TEVJF - Teva Pharmaceutical Industries Limited (TEVA) Presents at J.P. Morgan 42nd Annual Global Healthcare Conference (Transcript)

2024-01-09 12:34:10 ET

Teva Pharmaceutical Industries Limited (TEVA)

J.P. Morgan 42nd Annual Global Healthcare Conference

January 08, 2024 11:15 AM ET

Company Participants

Richard Francis - President, CEO & Director

Conference Call Participants

Christopher Schott - JPMorgan

Presentation

Christopher Schott

Good morning, everybody. I'm Chris Schott, Firm Analyst at JPMorgan and it's my pleasure to be introducing Teva today. From the company we have CEO, Richard Francis. Richard joined Teva roughly a year ago, can be said a very productive 2023 and looking forward to hearing about the setup for Teva going forward.

So with that, Richard, thanks for joining us, and we'll jump to Q&A after your presentation.

Richard Francis

Thanks very much, Chris. Good morning, everybody. Delighted to be here. Yes, it's been One year, One hell of a year where I think that the work we've done at Teva really transformed Teva quite a bit of change and put us on the path for continuous growth going forward. So very excited about that.

And let me walk you through a bit of what's given me that optimism and some of the progress we've made in that first year. So when I was here last year, you should listen to my first week in the company, which is an interesting first week to have when you come in. This was sort of generally the questions I was been asked, how are you going to get the company back to growth? The company has been declining top line for many years. How are you going to turn the corner? What are the things that are going to drive that growth? What are the important assets?

And then the majority of questions like were around debt and litigation. And so that's sort of what I arrived and literally a year on, I'm pleased to say the company has been to growth. And so the first 9 months of the year, we have shown that we are growing Teva now again, which is important.

We've also started to highlight what's going to drive that growth going forward. So some big focus on our I products in the market, particularly AUSTEDO. And we've also said that we're going to reconfirm our financial commitments, which I said a year ago this week, and I reiterate that again, and that we're going to hit our financial commitments for 2027.

So a lot has happened, and it all comes down to the Pivot to Growth strategy. We put together a Pivot to Growth strategy, and we launched it in April of last in New York. And what's -- and this was a very important moment for the company because it clearly articulated what the organization needs to do to drive ourselves back to growth. What prioritization we need to put in place to make sure that we can create sustainable growth.

And it was based on 4 main pillars: Deliver on our Growth Engines, Step Up Innovation, Create Generics Powerhouse and Focus the Business. These are the 4 pillars we put in place in April and the progress we've made, I think, is significant, and the momentum we've got is significant. And so deliver on our growth engines. We have some clear assets, which I believe have a lot of potential.

They are the innovative portfolio, AUSTEDO, AJOVY and UZEDY. I'll talk about those, but also our biosimilar portfolio. Step Up Innovation. One of the things i think Teva is not known for and it will become known for is the quality of our pipeline. And I think Eric Hughes, is Head of R&D is here today. We spent a lot of time earlier on talking about just the quality of the pipeline we have and the fact that it's not recognized and what we've done is try to move that through the clinic really quickly.

Create a Generics powerhouse that's about making sure that we have all the capabilities in Generics at Teva. We just never put them together to effectively deliver consistent growth top and bottom line. And I think we've also made progress on that. And then finally, Focus The Business. I'll talk a bit about TAPI and once again, how we have the opportunity to grow this part of our business, which is the largest -- the second -- sorry, largest API manufacturer in the world.

So that's our Pivot to Growth strategy. This drives every decision we make every day in the company. We focus based on this strategy. This is operationalized now. We measure it every month. This is not a strap line, a tagline. This is operational. This is how we've achieved what we've done in 52 weeks, actually less last because we launched it in April. And you'll hear me constantly talk about this throughout the year. Now let me go through these individually. So -- and quickly, so don't worry.

Deliver on our Growth Engines. This comes down to AUSTEDO, UZEDY and AJOVY. Now AUSTEDO, we said we'd hit $1.2 billion this year. We're on track to do that. Obviously, we haven't got the full year in yet, but we're on track to do that. And that's important because we put significant resources behind it to make sure that happens. So we built capability and allocated resources and taking them away from other parts of the business, thus manage our expenses.

