Hello, and welcome to the Q3 2023 Teva Pharmaceutical Industries Limited Earnings Conference Call. My name is Alex. I'll be coordinating the call today. [Operator instructions] I will now hand over to your host, Ran Meir, SVP of Investor Relations. Please go ahead.

Thank you, Alex. Thank you, everyone, for joining us today. We hope you have had the opportunity to review our 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 tevapharm.com. Please review our forward-looking statements on Slide no. 2. Additional information regarding these statements and our non-GAAP financial measures is available on our earnings release and in our SEC Forms 10-K and 10-Q. To being today's call, Richard Francis, Teva's CEO, will provide an overview of Teva's Q3 results and business performance, recent events and our priorities going forward. Then Dr. Eric Hughes, our Head of R&D and Chief Medical Officer, will discuss progress on our innovative pipeline. Our CFO, Eli Kalif, will follow up by reviewing the financial results in more detail including our 2023 financial outlook. Joining Richard, Eric, and Eli on the call today is Sven Dethlefs, Head of North America business, who will be available during the question-and-answer session that will follow the presentation. Please note that today's call will run approximately one hour. And with that, I will now turn the call over to Richard. Richard?

Thank you. Ran. And thank you everybody for joining us today. I like to begin by saying that we are deeply saddened by the terror attack in Israel on October 7. Since that day, Teva’s board, leadership team and I have made the safety and wellbeing of our Israeli colleagues our upmost priority. I visited and met employees of the facility in Israel immediately after the attack. Many have families and friends who have perished or being kidnapped. What really stood out and inspired me was that despite all the difficulties, they are running together to bring medicines to the patients who need them, especially now. I am personally humbled by their incredible resilience, care and sense of purpose. Now we have increased support of our emergency supply of medicines to hospitals, pharmacies and patients, and we have partnered with our longstanding partners to donate products and provide other humanitarian aid. Through it all, our production remains largely unaffected, and gratefully none of our sites have incurred direct damage as a result of the war. We continue to secure continuity plans to be certain we can maintain our business continuity, while most importantly taking care to ensure that our colleagues are safe and well in these difficult times. Now moving on to Slide 5, I'd like to update you on strong performance in Q3 as we continue to execute our Pivot to Growth strategy. Now our strong performance of our growth was delivered by our growth engines, AUSTEDO, AJOVY and generic business. Revenues were up 7% in US and in local currency. Our gross margin continues to improve. We sort of increased by 50 basis points versus Q3 2022. We're pleased to announce an exciting partnership with Sanofi in Q3, the deal to really maximize our TL1A asset. Because of…

Thank you, Richard. Can I have the next slide? So as Richard mentioned, we're excited by the improved sales of AUSTEDO, which is a testament to AUSTEDO's safety and efficacy. To build on what we've already achieved with AUSTEDO, we want to make sure that the flexibility and the convenience of AUSTEDO is improved with our patients and we're happy to present this data from our real-world studies called START. This study was a real-world study to look at how our four-week titration pack is used. What we see in this study is that 78% of the subjects completed the study, 97% were adherent to the medication, 76 reached the optimal dose, and 95% reached a dose greater than 24 milligrams per day. But why is this important? Well, the important thing is to get patients on the right dose that's optimal for them, use the flexibility of our set-o, and maintain patients on effective treatment. And you can see that in this study, we had actually a very good response rate in the Abnormal Involuntary Movement Scale of 4.8, which is actually numerically better than our pivotal studies. So we believe with the titration pack, the flexibility of the dosing, and these adherence rates that we see in our START study, we will maximize the ability of patients to recede and obtain the proper dose and stay on treatment. Okay, next slide. As Richard mentioned, we're also excited to see the improved sales of AJOVY. AJOVY is a program that we have for migraine, and we can recapitulate our Phase 3 studies in its effect on the monthly migraine days that we improved. So in this study called UNITE, there's a prospective study, but the uniqueness of this study was that we looked at patients with migraine who also…

