Kevin C. Mannix - Teva Pharmaceutical Industries Ltd. Kåre Schultz - Teva Pharmaceutical Industries Ltd. Michael McClellan - Teva Pharmaceutical Industries Ltd. Brendan O'Grady - Teva Pharmaceutical Industries Ltd..

Gregg Gilbert - Deutsche Bank Securities, Inc. Jason M. Gerberry - Bank of America Merrill Lynch Elliot Wilbur - Raymond James & Associates, Inc. Zhu Shen Ng - Morgan Stanley & Co. LLC Irina R. Koffler - Mizuho Securities USA LLC Liav Abraham - Citigroup Global Markets, Inc. Umer Raffat - Evercore Group LLC David A. Amsellem - Piper Jaffray & Co.

Jami Rubin - Goldman Sachs & Co. LLC Ami Fadia - Leerink Partners LLC Rohit Vanjani - Guggenheim Securities LLC Aharon Gal - Sanford C. Bernstein & Co. LLC.

Ladies and gentlemen, thank you for standing by and welcome to the Teva First Quarter 2018 Financial Results. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. I must also advise you the call is being recorded today, Thursday, May 3, 2018.

I would now like to turn the conference over to your first speaker today, Kevin Mannix, Senior Vice President, Head of Investor Relations. Please go ahead, sir..

Thank you, Steve, and thank you everyone for joining us today to discuss Teva's first quarter 2018 financial results. Earlier this morning, we issued our press release detailing our results for the quarter and year.

A copy of the press release, as well as a copy of the slides being presented on this call can be found on our website at www.tevapharm.com, as well as on our Teva Investor Relations app. Our discussion today 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 to better understand its business.

Further, management believes the inclusion of non-GAAP financial measures provides meaningful supplementary information to and facilitates analysis by investors in evaluating the company's financial performance, results of operations and trends.

Reconciliation of GAAP to non-GAAP measures are available in our earnings release and in today's presentation. Today, Kåre Schultz, our Chief Executive Officer, will open the call with some remarks on our results, recent events and outlook for 2018.

Mike McClellan, our Chief Financial Officer, will review the first quarter financial results in more detail and discuss additional assumptions around our 2018 outlook. I'd also like to note that on the call with us and available during the Q&A is Brendan O'Grady, Teva's Head of North America Commercial.

And with that, I'll now turn the call over to Kåre. Kåre, if you would, please..

Good morning or good afternoon to all of you and thanks for calling in. We had a strong start to 2018. The sales in the first quarter came out above $5 billion, $5.1 billion, and you will have seen that our earnings per share also came out strong. So, the GAAP EPS came out at $1.03 and the non-GAAP EPS came out at $0.94.

The free cash flow was also strong at $1.9 billion, and of course there were several factors influencing this. One of the factors was the fact that our restructuring program is on schedule. It's doing very nice. I'll get back to some more details about that. It's of course also important that our generic business is in a good balance.

What I mean by that is that, as you all know, there will be products that are dropping off at end of the lifecycle in generics and where prices are coming down, and then there'll be products that you are launching and that are coming in at healthy profitability in the beginning of the pipeline.

And we've seen a good level of approvals and launches both in the U.S., Europe and in the Growth Markets. COPAXONE is maintaining its share very nicely in the U.S. I'll give you some details on that. But it's really very steady at around 85% of the 40 milligram marketplace, and also in Europe, it's looking good.

AUSTEDO that we launched last year first for Huntington's disease chorea and Huntington's disease movement disorder, and then for tardive dyskinesia and other type of movement disorder is continuing to grow nicely and we see continuous growth in patients and also in revenues.

And as a consequence of all these positive developments, we have been able to reduce our debt, and the net debt is now down below $30 billion, which we see as a positive sign on our ability to keep on reducing debt also going forward. As a consequence of the better performance in the first quarter, we have raised our guidance for the full-year.

So, we are now guiding that the non-GAAP EPS for the full-year will be between $2.40 and $2.65. And we've also increased the guidance for free cash flow, and it's come up from $2.6 billion to $2.8 billion by $400 million to between $3.0 billion and $3.2 billion. In terms of GAAP and non-GAAP, there is a few differences on the revenue line.

Of course, there's no big deal. It's the same, and we have a development here from 2017 to 2018, where we have a reduction in revenues, and we'll discuss it a bit later. But it's primarily a combination of businesses that we sold off and of some decline in the COPAXONE and U.S. generic business that we have already commented on in previous quarters.

On the operating income, you can see that there is a slight difference between the non-GAAP and the GAAP in the sense that in the first quarter of 2018, our GAAP operating income was $1.5 billion and the non-GAAP was $1.4 billion. And the same thing then goes down to net income, where the GAAP is slightly higher than the non-GAAP.

