we're confident in the way that we've designed the study with the number of patients and the total number of injections that we'll have, what we believe to be a very good safety profile to avoid these side effects. The study is initiated. I'm very proud to say it's going well, and we're looking forward to the results.
Thanks, Eric. Maybe I'll start by answering your question, but I'll also ask Sven, our head of North America, to come in because obviously it's his team launching the risperidone long-acting UZEDY. I think we think because of the favorable patient profile we have with the product and the feedback we've got from the physicians and the clinical nurse practitioners already and the unmet medical need, we think we can make some inroads based on the product characteristics I just laid out. We see the opportunity. Definitely, we think this has an opportunity to grab between 10%-20% of that $4 billion market. I would maybe give the call to Sven to add a bit more flavor to that.
Yes. Thank you, Richard, and thank you, Umer, for the question. There are about 1.6 million treated schizophrenia patients in the U.S. 10 of them, as we know, receive long-acting injectable products. The category itself is growing at around about 4%-5% per year. It's always good to launch a new franchise into a growing category. We actually believe that we can compete with UZEDY across the LAI spectrum, which means that we do not see UZEDY as being limited to the risperidone molecule alone. The main reason that we believe that is that the product profile makes it ideal for the use in the hospital setting, where the majority of the new patients gets initiated with LAIs.
Among the many key attributes in patients, convenience, it's subcutaneous, it has several injection site options, short and narrow needle, small injection volume. We are actually most excited about the pharmacokinetic aspects of the product, and especially here, the therapeutic levels that can be reached within 24 hours, which is quite important for emergency treatment in hospitals. We have, as compared to other drugs in the category, no oral supplementation or loading dose. You can discharge the patients right after first treatment, and you are safe that you have here therapeutic levels for 1 or 2 months. For that reason, we believe we have a highly competitive product in the LAI category. As I said, we believe we can compete here across all molecules and to set a new standard for LAI treatment.
Thank you, Sven. Thank you, Umer. Thank you for the question. Next question.
Thank you. Our next question comes from Balaji Prasad from Barclays. Your line is now open. Please go ahead.
Hi. Good morning, and thanks for the questions. A couple for me. Firstly, on biosimilar Humira. I wanna understand how much of this had bag did Alvotech, CRL post to you in your discussions with the PBMs. What is the tone of the negotiations now? Is it fair to assume that 2023 is not the focus of your PBM discussions? One. Two, could you also clarify about the legal settlements that you're taking a provision for? What litigations are these related to? Lastly, if you could just maybe comment further on UZEDY and the market potential for this that you see currently. Thanks.
Okay. Thanks for the question, Balaji. On Humira and the PBMs, Sven, I'll hand that one to you.
Of course, we had intense discussions with all major customers, PBMs and all the downstream customers for Humira. The CRL, of course, changed the situation because our customers had to prepare for the market entry at happening end of June and July first. Now we received the CRL. That is, of course, transparent and known to all our customers, and we now have to wait for the outcome of the FDA discussions that Alvotech has concerning the approvability of the biosimilar BLA and also of the interchangeable BLA, and then we will see how we take it forward with the PBMs.
Thanks, Sven. The legal settlement, Ali.
Thanks, Balaji, for the question. Yeah. We had some a few adjustments on mainly on two cases. One, we're actually progressing on the Patient Assistant Program on COPAXONE with the DOJ. Currently, our estimation are around $100 million. That is what we actually working on trying to settle it. This quarter, we actually at this one. The other elements that we're actually looking now, it's kind of a tiny element related but to the HIV and on the reverse payments, which is something that we're actually participating with Gilead. This is a $50 million, and the rest is kind of mostly about the timing and other elements relating to a very certain molecule. That's the high level.
Thanks, Eli. Then to on the UZEDY, maybe to clarify a bit what Sven said and I said earlier. we we think this is a great opportunity based on the product profile we have, the very patient-friendly profile. It's a $4 billion market. Based on what we understand about the needs of the patient and the physician feedback, we think we have a very good solution when it comes to a long-acting formulation. We see ourselves getting to between 10% and 20% of the market. We'll see how that plays out. I think one thing I would say, when it comes to the schizophrenia market, maybe Sven can add a bit of flavor of this, it will take a bit of time. This is a secondary care.
