Teva Pharmaceutical Industries (TASE:TEVA) Q4 2018 Earnings Call

0:00 Good afternoon ladies and gentlemen and thank you for standing by. Welcome to today's Teva Pharmaceutical Industries Limited fourth quarter 2018 results conference call. At this time all participants are in 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 please press star 1 on your phone and wait for your name to be announced. I must remind you that this conference is being recorded today, Wednesday the 13th of February 2019. And I would now like to hand the conference over to your first speaker today, Mr. Kevin Mannix, Senior Vice President, Investor Relations. Please go ahead. Thank you, Operator. Thank you, everyone, for joining us today to discuss SEVIT's fourth quarter and full year 2018 financial results.

0:47 We hope you've had an opportunity to review our earnings press release, which was issued earlier this morning. A copy of this press release as well as a copy of the slides being presented on this call can be found on our website at www.tevafarm.com as well as through our Teva Investor Relations app. 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.

1:42 To begin today's call, Cora Schultz, Tevis Chief Executive Officer, will provide an overview of the 2018 performance, recent events, and priorities going forward. Our Chief Financial Officer, Mike McClellan, will follow by reviewing the fourth quarter financial results in more detail before providing an overview of Tevis 2019 financial outlook. Joining CORE and Mike on the call today is Brendan O'Grady, Tevis Head of North America Commercial, who will be available during the question and answer session that will follow the presentation. Please note that today's earnings call will run approximately one hour. And with that, I'll now turn the call over to CORE. CORE, if you would, please. Welcome, everybody, and thanks for listening in. In 2018, we did meet or exceed all the components of our 2018 financial guidance. This meant that our revenues came in at $18.9 billion and we did see a stabilization of the quarterly sales between the third and the fourth quarter. Our non-GAAP EPS came out at $2.92 versus the original guidance which was significantly lower.

2:48 The free cash flow also met the guidance and came in at $3.7 billion. As you all know, it's important that we keep generating cash in order to serve the debt that is still significant. We deployed a new and unified and simplified organizational structure as a way to reduce the spend base and still keep a very efficient commercial organization, manufacturing organization, and R&D organization. We did see a reduction of the spend base of 2.2 billion in 2018. and we also saw a reduction of the net debt by 14% down to $27.1 billion. In the United States, we launched Adobe. We had approval, we had launch, and we are seeing a very, very strong development in the marketplace that we are very satisfied with.

3:44 We're also seeing continuous strong growth of Osteto, the drug that's being used in Huntington's disease and Tardive Dyskinesia. and it continues to gain momentum quarter by quarter. On Copaxone, we did see a decline as expected, but we are maintaining a high volume share in the US and European markets. And in the North American generic market, we did see revenue stabilizing, which is significant since we have had a significant decline in the overall North American generic market over the last five years. and we talked about this already after the third quarter that we were seeing a stabilization. I mentioned it in January at J.P. Morgan and I can confirm it again today that we are seeing a stabilization in the total revenues at around the level of roughly one billion US dollars per quarter for our North American generic revenues.

4:44 If we take a look at the spend base, then you probably all remember that a bit more than a year ago when we announced the restructuring plan, we made it very simplistic. We said, what was the total spent we had in 2017? We're going to reduce that with $3 billion, and we will do it no matter what happens to exchange rates, comparators, all kinds of details to make it simple. Now, we're well on the way to do that. We had a gross reduction of $2.3 billion, and then we had $0.1 billion. Thank you very much. employees since we started the restructuring plan.

5:49 We've also been reducing the manufacturing footprint and in 2018 we have been closing seven manufacturing facilities and 11 more will be closed or divested in 2019. If we take a look at the net debt, there's been a couple of significant movements. First of all, as you probably remember, last spring we did a new issuance. We used the proceeds from the new issuance and from our cash flow to pay down all term loans, meaning that we don't have any term loans, any bank loans right now. And we also moved some of the bonds into a longer maturity.

6:36 The net effect of all of this was a reduction of the debt by 4.4%. If we now turn to, you could say, the future growth drivers, then adjovi is, of course, a key driver. As you all know, adjovi is a drug in a new class of drugs that treat chronic migraine with fantastic clinical efficacy, basically reducing the number of migraine days on average by 50%. in some cases up to 75 to 100% reduction of migraine days. So this is really a fantastic offering to patients. First time in 20 years that there's a real new therapy for migraine.

7:23 We are in this class together with two competitors and we are very satisfied with the patient capture we see. We see that we roughly now capture around 30% of new to brand patients. and we hope of course to be able to maintain this level going forward. A lot of new prescribers are coming every month and we expect to grow the prescriber base on a steady basis over the coming years. So Adobe is very important for future growth and we are very optimistic about the outlook. Another strong driver is Osteto and as I said it's having a high market share in Huntington's disease, in movement disorders in Huntington's, but it's also growing strongly in tardive dyskinesia.

8:15 We have one competitor that's also in tardive dyskinesia, and this is a new market where there's basically been really no therapy approved before Osteto and the competing product. So here we are sort of opening up a new market, and it's a big market, probably half a million people in the U.S. suffer from tardive dyskinesia. So we do expect the patient numbers to keep on growing over many years, and as a consequence of this, we do expect, of course, also that the revenues of Osteto will keep on growing. In 2018, we exceeded the target we had of $200 million, and we expect this, of course, to keep growing going forward.

