Teva Pharmaceutical Industries (TASE:TEVA) Q2 2019 Earnings Call

0:01 Ladies and gentlemen, thank you for standing by and welcome to today's second quarter financial results. At this time, all participants are on a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you'll need to press star 1 on your telephone. and wait for your name to be announced. 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 7th of August, 2019. And I would now like to hand the conference over to your first speaker today, Kevin Mannix, Senior Vice President, Head of Investor Relations. Please go ahead, sir. Thank you, Kaz. And good morning, everyone. Thank you for joining us today to discuss our second quarter 2019 financial results. We hope you've had an opportunity to review our earnings press release. A copy of the release as well as a copy of the slides being presented on this call can be found on our website at www.tevafarm.com as well as through the Teva Investor Relations app.

1:02 Please note that the discussion on today's call includes certain non-GAAP measures as defined by the SEC. 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, Cor Schultz, Teva's Chief Executive Officer, and Mike McClellan, Teva's Chief Financial Officer, will review the second quarter results. Question-answer session will follow the presentation.

1:49 And joining CORE and Mike on the call today is Brendan O'Grady, Tevin's head of North America Commercial. And with that, I'll now turn the call over to CORE. CORE, if you would, please. Thank you, Kevin. Good morning, everybody. Thanks for calling in. We have very nice quarterly results that we would like to present to you. We have seen revenues of $4.34 billion, which was in line with our expectations. We saw a gap diluted loss per share of 63 cents and a non-gap diluted EPS of 60 cents. And we saw a non-gap EBITDA of 1.14 billion. The free cash flow was 0.17 billion. And basically we are seeing what we also saw last quarter, a stable North American generic business. It's of course supported by a long list of new launches and the ongoing effect of the portfolio optimization that we initiated some one and a half years ago. We also see a continuous strong growth of Osteto, having sales of 96 million in the second quarter, up 30% over the first quarter, and continuing a very, very good trend. We are satisfied with the TRX share on Adobe, and we are very happy about the launches that we are undertaking right now in Europe.

3:05 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 a $3 billion reduction compared to 2017. And we also see a small reduction this quarter of our net debt. And just for information, we did make a scheduled reduction in the gross debt by paying down $1.6 billion in July. And as you can see, we are reaffirming the 2019 financial guidance, and this goes, of course, 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 compaction and we basically knew that revenues were gonna fall roughly four billion on a yearly basis.

4:02 That's also what you see. You see the quarterly revenue coming down from some 5.3 to 4.3 billion. But you also see now the beginning of the trough, as I've been calling it, the trough of 19, which is basically where the revenue stabilizes. You also see that the gross margin that was coming down is also stabilizing now just about 50%. And the operating margin is 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 big effect of the revenues declining and us only being able to take down the cost quarter by quarter, but still the effect now is that we are stabilizing the operating profit at around roughly one billion per quarter.

5:05 and you see that the net income is around 650 million right now. And that results, of course, in the earnings per share stabilizing right now around 60 cents. Now this is, as I've said before, this is what we expect to be the trough here. It's not that there'll be a dramatic turnaround in the coming years, but the trend lines will slowly change and we'll start to see a 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 the spent base reduction, this is a massive undertaking. This is the whole organization reducing by more than 10,000 people in a very, very short time span.

5:57 This is divesting or closing some 20 factories around the world. So a major undertaking, and I'm happy to say that everything is being executed according to plan. And the simple math of the spend base in the first half is that we spent $6.6 billion, which basically means that the yearly equivalent is $13.2 billion, and our target, as you know, is $13.3 billion, which is $3 billion less than the actual spend we had in 2017. and this of course includes everything, so there's nothing excluded or any tricks there. So it's a 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, Adobe and Osteto, and we are very happy about the strong launch we've had of Adobe.

6:56 We still have about 20% TRX share in US, and we have just started the launches in Europe. We've seen a moderate decline in the NBRX share. We think it's related to a couple of factors, one being the fact that we've stopped the full pay down on all 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 the patients do prefer an auto-injector and therefore of course we are are eagerly awaiting the approval and the launch of our own auto-injector for Adobe. If we turn to Osteto, then we continue to see very, very strong growth of Osteto, both in terms of prescriptions and in terms of sales.