Thank you, Eric, and good morning, and good afternoon to everyone. I'll begin my review of our Q3 2023 financial result with slide 25. Starting with our GAAP performance. Revenues in the third quarter of 2023 were $3.9 billion, representing an increase of 7% compared to Q3 2022, both in reported terms and in local currency. To provide you some color on our revenue performance in the region. In North America, with overall strong performance was 11% growth in Q3 2023, compared to third quarter last year, this growth was mainly driven by higher revenue from generic products AUSTEDO and AJOVY partially offset by lower revenue from BENDEKA and TREANDA. As Richard mentioned, revenues in our generic business in North America increased by 15% in Q3 2023, mainly due to revenues from generic 0:20:54.2, partially offset by increased competition to other generic products. Revenues in our Europe segment was flat in local currency terms. We continue to see strong growth in AJOVY and a solid growth in our generic business in the third quarter. This was, however, largely offset by lower revenues from our legacy brand including COPAXONE. Revenues from our international market segment increased by 20% in local currency terms. This was mainly driven by higher revenue from our generic products, largely coming from price increases as measured to AUSTEDO higher costs due to inflationary pressures. This increase was partially offset by regulatory price reduction and generic competition to off-patent products in Japan. GAAP operating income was $355 million in the third quarter of 2023 compared to an operating income of $419 million in the third quarter of 2022. The lower operating income in the third quarter of 2023 was mainly due to higher legal settlements and lost contingencies, higher R&D and S&M expenses, partially offset by higher gross…

Thank you, Eli and thank you, Eric. So in summary, strong Q3 performance driven by AUSTEDO, the launch of UZEDY and AJOVY and good performance across our generic business in all three regions. Through that, as you heard from Eli, we're increasing our guidance and revenues this year. And I'm pleased to show that the Pivot to Growth strategy is starting to get traction as I've highlighted with the AUSTEDO and collaboration with TLA1 with the capability build that Eric and his team have done that's allowed us to accelerate our landscape along that team product in Phase 3 studies as well as with the Teva api, the recruitment of our CEO. With that, I'll hand it over to people to ask questions.

[Operator Instructions] Our first question for today comes from Umer Raffat of Evercore ISI.

Hi, guys. Thanks for taking my question. I noticed a dose level C was dropped in your TL1A trial. I'm assuming that was the highest dose. So I have a two-part question. One, can you confirm that among the dose level A and B that was kept, you have at least a 500-milligram dose in there? And secondly, I understand that the decision to drop the dose level C was informed by optimizing, evolving biomarker data. Could you please elaborate on that as well? Thank you.

Hi, Umer. Thanks for the call. Thanks for the question. Eric, I'll hand over to you.

Thank you, Umer. So yes, we amended our study design and we dropped the dose. This was driven largely in part by our comparative in-vitro data. As I mentioned, the potency of the compound is, we believe, is best-in-class. We think the selectivity drives a lot of our potential biomarker movement. We were looking at free TL1A levels, which I think are important in dose selection. And we used this in combination with RPK and what we observed in other development programs when we look at exposures in the programs. So we took advantage of this. And we optimized the study by dropping a dose and increasing actually the size slightly in the other arms. So we're happy with the changes. I think that makes the program more efficient and more useful data that will come out of it. And I can't comment on dosing or which dose was removed at this time.

Our next question comes from Balaji Prasad from Specialty Pharma Equity Research.

Hi, good morning. This is Balaji from Barclays. Couple of questions from me. Richard, just want to get your sense if you think that Teva has reached a spot where you are comfortable or actively seeking to expand your pipeline or portfolio either with BD or in licensing. Second, you're in the guidance. I still see a $400 million spread so late into the year, which is rather interesting. Is it fair to assume that you are still expecting some large one-offs so late in the year that can still impact to the extent of a few hundred million dollars if approved? Thank you.

Thanks, Balaji. Thanks for the call and the question. I appreciate that. So on the BD, to ask that question, yes, we are actively looking to do BD and in license. We started that and we've been doing that actively. I think we are excited about the products we have in innovation within the market and in our pipeline. That said, as we committed in the Pivot to Growth, we want to build on that. And we think we have capacity to add products both in our pipeline and also commercially. So we are actively doing that. But we want to be very selective, make sure it fits to our portfolio, our TA strategy. So that does take some time. With regard to the guidance, I think the question was the 15.1 to the 15.5 bit of a range there. Do we expect to one-off to drive that? I'll let Eli answer that. So, over to you, Eli?