9:02 If we move to The drag we've had on our revenues for the last year. Then all of you know that it's Copaxone that's the key drag and that the drag is coming due to the expiry of the patent and the fact that we have generic competition both on the 20 since a couple of years and now also on the 40 milligram. If you look at the TRX count, You will see that on a sort of moving annual total, we're probably losing around 20% of the scripts. And if you look at the revenue, you can then deduct that we're probably losing on pricing something in the ballpark of 25%, altogether around 45% on an ongoing basis. We expect this to continue at a similar level during 2019.

9:53 and as a consequence of that we will of course have a reduction in revenue on Copaxone. It's important to say that outside of the US we have a more stable situation. We do have a modest decline in Europe but it's a lot less than what we're seeing in the US and we're very happy to conclude that we still at the end of the year had something like 75% volume share. Of course, this will be somewhat reduced during 2019 and again in 2020. If we look at our focus areas, then a key focus is, of course, to secure the revenue generation. I just explained about Adobe and Osteto. And we have, of course, not removed the resources during the reorganization from those products.

10:43 which is probably why they're doing so well in the marketplace. It's also important to mention that we are also going to launch ADOE in Europe and that we are also working on broadening the geographical base for STETO. And I think I'll just mention here, talking about Europe, that worth mentioning is where we've had a lot of headwinds in the U.S. the last couple of years on compaction and generics. Actually, Europe had its best year ever in terms of operating profit for Tether in 2018. We're seeing a stabilization of the generic business, but of course, as always, it only stabilizes as long as you execute new launches that offset the price loss you have on old products. But that's what we're seeing right now and what we are striving to maintain.

11:37 We continue to have a drag on revenue from Copaxone and from the ProAir HFA franchise where we do see authorized generics being launched. On the expense side, we will have to keep on reducing our total spend. That's why we are having plans to meet the target of a three billion reduction versus 2017. We continue to consolidate our manufacturing sites. by closing and divesting some sites and moving production to other sites that continue to be in operation. We do have a lot of sites and we also have sometimes challenges with GMP inspections and making sure that we have perfect compliance and quality, which is of course what we strive for. Right now we have had an inspection last year in a site in Florida, Davie, where we recently got a warning letter which was expected and we're working to rectify it and we don't see it having any short-term negative effect on our business.

12:44 We are targeting investments in our pipeline. We are targeting investments in biopharmaceuticals and biosimilars and we are constantly optimizing our portfolio of both generic and innovative development projects. On the debt side, We are committed to utilizing our cash to pay down debt and to continue to do so over the coming years. We have 1.7 billion that's scheduled for repayment in 2019, and we will have no liquidity issues with paying down that debt, as we will also not have in the coming years. So basically, we have a financial outlook that is completely in line with the overall plan that we created more than a year ago.

13:29 This is the trough year, as I've been saying since the beginning of the plan. This is the year where we bottom out on revenue and operating profit. And in 2020, we expect to return to growth and continue to do so in the coming years based on the launches of the new products. We have set out three long-term financial targets. I'd like to explain just briefly why these are the most important targets. for the successful financial performance of our company. First of all, we need to generate solid earnings on a long-term basis, and the only way to do that is to have a strong operating income margin. Right now, we are below the 27%, but in the coming years, we will be improving it.

14:20 It's a combination of improving, you could say, manufacturing costs for generics by optimizing our manufacturing base and getting the margin lift from launching new and innovative products that typically have a higher margin than generics. When we then generate the income, we need a high level of cash to earnings in order to have the cash to honor our debt. That's why the cash to earnings needs to be above 80, which we will ensure in the coming years. And of course, one of the ways you ensure that is that you don't go out and buy a lot of stuff A lot of things, a lot of companies will be focused on optimizing our own business rather than adding new businesses to it.

15:06 And as a consequence of these two targets, we will be able to reduce our net debt and we do have a target here that we will have a net debt which will be below three times EBITDA and we expect to reach that within these three to five years. It goes without saying that we are committed to pay down the debt and we do not have any plans to raise equity. Now, having talked about the financial targets, I will now hand over to our CFO, Mike McClellan. Thank you, Gordon. Good morning to everyone. I will now take you through a summary of the Q4, a brief snapshot on the 2018 results, and then follow with our 2019 guidance and some important assumptions there.

15:53 We start with a review of our GAAP performance. We posted a quarterly GAAP net loss of approximately 2.9 billion and a loss per share on a GAAP basis of $2.85 for the fourth quarter of 2018. As I'll detail in the following slides, the GAAP results were impacted mainly by impairment charges and recurring amortization. So if we turn to the next slide, you can see here our non-GAAP adjustments. In Q4, we saw significant goodwill and Intangible Impairments of approximately $2.7 billion, mainly related to the international markets, coming from a decline in value driven by currency declines as well as negative trends in Japan, Russia and Mexico. Also, we see other impairments of approximately $1 billion.

16:40 A large percentage of this is tied also to Japan related to our Takayama plant and our long-listed products. We also have seen a revaluation of intangibles in international markets, US and EU, primarily from the activist acquisition. Restructuring charges of 46 million in the quarter were significantly lower than the first three quarters of 2018, as the majority of the actions have already been recorded. So looking at our non-GAAP performance on slide 15, quarterly revenues were 4.6 billion, a decrease of 16% compared to Q4 2017. That decrease was mainly attributable to generic competition to Copaxone in the U.S., declines in U.S. generic products, and business divestments of approximately $140 million, the majority of which pertain to the women's health, and the remaining was a distribution business in Europe. This was partially offset by new launches in the U.S., mainly generic Sensipar and Cialis, as well as our brands Estado and Aranda Business. Compared to Q4 2017, we experienced a negative FX impact of $100 million quarter on quarter.