7:44 Of course, there's always some quarterly variances, but we think that the numbers we see here are very much a reflection of the true situation in the marketplace. It's well covered by basically all health plans and the gross-to-net situation is also very stable. So this is really exciting for us. If you think about the patient numbers here, then the script we have right now is equivalent to a little more than 8,000 patients on the drug. And it's a combination of Huntington's chorea and tardive dyskinesia. and as I've said before, our estimates are that there's around 500,000 people in the US suffering from tardive dyskinesia. So in that sense you can say we are only scratching the surface with this therapy for the moment and we have very, very good reception among specialists and among patients.

8:39 The drag on our business, if we go to the next slide, is really the development in Copaxone. There's nothing new here. and you can see we have a pretty linear volume decline which has been more or less stable. Of course again here we have some quarterly variations and that's of course because we have a volume decline and we have increased rebating over time in order to maintain this volume. And that means that the quarters can go a bit up and down due to various rebates, rebate accruals and so on. But if you really look at the underlying trend then you could say that we are sort of halving or losing half of the value of the business on a yearly basis.

9:25 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, but which you can see in our numbers, we have a relative 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 in 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.

10:36 As you all know, we are involved in a opioid litigation and we are involved in Investigations on allegations 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 liability because we have not seen any evidence of us having any misconduct in the opioid situation or any misconduct in the pricing area. So we will continue to defend ourselves.

11:24 And we do not see the opioid situation, which is a very tragic situation in the US. We do not see that as a situation that will be solved by litigation. We think there's 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 DOJ 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 sort of substantiates the allegations. So we continue to defend ourselves denying these allegations.

12:10 Now, if we look at the business going forward and our financial targets for the business going forward, then I'd just like to repeat these. We have talked about them 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 Thank you for joining us today. to keep on reducing our debt. The simple math is that right now we're probably having net earnings of some 650 million per quarter.

13:16 That's 2.6 billion a year. 80% of that, that's roughly just around 2 billion. So as you see, we're also guiding 1.6 to 2 billion on the cash flow. So we're really aiming at getting to that level where we, on a consistent basis, generate most of the result as cash There will always be quarterly fluctuations with a big balance sheet as ours. Of course, there are quarterly fluctuations, but on a yearly basis, it's very important that we meet this target of the 80% cash to earnings. And that is important because we need to reduce the debt. As you know, our net debt to EBITDA ratio right now is above 5, and we really want to get it below 3. And the only way to do that is generate cash and pay back the debt. So we will continue to use all our cash flows to really pay down debt, and as I've 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 that's the best way to create value for our long-term shareholders.

14:24 Now, with these financial targets, I'd like to turn it over to Mike, who will go through the financials in detail. Thank you, Corin. Good morning, everyone. As always, we will start with a review of our gap performance on slide 15. Evan posted a quarterly gap loss of $689 million and a loss per share on a gap basis of $0.63 for the second quarter of 2019. As we will detail in the next slide, the gap results were mainly impacted by legal settlements and impairment items. So turning to slide 16, in the second quarter we experienced non-gap adjustments amounting to an impact of $1.3 billion on net income. consisted primarily of 646 million provision for legal settlements. This is 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.

15:25 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 a decline in the revenues from Trianda-Bendeka, ProAir, lower revenues in Europe, and a decline in Japan. This was partially offset by higher revenues from Estado, Ajovi, QVAR, and Aranda 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.

16:17 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 OTC 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 at Copaxone. Operating income in 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 Thank you. Thank you. We will dig deeper into the trends in revenue and cash flows later in the presentation.

17:30 So turning to slide 18, we've been highlighting for several quarters now, including in our 2019 guidance provided in February, the impact of the stronger U.S. dollar on our results as approximately 50% of our revenue come from sales denominated in non-U.S. 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 U.S. dollar were the euro, U.K. 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.

18:22 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. QVAR also continues to perform well in the second quarter, with $60 million in revenue. We do see sales of Trianda 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 Bendamustine 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 OTC 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.

19:24 Lastly, other sales were up 6% compared to Q2 of 18 and 8% sequentially. This line primarily consists of sales of API to third parties and certain contract manufacturing services. The increases are primarily due to stronger sales in our API business. Turning to slide 20, Thank you very much. A swing of nearly $500 million between the quarters.

20:14 On Flight 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. Starting to slide 22, we ended the second quarter with a net debt of $26.6 billion and a net debt to avatar 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 had. This new RCF can be used for general corporate purposes, including repaying existing debt. As of June 30, 2019, no amounts were outstanding under the RCF. And as of today, we have 500 million outstanding under the RCF.

