Teva Pharmaceutical Industries (TASE:TEVA) Q3 2021 Earnings Call

0:00 Good day and thank you for standing by. Welcome to the Teva Pharmaceuticals third quarter 2021 financial results conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question and answer session. To ask a question during the session, you will need to press star and one on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance over the phone, please press star zero. I would now like to hand the conference over to our first speaker today, Kevin Mannix, Senior Vice President of Investor Relations. Please go ahead.

0:38 Thank you, Nadia, and thank you everyone for joining us today to discuss Teva's third quarter 2021 financial results. Joining me on today's call is Cor Schultz, Teva's Chief Executive Officer, Eli Kalif, Chief Financial Officer, and Dr. Sven Dietles, Teva's Head of North America Commercials. We hope you've had an opportunity to review our press release which was issued about an hour ago. A copy of the release and the slides being presented on this call can be found on our website at www.tevapharm.com. Please note that the discussion on today's call includes certain non-GAAP measures as defined by the SEC. Management uses both GAAP financial measures and the disclosed non-GAAP financial measures internally to evaluate and manage the company's operations in order to better understand its business.

1:25 and further management believes the inclusion of non-GAAP financial measures provides meaningful supplementary information and facilitates analysis by investors in evaluating the company's financial performance, results of operations and trends. A reconciliation of GAAP to non-GAAP measures is available in our earnings release and in today's presentation. Please note that today's call will run approximately one hour. And with that, I'll now turn the call over to Tevis Chief Executive Officer, Cora Schultz. Cora, if you would please.

1:54 Welcome, everyone, and thanks for your interest in TEFA. Our Q3 2021 financial highlights will start focusing on our revenues. The revenues came in stable compared to last year, but with a lot of underlying dynamics, which I'll be reviewing in the following slides. Our adjusted EBITDA came in at $1.2 billion, also very stable compared to a year ago. GAAP-valued EPS came in at $0.26. Non-GAAP-valued EPS came in at Thank you for joining us. and to access KPIs. And of course, we believe that by being the leading generic company in the world, we have a special, you could say, ability to support low and middle income countries with essential medicines and we believe that's a very strong commission we're showing with this bond offering.

3:12 If we move to the next slide, and here you can see some of the dynamics on the revenue side. I'll just highlight a few of them. If you look at North America, you can see that North American revenue is a little bit below what it was a year ago. It's basically driven by the usual suspects, you could say, which is that Copaxone is declining, and we have Ojovi and Osteto increasing. And I'll be commenting on the increase of Ojovi and Osteto in the coming slides. If you look at Europe, then you can see that Europe is up compared to a year ago. We have seen some fluctuations, as you know, in Europe due to the COVID-19 pandemic. So we saw lower volumes in the first and second quarter of this year.

3:59 We're seeing volumes starting to pick up again here in the third quarter, and we expect volumes to continue to increase in the fourth quarter. In international markets, we're basically more or less unchanged, and that really means that the key drivers here are, as I said, with Jovi and Osteto. So let's move to the next slide. Here you can see the development for Osteto in the US. As you can see, we have seen nice, strong growth in the last three quarters, but you can also see that there was a COVID-related slowdown in the growth, and that was really because less patients were going to their psychiatrist, more psychiatrist offices were closed during the lockdowns, and therefore we saw this slowdown Thank you very much.

4:48 Thank you. people suffering from tardive dyskinesia in the U.S. and only a very small fraction of this patient population is currently being treated. So we are very optimistic about the future growth of Osteto. If we move to the next slide, then as you know, Adobe is launched now in most of the European countries and has been launched in the U.S. for several years.

5:41 And with regard to Osteto, we see a continued nice development in the U.S. in The terms of our total scripts growing quarter over quarter and we also see a very nice development on Adobe in Europe with volumes growing steadily also quarter after quarter. We had an initial ambition of 25% market share in US and Europe for Adobe. We increased that ambition I think one or two quarters ago to a third of the market and we still believe it's very likely that we can reach a third of the market and that's basically due to the Thank you very much. and Japan in the Adobe numbers. So let's move on to the next slide.

6:52 Here we're showing you our specialty in biosimilar R&D pipeline, product pipeline. We're very happy with it. I won't go through it all. That would take too long. But let me just mention two interesting projects. One is Risperidone LAI, long-acting Risperidone, which has been accepted by FDA. Our file has been accepted. for review. We hope to have it approved next year. This is a major new benefit for people suffering from schizophrenia in the form of a subcutaneous injectable long-acting risperidone. So we look forward to bringing that to the market to the benefit of people suffering from schizophrenia. We also have a new interesting license arrangement.

