TEVA Stock | Teva Pharmaceutical Industries Ltd Q3 2021 Earnings Call

Thank you, Kåre, and good morning and afternoon to everyone. I will begin my review of the third quarter 2021 financial results on slide 14. Starting with our GAAP performance, revenue in the third quarter of 2021 were 3 billion 887 million, a decrease of 2% or 3% in local currency terms compared to the third quarter of 2020. This decrease was mainly due to lower revenue in our North America segment, mainly due to Copaxone and generic products, partially offset by higher revenues from generics and OTC products in our Europe segment. Ajovy and Austedo. Our revenue continues to be affected by the ongoing impact of the COVID-19 pandemic on markets and on customers' stocking and purchasing patterns. For the sake of year-over-year comparison, I would like to note that Q3 2020 includes generic product sales in Japan totaling 62 million and approximately 240 million for the full year 2020. As we have previously communicated, these products were divested as of February 1st, 2021, along with a manufacturing site in Japan. Foreign exchange rate movements during the third quarter of 2021, including hedging effects, positively impacted revenue by 42 million compared to the third quarter of 2020. Operating income was 623 million in Q3 2021 compared to a loss of 4.3 billion in Q3 2020. Net income was 292 million in Q3 2021 compared to a net loss of 4.3 billion in Q3 2020. Turning to slide 15, you can see that net non-GAAP adjustments in the third quarter of 2021 were 360 million versus approximately 5 billion in Q3 2020. You will recall that the operating loss and net loss in Q3 2020 were mainly due to a goodwill impairment charge and higher intangible assets and permits which were related to our North American reporting units. Non-GAAP net income and non-GAAP earnings per share for the third quarter of 2021 were adjusted to exclude these items, with the largest being amortization of purchased intangible assets totaling 199 million, the majority of which is included in cost of goods sold. Now moving to slide 16 for the review of our non-GAAP performance. Kåre and I have already reviewed the third quarter revenues which totaled approximately 3.9 billion, so let's move down the P&L and look at the margins. Year-over-year, total non-GAAP gross profit was flat, and our gross profit margin improved by 53.6% compared to 52.4% in Q3 2020. The year-over-year increase in non-GAAP gross profit margin, both for the third quarter and year-to-date, were mainly driven by improved profitability due to our ongoing efforts to optimize our cost of goods sold, improved profitability from generic products resulting from the change in our product portfolio mix mainly in our North America segment, and higher sales of Austedo and Ajovy, partially offset by our lower sales of Copaxone and lower profitability from ANDA. Our non-GAAP operating margin was 26.8% versus 25.8% a year ago. The increase was driven by higher gross profit margins mentioned above. We ended the quarter with a non-GAAP earnings per share of 59 cents compared to 58 cents in Q3 2020, mostly due to a lower spend base. Turning to our spend base on slide 17, we see that our quarterly spend base declined by approximately 108 million or 128 million net of FX. Looking at the year-to-date comparison, our spend has declined by 333 million or 540 million net of FX. Based on the first nine months of 2021 and according to our current estimation, we believe our spend base will come in at approximately 12 billion for 2021. Now turning to free cash flow on slide 18. Teva's free cash flow in the third quarter of 2021 was 795 million, extending the sequential rebounds we saw in Q2 and Q1, which generated 625 million and 59 million respectively. Please recall our 2021 free cash flow guidance which we first provided in February, reaffirmed in April and July, and are reaffirming today. 2021 free cash flow is expected to be in the range of 2 billion to 2.3 billion. We expect free cash flow to pick up through the end of 2021 as we keep driving optimization of our working capital with a high focus on inventory improvement. Turning to slide 19, I'd like to talk about our debt management. This morning we announced the launch of a 4 billion offering of senior notes, the proceeds of which we expect to be used for refinancing existing debts by way of a tender offer that was also announced today. This is a really debt-neutral transaction, and as you know, Teva has been very clear and consistent with its long-term financial strategy which includes commitment to deleverage. We have executed on these commitments and reduced our net debt by more than 12 billion during the last four years, with the majority of cash generated by our operations directed to debt repayment. Today's announcements reflect our proactive efforts to refinance our debts ahead of significant maturities, just as we did in Q1 2018 and Q4 2019. With these transactions, our main goal is to align our debt maturity profile for the coming years with our operational performance as we continue to focus on delivering our business objectives and long-term financial targets. The bond offering we announced today represents Teva's first-ever sustainability-linked bond. We intend to offer euro and US dollar denominated sustainability-linked senior notes. For the last several years, Teva has evolved its approach to corporate responsibility, strategically integrating ESG aspects in its core business operations. For Teva, ESG means advancing health and equity through our medicines and across our business, optimizing the footprint of our operations on the planet, and dedicating ourselves to quality, ethics, and transparency. As part of our sustainability-linked bond offering, we have set ambitious KPIs to measure our contribution to social matters through access to medicine in low- to middle-income countries by expanding regulatory submissions and product volumes, and environmental matters regarding absolute greenhouse gas emissions reduction. Our intention is to set a direct link between our corporate responsibility commitment and our funding strategy. The bond proceeds will be used for general corporate purposes, which we will dedicate to refinancing of existing debt maturities expected in the coming years. On slide 20, you can see that our net debt at the end of Q3 2021 was 21.7 billion compared to 22.7 billion at the end of Q2 2021. This decrease was mainly due to our free cash flow generation during the quarter as well as exchange rate fluctuations. Upcoming maturities include 1.2 billion next month. Our net debt to EBITDA continues to decline, coming in at 4.51 times for Q3 '21, as we continue to make progress towards our 2023 target to be under three times by the end of that year. I would like to end my presentation by touching on our financial outlook for 2021, which you can see here on slide 21. Throughout the year, our revenue has continued to be negatively impacted by the ongoing COVID-19 pandemic. We have seen its impact on our markets and on customers' stocking and purchasing patterns. Certainly, some geographies, regions, product launches, and mix of products have struggled more than others to return to their pre-COVID patterns. Nowhere has this been more apparent than in the US market for Austedo. The decrease in physician visits by patients and physician interactions by our sales personnel due to COVID-19 has resulted in less doctors diagnosing and prescribing treatment for a patient population suffering from tardive dyskinesia, which is very under-penetrated. In July, we reduced our guidance by 100 million to 850 million for 2021. While sales were a bit lighter in Q3 than we expected, we are still pleased with what we are seeing and expect an acceleration to occur in Q4. Therefore, we are reaffirming our guidance for Austedo at 850 million. The same can be said for all other components of our 2021 outlook, which includes total annual revenue of 16 billion to 16.4 billion, non-GAAP operating income of 4.3 billion to 4.6 billion, non-GAAP EBITDA of 4.8 to 5.1 billion, earnings per share in the range of 2.50 to 2.70, and a free cash flow of 2 billion to 2.3 billion. This concludes my review of Teva's results of the third quarter of 2021. We will now open the call for questions and answers. Operator, will you please open the call for questions?