17:53 Net of the FX revenues in Q4 2018 decreased 14%. Gross margin was 51.1% compared to 50.9% in Q4 2017. The change in gross margin was driven by an increase in our European generics profitability, the discontinuation of our OTCJV with Procter & Gamble, and higher contribution from new generic launches in North America. This was partially offset by the decline in share and profit of Copaxone and various specialty products in the US as well as the divestiture of our women's health business which had a higher gross margin. Operating profit declined 32% compared to Q4 2017. The decrease is mainly attributable to the decline in revenues and the loss of profit from divestitures and discontinued activities.

18:43 We ended with a non-GAAP EPS of 53 cents which declined 41 cents from Q4 2017 due to the decrease in operating income partially offset by a lower tax rate. We will talk a bit more about the trends in revenue and cash flow later in the presentation. So turning to slide 16 as we guide it in November, exchange rate movements continue to be a headwind on our revenues in the fourth quarter. We see that the exchange rate movements during the fourth quarter of 2018 had a negative impact of 100 million, while the impact on operating profits was much more modest. The main currencies relevant to our operations that decreased in value against the U.S. dollar were the Euro, Argentinian Pesa, Turkish Lira, and Russian Ruble.

19:33 Turning to slide 17, we'll take a look at some of the revenue trends that we've been seeing through the different segments in the last quarters. Our North American generic business had its strongest quarter of the year, supported by the launch of generic Senzapar and the ongoing exclusive launch of generic Cialis. Copaxone saw its largest sequential quarterly drop as the pace of generic erosion picked up, as well as the reserve taken for the 2019 pricing impacts on trade inventories. Pro-air revenues in 2018 Q4 decreased by 21%, compared to 2017, mainly due to the reserve taken in the fourth quarter for utilization shifts in usage and potential return risks following generic competition to the short-acting beta antagonist class of drugs, including an approved generic version of Ventolin HFA, and we have launched our own pro-authorized generic to select customers in January of 2019.

20:35 QVAR in the US dropped down to nine million in the fourth quarter, due to net pricing adjustments. Revenues in Europe and in our international markets were relatively flat compared to the third quarter of 2018, and I'll address both of these markets in a few minutes when I review our assumption for 2019. Turning to slide 18, free cash flow for the quarter was 522 million, a decrease of 182 million versus Q3 2018, primarily due to lower net income a higher level of legal settlements, and a Jovi launch milestone payments. For the full year 2018, free cash flow was $3.7 billion, which benefited from a billion in one-time items in Q1, attributable to the working capital adjustment with Allergan and the legal settlement with REMSA, which we've mentioned in previous quarters.

21:28 So if we turn to slide 19, we will see the full year 2018 performance, as well as the guidance development for the year. Despite expected headwinds, we were able to exceed our initial guidance. Our business benefited especially from lower than expected erosion of Copaxone, as well as our continued efforts to reduce expenses and tax rate favorability. So turning to slide 19, we'll now present some of the main assumptions for our 2019 outlook, which can also be found in this morning's press release. The most notable assumption is our global Copaxone revenues, which we expect to decline by approximately $900 million versus the full year of 2018, mainly in the U.S., but we are also seeing in Europe competition due to the introduction of competing products putting pressure on prices.

22:21 A few slides ago, I spoke about ProAir and the drop we saw in the fourth quarter. We expect 2019 sales to be significantly below 2018, due to the introduction of generic albuterol products somewhat offset by our own launch of an authorized generic version of ProAir. We expect Adjovi to grow nicely in 2019 to approximately 150 million in sales based on the momentum we've seen since our initial launch last September. We also see Ostato growing to approximately 250 million in sales in 2019. Turning to our generic businesses, we see a slight decline in North America due to erosion and volume declines offset by our new launches. In Europe, we expect sales will be impacted by our continued efforts to optimize our portfolio, the full-year effect of the OTCJV dissolution, and continued currency headwinds.

23:17 In our international generics, we will see pressure on 2019 sales from the adverse impact in Japan due to the national health insurance price revision, as well as from the continued erosion of long-listed products. These are products that have lost market exclusivity through the expiration of patent protections and data exclusivity periods. International markets will also be continued to be impacted by currency headwinds. On slide 21, we'll continue with our assumptions for 2019, including the impact of foreign exchange, which we expect to negatively impact sales, mainly in the EU and international markets, by $300 million and operating profit by $100 million versus our 2018 full-year results.

24:04 Now, on this slide, I'd also like to highlight other income, which we expect will significantly decline from the 2018 year total of approximately $200 million. So now turning to our financial outlook for 2019. Based on the assumptions I just reviewed, we expect total 2019 revenues to be between $17 billion and $17.4 billion. With the completion of our cost reduction program, we expect non-GAAP operating income to be between $3.8 billion and $4.2 billion, while EBITDA is expected to be between $4.4 and $4.8 billion. Using a share count of approximately one point We expect earnings per share to be in the range of $2.20 to $2.50.

24:54 Lastly, 2019 free cash flows expected to be in the range of $1.6 billion to $2 billion. This now concludes my presentation. We will now open up the call for questions and answers. Operator, if you'd please ask the first question. Thank you. Our first question comes from the line of Jason Scurvery. Your line is open. Hey, good morning, and thank you for taking my questions. I guess just first question on 2020. Can you talk a little bit about how you drive a return to growth? There's still a pretty fair amount of tax zone in the 19 number, so if you can just talk a little bit about how you see it. a broader return to growth. And secondly, just on QVAR, consensus for 2019 is about 227 million. 4Q sales are annualizing at about 35 million.

