Teva Pharmaceutical Industries Ltd (TEVA) 2023 Q3 法說會逐字稿

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

Thank you, Alex. Thank you, everyone, for joining us today. We hope you had an opportunity to review our press release, which was issued earlier this morning. A copy of this press release as well as a copy of the slides being presented on this call can be found website at tevapharm.com.

Please review our forward-looking statements on Slide 2. Additional information regarding these statements and our non-GAAP financial measures is available on our earnings release and in our SEC Form 10-K and 10-Q.

To begin today's call, Richard Francis, Teva's CEO, will provide an overview of Teva's Q3 results and business performance, recent events and our priorities going forward. Then Dr. Eric Hughes, our Head of R&D and Chief Medical Officer, will discuss progress on our innovative pipeline. Our CFO, Eli Kalif will follow up by reviewing the financial results in more detail, including our 2023 financial outlook. Joining Richard, Eric and Eli on the call today is Sven Dethlefs, Head of North America business, who will be available during the question-and-answer session that will follow the presentation. Please note that today's call will run approximately 1 hour.

And with that, I will now turn the call over to Richard. Richard?

Thank you, Ran, and thank you, everybody, for joining us today. I'd like to begin by saying that we are deeply saddened by the terror attacks in Israel on October 7. Since that day, Teva's Board, the leadership team and I have made the safety and well-being of our Israeli colleagues, our utmost priority. I visited and met employees at the facilities in Israel immediately after the attack. Many of them have families and friends who have perished or been kidnapped. What really stood out and inspired me was that despite all the difficulties they are running together to bring medicines to the patients who need them, especially now. I am personally humbled by their incredible resilience, care and sense of purpose.

Now we have increased support of our emergency supply of medicines to hospitals, pharmacies and patients and we have partnered with our long-standing partners to donate products and provide other humanitarian aid. Through it all, our production remains largely unaffected and gratefully, none of our sites have incurred direct damage as a result of the war. We continue to secure contingency plans to be certain we can maintain our business continuity while most importantly, taking care to ensure that our colleagues are safe and well in these difficult times.

Now moving on to Slide 5. I'd like to update you on strong performance in Q3 as we continue to execute or pivot to growth strategy. Now our strong performance of our growth was delivered by our growth engines, AUSTEDO, AJOVY and our generics business. Revenues were up 7% in U.S. and in local currency. Our gross margin continues to improve. We saw an increase by 50 basis points versus Q3 2022. We're pleased to announce the exciting partnership with Sanofi in Q3, a deal to really maximize our TL1-A asset. Because of these results, I'm pleased to announce that we're going to increase our outlook of revenue to $15.1 billion to $15.5 billion for 2023.

Now to move on to the next slide. We continue to maybe update you on our pivot to growth strategy. As you all remember, this was based on 4 pillars: deliver on our growth engines, step up innovation, sustain a generics powerhouse and focus our business. So I was going to touch on some of the progress we've made in Q3.

As I've just mentioned, AUSTEDO is performing well and is on track to hit $1.2 billion for 2023, and we remain committed and confident of hitting the target of $2.5 billion in 2027. UZEDY was launched earlier in the year, and I'll give you an update on that. And we're pleased to announce with our partner, Alvotech that were doing an FDA inspection in early Q1 in 2024, it raises the opportunity that we may be able to launch Humira next year.

With regard to innovation, I'm joined on this call by Eric Hughes, we'll go into more detail. But a couple of highlights are obviously around olanzapine, our long-acting treatment for schizophrenia in the Phase III study. This is progressing really well and ahead of schedule. So we're confident we'll be able to report results in that -- in the second half of next year.

To have a generics powerhouse, we made good progress as you'll see, we have growth across all of our regions.

And then finally, on Pillar 4, focus our business, we continue to do the work to create a stand-alone business unit to Teva api, I'm pleased to announce the appointment of our CEO for that business that allows them to compete in a global market.

And moving on to the next slide, just to touch upon what are the news we had in Q3, the exciting collaboration with Sanofi. I'm pleased with this collaboration because it really strengthens our pivot to growth strategy. It allows us to partner with a global leader in immunology, both from an R&D and commercial perspective, while retaining the economics going forward, which is important as we want to drive long-term growth for Teva. We see this asset as an asset that can drive long-term growth because of the size of the market will be operated in. I'll come to that a bit later on.

Now back to performance on the next slide. As I said, we had strong performance in Q3. Revenue was $3.9 billion, up 7%. That was driven by both our innovative business as well as our generics business. AUSTEDO continued its impressive growth, up 30%, while AJOVY continues to grow well at 22%. Pleased to show that we saw growth across all of our regions, with particularly strong performance in the U.S. and international markets.

Now to double click and dive a bit deeper, I'd like to move on to AUSTEDO. AUSTEDO, once again, we confirm that we're committed to the $1.2 billion target for 2023. Revenue was up to $339 million for Q3, up 30%. And support and underpinned by good strong TRx growth of 29%.