21:17 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 $2.50, and free cash flow from 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 and Joby, the timing of generic launches, foreign exchange rates, especially the Euro and our expense management. At this point, I would like to address a second press release that you may have seen this morning.

22:03 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 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 of your family. This decision has no real influence from the situation of Teva. We do have our business challenges, but I'm really convinced that the employees, management, and board of this company are doing the right things to address this challenge to put Teva on a solid footing and allow us to grow in the future.

22:50 I'm fully committed to the next three months with the company through the earnings call on November 7th of 2019 for the third quarter. And I will do everything to support CORE, the board, and the company in 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 I have to make. Yeah, and on that note, I'd just like to thank Mike for his tremendous efforts and for the very, very good working relationship we've had since I started at Tether. It's been a real pleasure to work together with Mike, and I wish Mike and his family all the best in the future. And we'll still be working together for the next three months, so it's a little early to say goodbye to Mike, but you'll get a chance if you want to do that after the third quarter.

23:48 So with that, we will move into the Q&A. Thank you, ladies and gentlemen. As a reminder, it's star and one. If you'd like to ask a question, please remember to limit yourselves to two questions per person. Your first question comes from Randall Stanicki from RBC Capital Markets. Please ask your question. Great. Thanks very much, Cora. Just because it seems to be the primary issue in the stock, I appreciate the comments around the opioid situation. And last quarter in May, it made some comments that you wouldn't be surprised if this went to the Supreme Court. And then the next month, Teva in June settled the Oklahoma case. So what is Teva's stance here? Are you open to more broad settlements? And as you call out exploring alternatives to litigation, is that what you mean there? I'm just trying to get a sense of Teva's strategy going forward.

24:38 Then I have one follow-up. Okay, thank you for that question. In any specific litigation situation, We tried to assess what's in the best interest of the shareholders and of the company. And the specific analysis of the situation in Oklahoma is what led to our settlement. In that connection, we did not admit any wrongdoing or any responsibility. We still believe that the right solution to the opioid issue is not through litigation. We still deny any wrongdoing. We don't think we broke any law or did anything wrong. but it is a very serious issue of course affecting lots of people in a very negative way and it does make sense for society to take action and improve this situation. Going forward we will take a stand that we have not done anything wrong but that we would like to participate if there is a way in a holistic way to improve this situation to the benefit of the American people going forward.

25:43 Now what kind of Thank you for having me. So maybe I'll give a brief comment, and then Brendan can give some more color to it. Overall, I'm very happy about the launch of Adobe. We are above 20% TRX, and we think that that's a very nice and good start. There are some swings right now among all the three competitors on the sales we book per quarter, simply for reasons that we have a lot of, I guess all of us, coupons, paydowns, a lot of elements going into the gross to net.

26:40 which are more complicated in the early phases than it will be once the market settles down. So we are in the phase of, you could say, increasing the ratio of scripts that get paid for, therefore improving the gross to net. And we are also in the phase, of course, of continued rollout to more and more target doctors and so on. But maybe, Brendan, you can give a few more comments to it. Sure, happy to, Kaur. You know, if you look at the U.S. market, the CGRP market is a very competitive one, not surprising with relaunching so close together. We've taken a little bit different approach than I think some of our competitors have. We've tried to focus on profitability for the asset, so we've approached payers in a very specific way.

27:28 And we've grown our coverage to about 70% acceptable coverage, which we think is good to achieve our financial goals. We added Aetna. on their preferred formulary July 1st. We continue to build formulary access, and we're in negotiations now for 2020. So we think we'll have the access that we need to get to our financial goals. As Cora mentioned, we stopped doing the copay buy-down for plans that had Jovi on an exclusion list or an NDC block. That impacted our new-to-brand share, and due to the overwhelming demand that we've seen, We actually sacrificed some samples in Q2 to make sure that we had ample trade stocks. 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 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 brand and our TRX share as a result of that. As for the gross net, I won't really comment on that because I think every company probably has their own gross net there, but it's stable at this point.