7:37 It's shown here in phase one, ANLE-138B. And if we move to the next slide, and I'll just tell you a little bit about that. We have made a license agreement with Modac, a German company, and it's regarding two compounds that are in the development for treatment of MSA and Parkinson's disease. And we're very excited about this. As you know, we have a long history in Parkinson's. We think these projects are very, very interesting and hopefully long-term, if they turn out to work, Then they could also have a potential in treatment of Alzheimer's. So that's a really exciting addition to our portfolio.

8:25 Let's move to the next slide. As you know, we have a long-term target for our operating margin of 28%. And during our restructuring with the loss of Capaxon, of course, we saw operating margin decline, and then we turned around in 2019, and now we're growing the margin, and I'm happy to report that we're growing the margin in line with our expectations. You can see here, yesterday Q3, it's 26.8, and if you take the midpoint of our guidance, it's 27.5, and we're still committed to the target at the end of 2023 of 28%. Going to the next slide. It's actually today very close to exactly four years since I joined Tether.

9:16 And I'm very happy to report that in those four years, we reduced the debt by some close to $13 billion, $12 to $13 billion. And we've actually also paid $4 billion in interest rate in those four years altogether. So something like close to $16, $17 billion have been returned to the bondholders. and we'll continue to do that because as you can see on the next slide, we have our unchanged long-term financial targets. We want to take the net debt to EBITDA below three times at the end of 23 and in order to do so, we need cash earnings to be strong, above 80% and we need the operating income margin, as I said before, to be at 28% so that we generate the cash needed to basically keep on reducing and we are committed to use the cash flow for debt reduction and we have no plans of raising equity.

10:16 And on that note, I'll hand over to Eli Kalif. Thank you, Cor, and good morning and afternoon to everyone. I will begin my review of the third quarter of 2021 financial results on slide 14, starting with our cash performance. Revenue in the third quarter of 2021 were $3,887,000,000. A decrease of 2% or 3% in local currency terms compared to the third quarter of 2020. This decrease was mainly due to a 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 and Shopee and Zillow.

11:02 Revenue continues to be affected by the ongoing impact of COVID-19 pandemic on markets and on customer 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 the manufacturing sites 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.

11:48 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 impairment.

12:34 which were related to our North American reporting unit. Non-GAAP net income and non-GAAP earning per share for the third quarter of 2021 were adjusted to exclude these items with the largest amortization of purchase 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, Corey and I have already reviewed the third quarter revenues, which total 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 Aceto and Adobe, partially offset by our lower sales of Copaxone and lower profitability from ANDA.

13:57 Our NAND gap operating margin was 26.8% versus 25.8% a year ago. The increase was driven by higher gross profit margin mentioned above. We ended the quarter with a non-GAAP earning 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 base declined by $333 million or $540 million net of FX.

14:44 Based on the first nine months of the 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. Deva'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, reframed in April and July, and are reframing today. 2021 free cash flow is expected to be in the range We expect free cash flow to peak up through the end of 2021 as we keep driving optimization of our working capital with a high focus on inventory improvements.

15:43 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 a serial note, the proceeds of which we are expected to be used for refinancing existing debts. by way of standard 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 this commitment 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.

16:29 Today's announcement reflects our proactive efforts to refinance our debt ahead of significant maturity 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 core operational performance as we continue to focus on delivering our business objectives and long-term financial targets. The bond offering we announce today represents Teva's first-ever sustainability-linked bond. We intend to offer a 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 assets 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 dedicated ourselves to quality, ethics, and transparency.

17:33 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 dark link between our corporate responsibility commitment and our funding strategy. The bond proceeds will be used for general corporate purposes which we will dedicate it to refinancing of existing debt maturity 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 fluctuation.

18:36 Upcoming maturities include 1.2 billion next month. Our net debt to EBITDA continues to decline, coming in 4.51. for Q321. As we continue to make progress towards our 2023 targets 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 market, and on customer stocking and purchasing patterns. Certainly, some geographic regions, product launches and mix of products have struggled more than others to return to their pre-COVID patterns.

19:31 Nor has this been more apparent than in the US market for Estedo. 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 the patient population suffering from serotic 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 expected an acceleration to occur in Q4. Therefore, we are reframing our guidance for Stevo at $850 million.

20:18 The same can be said for all other components of our 2021 outlook, which includes total annual revenue of $60 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 several 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? Thank you. Dear participants, we will now begin the question and answer session.

21:03 As a reminder, if you wish to ask a question, please press star and one on your telephone keypad and wait for a name to be announced. We will kindly ask you to limit your questions to a maximum of two. Once again, if you wish to ask a question, please press star and one. If you wish to cancel your request, please press the hash key. The first question comes from the line of Omer Rafat from Evercall. Please ask your question.

