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Teva Pharmaceutical Industries (TEVA) Q3 2017 Results - Earnings Call Transcript

Seeking Alpha logo Seeking Alpha 11/2/2017 SA Transcripts

Teva Pharmaceutical Industries Ltd. (TEVA)

Q3 2017 Earnings Call

November 02, 2017 8:00 am ET

Executives

Kevin C. Mannix - Teva Pharmaceutical Industries Ltd.

Yitzhak Peterburg - Teva Pharmaceutical Industries Ltd.

Michael McClellan - Teva Pharmaceutical Industries Ltd.

Kåre Schultz - Teva Pharmaceutical Industries Ltd.

Sol J. Barer - Teva Pharmaceutical Industries Ltd.

Dipankar Bhattacharjee - Teva Pharmaceutical Industries Ltd.

Robert Koremans - Teva Pharmaceutical Industries Ltd.

a typewriter on a table: Earnings Call Transcripts © Provided by Seeking Alpha Earnings Call Transcripts

Michael R. Hayden - Teva Pharmaceutical Industries Ltd.

Hafrun Fridriksdottir - Teva Pharmaceutical Industries Ltd.

David Stark - Teva Pharmaceutical Industries Ltd.

Analysts

Liav Abraham - Citigroup Global Markets, Inc.

Timothy Chiang - BTIG LLC

David Maris - Wells Fargo Securities LLC

Marc Goodman - UBS Securities LLC

Christopher Schott - JPMorgan Securities LLC

Umer Raffat - Evercore ISI

Jami Rubin - Goldman Sachs & Co. LLC

Gregg Gilbert - Deutsche Bank Securities, Inc.

Ken Cacciatore - Cowen & Co. LLC

David R. Risinger - Morgan Stanley & Co. LLC

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Teva Pharmaceutical's Third Quarter 2017 Financial Results Webcast. At this time, all participant lines are in a listen-only mode. During the presentation, we will have a question-and-answer session. I must advise you the webcast is being recorded today, Thursday, the 2 of November 2017.

I would now like to hand the webcast over to your first speaker today, Kevin Mannix, Senior Vice President of Investor Relations. Please go ahead, sir.

Kevin C. Mannix - Teva Pharmaceutical Industries Ltd.

Thank you, Kelam. And thank you, everyone, for joining us today to discuss Teva's third quarter 2017 financial results. On the call with us today are Dr. Sol Barer, Chairman of the Board; Kåre Schultz, our President and CEO; Dr. Yitzhak Peterburg, our outgoing CEO; Mike McClellan, Interim Chief Financial Officer; Dipankar Bhattacharjee, Global Generic Medicines; Dr. Rob Koremans, Global Specialty Medicines; Dr. Michael Hayden, Global R&D, Chief Scientific Officer; Hafrun Fridriksdottir, Global Generics R&D; Dr. Carlo de Notaristefani, Global Operations; and David Stark, Chief Legal Officer.

We will start the call, which will last approximately one hour, with a review of the quarter and revised 2017 outlook by Yitzhak and Mike, followed by remarks from Kåre and Sol. We will then open the call up for question and answers. Please note that Kåre will not be participating in today's question-and-answer session.

A copy of the slides of the presentation can be found on our website at www.tevapharm.com as well as on our Teva Investor Relations app.

During this call, we'll be making forward-looking statements, which are predictions, projections, or other statements about future events. These estimates reflect management's current expectations for Teva's performance. Actual results may vary, whether as a result of exchange rate differences, market conditions, or other factors.

In addition, the non-GAAP figures exclude the amortization of purchased intangible assets, costs related to certain regulatory actions, inventory step up, legal settlements and reserves, impairments, and related tax effects. The non-GAAP data presented by Teva are used by Teva's management and Board of Directors to evaluate the operational performance of the company to compare against the company's work plans and budgets, and ultimately, to evaluate the performance of management.

Teva provides such non-GAAP data to investors as a supplement of data and not in substitution or replacement for GAAP results, because management believes such data provides useful information to investors.

And with that, I will now turn the call over to Yitzhak. Yitzhak, please.

Yitzhak Peterburg - Teva Pharmaceutical Industries Ltd.

Thank you, Kevin, and hello, everyone. I would like to start by offering a very warm welcome to call.

In just a few minutes, Mike will provide a thorough overview of our third quarter results and outlook for the remainder of the year.