And we -- I recommit to the fact that we're going to do $2.5 billion by 2027. Now when I said that, when I launched it in April, there's a lot of skepticism. I think there's a lot less skepticism now and more belief that, that could be possible. I think it's definitely possible.

UZEDY our long-acting treatment for Schizophrenia, our long-acting respirator. We launched in May last year. We made great progress on that. The product profile really suits what the physician wants, particularly around getting a patient to a therapeutic dose with one injection. And we've got good -- 2023 was about setting up the market for us, getting access with Medicare and Medicaid and also the commercial payers.

We've made good progress on that to make sure we're in a good position for 2024. And then AJOVY. And AJOVY is an interesting one. It's been on the market for 5 years, but we constantly have seen ourselves and our commercial team is driving the performance of that. So we've grown this product in market share in most of our geographies. And we look to the future and we see continued growth of this based on the fact that we're going to be launching in other markets as well as keeping up this competitive edge.

Now what does that look like in the numbers? This is year-to-date. Obviously, we haven't disclosed the full year, but AUSTEDO was up 32%, which is I think is impressive. We launched the once a day back in May. And AJOVY is up 24%. So once again, showing where we focus and we apply more resources and build more capabilities, we get good returns.

And we foresee us continuing with this as we go forward. So that's delivered on our growth engines, but another element of delivery on our growth engines was our biosimilar strategy. Now our biosimilar strategy is very simple. We want to have a big portfolio around about 20 products. We have 16 currently on our pipeline, and we want to do that, the majority of that through partnerships because we want to make sure we're allocating our capital across our business, particularly on innovative.

We think we have all the reasons to be successful in biosimilars. We have great commercial presence in all the markets. We have good experience at it. We have good manufacturing. But the partnership model is the one we favor. And as you can see here, we're going to cover with our 16 products roughly 70% of the value that's coming off patent in the next few years. And we have 5 biosimilars we're going to launch by 2027. So I think we're well positioned and that this will be another element of driving growth throughout this strategic period.

Now if I move on to step up innovation. Once again, very surprised the quality of the research we have at Teva here, which I shouldn't be. I was down in Australia over the holiday period meeting our antibody engineering specialists and then world-class. And as you see on this slide, we have some really interesting products coming through our pipeline. And I say some of these, I think, are relatively derisked based on what we know about UZEDY with Olanzapine and what we know about ICS SABA.

And obviously, we have TL1A, but IL-15, which has just come into the news today based on another company making a move on that particular target. Diving a bit deeper on this Olanzapine. This is a very important program for us. And when we came in Eric and I looked at this and we said, "We've got to move these product programs faster through the clinic. And Eric and his team have done that.

So olanzapine, we've completed the recruitment of the Phase III study. So now we're just accumulating the patient data. And this we'll read out in the second half of this year. If it achieves its product profile with efficacy and safety, we think this has an opportunity to change the landscape of tumor in Schizophrenia, particularly with Olanzapine because there's no product which has safety and efficacy together.

And we're pleased to have seen that we've partnered with Royalty Pharma on this to help make sure we can maximize this asset. Then on ICS/SABA. ICS/SABA, a combination product for the treatment of tumor and Asthma, a big opportunity here. There's 10 million patients in the U.S. with the recommendations and the guidelines are should be on a combination. So the need for combination therapy is high.

We think we have a good product here as a good indication, pediatric and adult and a good device. We started the Phase III in October last year, and this is another one where we're trying to accelerate this through the clinic to make sure it can come to market in a timely fashion. So we're excited about that. $2.5 billion, just to give you an idea of what that means.

If 30% of the 10 million patients went on a combination the market would be $2.5 billion. And I think if the market moves, it's going to move more than 30%, but that's how I got to that number. TL1A, still quite a topical target to talk about. But obviously, we focused on this once again to make sure we accelerated the Phase II data. So we have a position this year where we can move into Phase III in early '25. That's what we want to do.