Now on the next slide, I want to reiterate our commitment to the $2.5 billion target for 2027. We're doing this by investing in our brand and building capability of the company. As we mentioned earlier in the year, we have increased our sales force. We have invested in improving our patient support services as well as looking to launch this brand into the European market by 2026.

Now we see the opportunity not only because we're investing in building capability but there's a significant unmet medical need when it comes to patients suffering from target dyskinesia. And tragically, there's a lot of patients who still need to benefit from AUSTEDO. So we have work to do there and ability to improve patients' lives.

Now moving on to the next slide AJOVY. We're on track to reach or even exceed the $400 million for 2023 with good growth in Q3 and revenues of $114 million. As I said, revenue -- as I said, growth was 22%. What I like about it, AJOVY is not the fact that we're just growing it in all of our regions, but we remain very competitive in what is a competitive sector and segment of the market, highlighting our sales and marketing and medical commercial capabilities.

Now moving on to the next slide. The newest member of our innovative family is UZEDY, a long-acting treatment for risperidone launched in May of this year. Now we're pleased with the launch. And as you can see, UZEDY's capturing over 55% of all NBRx in the risperidone long-acting market. And this is driven by the strong feedback we are receiving from physicians and patients, physicians -- patients obviously, appreciate the subcutaneous injection versus intramuscular. I think the physicians find the fact that UZEDY can reach therapeutic doses within 6 to 24 hours to be really helpful when they are treating patients who have a relapse. This market is an attractive market. It's a $4 billion market. UZEDY will have a real part to play in that market.

Now as I've said before, 2023 as a setup year for 2024, we need to make sure we get access for many inclusions in our hospitals, and we're making very good progress on that. So we look forward to updating you on UZEDY as we near the end of the year.

Now moving away from our innovative portfolio to our generics business. And as I said earlier, I'm pleased to show that we're growing our generics business across all of our regions. U.S. included. And as you can see, strong growth in the U.S. 15%, a solid growth in Europe and good growth in emerging markets and local currencies of 17%.

Now to move on to our pipeline, which is obviously a key pillar of our strategy, our pivot to growth strategy and step up innovation. Just to look at the late-stage assets we have. I've talked about olanzapine and I've encouraged we are with the recruitment of our patients into that Phase III trial, and we look to be announcing what Eric and his team will look to be announcing those results in the second half of next year. Once again, to reiterate, this is a significant market. And with olanzapine, there really isn't a satisfactory long-acting version of this product, this molecule in the market. So we're excited about this and hope we can bring to this patient population.

Moving on to ICS/SABA, another product that entered Phase III clinical trials in Q3, we started to acute patients already. And this is a significant opportunity. As I mentioned on previous calls, based on the guidelines in the U.S., there are 10 million patients who should be on an ICS/SABA combination. And so if you just take 30% of these, the market is still significant at $2.5 billion. So a real opportunity to continue to drive growth for Teva in our innovative business.

And then finally, on anti-TL1A, I have spoken a bit about it, and I'm sure Eric will touch upon this as well. But just to highlight the size of the opportunity in UC and CD, which we see is around $28 billion for what we think we have a best-in-class product.

And then my final slide, I'd just like to close out with our recent progress on our ESG strategy and initiatives. In Q3, we made good progress on executing our ESG strategy and we made good progress against some of our ESG targets. And I'm pleased to announce on behalf of the team to the company received some awards. We were winner of the Best Company for ESG Reporting in the health care sector. And also in 2023, Best Corporate Social Responsibility initiatives. So really highlighting the work and the progress we've made on our ESG strategy.

Now with that, I would like to hand over to my colleague, Eric Hughes, who will walk you through some of our pipeline news.

Thank you, Richard. Turn to the next slide. So as Richard mentioned, we're excited by the increased sales of AUSTEDO, which is a testament to AUSTEDO's safety and efficacy. To build upon what we've already achieved with AUSTEDO, we want to make sure that the flexibility and the convenience of AUSTEDO is improved with our patients, and we're happy to present this data from our real-world studies called START. This study was a real-world study to look at how our 4-week titration pack is used. What we see in this study is that 78% of the subjects completed the study, 97% were adherent to the medication, 76% reached the optimal dose and 95% reached a dose greater than 24 milligrams per day.

But why is this important? Well, the important thing is to get patients on the right dose that's optimal for them, use the flexibility of AUSTEDO and maintain patients effective treatment. And you can see that in this study, we had actually a very good response rate and the abnormal involuntary movement scale of about 4.8%, which is actually numerically better than our pivotal studies. So we believe with the titration pack the flexibility of the dosing and the adherence rates that we see in our START study, we will maximize the ability of patients to receive and obtain the proper dose and stay on treatment. Turn the next slide.

As Richard mentioned, we're also excited to see the improvement -- improved sales of AJOVY. AJOVY is a program that we have for migraine, and we can recapitulate our Phase III studies and its effect on the monthly migraine days that we improve. So in this study called UNITE. It was a prospective study, but the uniqueness of this study was that we looked at patients with migraine who also had depressive symptoms. And this is important because depression is a comorbidity with migraine that lead to chronic migraine increasing -- increased disabilities and decreases in quality of life.

