Teva Pharmaceutical Industries (TASE:TEVA) Q1 2019 Earnings Call

0:00 Good afternoon ladies and gentlemen and welcome to the Teva Pharmaceutical Industries first quarter 2019 financial results call. At this time all participants are in a listen only mode. There will be a presentation followed by a question and answer session at which time if you wish to ask a question you will need to press star 1 on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today on Thursday the 2nd of May 2019. I'd now like to hand the conference over to your first speaker today, Kevin Mannix, Senior Vice President, Investor Relations. Please go ahead. Thank you Jenny and thank you everyone for joining us today to discuss Tevis first quarter 2019 financial results. We hope you've had an opportunity to review our earnings release which was issued approximately one hour ago.

0:49 Thank you for joining us. Thank you for joining us. Our chief financial officer, Mike McClellan, will follow by reviewing the first quarter results in more detail. Brendan O'Grady, Teva's head of North America Commercial, will join Cor and Mike for the question and answer session that will follow the presentation.

1:55 And with that, I'll now turn the call over to Cor Schultz. Cor, if you would, please. Welcome, everybody, and thanks for dialing in. The short message for the first quarter of 2019 is that everything's on track. Basically, the revenue is on track, the launch is on track, the cost reduction program is on track, and the debt reduction is also on track. And as a consequence of that, we're reaffirming our financial outlook for the year. If we look a bit more at the details, then revenues came in at 4.3 billion, and that was after 200 million of headwind on the currencies. The gap diluted loss per share was 10 cents, and it was mainly related to write-downs on intangible assets. The non-GAAP diluted EPS was coming in at $0.60 according with our plans. Same thing for EBITDA coming in at $1,150,000,000 and the free cash flow which came in at $360,000,000.

2:55 We're seeing a stabilization of US generics and European generics so that means we're seeing a stabilization of our global generics business. You probably remember a year ago where we took significant action to stop the declining value of the US generic business by basically going out and saying that we would not be selling products at a loss and streamlining our whole portfolio of generics. When we had the half-year results last year, I was indicating that we were seeing signs of stabilization, but we couldn't be sure about it. And when we shared the full-year results three months ago, we confirmed that now we have seen a stabilization. This is further confirmed by this first quarter. We now have five quarters in a row where the North American generic business is around $1 billion in revenues per quarter and where the European revenue is around $900 million per quarter. and of course with some exchange rate things.

3:51 So that's important that it has worked. We are now having a stable business in our generics, of course helped by ongoing launches and by strong key products. In terms of products, we have good success with Adobe. It's growing nicely. I'll get back to that and the same thing for Assetto. Both products are growing nicely. I'll comment on that. I'll also comment on Copaxone where we of course see a continued loss of revenue due to the generic competition. and then we're very excited about the launch of Adobe that's coming up in the EU following the approval by the EU in April of this year. On the spend base, we will be achieving our two-year target of a 3 billion reduction. I'll show some more details about that and that's of course partly due to the site consolidation, closing manufacturing sites all around the world but it's also due to general savings in the whole P&L. The net debt has been decreasing by half a billion and we are now at 26.7 billion and we have 1.6 billion scheduled for repayment in the middle of this year. Let's have a look at the spend base and the restructuring progress we're making.

5:02 So this is a chart where we compare the starting point, the $16.3 billion we had in total spend in 2017. That was the basis for our restructuring program where we said that during 2018-2019, we would reduce the spend base by $3 billion, getting to a full year spend of 2019 of $13.3 billion. So that's the target, $13.3 billion. on the middle here you have the MAT which is of course constantly moving down as we reduce cost and the MAT for the first quarter looking back four quarters is standing at 13.8 and that indicates that we will hit the restructuring target but what indicates it even more is that if you take the first quarter total spend then it comes out at Thank you very much.

6:10 More people will leave this year. It's basically all announced, but it's a consequence of the delays in winding down factories and doing different changes at different sites. So we'll see a further reduction of several thousand employees during this year. Now, we can't succeed by just cutting costs. We also need to grow our revenues. And the two key drivers here are Adobe and Osteto. And if we take a look at Adobe first, then you can see we have a very steady increase in patients in weekly scripts. The weekly script count is approaching 10,000, which we hope to hit in a couple of months. And you can see that the NBRX share, so the neutral brand share, is hovering just below 30, between 28 and 30%. That basically means that, of course, long-term, the NBRX share gets translated into NRX, gets translated into TRX.

7:04 Thank you very much. and for that reason we have a low, very low net sales. That's not a consequence of the discounting we're doing. It's more a consequence of the fact that we pay for patients to get on grant and then if they have insurance, we will on a gradual basis over the year increase the cash that we're collecting for these patients. 8% of the scripts are on quarterly dosing which roughly translates into some 20-25% of all our patients being using the product on a quarterly basis and we have strong growth in the number of prescribers and we have good access by now.

8:00 So all in all, we are very, very happy about the progress of Adobe and we do very much look forward to launching this great product which helps people with chronic migraine in Europe. And I can just point you also that we just released long-term data on Adobe, long-term clinical data and it's really phenomenal good data. We still see 60% plus people having more than a half of their migraine days and on episodic migraine, we see two thirds of people having more than a halving of their migraine days. So really good encouraging long-term clinical data also. If we look at Osteto, Osteto is growing very, very nicely as well. You can see both the TRX numbers, the patient numbers and the revenue is growing nicely. We do expect to hit our target for the year, which is 350 million in sales.