But basically, we made on a non-GAAP basis $1 billion in net income in the first quarter, and that is what results in the $0.94 per share. So, all-in-all, we're very satisfied with that and we're also very satisfied with the total cash generated, which in the first quarter was $2.5 billion.

Now, one of the elements that has been driving this development is the restructuring program that we announced back in the middle of December.

And as you probably remember, the total target for the program in terms of reduction in the spend base is $3 billion, and it's our plan to realize half of that in the current year and the full amount by the end of 2019.

And we are very much on track with that, and one of the key elements is of course the reduction in the total manpower of the company. And you might remember that compared to the end of the third quarter, which was the basis for our restructuring plan, we had a plan to reduce the head count by some 14,000 persons.

And in the first quarter, we see here that we come out at a number which is around 46,000 in total, and that is roughly 6,200 less than when we started the plan. So, we are on track to achieve exactly the reductions we planned and that we set out for. If anything, it's going slightly faster than planned, but it's not a major deviation.

But it does contribute a little bit to us having slightly lower cost than we were expecting in the first quarter. So, that's positive. We're also doing a lot of changes to our manufacturing footprint, optimizing it, consolidating sites, and divesting or closing redundant sites.

And so far, we have announced 10 plant closures since December, since we announced the restructuring plan. On the consolidation side, we're also consolidating all other activities such as R&D sites, headquarter sites, office locations and so on.

So, there's a massive activity ongoing, but it's all proceeding according to plan, and I'm very happy about the development on our restructuring plan overall. If we look at the revenue side, then of course U.S. generics has been a big discussion topic and a big unknown for quite a while with a lot of changes happening.

I'm happy to report to you that when it comes to the volume, which is the starting point of any business of course, then we see a very strong performance in the first quarter. We actually had more than 0.5 billion of scripts in the U.S. for our generic business, 583 million actually, around 15% volume share on the U.S. generic prescriptions.

So, that's of course positive. I know that you like to ask about the pricing, and I know you all remember I told you that I wouldn't comment on it anymore with any specific numbers, because I thought the generic industry had been doing a bad job on pricing and had been part of driving down prices.

I can tell you that we are actually working on optimizing our portfolio with a strong focus on profitability. We're doing it in close collaboration with our key customers in a positive environment, ensuring stability in supplies and making sure that we can live up to the expectations from patients.

But it does of course have the effect that we – in our forecast, we see a adjustment of the total business we have in the U.S. that was part of what we announced at the beginning of the year, where we said U.S. generics would probably sell around $4 billion for the year, and we still expect that.

One of the reasons why this is possible is of course all the new launches, and we are still by far the biggest in volume share, but also by far the biggest in the number of product applications that are sitting with the FDA, also in terms of tentative approvals and first-to-files.

So, we think we have a very strong starting point for stabilizing and expanding profitability in our U.S. generics business.

You can see here on the slide the 10 products that we launched in the first quarter, and this is kind of the run rate we want to have and we need to have, but also the one that we are expecting to have broadly speaking going forward, so that every year we can put enough new generic products into the marketplace to stabilize our U.S.

generics business. Another important element in our sales is of course COPAXONE. That's also nothing new. It's been also reviewed and discussed by all of you for a long time. And what you see here is sort of the raw data on how many scripts, what's the TRx volume.

And as you can see here, it's kind of a boring graph, because since the beginning of the year, it's completely flat around 10,000. And that basically means that there hasn't been any real change to our market share and to the mix between our market share and that of competition.

We have roughly 85% of the volume in 40 milligram and we maintain a very high level of access. Of course, we've had to take a price hit. That's what you see in the turnover. We have reduced the price by increasing rebates in connection with the generic competition. So, the benefit of course is for patients who get the products cheaper now.

But as you can also see, we are basically hanging on to the volume share quite nicely. I'm sure there will be questions about what do we expect in terms of increased competition with COPAXONE. And of course, we do expect to see tougher competition later in the year, but so far so good. We're hanging on to the 85%.

Another thing that's exciting for us is AUSTEDO. I talked about it already. And if we take a look here, you can just see that we are accumulating more and more patients quarter-by-quarter. Our revenues are on target. We had $30 million of revenue in the first quarter.

I mentioned already a quarter ago that the target we have for the full-year is around $200 million, and we expect to get very close to that. And the reason why we see this potential short-term, but also see a big long-term potential is of course because there is a big unmet need. You can see our estimates of the unmet medical need.

You're talking more than 0.5 million persons in the U.S. who can benefit from this kind of therapy. So, there is a big potential market out there and we're doing our best to grow it, and so far, it's looking good. Now, talking about the business development and growth longer term, of course, everybody's interested in fremanezumab.

