Teva Pharmaceutical Industries (TASE:TEVA) Q3 2020 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by and welcome to the Teva Pharmaceutical Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. We will currently ask you to limit yourselves to one question and one follower page. I must advise you that this conference is being recorded today and I would now like to hand the conference over to your first speaker, Kevin Mannix, Senior Vice President, Investor Relations. Please go ahead, sir. Thank you, Valerie, and thank you, everyone, for joining us today to discuss Teva's third quarter 2020 financial results. On the call with me are Cora Schultz, Teva's Chief Executive Officer, Eli Kalif, Chief Financial Officer, and Brendan O'Grady, Teva's Head of North America Commercial. We hope you've had an opportunity to review our earnings press release which was issued earlier this morning. 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 our Teva Investor Relations app.

1:13 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 and to better understand its business. Thank you for watching. To begin today's call, Cor and Eli will provide an overview of the third quarter performance, recent events, financial outlook, and priorities going forward.

2:01 This will be followed by a question and answer session. Today's call, which will run for one hour, is being webcast live and recorded. You'll be able to replay the call as well as view the transcript later today on the Teva Investor Relations website. And with that, I'll now turn the call over to Teva's CEO, Cor Schultz. Cor, if you would, please. Thanks, Kevin. Welcome to all of you, and thanks for joining this call, and thanks for your interest in Tether. We had a solid third quarter. We saw revenues of $4 billion. That's slightly below our expectation. The reason was that we saw overall lower total script volume in both U.S. and Europe as a consequence of COVID-19, and slightly less patients actually going to doctors and to hospitals for therapy.

2:48 When we look at the EBITDA, then the non-GAAP EBITDA came in at $1.2 billion, which is completely in line with our expectations. So we compensated for the slightly lower revenues by cost savings. We had a GAAP loss per share of $3.97, and that includes a $4.6 billion Google impairment. And we had a non-GAAP EPS of $0.58, which was completely in line with our expectations. The free cash flow was also in line with expectations at $0.5 billion. We are very happy to see a continued reduction in our debt, and the net debt as of the end of the third quarter now stands at $23.8 billion. In terms of business news, we had several interesting things happening in the third quarter.

3:33 The first one I mentioned here actually happened at the very end of the quarter, the last day of the quarter. That was the very successful launch of the generic versions of the HIV medications Truvada and Tripla in the U.S., The sales are all booked in the fourth quarter, but we actually did have the sort of physical launch on the very last day of the third quarter. We're also very happy that we continue to see the strong penetration of Trixima, and we're also very happy about the development of Adobe, and the fact that we are now looking forward to getting it approved in Japan, since it has been sent into the authorities by our partner, Otsuka, in July. In a very interesting move, we now complement our portfolio of inhalers, digital inhalers, in the U.S. asthma space, and we now have launched also the Adu DigiHaler and the Amon Air DigiHaler, which basically means that we offer a full therapeutic opportunity for people to treat their asthma with our DigiHalers, which is a new and very advanced way of treating asthma where you get direct feedback from the device and where your device communicates with your smartphone direct to your caregiver. So we are having high expectations for this going forward.

4:47 Last but not least, I'd like to just touch very briefly on the fact that despite COVID-19, which is affecting the whole world and of course affects all the countries in which we have our operations, we were able through resilience of our organization to maintain full operational capacity everywhere and serve the roughly 200 million patients we serve on a daily basis with our essential medicines. Next slide, please. Today, I actually celebrate that I've been three years with the company as CEO, and one of the key things which I'm proud of is this debt reduction you're seeing here. In the three years that have passed since I joined, we reduced the debt from 34 billion down to 23.8, so more than 10 billion reduction.

5:32 And as you know, it's our ambition to keep on doing Thank you very much. Now, in terms of revenue development, you could say the last three years we've seen a significant reduction in revenue as a consequence of the patent expiry of Copaxone in the U.S. and Europe. And now we've actually reached a level where we have sort of flattened, we've plateaued, stabilized the revenue, and we're now looking forward to marginal increases in revenues moving forward.

6:26 There's a couple of quarters here where we have once-offs, and we always have that once in a while. That's the nature of our business. One was one we knew about. That was the fourth quarter in 2019 where we made a launch of Sinicalcid. That boosted, as you can see, the North American sales, that generic launch. And then there was the first quarter of 2020 where in Europe we saw a patient-level hoarding of all kinds of products, generics, all kinds of products, which happened just at the arrival of COVID-19 before the lockdowns. and that's why you see the European sales jump in the first quarter this year. Then there was a reverse of that jump in the second quarter so you see the European sales go down from 1.4 billion in the first quarter to 1 billion in the second quarter. and now you see more of a normalization.