So we designed UNITE to prospectively look at both the effects on monthly migraine treatment and as well as depressive symptoms. And we're pleased to show that the primary endpoint was achieved and recapitulated our interim results and the monthly migraine rates, but also in the secondary end point on depressive symptoms. So this is the first study to show in fact, that we have a significant effect, not only on monthly migraine but also on depressive systems in a CGRP either subcutaneous or oral. So very excited to see this. I think this is a great benefit to patients. Go to the next slide.

Now we're also excited to present more data on UZEDY from our pivotal studies in this sub analysis. In the RISE study or pivotal study, we looked at the disease duration across all the patients that we enrolled. And here, you can see that we had patients that were less than 5 years all the way up to greater than 20 years. And why is this sub-analysis important?

Well, there is the thought that after many years -- greater than 20 years, the treatment of schizophrenia becomes slightly resistant to treatment. But here, we can see that clearly, there's no impact on disease duration on the effectiveness of UZEDY. So greater than 20 years is a very good, population has shown treatment effect then. Equally as important is those patients that are less than 5 years duration of their treatment. Here, again, even in this population, which has a higher relapse rate early in treatment, we also had a great effect, which is important because in LAI, there is a continuing theory that LAIs are an effective way of starting treatment. Thank you. Next slide, please.

Now Richard mentioned the olanzapine LAI study. It's going very well. We've enrolled over 550 patients to date. And I just want to review quickly what the study design is for our Phase III program. We do have 3 doses against placebo for 8 weeks to the primary endpoint, and then we'll roll those subjects over into 3 doses again for an up to 48 weeks to build our safety database. This study has enrolled very quickly. And I'll go over time lines of the readout, but we're excited to see that a study enrolls quickly. This is obviously a testament to the capabilities of the R&D organization as well as the desire of investigators to use an injectable olanzapine. Go to the next slide.

Finally, I just want to touch base on our TL1A program. Richard mentioned that we had a deal signed with Sanofi to advance this very important product forward. As I've mentioned many times in the past, this is a very important underserved market. There's over 4 million patients diagnosed. About 2.7 million are treated However, the treatments are -- have good effects that only lasts for so long, people frequently cycle through treatments. And many of these patients actually end up still getting surgery as their disease progresses. So more treatments are important in this disease area.

We believe we have the best-in-class potential for TL1As, we have a potent compound with great selectivity. We've shown good safety in our asthma study, and we've shown low antidrug antibodies today. The collaboration with Sanofi is going to capitalize on the potential of this target. This target has the potential to go across many different disease indications. It's a pleiotropic cytokine that affects many different pathways. So the possibilities are large for this group. As I've mentioned, we're going to -- we've accelerated the program, and we're putting all our effort on getting our interim analysis readout in 2024. So looking forward to more in collaboration with Sanofi.

And just to review our milestones and development. So I mentioned TL1A, we're moving forward to putting resources and investment in making sure that we achieve our interim analysis within the second half of 2024. I have been talking about olanzapine LAI and its acceleration. We have been reporting that we were going to report the results of the first half of 2025. But I'm happy to say we've accelerated that to the second half of 2024. We've enrolled patients in our anti-IL15 POC study for celiac disease, and we will have PK from our SAD and MAD studies coming out in the second half of 2024. We are well on our path to have our first patient dosed in our anti-PD1-IL2 program in the first half of 2024 as when we submit our IND. And as Richard mentioned, ICS/SABA has now launched into our Phase III program, and we're looking for results in first half of -- or second half 2026. So lots of things going on. I'm glad to see that we're accelerating our programs and keeping to our time lines.

And with that, I'm going to pass it off to Eli.

Thank you, Eric, and good morning and good afternoon to everyone. I'll begin my review of our Q3 2023 financial results with Slide 25. Starting with our GAAP performance. Revenues in the third quarter of 2023 were $3.9 billion, representing an increase of 7% compared to Q3 2022, both in reported terms and in local currency. To provide you some color on our revenue performance by region, in North America, we had overall strong performance with 11% growth in Q3 2023 compared to third quarter last year. This growth was mainly driven by higher revenue from generics products, AUSTEDO and AJOVY partially offset by lower revenue from BENDEKA and TREANDA.

As Richard mentioned, revenue in our generics business in North America increased by 15% and in Q3 2023 mainly due to revenues from generics Revlimid, partially offset by increased competition to other generic products. Revenues in our Europe segment were flat in local currency terms. We continue to see strong growth in AJOVY and a solid growth in our generics business in the third quarter. This was, however, largely offset by lower revenues from our legacy brands, including COPAXONE. Revenues from our International Markets segment increased by 20% in local currency terms. This was mainly driven by higher revenue from our generics product, largely coming from price increases as measured to offset higher costs due to inflationary pressures. This increase was partially offset by regulatory price reduction and generic competition to off-patent products in Japan.