25:44 So just can you provide a little bit of color on how you're thinking about QVAR in 2019? Thanks. Yes, thanks for those two questions. I'll address the 2020, and then Brendan will give you some color to what's been happening with QVAR. So you would say if you oversimplify the situation, Then you can say, as you mentioned, that the drag on revenue or pressure on revenue from continued reduction in compaction sales, and let's just assume that they're dropping at around 45%, that means that the absolute drag per year goes down. So, whereas we had a big drop this year, we'll have a smaller drop in terms of absolute drop in the current year, and again next year it will be smaller again. Now that drop is being offset by the growth of new products, the growth of Osteto, the growth of Adjovi, and the growth in all over business in terms of new generic launches.

26:46 So if you look at that total balance, then it's pretty clear that this year there's more being lost on Copaxone than is being gained on Osteto, Adjovi and so on, whereas in 2020 will get to a balance where we believe that at the end of the year we'll see, you know, that we are significantly growing more than we're losing, and that will lead to a marginal growth in revenue and operating profit in 2020. And then once you get into 2021, of course, the loss on compaction is getting close to zero, and that means we get the full benefit of the continued growth of Stato, Jovi, and other parts worldwide. So that was on the 2020. On the Q bar, Brendan, could you comment on what We've seen with QVAR and what we expect going forward.

27:33 Yes, sure. And good morning, Jason. So with QVAR, obviously last year we transitioned from the MDI product to the ReadyHaler product. And that transition occurred in the pipe during the first quarter. And it took a little bit longer for the MDI to bleed through the system. And so you saw some prior period adjustments, which is why the net sales ticked down throughout the year. In the fourth quarter, we got significant Medicaid claims that came in, which further impacted the net sales. But we do see QVAR's share returning to about 22%, which is a very good share for QVAR. And if we continue to hold that share throughout the year, you'll see QVAR in that range of $227 million or so, as you noted.

28:28 Next question, please. The next question comes from the line of David Maris. Please go ahead. Your line is open. Good morning. Mike, maybe a broad question. When you look at the street assumptions of, I don't know, $600 million or $800 million more in EBITDA for 2019 versus your current or your new guidance, where do you see the largest difference And then separately, were there any expenses that were maybe bulked up in 2018 other than maybe a little bit of Osteto or Jovi expenses that aren't being repeated?

29:15 And what are the scale of those expenses? Thanks. Yeah, so I'll take a little bit of a stab at where we see differences versus the street expectations. And we did mention some of these headwinds in our presentation at J.P. Morgan. I think our COPAX zone is a little bit below what the expectations are. Definitely Crowair, we saw in January that there was a launch of an authorized generic product. to one of our competitors and we have to look at this class as being generically written for almost the majority of the scripts. So that's causing a big change and we see a significant decline coming there.

30:00 I think we also see that we are gonna meet the three billion cost saving targets, but I think some of the expectations we would go even a little bit further than that. And then again, we don't have a repeat of this other income that was out there in 2018. and that's putting a little bit of a pressure. So I think those are the main things and you combine that with the currency impact. We've seen that in the second half of 2018 and we see that continuing into 19 being a continued pressure. And when we look at some of the external models, I don't think the same effect has come through as strong as we see it. So those are the main things. In terms of expenses, we did see rather flat operating expenses Q4 versus Q4 but you have to remember that in Q4 of 2017 we actually had a period where we reversed the year-to-date bonuses as we did not pay a 17 bonus in 18. So the Q4 last year was a little bit artificially deflated. We're still on a good path but the majority of the actions have been taken out and we will start to see the spend base in the second half of 19 start to to stabilize after some decline in the first half. Those are the things that I see.

31:20 Any other points you want to ask, we can take from there. I guess just as a follow-up on a point of guidance, I've gotten a number of emails already that say, okay, well, this just seems sandbagged. And So the stock is down 12% pre-market. Your thoughts on guidance, conservatism, and how conservative do you think this is on the low end? What could go wrong that would get you to that low end? So in terms of the overall guidance, guidance in my mind needs to be realistic and conservative. It's not a sort of average game where if you get it right every second time, then it's fine.

32:13 So you can't come out with a guidance that you will meet 50-50. So you need to have some credibility and some assurance that you can meet your guidance. And I think that's very important when we discuss it. It's also important that you are in the range of what can realistically happen and that you have a downward part of your guidance That covers if most things go wrong. And you could say there's a lot of moving parts here. We talked about some of them. You never know how fast a product goes generic. We are assuming that compaction stays on the current trend. It could go faster. It could go slower. You never know how fast you ramp up a product when you have two competitors.

32:58 Adobe could go better. Adobe could go worse. so you have a lot of moving parts and then when you give a guidance you take an educated estimate of all these moving parts and you explain the assumptions you have and then of course if some of the assumptions turn out to be worse or better that affects the actual result but that's why we explain the assumptions in our guidance. Next question please. Thank you. The next question comes from the line of Louise Chen. Please go ahead. Hi. Thanks for taking my questions here. So I had a few. My first question was that you noted 2019 as your trough year. So how should we think about the upward inflection in 2019?

33:43 Can you give us a sense of the magnitude, even if it's just qualitative? And then the second thing is, what do you include in your guidance for 2019 new launches in the U.S. and outside the U.S. for generics? And then just last here in terms of longer vision for Teva, Is it brand? Is it generic? What are you focused on going forward after this trough period? Thank you. So I think, Mike, if you take the first question and Brendan take the second, then I'll take the last one. Yeah, so we do see 2019 as the trough at this point. We will see a return to revenue growth in 2020, and I would expect as well an operating profit growth. But we're probably talking single digits into 2020 and then starting to accelerate beyond there. We still have potential drag in 2020 depending on how the Vendeka situation in the U.S.