21:32 Hi, guys. Thanks so much for taking my questions. Have the expectations for the private attorneys, who seem to have been the holdup for many companies that are trying to settle, have their expectations rebased after they got the big money settlement they wanted from the bigger companies? And are they actually at the negotiating table now or not quite? And then secondly, I'm somewhat confused about the commentary on Osteto I'm hearing. So volumes were up 8% quarter-over-quarter, sales are up 15%, and yet attract slightly behind versus consensus. but what it really means is in 4Q it would have to track at like a 50% jump versus 3Q to get to the guidance. If you could just clarify that. And then finally on the sustainability bond, one of the questions I had was isn't sustainability bond proceeds supposed to be specific to sustainability projects or could they also be used towards refinancing upcoming debt? Thank you very much.

22:31 Thank you, Uma. I will take the first and the last question and then and Sven, the head of North America, will take the OSTATO question. So with regard to the opioid settlement discussions, we are in active discussions with the state AGs and with the plaintiff lawyers. I don't think there's been any rebasing or change in, you could say, the discussions. But you are right that it is, of course, very complex. There's a lot of involved parties. And we haven't reached a settlement yet, as you will have seen, apart from one state and which we're happy about, but that's of course only a small fraction of the whole opioid complex. So we're optimistic that we can still reach a settlement within the next 12 months.

23:17 We're in active dialogue and we hope to see that coming to fruition over the next 12 months. Then on the OSTETO question, I'll hand that over to Sven.

23:30 Thanks, Uma, for the question. The orthodontic plan for 2021 is based on two assumptions. One is on psychiatrists returning to office to diagnose patients in person, and the second one is based on the effect of the DTC campaign, which we started in May, accelerating new patient starts towards the second half of the year. What we've seen in our new patient starts going out of Q3 and now going into Q4 is a significant separation from the baseline trends. So for that reason, we expect in Q4 to have an acceleration of sales and to end the year strong with those data.

24:10 Thanks, Fred. And with regard to the bonds, when you're right, there's something called green bonds, which are linked to a, you could say, purpose of the bond being investments in initiatives to improve the environmental impact of your activities. That's not what we're doing. We're doing sustainability-linked bonds and that's really linked you would say to the UN goals for sustainable development and it's where you do something where you help the world in a way that you are able to do and because we are the leading generic company in the world we are able to provide high quality essential medicines to low and middle income countries and that's what we are committing to and at the same time we are also committing to improving our environmental footprint by reducing emissions of greenhouse gases. So we think that's a really strong signal to our commitment to these two areas.

25:09 And we think we're in a unique position to improve access to essential medicines in low and middle income countries due to our portfolio of these products. We are the company in the world that has the most of the essential medicines on the WHO list of essential medicines. So we are very happy and proud about this. and we hope that the bond issue will be very successful and that we will, of course, be reporting on an ongoing basis how we are meeting the targets we are setting for ourselves and, of course, we are committed to them and expect to meet them in line with the commitment we showed them today. So thanks for the question, Zuma. Let's have the next question. Thank you. The next question comes from the line of Elliott Walbaugh from Raymond James. Please ask your question.

25:56 Thanks. Good morning. Good afternoon. Questions for Cor and Sven. Just specifically, in North American generics, maybe just give us some perspective in terms of the primary contributing factors behind the sequential decline and sort of the break below the $900 million mark, which obviously has been stable for decades. Some time, just curious as to, you know, whether it's, you would call it very product specific. Is it more just accelerated erosion across the base? The absence of approval, just some color there would be helpful. And then for core, maybe just, you know, bigger picture question in terms of thinking about the U.S. generics business as a whole, just looking at R&D spend in the North American segment, it's annualizing somewhere around $600 to $700 million. Thank you very much.

27:16 about your thinking about the need to sort of recalibrate or rethink investments in tied to the U.S. generic business. Thanks.

27:24 Yeah, thanks for those questions. Sven will address the first one, and then I'll address the second one. Yeah, thanks, Andrew.

27:31 So for the U.S. generics, just as a reminder, we report North America generics, a combination of Canada biosimilars and the U.S. generics business. and there are three factors that influence the current sales trend. One is the price erosion. For our portfolio, I can say that we have a relatively stable price erosion scenario. It's, of course, influenced by Trubada and Atribla facing more generic competition, but we have remarkable resilience in the complex generic portfolio. For that reason, overall, our pricing environment is relatively stable. The second factor is volume. We're coming now to the end of our volume consolidation and network restructuring that led to basically a planned volume reduction due to portfolio consolidation.

28:21 So here we also expect, let's say, a stable environment going forward. And the most important factor, of course, for us this year is the number of product launches. Here we see for us, but also for the industry overall, the number of FDA approvals that we got were not on plan, and that is one of the factors that influences the performance for this year.