8:55 and we are having very favorable national formulary coverage, both in commercial and in Medicare Part B. So as you know, we've discussed before, in tardive dyskinesia, there's huge unmet need. If you look at these TRX counts per quarter, and you should compare it to that in tardive dyskinesia alone, there's probably 500,000 patients in the US suffering from this condition. They've had no real efficacious therapy before but with this drug, they now have a drug that's indicated for it and we're very optimistic about the future growth of Osteto both in patient numbers and in revenue. If we take a look at the Propaxone, Then we continue to see generic competition, of course, and we see a steady increase in the volume that goes to the generic brands.

9:50 Right now, we're sort of at the level where we had Thank you very much. Thank you for watching. and of course in the coming years it will keep on sliding and we maintain the level of a reduction of around roughly 45% in revenue per year in reduction of Copaxone revenues.

10:56 With that, I will hand over to Mike who will give you some more details on the financials. Thank you, Corey. Good morning, everyone. We start with a review of our GAAP performance on slide 10. Stevo posted a quarterly gap loss of approximately $105 million and the loss per share on a gap basis of $0.10 for the first quarter of 2019. As we'll detail in the next slide, the gap results were impacted mainly by impairment charges and recurring amortization. So turning to slide 11, in the first quarter we experienced non-gap adjustments amounting to an impact of $759 million on net income. The adjustments primarily consist of the impairment of intangible assets and product rights amounting to $364 million and amortization charges of $283 million for the quarter, which is the new run rate level for amortization for the year.

11:52 Now turning to our non-GAAP performance on slide 12, quarterly revenues were $4.3 billion, a decrease of 15% compared to the same period in 2018. The decrease was mainly attributed to generic competition to Copaxone, totaling $310 million, a decline in our respiratory and oncology products, totaling $223 million, and a decline in our North American generic sales, totaling $122 million. This was partially offset by growth in ANDA, Estado, and Ajobi. Compared to the same period in 2018, we experienced a negative foreign exchange impact of $177 million in revenues. Net of FX revenues for the quarter decreased 12%.

12:39 Gross margin was 50.1% compared to 51.7 for the same period in 2018. The change in gross margin was driven by the decline in sales which I just highlighted, partially offset by an increase in generic profitability and the discontinuation of our OTC joint venture as a part of the profit share of the joint venture was previously recorded against cost of goods sold. Operating profit in the quarter declined by 29% compared to the same period in 2018. The decrease was mainly attributable to the decline in Copaxone and other specialty brands, which I just mentioned. as well as lower other income. This declined by $104 million this year versus last. The higher other income in the first quarter of 2018 was mainly due to Section 8 recoveries from multiple cases in Canada that did not repeat in 2019.

13:33 These declines were partially offset by our ongoing cost reduction program. Non-GAAP earnings per share in the quarter was $0.60, 36% or 34 cents lower than the same period a year ago. The decrease was mostly due to lower operating profit, partially offset by lower tax provision. We'll talk a bit more about the trends in revenue and cash flow later in the presentation. So turning to slide 13, we've been highlighting for several quarters now, including our 2019 guidance provided in February, the impact of the stronger U.S. dollar on our results as approximately 49% of our revenues come from sales denominated in non-U.S. dollar currencies. We see that the exchange rate movements during the first quarter of 2019 had a negative impact of $177 million on revenue, while the impact on operating profits was much more modest at $58 million. The main currencies relevant to our operations that decreased the most in value against the U.S.

14:33 dollar were the Euro, Russian Ruble, Argentinian Peso, and Israeli Shekel. So turning to slide 14, I'd like to highlight some of the revenue trends we've been seeing throughout the different segments and regions. Starting with North America, I'd first like to highlight again the performance of our two most recent launch franchises, Jovi and Estado. Both are on track to achieve our annual sales guidance of $150 million and $350 million respectively. Despite our North American generics business losing two exclusivities from the fourth quarter of 2018, the business generated $966 million in sales and averaged approximately $1 billion in sales for the last five quarters.

15:21 North American Copaxone sales experienced their second consecutive significant quarterly decline, dropping by more than 40% compared to the fourth quarter of 2018 to $208 million as the pace of generic erosion picked up, leading to share loss and destocking at the wholesale and retail level. In addition, we did see some price pressure in the first quarter compared to the end of 2018. The current annual run rate is now expected to be around $800 million for the U.S., in 2019 versus our previous estimate of approximately $1 billion as we see sales leveling out this year at about the first quarter level. Pro-air revenues rebounded in the first quarter compared to the fourth quarter, which had been impacted by higher sales reserves recorded in anticipation of generic competition, including the approved generic versions of Ventolin HFA and Proventil HFA.

16:15 We launched our own ProAir HFA authorized generic to select customers in January 2019, and these sales are captured in North American generics. QVAR recovered nicely in the first quarter to $64 million, a level which we see... and sales of Trienda Bendecca declined versus both one year ago in the fourth quarter, mainly due to the introduction of a competing Vendamustine solution or Big Bag in May 2018. Revenues in Europe grew 5% compared to the fourth quarter on the strength of our generic sales, including OTC products that are historically strong in the first quarter due to the cough and cold seasons. Our international markets are down 10% sequentially from Q4 due to expected weakness in our sales of generics in Japan.