Yes, thanks, Balaji, for the call, for the question. Sorry. And basically, we are actually keeping the guidance, of course, for AUSTEDO so you can actually look on the first three quarters and understand the growth there, year-over-year Q4, just on AUSTEDO. But, namely, in terms of the other elements and the other lines on the revenue, there is nothing there in specific that is going to be changed versus the next. And considering this is an analogy of Q4 that we have each year.

Our next question comes from Jason Gerberry of Bank of America.

Hey guys, thank you for taking my questions. I guess firstly, just on the TL1A partnership, I actually had a follow-up question regarding the $600 million milestone for starting Phase 3. Is that contingent just on showing something static as a benefit, or do you actually need to generate data that are competitive with the more advanced TL1A programs? Just wondering how much risk there is to kind of capturing that $600 million milestone and moving forward. And then my second question, just on your EBITDA guide for the year. I guess to get to the midpoint or the high end of the range, it's a pretty substantial, sequential step up. I get that there's going to be more brand revenue, better mix, better margin in the fourth quarter, but you presumably won't have the generic Revlimid contribution. So, how should we think about OpEx swings here in fourth quarter versus sort of the run rate in the three quarters leading into 4Q? Like would we expect a step down in OpEx or is there some other factor that can drive this big sequential uptick?

Okay, Jason, thanks for the question. I'll start and answering them and I'll let my colleagues contribute. So, on the TL1A, the Phase 3, there were no conditions around the Phase 3. The Phase 3 is about completing the Phase 2 -- sorry, Phase 2, complete the Phase 2 and having to get approval to move into the Phase 3. So, that's what the deal is on. There are no criteria around that. So, I think hopefully that's very clear. With regard to the EBITDA range, I think it was, and a bit about OpEx. So, maybe I'll start this and then Eli can contribute. So, you have seen and Eli did talk about our OpEx guide but this is in line with our strategy. This is in line with what we plan to execute. We're driving AUSTEDO, making sure that brand is supported, appropriately the same for UZEDY product we just launched in schizophrenia. And obviously, Eric and his team have started to hit the ground running, particularly on the Olanzapine and also TL1A recruiting, faster than we expected. So, that obviously incurs cost, but I think that's a good thing, particularly if that's part of our Pivot to Growth strategy. So, those are the reasons why the OpEx has probably gone up. There's a reason why it's gone up, but we're pleased with them because it's in line with what we want to do. Now, obviously going forward, just to give a bit of flavor for the OpEx and the R&D, obviously TL1A in partnership with Sanofi will have a 50% of that cost taken by Sanofi. So as we move into next year and possibly depending on where it closes this year, we'll have a contribution from Sanofi. So I think that we've thought about that, that allows us to manage our pipeline and to be very thoughtful, but also think big about what we want to do at TL1A. Now we have this collaboration. So and then the final part I'll say is as we commented before, Revlimid was a contributor in Q3. We see that as a significantly less contributor in Q4, a very, very smaller part of that. So you take that into account. But Eli, maybe you like to add a bit more flavor to that as well.

Yes, so thanks Jason. So overall, the way we need to think about it, we will end up according to the guidance with higher revenue versus last year. But we will trend the OpEx at the level of close to 26% of our revenue. And that's the way to think about it. Another point for you to consider, we're still looking for the 53% gross margin for the yearend, which means there is a step up in Q4, which is mostly related to a further mix that we have in that quarter. And that will drive our ability to sustain the EBITDA guidance, although OpEx is still increasing in terms of dollars.

Our next question comes from Nathan Rich of Goldman Sachs.

Great. Good morning and thanks for the questions. You mentioned the higher R&D expense in the quarter. I think you kind of expected maybe a bit of a step down in the fourth quarter. But I guess going forward, what's the right way to think about R&D expenses as a percent of sales just given the investments, you're kind of making in the pipeline. Does that move up a bit over time? And then on UZEDY, you mentioned the positive feedback from providers. I was wondering if you could just elaborate a little bit on that and how that's kind of informed your view on the pace of uptick and how we should be thinking about the revenue contribution from this product as we go into next year.