And we have, as you know, a voucher. So, we are getting a fast review by FDA. We've had a very positive collaboration with the FDA, and we have two other companies also in that final stages of the review process with FDA. And we had a surprise – a negative surprise when our manufacturing partner that does the API, Celltrion, got a warning letter.

And I'm happy to inform you that we are expecting now to see the pre-approval inspection take place within the coming months, and this will have to go hand-in-hand with a re-inspection of Celltrion, a warning letter re-inspection.

And of course, we have high confidence that both these inspections will be passed, and that means we will be able to get approval and launch before the end of 2018. At the same time, as you know, we have filed fremanezumab in Europe, and that's proceeding just completely standard, and we expect to see EMA take action on this.

We expect an approval in the first half of next year. And just to remind you, in the competitive landscape, of course, there are three products that might launch this year, of which we are one. This is a new class that treats chronic migraine very effectively. All the three products basically have similar efficacy.

But we do have one key benefit, and that is the fact that our product will most likely be approved for once quarterly injection, which means that you only need to take your therapy once a quarter. We have proven in our clinical trials that that's exactly the same efficacy as if you do it once a month, which is the case for our competitors.

So, we think everybody who wants a more convenient way of treating their migraine and achieve the same good clinical outcome will be sort of attracted to that we can offer quarterly treatment. So, that's what I want to say overall on the business, and now I'll hand over to Michael McClellan, who will comment on the numbers. Over to you, Mike..

Thank you, Kåre. Good morning, everyone. You've received a lot of information today in our press release as well as the 8-K we furnished last week with a lot of details on our new segment reporting.

Following the reorganization we announced in November of last year, we have adjusted our segment reporting to align to the new organizational structure of the company. We are now organized by three regional segments, which have full P&L accountability, as well as an other non-core activities segment, which includes third-party API business.

To assist you in your analysis, we have provided historical information for select revenues by activity in each of the three regions, and for your reference, it is in slide number 26 in the backup sections of this presentation.

In addition to this information, I think it's important to point out the following, which I hope will help you in adjusting your historical models. First of all, our Canadian business, which had annual revenues in 2017 of approximately $590 million, including $476 million in generics, has moved from rest of the world into the North American segment.

Second, our API business, which had approximately $750 million in revenue, is no longer included in the generic figures or in the regions. It is in the separate non-core segment. For your reference, about 37% of the API sales were generated in the U.S. in 2017, 36% in the Growth Markets and 27% in Europe.

API is now under other activities, which also includes our Medis business, which had revenues of $445 million in 2017. Third, we moved the payments we received in connection with our agreement to sell the NINLARO royalty stream from rest of the world to North America in the new segmentation.

This includes two payments of $75 million each in quarter one of 2017 and quarter two of 2017. And lastly, we had to reclassify Section 8 payments from Canada, which were once in 2017 netted in G&A expenses, but are now in other income, and you can see those done historically for all of the quarters of 2017.

I'd like to take the time now to highlight what we think are some important areas of our results and some more important details on our updated outlook of 2018.

So, turning to slide 12, as always, we start with a review of our GAAP performance, where we posted a quarterly GAAP net income of $1.1 billion and an EPS on a GAAP basis of $1.03 in the first quarter of 2018.

As we will detail in the next slide, the higher GAAP results than the non-GAAP come from a combination of some positive items like legal settlements, offset by amortization and a few others. So, turning to our non-GAAP adjustments, you will see that we had several income figures, as well as a few impairments.

Please note that due to a change in the risk-free interest rates, we have adjusted our weighted average cost of capital by about 0.5%, which impacted several of these items leading to some impairments. Starting with the $706 million of impairments, a portion was related to U.S.

intangible assets, mainly due to the changes in fair value of generic products acquired from the Actavis Generics. In addition, we had a small impairment related to Rimsa due partially to the change of our weighted average cost of capital, as well as a change in allocated net assets to the Rimsa reporting unit.

We also impaired a few assets that we'll transfer to Procter & Gamble as part of the PGT JV termination. And lastly, we've recognized some accelerated depreciation and impairments related to site closures as part of the restructuring plan that Kåre mentioned earlier.

In Q1, we also incurred $247 million of restructuring expenses as part of that program. And I do remind you that we expect the cash effect from restructuring programs to be roughly $800 million for the full-year of 2018. We also had a series of gains in our GAAP P&L that were adjustments for a couple special items, including the sale of the non-U.S.

women's health business, the Allergan working capital settlement, a settlement related to our purchase of Rimsa, and a reversal of the GSK patent infringement lawsuit for carvedilol due to a positive judgment that we received.