17:07 We do attribute some of the region's weakness to seasonality and would expect the business to pick up from this level later in the year, but still be below our 2018 sales for the full year as we guided in February. Lastly, other sales were down 16% sequentially. This line primarily consists of sales of APIs to third parties, certain contract manufacturing services, and an out-licensing platform offering portfolio products to other pharmaceutical companies through our affiliate Metis. The decline is primarily due to a reduction of low-margin sales in our contract manufacturing business. So turning to slide 15... Pre-cash flow for the quarter was 360 million, a decrease of 162 versus the fourth quarter of 2018, primarily due to the annual incentive payments. Looking to the remainder of the year, we expect free cash flow generation to be stronger in the second half versus the first half as we move through the current working capital drag on receivables and bonus payments that I highlighted in February.

18:14 Turning to slide 16, We ended the first quarter with a net debt of $26.7 billion and a net debt to EBITDA ratio of 545. We did use some excess cash in the first quarter to repurchase approximately $100 million of bonds due later in 2019. During April, we also entered into a new $2.3 billion unsecured syndicated revolving credit facility, which replaced the previous $3 billion revolving credit facility that we had. So now turning to our financial outlook for 2019 on slide 17. Today we are reaffirming our annual guidance that was presented in February, including an earnings per share in the range of $2.20 to $2.50. This now concludes my remarks on the quarter.

19:03 We will open it up for Q&A, so operator, if you would please. Absolutely. Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. In the interests of time, please limit yourself to one question and one follow-up question. If you need to withdraw your question, you can press the hash key. Once again, please press star 1 on your telephone keypad if you would like to ask a question. Thank you. And our first question today is from the line of Ken Kakachur from Cowan & Co. Please go ahead.

19:49 Thanks so much and good morning. My question is on the cash flow. Mike, you alluded to some of the puts and the takes, but just wondering as we are working through all the cost reduction, we do seem to be pretty tight on operating cash flow and what we're yielding. Just wondering, can you start giving us a sense to what degree this may drive deeper cost reductions, any urgency to continue to go beyond the $3 billion, and can you give us any roadmap to how you would achieve that? Thank you. Let me start and say the first quarter is affected by, of course, a few items that you don't see in the third and fourth quarter last year. We have the annual incentive payments that are coming out. That's about $300 million. You're also seeing, as normal in the first quarter, a little bit of an inventory increase. Thank you very much.

20:57 Now, of course, we monitor this very closely. As we go into next year, we'll continue to look to make efficiencies in terms of our cost of goods and other places. But at this point, it's a little early to tell you that we're going to have net savings beyond the $3 billion. Maybe I'll let Cor give you a little bit of his perspective on that as well. Yeah, of course. We have the aim to become as effective as any of our competitors. which means that longer term we need to improve our margins which is why we have a long term financial target of an operating margin of 27% which is higher than where we are right now. So of course in order to achieve that we need to set plans in place so that this happens. Our plan right now is to communicate more broadly on this. Thank you. Thank you.

21:48 Thank you. Our next question is from the line of Navin Jacob from UBS. Please go ahead. Hi. Thanks for taking the question. Just on the Stetto, if you could, you know, previously you were highlighting patient and now you're highlighting prescriptions. Just wondering if you could give us a similar metric that you've done in the past with regards to patients. Yeah, I'm sure we can do that, at least give you a feel for it.

22:34 There's, of course, a very close correlation between the two, so I don't think there's a big difference, but I'll just hand it over to Brendan to see what we think about the patient number. So thanks for the question. Now, look, we see the patient number continue to grow. We're very happy with where we are with Osteto currently, and the growth in Osteto from Q4 to Q1 continues. We've seen very strong demand so far in Q2 as well. So from a patient numbers perspective, I think the numbers continue to grow as well as the revenue, and we're headed towards achieving our goal of $350 million for the year. And just to follow up on U.S. generic pricing, are you seeing any acceleration in price erosion in Q1 relative to Q4?

23:24 And just some commentary there. on the overall landscape for 2019. Yeah, I can give you an overall name Brendan can comment on. If you take a macro view on it, and that's confirmed by various external sources, then it's quite clear that we don't see any deterioration from Q4 to Q1. If anything, we see a continued stabilization of the US generic pricing levels. Yeah, the only thing that I would add to that core is that our assumptions for pricing are exactly where we thought they would be, and so we continue to march along that path. And as you annualize out of the portfolio optimization in the U.S., I know you're still doing optimization next U.S., but in the U.S., it sounds like you're close to completing the optimization here.

24:18 Will there be a rebound in price erosion after that's annualized? So, yeah, we've completed the exercise here in the U.S. and we've gone through that. I don't expect there to be a rebound. We continue to have a competitive marketplace and we respond, but I think we've seen most of that work its way through the system. Thank you very much. Thank you. Our next question is from the line of Gary Nachman from BMO Capital Markets. Please go ahead. Hi. Good morning. Cora, after one, two results, do you remain confident you can return to growth in 2020, both with revenue and EBITDA, even with a lower Capaxone level that you highlighted?

25:05 And then just on a Jovi, how is this market shaking out relative to your expectations? Lilly has stepped up their efforts recently with Emgality. Just talk about the resources you're putting behind Ajovi to compete effectively with both Lilly and Amgen. Thanks. Thanks, Gary. I'll give it a shot at both questions, and I'm sure Brendan can give you some more color on Ajovi. If we look at the earnings and the revenue, then you could say if, Thank you very much. I still expect this year to be the trough year, which basically means that we expect to see better earnings in 2020 than 2019.