28:43 Thanks, Sven. And with regards to the overall question on generic R&D and the generic segment in the US, then we are fully committed to being leaders worldwide in generics, also being leaders in generics in the US. And our R&D spend is showing a very good return on a longer basis. We are basically aiming at a 80% target of what goes off patent, whether it's biologics or chemical indices. And we are doing our R&D to match that. As you know, we have more than 1,000 R&D projects combined between biosimilars and generics, the majority, of course, being in generics. And we think we have a good return on it.

29:29 We are still committed to the $4 billion generics revenue on average over the coming years. in the North American generics and biosimilar space. We think we can meet that. It's correct that this quarter we haven't seen any major launches, and therefore we have a slightly weaker quarter. It's not really due to price erosion accelerating in our case, but it is due to the fact that, as you've noticed over the last years, we've had, like, for instance, some years ago we had EpiPen launch, then we had the Truxema launch, then we had the Truvada Natripla launch, and we are having some launches that are waiting for regulatory approval. We are optimistic that we'll see them in the coming quarters. So we are very committed to the US generic segment and we don't see a structural weakening of that in the years to come. The amount that's up for grabs, so to speak, the amount of revenue that goes off patent stays unchanged very high.

30:26 So we think this is a good business and we'll keep on doing all the necessary research to support it. Thanks for the questions. Let's move to the next questions. Thank you. The next question comes from the line of Ronnie Gall from Bernstein. Please ask a question.

30:42 Good morning. I kind of want to stay for a little bit on the theme of the generic business. You know, I'm kind of looking at the increase of Rituximab over the last few months. And obviously, it's been a big driver for you for 2021 over 2020. You don't have another similar launch in 2022. And it seems that Rituximab erosion is in terms of price is large enough to impact the growth of the overall market. North America Generic Line. Can you talk about some other products that may launch in 2022 that will offset that erosion? Otherwise, it's just tough to see that generic business reaching that $4 billion in 2022. Can you talk a little bit about the ups and downs of that business? And second, the debt that you're being offering here, Eli, can you just tell us roughly what should be the range of interest rates that you will have in 2022 versus 2021, assuming you're able to do the refinancing.

31:37 I know it's a projection at this point, but just give us a feel for where it's going.

31:41 So thanks for those questions, Ronnie. So Sven will answer the first one, and Eliyahu will answer the second one. Yeah.

31:49 Ronnie, so for 2022, we of course have around about 30 to 40 generic product launches already lined up. every product that we did not get approved or will not get approved this year in the U.S. generics business naturally rolls forward into 2022. And these are the complex generics that we talked about earlier this year. For the biosimilar space, we don't expect a product launch in 2022. And you're right, we took some markets now in a situation where we have three competitors, Teva, Pfizer, and since January also Amgen, that of course changes the pricing environment. And we move now the strategy for and Fuxima to value maximization

32:31 for 2022. Over to Eli and the total finance cost that we're expecting next year.

32:40 Yes, so I would say, Roni, if you follow the 2021 and also what we see in 22, accordingly to our estimation, we are going to keep the $1 billion in terms of finance expenses, so we don't see that one changing. Thanks for the questions, Ronnie. Let's move to the next questions. Thank you. The next question comes online of David Amselem from Piper Sandler. Please ask your question.

33:09 Thanks. So regarding business development in the wake of the MoDAG license agreement, I guess the question here is given the cap structure and given the specter of of liabilities, particularly on opioids. What can you do in terms of in licensing and acquisitions in terms of size, in terms of stage of assets, or even acquiring a commercial ready or commercial stage asset? How aggressive can you be there? That's number one. And then just stepping back on biosimilars, Obviously, your question is what kind of footprint you'll have over time. Can you just talk to philosophically what you think pricing erosion is going to look like in some of these markets? Do you think they'll mirror what we see for complex generics, or do you think that pricing and margins will remain even more robust over time? What are you seeing, and what do you think ultimately will happen?

34:14 Thanks.

34:16 David, thanks for those two questions. So with regards to BD, then what we can offer is basically our expertise, our know-how, our capabilities in development, and our commercial capabilities. We cannot offer big upfronts, big cash payments, as you correctly note. But it turns out that there's actually quite a lot of companies and research groups that are not just interested in sort of cashing out and getting a lot of cash now, But some of them are really interested in keeping, you could say, some upside by staying in the project in the sense that they have future revenues coming in in the form of license fees. And because we have a strong track record in areas like what we just discussed with MoDAC, we have had one of the best Parkinson's drugs ever in the form of Acelate. And we have a really solid CNS knowledge base and commercial footprint. That makes us attractive.