7:19 And I would say the European and US sales in the third quarter, they are probably around 5% below the normal run rate that our market share would carry. We have not lost any market share, so it's really that the volume in the market is still somewhat negatively affected by COVID-19. We do hope, of course, that in the coming quarters We will see a normalization so that we get back to the normal total market size. And then, of course, in the fourth quarter, we will see the benefit of the so far very successful launch of Truvada and a tripler in North America. So a little bump up there in North America in Q4. Can we move to the next slide, please? So as you know, we have three main drivers Thank you for joining us.

8:29 and you can see it still keeps growing strongly. Also here there are some ups and downs per quarter. That's just random moves in the pipeline so to speak or in the value chain. The main thing here is it keeps increasing. It's 64% up versus the same quarter a year ago and we're now above 10,000 patients and I know I mentioned this before but it really is important to realize that the 10,000 patients is a combination of Huntington's disease and tardive dyskinesia and the potential for tardive dyskinesia in the U.S. is huge. There are roughly 500,000 patients suffering from tardive dyskinesia in the U.S. And of course, not everybody will all get therapy, but I'm sure that in the following years, we'll see more patients in therapy than we have right now.

9:18 So I'm very optimistic that we'll see a continued strong growth of Osteto in the coming quarters. If we move to the next slide, please. Now the second element that needs to drive our growth worldwide is Adobe. And here we have actually quite an interesting development. First of all, let's start with the negative piece. The negative piece is that the sales were 35 million and we would like to see them higher. And that's partly because our TRX share is a little bit low now due to the fact that we lost NPRX as we lost traction in the market in the beginning of this year, basically due to the fact that we did not have an auto-injector and the two competing products both had an auto-injector. Now, we have launched the auto-injector back in May, and what you see here is something that I've only seen, I think, once before in my 30 years in pharmaceuticals.

10:15 It's a really successful relaunch, in this case driven by a device. and what you see is that the capture rate sort of has more than doubled in a few months from being close to 11% to now being nearly 25%. And you can see now that it starts to carry through to the TRX count. So I'm very optimistic that we will continue to see a journey growing nicely and I can tell you it's not on this slide but in Europe we see the same very nice development in a big market such as Germany where we've also launched the ultrainjector. We also see and more. Next slide please. Another element in our strategy, and here I refer to our R&D strategy that we disclosed some time ago, is biosimilars. And those of you who have followed the company know that I've been saying before we launched Troxima a year ago that we wanted to prove that the U.S. market is really open for biosimilars.

11:41 And if you have the right commercial setup, you can actually penetrate nicely, and there's a new Thank you very much. and this is of course important because it's a good launch but it's also important because as you know we have more than 10 biosimilar products in our pipeline now for North America for the U.S. market and this is just validating the commercial model that this is a business which is a really good supplement to traditional old generics and we're looking forward to launching many more biosimilars going forward.

12:41 One of the reasons why we think that will keep on growing is really that it's the only biosimilar, rituximab biosimilar that has RA indication as part of its label. Next slide, please. So we are looking into hopefully a marginally growing revenue in the coming periods as a consequence of these growth drivers I just described. And of course, combined with the fact that Copaxone keeps declining, but keeps declining less than these three elements have grown. But that's not the only thing which goes into our sort of optimization of the business. We are also working very hard on improving the operating margin, both through the gross margin and through total improvement in our business model.

13:31 And here you see how we bottomed out at 24.5% in 2019. Thank you for joining us. More than two years ago, just after I joined Tether, and this is a target we are firmly committed to, and all our optimization of the business is driving towards achieving this target, which is very, very doable. Now, let's take you to the next slide.

14:17 And here I have the same slide as you see many times, and this is basically a slide that's been unchanged for a couple of years, and I think it will stay unchanged hopefully for for the next three years until we get to the point where we actually realize the numbers, which will be at the end of 2023, which is three years from now. First of all, we are committed to the 28% operating income margin. We are committed to cash earnings above 80, and we are committed to getting remit debt to EBITDA below three times. And of course, the way to do so is to utilizing our cash flows to pay down debt, and we do not plan to raise any equity. and on this slide I would like to actually reflect a little bit on the last three years with Teva because it has been a phenomenal journey operationally together with my management team and all the employees.

15:08 I think everybody's done a fantastic job in optimizing the company, restructuring the company, securing a healthy margin despite a revenue loss of around $5 billion on a yearly basis, getting good control on the cash flow and keeping on paying down the net debt. I would like to share with all our shareholders who are listening that it is of course frustrating that when your operational plan actually is executed completely according to plan and you see your whole organization doing a great job that you then have legal situations, litigation situations in the U.S. which are related to events way before you joined the company, litigation situations that get worse and many more.