34:35 turns out. So that's a little bit of a wild card in that. And then, of course, currencies could be positive or negative versus the 2019 depending on how the markets develop. And so in regards to new generic launches for 2019, I think we see 2019 shaping up very well potentially. Of course, any new generic launches are a mix of legal, technical, and regulatory success, so you never really know where that's going to play out. But we do have some significant launches planned for 2019, so I think that overall we should see a fairly good year as far as new generic launches go. And longer term after 2019, our vision is to be and continue to be leaders in generics worldwide.

35:22 and to build a strong pipeline and have success in biopharmaceuticals, meaning in both biosimilars and innovative biologics. And you could say if you want to look at what's been coming, then of course there's the rollout of adjovi worldwide with the European launches coming up this year and the rest of the world in the coming years. There's an exciting development project that we have together with Regeneron on pain therapy. and if Fasinumab turns out to come out with good safety data and it gets approved, then that's an exciting possibility to put people on a non-addictive pain therapy which will be really, really good and this is a product we will be together with Regeneron then launching both in the U.S.

36:13 and worldwide. So there's a lot of exciting things happening. We have a broad pipeline also of biosimilars that we'll be launching in the coming years So it will be in those areas of continued leadership in generics, both simple and complex generics, and then biopharmaceuticals. And to add to the 2019-2020 point, we would see the inflection actually starting in the back half of 2019 through the quarterly progression. Thank you. Next question. The next question comes from the line of Greg Gilbert. Your line is open. Thanks. Two points of clarification on 2019 guidance on a couple potentially material items. One is, how are you treating the generic risk to triand and whether and when that happens? And on the positive side, are you confident in launching or are you assuming you're launching generic Forteo later in the year?

37:08 And then, Cora, I certainly understand why you don't want the company to spend cash flow and operational time on large acquisitions. What about licensing deals or smaller bolt-ons that will help further your franchises, particularly on the branded side? You have flexibility to do that, and are you focused on that? Thanks. Okay, so I suggest that, Mike, if you cover trend, you bring them cover for two, and then I'll answer the last question. Yeah, so our guidance doesn't include a material impact from Trianda generics because it's not likely they'll launch before the very late part of 2019, so there's just a minor impact. If we do see that the orphan drug exclusivity for Bendecca keeps the Trianda generics off the market, there could be a slight upside to what we put forward in 2019, but we don't expect it to be material. That is actually being handled by our partner Eagle as it is their marketing authorization for Bendecca and we're not directly involved in the legal discussions there.

38:11 In regards to Proteo, it is in the second half of the year of our plan. It continues to proceed as anticipated. We have it appropriately risk adjusted in the overall numbers but it continues to move along. In terms of acquisitions, you're absolutely right. We have no plans Thank you very much. to local deals on complex generics, other opportunities that might arise that make sense. So it's not that we're not active in the business development area.

39:04 It's just not big corporate deals. It's specific product in licensing we're talking about. Thank you. Next question. The next question comes from the line of Chris Scott. Please go ahead. Your line is open. Great, thanks very much. I just had a couple of questions on Jovi, if I could. I guess the first was, can you just update us at this point on your expectations for gross to net for the drug and how we should be thinking about the amount of free product that's being provided in the market? I'm just trying to get a better sense of how to ramp the 4Q sales we just saw relative to the 2019 outlook for that drug. And then the second question on that same topic, you've obviously seen a very strong uptake so far for the product, but can you just talk about the impact that you see from being, I think, your non-preferred on two of the national formularies?

39:51 How does that factor into how you're thinking about the competitive landscape for the product at this point? Thank you. So just a little bit on the growth to net. So, you know, as Joby continues to evolve throughout the year and as we get to 19, one of the things that I think is important to keep in mind is that Payer access is going to continue to be fluid. A lot of the discussions are still ongoing. There's payers that made decisions early in the fourth quarter of 2018. They're going to look at it again in early 2019. I think you'll see some decisions that will change mid-2019. So I don't think the payer landscape really solidifies until probably 2020. and of course when you have three products like this that all have very similar efficacy all launched at the same time, it makes for a rather aggressive payer environment.

40:39 So it will continue to be fluid. I think that we have discussions ongoing with many of the payers currently. I think that some of the announcements that have come out, there's still discussions that are ongoing. We are not really excluded anywhere. So this is all a balance and you need to balance the access with the appropriate amount of discount in gross to net. So I would say that as you look at Ajovi today, we have about 60% coverage in the commercial sector, which I think is fairly good. We continue to add plans throughout the first quarter. We've got some wins just recently. And overall, I think that we'll have the appropriate access that we need to hit the number that we're looking to hit, which I think Mike communicated earlier, around $150 million.

41:34 Next question. Next question comes from the line of Randall Stanicki. Your line is open. Great. Thanks, Cora. Are you guys still committed to net leverage below four times by the end of 2020? And the reason I ask is because wouldn't that imply a notable step up towards $5 billion in EBITDA if that's the case? And then secondly, can you just comment on the U.S. generic gross margin? How much of a step up or a ramp are we going to see from that the pruning of $400 million in unprofitable revenue there I would think should add several hundred basis points to the U.S. gross margin. Can you just confirm if that's the case and maybe give some directional color going forward? Thanks. So your first question on the four times net debt to be died end of 2020, you're absolutely right that it takes a bit of strong performance in 2020 to get to that at the end of 2020.