35:17 Some of the big pharma guys, they sometimes prefer to pay a big upfront and take nearly all the rights and very low royalties if it succeeds. But we can offer the opposite. You could say low upfronts, lots of expertise, strong commercial footprint, and then of course we'll be paying some royalties if it succeeds. That's the same thing that goes for a lot of the generic in licensing that we're doing and for that matter for the biosimilar in licensing that we're doing. If you look at the Alvotek in licensing, same idea. Small upfront, we take part in commercialization or we do the whole commercialization and that gives value to the company that's out licensing to us. So we are optimistic that we can keep on doing that and we are not going to do any deals where we put a lot of money on the table.

36:05 We are totally committed to debt reduction and we'll stay that way at least until we reach the and the 23 target of net debt to be down being below three times. And I can share with you personally, I'm really thinking that we should go even lower towards two times before we could contemplate any significant cash in relationship to business development. When it comes to biosimilars, then I'll give you my take on it and Sven can add some US perspective to it. are more complex and more expensive to develop. The regulatory hurdles, the scientific hurdles are higher. So in that sense, they are, like you said, more like complex generics rather than simple generics. And as a consequence of that, what we've seen so far is a pricing development that is, I would say, a mix between what you could expect from an old-fashioned simple generic and what you would expect from a specialty product getting more competition.

37:12 So what you see is that biosimilars will start out with a lower discount than traditional generics and then they will be dropping in price as more competitors enter but classically less competitors will enter and therefore the competitive pressure will be somewhat less but of course the trend line is The same that the price will go down as more competition occurs, but the absolute levels are more attractive. So the initial launch price has a lower discount than it has for normal simple generic, and the price erosion is slower. So in that sense, I think you're right. It's more like complex generics. And if we look at some of those, then we can see that our situation, for instance, on EpiPen as an example of a complex generic, Thank you very much.

38:31 The main driver for value creation is the launch sequence, so are we first, second, or third, or fourth to market? It's actually the most important factor for generating value, and you see this in the difference between Hatsuma or Troxima, for example, in our case, where we are first to market or fourth to market. In terms of price decline, we model it in analogy to what we see over the last years already in Europe, because the European biosimilar market is more established than the U.S. market. but it behaves, as Kaur said, more like a complex generic market. So you have a stronger value creation upfront because the price decline is lower and then basically it trickles down as new competitors come into the market. But overall we believe the tail end value of these drugs are much more significant than for normal generics.

39:19 Thanks, Sven. Thanks, David, for the questions. Let's move to the next questions. Thank you. The next question comes from . Please ask your question. Good morning, Yaron, and thanks for the questions. Two for me, just to follow up on the biosimilar front with last week's interchangeable designation for Boehringer Seltzer, how does this influence your thoughts on the commercial landscape for Umaira? And also with ATV02, what are the current roadblocks that you're in with such to getting it out to the market? Secondly, on the free cash flow guide for 2021, You have a variation of around $300 million, a range of $500 million to $800 million for 4Q. Are there any material variables which can have a $300 million impact with just two months left for the business?

40:11 Thanks.

40:14 For those two questions, Sven will handle the first question. I'll give a top line on the cash flow, but I'm sure Eliyahu will also comment on it.

40:23 Yes, on the first question, I think it was about the prospect for Humira biosimilars based on the fact that Boehringer got an interchangeability designation for their biosimilar, yes. So we know, of course, Amgen will come first, and then we have a whole range of competitors lined up for July launch. As I said before, I believe the launch sequence here will be the main value driver. Amgen also started an interchangeability study for the high concentration products. We don't believe that they will come on time with the interchangeability designation to market, so in 2023. Our own product that we licensed from Albutech will be interchangeable, sorry, and it will be a high concentration formulation, so we should be in a pretty good space for this product launch.

41:16 Thanks, Sven. With regards to free cash flow, you raised the question How can you vary, let's say, $300 million? And there's actually a very simplistic answer to it, which is reflected if you go back historically and look at our cash flows, that in the cash flow you have elements of working capital that have a high influence, not just, you could say, the quarterly earnings, because, of course, the quarterly earnings don't typically have $300 million in uncertainty on them. But the free cash flow, you have your inventories, you have your accounts, Receivables, you have your accounts payables and so on. And just small swings on those can actually, if they all swing in the same way, have a big impact on the cash flow. You saw it in the first quarter where we just had negative, you could say negative is maybe the wrong word, but all the movements on the working capital went sort of against the free cash flow.

42:09 So we had a very low free cash flow. You've seen other quarters where all the movements on these working capital items moved positive to the free cash flow. So that is really the explanation overall, but I'm sure Eliyahu can give you some more feel for the details of how much are the effects of these working capital elements on the actual free cash flow.