16:16 and many more. And of course we would love to solve these litigations. We are still in a constructive positive dialogue with the state AGs on the opioids and as you know we are going to trial with DOJ on Thank you, Cora, and good morning and afternoon to everyone. As always, we start with a review of the GAAP performance on slide 13. Revenue in the third quarter of 2020 were approximately $4 billion, a decrease of 3% in both U.S. dollar and local currency terms, compared to the third quarter of 2019, mainly due to a lower revenue from generics, OTC, and Copaxone in all regions, and lower revenue from Fuvar and Bandeca Trianda in our North America segment, as well as reduced demand for certain products resulting from the impact of COVID-19 pandemic. partially offset by higher revenue from Oceto and Adobe.

17:38 Teva posted a quarterly gap loss of $4.35 billion, a loss per share on a gap basis of $3.97 for the third quarter of 2020. The significant year-over-year decline was mainly due to a $4.6 billion goodwill impairment, which I will discuss on the next slide. On slide 14, we can see The company is committed to its projected cash flow target. and many more. Amortization were $251 million for the third quarter, aligned with the range of $25 to $250 million to $216 million per quarter that we got at the

19:09 beginning of the year. Now turning to our NAN gap performance on slide 16. Again, we see modest year-over-year decline in quarterly revenue, which I addressed in my opening remarks. Moving down the P&L, Gross margin was 52.4% in Q3 2020, compared to 51.4% for the same period in 2019. The higher gross margin was mainly due to improvements in our operating network, coupled with increased sales of Assetto with high gross margin, partially offset by decline in the generic business, as well as our legacy specialty brands in the US. Year to date, our gross margin is 52.5%, versus 51.5% in the full year 2019.

20:00 As Cole mentioned, we remain on track to reach our long-term financial target. The year-to-date improvement in the gross margin is a reflection of our ongoing development plan to operate with the most optimal manufacturing and efficient overhead cost structure. Looking ahead at Q4 2020 and for the full year, we expect our gross margin to reach the level of 52.5%. Operating income in the quarter declined by 3% compared to the same period of 2019, while our operating margin of 25.8% for the same quarter was in line with the Q3 2019. Still, our year-to-date operating margin was 26.6% versus 24.5% in the full year 2019. In the first nine months of 2020, operating expenses were $201 million less and more.

20:58 As part of our long-term financial targets, the company continues to manage expenses and fundamentally reposition the overall operating expenses structure with the view that disciplined cost structures can provide incremental earning leverage as revenues stabilize and begin to grow again. Looking at Q4 and the full year, we expect our operating margin to be stable at the level of 25.5% to 26% as score notified earlier. Non-GAAP earnings per share in the third quarter were 58 cents in line with the same period last year and bringing our year-to-date non-GAAP earnings per share to $1.89 versus $1.78 last year. Turning to slide 16.

21:49 I would like to touch briefly on our spend base. Despite the quarterly fluctuation in the stop line this year due to the COVID-19 pandemic, we have done a good job managing our overall spend base. Our spend base in the first nine months of the year was just under $9 billion, a decrease of $381 million versus the same period in 2019. The reduction in the spend base is a reflection of both the active management of our operating expenses and the ongoing efforts to improve our gross margin through the transformation of our network, which we outlined at the start of the year. Overall, if we add together the expansion of the both gross and operating margin in 2020 compared to 2019, we can see the progress in the main five key levers we introduced earlier this year.

22:41 Procurement cost excellence, network optimization and restructuring, operational and quality excellence, and to end supply chain integration and agile operating model and organization. Turning to slide 17. We see our free cash flow for the quarter came in at 506 million compared to 551 million in Q3 2019. The sequential decline from Q2 2020 was mainly the result of an increase in inventory. This brings our total free cash flow generation for the first nine months of 2020 to more than $1.6 billion, benefiting from stronger than unusual start of the year.

23:27 Based on the first three quarters and our outlook for the remainder of the year, we are maintaining our guidance for 2020, which is $1.8 billion to $2.2 billion. Now turning to our debt developments on slide 18. As you all know, our current and long-term focus continues to be on debt reduction. In July, the company repaid $1.2 billion in maturities, bringing the total debts repaid this year to $1.9 billion. Unfortunately, due to translation differences, we only saw a modest accretional decline in our net debt total and a slight uptick in our net debt-to-EBITDA ratio, which was 4.92 turns.

24:12 We continue to expect this ratio to remain under 5 turns going forward and decline each year, reaching under 3 turns by year end 2023. As we have noted throughout the year, we have the liquidity and cash flow to cover bond repayments for the year 2021 and 2022 before looking to refinance the 2023 maturities. So, turning to the financial outlook for 2020 on slide 19. This year has proven to be a most unique year indeed with the global pandemic presenting our operation in all three regions of the world with the challenges that have made it difficult to accurately focus the top line. We need to remember that we are still operating in a very dynamic and highly volatile environment. We are working every day to ensure the health and well-being of our employees worldwide while managing through a perfectly changing local condition at our locations worldwide.