Moving on to our non-GAAP results on slide 14, revenues for the first quarter were $5.1 billion, a decrease of 10%, mainly due to generic competition for COPAXONE 40 milligram in the U.S., as well as the market dynamics in the U.S.

generic markets, and a loss of revenues following the divestment of certain products and discontinuation of certain activities. The decrease in gross profit margin was mainly the result of the declines in the North American region, mainly due to lower COPAXONE sales and price erosion in the generics market, most of which were price impacts.

Despite the aforementioned decline in our gross profit, the cost savings from our ongoing restructuring program softened the hit and allowed us to keep the loss in EBITDA roughly in line with the loss in revenues of 10%.

Free cash flow excluding exceptional items was $1.9 billion in the first quarter of 2018 compared to $0.3 billion in the first quarter of 2017.

This is mainly due to the proceeds that came in from the working capital adjustment with Allergan, the legal settlement with Rimsa, and this compares to a negative impact that you see in Q1, where we had payments for legal settlements including the FCPA.

On top of that, we also generated some proceeds from the women's health divestiture outside the U.S., bringing us to a total cash generated of $2.5 billion for the quarter. Turning to slide 15, again, we see the revenues in the first quarter of 2018 declined 10%.

In North America, we saw a decline of $566 million, mainly due to generic competition to COPAXONE and the adverse market dynamics in the U.S. generics. In Europe, we had a solid performance mainly due to new generic launches.

In Growth Markets, revenues from better performance in Israel and Japan, as well as an AZILECT approval from Takeda raised the sales in that unit.

Divestments and other mainly includes the women's health divestments of $144 million quarter-on-quarter, the closure of the Hungary distribution activities, the deconsolidation of Venezuela and the non-recurrence of the payment related to the NINLARO transaction in 2017, which was $75 million.

On slide 16, we look at the non-GAAP operating income in the first quarter of 2018, which is $1.4 billion, a decrease of 11% compared to the first quarter of 2017.

The cost savings from our ongoing restructuring efforts, which you see benefited all of the regions, especially Europe and Growth Markets, allowed us to partially offset the reductions in revenues in North America.

And you can also see that the effect of the divestments mentioned on the revenues also had a negative effect of $156 million on the operating profit from one quarter of last year to Q1 this year.

On slide 18, we see EBITDA was $1.6 billion in the first quarter of 2018, down 10% compared to the $1.8 billion in the first quarter of 2017, but up 4% compared to Q4 2017.

As we saw in the previous slide, we were able to partially offset the revenue decline in North America and the effects of the divestment with savings coming from the restructuring plan.

Going forward, we would naturally expect to see a decline in EBITDA on the coming quarters when we see a full launch of the second generic competitor to COPAXONE 40 milligram in the U.S. Turning to slide 18, you can see global revenues of COPAXONE were $645 million, a decrease of 21% compared to Q4 of 2017.

As Kåre mentioned earlier, our COPAXONE market share and volume have held up nicely despite Mylan's introduction of a 40 milligram generic in the United States last October, which had a greater impact on pricing than on volumes. Free cash flow was $1.9 billion in the first quarter of 2017 compared to $0.3 billion in the first quarter of 2017.

The increase was mainly due to proceeds from the working capital adjustment with Allergan, the legal settlement with Rimsa, compared to negative effects of the FCPA and DOJ payments made in the first quarter of 2017.

Starting this quarter, based on a change in the accounting rules related to the classification of the retained portion of accounts receivables that have been secured, our cash flow from operations does not include these amounts, which totaled to $444 million in Q1 2018, as it comes through the investing line of the cash flow statement.

This has no net impact on free cash flow. The increase of the amounts in the securitization this year from last year is related to the retained percentage that increased following our rerating to BB in late 2017.

So, turning to slide 20, since the start of 2018, we've one renegotiated the financial covenants with our lending banks; two, issued $4.4 billion of new debt; and three, used the issuance plus the cash generated from free cash flow and divestments to reduce the company's overall net debt by $2.2 billion.

And we've also extended the debt maturity profile that aligns to the future maturities that we expect to generate in the annual cash flow.

As you can see in the additional information we've provided that we now have $700 million due for the rest of 2018, mainly Swiss franc loans that we will pay off in Q3 and Q4, and we have $2 billion in 2019, which we plan to repay with the net cash on hand and the free cash flow that we will be generating in the coming quarters.

I'd also like to highlight the fact that we have no outstanding bank debt subject to financial covenants at the end of Q1 2018.

In terms of liquidity, I'd just like to point out here that our adjusted net debt to EBITDA ratio, which includes the impact of the divestitures being adjusted out, is at 4.68 at the end of Q1, which is a slight decline from 4.82 at the end of the year.