28:53 Then I'd just like to be very specific in answering your questions about the $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 Osteto where we set a target of $350, we'll probably be significantly above that. So all in all, you could 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, Cora. Thanks, guys. Thank you. Next question comes from the line of Akash Tiwari from Wolf Research. Please ask your question. Hey, thanks so much. So, number one, we noticed that you took a $646 million payment for legal settlements and loss contingencies that was specifically related to opioid-related matters. Can you help us contextualize? We're seeing headlines that distributors are proposing a $10 billion settlement, and today you're taking a relatively small legal fee for opioid-related matters. 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 not in the multi-billion dollar range?

30:07 And maybe just on CGRP for 2020, you know, consensus numbers are near 300 million, which imply a pretty significant script acceleration, and, you know, 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 CGRP? And how big is kind of the EU 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. Yeah, 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 in there.

30:55 And based on the settlement for Oklahoma, what it does from a purely technical accounting perspective is 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's usually a premium attached to that. and then see with all of the other cases what 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 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 gonna go, you end up booking the low end of the range and that's what we've done.

31:50 So at this point, as you saw from CORE's presentation, we still don't see that we have a huge liability in this case in terms of causing this epidemic, 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 that's where the number comes up. The number that you see externally is everyone's 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 Purdue's settlement in Oklahoma.

32:35 So it's very complicated and that's how we ended up with the numbers that we have. Thank you, Mike. On the CGRP market and our revenues in 2020, it's too early to give a firm guidance, but the simplistic math is we have around 10,000 normalized scripts per week right now, and that's after less than a year in the market. So a very simplistic assumption is a year from now it might be around 20,000. If you multiply 20,000 per week with a gross price of 575 with a significant gross to net deduction, and I'm sure you can do the math and you'll probably get to a number which is pretty close to the overall number you mentioned. Got it. Thanks so much. In Europe also?

33:21 Yeah, in Europe we are having the first launches as we speak and in Europe so far we are seeing a, I would say, positive pricing environment which means that we're seeing prices which are similar to the US which is normally not the case in Europe. and we see very good reception in the first countries. 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, but there are more hurdles to reimbursement. So long-term, you could speculate that the potential is roughly of the same size in Europe as in US, but due to the way reimbursement works, Thank you. Next question comes from David Amsalem from Piper.

34:10 Please ask your question. Hi, can you hear me? Yes, sir. Okay, sorry about that. So just a couple quick ones. One, I may have missed this earlier, but can you comment on Forteo and, you know, as we're getting into the fall, you know, any thoughts on, you know, contribution and then further field extent to competition?

34:59 So that's number one. And then secondly, on Ostito, 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 of both Ingrace and Astuto grows, do you expect more restrictive control on the part of payers as the VMAT2 class grows here? And, you know, longer term, will you have to contract more aggressively? Does it become more of a zero-sum game between you and Neurocrime. So help us understand your long-term thinking there. Thanks. Sure. So I'll take the Forteo question first and then I'll work into Aspeta.

35:44 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. Actually, I think maybe 28 we launched Zyac last night. So that's launching today. So I think it's 28 generic launches here today. We have another 12 to 15, so that'll bring our number 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 will specifically comment on is Restasis. That gets asked quite often. We're ready to go. We're awaiting word from the FDA. That could be imminent. We'll wait and see.

36:29 The FDA can be unpredictable, so you never really know. And the other one is EpiPen Jr. Epifen Jr. is imminent. We'll be launching that within the next couple of weeks and we'll have that in the channel for the back to school season. So that's kind of how generic to look for the rest of the year. In regards to Osteto, as Cora mentioned, it is a very big market in TD. There's about 500,000 patients. We have just scratched the surface. I think you can see from the uptake that Osteto 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 growth to net, and I think that the dynamics will allow us to continue to grow in both tardive dyskinesia and Huntington's disease without any significant controls going forward.

37:28 Thank you. Thank you. Next question comes from the line of Elliot Wilber from Raymond James. Please ask your question. The first question for CORE, going back to the company's longer term or, I guess, objective target margin of around 27%, you know, given where you are currently, 23%, seems like the leverage with respect to, you know, additional cuts from SG&A, R&D are obviously not what they were over the past couple of years, so 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?

38:25 And then I want to ask a question of Mike with respect to, obviously, you've reiterated free cash flow expectations for the year. but wanted to confirm, in fact, that your CAPEX objectives are still the same. Thanks. So you're 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 SG&A. We can still maybe optimize a little bit, but that's really not where it's going to come from. It has to come from the combination, as you said yourself, Product Mix, where the growth of Osteto and Adobe will help us, and then continued improvement of the manufacturing cost, making manufacturing more efficient.