GAAP operating income was $365 (sic) [$355] million in the third quarter of 2023 compared to an operating income of $419 million in the third quarter of 2022. The lower operating income in the third quarter of 2023 was mainly due to higher legal settlements and loss contingencies, higher R&D and S&M expenses, partially offset by higher gross profit. Our higher R&D expenses in the third quarter of 2023 compared to the third quarter of 2022 were mainly due to an increase to support our late-stage innovation pipeline that Richard and Eric mentioned earlier, in line with our pivot to growth strategy. In addition, last year and the third quarter of 2022, our R&D expenses were lower due to an adjustment in payments related to a contract with one of our R&D partners. We also saw an increase in our S&M expenses compared to the third quarter last year mainly due to promotional activities related to AUSTEDO and UZEDY as well as exchange rate fluctuations in our Europe segment, where the GAAP income of $80 million compared to the net income of $56 million in Q3 2022 and a GAAP earnings per share of $0.07 compared to GAAP earnings per share of $0.05 in the same period a year ago.

The higher net income in the third quarter of 2023 was mainly due to reduced tax expenses in 2023 compared to Q3 2022. Our tax rate in Q3 2023 was mainly affected by increased deferred tax assets resulting [IT-related] integration plans. Such integration plans have been adopted, among others, in an effort of addressing the global adoption of OECD pillar to minimum effective corporate tax commencing in 2024. The increase in our net income was partially offset by lower operating income as discussed above.

Foreign exchange rate movements during the third quarter of 2023, net of hedging effects negatively impacted our revenues and GAAP operating income by $9 million and [$53] million, respectively, compared to the third quarter of 2022. This was primarily a result of the impact of a stronger U.S. dollar against currencies of certain international markets in which we operate, partially offset by the benefit from euro appreciation, approximately 46% of our revenue in Q3 2023 came from sales denominated in non-U.S. dollar currency.

Turning to Slide 26. You can see that the total non-GAAP adjustment in the third quarter of 2023 were approximately $598 million compared to $602 million in Q3 2022. Notable GAAP adjustment this quarter include legal settlements, loss contingencies of $314 million, mainly related to estimated provision recorded in connection with certain litigation cases in U.S. Additional notable adjustments included amortization of purchased intangible assets of $145 million, the majority of which is included in cost of sales.

Now moving to Slide 27 for review of our non-GAAP performance. As I mentioned, our third quarter revenue were totaled approximately $3.9 billion represented growth of 7% compared to the third quarter of 2022.

Now let's move down to the P&L, starting with the gross profit margin. Our non-GAAP gross profit margin was 53.5% in the third quarter of 2023 compared to 53% in Q3 2022. This improvement in non-GAAP gross profit margin was mainly driven by a favorable mix of products, including higher revenue from AUSTEDO in our North America segment partially offset by higher costs due to inflationary and other macroeconomic pressures.

As I mentioned last quarter and as expected, this was an approximate 130 basis point sequential improvement in our non-GAAP gross profit margin in Q3 2023 compared to the second quarter of 2023. This sequential improvement in gross margin was driven by continued shift towards a more normalized portfolio mix, mainly driven by strong growth in AUSTEDO, continued growth in AJOVY as well as improvement in our cost of goods sold due to the expected easing of the inflationary pressures and other measures we are taking to drive productivity in our supply chain.

Our non-GAAP operating margin in Q3 2023 was 26.5% versus 27.2% in Q3 2022. This decrease in operating margin was mainly due to an increase in R&D expenses, partially offset by higher gross profit margins, as I just mentioned, as well as lower G&A expenses. We ended the third quarter with a non-GAAP earnings per share of $0.60 compared to $0.59 in Q3 2022, mainly due to a higher non-GAAP operating income, partially offset by higher financial expenses in Q3 2023.

Now let's take a look at our spend base on Slide 28. As you can see, our quarterly spend base increased by $213 million or $171 million on a local currency basis. This increase was due to a higher cost of goods sold related to a higher revenue compared to the third quarter of 2022, as well as higher operating expenses related to higher R&D and S&M that I just mentioned earlier, partially offset by efficiencies in our G&A expenses.

As we move forward, we expect our operating expenses to be approximately from $1 billion to $1.05 billion in the fourth quarter including a quarterly run rate of R&D expenses to be in the range of $230 million to $250 million as we continue to progress our [pipeline], including the late-stage incubated assets. This is in line with our pivot-to-growth strategy to position the business for long-term growth and success.

Turning to free cash flow on Slide 29. In the first 3 quarters of 2023, we generated $0.9 billion of free cash flow versus $1.1 billion during the same period last year, a decrease of $200 million. This resulted mainly from changes in working capital items, including on average, higher inventory levels as well as lower net income as a result of lower gross profit and higher operating and finance expenses. Today, we are reaffirming our 2023 free cash flow guidance. Our 2023 free cash flow is expected to be in the range of $1.7 billion to $2.1 billion, our fourth quarter free cash flow expectation includes a sequential ramp-up in our revenue and profitability with a meaningful contribution from AUSTEDO. In addition, we continue to drive working capital improvements, including significant inventory efficiencies and continuation of the positive impact from accounts payable as a result of expansion in our vendor payment program, which we launched earlier this year. This free cash flow outlook range does not include the first upfront milestone payments stable to us under the exclusive collaboration with Sanofi for our anti-TL1A, which we announced in October.