26:06 Whether we will exactly see it on revenue could depend on what happens to, for instance, the open drop designation for Bendecca. Right now we have it. It looks good for Atlanta and Bendecca. We hope to keep it. But, of course, there can be swing factors, but I don't think there will be swing factors on the revenue that we cannot offset on the earnings. So definitely 2019, I still expect that to be the drop year for earnings. and then revenue, we'll just have to wait and see the details. But of course, the lower Copaxone comes out this year, the bigger the chance that we also have this year as a trough here for revenue because Copaxone then will lose less in 2020. And we will have Ajovi and Osteto growing as we've explained many times. This year, we expect to hit the 150 million for Ajovi, 350 for Osteto and of course, substantially more in 2020.

26:59 In terms of the dynamics, I won't really comment on the competitive products because they should ask competition, but I can at least share with you that the dynamics are in a way very much as we expected for our product, Adobe, but it's a little different from the whole market because the number one to launch normally holds a good grip on the market. That's not the case right now. Thank you very much. which is, by the way, why we think that there's a company that has to pay royalty to us, not just in Europe where they have agreed to do it, but also in the U.S., but that's a side issue. So we're basically seeing that the product that we have and Lilly has seems to have some clinical benefits which are helping us in the marketplace.

28:06 So we are very happy with these 28% to 30% we are holding right now, and I think that's the kind of level you should expect that we will be holding going forward, maybe with some bigger dynamics between Amgen and Lilly. But on what we're doing, maybe, Brandon, you can say a bit more about that. Thanks, Cor. As Cor mentioned, we're very happy with where we are relative to the CGRP market. The product's been well accepted by physicians. We're doing very well in the headache centers and with neurologists, which is a big focus. Of course, we have the pre-filled syringe. The other two have the auto-injector. While that isn't a significant issue in a once-a-month injection, I think that is a little bit of a drag on our new-to-brand share. We hope to introduce the auto-injector Thank you very much.

29:14 We have the right-side sales force out there focusing both on neurologists as well as high-decile, I would call them non-neurology writers. And so we've got a competitive share of voice. We continue to monitor that very closely, and we think that we're effectively resourced right now to compete, and we'll continue to do so. So we're very bullish, as you know, on Adobe and happy with where we are. Okay. Thanks for all that, Collin. Thank you. Our next question is from the line of Leah Abraham from Citi. Please go ahead. Good morning. You noted $800 million of U.S. Capaxon revenues this year. Are your expectations for ex-U.S. Capaxon revenues the same as when you provided guidance in February?

30:03 So basically are you saying, are you now assuming full-year Capaxon revenues of $1.3 billion, if you can just confirm that? And then... As it relates to the gross margin, I'd be interested in any comments on gross margin development in 2019 relative to your prior expectations given slightly lower expectations for U.S. Capaxian revenues. Thank you. Thank you. I'll answer the first question on Capaxian revenues. and then Mike will explain what we expect for the Roth market. So you're absolutely right that we have an expectation of around 500 million for the rest of the world on Capaxon. That is completely unchanged. So that of course adds up to 1.3 billion. There's a little color on it which is only very positive and that is, as you might have noticed, the European patent authorities have had a look at our Capaxon patents and have upheld the patents Now, it's a little complicated structure in Europe because once the European authorities, they uphold the patent, then of course you need to go out and enforce that in each of the countries. And we're in the process of doing that.

31:15 But this actually has the potential of securing our capacity revenues at a higher level going forward in Europe than we were predicting a year ago. So we're quite optimistic about the, you could say, the stickiness of the compaction revenues outside of the US. Yeah, so in terms of gross margin, Liev, I think if you look at the full year, you're probably going to see something very similar to the first quarter, maybe some little swings up and down. But we do expect to cover the slight downside in Copaxone with some other products. And we're seeing a slightly better margin in our generics business. So overall, I think you're going to see us be somewhere in the range for the full year that you saw in the first quarter.

32:02 Thank you. Thank you. Our next question is from the line of Esther Royavedu from Oppenheimer. Please go ahead. Thank you for taking my question. On Ostito, can you share any prescriber feedback on potentially switching patients over to Ostito in the second half of the year? And then more broadly, can you comment on the pricing environment for Ostito and how you see that trending as the year progresses? Sure, I'd be happy to comment on both. As far as the switching from either from Ingresa to Alceta, which I'm guessing is the essence of your question, I think that both of the products are competing in a very early market.

32:47 Sardide dyskinesia is a highly unserved or unmet, there's a high unmet need in that population, and there's a lot of market growth for both products. I don't have any specific data to share with you about failures of one going on the other and I would be just speculating if I did so I will just reserve my comments to say that Osteto is first line therapy and doing well in competing with Ingresa. As far as the pricing environment, the pricing environment is relatively stable. We have been proactively working with payers both in the commercial side and the Part D side Since launch, and I think that goes to show when you look at our access coverage, I think 89 in Part D and 85 in commercial or maybe vice versa, but certainly high in both. And we do enjoy some advantages in access that our competitor does not.

33:42 As far as their contracting strategy, I can't really say, but pricing is not really a concern as far as rapid continued erosion. Gotcha. And then, Jovi, maybe taking a step back on the larger migraine market, can you share your thoughts on, you know, potential impact on MAP usage and when oral CGRPs get to market for prevention? How does that affect the access environment and your messaging to prescribers? So I think that, you know, this is still a rapidly forming market. There are still – there's 36 million – Migraine patients, potential patients out there. So there's still a huge unmet need and we continue to see volume and demand grow for all three of these agents. There is a potential infusion on the horizon as well as orals. We'll wait and see what the oral profile looks like.