So, for the financial outlook, turning to slide 23, as Kåre mentioned in his opening remarks, we're increasing our full-year guidance due to the strong first quarter performance, along with our confidence in executing the restructuring plan and delivering the rest of the year.

This includes a free cash flow that will be between $3 billion to $3.2 billion.

As we think about the quarterly progression of our performance throughout the end of the year, we believe that the biggest single factor we'll see in the quarterly progression will be the impact of any future full second generic launch of COPAXONE 40 milligram in the United States.

So, this concludes my remarks, and I'd like now to turn it back over to the operator, who'll start the Q&A session for our call. Thank you..

Thank you very much. The first question we have today comes from the line of Gregg Gilbert from Deutsche Bank. Please go ahead..

Good morning. Good afternoon, team. Thanks a lot for the question. Kåre, I'm trying to get a sense of urgency, or a sense of your sense of urgency to reduce debt. Obviously, you've done a good job so far with cash flow.

But to the extent your turnaround continues to deliver on plan and the equity price improves, can you talk about your thoughts about using equity at some point to reduce debt, to accelerate de-levering and get back to playing some offense and being able to do some BD, et cetera? And my follow-up is for Brendan.

Curious about the status of your generic XIFAXAN program. I saw the stay get extended the other day. Trying to understand what that means in terms of your belief in approvability of your current application in light of the draft guidance – or the guidance at FDA. Thanks, guys..

Thank you very much. I'll answer the first question, and then I'll hand it over to Brendan for your second question. So, with regards to using equity, I've said it before and I'm pleased to repeat it again. I have absolutely no plans of issuing new equity.

Basically, no matter what the price would be, the plan we have right now is based on, you could say, an organic improvement of the balance sheet by using our cash flows to reduce debt and by a strategy of consolidation and efficiency and profitability improvements over the coming years.

So, there are no plans for any kind of M&A activity or any issuance of equity whatsoever. We will simply use the operating cash flow we generate to reduce the debt over the coming years..

Thanks. That's clear..

So, with that, I hope I addressed that question, and then I'll hand it over to Brendan..

And Gregg, that was XIFAXAN, right?.

You got it..

Thank you..

Yeah. So, just a quick comment on XIFAXAN. Obviously, that is driven by the litigation and the approval. We had a 30-month stay that is over in August of 2018. We're responding to the FDA's revised guidance around bioequivalence. So, we've moved that out of 2018 and do not expect a launch in 2018..

Okay. I hope that addressed your question..

Thank you, Kåre. Your answer was clear. Thanks..

Next question?.

Thank you. The next question comes from the line of Jason Gerberry from Bank of America. Please go ahead..

Hi. Good morning. Thanks for taking my questions. Just wanted to get a sense, your interaction with the FDA so far on the fremanezumab application and what gives you guys, I guess, confidence in approval by year-end.

And have you guys had any advancement in terms of finding or securing a backup API support source?.

Jason, thanks for that question. I'll handle that. So, first of all, we've had a very constructive dialogue with FDA and we continue to have that. And it's pretty evident from the clinical data we have and actually that of our competitors as well, there's not much doubt about the efficacy of this class. It's very efficacious.

It's a huge improvement in the health situation for people with chronic migraine. So, we don't see any real issues on the efficacy and safety side.

So, the only, you could say, issue we have had outstanding or we still have outstanding is the fact that our API source Celltrion have had warning letter based on the inspection they had last year, where they got a 483.

And we have been in discussions of course with FDA on this, and based on those discussions, we are expecting to see a inspection of their plant in the coming months. And of course, we're expecting that we will be able to have our partner meet the demands from FDA.

And based on that, we are expecting to see a approval and launch before the end of this year. And we do not have any backup source that we have filed with the FDA. So, we are basically assuming and expecting that Celltrion will get in good shape in terms of GMP compliance, and we have no reasons to believe otherwise..

And Kåre, just to follow up, what ultimately makes you confident that the broader issues in the warning letter beyond just fremanezumab are resolvable? Is that something that you've gained incremental comfort on over the course of the past few months?.

You could say my assessment is based on mine and some of my colleagues and external experts' assessment of the outstanding issues mentioned in the 483 and then the activities undertaken by our partner Celltrion to remedy all these different deficiencies and make sure that they have a good state of GMP compliance..

Got it. Thank you..

Thank you very much. The next question today comes from the line of Elliot Wilbur from Raymond James. Please go ahead..

Thanks. Good morning. Kåre, I just wanted to get a little bit more color around your commentary on the U.S. generics business optimization, maybe a little bit more detail kind of where you are in that process.