Over the past nine months, it has been an honor to serve as Teva Interim CEO, especially during such a challenging period. I am very much appreciated having the full support of Sol, my fellow Board directors, and the entire management team to take the necessary, important, and in some cases, very tough measures to help bring Teva back on track.

I'm pleased with the progress we have made to date on key assets in our specialty pipeline, which included the approvals and launches of AUSTEDO for the treatment of chorea, associated with Huntington's disease and tardive dyskinesia in adults. We also took measures to expedite the review of our recently submitted BLA for fremanezumab, an anti-CGRP monoclonal antibody.

During the quarter, we acquired the U.S. FDA priority review voucher to allow us to accelerate the review time for fremanezumab, which if approved, will be among one of the very first to enter the market in a new class of drugs for the preventive treatment of migraine. We are thrilled about the potential to make this therapy available to the millions of people around the world who live with the debilitating effects of migraine.

These achievements also represent an important part of the company's ongoing efforts to address the erosion of our largest product, Copaxone, due to generic filers.

This erosion accelerated significantly last month following a competitor's approval and the launch of a generic Copaxone 40 milligram in the U.S. We have been preparing for this transition through our investment in geographical product and pipeline diversification. And this investment will certainly take time to bear fruit and to begin to contribute steadily to our cash flow.

We've also moved forward with the divestitures of several products and businesses, including yesterday's completed sale of PARAGARD and soon to follow Plan B One-Step to allow us to progress the repayment of our debt. We have now signed contracts to divest non-core assets that will generate approximately $2.3 billion in net proceeds with the majority expected to be collected in 2017.

I truly believe that Teva possess unique capabilities and strengths that can serve as tremendous assets, while it looks to meet the demands of an evolving global industry (5:47). I believe that the company will be able to step out of this situation as a better and stronger company. And it will do that under the leadership of Kåre, who I wish every success in the future. I'm looking forward to working with Kåre as a member of our board of director, where I now return to.

Thank you all. It has been a privilege. I will now turn the call over to Mike to provide more insight into the numbers. Mike?

Michael McClellan - Teva Pharmaceutical Industries Ltd.

Thank you, Yitzhak. Good morning, everyone, and please join me as we review the results of the third quarter.

So revenues this quarter were $5.6 billion, up 1% compared to Q3 of 2016. While we had another month of Actavis this quarter as well as the revenues of Anda, which was consolidated in Q4 2016, there have been continued headwinds in the Generic business, while our Specialty business was impacted by the loss of exclusivity of several products. We'll dive into the revenue trends in the coming slides.

On a non-GAAP basis, operating income was $1.5 billion, resulting in $1 EPS, while on a GAAP basis, operating income was $0.4 billion and EPS was $0.52.

As in Q1 and Q2 this year the effect of our mandatory convertible preferred shares was anti-dilutive, so the number of shares remains at 1.017 billion.

Now focusing on our non-GAAP P&L for the quarter. Operating income is down 18% and EPS is down 24%. The profitability of the company was down to 26.2% from 32.2% in 2016 Q3. This reflects a lower gross profit of 53% in the quarter, compared to 61% in the same quarter of the previous year. This is driven by several factors, the inclusion of Anda distribution business, as well as lower margins in the Generics, specifically in our U.S. Generic market. This was partially offset by reductions in expenses, mainly in our R&D and sales and marketing.

Our cash flow from operations was over $1 billion, landing at $1.1 billion in Q3 2017. And this quarter had no significant one-time payments, as we had seen in the first half of the year.

For our non-GAAP adjustments for the quarter, they were just under $0.5 billion net. We had impairments of over $400 million, mostly relating to assets acquired as part of Actavis. Amortization expenses were $357 million, which is in line with our current run rate.

During the quarter we also acquired an FDA priority review voucher, as mentioned by Yitzhak, which will allow us to accelerate the review time of fremanezumab, one of our key Specialty assets for the treatment of migraine. You can see it here as an R&D expense.

Finally this quarter, we utilized historic capital losses related to the Actavis acquisition, resulting in an unusually large tax effect in our non-GAAP adjustments.

Starting with the balance sheet. Total assets at September 30 were $86.1 million, a slight reduction from June 30. The largest move was an increase in other current assets, reflecting the transfer of the assets related to our Women's Health business into a held-for-sale position. This includes an allocation of goodwill following the announcement of the upcoming divestments of these assets. As you may have seen yesterday, we closed on the first of these divestments with PARAGARD.