And the total finance cost that we're expecting next year, yes. So, yeah, so I would say, Ronnie, you know, if you follow the 2021 and also what we see in '22, accordingly to our estimation, we are going to keep the 1.1 billion in terms of finance expenses. So we don't see that one changing. Thanks for any questions. Let's move to the next questions.

Thank you. And yes, so overall, I would say that in Q3 we saw more improvements in terms of how we are running our inventories related to our demand behavior. So we saw that in that area as well. We saw some terrible collections that actually moved according to the mix of the revenue and the shipping pattern. So all in all, it went slightly, and we still see our conversion above 70% for the year. So that's on track.

Yeah, so thanks for the questions. And I think that in terms of what we are looking to do, of course we were going to look to do both euro and USD. For the euro, five years and eight years, ten years, and for the USD, five years and seven years, ten years. And actually, the way that we see it, we are going to make sure that in the coming years we're able to use our cash flow to support our maturities, and that will create kind of for the new issuing to get into a slotting between the years of '27 to '30. And with that one, we're actually creating more modest and, I would say, a portfolio on our maturity to allow us to be able to pay according to our free cash flow generation.

Yes. So, Nathan, thanks for the question. And so what we see is actually in the main three areas. One of this one is the specialty portfolio, which as we mentioned, we see instead of them to accelerate. That's one element. The second element is more dynamics in our generics, which is actually including what Sven mentioned about biosimilars and the other stuff. And in between the other two regions, European and international markets, those actually going to contribute to the increase from Q3 to Q4. And we can also add that, as you said yourself, it is a seasonal pattern that we've seen, I think, the last 10 years, that there's always stronger demand. And just in general terms, one of the reasons for stronger demand in the fourth quarter historically is, of course, the fact that you have speculative buying by wholesalers because you have price increases typically around the first of January. That's been the tradition in the U.S. marketplace. So that also adds to this. And then, of course, the holidays and inventory builds up before the holidays, which we've also seen for many years.