25:13 Our financial outlook is therefore based on our current visibility and information that is available today and does not reflect any unexpected impact of COVID-19 on our businesses. Throughout the year, we have seen the significant effects it has on the purchasing pattern of our large global customers and overall utilization by patients. In Q1, we experienced stronger than expected revenue of pandemic-related products and customer stockings. This effect was offset in Q2 and we saw a continuing decline in Q3. As a result of this, and based on the performance of the first nine months, today we are adjusting our guidance range for full year revenue from the original range of $16.6 billion to $17 billion to the new range of $16.5 to $16.8 billion. This squares the midpoint of our range by $150 million. The new range includes adjustments to our full year expectations for global sales of Copaxone and Adobe.

26:15 For Copaxone, we are raising our guidance by $100 million to approximately $1.3 billion. For Adobe, we are lowering our guidance by $60 million to $200 million for the reasons aforementioned described. For our other financial targets for 2020, operating income, EBITDA, and earnings per share, we are tightening the range by bringing up the lower end for each one reflecting the reduction in the spend rate that I just outlined a few minutes ago. The cash flow guidance, as I already mentioned, remain unchanged. Where we end up within each of these range will be determined mainly by the rate of recovery in purchasing patterns and overall utilization by patients, which has been impacted by the ongoing pandemic as well as our product mix in our generic business for the rest of the year. and this concludes my review of the third quarter result and 2020 financial guidance.

27:14 We will now open the call for questions and answers. Operator, would you please open the call for questions? Thank you very much, sir, ladies and gentlemen. We will now begin the question and answer session. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. We will remind you to limit yourself to one question and one follow-up speech. Once again, it is star one to ask a question. And your first question comes from the line of Greg Gilbert of Trust Securities. Please go ahead. Thank you. Good morning, Cor. As you pointed out in your prepared remarks, the company is executing well against the targets that you and the team have laid out that you're Thank you very much.

28:33 with a reasonable DPA and a penalty. Has that ship sailed, given your comments about going to trial? Any other color you could offer would be great. Thank you. Cord, just check your mute button, please. So thanks for that. Very good question. So on the opioids, We are still in a very positive dialogue with the AGs, and that's the same group of AGs, of course, that we did the framework settlement with. And it is hopefully so that we'll see a firm settlement within the foreseeable future. Now, the problem is I've said that before, and I've also alluded to the fact that one of the triggering points for getting the actual settlement done where everybody signs, because there's a lot of parties involved in this, A lot of the states, a lot of the plaintiff lawyers, and so on. So one of the triggering points for getting settlements like this done is when there is the pressure from an actual trial that all the parties are going to. And I was very optimistic, I guess about a year ago, that the New York trial that was scheduled originally for January, then March, then January, then got even postponed, hasn't happened yet. And then there was a West Virginia trial that got postponed, so All the trials that could trigger that people sign on the dotted line had been postponed. It's quite obvious that there's

30:05 been ongoing negotiations between us and the AGs and between the four other companies that participated in the framework. And I would say that... They are maybe more progressed in terms of the fact that they have reached enough financial number than they started out with, all of them it seems like. But it's important to mention that from the beginning, we were five individual companies that were negotiating at the same time with the AGs. but we didn't negotiate a, you would say, combined deal. It's five deals, so to speak, each company having a deal with the AGs and the police lawyers. So I'm still very optimistic that we will have a chance of seeing that whole thing come to a solution where we see a settlement where we will be supplying Suboxone to all of the US and that is really the best solution because in doing so, We will be able to help people to wean off the misuse of opioids. So that's really what's the situation on opioids.

31:11 On price fixing, I'm always open to a settlement if it's a settlement that is reasonable. So a reasonable DPA with a reasonable fine, that is something of course that I can live with. I can't live with having to admit to criminal acts that the company did in my best assessment and so on. So that's really why it's moving towards a trial. Sometimes, you know, in these cases, we saw it last with the accusation on speaker programs which we settled not so long ago. So sometimes once you get really close to the trial date, you have new people involved and there's new negotiation and it does get settled. Sometimes it actually goes to trial. But it's not that I'm against settling, I'm just saying that we believe that the whole So the body of evidence is so weak that it makes a lot of sense for us to go to trial.