42:30 Eliyahu Sharon Kalifman Yes, Balraj. So overall, I would say that in Q3, we saw more improvements in terms of how we are running our inventories. Thanks Eliyahu, thanks for the questions. Let's move to the next questions. Thank you. The next question comes from Lan of Navantai from Sissi.

43:16 Please ask your question.

43:19 Hi, good morning. Thanks for taking my questions. I have two follow-ups on generics and opioids. If you could discuss further the US generics outlook. You previously saw no material change in market conditions and volumes coming back in June. Did that change at all after the Q3 performance? And then on opioids, given how the New York trial is going, could we see A nationwide settlement in the first half 2022 or more likely in the back half of next year? And also, can I just please ask the maturity of the new ESG bonds? Thank you.

44:03 Yeah, thanks for those questions. I think Sven will take the first one. I'll take the second one and Eli will take the third one.

44:12 Yes, thanks, Evan. I think the question was about your generic volume development and the outlook for the business. So let me answer this a little broader because we lost, of course, market share from 13 points to around about eight and a half points over the last three years since 2018. But if you analyze the volume of the underlying causes for that, that was primarily driven by management decisions to support our restructuring and the portfolio consolidation. So going forward, Volume for us is not as high strategic value because our customers have moved from basically buying broad portfolios to buying individual molecules. So we try to optimize molecule level or the molecule value. And that's, of course, also driven in some occasions to volume capture. But overall, I would say going forward, if we want to go for higher volumes in the US generics business, it always needs to serve the purpose of making our network and operations more efficient, but also then, of course, to capture value, because I believe volume alone is not a strategic objective for us in the U.S. generics business.

45:24 Thanks, Sven. With regard to the opioid settlement discussions and the New York trial, it is correct we have an ongoing trial in New York, a jury trial, and that's proceeding, but it won't end in... In the near future, it will end sometime in the coming months. And a trial can always be a trigger for a settlement. But of course, you never know. The New York trial could be the trigger for a settlement once we get close to the actual verdict. We are very positive towards reaching a settlement. We are in constant dialogue with the state AGs and with the plaintiffs. So we are optimistic that we can reach a nationwide settlement.

46:11 I cannot tell you that it will happen in the next month. I think it's realistic that it can happen within the next 12 months, but I can't be more specific on the timing. Then I think the last question, Eliyahu, is about the bond offering, what the maturities, currencies, and so on.

46:28 Yes. So thanks for the question, Evan. And I think that in terms of what we are looking for to do, of course we were going to look to do both Euro and USD for the Euro 5 years and 8 years, 10 years and for the USD 5 years and 7 years, 10 years and actually the way that we see it we are going to make sure that we in the coming years enable to use our country 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 are actually creating more models and I would say a portfolio on our maturity to allow us to be able to pay according to our free cash flow generation.

47:15 Thanks Eliyahu and thanks Nathan for the questions. Let's move to the next questions. Thank you. The next question comes from the line of Nathan Rich from Goldman Sachs. Please ask your question.

47:27 Thank you and good morning. I have a few questions. First, maybe a follow up for Sven on the generic pricing in the US. It sounds like generally generic pricing trends haven't changed, maybe excluding the dynamics with Truvada and Atripla that you mentioned. So could you maybe just kind of talk about what you saw play out in the third quarter? and then as we think about the fourth quarter, I know it's a seasonally stronger quarter, but it does seem like the guidance implies a bigger step up in sales than what you typically see. So Eliyahu, I don't know if you could maybe just help us think about the cadence between 3Q and 4Q this year. And then just lastly, if you could comment on what you've seen with respect to input cost trends, either API or labor costs and how that's factored into your outlook. Thank you.

48:18 Thanks, Nathan. I think Sven will take the first one. and Eli will take the second one.

48:25 Okay, thank you for the question. Of course, we track pricing in the industry and U.S. generics and for our portfolio. So what we've seen is and we've seen also the number of Sandor what they reported yesterday on the U.S. pricing portfolio. We don't see the same trend in our portfolio because we have a different portfolio structure than Sandor has. For us, as you also said, two bar and a triplet were the major factor in the first two quarters of this year. In the third quarter, we had a more stable pricing environment because this effect, of course, is leveling off.

49:02 The main driver for us is the ability to price and to supply complex generics because they are more resilient in the markets.

49:12 Going forward, what we observe in terms of pricing environment are two factors. One is the stability of suppliers in inventory management, basically because inventory discontinuities drive or set off price bidding. That's one element. The second one is the approval rates for new generics coming into segments where we already have generics, so it's basically FDA-driven. But here we don't see any acceleration of the trend So for that reason going forward, we actually calculate our business for 2022 within a stable pricing environment for U.S. generics.