39:14 Now, we are 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, then we will share with you are our longer-term plans for how to optimize manufacturing going forward. And in terms of how much can this combination of product mix and the manufacturing optimization, how much can that generate in terms of improvements in operating margin and in terms of improvements in gross margin, then it's my experience from having done other long-term projects of a similar nature that you can achieve somewhere between 50 and 100 basis points per year.

39:59 It doesn't come linearly because you do have some 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'll be able to do that going forward. Yeah, 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.

40:45 And often the seasonality of inventory, we tend to stock up a little bit in the first half, and then it'll decline in the second half, which is a cash aid. And that's usually due to the plant shutdowns towards the end of the year. So we are still on track 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, we'll probably be a little bit lower than our original expectations. I think we expected 650-ish in the beginning of the year. We're probably closer to 600. So some of that will contribute to a better cash flow in the second half. Thank you. Next question comes from Greg Gilbert from Centris.

41:32 Please ask your question. Thanks. I'll ask my two right up front. First, Brendan, you have commented on generic Forteo and NuvaRing in the past. Can you comment on them further today, or should we read it 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 were signing up for a major turnaround that would be painful in many ways. but I suspect you did not sign up for a massive opioid story that could take years to resolve and create investor concern about bankruptcy 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?

42:17 Thanks. So I'll take the new ringing for tail question then I'll let Corey answer. So quite simply, We continue to work with the FDA with both NuvaRing and Forteo. And just because the unpredictability of when these may get approved, that's why I didn't mention 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'll be ready to launch the products. And you're 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 that we had to push hard to get approvals so that we could launch, you know, Assetto, Adobe, and so on, and start driving growth on products, which is a normal thing, which in all the jobs I've had in the industry is a key element, of course. So optimizing cost drastically through the restructuring program Thank you very much.

43:50 I remember some product litigations that went on for probably around 10 years in the US. So these things are, like you said, things that take a long time. And when I joined, I did know, of course, that Tether had a 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 way it has developed. I would say I'm not the kind of guy who ever quits unless the job is done. So of course I'll see it through. I'll get the job done. I have a five-year contract. If I have to stay longer, I'll do it. So from my personal point of view, I have this funny thing that I like it when it's difficult. I've always liked it better when it's difficult than when it's easy.

44:38 So in that sense, I'm in a very happy situation, you could 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 give 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 Mike, who for personal family-related reasons are leaving now, I have exactly the same management team as I appointed now nearly two years ago. So I'm not really worried about that. I am, of course, very focused on how to manage these complicated legacy litigations the best possible way, and we will continue to do that to the best of our ability for years to come into the future.

45:28 So the short version is I'm totally committed to the company. Thank you. Thank you. Next question comes to the line of Uma Rafat from Evercore. Please ask your question. Hi. Thanks so much for taking my question. Cora, Mike, I want to apologize in advance, but this is a tough one. Thank you for joining us. what you guys shared so far and I just wanted to offer up 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 what's the incremental financing rate for that thank you very much yeah so you know I'll address it it's not prepared remarks I am definitely making a personal decision and You can say you can do your job from anywhere, but you can't.

46:41 You need to be with your teams. Unfortunately, Israel is not located that close to anywhere I need to be, and I've been doing this for two years. I've been commuting most of the time, living by myself either in hotels or in an apartment in 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 a little more than we're going to be able to generate organically, so we will try to get out in front of those.

47:27 We're constantly watching the market to see when is the right time to refinance without Drastically increasing our interest costs. Unfortunately in the last eight weeks, the publicity and the trial by media from both opioids and the price fixing has had a big effect on our spread. So we're looking at all the different options that we have. We don't want 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 the street and the speculators are currently looking at. But it's a very intense situation. So we are managing it.

48:16 We're in constant discussion with our board, with management, with our banking partners, people watching the market. But in a quantum, we'll probably need to refinance two to three billion in the coming years and then potentially maybe another one to two as we get to the 2023 maturity. So that's kind of what we'll be looking at. We need to find the right approach to do it that's most beneficial for the company and hits the market in the right timing with the right story. And, Uma, 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 talk about it in terms of details and I think we should respect his privacy but he does have a very serious health issue in his close family and the place where he needs to be for that reason is not a place where he 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 related to a very serious health issue so Not in Mike, but in his family. And with that, I think we should move on. Next question.