32:09 I hope that clarifies your question. Thank you, Cor. Thank you. And your next question comes from the line of Huma Rafat of Evercore. Please go ahead. Hi. Thanks so much for taking my question. Cor, I know there's definitely a huge focus on the litigations and settlements. But as we think beyond and we think about the base business, I feel like the one thing inventors aren't quite hearing is a clear plan on new products, new innovation, and the real direction from a base business evolution perspective where a real path is laid for sustained top line growth which people are willing to get excited about and put a real multiple on. And I would just like to perhaps offer an opportunity for you to lay out your vision Assuming you do get these settlements over the next 12 to 18 months, where do you see it going? What are the plans to make the next Ejovi and the next Osteto and the likes? And a quick CFO question, if I may, as well.

33:11 There's an unusually large gain from American Well Corporation, and I wonder if there's other investments of this scale we should be aware of within Teva. Thank you very much. Yeah, thanks for those two questions. I'll start with the first one about future growth. and it's a little bit of course a long answer I have to give you because our business is comprised of several buckets or several categories and the underlying business is really the generic and ODC business and there we see a quite stable situation in North America and in Europe and of course we have these bleeps in North America when we have you know We launched the first to file and we make some extra 100 millions in a quarter and then the next quarter we make some and then not so much.

34:04 But if you look at it underlying in terms of volume and in terms of sales, then I would say a very stable business in North America and a business that keeps growing in the coming years, low single digits in Europe, stable pricing environment in Europe and a renewed focus from some customers on the supply chain and on, you could say, the reliability of the supply chain. And as you know, we have probably the most US-European centric supply chain of any generic supplier. So that's really the basis. Not a lot of growth, but stability in North America and some growth in the rest of the world on generics. Then on the biosimilars, I'm optimistic, as I just went through, that in the coming years we will see growth in our total biosimilar business.

34:51 I think it's relatively sustainable. and many more. So you saw here that in the third quarter, if we combine a Stevo and a Joby, we probably did something like 200 million in total. And this is growing fast. So next year, if you do the math combined, they will be a billion, and they will keep on growing.

35:38 So they will attract a lot of growth, and that will go on in years. I think the foreseeable future. And then of course you have the sort of the, what should we call it, the possible positive surprise in the shape of Fasinumab because Fasinumab has actually finished its phase three efficacy trials. That's one readout on long-term safety that we're getting in the first quarter. We are, you know, two companies or not, we're actually four companies but two products in development for this action modality in pain medication. And the ones ahead of us, Pfizer and Lilly, with their Tenesumab, they have just gotten an ad come with FDA.

36:27 I think it's scheduled for March. And that basically means that by March, we will get a good indication of whether their product has a chance of getting approved. Now, the mechanism of action is similar to our product. and you can't compare really from trial to trial, I know that. But if you look at it, it doesn't look that there's any significant difference in efficacy or safety if you just look at it from an overall point of view. So if they get a positive opinion and eventually a regulatory approval by FDA, then there's a high likelihood that facinimab can get the same. And we just talked about all the negative elements of the opioid situation in the U.S. It does, of course, have the positive side to it.

37:12 There's a huge unmet medical need for non-addictive pain medications, and facinimab could be one of those. So if facinimab makes it, then we will, for the next many years, have not two but three main specialty products driving our top line. Add to that, as I said also before, the broad range, more than 10 biosimilars we have in the pipeline for the U.S. and then the other exciting things we don't talk about so much, but actually we just had the end of our phase three program for a long-acting antipsychotic based on a new modality, new formulation for creating the prolonged action profile.

37:57 And as you know, in schizophrenia, the preferred solution is really long-acting products. And here we made sort of a version of risperidone which is longer action and subcutaneous which basically means that from a patient point of view it should be by far the preferred product. Now we don't have the readout of that phase three trial yet. We will have that sometime in the first quarter. And there are two to follow, olanzapine, lorazodone are to follow. So we do have a lot of different things that can drive growth in the coming years. So that was quite a long answer. But it really basically means that I'm optimistic that we will see not dramatic revenue growth, but single-digit revenue growth over the coming years, everything else being equal.

38:44 And of course, in these COVID times, I can't promise you anything. We need to wait until we get the guidance for next year in February. But if you ask me about the longer-term outlook, that's how I see the growth drivers, the key ones. Then you have a question about American wealth. It's correct that we have a minor shareholding in American Wealth and we're flagging that in our quarterly accounts. Right now, we don't have any other holdings that are sort of in a situation where they would sort of based on my sort of predictions for the coming year, pop up as having a major cash value. Thanks for the questions. And your next question comes from the line of Ron Eager of Bernstein.