49:50 Thanks, Sven. And Eliyahu, will you comment on the change in revenue from third quarter to fourth quarter?

49:59 Yes. So Nathan, thanks for the question. So what we see actually in the main three areas, one of these one is the specialty portfolio, which as we mentioned, We see a set of them to accelerate. That's one element. The second element is more dynamics in our generics, which is actually including what Zen mentioned, kind of about similar. And the other stuff is in between the other two regions, Europe and international markets. Those actually are going to contribute to the increase from Q3 to Q4.

50:35 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 1st 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 built up before the holidays, which we've also seen for many years.

51:10 Nathan, was there one more question?

51:13 Oh, just input cost, if you could just comment on what you've been seeing.

51:18 Yeah, so I'll comment on that. So we've seen a lot of industries reporting that they are dramatically affected by input costs, such as energy, raw materials, transportation and so on. And of course, we also see that, but to a Thank you very much. It might be that we will, going forward, see an inflation effect on cost of labor. That remains to be seen.

52:10 It's really too early to predict. You can spend hours discussing that with any economist that you pick. So we'll be observing that. And of course, it's important if we get into a more inflationary environment, it is important that our whole generic portfolio, for instance, in the U.S., our whole OTC portfolio, and our specialty portfolio in U.S. is subject to price flexibility because we can actually increase prices on all these products. So thanks for those questions, Nathan, and let's move on to the next. I think it might be the last. One more. So we have two left. Okay, two more people. So let's have the next one. Thank you. The next question comes from line of Jason Gerbery from Bank of America.

52:55 Please ask a question.

52:58 Hi, this is Ash Verma on for Jason. Thanks for taking our questions. So one on opioid litigation. So can you talk about the recent Louisiana opioid settlement, which has a November 2nd opt-in for the deadline for the political subdivisions? Do you have any visibility into that process? I would imagine that that would be informative in terms of what happens with the rest of the states for the subdivisions. And the second question is the Respiradon and LAI. So how much of a benefit does the sub-Q provide here?

53:34 Sorry, could you just repeat the last question? How much exactly what does Respiradon and LAI provide?

53:40 Yeah, how much of a benefit does the subcutaneous formulation provide here? As you know, like one of the other sub-Q has not done well in the market.

53:50 Thank you very much. So I think I'll handle both of these. With regard to the opioids and the settlement in Louisiana, then we're very happy about this settlement. It is basically a mirror of what we are offering and seeking to reach as a nationwide settlement. So it's a pro-rata cash amount paid over 18 years, the same way as we are discussing it for the nationwide settlement. And it includes also products of oxen. and that is of course important because that's a product you use to wean people off opioid abuse and misuse. So we're very happy about it. Your specific question about the subdivisions, this assumes that all the subdivisions in the state of Louisiana are included and that's been the way we've been negotiating it with the state and we're optimistic that this will be the case.

54:48 I can't remember the deadline, I think we haven't reached it yet where we just need to get confirmation that all the subdivisions are included, but that's our clear assumption that that will be the case. And of course, for the nationwide settlement that we're discussing, we also need the subdivisions in there because otherwise it doesn't really make any sense. So that's what we're going for. With regard to Risperidone LAI and what the benefits are compared to the other long-acting injectables that exist in the marketplace, I'll need to give you just a little bit of explanation. So when you suffer from schizophrenia, it's really important that you stay on your medication. And there's a risk if you only take daily tablets that you skip some tablets because you get a little confused, you feel very well, and then all of a sudden you get a relapse.

55:41 And every time you get a really bad relapse and get psychotic, it is very harmful for your brain and your cognitive functions. so therefore it's very important that you stay on your medication and therefore all the long action products were invented initially. They are typically given as intramuscular injections, kind of a depo effect and these injections are quite painful because it's a quite thick needle so to speak, a long needle and you need to get it into the muscle tissue so this is not a very Thank you very much. showing that both once monthly and once every second month, we have excellent efficacy, very, very strong phase three clinical data.

56:56 So that's really the benefit. You get the strong efficacy, but in a nicer, more convenient way. So thanks for those questions, Ash. And now to the last questions. The last question comes from Gary Natchman from BMO Capital. Please ask a question.

57:14 Hi, good morning. First, Cora, where are you seeing most of the COVID-19 impact in different markets and with customer stocking and purchasing patterns? When should that normalize? Will that happen in 4Q? And are you still confident 2021 should be a trough year, whether revenue or EBITDA? What are some of the big levers there that we should be thinking about now as we're approaching year end? And then the second question is, Ajovi launched in Japan. What's the opportunity there? What other markets will you be going into? What could the contribution from Austedo be in China and other markets outside the U.S.? And how much will ex-U.S. markets contribute to your guidance targets for both Austedo and Ajovi this year that you set out?