I'm just sort of wondering, based on your interaction with customers, what are some of the pushes and pulls in terms of customers being willing to accept or – being told they have to accept higher price versus risk discontinuation, how willing are they to cede on price, given what seems to be fairly large retrenchment across many manufacturers in the U.S.

and the potential supply chain risk that creates versus letting you out of some of these contracts without having to be forced to pay a lot of inabilities? Second question, just want to get a little bit more color around the guidance increase in revenue, hard to get too granular on $200 million or 1% in revenue, but just curious if it's fair to say the bulk of that is COPAXONE and FX.

Thanks..

So, Elliot, thanks for that. I'll give a little bit of color to the U.S. generics, and then I'll let Brendan give some more details, and then Mike will give you some answers on the guidance. But if we start with the overall situation on U.S.

generics and pricing, I think it's really important to understand the basics of the dynamics that's been happening. And the way at least I've analyzed it is that we had a consolidation on the buyers side and you've had a situation where suppliers were maybe accepting lower prices because they used to have a healthy margin.

And at least not all market participants and definitely not Teva was maybe totally on top of profitability product-by-product at a very detailed level. And if you then go into a semi-commoditized market and you take a race to the bottom on price, then you will be destroying your own profitability.

And the only way to sort of get out of that negative spiral is of course to stop it by saying, well, we're not in the business of volume, we are in the business of profitability, and then changing your course of action without of course harming any patients and without harming your customers.

That's of course very important because we are the biggest supplier of medicine in the United States. We supply to more patients than anybody else. So, we are very keenly aware of that responsibility, and we don't want to cause any disruption. But as the market leader, it's also us who are part of setting the tone.

And I just thought it was really important to explain that we're not in the business of just supplying more and more volume for the sake of the volume. We are in the business of business, and that is to have a profitable business. So, therefore, we took these initiatives and there's no risk that we won't be able to supply.

That's not how we're doing it. We say we're doing a classical portfolio optimization exercise. And I'll turn it over to Brendan and he can give you a bit more color on how this is progressing with our key customers..

Thanks, Kåre. And yeah, I'll give you a little bit more color there. So, we've met with all of our major customers and supplied each one of those customers with a list of products that we specifically wanted to address.

And I will say that having worked through all of the issues we have, we're just about through that exercise and it's really kind of like an 80/20 rule. About 80% of the products we will get out of and they will move to other suppliers, and about 20% of the products we will see an increase in price on.

So, we've been happy with the response from our customers. We've worked with them very cooperatively and responsibly. And the idea here, as Kåre mentioned, is not to create any kind of supply shortage in the market, but to do so in a very easy way for them and for us as well.

So, we've been able to minimize or even eliminate any failure to supply penalties..

Thank you, Brendan. And then, we'll move on to the guidance. And before we do that, I'll just remind you all that when we sent out the guidance a quarter ago for the full-year, we had taken into account that this would happen in the U.S. So, our $4 billion expectation for U.S.

generic sales was inclusive of the loss of turnover as a result of the tail cutting. And of course, the reason why we do it is that there's no sense in selling products when you have a cash loss on doing it at the margin. So, there's no real change in the guidance from what we saw a quarter ago and from what we saw now when it comes to the U.S.

generics. But with that, over to you, Mike, on the $200 million up on the top line..

Yeah. So, I'll tell you a little bit about why we raised the guidance both on the top line and the operating profit. So, the $200 million on the top line is coming across the different regions. Europe has had a good performance, Growth Markets as well. We've seen a strong performance in the Anda business in the U.S. COPAXONE is maintaining very well.

So, we're off to a very good start. It is only 1% on the full-year, so it's not a major deviation. FX is a slight advantage there, but we did build our expectations on FX rates that are pretty close to what we've seen in Q1. So, I don't see that as a major driver.

We also have included the expectation that we will have a little bit additional cost savings based on what we've seen through the Q1. When you add all of that together, you end up with about $200 million both on the top line and on the EBITDA, and that's the basis of our guidance. So, it's no one single driver.

It's just strong performance across the portfolio..

Thank you, Mike..

Next question?.

Thank you very much. The next question today comes from the line of David Risinger from Morgan Stanley. Please go ahead..

Good morning. Zhu Shen here for David Risinger. Thanks for taking my question. Could you please discuss the R&D and SG&A cost reduction opportunities looking forward? Yeah, that's it for me..

Okay. Thank you, Zhu Shen. I'll handle that. Yeah, you could say, in broad terms, what we've done is we have sort of resized our portfolio and our R&D to what we think is sustainable and needed for a healthy business. And in broad terms, that's sort of ongoing $1 billion in yearly spend on R&D, roughly 50/50 between generics and specialty.

Of course, we have some elements, pilot scale, manufacturing upscaling, some clinical testing and whatsoever, where we have facilities that we use both for specialty and R&D. So, we're seeing some synergies there by consolidation of the two branches of R&D, which we've done.