Thanks for the questions, Nathan. So just to sort of comment on the R&D expense, we don't expect a step down in Q4 because this is part of our strategy. And the strategy is to aggressively move our innovative pipeline through the clinic. And as I said, we have ICS/SABA into Phase 3. We have an Olanzapine full tilt in Phase 3 and obviously TL1A in Phase 2, which we're moving very aggressively. So I think that's on purpose and that will continue. I'll let Eli talk a bit about where we will be in percentage of sales but obviously one thing to always consider which may be slightly new with [inaudible] our sales we have shown that we've grown ourselves for the second quarter in a row and we are moving the business back to growth so obviously that does allow us some flexibility although I want to assure you our focus on expenses is maniacal so that's just an important understanding. But, Eli, do you want to give a bit more flavor?

Yes, so overall the way to think about R&D we are actually looking to trend just a bit above 6% for the yearend which means that Q4 will also have a step up and as I mentioned in my prepared remark, we are actually providing kind of more transparency here between 230 to 250 and that will be by itself very close to I would say the 6% that we see in the quarter and for the year. The way to think about is going forward of course we will provide our guidance for ‘24 on the back of Q4 on February but the way to think about it, it will be arranged between 6% to 6.5% of our revenue going forward according to our strategy and this is mostly related to the mix inside the innovative speed in the R&D.

Thanks Eli. And then moving on to UZEDY and we talked a bit about the questions around the positivity we have in the next year so I will hand to Sven , Head of North America to give some flavor for the excitement in the market.

Yes, thank you Richard. So we have a very good uptake, our launch plan is full on track. We are of course now working towards market access, in hospital access, listing on hospital formularies, we are right on plan and Medicaid and Medicare we are also in discussions here we have secured on par access within [Bega Sustaina] in a couple of states and we are working towards this goal with all the remaining states but also with the Medicare plans so that we are quite confident that we will have a very good market access position going into 2024. What is very encouraging for us is that the product profile that we hope for will find a good reception with physicians actually played out as planned. We've generated so far about 4,000 prescriptions. Please keep in mind that we have a large number of free samples in the market to get patients started so when we move forward and have utilized these samples, we will see more paid for prescriptions. But we get to so today the majority of our patients from switches from oral therapies to UZEDY and then from within the category of switches from other LAIs to UZEDY, we have here sources of revenues that come primarily of course from the respiratory market from [Procerous and Consta] but also from the other LAIs. So we believe what we always hope for or aim for that this becomes a new standard of care in the LAI segment will actually materialize and for that reason we believe that UZEDY will be then a material contributor to our role in innovative medicines in 2024 and going forward from there.

Our next question comes from Ash Verma of UBS.

Hi. This is Di asking on behalf of Ash. Thanks for taking our questions. So I have two. The first one is on the AUSTEDO. Can you give us some color on where the XR is taking share from. So it's now run rate. It's at around like 10% of total molecule. So we just want to understand is it taking shares from regular AUSTEDO, generic or Ingrezza? The second question is can you give us the rough sense for what's the EBITDA margin for the standalone business? Also curious how that margin profile has been trending for the last few years. Thank you.

Well thank you. I apologize Mr. Nate but thank you for asking the question. I'll hand over the AUSTEDO question to Sven, you can give a bit more detail on that.

Yes, thanks for the question. So XR off-take is strong. We have a higher share actually in the total business than the 10% that you mentioned. So far, we get one about one third of our new patient starts on AUSTEDO XR and the other two thirds on B and D of course that's an annualized figure. It's now ramping up that XR becomes much, much more prominence in new patient starts. And the sources of patients in itself for these patient starts are around about half of them are naive patients. They start neuron therapy for a BMA2 inhibitor, and the other half come either from BID switches, so from AUSTEDO BID, or from Ingrezza or tetrabenazine. So here, what is in currency for us is that we have a significant number of new prescribers that have never prescribed AUSTEDO that now start prescribing AUSTEDO XR because they value the convenience of a once-daily formulation. And I think that's very good for us because that is a market segment that we could not access before in the absence of a once-daily formulation. So for that reason here, I think we are right on track in making AUSTEDO continuous growth driver for our innovative business.