And obviously, we partnered with Sanofi, which was important because I think Sanofi know a lot about immunology and the fact that after the due diligence, they wanted to have this asset as part of their portfolio, and they're very excited about it. And they think like we do, this is a pipeline in a product. And so right now, we're targeting, obviously, UC and CD, which is where we get the $28 billion.

But I think this could go a lot broader than that, and that's our aim to start focusing on that this year. We also started to build our muscle in BD again. We haven't been doing much of that in recent years, mainly because of our balance sheet, but also maybe haven't been thinking too dynamically about it.

But with help of the team and Angus Grant, who heads up BD has joined us, who is an innovative capability from his previous experiences, we wanted to move into a more aggressive starts on BD.

And as you can see, the Sanofi TL1A, I've spoken about Olanzapine with Royalty Pharma. What's important about these not only is the financial aspect and how that allows us to maximize these assets as we go through and drive them fast, and not have to think about slowing down because of the financial constraints we may have. They also validate the quality of our science.

As I said, to Sanofi in immunology, but Royalty Pharma, Pablo and his team, I think the quality of the due diligence they did highlighted the program we have in Olanzapine. We have started to build our early pipeline with biologic design, a very interesting program that complements well our capability of antibody engineering.

And then we expanded our Alvotech partnership because we want to have more biosimilars, that portfolio play that I talked about with 20 assets in our biosimilar portfolio. So on step-up innovation, I think we've done a lot. Now moving on to the third pillar, which is Generics Powerhouse.

So I thought carefully -- we thought carefully about calling it a Generics Powerhouse. We're not trying to hedge here, we're not trying to present its Generics Powers. It's going to grow top and bottom line. How do we do that? Well, we have all the capabilities at Teva. We have a great commercial footprint. We have a very, very deep pipeline and we have good manufacturing. The challenge is we just don't execute on that as optimally as we should.

So we don't get the benefit of it. So what we're doing is we've been very focused, and you'll hear that throughout the strategy, very focused. We prioritize. We do certain things, we don't do other things. When it comes to our portfolio in the market, we're going to take out some of those dilutive or nonprofitable products from our portfolio because they just create complexity in our manufacturing which increases our COGS, we put pressure on our margins. We're going to take those out.

On our pipeline, we cover pretty much everything that comes off patent. That's good and bad. -- so good is we cover everything. So we have every opportunity. The bad is to try and execute that to make sure all those products come to market on time on the first day when they should, is very difficult. And actually, when we did the analysis, we realized that the majority of the value is actually in 60% of the assets.

So why don't we go after 60% of the assets with real intent and make sure we launch those on time, then the value upside would be significant. And we have that because we have the pipeline. I've been chasing pipelines in my past. I don't have to chase pipeline here. I just have to actually execute on it and maybe cut it down a bit. So what I say to people is, we'll get more for less.

Then on the optimization, we need to keep reducing our manufacturing footprint, but now start to move into operational excellence. So we're reducing our COGS. We're managing our inventory and net working capital better, and we put in programs to do that. So we have all the ingredients to be a Generics Powerhouse trade consistent top and bottom line growth. Now just to sort of not just say words but to back that up.

This slide just highlights you when we're talking about complex generics where there's a lot of value, obviously, because there's less competition. We have had -- we do have a capability. This is not a muscle we're trying to build, it's just one we're trying to execute more effectively. And as you can see here, we launched 10 complex generics from '22 to '23, and we've got 14 planned for '24 to '25.

And this covers all the platforms, as you can see here, whether it's peptides, whether it's respiratory, long-acting injectables. What we want to do is make sure we execute all these programs in a timely fashion so they come to market, so they can optimize their values. That's what we're focused on. But we have the capability, we have the experience. So it goes back to making sure we execute on it.

So then that's the third pillar. That's creating a Generics Powerhouse. So I think we have the ingredients and now it's about execution. And actually, if you saw our Q3 results, all our regions returned to growth. So we have growth in Europe in our generics business and international markets, and we had 15% growth in our U.S. North American business.