39:30 Please go ahead. Good morning and thank you for taking my question. Cora, I'd like to talk a little bit about stimulus because like you, I think this is really interesting growth drivers. I guess of the 10 products, let's just start with the 10 products you have in the pipeline. Could you share with us any named products before 2025? And out of those 10, how many are yours only versus how many are you sourcing from Celtrion or other partners? That is kind of like what's your share of the margins here? And then specifically around the Humira biosimilars. You might finish on this one. Specifically around the Humira biosimilars, I haven't seen a settlement for you with AbbVie, so I have no good idea about when you're going to come in. And it seems you are doing an interchangeability trial. If you can comment on that, tell us when you expect those results and how do you think it positions you in the marketplace?

40:22 Yeah. So first of all, out of the, let's say, roughly 10 plus biosimilars we have in development or where we're waiting for approval and launch in the U.S., it's 50-50 between internal development and things that we have in-source. You saw the Algotech deal, which we announced just recently. So we basically have half coming from that deal and half coming from our own internal development. and then I have to disappoint you that for competitive reasons we have so far decided not to comment on any specifics. It's not difficult to guess some of them I'm sure because we are basically going for roughly the 10 biggest because that makes the most sense.

41:11 So I'm sure you can guess most of them but we've actually decided not to comment on the actual timing and the actual products and that's really for competitive reasons. So I'm sorry about that. I appreciate it. Thanks for the question. Thank you. And your next question comes from the line of Elliott Whitbur of Raymond Jales. Please go ahead. Hi, good morning. This is Lucas Leon for Elliott and thanks for taking my questions. So the top line outlook is lowered by $100 million with COPAX on outlook increased by $100 million. and Ejovi down by $50 million, implying a $150 million reduction in other areas.

41:56 So what are the primary factors accounting for that? And if I could sneak in a product-specific question, Ejovi sales have been lighter than expected given absolute and relative growth as measured by RxTrans. Could you help us understand the dynamics there? Is this a function of heightened rebate pressure, or were there other one-time factors leading to the flat-ish sequential top line? Thank you. Thank you. So your math on the top line is absolutely correct. And the $150 million that we talk about here is basically related to the lower total script volume in the U.S. on a lot of different products, including generics, and the same thing in Europe.

42:42 What we saw was We saw first an increase in volumes in the first quarter, and we saw a significant decrease in volumes in the second quarter to the tune of maybe 15%. And then in the third quarter, we've seen on average, because there's of course ups and downs from different lines of business and so on, but on average on both our sort of older specialty products and our generics, we're seeing something like a 5% reduction and many more. It's probably right now, it's difficult to predict as you know, we hope that in Europe people are getting more used to that the doctors are open, the pharmacies are open.

43:42 I know we have a lot of lockdowns in Europe right now, but none of those lockdowns include doctors, none of those lockdowns include pharmacies. So we see that there's a, you would say, asymptotic approach to the normal volume, and we hope we'll continue to see that in the fourth quarter. And in the U.S., as you also know, in most states there's a quite open situation with also pharmacists and doctors and so on trying to get back to normal. So that's really the reason for that. If we look at Adobe, then I already commented on the fact that the TRX are lower than we had expected. And of course we're catching up now with NBRX getting back up around 25%. The TRX will of course be climbing nicely here also in the fourth quarter.

44:30 The only other factor which has affected it is really the fact that some of these neutral brand scripts that we're seeing now, they do get a buy-down support in the initial phase. And that means that if you have a high volume increase in NPRX versus a stable TRX volume, then you get slightly less net sales out of that due to your buy-down coupons. We have not seen any changes in the contracting environments So we've not seen any increases in the rebates given under the various contracts. I hope that answers your question. Yes, thank you. Thank you. Your next question comes from the line of Aikash Tiwari of Court Research.

45:18 Please go ahead. Hey, thanks so much. So you guys took a pretty significant goodwill impairment charge regarding uncertainty on resolution of certain litigation. for your North American business. Can you talk about what's leading to that? Does it have anything to do with generic reglement? And is there any comment on when that product is getting onto the market? And then is it fair to say if there wasn't an ongoing civil liability on the generic price-shifting side, you would have more strongly considered a settlement with the DOJ? What are the legal ramifications long-term of admitting guilt in regards to the civil liabilities and is there a time frame for the DOJ resolution and then the civil liabilities resolution on price fixing?

46:03 Thank you. Okay, thank you. I'll give the first question to Brendan and then I'll just take the price fixing now. So on the price fixing is correct, there's of course a criminal side to DOJ and a civil side to DOJ and then we also have a legal situation with the state AGs on price fixing. And you're absolutely correct. If we as a company were to admit to a criminal act on price fixing, which we did not commit, then you would sort of take away your own defense on the civil side, whether it's with DOJ or whether it's with the AGs. And typically, you will often be able to reach a solution with a DOJ that from a financial point of view is something that you can accept given the circumstances and the hassle of going to trial. But it's more uncertain how it looks with the trial that the civil AG trial because that's a more broad-based accusation they are raising and if you were to go along with that which is in our view unfounded Then that, of course, would have a potentially higher financial cost. And that's exactly right. That's one of the reasons why we did not want to settle with DOJ with a DPA that would force us to meet criminal conduct which we have not conducted.