This enables us to constantly produce enough new generic filings to keep our business going long-term.

And you could say the $0.5 billion in specialty R&D in my mind is enough to keep us going, and having a couple of good hits, not on a yearly basis, but over a 10-year period, we will have several good hits and we will have products like fremanezumab coming to the market and products like AUSTEDO, like COPAXONE, these types of products which will be high, high clinical benefit, relatively high price in the specialty segment.

And we think we can maintain that balance nicely with the current spending. We don't have any plans of further dramatic reductions below the sort of $1 billion level. But we don't see any reason why we would take it up either. So, for the coming years, that's really the level we are expecting. And Mike, you can just give some more clarity on it..

Yeah. Let me give you some color. Our spend base reduction, we are planning to get to $3 billion by the end of the restructuring plan. We promised you $1.5 billion in this year. If you look at Q1, the spend base versus Q1 of last year is actually down by a net $400 million. That is against a currency headwind of about $190 million.

So, overall, we were able to reduce the real operating and cost of goods by $420 million. We had a headwind against that of FX of $190 million. But then, again, we also benefited from the divestment which reduces the spend base. It's not part of our $1.5 billion net target that we're talking about.

But you'll see overall the $400 million is minus $400 million in operating, plus $200 million in FX, and then another $150 million coming back out from the divestments..

Thank you, Mike. I think that covers the question..

Thank you..

Next question?.

Thank you very much. The next question comes from the line of Irina Koffler from Mizuho..

Irina?.

(40:31) market in terms of commercialization for AUSTEDO. And the second one is for migraine, we heard at AAN that you would be considering using some of your primary care respiratory reps to promote CGRP. Can you just comment on that briefly? Thank you..

Irina, I'm sorry, but for some technical reason, I didn't get fully the first question on AUSTEDO.

Could you just repeat it, please?.

Sure.

Are you planning to start promoting AUSTEDO in the psychiatry market more aggressively?.

Okay. Thank you very much. I will refer both the question on AUSTEDO and the CGRP and respiratory sales force question to Brendan..

Yeah. So, thank you, Irina, for the question. So, in regards to AUSTEDO, yes, we are increasing the amount of sales support around AUSTEDO to the psychiatry group, and we did so just recently. That sales force – that increase in FTEs will be out there in the first part of May. So, we're there.

As far as the question about fremanezumab and how we plan to promote that, we have two sales forces that will be promoting fremanezumab. One is a neuroscience sales force, and we've kind of restructured our respiratory sales force a little bit to allow some promotion there as well..

Thank you..

Next question?.

Thank you very much. The next question comes from the line of Liav Abraham from Citi. Please go ahead..

Good morning. First question is on COPAXONE.

Just given your experience with one generic 40 milligram on the market and the response of both customers and patients and payers, are there any changes to how you think this market will evolve with two generics in the market? Any change to your assumptions there regarding how the revenues will progress as a second generic enters the market? And then secondly, just on the CRL that Celltrion recently received for biosimilar RITUXAN and Herceptin.

I noticed yesterday that Sandoz received a CRL for its biosimilar RITUXAN. Was the Celltrion CRL only due to manufacturing or were there any other deficiencies noted in that application? And any other – any additional color you can provide there? Thank you..

Thank you for those two questions. We'll handle the COPAXONE first. I'll just give a few general comments, and then Brendan can give you some more specifics. From an overall point of view, there's no real change in how we see it.

You could say the best proxy we have for it is, if you look at the 20 milligram, where you have two players beside us that each have a generic in the marketplace. And you can get some inspiration by looking at how much volume they've got by now.

And then, you can look to other markets where it's kind of a similar specialty injectable product that we're talking about, similar to COPAXONE.

And my thinking is that we will of course see some further pressure on our pricing by the fact that there will be two generic 40 milligrams in the marketplace and probably also marginal pressure on the volume throughout the rest of the year. And that's what we modeled into our guidance as well.

But Brendan, do you have any specifics – any new thoughts on how that will play out?.

Yeah, just a few things to add, Kåre. So, I've been in this market a long time and I've seen this market evolve. And I will tell you that I haven't seen any surprises as the way this market is shaped since 2013, 2014, as we've seen generic competition on 20 milligram as well as 40 milligram.

So, as Kåre mentioned, as we see another 40 milligram generic into the market, I think there will be some downward pressure on price, probably a little on volume as well. But today, we maintain about 85% of the overall COPAXONE market, and it is following our expectations and our plans for the year..