42:31 So I won't be able to tell you firmly that we will for sure hit it exactly at the end of the fourth quarter of 2020. It could be that it's slightly later. What's most important is, of course, our long-term financial target, which is three times, so going below three times, net debt to EBITDA, and we'll be progressing towards that over the next three to five years. There'll be no change in our strategy. So the exact timing remains to be seen. The key important driver here is that we are driving towards a constant debt reduction over the coming years. When it comes to the gross margin, then you could say when you look at the total picture, which is I guess what you can see in the numbers, then we have a drag on the gross margin from Copaxone sales being reduced.

43:18 The fact that we are reducing the price and the volume of this high margin product means that there's a negative effect on our gross margin. We've seen a positive effect on our generics, which goes the other way, and we will continue to see a marginal positive effect on our U.S. generics margin in the coming years. If I could add to the debt question, first of all, we expect to pay down the $1.7 billion maturities in July through operating cash flow and cash on hand. We're not expecting to refinance. And second, we are... actively starting discussions with our core banking group to look at reshaping our revolving credit facility to get out in front of getting it to the 12-month window of being current.

44:04 So we're working on that, and we hope to conclude that in early 2019. Great. Thanks, guys. Next question. Thank you. The next question comes from the line of Vermeer Duvin. Your line is open. Great. Thanks so much for taking the question. Just maybe following up on the Jovi commentary and questions, just you mentioned Europe also is a target market here, and I know we saw some pushback from NICE on Imavig. So just trying to think about what your expectations there are in terms of timing of launch and sort of the pace that we should expect there, and also maybe net pricing as compared to what we're going to see in the U.S. Thanks. Thank you for that question. We are, of course, expecting to have the final new EU approval very soon. We have a positive opinion, so that means, you know, within two months we will have the actual EU approval.

44:59 And the way you launch in Europe is really market by market, and that's not because you don't have the approval, but because you need reimbursement. And reimbursement is, of course, something you settle with the governments, the healthcare systems in each of the countries. So what you will expect is... In the markets where it's relatively easy to launch at a good and reasonable and fair price compared to the value of the product, you will see early launches. So this year, for instance, countries like some of the Scandinavian markets, countries like Germany, you will see us launching the product. In other countries, it might take negotiations for one to two years before you end up seeing the launch. If we look at our competitors, Thank you very much.

46:16 especially in Southern European countries but also in UK where you have local organizations even that you get into negotiations with. So we will expect a solid and positive uptake but with a slower ramp up than you see in the US but with a good and healthy operating margin on the business. Thank you. Next question. Thank you. The next question comes from the line of David Amselem. Your line is open. Thanks, just a couple. So first, can you talk about just product-specific questions? One is on EpiPen and on the generic and how you're thinking about the ramp of that product and how the market dynamics for that product will play out. And I also wanted to circle back to Forteo.

47:06 I know it's in the guidance and risk-adjusted, but I did want to get your thoughts on the and the potential for other entrants and how crowded that market will be. This is more of a 2020 question and beyond, but I wanted to get your thoughts on the extent to which that's going to be a sustainable stream of cash flows. Thanks. David, thank you for the question. I'll address EpiPen first and then I'll come back to Forteo. As far as EpiPen goes, of course the market is still in an overall shortage of epinephrine and we're continuing to manufacture and build more supply. I think you'll see us come into a more normal supply by the end of the first quarter, early second quarter and of course then we launch or we'll have EpiPen Jr.

47:58 late second quarter in the June timeframe. So we continue to build supply. It's getting better and we have it out there and it's available. So it's available for customers if they need to order it and we are making nice progress at EpiPen. Is it, in your question around Forteo, you know, we'll wait and see. Forteo is not an easy product to make and we'll see whether the competitors commit to the market in 2020. But overall, you know, we feel pretty good about Forteo. We feel pretty good about the runway that we have with it. Okay, then if I may sneak in just another one. In terms of other competitors, key launches that you're willing to call out. Are there any that we should think about that should be on our radar this year or early next year, sort of limited competition or exclusivity opportunities? Thanks.

48:55 Yeah, I mean, I think you can think of a couple other ones. I think that, you know, Restasis is hopefully a launch force this year. We'll see where we go with the FDA. We're waiting with FDA action on that product. So that could be a nice product as well as the other one would be NuvaRing that we're looking at as well this year. Thanks. All right. Next question, please. Thank you. The next question comes from the line of Ken Cacciatore. Your line is open. Great. Thank you. Just wanted to ask back again on Adjovi and Osudo where you seem to be doing really well and performing very strongly. Just specifically on Adjovi, for understanding and talking to some consultants that Aimabig may be suffering from a bit of higher constipation than they originally expected.

49:43 So just wanted to understand in the marketplace right now how much you're benefiting from that Abigman issue. You think it is, or what are you hearing from your sales force as they continue to market Adobe? And then on Ostito, maybe if you could break down the percentage HD versus TV at this point, and any nuance you can give us on potential dosing advantage, what's going on in the TD marketplace. Again, you seem to be showing nice acceleration for that product as well. Thank you. Thanks for those questions, Ken. I'll give just an overall comment and then Brendan can give some more details. It's, of course, a well-known fact from the labeling and from the clinical trials that imovic has constipation as a safety issue and that's been documented.

50:32 When it then comes to anecdotal evidence, it's also quite clear that it is, you could say, an unpleasant side effect, desired side effect to have. And in a three-player game where you have one product that has it and you have two products that do not have it because they have a slight different mechanism of action, then long-term I believe it will be a benefit for us that we don't have this negative side effect. It's difficult for us to comment on any specifics because we don't have insight into the ongoing safety follow-up and database on that. But for sure there is a product differentiation here which we think will work to our benefit both in the US and in the European market.