This is in hospitals, as Sven alluded to. There's a bit of time to get on formulary, to get into those hospitals, to get into those departments and outpatient clinics to make sure it's ready and available for when these patients come in. There is a bit of setting up the system to make sure that happens. Once that's in place, we see this product having a good trajectory. I don't know whether you want to add anything to that, Sven.
I think, Richard, you covered everything. As you said, we are prepared for launch. It will happen in the next days. We have a dedicated sales team both for in the field but also for hospital coverage. We're working through the hospital listing, getting reimbursement in all places. Then we believe, of course, the molecule itself is well known, the efficacy is well established, that's clear. I think we can communicate our product attributes also in a very clear and compelling way. We've done extensive market research to prepare for this launch. I believe we will have a good uptake, although you have to see that in schizophrenia, in these indications, you typically have a slower development like in other indications. I think, we are well prepared here.
Thank you, Sven. Thank you, Richard.
Thank you. Our next question comes from Ash Verma of UBS. Ash, your line is now open. Please go ahead.
Hi, good morning. Thank you for taking our question. I had two, one just on biosimilar STELARA. Are you planning to pursue interchangeability here as this can be an important feature in this self-administer market? I think Amgen has already filed for interchangeability. The resolution on the Iceland manufacturing site is still going on, and we understand, I think STELARA is also coming from that site. Can the STELARA launch timeline get impacted here? That's my first one. Second, for the free cash flow guidance that you provided, how confident are you on the Reaffirm outlook here?
I mean, typically gross margin improvements can be gradual, and with this level of EBITDA deterioration in 1 Q, can you reach the free cash flow guide on gross margin improvement alone, or do you think you need to cut some OpEx as you progress in the year? Thank you.
Thank you, Ash. Thanks for your question. I think on the STELARA one, Sven, if you would like to give the answer, and then Eli, you wanna go into the free cash flow.
Yes. On Stelara, of course, we are also preparing for this launch. Our launch is, of course, dependent on FDA approval, but also on clearance of all the patent aspects around it with J&J. Like for all biosimilar license applications, the site inspection will be part of the review process. The site in Iceland from Alvotech will be inspected for approval of this drug. Concerning your question about interchangeability, we are still looking into that aspect of the drug. We will also see now, of course with the market information from Humira, how our customers look at interchangeability. We believe we will have a competitive offering when we come to market with Stelara.
Eli, free cash flow.
Hello, Ash. Thanks for the question. It's Eli. It's a fair question. I will split it to two. First of all, what we see in the P&L. I looked earlier on the guidance for the year. I see that the consensus now is really close to $15 billion. We are well seated in terms of revenue, and we are in the range and very well seated there, which mean that we are growing in our innovative, and we will see more growth also on our generics, as well on outside of the U.S., the European and international market. That's going to help us this year in terms of the free cash flow.
The gross margin will pick up gradually, but currently we don't see now any departure from our view on the range on the free cash flow. The second part of it is the working capital element. We actually have a certain enhancement in place in the last year or so, and it's mostly about our optimizations on the inventories and the supply base. We will see from there also a certain level of benefit helping us to support our working capital and free cash flow. The answer is that we are in the guidance.
Thank you, Eli. Thank you for your questions, Ash.
Thank you. Our next question comes from Nathan Rich of Goldman Sachs. Nathan, your line is now open. Please go ahead.
Great. Thanks for the questions. Maybe just following up on the last one. Eli, how much of the gross margin pressure was mix related versus inflation related? Can you maybe just talk about the level of visibility you have into the inflationary pressure, given there seems to be some lead time there, just in terms of confidence of that kind of easing as the year progresses. Then I'd be curious how AUSTEDO compared to your expectations for the quarter. I know there's some seasonality to sales, but revenue per script looked lower than we expected. Can you just expand on what drove that in the context of your full year expectations? How do you think the once-daily dosing improves your positioning with physicians going forward? Thanks for the questions.
Thank you, Nathan. Handing the first one to Eli.