On the liability side, as of September 30, 2017, our debt was $34.7 billion, compared to $35.1 billion at June 30, 2017. The decrease was mainly due to the $600 million of debt repayments on our five-year term loan, our revolving credit facility, and other short-term loans, partially offset by foreign exchange fluctuations on our euro-based bonds, which raised the debt by $200 million. 8% of our debt is now classified as short term, compared to 4% at June 30, 2017, mainly due to changes in the current portion of our long term debt.

Foreign exchange impacts – impacted our results. With the exception of the Venezuela bolivar, were positive on the top line and negligible on operating income. In the third quarter of 2017 we continued to update the exchange rate we used to translate results in Venezuela and decided to use the Dicom rate of 3,345 bolivar per dollar, which is not materially different from the blended rate we calculated internally.

This resulted in the decrease of $243 million in revenues and $25 million in GAAP operating income and $15 million in non-GAAP operating income compared to the previous quarter of 2016.

In light of political and economic conditions in Venezuela, we exclude these changes in revenues and operating profit from any discussion of local currency results.

Our Q3 EBITDA was $1.63 billion and EBITDA for the last four quarters now amounts to $7.3 billion.

Cash flow, as mentioned previously, this quarter cash flow amounted to $1.1 billion, as we had no exceptional payments in this quarter. In the first half of the year, I remind you that we had approximately $1 billion of payments, including $0.5 billion for our FCPA settlements, $250 million for the final settlement of certain hedging transactions, and $225 million related to the ciprofloxacin settlement.

Looking at our liquidity measures. While debt is reducing slowly, offset by some headwinds in the currency impact, this quarter's EBITDA is lower than that of Q3 2016, resulting in a net debt-to-EBITDA ratio of 4.7x, up slightly from the 4.57x last quarter. Leverage, however, decreased slightly to 53%.

Now getting into the quarterly revenues. We saw an increase of 1% quarter over quarter, made up of a number of movements. First of all, U.S. Generics revenues were down $102 million, despite the increase of an additional month of the Actavis Generics compared to the same quarter in 2016. The U.S. business was impacted from continued price erosion, which was 10% in Q3 2017 on the base business, as compared to the same quarter of last year, as well as accelerated FDA approvals of additional generic versions of competitors in our base business, as well as lower volumes of the Concerta authorized generic, following additional competition.

Our EU and Rest of the World Generics, excluding Venezuela, were up slightly due to organic growth and an extra month of the Actavis acquisition compared to 2016 Q3.

I'll address Copaxone separately in a minute. But our other Specialty products increased $47 million due to strong performance in our respiratory and oncology franchises, partially offset by the loss of exclusivity of AZILECT.

Other revenues were up $300 million, mainly reflecting the inclusion of Anda business, which was consolidated first in Q4 of 2016.

Currency fluctuations, particularly the euro, resulted in a slight increase in sales, which was more than offset by the devaluation in Venezuela that I just discussed, resulting in a net decrease of revenues by $169 million.

So for Copaxone, revenues were almost $1 billion in Q3 2017, which is a decrease of 7% compared to the third quarter of 2016. The revenues were down 7% mainly due to lower sales in the U.S., impacted by a $55 million increase in managed care rebate accruals for the inventory in the channel at September 30, following the FDA approval of a generic competition to Copaxone 40 milligram. And in addition, we had lower volumes of Copaxone 20 milligram compared to 2016.

In terms of geographies in which we generate our income, the United States generates slightly more than 50% of our revenues, in line with the results of last year. Europe was up slightly to 27%, while the Rest of the World markets generated 20% of our revenue, down from 23%, influenced heavily by the Venezuela devaluation.

Compared to this quarter of Q3 2016, the share of other revenues has increased from 4% to 10% following the inclusion of Anda. Specialty accounted for 36% and Generics was down to 54%.

For the quarterly non-GAAP operating profit, we are down overall 18%. The largest decrease was in the profit of our Generics business, mainly due to lower revenues and margins in the U.S.

Copaxone revenues and profit were down slightly based on the discussion I just had. And the profit of our other Specialty products increased by $109 million due to higher revenues and significant cost savings.

Financial outlook. Today, we are updating our full year guidance, expecting revenues of $22.2 billion to $22.3 billion, EPS between $3.77 and $3.87, and cash flow of $3.15 billion to $3.3 billion.