34:35 Will they have the same efficacy profile, the same side effect profile? I don't know. We'll have to wait and see when that happens. But I think that a monthly injection, and in our case a quarterly regimen, is an extremely convenient way to address this problem. And remember, we competed with a daily injection MS in an oral world or even against weekly injections, and now three times a week. So I don't think – I think that the market will continue to expand, and certainly as more competitors come into the market, those are potential threats. But I think we're happy with the profile that we have with the Joby, and we have plans for significant future growth. Thank you very much. Thank you very much. Our next question is from the line of David Marris from Wells Fargo. Please go ahead.

35:27 Good morning. First, you previously provided guidance for revenue EPS and the EBITDA. In the press release, you say that you're reaffirming your revenue and EPS guidance. I just wanted to confirm whether or not the previous EBITDA guidance of 4.4 to 4.8 billion still stands. Secondly, if you could detail what the impairments were specifically just since you took large impairments on the Actavis business previously. And then lastly, there was a lot of drama this quarter, especially related to the stock on opioid liability. I know there's disclosure in the filings, but is there any context that you can provide or commentary that you can provide to give us some context around this issue? Thank you.

36:15 Thank you, David, for those questions. I'll do the first answer because that's easy. And then the impairments, Michael commented on that and now I'll comment on the opioids. So we are confirming the whole financial outlook, including the EBITDA outlook. and it's of course, like you said, between 4.4 and 4.8 billion. So it's the whole thing that we're confirming and that's also what you have on the slide that we just showed. So that's a very straightforward answer. Mike, on the impairments? Yeah, so there was probably about an even split of that 350 million in the U.S. between IPR&D and assets on the market. You know, we have a large amount of intangibles and every quarter we look to see if there's changes in the market or changes in the development profile of the IP and R&D assets. and we make the determination for those who no longer can sustain their carrying value that we write them down.

37:14 So we had, like I said, $350 million. Of course, the majority of that was assets that were purchased in the activist acquisition, but as we have a large balance sheet, we will see these occasionally and we've been seeing them almost on a quarterly basis as there's always fluctuations in timing and impact of these kind of products in the market. And then on the opioids, of course, we can't say that much about the ongoing legal proceedings, but I can share with you that, of course, we share the assessment that the misuse of opioids, both, you would say, prescription-based but also illegal opioids, is a significant health care problem and a significant problem for the U.S., and this problem has been created over a long period of time and is very difficult to tackle.

38:07 It is, from our point of view, sad to be accused of being a part of creating this problem given the fact that what we do is we manufacture and provide generic products where we do not do any promotion whatsoever. and where we have the exact labeling that came from the originator products. So we are not involved in any kind of promotion of our generic products. And the few specialty products we have, they are actually for terminally ill cancer patients who are already on opioid therapy and who get breakthrough pains. So these are people in a very, very tough and sad situation. The products are covered by a very significant rinse, so a risk mitigation mandated by FDA. They are distributed under very, very strict control and we have always lived up to all the requirements both of the brands and on the restriction in how we sell the products reporting everything to FDA and relevant authorities.

39:04 So really from my point of view, I can't see anything which we've done which is wrong given the law and the rules of pharmaceutical manufacturing and sales in the US. But however, it is a political issue and I would say it's a very politically sensitive legal situation on the opioids. I would not be surprised if these proceedings go all the way to the Supreme Court eventually because it is a principal thing whether you can in any way be sort of being responsible for something you are doing following all the laws and regulations of the land. But that remains to be seen. Thank you very much. Thank you. Our next question comes from the line of Randall Stanicki from RBC Capital Markets. Please go ahead.

39:55 Great, thanks guys. Brendan, last quarter you called out Restasis and NuvaRing as potentially attractive opportunities and I think some of your competitors are probably thinking about that as well. Any update on those products or any other potential big launches in the generic segment for the remainder of this year? and then I have one follow-up for CORE. Yes, so let me just, I'll answer your question in a macro way and then I'll boil down into some of the more specific launches. We have a potential for 80-some launches this year of which we will probably do about half. So I think that we've got a nice opportunity in front of us this year. If we look at some of the bigger launches, NuvaRing is still in our plan for the second half of 2019. and Restasis is also still in our plan.

40:45 We should know on Restasis I would think by early to mid-summer as to where we are so that is an attractive launch and I also mentioned that We have the potential for Forteo in the second half of the year, generic Forteo, Teriparatide in the second half of the year as well. So those would be kind of the three remaining, as you would phrase, the bigger opportunities, but all of the others are good opportunities as well. So that's kind of what the launch looks like through the rest of 2019. That's helpful. And then last quarter you talked about, in the context of some additional cost savings opportunities, You talked about the ongoing COGS opportunity to take out costs there, and you said a 50 to 100 basis point opportunity on a go-forward basis. Can you just provide some context to that?

41:37 Is that 50 to 100 basis points of the overall business on an annual basis, and where is that coming from? Because if so, that's a pretty meaningful EPS tailwind. Thanks. Thanks for that question, Randall. Yeah, it is from the overall business. So it's based on my experience of optimizing total manufacturing systems in other companies. And it's given the level we are at right now. We have roughly a gross margin around the 50%, which means there's a big cost base there to work on. And it's not something that comes easy. It takes a long time to do it. It's not something you do just... by a few lucky moves. It's something you do by optimizing thousands of processes and manufacturers.