Yeah. Nathan, thanks for the question. Percentage-wise, if you look, year-over-year, this is a 5 percentage points decrease in gross margin. The first element related to inflationary pressure, this is around 2.5 percentage points, like half of the impact. This is mostly related, as I mentioned in my prepared remarks, to inventory that we received on the second half of 2022 that embedded inflationary costs and that actually went and we consumed and then sold the goods during this quarter. That main impact really it came with across, I would say cost of labor and other elements related to direct material costs embedded in the sourcing pricing, and as well energy and freight. Now, we see freight and energy rebounding.
We had a successful hedging program last year on the energy that helped us to secure certain rates, and we see the benefit this year. We're going to see a very nice benefit as well in freight in terms of the combinations and how we're managing long and short lead time items in order to optimize more on the ocean versus the sea, as well as consolidation of shipments. That's for that element. The other element is around, I would say, the product mix is kind of between 1 to 1.5 points, and the rest is coming really from hedge and OpEx. That's how you should frame and think about that difference.
As we look forward in terms of for questions about and inflationary pressures and some shortages on labor, that happened in the industry in Q4 and getting more ease now, and a lot of other elements starting to rebound. We see it in the pricing, we see it in the, in our sourcing. We believe that this one will get kind of at least half effect throughout the rest of the year. If you look on our product mix and the expected revenue, mostly on our innovative portfolio, this one will rebound and give us more accretive margin going forward.
Thanks, Eli. To answer your standard questions. it's Q1 instead it was in line with our expectations, what we had forecast. As I'm sure you're aware, there is a swing factor between Q4 and Q1, largely because of speculative buying and inventory build that happens. If you look at the sort of fundamentals, the metrics, the leading indicators, TRX up 28%, NRX up 30%. You know, as I said in my opening remarks, very excited about AUSTEDO and the potential. Your question about what does once a day do? You know, I think if we had any one slight weakness with AUSTEDO, and it's only one, it was once a day. Now we have that.
I think the product profile is very strong and is accepted by our physicians as a favorable product profile. Now with the once a day, I think that strengthens that. The other thing is we have reallocated resource and capital to AUSTEDO to match the expectations we place on it. We've allocated resource to make sure that can happen. I think we're well set for AUSTEDO for the rest of the year. This builds in a bit to Eli's question and answer there on margins. I do see with the combination of UZEDY coming, the launch of that, the growth of AUSTEDO, the continued growth of AJOVY, that's going to change our product mix into the high margin innovative business. Strong expectations and confident about AUSTEDO. Thank you for your question.
Thank you. Our next question comes from Chris Schott of J.P. Morgan. Chris, your line is now open. Please go ahead.
Great, thanks so much. Just 2 questions for me. I'm still trying to get my hands around the gross margin update. Maybe you can just help us a little bit of what is a reasonable gross margin target for the year when we kind of balance maybe some of the dynamics in 1Q is what sounds like kind of gradual improvement for the rest of the year. Is something like 51% or 52% kind of the right ballpark or is it going to bounce back more than that? Just be helpful a bit just so we don't have any more surprises there. The second question I have is a bigger picture one. I think you're highlighting kind of pipeline capabilities as one of the underappreciated pieces of the Teva story.
Since there's a number of pipeline assets that you're going to be talking in more depth next week, how do you think about the overall level of investment that Teva's making in R&D? I know you have kind of a hybrid business between generics and brands, but when I think about level of investment as a % of sales, I know it's not a perfect metric, but Teva's at kind of the low end of the industry on that front. I'm just trying to kind of balance the resources you're allocating to R&D versus the desire to maybe push this pipeline and maximize pipeline value appropriately going forward. Thanks so much.
Thanks for the questions, Chris. Eli, start on the gross margin and then...
Thanks for the question. Yes, as I mentioned, the, in the second half of 2022, most of the impact was actually coming from what we call sustained costs related to inflationary pressures. now it really depend on the mix that's coming in the quarter on element that you consume for your inventory. What we see for the rest of the year, I would say that we are at the low of the 53 currently, considering on rebounding, I would say at least half of the impact on the inflationary pressures from the reasons that starting from mid of Q2 start to actually to source as well new inventories that actually embedded a different pricing now as more of the stocks are starting to ease.