Thank you, Sven. And to your second question about Teva api and guidance on EBITDA, both past and present and future, we are not giving any to level up detail on EBITDA for Teva api at this moment.

Our next question comes from Glen Santangelo from Jefferies.

Oh, yeah. Thanks for taking my questions. Just two quick ones for me. Obviously, with so much focus on the innovative pipeline, generics often get overlooked. I mean, Richard, it seems like the generic business had a great quarter, particularly in North America. The trend seems to be getting a little bit stronger. I was wondering if you could just sort of comment on the competitive and pricing dynamics that may be driving that trend. And then secondly, as it relates to the Alvotech partnership, the company made an additional investment there in the wake of a number of CRLs right more recently on [inaudible]. Could you give us an update on that relationship and the biosimilar pipeline as it relates to that Alvotech partnership? Thanks.

Thanks Glen. Thanks for the question. So we are pleased about the performance of our generics business. I think this is a journey in our strategy to make sure our generics business is a sustainable powerhouse. And within North America, we've obviously seen a strong quarter there. I think Eli did highlight that big contributed to that was Revlimid. What I would say about your sort of more general market conditions around more favorability and I've been consistent on this. I think to be the market conditions will change based on supply, demand and competition and that will be constant. And so as more people come into a market, the prices will go down because the competition will drive that. I don't see those dynamics changing. There will be quarters where the pricing pressure is less and there will be quarters where the pricing pressure is more. I think for our strategy to make sure we can be in control of that, we focus our R&D engine under Eric Hughes on making sure we deliver our generics, our complex generics on time and first to the market, more than we have done in the past. And that's where we'll drive value creation and will ensure ourselves against this volatility within the market. So I think that's how we think about market going forward and how we think about making sure we stay competitive and have a sustainable business. With regard to Alvotech and the partnership, the relationship is actually very good. I mean, one of the things we did when we invested again into this partnership is, and I've said this before as well, Alvotech is very good when it comes to developing biosimilars. Their R&D capability, I think we will have the best product on the market if we launch Humira both from a device point of view and a product profile interchangeability. They're very good at that. What we're doing is working even more closely with them to ensure that from a manufacturing capability we can help not only get through the FDA inspection, but also be able to deliver the volumes that we see would be necessary. And also think which are very capable of because we have 53 sites and we have roughly 30 FTA inspections a year so we do know what we do. But I think maybe to conclude the relationship is very strong. Our pipeline, we've expanded with them because we see their capability. We continue to build out our pipeline through partnerships and so you'll see some announcements on that hopefully in the future because we do believe our strategy is to have a broad portfolio for domineering through partnerships and that allows us to go to the market with a portfolio play and also to ensure ourselves against the peaks and troughs that are associated with launching biosimilars one year and then maybe not having them the next. So hopefully that answers your question Glen and I appreciate the call.

Our next question comes from David Amsellem of Piper Sandler.

Hey, thanks. So a couple of high-level questions just on overall strategy. So with the upfront payment in hand from Sanofi, so you have a little more wiggle room here, I should say. And with that in mind, are you focused on assets in neuropsychiatry where you can leverage your commercial infrastructure that you have in place? Is that the top priority there? And then secondly, as it relates to biosims, just coming back to the [inaudible] getting out of that business, how do you think about your role in biosims going forward? I know what you're saying in your comments, but is that something you could be opportunistic about going forward in terms of monetizing that business? Thank you.