47:30 And on the first one, I don't know whether Brendan or Eliyahu can answer that. So, Kaur, I'm hearing you loud and clear, but I The Goodwill impairment charge $4.3 billion on North America regarding uncertainty on certain legal timing. what is kind of leading to that big step down on goodwill impairment and does it have anything to do with generic Revlimid and when could that product get onto the market given the Dr. Reddy statement? Thank you. Yeah, so maybe you can talk about the Revlimid, Brendan, but I'll just give a brief answer to the first part of it.

48:18 So the reason for the adjustment, the main reason for the adjustment is, you could say, accounting technical. The fact that there is a... and many more. It is just an overall assessment that there are factors in the market that probably will continue, such as the opioid litigation, the price fixing litigation.

49:08 We do believe that due to COVID-19, these could be very prolonged. They could go on, you know, the price fixing litigation could go on for years. And as a consequence of that, we can't say that the overhang on the share price will be removed soon. And as a consequence of that, we decided to make a write-down on the goodwill. but maybe Britt and Brendan, you can comment on the RevLimit. Yes, of course, I'll just make a comment on the RevLimit piece. We typically don't comment on settlements for obvious reasons and confidentiality and we typically don't comment on the dates of particular launches. So I'll just leave RevLimit at that and leave it with CORE's answer. Thank you. Next question.

49:55 Thank you. Your next question comes from the line of David Amsal of Piper Sandler. Please go ahead. Thanks. Just a couple. So I wanted to get your thoughts on the longer-term trajectory of Osteto. As we all know, Neurocrine is running a study of valbenazine in Huntington's Choreo, which should read out next year. Do you think that's something that, to the extent that they get a label expansion, could prove to stunt the growth of Osteto over the long term? That's number one. And then number two, you know, you have some high-value generics, Forteo, Nuvering. To the extent that those don't bear fruit in a timely manner next year, is that something that you think...

50:42 could have an impact on the trajectory of the generics business, particularly considering you have a more competitive landscape for biosimilars. How should we think about that to the extent that you have a paucity of launches next year if that comes to pass? Thanks. Thanks a lot. So in terms of Osteto, like I said when I commented on the development, Osteto and the competitive product, is actually in a very good position where they are the first products approved for tardive dyskinesia. There are only two products approved for this disease. I think we have around 10,000 patients. They have around 15,000 patients on drug. And the patient pool just for tardive dyskinesia is around 500,000, and maybe only half of that will ever get on active therapy.

51:36 But it just means there's a big potential. and the competitiveness is, you could say, quite similar and reflected in the patient counts due to the fact that Ingressal launched a little bit ahead of us, so they're a little bit ahead, but I think the growth in patients is pretty similar between the two companies, so I don't see that their potential approval in Huntington's would make a major change in the market dynamics, so I'm very optimistic that due to the huge unmet medical need We will continue to see Osteo growing for the next many years. With regard to the high-value launches, and you can see, of course, it always gives a little positive bleep.

52:22 I just showed you the Senocalcid 19, and we're going to have Truvada and a Tripler here in the fourth quarter of 2020. And most likely, every year we get one of these key, more complex, high-value drugs approved. We still have EpiPen and so on. So I don't think it's going to play a major difference to what we see in terms of earnings and revenue next year. But maybe I don't know, Brendan, if you want to give a specific comment to some of these high-value launches. Sure, Cor, I'd be happy to. So we have numerous potential high-value launches that are always possible next year. There are five or six of them. you know we'll see as we move through the regulatory process which ones get approved and which ones don't and you're right you know the market can change by the time you get approval and launch but the way that we've certainly account for those and risk adjust those in our P&L takes all that into consideration so I'm optimistic next year we'll have several high value launches we'll see how that goes but that's generally the way it plays out and the only other thing that I would add on Osteto is that You know, there is a significant number of patients out there, as Cora said.

53:37 About 5% of the market, available market, is treated between us and our competitor. So we do see significant upside potential with tardive dyskinesia. And tardive dyskinesia represents the majority of the growth and the value. Huntington's disease is important, but tardive dyskinesia is certainly the bigger market. So I'll just leave it there. Thank you. Your next question comes from the line of Randall Stanicki of RBC Capital. Please go ahead. Great. Thanks, Cora. It looks like you're reaffirming your implied EBIT target in 2023 of close to $6 billion on the assumption that you can take down net debt by a couple billion a year and get under three times on net leverage.