42:28 But my experience is that when you do that in a structured way and you have a clear long-term strategy, then you can improve your gross margin for your entire business with some 50 to 100 basis points per year over a longer period. So that I can just confirm. So just to be clear, we should be thinking, as we think about the next several years and we look at, you know, TABA's consolidated gross margin, we should be thinking about that gross margin moving higher by perhaps 50-200 basis points annually? You could say that we have a long-term target of the operating profit of 27%. That's higher than where we are now. Part of that improvement, of course, has to come from the COGS, because if we don't improve the gross margin, then it's going to be very difficult to get a significant improvement of the total margin.

43:14 So yes, we will be targeting something like that. We will give you some more details on what we are planning to do once we finish the restructuring. That means once we report on the full year of 2019, next February, we'll give you an outline of how we see the ongoing optimization of our manufacturing system. Okay, that's great. Thanks very much. Thank you. Our next question is from the line of David Amsalem from Piper Jaffrey. Please go ahead. Thanks. So just on Jovi, you've commented in the past that the steady state gross to net potentially would be in the 20s and maybe 30%. And I was wondering if you could revisit or are you willing to revisit those assumptions?

43:59 And when do you think that spread will normalize given all the moving parts and particularly the heavy subsidization of assets? out-of-pocket costs. And then secondly, and I apologize if I missed this, but just on Forteo, what's your view on the competitive dynamics, not necessarily during the initial launch and generic market formation, but over the long term in terms of how significant the competitive landscape will be, and what are your thoughts on the number of entrants from Forteo? Thank you very much. and the growth to net has been more challenging, I guess, or deeper than one would expect.

45:00 I mentioned 20% to 30% before. That was early on. The market has been quite volatile, and I think it's going to be probably north of 40 for many of the players is probably where we're headed. But I do think that things will start to stabilize. As we've had conversations with many of the payers, many of them have said that, that the value now in the net price of these medications is to the point where as we get to a 2020 marketplace that it will be probably not uncommon to see all three products available on the formula. So we continue to work through that. We have about two-thirds, about 67% of our patients currently covered with some form of insurance reimbursement.

45:45 We ended last year with about 20% of our scripts getting reimbursement, and that number is now up to 50%, and that continues to climb and should converge as we get further along in the year with what our overall coverage is. So I think that that's probably where we're headed on the growth, and it's probably going to settle out north of 40 somewhere. I don't really want to comment any more than that, but we'll see where it goes. As far as Forteo goes and how that product is, Thank you for joining us. were either alone or were with one, maybe just two other entrants for a while.

46:49 Thank you. Thank you. Our next question is from the line of Greg Gilbert from SunTrust. Please go ahead. Thanks, Brendan. Another Jovi question. You've talked a lot about pricing and reimbursement, et cetera, and gross to net, but on the SC&A front, are you confident that your SG&A footprint that is reps and marketing spend and DTC is adequate in light of some of your competitors being more primary care focused about how they attack this market. And then, sorry Cor, back to the opioid, the unfortunate opioid subject. I hear you on your views on who's to blame, but in the real world of the parties trying to come up with some numbers, I was curious if you think the people on the other side of the table have an understanding and in some ways agree with you on the different levels of flame for say a branded versus a generic bucket or even the distributor since you own one of those as well as a company's relative ability to pay.

47:51 So maybe you could comment on some of those concepts recognizing that you don't think that did anything wrong. Thanks. Yeah, so I think we will go first with the Adobe question and Brendan will handle that and then and I will share the answer to the opioids. Okay. So as far as the SG&A expenses and being competitive, look, I'm a commercial guy, so I'd always like to spend more money in the marketplace, but I think that we have to balance our spend with our goals. And I think that the way that we've moved expenses off of older, less priority products to focus on adjovinants that is appropriate, I think we are satisfied with the market growth that we're seeing with where we are.

48:36 We're confident that we'll be able to hit our number by the end of the year. And we continue to look at creative ways to get our share of voice out there. So from a sales rep standpoint, I think we're competitive right now. I think we're very competitive in the neurology and headache centers. I think we are competitive, as I mentioned, with those high decile non-neurology writers. Things will continue to evolve. We continue to look at it. We have not done significant DTC advertising to date. We are evaluating that. Of course, the DTC advertising that is going on benefits to some degree all of the parties out there, and certainly we're looking at different ways for multi-channel marketing, which is a little bit more cost effective to get your message out. So the bottom line in answer to your question is that, yeah, we would always like to spend more, but I think that we are appropriately resourced to achieve our goals.

49:31 Okay, thanks. and with regards to the opioids, then it can be difficult, of course, to say what the other side of the table thinks. You know, there's more than 1500 court cases in plaintiffs and I guess in most of those cases, the real plaintiffs of the counties, the states and so on, they're really not paying anything for starting the court cases. It's probably been done by the plaintiff's lawyers who are financing this on a no cure, no pay basis. So it's a very serious and many more. that that bill should really be picked up by everybody selling alcohol, everybody manufacturing alcohol, all the microbreweries, all the big distilleries.