So this is starting to take effect. It will take time because these -- those 3 areas I talked about aren't done overnight, but we did a lot of work in 2023 to put us in a good position for '24, '25. Now the final pillar is Focus the Business. Now this comes down to two things: capital allocation. Capital allocation is key in Teva because in a way, we don't have the money to throw around.

So we're going to think about where do we allocate our capital and where do we take it away? How do we create that prioritization? So that's what we're doing constantly. Another part of focusing the business is around our API business, TAPI, which I spoke about earlier. We've created a stand-alone business because we see the opportunity for TAPI to grow.

It's declined. And I think it's been constrained by the fact that we've been -- its predominant goal has been to serve Teva the generics business. In reality, this is a #2 API player in the world, it touches complex API to simple API, it's high margin, has real opportunity. And when you look at the size of the API market, it's $85 billion, and it's growing at 6% to 7%.

And we're a major player, but we're not in that market. We've been concentrating on Teva. So we've changed our strategy. We've created a separate management team with the CEO and our whole executive team to focus on growing this business and being part of that big $85 billion API market.

We have all the capabilities once again. This is the wonderful thing about Teva, everything I talk about on this strategy, every pillar, we have the capabilities to execute on it, and we have it in front of us right now.

So that's one focus on business. Now in some closing remarks, when it comes to ESG, we continue the journey to make sure that Teva creates a sustainable strategy going forward. And this touches upon those 3 key areas we've talked about in the past, which is a healthy people, making sure access to medicine is key, making sure we're still an inclusive company.

It also talks about the impact we can have on the planet and making sure when it comes to greenhouse gas emissions, we're working hard to reduce those and making sure that we're caring for this planet for future generations. And healthy business, obviously, it's about doing the right thing all the time, every time. And we're focused on the governance that's required to do that.

Now a question I'm often asked is, are you going to stick to 2027 guidance on the financial metrics on operating, on CAGR for mid-single-digit growth, the operating margin of 30%, debt -- Net Debt-to-EBITDA 2 or below and cash flow in is 80%? Yes, we are. And I can say that confidently because of the things I've outlined in our 4 pillars. We know how we're going to drive the business top and bottom line, and we know we can achieve this. And we know we can continue to pay down our debt.

So to close, this strategy is designed not to get Teva growing in '23, it's to get it going right through the life cycle up until 2030. And as you can see here, what I tried to point out here is this strategy has changed the potential for Teva. It's changed the future outlook for Teva. There is no question in my mind about that. And then when you look at -- what we said over '23 to '24 to Return To Growth, we've done it. We did it in the first year. We're going to continue that in '24, and it's driven by these things. It's driven by AUSTEDO, AJOVY a, UZEDY and getting the generics business more stable and launching biosimilars.

Now after that '25 to '27 is that bringing through that pipeline I spoke about, Olanzapine, ICS/SABA, bringing some other programs from outside through BD with Angus and his team. And also, that's when we should start to see the generics business really start to tick up, particularly in North America. And then '28 and beyond is when we set the TL1A, the anti-PD1-IL2, the IL-15, those start to come in. So we have all the ingredients to continue to drive this company on the top line.

But importantly, because of those assets I mentioned, particularly on innovative and biosimilars and the complex generics, we can grow the bottom line as well, which is why I'm confident about the OP of 30%. So that's why I think the future is very different a year on than it was exactly a year ago today because of the work, the company, the employees, the executive team has done on this strategy, which drives our focus every single day. And I think you can see with the results in '23 so far as it is starting to get significant traction. So with that, I'll close that and take some questions, Chris.

Question-and-Answer Session

Q - Christopher Schott

Sounds great. Jump in here. So as you mentioned, we said here a year ago and you were just sitting in the seat. I think it was -- you're tying to get your first thoughts the first week In the job. But just bigger surprises, positive and negative in your first year as you've kind of had a time to really digest the business?

Richard Francis

The biggest surprise, I think -- well, I did a lot of due diligence before I came in. So I reduced the number of surprises. But I think the biggest one is the quality of our innovative pipeline discover. I was down in Australia, talking to the team the antibody engineering is world-class.