Turning to Slide 30. Our net debt at the end of Q3 2023 was $17.7 billion compared to $18.4 billion at the end of 2022. Our gross debt was $20 billion compared to $21.2 billion at the end of 2022. The decrease in our gross debt was mainly due to $1.6 billion senior notes repaid at maturity and [$54] million of exchange rate fluctuations partially offset by $500 million outstanding under the revolving credit facility as of September 30, 2023.

As I mentioned last quarter, in July 2023, we withdraw a total amount of $700 million under our $1.8 billion revolving credit facility. The proceeds of which were used to repay $1 billion of our senior notes at maturity in July. In September 2023, we repaid $200 million. And as of today, $500 million is outstanding under the revolver credit facility.

Our net debt to EBITDA improved compared to Q2 2023, coming now at 4.03x for Q3 2023 due to foreign exchange rate movements as well as free cash flow generation in the third quarter. As part of our capital allocation strategy, debt reduction continues to be our focus, and we expect to continue to work towards our long-term financial target of being 2x net debt-to-EBITDA by end of 2027.

Turning to Slide 31, which presents our upcoming debt maturities. As I mentioned, we have already repaid [$1 billion] of our 2.8% senior notes at maturity in July 2023. So there are currently no additional maturity payments due in 2023. Following our successful refinancing of approximately $2.5 billion of our debt through a sustainability linked senior notes during the first quarter of 2023, we've aligned our near-term debt maturities with our annual free cash flow guidance for this year. We believe we are well positioned to continue to serve our debt and meet these upcoming maturities over the next couple of years with our ongoing cash flow generation.

Now turning to our 2023 non-GAAP outlook on Slide 32. As Richard highlighted earlier, we have a solid third quarter and year-to-date performance in terms of our revenues across all regions. This includes continued strong momentum in our key growth engines, especially AUSTEDO continued growth in a AJOVY as well as solid performance in our core generics business globally. In addition, we are seeing a relatively higher revenue from COPAXONE compared to our initial expectation, which we now expect it to be approximately $550 million for the full year. To reflect this revenue performance in the first 9 months, along with the expected development in the fourth quarter, we are increasing our full year revenue guidance range by $100 million, we're now expected our revenue to be between $15.1 billion to $15.5 billion for and the full year of 2023. We also continue to expect sequential improvement in our margins in the fourth quarter. As previously communicated, we are driving and continued the shift in our portfolio mix, mainly driven by strong growth in AUSTEDO as well as further improvement in our cost of goods sold.

To reflect our year-to-date tax performance that I referred earlier, we are now expecting our annual non-GAAP tax rate for the full year 2023 to be in the range of 12% to 15%. And we expect our fully diluted share count to be approximately 1.132 million shares for the full year of 2023. Today, we are also reaffirming our 23% non-GAAP outlook for operating income, EBITDA, earnings per share and free cash flow as provided in February.

I want to reiterate that our full year revenue, operating income, adjusted EBITDA, diluted EPS and free cash flow outlook ranges do not include the first upfront milestone payment payable to us under the exclusive collaboration with Sanofi for our anti-TL1A, which we announced in October.

With that, this concludes my review of Teva results for the third quarter of 2023. And now I will hand it back to Richard for a summary.

Thank you, Eli, and thank you, Eric. So in summary, strong Q3 performance driven by AUSTEDO, the launch of UZEDY and AJOVY and good performance across our generics business in all 3 regions. To that, as you heard from Eli, we're increasing our guidance on revenues for this year. And I'm pleased to show that the pivot to growth strategy is starting to get traction. As I've highlighted with the AUSTEDO, the collaboration TL1A, with the capability build that Eric and his team have done has allowed us to accelerate olanzapine or long-acting product in Phase III studies as well as the Teva api recruitment of our CEO.

With that, I'll hand it over to people to ask questions.

(Operator Instructions) Our first question for today comes from Umer Raffat of Evercore ISI.

I noticed a dose level C was dropped in your TL1A trial. I'm assuming that was the highest dose. So I have a 2-part question. One, can you confirm that among the dose level A and B that was kept, you have at least a 500-milligram dose in there? And secondly, I understand that the decision to drop the dose level C was informed by optimizing evolving biomarker data. Could you please elaborate on that as well?

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

Thank you, Umer. So yes, we amended our studies design, and we dropped the dose. This was driven largely impacted by our comparative in vitro data. As I mentioned, the potency of the compound is, we believe, is best in class. We think the selectivity drives a lot of our potential biomarker movement. We were looking at 3 TL1A levels, which I think are important in dose selection. And we use this in combination with RPK and what we've observed in other development programs when we look at exposures and the programs. So we took advantage of this, and we optimized the study by dropping a dose and increasing actually the size slightly in the other arms. So we're happy with the changes. I think that makes the program more efficient, more useful data that will come out of it. And I can't comment on dosing or which dose was removed at this time.