51:17 And then I'd also just like to say that on tardive dyskinesia, this is a brand new marketplace and there's never been any drugs before to treat tardive dyskinesia. So it's a huge medical benefit that we are bringing to a lot of people, and I think it will be growing for a long time. But maybe, Brendan, you can give some more details. Yeah, so just first a quick comment on Adobe. So I think that everything that CORE said regarding Adobe is obviously accurate. But the other part of it is that with three of these products launching in relative close proximity, and with Amo Bigel first, I think when the other two were approved with Adobe, I think that practitioners and prescribers are going to look at some of the different products and going to use some of the different products to see how they actually result in the real world in patients and see if there are differences.

52:13 We designed Adobe or the launch of Adobe to make it really easy for physicians to use and access. We put samples in the office, of course the pre-filled syringe is a very simple way to inject the product so ultimately we were very happy with the uptake there that we're seeing on adjovi and I think that our significant presence in the headache centers and with neurologists bodes well for our early success. So we're happy with where we are, we're going to continue the launch trajectory around adjovi and we're very happy with what we're hearing back from physicians and patients regarding the overall effectiveness of the drug. As we talk about Osteto, I'll just add that we launched Osteto early first for Huntington's disease and then came in the market about six months later for tardive dyskinesia. And as Cora pointed out, that's a very underserved market and it's a very large market. So we're happy with the potential that we see for tardive dyskinesia.

53:08 We have significant Salesforce presence around that. We'll continue to drive that indication in that market. Thank you. Next question, please. Thank you. The next question comes from the line of David Rissinger. Your line is open. Yes, thanks very much. I have a couple questions. First, could you please comment on the international business outlook? It appears that the international business is performing worse than expected, and I know that you have emphasized the U.S. stabilization but I didn't hear you previously talk about international weakening.

53:56 And then second, with respect to manufacturing, I think, Carl, you said that when you had recently joined Teva, you said that if you started the company from scratch, you'd have 12 facilities globally. I think the company's targeting to be at about 65 Could you help us understand why that won't go to 45? Thank you. Thanks for those two questions. If we take the international business first, then it's correct that we are having some headwind right now, which is what we have been reporting and what we've also included in our guidance. And I would call out two key things. One is the pricing reforms in Japan. The pricing reforms in Japan had led to a bigger drop in the price on what's called long-listed products.

54:51 So these are kind of like branded generics, you could say. And there's a tradition of a high use of those in Japan. And the authorities are pushing down pricing on these products more than they've been doing until recently. So that's a negative. Then there's the whole currency element where you could say there's a lot of and many Latin American countries have seen a weakening of the currencies. So you could say it's really not the underlying volume. It's really not the underlying demand in the market that's causing us problems. It's these specifics on pricing and currency that is the main driver.

55:39 On the manufacturing side, you quoted me absolutely correctly. And of course, one thing is how you do a greenfield thing. I think most companies do not have a manufacturing setup that is the same as they would do if they could do it from scratch. And that's definitely not the case for us. And we did start, or we didn't start, but when I joined the company, we had around 80 manufacturing facilities. And as I mentioned today, we have a closed seven and we're about to close eight. and a dozen more, so we'll probably get down to around 60 at the end of the restructuring. But that, of course, doesn't mean that we won't do any more going forward, but it's very complex when you close down existing facilities because you have all the regulatory approvals, have all the validations, sometimes you have specific equipment, so it takes time.

56:31 But we will, of course, continue to consolidate and improve efficiencies in our manufacturing for the next many, many years. But you will not see the same dramatic reduction as you see in the restructuring period. You will see a more modest reduction in the number of manufacturing sites. And you will see us striving to improve the gross margin of our generics business on a constant basis. Yeah, let me add one quick thing to the international markets. There is about a 50 million impact of divestments. We still had women's health sales in the first half of 2018. and we have divested recently the TevAdapter business which was announced last week. That'll be another about 30 million direct. So overall about 50 million is related to divestments of business.

57:19 Thank you. Next question please. Thank you. The next question comes from the line of Ronnie Gale. Your line is open. Good morning everybody and thank you for taking my questions. I have three if I can sneak them in. First, We just finished analyzing the 2019 formulary coverage in multiple sclerosis, and it seems there's been quite a big shift starting 1Q19 about access. Just so we are ready for this idea of volume versus share loss, it looks like you lost coverage in TRICARE, United, and ESI. Is this what you're seeing? Is this actually the case here? What we're seeing externally is not always right. And if so, should we be just ready for a significant more volume loss in 2019? Second, we've heard that post the ESI Cigna close, there's been a series of pretty sharp demands for concession from all biopharma on the branded side. Is this true? How does this impact your branded product trajectories?

58:19 And does that also extend to a CVS close of Aetna? Essentially, are we seeing the consolidation on the insurance side coming in for further demand for especially older products in competitive markets? and third, more on the financial side, you're kind of guiding to like $1.8 billion in free cash flow in 2019. This is, I guess, the bucket from which you pay your debt down and I'm kind of wondering if that number, just given how much it's lower than 2018, includes any assumptions about pay down of some sort of penalties or fines from some of the existing investigation or this is kind of like a pure business question decline from which we have to start our 2020 projections?