54:22 So that seems to imply revenue growth of 2% to 3% on your 28% margin. EBITDA growth, mid to high single digits. So first question is, is that the right way to think about the outlook on those metrics? And then secondly, can you talk about the digital health, sorry, digital therapeutics opportunity on the back of Air Duo and Arm on Air? Are there additional opportunities as you think about the broader base of business, either brand, generic, or Biosimilar. Do you see a 505 opportunity in digital therapeutics? Thanks. Thanks. So the first question, you are, of course, all spot on there. We will probably have a cash flow, you know, $2 billion, $2 billion plus per year, and we'll allocate the cash flow to debt reduction.

55:16 So that means in the next years we'll take some $6 billion plus out of our debt. And that, of course, means that the math is quite straightforward, that EBITDA should be around $6 billion. And the way to get to that EBITDA is also pretty straightforward because we've already sort of explained to you what we think the operating margin will be because that's going to be 28% in the end of the period. And then, of course, you can calculate, as you rightly did, that we need a low single digit growth in revenues in order to get to there. And that's what we believe we can do. And the reason why we believe we can do it is what I explained to Uma based on his question with the various elements going in and contributing to a combination of stability and growth.

56:05 And when you add all that up, you get to single digit growth rates on the revenue. So that's really our plan. With regard to your second question, then I'll first comment on the actual digihalers and then I'll comment on the further possibilities within the digitalization of pharmaceuticals. So on the digihaler, it's, I think, extremely exciting because here we have a product that fits perfectly with the unmet patient needs because if you are on asthma therapy, then there are at least two things that are crucial. One is you take your medication correctly and two is that you monitor or somebody else helps you monitor your disease so you avoid hospitalization and severe asthma attacks. Now, the DigiHaler platform, sorry for giving a slightly long answer, but it really consists of a normal inhaler, but inside the inhaler there's inbuilt a flow meter that registers whether your flow and your inhalation is a good or bad inhalation. That's super important for compliance.

57:12 There's automated communication to your smartphone, from your smartphone to the cloud, run by Amazon Cloud Services, and on from the cloud to any caregiver that you give access. Could be your doctor, could be a nurse, could be your parents, could be your loved ones, anybody who you want to share your data with, you can do it that way. And by following the patterns, we believe that both short-term by people being, you know, Thank you for joining us today. built right into the inhaler. We have just launched, and we are seeing nice, steady uptake, and we are seeing a lot of usage already, and we look very much forward to sharing because, of course, we collect data on this, and that will also give us more medical insights.

58:26 Now, that's on the respiratory franchise we have, and as I said, we will keep on building that respiratory franchise now based on the DigiHaler, both in U.S. and in Europe. On the more sort of long-term question of does this give inspiration to do other things, of course it does, and I won't sort of share with you today all our ideas, but just say we do have ideas for how we might be able to put this kind of digitalized patient compliance tracking into products that will then also help communication between patients and caregivers and improve the adherence to therapy and through that improve the clinical outcomes.

59:12 So it's a very exciting year. Thanks for the question. Thank you. And your last question comes from the line of Balaji Prasad of Barclays. Please go ahead. Yeah, hi. This is Steven. I'm for Balaji. Thanks for the questions. Maybe if you could talk more about the outlook for Adobe. I guess could you just provide a little bit more color on What exactly has changed from the outlook provided in August? And then how do you view the additional competition coming into the migraine prevention market over the next one to two years? Thank you. Yeah, thank you very much. So what really changed has been that the total market growth has not been exactly as we hoped for.

59:57 So therefore, we are getting a higher TRX number, as you saw, We are getting a higher NBRX share, so we are getting a higher share of the market, which is good. But the total market has continued to be held back in its growth compared to what we hoped for and planned for, most likely due to COVID and the fact that new therapies simply grow slower when people go less to the doctor. And that's the key driver. The other element that's been a factor is that we've probably seen more, you could say, new scripts come in where we ended up using copay cards and pay downs and that has led to a slower, you could say, ramp up of the revenue per script compared to what we were planning for.

1:00:45 Now next year we expect to see a continuous growth in the NBRX rate and as a follow on from that the TRX rate and as people get on more regular therapy of course they don't get the same initial buy down and that means that the net revenue per script will be going up So we're quite optimistic that we'll see a nice development of the Agile resales next year, also helped by the increasing number of European launches and the very strong initial performance we're seeing there. So thank you very much for that question. Thank you. Thank you, everybody. That concludes our call for today. We look forward to speaking to you today, tomorrow, and the weeks to come. Thank you again for participating. Thank you, ladies and gentlemen. That does conclude your conference call for today.

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