I have to remind people that Teva had the first TL1A. We just didn't invest in an executor. We've got a very cool IL-15, which is now apparent becoming quite a cool thing to talk about. And I think people start to talk about anti-PD1-IL2 too soon. So I think that quality, the thing that surprised me a bit as well, which is maybe slightly negative is there are some really good opportunities in Teva.

And I think the company just struggled to focus on those. There are so many things you can do in Teva and what we've done with this strategy to say, no, we're just going to do this, this and the other stuff, it will just tick over. And I think that's one thing we've had to really learn how to do. But maybe the other surprise I had is this is quite a lot of change in Teva.

And in my experience, when you go into a company with change, there can be a reluctance to change because in a way, it can be a criticism of what you've done as an employee. I haven't found that until Teva. The appetite to get this company back to greatness is so big that the employees, executive management team, everybody has embraced and used their knowledge to say, this is what needs to change. So the ability for us to move quickly, which we have done has been a surprise to me, a really positive surprise.

Christopher Schott

Great. It clearly seems like your focus is pivoting towards investing and continue managing this pipeline you have. I guess I'm still trying to get my hands around how you balance kind of the near-term dynamics where you're starting to see an inflection in the growth, but you don't have the pipeline assets contributing from a top line perspective in a meaningful way. How do you balance those 2 -- on one hand, I assume you could pour lots of money into R&D and really accelerate this and that comes to the cost of margin, I would think. So how do you think through that piece of it as we go through the next few years?

Richard Francis

Yes, it's a really good question, Chris. I mean we thought about it long and hard because this is a strategy that we laid out over 5 years to 2027 and there will be another version of it, but an iteration rather than as we've been thinking long term here. As I look at this, the opportunities we have in the short term to get this company back to growth, driving profitability, changing our gross margin are significant.

Okay. So then the question is, how do I balance that with this 30% margin? And we did a huge amount of work on the modeling and just understanding our position on expenses. We realized actually, this doesn't have to be linear. Maybe in the short term, our margin, our operating margin won't grow as quickly because right now, we have so much opportunity in front of us.

I think it would be the wrong thing not to invest in that. We've got to do that mindfully, carefully. And so you'll see us moving, we move resources around. We've reduced our expenditure on generics as we go after less of that portfolio. We've invested more in innovation. We've done some of these partnerships to make sure we can balance out that expenditure while going quickly.

So hopefully you see from that, we've been very thoughtful about that. But I believe that what our job is, is to get this company back to growth, hit those financial targets. And to do that, we must not ignore the opportunity that's in front of us right now. Now obviously, some of that, if AUSTEDO, UZEDY and AJOVY keep on performing, then I think that gives us some feasibility as well. But it's a good question, and probably one you'll ask me every year, and hopefully, I'll consistently deliver.

Christopher Schott

Sounds good. I guess on that front, though, is it fair to think about that we should start thinking about OpEx growing a little bit as we look at like the...

Richard Francis

Yes, absolutely. No, there's no question. I mean as much as we try to reallocate, we're in a really good position of having a great pipeline this late stage, Phase III, Phase II in sequence, a number of Phase I, which will be moving into Phase II quite quickly as well. So we don't want to compromise that. So that will mean go up. And obviously, from the sales and marketing, we want to make sure we're maximizing those assets that we have out there.

So it will go up. We're trying to be disciplined on the percentage of revenue that, that moves. It still probably will move up a little bit because once again, that I don't want to be so disciplined that I leave opportunity on the table. So that's the constant balance. But good to Teva of recent years, we are very cost conscious. And so every time anybody gets more money to spend, there goes a responsibility to spend that wisely and to give a return on it.

Christopher Schott

All right. So I think of it as kind of a balanced message on something to be just kind of low margins and build from there.

Richard Francis

No, absolutely no.