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

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

Thanks, Balaji. Thanks for the call and the question. I appreciate that. So on the BD to answer that question, yes, we are actively looking to do BD and in-license when we started that. We've been doing that actively. I think we are excited by the products we have in innovation within the market and in our pipeline. That said, as we committed in the pivot to growth, we want to build on that. We think we have capacity to add products, both in our pipeline and also commercially. So we are actively doing that. But we want to be very selective to make sure it fits to our portfolio, our TA strategy. So that does take some time.

With regard to the guidance, I think your question was the $15.1 billion to $15.5 billion a bit of a range there. Do we expect a one-off to drive that. I'll let Eli answer that. So over to you, Eli.

Yes. Thanks, Balaji, for the call -- for the question, sorry. And basically, we are actually keeping the guidance for AUSTEDO so you can actually look on the first 3 quarters and understand the growth there year-over-year Q4 just on AUSTEDO. But namely in terms of the other elements and underlying on the revenue, there is nothing there in specific that going to be changed versus current trends and considering the seasonality of Q4 that we have each year.

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

I guess, firstly, just on the TL1A partnership, I actually had a follow-up question regarding the $600 million milestone for starting Phase III. Is that contingent just on showing something stat fig as a benefit? Or do you actually need to generate data that are competitive with the more advanced TL1A programs? Just wondering how much risk there is to kind of capturing that $600 million milestone and moving forward?

And then my second question, just on your EBITDA guide for the year. I guess, to get to the midpoint or the high end of the range, it's a pretty substantial sequential step-up. I get that there's going to be more brand revenue, better mix, better margin in the fourth quarter, but you presumably won't have the generic Revlimid contribution. So how should we think about OpEx swings here in fourth quarter versus sort of the run rate in the 3 quarters leading into 4Q? Like would we expect a step down in OpEx? Or is there some other factor that can drive this big sequential uptick?

Okay, Jason, thanks for the question. I'll start answering then I'll let my colleagues contribute. So on the TL1A, the Phase III. There were no conditions around the Phase III. The Phase III is about completing the Phase II and have the FDA approval to move into -- sorry, Phase II -- complete the Phase II and FDA approval to move into the Phase III. So that's what the deal is on. There's no criteria around that. So I think hopefully, that's very clear.

With regard to the EBITDA, the range I think it was and a bit about OpEx. So maybe I'll start this and then Eli can contribute. So you have seen that Eli talk about our OpEx going up, but this is in line with our strategy. This is in line with what we plan to execute. We're driving AUSTEDO, making sure that brand is supported appropriately the same for UZEDY, the product we just launched for schizophrenia. And obviously, Eric and his team have started to hit the ground running particularly on olanzapine and also TL1A recruiting faster than we expected. So it obviously incurs costs, but I think that's a good thing, particularly that's part of our pivot to growth strategy. So those are the reasons why the OpEx is probably has gone up. There is the reason why it's gone up, but we're pleased with them because it's in line with what we want to do.

Now obviously, going forward, just to give a bit of flavor for the OpEx on the R&D, obviously, TL1A in partnership with Sanofi will have a 50% of that cost taken by Sanofi. So as we move into next year and possibly depending on where it closes this year, we'll have a contribution from Sanofi. So I think that -- we've thought about that. That allows us to manage our pipeline and to be very thoughtful but also think big about what we want to do at TL1A, now we have this collaboration.

So -- and then the final part I'll say is, as we've commented before, Revlimid was possibility in Q3. We see that as a significantly less contributor in Q4, very small part of that. And so you take that into account.

But Eli, maybe you'd like to add a bit more flavor to that as well?

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

Our next question comes from Nathan Rich of Goldman Sachs.

You mentioned the higher R&D expense in the quarter. I think you kind of expect maybe a bit of a step down in the fourth quarter. But I guess, going forward, what's the right way to think about R&D expense as a percent of sales just given the investments you're kind of making in the pipeline, does that move up a bit over time?

And then on UZEDY, you mentioned the positive feedback from providers. I was wondering if you could just elaborate a little bit on that and how that's kind of informed your view on the pace of uptake and what -- how we should be thinking about the revenue contribution from this product as we go into next year?

Thanks for the question, Nathan. So just -- and I'll hand to Eli -- just to sort of comment on the R&D expense. No, we don't expect a step down in Q4 because this is part of our strategy. And the strategy is to aggressively move our innovative pipeline through the clinic. And as I said, we have ICS/SABA into Phase III. We have olanzapine at full tilt in Phase III and obviously TL1A in Phase II, which we're moving very aggressively. So I think that's on purpose, and that will continue. I'll let Eli talk a bit about where we will be in percentage of sales. But obviously, one thing to always consider, which may be slightly new with Teva is, our sales, we have shown that we've grown ourselves for the second quarter in a row and we are moving the business back to growth. And so obviously, that does allow us some flexibility. Although I want to assure you our focus on expenses is maniacal. So that's just a thing worth and understanding.

