Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) CEO Kare Schultz said today at his company's annual press conference that streamlining and optimization won't be enough to get the company back to growth. The company will need to launch new products and it has promising drugs in the pipeline, some of them being developed in Israel.
Referring to Teva's results, Schultz commented, "2019 was a good year financially. We met all of the guidance we gave. Revenue totaled $16.9 billion, and free cash flow was $2.1 billion. This is very similar to what we planned at the beginning of the year, and we're very satisfied."
Schultz added that Teva has 35,000 products, "but some of them have a big influence on our results, such as Austedo for treatment of movement disorders. We also launched Ajovy, an excellent and biotechnologically revolutionary drug for treatment of chronic migraine. We're one of three companies with a product of this type. We're about to launch an automatic-injectable syringe that will help patients inject the drug at home.
"The biggest sales are of Copaxone, which are obviously declining because of the loss of the patent. We've managed to keep the loss under control, because 40 milligram Copaxone is still protected by a patent in Europe, and we're giving customers a discount in the US. We lowered the price in order to preserve the volume, and it's working well. We have a 60% market share in Copaxone sales in the US. The product will continue to fade to sales of over $1 billion worldwide in 2020. There are biological products for which the patent has expired, and biosimilar drugs are entering. This business has grown in Europe, but not yet in the US. In November, we launched Truxima, a biosimilar for Rituxan, and this is very exciting," Schultz said.
"Teva's troubles shocked the public"
Shultz talked about the streamlining plan that Teva began in late 2017, six weeks after he became CEO. He said, "It was a shock for the public that Teva's troubles were bad enough to require such a process. Thirteen plants were closed down or sold, and ten more are on the way. We cut annual expenses by $3 billion. That's a lot of money. 13,000 employees left, and it's sad, but most of the people found new jobs, because the global business situation is good. We had to undergo this process because of the huge debt and the challenge of losing the Copaxone patent and the decline in the US generic market. Sales were about to fall by $5 billion, and the debt was $40 billion. It was that or sell the company. We did it, and we're very proud of it. The most important thing is that we did it while maintaining full production capacity."
"I'm glad to say that it helped, and we have reduced the debt by $9 billion during this period. That's a very large figure. We'll go on reducing the debt in order to create a sustainable future. We underwent a refinancing process. We have no bank loans, only bonds. There are years in which the bond payments are $2 billion, and we can handle this with the existing cash flow. There are years in which we'll have to repay $4 billion, and we'll need refinancing then. We did this successfully in the last quarter. The debt-EBITDA ratio in the fourth quarter was 5.3. In 2023, we have $4.3 billion to pay, so we'll refinance debt again in 2022."
Referring to what will happen after the cost-cutting plan, Schultz said that two important measures were involved: optimization and revenue growth. "In optimization, we had 80 production sites as a result of the main acquisitions over the years. That's inefficient. We're now evaluating the acquisition process, the regulation, integration of computer systems and so forth in order to streamline. Instead of buying the same raw material from seven suppliers, we're buying from one or two at a lower price. Eric Drape, who was appointed EVP of global operations, changed the organizational model while creating optimization. The result should be cheaper production, but it's not a quick process; it will continue over the next 10-15 years. We can improve our (non-GAAP) operating profit margin from 24.5% to 28%. It's not a miracle; it's similar to what our competitors are doing.
"As for revenue growth, the two growth engines are Austedo and Ajovy. Austedo is designed for 90,000 patients in the US, and the potential is enormous, because there was previously no treatment. This product can grow for the next ten years. We're working on launching the product in China, without having to carry out clinical trials. The Ajovy drug meets a very important medical need. The pricing of Ajovy in Europe is good - the same as in the US.
"In the longer term, optimization won't be enough; we'll have to launch new products. We have a very broad pipeline of products, including very good respiratory products. We'll launch an inhaler this year in the US that also gathers information. Most of the products in development fail, but as we get further along in development, the chances of success go up. The Fasinumab product, a biological product for relieving pain, is in Phase III. We're working on the product with Regeneron Pharmaceuticals. There are over 1,000 products in development in our generic pipeline now.
"The patents for products worth $210 billion will expire in the next decade. The price will of course drop when generic competition begins. That means $2-2.5 billion in annual sales for Teva, based on our market share. The new products that we'll launch will make up for the drop in generic drug prices."
Teva saves money for health systems
Schultz presented data showing that in 2018, Teva alone saved the US health system $41.9 billion. The saving was $8.6 billion in Europe and NIS 1.4 billion ($400 million) in Israel.
"We're very connected to R&D in Israel. Before I became CEO, there was a falling off in this activity, and I think that is a pity. Everyone knows that there's a lot of innovation in Israel, but we now have twelve new cooperative ventures in the field. Who knows - maybe ten years from now, we'll be talking about a wonder product like Copaxone that came from R&D in Israel," Schultz said.
Talking about Teva's long-term financial targets, Schultz said, "The goal is to generate sustainable business, not to make acquisitions. For the end of 2023, the target is a 28% operating profit margin, an 80% or higher ratio of cash to profit, and a ratio of debt to EBITDA of under 3. We'll do this the hard way, with improvement every year. We won't ask the shareholders for money, so that the existing shareholders will benefit from the improvement. The forecast for 2020 is stabilization in revenue and a higher profit per share. We have a positive future."
Answering a question about the effect of the opioid proceedings on fluctuations in Teva's share price, Schultz said, "Most of the fluctuations in the share price concern opioid-related legal proceedings in the US. The situation is that we weren't sued by anyone initially for something wrong that we did, such as breaking the law. They're suing the companies for contributing to addiction to painkillers, and the companies have to pay for this. This is a new legal theory.
"There is indeed a big problem of addiction in the US, and we want to contribute to treatment for it, so we're negotiating with states there. Together with the three largest distribution companies and Johnson & Johnson, we reached a plan for contributing products that assist in combating addiction. We're working on a final agreement, but it requires the agreement of all the states involved. I'm cautiously optimistic that it will succeed, because it's for the benefit of people in the US. Otherwise, we'll be dragged into a decade of trials, and that won't help people. It will continue contributing to volatility in the share price until it ends."
In answer to a question about rumors of negotiations with Amazon, Schultz said, "There were never any negotiations with Amazon about selling Teva; these are crazy rumors. We're talking to them, of course, because they distribute medical products."
In answer to a question about Austedo in China, Schultz said that the launch "is not yet taken into account in the guidance for this year. Launching a new drug in China takes a lot of time, and revenue in the first years after the launch will not be substantial, but it will increase. This is more important in the long term."
Concerning Rimsa, the Mexican company acquired by Teva, Schultz said, "Unfortunately, there was a problem with the quality of the products. We fixed it, and launched some of the products again, so that our sales in Mexico increased this year, but it will take time to deal with this."
On China, Schultz said, "The coronavirus is a significant challenge in China, and is liable to prove a significant challenge for all health systems. We don't have many employees in China; we have a bit of commercial activity there. It's ironic, because we announced only recently that we wanted to expand in China. Financially, we don't have much revenue there to lose, because we didn't have much there to begin with. There is an indirect risk, because we buy some of our raw materials in China, and we're working on finding substitutes."
"It is possible that in the coming months, we'll hear about existing drugs likely to help in treatment, and if we have such drugs, we'll be able to help," Schultz added. "As of now, there's no effect on our operations and none on our results."
Published by Globes, Israel business news - en.globes.co.il - on February 19, 2020
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