50:30 They should really be blamed for the misuse of alcohol. This is a bit like what you're seeing here. You should follow all the laws and the rules of the land. How can you, at the end of the day, be held liable for misuse of products in an illegal and incorrect way? But of course, what you're getting at is that the The plaintiff lawyers who really sort of run the game. How do they see this? I think they look at where they can get some money. That's what they're looking at. And as you know, we have a lot of debt, so we don't have that much money. So I think they'll have somebody to find somebody else if they want big settlements. It won't be with us. Thanks. Thank you. Our next question is from the line of Uma Raffert from Evercore. Please go ahead.

51:15 Hi, thanks so much for taking my question. And Cora, I love your quote just now on the last question. I just wanted to focus on two specific things. First was on accounts receivable. And I guess my question is, it's clear that less is being recovered in the first half on accounts receivable side. But I also noticed you're securitizing accounts receivable. So I'm just trying to understand exactly what's happening there. Is it a net cash positive or negative on a free cash flow basis? and the second one is one of the slides say you've taken an impairment charge on Revlimid. Can you lay out for us why that was? Because presumably you have a settlement in place. So is it because you don't think there's an approval coming on time or something else? Thank you. Yes, so thanks, Umar. I'll take both of those. So there is a securitization program. This is something that's been in place since 2011.

52:04 It's securing some European receivables, which are notoriously tricky to collect on. So this is, you can see it in the footnotes of R10Q, R10K. It's a program about the size of $700 million, which turns over several times a year. Thank you very much. is now technically considered an investing cash flow. So you see an exact reflecting mirror of a reduction in operating cash flow and a positive investing cash flow. It's $362 million for this quarter, but it's a minus in operating and a plus in investing and no real change net.

52:56 There hasn't been really a net change in this program over the last couple years. So if you need more, we can always take that offline and describe that to you a little bit better. So in terms of the Revlimed, there's no change in our settlements, but the initial assumptions when we valued this asset at the time of the activist acquisition, as it's a file that came in from that side, is that we would have a longer runway as a single asset. Thank you for joining us. Okay, thank you very much.

53:55 Thank you. Our next question is from the line of Elliot Wilbur from Raymond James. Please go ahead. Thanks, good morning. First question for Brendan, just update us in terms of supply situation around generic EVIPEN still expecting basically return to full capacity sometime over the course of the second quarter and any change in sort of your prior expectations of what you'll ultimately capture at PEAK. And then I want to ask a question around the Facinimab development program. It looks like there's been a fairly significant change to the long-term safety study. And I just want to get a sense of, you know, what drove that. Was it something you saw that was seen with the asset itself or is it something that's coming out with respect to some of the other NGFs in development?

54:46 And, you know, maybe just give us a sense of What the timeline looks like for that product at this point. Thanks. Thanks, Elliot. I think I'll do both of those. EpiPen is pretty straightforward. We are ramping up the volumes and providing EpiPen to anybody who needs to buy one. We have the adult version on the shelves. We're distributing it through ANDA. So any pharmacy who needs EpiPen can just call ANDA and they'll get it within 24 hours. And we're seeing a nice... Revenue coming in from that. We will have the junior pen ready for the school to start in August. So we'll be able to supply every pen fully to the marketplace. Right now we are probably approaching some 20% share of the market that will be increasing. And of course we never know what competition will do.

55:37 But if there's no real change in the competitive situation, we could be approaching 50% share as we exit this year. So that's a very nice story for us. On Fasinumab, I don't know exactly what change you're alluding to. There was a change, but that's some time ago, where we took out the high doses. So we are now testing one milligram every four weeks or one milligram every eight weeks. And the reason why we took out the high doses was that we were seeing some safety issues, which is all about the joints, as you know, the narrowing of the joints. and we were seeing that on high doses. We have since then had data come out on the low doses in terms of the short-term efficacy, which look really good. And we've also had some safety data coming out, which also looked acceptable on the short term for the low doses that we are continuing in our clinical development together with Regeneron.

56:32 And we will expect to continue those safety studies that are of longer duration. And then in due time, we will get the data from those and then we just have to wait and see it's anybody's guess whether these data will confirm that it is a product that can be approved based on its very good safety and clinical efficacy or whether there will be some challenges on the safety and that will of course be up to both us and the regulators to assess that once we have the long-term safety data but we don't have that yet. Thank you. The next question is from the line of Ronnie Girl from Bernstein. Please go ahead.

57:17 Good morning, everybody, and thank you very much for taking my questions. A couple for Brandon. I've got a follow-on for CORE. Brandon, first on Adobe, the scripts that the physicians are currently providing, is this under buy and build as it essentially goes into pharmacy benefits and will that change? Are you expecting that segment to continue to be strong because you're kind of like a lone bear or essentially disappear as you get the auto-ejector? And then on Alcido, I was kind of spooked a little bit by ESI beginning to manage the category. In your thinking, you know, is this category going to begin to get managed longer term between you guys and Eurocrime? Do you expect prices to flatten out? And more broadly, you know, initially the thought was this might go to like the $2 billion range.

58:04 Is this more realistic, kind of like between $500 billion for big sales? And I might as well add the follow-on right away. Thank you very much. Okay, so hi Ronnie. I will go first and I will answer the Adobe question as far as the quarterly dosing and is it buy and bill or is it going through the retail channel? The vast majority is going through the retail channel through the normal adjudication process. And I don't expect that to change.