Christopher Schott

Okay. Just tipping over to TL1A, I mean it seems like a super interesting mechanism. You guys have a nice asset here. Is there -- how focused are you in terms of time to market? Because I think as you mentioned before, you have the first one you developed, but you've got some of your competitors a little bit ahead in development. Is that something that as you talk with your partner, there is a big focus on trying to close that gap? Or do you feel just the asset is strong enough that, that timing is maybe less relevant?

Richard Francis

Yes. Well, look, let me be clear. I always want to be first. You always want to be there first. And if you can't be there first, be there close after them, whoever they are, whatever that category is. I think there's two things that are in our favor here is I think one, we're not as far behind as people think.

And as our Phase II completes, so we move into a Phase III, and we have that both indications, I think we're going to be closer. The second thing is, which I think we'll get traction in the medium term is we have the best TL1A. I have no doubt about that. We have the best TL1A. And so we've seen with other biologics that I've launched in the past, you can be second, you can be thirding before. If you have the best and you know how to market that, then you can still win in that market.

So I think we're not as far behind, and we could catch up. But regardless of that, we're going to have the best TL1A I think the fact that Sanofi did the due diligence they did on it, and they have obviously the same questions. Do I want an asset that could be behind and they've come to the same conclusions. And with their horsepower, I think we can move even quicker. The other thing is in the third, fourth indications, we're definitely not going to be second, because no one is moving to those indications yet, and that's what we want to be moving this pipeline in an asset, we started to have those discussions about what those indications could be.

Christopher Schott

Okay. That's great. In terms of just the timing here just latest on when we should expect kind of update on data, will we hear anything before the Phase II interim or...

Richard Francis

No -- sorry to say no. We will get the Phase II data that we need to go to the FDA and to move into a Phase III, but that won't be made public this year. That will come out in early -- sometime early H1 '25, that's primarily used to just make sure we can just go straight into a Phase III, which is another way that we actually move quicker than people think, and we'll have some good data there.

But that's probably the earliest that you're going to just know that it's positive because we'll be going into Phase III but the data won't come out until '25. We will have the Asthma data coming out sometime in H1 this year because I think the Asthma data is quite highlights the quality of this molecule. And I think actually, so now if you presented some of their R&D Day to highlight how good this TL1A is.

So that's probably some more data will become more public. So we can see that in the asthma study, we basically chose the wrong population, the drug still did what it was supposed to do.

Christopher Schott

Yes. Moving over to AUSTEDO. I think you mentioned the $2.5 billion target. There was some skepticism, less skeptics today. Just elaborate a little bit more in terms of I guess, where you feel you've made the most progress to kind of unlock value with this asset? And as we think about '24 and '25, where those kind of resources, dollars are going to continue to build this one out.

Richard Francis

Yes. So look, I mean, I was really confident about the $2.5 billion back in April when we talked about in New York. I am even more confident than I was then because of what we managed to do. So we've invested significantly in both the money and the capability. So we've built also an innovative capability within the team in the U.S., which is important.

So people who are experienced in the specialty area. So we've done that building capability, but we put extra sales force together. We've spent more money with regard to making sure adherence, compliance, conversion. We've obviously launched the once a day, which was with the one chink in our armor against the competition.

So everything we put in place last year, I started to talk about and say, look, it's going to take 6 to 9 months for the sales force to have impact, it's going to take for the adherence programs, the conversion from a script to getting on therapy to stand on therapy. All those things we put in place will take time. '24 they'll start to reach their optimal level. And we're talking about this across 5 different areas. And as you know, in my past, I used to work in the U.S. around the U.S. So this is something we spend a lot of time and focus on. So money doesn't drive necessarily, but money allocated in the right way with the right level of execution and follow-up is what we're doing. And so I think this product is definitely going to achieve is $2.5 billion. I would like to think next year maybe the questions are is $2.5 billion the right number.

Christopher Schott

That sounds good. On UZEDY, product's been in the market for a few quarters now. Can you just give us kind of feedback of where we are in terms of the launch and kind of priorities around that asset going forward?