I would say you should actually look on the low of $53.
Thank you, Eli. So if I understand your question correctly, Chris, are we allocating enough capital and resources to execute on what we've highlighted as a good pipeline? It's a great question. We'll give you a bit more flavor to that next week in New York. Yes, in short, we are. We're making sure we prioritize and allocate capital to where the opportunity is to drive growth and profitable growth. As Eric alluded to, we have some really exciting assets that we think to a certain degree are de-risked or validated. To allocate capital to that seems a very sensible thing to do. When it comes to that, we are making sure those assets are funded well to go through.
On our Capital Markets Day, we'll probably give you a better idea of how we're thinking about capital allocation across the two different types of business you talked about there, from our generics pipeline to our innovative pipeline, and how we're managing that. We'll go into more detail next week. Hopefully I answered your question, Chris, and thank you for it.
Thank you. Our final question for today comes from David Amsellem of Piper Sandler. David, your line is now open. Please go ahead.
Hey, thanks. Maybe just expanding upon the last question. In the past, you've talked about 505(b)(2) opportunities. I guess I wanted to ask about the balance between 505(b)(2) products, brand products versus new molecular entities and how you're thinking about it. Maybe asking differently how far along the innovation spectrum are you looking to go? Secondly, on AUSTEDO, can you just talk about the mix between tardive and Huntington's chorea and how you're thinking about the potential impact of INGREZZA to the extent that it gets its label expansion for Huntington's? Thank you.
Thank you, David. Thank you for your question. If I understood your question correctly, it's sort of how do we balance that focus for effort and resource on pure innovation to 505(b)(2)s. I think we balance that based on the opportunities that we see that we have already, then going forward, where we apply resource and capital. I think the 505(b)(2)s we see as complex generics, they're difficult to make. That falls in our wheelhouse nicely. From an innovative point of view, we're leveraging our capability in neuroscience and immunology with particular focus on this antibody engineering capability we have. We don't think we have to sacrifice one for the other.
I think what it comes down to is how do we reallocate capital from the other aspects that are not 505(b)(2)s innovative to make sure we can fund the opportunities we have. Right now we're doing that well, and as you'll see from the strategy next week, we have a clear strategic and operational plan as to how that's gonna be done over the longer term. I think that's how we're approaching it now. With regards to Huntington's disease and tardive dyskinesia and the mix of that and INGREZZA with potentially an upcoming label expansion, I'll hand that back to Stan in the U.S.
Yes. Thank you, Richard. Huntington's disease is round about 50% of our sales, 85% is the tardive dyskinesia. If you look at the size of the patient population, tardive dyskinesia is of course, the larger market, which is still significantly under-penetrated and underserved. That's our, clearly our strategic focus. For Huntington's disease, of course, we are here well-established because that was the first indication that we launched. We know that the prescribers that treat Huntington's disease are highly scientific. They value the dose options that we provide, the titration ability, and they also value the long-term efficacy data combined with the safety profile that we have. For that reason, we believe that we are highly competitive in this category, despite the anticipated label expansion from Neurocrine.
On the other hand, also, we now have with AUSTEDO XR exactly the drug formulation with the once-daily that, as Richard explained, was missing. We did extensive market research here about the prescriber segments that value these convenience factors, and I think we will have a very competitive product going forward, being it now in tardive dyskinesia or in Huntington's disease. For that reason, we are quite optimistic for the year 2023 and our growth in both categories going forward.
Thank you, Stan, and thank you again, David, for your question. I think that concludes all the questions we have time for today. I wanna thank everybody again for dialing in and listening and the ones who asked the questions for doing so. I'd just like to remind you all of the Investor Day we have on May the eighteenth in New York next week, starting at 12:00 P.M. Eastern Time. I look forward to seeing some of you in person there and look forward to hearing and seeing you online if you can't make it in person. Thank you again for your time and attention today, and look forward to catching up next week.
Thank you for joining today's call. You may now disconnect your lines.