Our 2017 financial outlook was lowered to reflect the following events. An earlier than expected at-risk launch of a generic competitor to Copaxone 40 milligram, with an expected impact on EPS of approximately $0.30.

In addition, we have lower than expected contribution from new generic launches in the U.S. We now project approximately $400 million of revenues from new product launches this year, compared to a previous projection of $500 million.

In addition, we have increased price erosion and volume declines in our U.S. Generic business, including increased competition to our largest product, the Concerta authorized generic.

In addition, we have a lower cash flow from operations due to the reduction in net income, as well as a delay in our resolution of our working capital dispute with Allergan, which is now scheduled to conclude in 2018 instead of Q4 2017.

At this point I'd like to turn it back over to Kevin Mannix.

Kevin C. Mannix - Teva Pharmaceutical Industries Ltd.

Thanks, Mike. We're just going to have some remarks from our CEO, Kåre Schultz, followed by remarks from our Chairman, Sol Barer. Kåre, please.

Kåre Schultz - Teva Pharmaceutical Industries Ltd.

Thank you, Kevin. I'm pleased to be here, and I would like to start by saying I look forward to getting to know Teva's shareholders and analysts, so that we can have an open dialogue about Teva's progress and future.

I have long admired Teva as a leader in the pharmaceutical industry. What drew me to this company and what makes Teva unique amongst its peers is its relentless commitment to developing medicines that help millions of people around the world lead better, healthier lives every day.

Teva has achieved an extensive global footprint while continuing to build on the Israeli culture that has served as its foundation for over a century.

I'm confident that the promise of Teva's specialist pipeline coupled with a disciplined focused on executing key generic launches and the strength and scale of operations will allow Teva to compete successfully as the global pharmaceutical industry continues to evolve.

I have spent most of my 30-year career overseeing both generic and specialty drug portfolios. I am familiar with ins and outs of the manufacturing footprint and development pipeline this entails. But, of course we'll need to study Teva's operation closely at firsthand.

We need to build on the company's ongoing efforts to strengthen operations, improve financial performance, and reposition Teva operationally and financially.

I recognize the significant debt burden that Teva is currently under, and it will be an absolute priority for me that we stabilize the company's operating profit and cash flow in order to improve our financial profile.

Although I'm not participating in the Q&A today, I do look forward to speaking with you and answering your questions at the appropriate time. With that I will now pass the call to Sol.

Sol J. Barer - Teva Pharmaceutical Industries Ltd.

Thank you, Kåre, and thank you to everyone for joining us today. Before we move to Q&A, I wanted to share some personal reflections accumulated over the 10 months that I have had since my appointment as Chairman of Teva.

I've shared with you my deep commitment to the company and the measures we would carry out to transform Teva. Since then, we have taken steps, including strengthening our board by welcoming four world-class directors whose wisdom and expertise are already adding great value. We also conducted a thorough search, did not compromise, and ultimately we found the right CEO for Teva. Today marked the beginning of the next chapter for our company.

I would like to emphasize how pleased we are to welcome Kåre to Teva as our new CEO. Kåre is a seasoned veteran in the healthcare industry. Over the course of his 30-year career, he has developed a unique perspective, overseeing generic and specialty drug portfolios, while managing complex business operations around the world. He brings a strong sense of corporate citizenship. And his disciplined commitment to excellence makes him a clear professional and cultural fit with our company.

This is a particularly demanding time for Teva, and we may continue to face significant headwinds. But I want you to know that the board and I remain deeply committed and confident in the strength of the company, our people, and in the future of Teva, and even more so that Kåre is the best person to lead Teva now and well into the future.

Let me assure you that Kåre will take a fresh perspective as he begins evaluating the opportunities in the near and long term to improve our performance, build on the company's strengths, and position Teva for the future. The reemergence of a successful Teva is important to all of us, for the benefit of patients and shareholders alike.

Before I close, I would like to take this opportunity to thank Dr. Yitzhak Peterburg on behalf of myself and Teva's Board of Directors for taking on the interim leadership role at a particularly challenging time, enabling a smooth transition, while remaining focused on our priorities.

Throughout our history, we have never shied away from change or challenges. That's why Teva and our employees will continue to do whatever is needed to improve our performance. I know Kåre shares this commitment and has the background and proven experience to deliver the results that will reestablish Teva as a leader in the industry.

So with that we will start the Q&A session. Operator, first question, please.

Click here to read question and answer session

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