Richard Francis

Yes. So UZEDY is an interesting one, which obviously tumor for the $4 billion long-acting treatment market for schizophrenia, and we launched it. What we've been pleasantly surprised about is our product profile has really created traction with the physicians. And there are many aspects of what's important about it from subcutaneous prefilled syringe kept in a refrigerator, which sounds small, but when you're a busy clinic, it's important.

But probably the most important thing is the fact that when somebody is having a relapse or an episode of Schizophrenia, you need to get into therapeutic dose really quickly. And with UZEDY with the technology we have behind this product, One injection within 8 to 24 hours or a therapeutic dose.

The other long-acting risperidones will take a week to 2 weeks, and you need to supplement them with all therapies. So when we speak to physicians, they say this is exactly what we need because I've got a busy clinic. And I want to know when the patient leaves, they're going to be controlled within a short period of time.

And so that's been a huge sort of we knew it's important, but now we realize how important that is. What we've been doing in '23 is working through the -- getting access and through Medicaid, Medicare and the commercial. And we've taken our time on that because we think this is an important asset, and we -- and obviously, the fastest way to do that is to discount it. We're mindful of the value of this product.

Christopher Schott

Yes. So where are we kind of heading into this year in terms of like how do we think about access building going forward?

Richard Francis

So I think we should end up in a comparable level at the start of this year, early quarter 1 to some of the competitors we have. We did a lot of work on that last year. So as we get into quarter 1, close to quarter 2, I think access will be where we need it to be. And so we should be in a position to start to see UZEDY contributing to the company in a meaningful way.

Christopher Schott

Great. And just as we're saying on the long-acting products, how much bigger of an opportunity is the long-acting olanzapine versus UZEDY as we think about kind of the franchise you're building out here?

Richard Francis

Yes. So UZEDY is a long-acting risperidone. And we think it has pretty significant potential, but there are many other -- there a number of other long-acting risperidones. There's only one long-acting olanzapine and its market share, I think, is less than 1% because of the PDSS side effect it has.

Now olanzapine is a very well thought of molecule physicians like. And I think one of -- not taking anything away from Eric and his team, I think one of the reasons why Phase III has gone so fast is because physicians want to get this product to the market. They see if they have a long-acting olanzapine that has no safety issues, this could be a game changer from getting patients from oral olanzapine onto a long-acting. So I think if that $4 billion market, long-acting has no Olanzapine in it. So I think that's a significant opportunity.

Christopher Schott

Can your decision to partner with Royalty there, is that more broadly, will you continue to look for kind of creative financing structures to help move the pipeline forward? Or should we think of you partner the TL1A, you did this one an R&D deal. Is that kind of the end of it and you can fund the rest of it? Or just how do you think more broadly about bringing others, to, I guess, help with the development of these?

Richard Francis

Yes. No, it's sort of all of those things you said. What we think about, and I think it came to that OpEx question you had is we looked at, we thought, okay, these are great assets, and we can move them quickly, and we looked at the investment we need to make in some of our commercial assets. And we thought, okay, this is tight. And do we slow things down?

One are interesting things we noted in Q3, some people said your R&D expenditure has gone up a bit. And we said, well, yes, because we recruited all our patients 6 months earlier than we thought. But those things -- so as we really drive that speed, we're realizing that, that does make managing the expenses something that's tighter. So we don't want to slow down. We want to keep going fast and to do that. That's where the Royalty Pharma deal came in. I think the Sanofi was more about capability partnering as well as if we want to go in multiple indications quickly that's a different expenditure as well and a different capability. So that's how we think about it.

And so it could happen more going forward. It depends how our P&L or financials evolve. But I also think it's good in a way that as I said up there, there's a lot of credibility, I think, in what Royalty Pharma do and their team of due diligence experts, which is 60 came away and thought this is a great asset. So I think that once again, reiterates the quality of some of the innovative products we have.

Christopher Schott

Yes. Great. Just tipping over to the North America Generic business. I know this is one that want debates have we hit a bottom? Are things getting better? Is it select products? You're -- Just kind of where we sit today. Is this a business that you're is we're seeing a strength in a few products and the underlying dynamics are still challenging? Or has there been kind of a sea change here or pricing maybe is in a different place than it's been for a while.