Thanks for the question, David. So starting with the basic thing, because our financial situation improves with the TL1A a deal in the $500 million upfront, how do we think about PD? So as I said, we are thinking about PD, we are active, we're looking, we've hired Angus Grant, a seasoned professional, dare I say, legend in the industry who's worked at innovative medicines all his life. And so we really have stepped up that and our capability around that and our focus on that. Now, yes, we are targeting CNS and immunology and within CNS, you do obviously psychiatry and neurology because we see the synergy play there with building a capability. In fact, in psychiatry, I think we're seen as one of the leaders in psychiatry now. So I think it makes sense to look there. That said, as opportunities come along, which may be in the broader, CNS will look at them. But right now, we're ensuring we stay focused to make sure we allocate our capital in a way that will be synergistic to our P&L and maximize our OpEx. With regard to the biosims question, I think our strategy is really clear. I think biosimilars is a massive opportunity to generate revenue. I've seen that in Europe. I believe that's going to happen in the United States. It'll be a bit bumpy in the United States as we've seen in the past. But we've also seen with Truxima or Tuximab, it's a great revenue generator. So the way we address maybe some of that uncertainty is to ensure that we don't allocate a huge amount of capital to it by doing that through partnerships. And we've built a broad portfolio. So when some assets come to the market in a timely manner or some assets overachieve and other assets underachieve on what their big sales could look like, we're balancing that out because we have a portfolio approach. But we feel very clear on our strategy and committed to our strategy. We think it's the right strategy for a company like Teva.

Our final question for today comes from Chris Schott of JPMorgan.

Hey, this is Karina for Chris. Thank you so much for taking your questions. So first on gross margins, I know you're not giving guidance for next year, but as we think about margin trajectory from here and the trends, we saw in Q3 and what we're going to see in Q4, is that kind of the correct starting point as we think about gross margin next year? Or are there any other pushes and pulls we should keep in mind there? And I think the second question is just on AUSTEDO. It seems like the product has had a very strong quarter. Just let us thinking around kind of investing behind that product and support for the asset. How are you thinking about balancing costs versus kind of maximizing the revenue opportunity? Has a thinking evolved at all? And any implications as we think about SG&A spent next year? Thank you so much.

Thank you, Karina. I'll take a go at both of those and then also allow my colleagues, Sven and Eli, to contribute. So when we think about margin, the way I think about margin going forward, it's aligned to our strategy. So when you think about our Pivot to Gross strategy, it was to make the company get back to growth, but grow it in an area where it will drive profitability at the top and the bottom line. Now, obviously, I think Eli has just highlighted and I highlighted in my comments that we improved gross margin by 50 basis points. The way we did that primarily is our portfolio mix. So as we drive AUSTEDO, as we drive AJOVY, as we drive UZEDY, as we bring an Olanzapine to the market, ICS/SABA to the market, those products have a very different gross margin profile than our generic business. And so that, by definition, will raise our gross margin. So that's sort of the big picture on it. Eli, give a bit more flavor if you want to, Eli.

Yes, so just, we are still actually aligned with our long-term financial targets by 2027 to reach the 30% on OP, which means if you look on our trajectory in OpEx, then as we are very, very questions on even that we're actually dollar spend higher, but you're turning it always versus revenue this year and last year, we believe that we've been 26% to 27% and OpEx going forward, which means that those gross margin of 55% to 67% on the long term should serve our goals.

And then moving on AUSTEDO. For AUSTEDO, we think we have a very important asset here and because of that, we ensure that that is funded in the appropriate way and obviously we have a big cost base at Teva and so for us, it's about prioritization and AUSTEDO is one of the top priorities we have in this company and so when it comes to getting resources, obviously there's a process to do that. It's not quite an open checkbook for Sven and his team, but it's very much, this is an asset we want to maximize, let's understand what that takes and then obviously manage that through other aspects of the business cost structure to make sure we can offset that as much as we can to once again stay very on top of our spend. As our revenue grows, we want to make sure our profitability grows with it. But Sven, do you have anything else to add to that?

Yes, I think one of the advantages that we have is of course that we can make synergistic investment between AUSTEDO and UZEDY because some of the prescribers that we target prescribe both of the brands. So we have leveraged and we can create some scale effects. We have this year stepped up our salesforce. We have increased our long-term care team. We have made investments in specialty pharmacy programs to increase our fill rates and we are also working on adherence. And I believe the fact that the prescriber base increases as more and more physicians start prescribing VMAT2 inhibitors, it naturally leads you to an opportunity to invest more behind sales and patient activation. And that's what we also plan to do for 2024. But as Richard said, of course, we are quite disciplined in analyzing where we want to invest our dollars.

Thank you, Sven. And I'd like to thank everybody for taking the time to listen to our call and to ask the question. We do appreciate the interest in Teva and I wish everybody a good day or a good evening. Thank you.

Thank you for joining today's call. You may now disconnect your lines.