58:50 I think the fact that a physician can administer the quarterly dose in the office gives us an option. and gives the physician or the patient an option for a buy-and-bill option, but I don't expect that to become the norm, and I don't expect that to significantly grow over time. As I mentioned, this is, I think the original assumption, if you went back two years ago before these products launched, that this category would be more of a specialty category, but with the wax pricing and with where the net is, this has really moved to retail. and I think the access will vastly call for just kind of a regular pharmacy reimbursement. So definitely a possibility and an advantage I guess that we have with the quarterly dosing but not one that I expect will be real prevalent. In regards to Osteto, again I don't want to speculate on our competitors contracting strategy but I don't think this is a sense where payers are trying to pit two products against each other. This is a Thank you very much.

1:00:09 and that they didn't reach an agreement with ESI and that's why they were excluded so we'll see where this goes but I don't expect the type of price erosion in this category so I think your original assumptions around us that'll stay intact. Yeah and just a little bit on those numbers I mean We did $200 million last year. We expect to do $350 million this year. So if it should stop at $500 million, then growth should stop at the end of 2020, which I think with the patient population not being treated out there, that's not realistic. So we expect Ostata to keep on growing nicely. On the R&D side, we spent roughly a billion on R&D, and you could see in the statistics, The big chunk of that is for innovative specialty products. We have about 30 development projects ongoing.

1:00:57 About two-thirds of those are biopharmaceuticals. And we don't really want to share that with anybody right now. The reason is that we are in the restructuring right now, this year and last year. But our plan is to share more with you once we finish this year. So once we get to February next year, will share a bit more with you on what is our pipeline, what are the different projects we have. We have some really exciting projects. There's some overlap in the actual biopharmaceutical R&D machine in terms of pilot plans, clinical development, the early phases. So we think we can do very efficient R&D and we can keep supporting R&D. Thank you. Thank you. Our final question today is from the line of Chris Schott from J.P. Morgan. Please go ahead.

1:01:59 Great, thanks very much for the questions. Just had two on JOV. The first is talking a little bit more about the EU opportunity for the drug. I think historically, XUS has been a smaller opportunity for some of the legacy migraine products. I was wondering if you see the CGRP dynamic being different and how large of an opportunity could that be? My second question on Jovi was just on formulary. Sounds like you are expecting broader coverage as we look out to 2020. But as we think about the current environment, has your current coverage been a hurdle at all for physicians in your view? And are you thinking about broader kind of national formulary coverage as further helping with uptake of a Jovi? Thanks very much. Thanks for those two questions, Chris. I'll take the first one and Brendan will take the second one. So when it comes to Jovi and the EU, then of course the unmet medical need is identical and the prevalence of migraine is identical to the US. So there's an enormous unmet medical need.

1:02:55 So the next question is reimbursement pricing. And in the EU, there is an interesting dynamic, which is that biopharmaceutical injectables And since the Jowi is a biopharmaceutical sophisticated injectable product, We see now that the prices for the competitive launches in Europe are right now at about the same list price level as in the US, which means that actually slightly higher.

1:03:43 And of course, since a number of European markets have a net price which is very close to the list price, this would indicate that the European market could actually end up having a net revenue per patient which will be higher than the United States which is something that doesn't happen that often. So in terms of the pricing, I think there's a good outlook. In terms of unmet medical need, there's a good outlook. Of course, there's certain hurdles to overcome and also get access in some of the markets. So what we expect is to see a gradual rollout with the easier markets to get started in which are like places like Germany, Scandinavia and so on where we'll see the early launches and then Southern Europe coming on later once we work our way through the different authorities that are gatekeepers for launches. But definitely a very exciting and good opportunity for us. Brendan or Joby?

1:04:38 Yes, so as far as coverage in the U.S. and formulary coverage, I think if you look across the three CGRP agents, Emgality is in the lead and that I think was part of their strategy was to get access quickly and we're pretty comparable to Amavig across the spectrum. So we're on at Caremark with Emgality, Amavig's not. We're not on at United Healthcare. We just gained access to Express Scripts National Preferred Formulary April 1st. Cigna's also reimbursing the Joby. So our coverage continues to expand and as I mentioned in previous calls, it's going to be a continued discussion with payers throughout 2019 and probably even into the first quarter of 2020.

1:05:26 But I think this eventually settles. So where we don't have coverage, we continue to have those discussions and try to improve our position. As I mentioned, I think the 67% that we do have is adequate for us to achieve our goals this year and continue to keep the JLB going. But getting to your question, has it been a hindrance for physicians? I don't think it has been. The way that we designed our program has been really to make it easy for physicians to write the product and easy for patients to access the product and that's somewhat of the lag in gross to net that you saw as we came out of the fourth quarter and into the first quarter is that we designed it so that patients had basically a copay card that would take the insurance out of the equation so we had time to build the formulary coverage and you're seeing that now transition as I mentioned that We exited the year at 20% of patients getting a reimbursed script.

1:06:23 That's now up to 50, and it continues to climb. So access will continue to be a goal. We'll continue to improve the access as we go through the year. But the problems that physicians are having, it really isn't. We've designed a program to be very efficient for them and hopefully be able to treat patients with the Joby. Thank you. Okay, well thank you everybody for joining us today and participating in the call. All the materials are on our website and will be available throughout the day and tomorrow to speak to you if you have questions. So take care. Thank you. Thank you ladies and gentlemen, that concludes the conference for today.

1:07:10 There will be a replay available for you to listen to. The telephone numbers to access this replay are as follows. From the US, 191-76-777-532 And from anywhere else in the world, plus 44-333-009-785 You will then need to enter the conference ID. Once again ladies and gentlemen, thank you for your participation. You may now disconnect.