Richard Francis

So look, I'm a bit of the outlier on this. I think I always have been. There is no change, okay? But that's okay I don't expect -- okay, if you're able to consistently launch high-value, complex generics and have a good supply chain and good go-to-market model. We have that. We're not executing as well as we could, but we made big progress on that.

Now the dynamics are, we have 3 purchases of generics in the U.S. They will always push the price as low as they can as competition comes in, and that will never change. There, any way you can offset that is to make sure we're launching products where there are competitors or there are less competitors coming in slowly.

And that's what we want to do with the strategy we've outlined. So I don't think there's anything fundamentally changed. It's a cycle. There'll be years that will be better than others. But in the strategy, we have not relied in our financial guidance on the pricing getting any better in the United States.

Christopher Schott

Okay. So this is about portfolio selection versus the market, sure thing.

On biosimilars, just your perspective on biosimilar HUMIRA as you kind of think about that opportunity. It seems like there's not a lot of volume that's been this large this '23. How attractive of an opportunity is that market? And maybe more broadly, just what's happened with biosimilar HUMIRA or cause you to think differently about the type of assets you want to move forward in the portfolio over time?

Richard Francis

So to answer your second question first No, not at all. And I'll explain a bit why. But I think what's happened with Humira is I think I always remind people of the biosimilars really only came in mid-year and understand the way payers and PBMs work is they got offered a significant rebate from the originator. And I'm pretty much sure they lock that into their financial models for the full year.

And so, well, maybe we'll make a bit of a move, but maybe we don't, but I've got this rebate anyway. So that year is taken care of. I don't know they definitively thought that. But if I was in their place, I'd say, well, I can bang that and then let's see if I can move biosimilars. I think '24 is very different. I think '24 -- and I think we've started to see a bit of movement in how some of the payers are thinking.

So I think '24 will be more reflective of what can happen in that market. To your question then is Humira, the sort of -- the guiding light of what could happen in others, absolutely not, in my opinion. I think each biosimilar will act differently based on not just the originator, but based on the therapeutic area based on the number of biosimilars that come in based on many different variables. What that does is make sure that our strategy that we put in place is the right one because we're not reliant on Humira.

We're not reliant on Stelara. We're not reliant on Zola because we have 16 biosimilars that are going to come to market. Some will do better than we think and some will do worse than we think. But we're not trying to predict that because I've been in biosimilars a long time, it's really hard to predict. And so we don't have to. Will biosimilars drive our Pivot To Growth? Absolutely.

Which ones will be the key ones, I have an idea, but I don't want to rely on that. And so that's why that portfolio plays out. But I think biosimilars now versus '27 '28 will be very different in the U.S.

Christopher Schott

Okay. And portfolio is kind of like portfolio purge -- it's still unstable. Yes, exactly. -- last couple of minutes here, just one on gross margins. I know that was in '23, it was some volatility there, I guess, just help me a bit about thinking of heading into '24. Our second half gross margins for '23, a reasonable proxy going forward or just how do we think about progression of gross margins?

Richard Francis

Well, look, I think that's an interesting one because Q1, that was a bit of the gross margin story rather than which I think we spoke about Q1 earnings. But I think what you've seen is the work we've done to come back from that is driven by fundamentals, which is our portfolio, the work we've done on our COGS and the work we've done around our pricing.

So I think all of that holds firm. So what I would say maybe answer your question even more categoring positively than you'd expected is, the gross margin will improve next year, definitely. And so the latter half of the year is a good proxy. And that's primarily driven by our portfolio that drives the revenues change instead is a high gross margin product. And if that's growing at 32%, which I just showed then that does obviously fall down to the gross margin line.

Christopher Schott

Excellent. We think we're about out of time here. Really appreciate the comments today, and thanks for joining us.

Richard Francis

Thanks, Chris. Really appreciate it. Thank you.

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Teva Pharmaceutical Industries Limited (TEVA) Presents at J.P. Morgan 42nd Annual Global Healthcare Conference (Transcript)