But Eli, do you want to give a bit more flavor?

Yes. So overall, the way to think about R&D, we're actually looking to trend just a bit above 6% for the year-end, which means that Q4 will also have a step up. And as I mentioned in my prepared remarks, we actually providing kind of more transparency here between [$230 million to $250] million and that will be by itself very close to, I would say, to the 6% that we see in the quarter and for the year. The way to think about it as we go forward, of course, we will provide our guidance for '24 on the back of Q4 on February. But the way to think about it, it will be a range between 6% to 6.5% of our revenue going forward according to our strategy. And this is mostly related to the mix inside the innovative feet in the R&D.

Thanks Eli. And then moving on to UZEDY, and we talked a bit, I think the question is around the positivity we have and then next year, so I'll hand that to Sven, Head of North America who can give some flavor for the excitement in the market.

Yes. Thank you, Richard. So we have a very good uptake. Our launch plan is full on track. We are, of course, now working towards market access. In hospital access, listing on hospital formularies, we are right on plan. Medicaid and Medicare, we are also in discussions here. We have secured on par access with Invega Sustenna in a couple of states, and we are working towards this goal with all the remaining states, but also with the Medicare plans so that we are quite confident that we will have a very good market access position going into 2024.

What is very encouraging for us is that the product profile that we hope for will find a good reception with positions actually plays out as planned. We've generated so far about 4,000 prescriptions. Please keep in mind that we have a large number of free samples in the market to get patients started. So when we move forward and have utilized these samples, we will see more paid for prescriptions. But we get to -- so today, the majority of our patients switches from oral therapies to UZEDY and then from -- within the category of switches from other LAIs to UZEDY, we have here sources of revenues that come primarily, of course, from the respirator market from PERSERIS and Consta but also from the other LAIs. So we believe what we always hope for -- aim for that this becomes a new standard of care in the LAI segment will actually materialize. And for that reason, we believe that UZEDY will be then a material contributor to our both in innovative medicines in 2024 and going forward from there.

Our next question comes from Ash Verma of UBS.

This (inaudible) asking question on behalf of Ash. So I have 2. The first one is on AUSTEDO. Can you give us some color on where the XR is taking share from? So now run rate is at around like 10% of total molecule. So I just want to understand, is it taking share from regular AUSTEDO, generics or INGREZZA.

The second question is on [stand-alone] business. Can you give us a rough sense for what's the EBITDA margin for the stand-alone business? Also curious how that margin profile has been trending for the last few years?

I'll hand over the AUSTEDO question to Sven who can give a bit more detail on that.

Yes. Thanks for the question. So if our uptake is strong, we have a higher share actually in the total business than the 10% that you mentioned. So far, we get about 1/3 of our new patient starts on AUSTEDO XR and the other 2/3 on BID, of course, that's an annualized figure. It's now ramping up, that XR becomes much, much more prominent in new patient starts. And the sources of patients in itself for these patient starts are around about half of them are naive patients that start neuron therapy for [VEMAT2] inhibitor and the other half come either from BID switches -- from AUSTEDO BID or from INGREZZA or tetrabenazine. So here, what is encouraging for us is that we have a significant number of new prescribers that have never prescribed AUSTEDO before they now start prescribing AUSTEDO XR because they value the convenience of a once-daily formulation. And I think that's very good for us because that is a market segment that we could not access before in the absence of a once-daily formulation. So for that reason here, I think we are right on track in making AUSTEDO continuous growth driver for our innovative business.

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

Our next question comes from Glen Santangelo from Jefferies.

Just 2 quick ones for me. Obviously, with so much focus on the innovative pipeline, generics often get overlooked. I mean Richard, it seems like the generics business had a great quarter, particularly in North America. The trend seems to be getting a little bit stronger. I was wondering if you could just sort of comment on the competitive and pricing dynamics that may be driving that trend?

And then secondly, as it relates to the Alvotech partnership, the company made an additional investment there in the wake of a number of CRLs right, more recently on [SOLAR]. Could you give us an update on that relationship and the biosimilar pipeline as it relates to that Alvotech partnership?

Thanks, Glen. Thanks for the question. So we are pleased about the performance of our generics business. I think this is journey and our strategy to make sure Generics business is a sustainable powerhouse. And within North America, we've obviously seen a strong quarter there. I think Eli did highlight a big contributor to that was Revlimid. What I would say about your sort of more general market conditions around more favorability, and I've been consistent on this.

I think to be -- the market conditions will change based on supply-demand and competition, and that will be constant. And so as more people come into a market the prices will go down because the competition will drive that. I don't see those dynamics changing. There will be quarters where the pricing pressure is less than the quarters when the pricing pressure is more. I think for our strategy to make sure we can be in control of that, we focused our R&D engine under Eric Hughes and making sure we deliver our generics and our complex generics on time and first to the market more than we have done in the past. And that's where we'll drive value creation and we'll ensure ourselves against this volatility within the market. So I think that's how we think about market going forward and how we think about making sure we stay competitive and have a sustainable business.