58:02 Thanks.

58:04 Thank you, Gary. I think I'll take the first one. Smith can comment also on it. And then I'll take the second one. So I'll do it over all high level because there's a lot of details to the COVID-19 impacts, of course. But if you think about it high level, then of course COVID's been with us so long now that we have to go all the way back to 2020. You remember that we had a patient hoarding of products specifically in Europe in the first quarter of 2020. Then we had a destocking at patient levels in the second quarter of 2020, which took volumes down. Then we had the effect of, you could say, the lockdowns in both US and Europe in the third and fourth quarter of last year, of 2020.

58:53 And then we were optimistic when we made the guidance for 2021 that we were seeing all the vaccinations coming on and we hoped that after Q1, then we would see basically the markets normalizing in Q2 of this year. Now, as we all know, it didn't go that fast. We did see the initial normalization of script levels in the U.S. starting at the end of the second quarter. But at that point in time, of course, we were below where we were expecting to be because we thought we would have had normal doctor visits, prescription visits, prescriptions and so on in Q2 of this year. And we didn't get that. We had the continued lockdowns. All these stuff happening both in Europe and U.S., high levels of infections and so on.

59:42 So we got lower volumes, which I showed you before, of status scripts, of rep visits to psychiatrists, of psychiatrists staying open and so on. All those numbers are subdued in the second quarter. In the third quarter, they've started to move up. That's why you see the status scripts are moving up. Also in Europe, the lockdowns have been more or less lifted. So we see European volume coming up, but we had hoped that European volume started picking up already in the second quarter and then accelerated in the first and fourth quarter. Now we're seeing all these things happening in the third quarter and we are expecting in our guidance that this will continue in the fourth quarter. We have good reasons to believe that because we're not seeing any new lockdowns in Europe.

1:00:27 We're not seeing any new lockdowns in the U.S. So we think we are aligned there in our projections for the year with the continuation of a normalization of the market. Then you can ask me, are the script levels actually back to where they ought to be? And here I would say we're getting very close to the 2019 levels. However, of course, we would be expecting a growth in, let's say, European total script volume because that's what we normally see, low single-digit growth. We haven't caught up with that lack of low single-digit growth in 2020, 2021, but we are sort of back to where we were in 19. If you look at psychiatrist doctor visits in the US, then we were below in Q1, we were below in Q2. In Q3, we're just getting close to where it used to be, so to speak, in 19 before COVID.

1:01:24 and I'm optimistic that once we get now into the fourth quarter, we'll see for the first time since COVID started that doctor visits in psychiatrist offices will be above that slowdown that we've seen. So a lot of details, but really it has affected us this year. It is normalizing. I would think that we would next year in Q1 continue to see the normalization. This is of course based on the assumption that we continue to see a strong vaccination drive and that we continue to see a relative low level of severe cases in hospitals, which is the current trend line. Any comments, Sven, on top of that?

1:02:07 No, I think you actually exhausted it. I would say the only risk factor I see is the cough and cold portfolio that's for U.S. generics but also for European OTC business because in 2020 or 2020-2021, We didn't have a real cough and cold season due to the social distancing, and that basically should happen or normalize also next year.

1:02:33 Thanks, Finn. Then on Adobe Japan and Osteto China, we're very happy about the launch in Japan of Adobe, and we'll be going for prevention of migraine. We think it has great potential. There's a big market for this in Japan. In Japan and in China, the way products penetrate is, I would say, slow and steady. Because first you get the approval, you get the price, which is set by the government. So you don't have a lot of hassle with the pricing. You don't have pricing negotiations like that. You've had that already. So that's the easy part. But you need to get on what's called hospital listings, both in Japan and China. So actually, it's the same pattern for Adobe and Osteo.

1:03:19 You work through all the hospital listings, you get the product on there, and then your scripts start to take off and gradually build up. So when it comes to the fourth quarter of this year, and you always sales in Japan or sales in China will still be marginal. They will not have a major impact. But in both markets, we are happy about the development, and the numbers will be accelerating over the next 10 years. So it's a steady buildup. It's a good launch in both cases, and we are very happy about the products reaching more major markets. So, Gary, thanks for the questions. I think with that, we will end the call. Go to the operator. There are no further questions. I would like to hand the call over to our speakers for closing remarks.

1:04:06 Thank you, everybody, for joining us for the call today. As always, we're happy to take any questions you have today, tomorrow, and in the coming weeks. Take care and be well. This does conclude our conference for today. This conference will be available for replay after 2 p.m. Eastern Time today through till November 26, 2021. You may access the remote replay system at any time by dialing 00443333009785 and entering the access code 6466787. The number again is 00443333009785. Thank you for participating. You may all disconnect.