49:31 Thank you very much. Thank you. Next question comes line of Esther Rajavulu from Oppenheimer. Please ask your question. Hi. Thank you for taking my questions. I have a couple. The first one is on Jovi and the launch in the EU. What kind of competitive dynamics are you facing there that are either similar to or different from the U.S.? and how are you thinking about the ramp in that market? Yeah, so in the EU you could say there are a couple of things that are similar in the sense that it's the same three products, it's the same three competitors with a little bit of a twist because of course it's Amgen in the US, it's Novartis in Europe but it's also Lilly and it's also us.

50:16 Now in Europe the access is different in the sense that you don't have these are all competitive access negotiations. You basically have a situation where typically there's negotiations with the authorities, they decide on a certain price level, and that's the price level given to a drop class. And that would then be the same typically for these three drops. And then you have, you could say, more of a similarity in that then you compete on disseminating the clinical information, informing doctors about the opportunities, and so on. And in that sense, it's quite similar. I would expect that longer term we will see the same solid uptake country by country. The hurdle is, as I said before, that before you get general access in a market, the national health authorities, because you're typically talking about nationalized health systems, so the national health authorities, they need to make up their mind on at what level and for which population they want to reimburse this therapy.

51:18 in this case it's pretty obvious that it's of course people suffering from chronic migraine and it's preventive therapy for migraine so you're probably talking about these four migraine days a month on average and we do expect that we will get good access and once you get access 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 have 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 U.S. So we are expecting in Europe and U.S. to have somewhere between 20% and 30% market share.

52:05 That's our best guess. Gotcha. Then I have two more quick ones. Going back to that slide five in your presentation where you talked about the growth margin improvement, How much of that year-over-year improvement was related to manufacturing efficiency versus the product mix or pricing? And are there geographic variability to the improvements? 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? Yeah, 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 and many, many more. And I think that's a great opportunity for us to be able to do that. And I think that's a great opportunity for us to be able to do that.

52:50 I think that's a great opportunity for us to be able to do that. By doing the constant optimization of the portfolio and the manufacturing, we do believe we can do these 50 to 100 basis points per year improvements going forward. In terms of the CFO search, we have just initiated that. 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.

53:35 Mike is here to do the third quarter. So we think we'll have a good and solid situation. Thank you very much. Thank you. Your next question comes to the line of Ken Cacciatore from Cohen & Company. Please ask your question. Great, thanks. Mike, I know we have you next quarter as well, but sorry to hear you're leaving and obviously hoping all the best for your family. Cora, I hate to revisit the opioid situation, but just trying to understand if you could help us understand some of the nuance besides just that Oklahoma was first. There's 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 Actique and Fentor.

54:23 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 branded that really more forced your hand. Thank you. Yeah, 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 was specific in the Oklahoma case and made us do the settlement.

55:15 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 all in all of those two products in Oklahoma. So that is a non-issue whatsoever. However, I have to step back to the beginning and say, this is a political situation. This is a political situation where people are pointing to somebody to 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 there were only two companies left. It is a local judge in Oklahoma It's not part of the federal court system.

56:02 It's a state court. The MDL 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 better time to fight or to get a global settlement in the MDL case in Ohio than it was in Oklahoma. So it was a specific assessment of the situation that led us to the conclusion that it was in 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 or have any direct responsibility whatsoever, and not because there was anything with the two special products we have which are really developed for terminally ill cancer patients.

56:49 Thank you. Thank you. Next question comes from Liab Abraham from Citi. Please ask your question. Good morning. On the legal settlement and contingency charge that you took of $646 million, in your assessment of the potential liability there, did you include all the opioid cases outstanding or just the state attorney general cases? Did you include all the cities and counties and Native American tribes, et cetera? And then secondly, just coming back to Jovi, Even if you're going to do slightly shy of $150 million in revenues this year, you're still anticipating a significant ramp in revenues in the back half of the year. So maybe you can address how you get there. Is there going to be a change in strategy?