With regard to Alvotech and the partnership, the relationship is actually very good. I mean one of the things we did when we invested again into this partnership is, and I've said this before as well, Alvotech is very good when it comes to developing biosimilar. Their R&D capability, I think we will have the best product in the market if we launch Humira -- from a device point of view or a product profile interchangeability, they're very good at that.

What we're doing is working even more closely with them to ensure that from a manufacturing capability we can help them not only get through the FDA inspection, but also be able to be -- able to deliver the volumes that we see will be necessary. And that's something which we're very careful at because we have 53 sites, we have roughly 30 FDA inspections a year. So we do know what we're doing.

But I think what -- maybe to conclude, the relationship is very strong. Our pipeline, we've expanded with them because we see that capability. We continue to build out our pipeline through partnerships. So you'll see some announcements on that, hopefully, in the future because we do believe our strategy is to have a broad portfolio, predominantly through partnerships and that allows us to go to the market with the portfolio play and also to ensure ourselves against the peaks and troughs that associated with launching biosimilars 1 year and then maybe not having them in the next. So hopefully that answers your question, Glen, and I appreciate the call.

Our next question comes from David Amsellem of Piper Sandler.

A couple of high-level questions just on overall strategy. So with the upfront payment in hand from Sanofi. So you have a little more -- well room here, wiggle room here, I should say. And with that in mind, are you focused on assets in neuropsychiatry where you can leverage your commercial infrastructure that you have in place? Is that the top priority there?

And then secondly, as it relates to biosims, just coming back to Viatris getting out of that business. How do you think about your role in biosims going forward? I know what you're saying in your comments, but is that something you could be opportunistic about going forward in terms of monetizing that business?

Thanks for the question, David. So starting with the -- I think I should say, because our financial situation improves with the TL1A deal and the $500 million upfront, we know how do we think about BD. So as I said, we are thinking about BD we're active. We're looking, we've hired Angus Grant, a seasoned professional director, legend in the industry who's worked at innovative medicines all his life. And so we really have stepped up that and our capability around that and our focus on that.

Now yes, we are targeting CNS immunology and within CNS, we do obviously psychiatry and neurology because we see the synergy play there. We believe in the capability. In fact, in psychiatry, I think we're seen as one of the leaders in psychiatry now. So I think it makes sense to look back. That said, as opportunities come along, which may be in a broader CNS will look at them. But right now, we are ensuring we stay focused to make sure we allocate our capital in a way that will be synergistic to our P&L and maximize our OpEx.

With regard to the biosims question, I think our strategy is really clear. I think biosimilars is a massive opportunity to generate revenue. I've seen that in Europe. I believe that's going to happen in the United States. It will be a bit bumpy in the United States as we've seen in the past. But we've also seen with TRUXIMA, rituximab it's a great revenue generator. So the way we address maybe some of that uncertainty is to ensure that we don't allocate a huge amount of capital to it by doing that through partnerships. And we built a broad portfolio. So when some assets come to the market in a timely manner, or some assets overachieve and other assets underachieve and what their peak sales could look like. We're balancing that out because we have a portfolio approach. But we feel very clear on our strategy and committed to our strategy. We think it's the right strategy for a company like Teva. Thanks for your question, David.

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

This is Katerina on for Chris. So first on gross margins, I know you're not giving guidance for next year, but as we think about margin trajectory from here and the trends we saw in Q3 and what we're going to see in Q4. Is that kind of the correct starting point as we think about gross margin next year? Or are there any other pushes and pulls we should keep in mind there?

And I think the second question is just on AUSTEDO. It seems like the product has had a very strong quarter. Just want us thinking around kind of investing behind that product and support for the asset? How are you thinking about balancing cost versus kind of maximizing the revenue opportunity, has it thinking evolved at all? And any implications as we think about SG&A spend next year?

Thank you, Katerina. I'll take a go at both of that and also allow my colleagues Sven and Eli to contribute. So when we think about margin -- when I think about margin going forward, it's aligned to our strategy. So when you think about our pivot to growth strategy, it was to make the company get back to growth, but growth in an area where it will drive profitability at the top and the bottom line.

Now obviously, I think Eli has just highlighted and I highlighted in my comments that we improved gross margin by 50 basis points. Where we did that primarily is our portfolio mix. So as we drive the AUSTEDO, as we drive AJOVY, as we drive UZEDY, as we bring olanzapine to the market, AUSTEDO to the market, those products have a very different gross margin profile than our generics business. And so that definition will raise our gross margin. So that's sort of the big picture on it.

I'll let Eli, give a bit more flavor, if you want to, Eli.

Yes. So just you know we are still actually aligned with our long-term financial targets by 2027 to reach the 30% on OP, which means if you look on our trajectory in OpEx and as we are very, very cautioned on even that we're actually dollars spend higher, but you're trending it always versus revenue this year and last year. And we believe that between 26% to 27% OpEx going forward, which means that those gross margin of 55% to 57% on the long term should serve our goals.

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

But Sven, do you have anything else to add to that?

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

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

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