59:05 So, Ronnie, I'll answer one and two, and then I'll let Mike take number three. As far as overall Capaxone formula access, you know, those are things that we've built into the plan this year, and I think you can see in our numbers for Capaxone we've worked in. We anticipated TRICARE and both UnitedHealthcare, and I think that Express Scripts and which will bridge us to the next question. Express Scripts is always a little bit more of a tricky answer as it goes there. So I wouldn't necessarily assume depending upon what you see in any particular formulary based on different agreements we have with numerous payers that just because you read something in the formula is actually how it is going to play out with the various covered lives in any one particular PDM or payer.

59:51 as a response to your question with ESI and the meeting that they had. I wasn't there. I think that meeting occurred last week or the week before last where they brought manufacturers down and kind of rolled out to them the new landscape with the ESI and Cigna merger or acquisition as to what their expectations are. But I've obviously heard we're studying what they've communicated and what their asks are. I think that it's pretty aggressive and I think that potentially in overreach there may be some CMS, Medicare Best Price implications to consider and I think that there will be probably significant manufacturer pushback from what I know of it.

1:00:38 But I need to study it a little bit more and get with my team. It's fairly new and we're looking at the overall impact. So with that I'll hand it over to Mike and he can answer the cash flow. Yeah, so if we look at the difference between the 3.7 that we actually realized in 2018 and say the 1.8 midpoint of the guidance, about a billion came off from special items that I mentioned earlier, the Allergan working capital and the REMSA compensation. Net income is down roughly 600 to 700 million, so that drags. We will see less restructuring cash out, but we will have Thank you very much. in 2019. So we'll have a $300 million to $400 million cash drag that should dissipate over the first couple quarters of 2019.

1:01:48 So that's where we get to the $1.8 million, which I think that cash drag on the rebate payments is probably the difference between what you would expect in the external models. Great. Thank you. Next question. Thank you. The next question comes from the line of Liv. Abraham, your line is open. Good morning. Coral, could you update us on your thoughts on opportunities to rationalize the cost base beyond 2019? You talked a little bit earlier about some opportunities on the plant side. Anything else that you can comment on and can we expect that three billion number to potentially grow? And then secondly, Ana Jovi, apologies if I missed this, but can you update us on What percentage of scripts are being written for the once quarterly formulation? Thank you.

1:02:43 Yeah, so first in terms of the spend base reduction, then once we've completed the current restructure, we will have reduced it by $3 billion. And, of course, there are still opportunities. The majority of those will probably be on the gross margin. The reason I'm saying so is that when I look at our... R&D spend, our commercial spend, so sales promotion and so on, then we are actually very competitive when we look at the situation at the end of 2019. So the majority comes from the cost of goods sold from the gross margin. We do have a very high level of cost of goods sold due to the fact that we have very, very high generic volumes.

1:03:28 And as I said before, this is something we'll be working on long term. There's no really quick fix to this because it's very technically complicated. We do serve more than 200 million patients every day. We do make more than 30,000 different products on an ongoing basis. So it's a big puzzle, but there's certainly possibilities to improve it. Based on my previous experience, and I won't say that we are having a firm number yet. We'll, of course, tell you about this a year from now. I would say that you can expect that you can improve the gross margin some 50 to 100 basis points per year if you have a really good optimization program in place. When it comes to Adobe and the quarterly dosing, we're seeing that roughly in any given week, roughly 10, 11% of the scripts are for quarterly dosing. That basically means that 30% of the patients, if you look at it from that point of view, are on the quarterly dosing.

1:04:28 and the reason for the difference is of course that if you get a script for the monthly dosing, that counts as one script. If you get a script for the quarterly dosing, it counts as one script but covers three months. So therefore we have this thing we call normalized script numbers, normalized patient numbers and in those numbers you could say roughly 30% of the patients are on the quarterly dosing. Thank you. And last question. Thank you. The last question comes from the line of Esther Rajavili. Your line is open. Thank you for squeezing me in. I had one quick one on Osteto. Can you help us understand the sequential change in Osteto patient numbers versus reported revenues for the quarter? And then also you mentioned growth in OUS markets for Osteto.

1:05:15 So if you can provide any specifics on what your plans are there, that would be helpful as well. Yeah, so if you want to reconcile the actual growth in patient numbers with the actual revenues, then, of course, there's a little bit of uncertainty on the patient numbers. And when you look at the actual revenue, there's always the swings, you would say, in the pipeline in the sense that we ship products to wholesalers, to specialty pharmacies, they ship it to patients, and there can be some minor fluctuations there. If you sort of average it out and look at a longer time series, then you see there's a very strong correlation between the growth in patient numbers, the growth in scripts, and the growth in revenue. And going forward, we do expect Ostetta to be growing strongly. You saw in our assumptions for 2019 that we're assuming sales around 350 million, up from the roughly 200 million we did last year. So we expect Ostetta to keep on growing.

1:06:18 and the reason why we are also optimistic about the long-term growth is that if you compare our actual patient numbers to the fact that more than 500,000 Americans suffer from tardive dyskinesia, then that gives you a hint about the long-term potential of the product. Yeah, when it comes to the ex-US markets, there's not going to be any material impact in the near term as we're still looking at the regulatory path to get the product on the market. So it's not something that really will have a big factoring in the Austato uptake in the coming years. Got it. Thank you. All right. Thank you, everybody. I appreciate everybody participating in the call today. We'll be around today, tomorrow, and the coming weeks to take any questions, and we look forward to seeing you in the future. Thank you.

1:07:08 Thank you ladies and gentlemen. A recording of this conference is available by dialing 00443333009785 with the access code 1174907. This does conclude the conference for today. Thank you for participating. You may all disconnect.