57:43 Are you going to start a DTC program? What is going to get you to that significant ramp in the second half? Thank you. So thanks, Leah. I'll take the first one. That settlement is meant to encompass the settlement accrual is meant to encompass everything. And as I described earlier, it's more of an accounting perspective on a wide range that we've taken. We'll monitor this as we go along and see if there's any change necessary. But given the information we have today and the way we see this, this is what we've recorded in Q2. So I'll take the next question regarding adjovium and the rampant second half of the year. So if you look at... from Q1 to Q2, our paid prescriptions increased from 40% to 60%.

58:30 We continue to see that increase during Q3. So it's a mix of transitioning patients from free coverage to paid reimbursement as well as continuing to gain new 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 is improved. We continue to convert patients. So that's how we'll get to our year-end number. Thank you. Next question. Thank you. Your next question comes from Chris Schott from J.P. Morgan. Please ask your question. Great. Thanks very much. My first question was on the North America generic business. You've been sitting at revenue just a bit below about $1 billion a quarter this year.

59:16 Should we think about that kind of billion dollar run rate as a decent run rate for that business going forward? Or can we actually start to see that number grow over time as some of these second half opportunities if they come to fruition? And then my second question was a bigger picture one. Just thoughts on what we saw with the Upjohn Mylan transaction a few weeks back and how you think about transformational M&A at Teva as you look about your product portfolio and geographic footprint. 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. Yeah, I'll give it a quick go with the generics, and then Brendan can give some more comments, and then I'll end up with commenting on the opt-on mining thing.

1:00:01 So I think the $1.25 billion, plus, minus, of course, depending on specific launches and so on, is a steady run rate. I don't see a big chance that this will improve significantly and I don't see a big risk that it will decline significantly. I think we'll be at around the four billion level for the years to come based on our strong portfolio with a lot of launches coming up. It is a fact that launches, they move in time. Sometimes you launch earlier than you thought. Sometimes you launch later than you planned. But on average, when the whole thing is moving, it sort of evens out. based on how many products you have in the pipeline, how many you are preparing to enter into the marketplace. And that combined with the fact that we've seen a relative stabilization of the pricing environment leads me to believe that this $4 billion a year level for North America is a sustainable long-term level.

1:00:59 But Brendan, how do you see it? I see it much the same way, Corey. I mean, I think if you look at You see that the North American run rate is anywhere between $900 million and $1.1 billion. And that is largely dependent upon the new product launches, how many you launch in a particular year, how many of them are high-value launches, what the market looks like when you get there. So we've had quarters where we've been closer to nine. We've had quarters where we've been closer to 1.1. So as Cora mentioned, we kind of see this as a sustainable business. going forward at around the $4 billion mark, give or take, depending upon the launches in any particular year. And on the Optron Mylan merger, I would like, of course, to wish them good luck with it. It doesn't really change your operational environment a lot when you merge. And the two parties have, of course, worked together a long time, including on EpiPen. And I would, of course, wish them good luck solving their manufacturing issues.

1:01:57 But while They haven't been solved. I'll also just make a little commercial for the generic EpiPen, which is available in all pharmacies. And if it's not there, you can just call ANDA and get it. So nobody should be short on EpiPen this fall, thanks to the generic version that we're marketing. That thing aside, we are not really seeking transformational M&A. We are sort of going about it 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 a risk of it taking longer, but it doesn't change the end game. The end game is to have a very strong and sustainable, profitable business.

1:02:45 Thank you. Thank you. Your final question comes in the line of David Marris 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 a settlement? And if so, what debt do you expect to refinance first? And if you wanted to help us understand what the kind of blended rate of the first Thank you very much. If you look at our overall cost of debt, most of this was borrowed back pre-activist acquisition at a very low rate because the company was investment grade at that point and the market was very buoyant.

1:04:02 So you'll be looking probably at taking out some of the 21, maybe even the 23, and it'll go from the roughly 3% interest rate that you see today to anywhere, you know, six, seven, eight, nine, depending on where the market is at the time we come in. And that's why we're going to be looking at this very cautiously. We don't want to overload the P&L with interest expense because of a short-term consideration of these litigations. 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 what's the timeframe?

1:04:48 I think it's pretty clear that if major amounts are gonna be expected from the industry, that they're going to have to be over a long timeframe. I don't think any of the players in the industry could handle large upfront cash amounts and if it becomes something more tend to wait, 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 situation without trying to explode too much of the debt cost.

1:05:35 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 dial 00443333009785 and enter the conference ID 8260368 followed by the hash key. Thank you for participating. You may now disconnect.