With regard to the biosimilars, then of course the details you will have to discuss with Celltrion. But it's so that we assess that the key issue in the CRL for both the products that we have licensed here in the U.S.

from Celltrion is really the warning letter and as such, we are expecting that with a positive re-inspection in the coming months, we will be able to see Celltrion eventually lift the CRL and get approval. But our planning is such that we are planning to have these lunches next year.

So, it's really not something that's affecting the financial outlook for the current year..

Thank you..

Steven?.

Thank you very much. The next question today comes from the line of Umer Raffat from Evercore. Please go ahead..

Hi. Thank you so much for taking my questions. Actually, I wanted to focus on two of your most important highflying items. First, Regeneron said in their press release this morning that they're discontinuing the high dose of their NGF program. So, I just wanted to get some update from you on what happened, what was seen at that high dose.

Was it RPOA or is it neuro-sensory changes? And what does that mean for the overall program now, because Teva – because Pfizer really haven't seen much of the RPOA events from my understanding? And secondly on CGRP, my question really is, you mentioned you expect an approval by year-end, but not in June.

So, like mechanistically, how does that work? Because my understanding is, if it's a CRL in June, then you need to wait for an inspection and then re-file, which may put a new clock in. So, I just wanted to get clarity there. Thank you..

Thank you for those two questions. First, on fasinumab, so the details you would have to discuss of course with Regeneron.

But as it's stated today in their release, what happened was basically that the independent data safety board that's overlooking the trials, they concluded based on an overall risk-benefit analysis that the high dose arms should be – or they recommended that the high dose arms should be discontinued, and that's happening.

And FDA of course has been updated on everything, and there will now be a dialogue with FDA with regards to the program. And so far, the trials are being modified with the high dose arms being taken out of the trial for fasinumab.

With regards to the question on CGRP, then we are in a positive constructive dialogue with the FDA, and based on that dialogue, we do see a possibility for us having the approval and launch this year. I can't get into more specific details on that..

Thank you..

Next question?.

Thank you very much. The next question today comes from the line of David Amsellem from Piper Jaffray. Please go ahead..

Thanks. So, just on fremanezumab, just thinking beyond the potential approval, so your competitors among the monoclonals are formulating it in auto-injector pens, and your product has relatively high volume compared to the Amgen and Lilly products.

So, I just wanted to get a sense of the extent to which you think you can formulate it over time in a pen device, and do you think that the relatively high injection volume could put you at a competitive disadvantage? Thanks..

Yeah. I'll give you the overall comment, and then Brendan can give some more details. I don't think we have any disadvantage. We don't have a significant high volume of the dosage. It's pretty complete standard like any other antibody that's given once a month and it's comparable to what competition has.

And with regard to the auto-injector, then for device development reasons, which are not linked to the product as such, we don't have the approval of the auto-injector that we'll be using yet. But we are in testing and moving ahead with that according to plans. So, we expect to see that in the market.

It's correct that if you get the therapy once a quarter, then of course you get a higher volume once a quarter. But it's very likely that the quarterly dosing will be taking place with a nurse or at a doctor's office with some assistance. And that in itself might be preferable for a certain segment of the market.

At least in my long experience with injectables, fewer injections seems to win over more injections. That's what I've seen in diabetes over the last 30 years and it's also what I've seen in psychiatry over the last 5 to 10 years. So, I'm very optimistic there will be a significant part of the market that will prefer less injections.

But Brendan, do you have any color to it?.

Yeah. I think there's some confusion going on regarding fremanezumab and the dosing frequency. So, as Kåre said, we will have a monthly as well as a quarterly, and the quarterly does require more injections, but it'll give the patient flexibility to have that injection either monthly at home, quarterly at home or quarterly in the doctor's office.

And because it's quarterly in the doctor's office and there's more than one injection, I think people are confusing that with our lack of a pen device at launch. So, we do have a pen device in development. We hope to launch it after we obviously launched the product itself.

And so, there's no issue with the pen device is related to the volume of the product. So, we think that we have a very, very competitive offering, because we will be the only ones that have the quarterly dosing, and we think that that will be both a benefit to physicians and patients..

Okay.

Any specifics on timing of the launch of the pen device?.

No, no specifics. It will be following the approval and launch of the product in a prefilled syringe. But we don't have any specific date on it..

Okay, thank you..

Thank you very much. The next question today comes from the line of Jami Rubin from Goldman Sachs. Please go ahead..

Thank you. Question for you, Mike, on debt pay-down. You ended this quarter with net debt of $29.3 billion.

I don't know if I saw it, but where do you expect that to be by the end of the year? And just given the results this quarter and clearly what seems to be faster debt pay-down, can you hit 4 times leverage by 2019? And is there an opportunity for further divestitures which could speed up debt reduction? Thanks very much..

Yeah. So, thank you, Jami. So, so far, we've paid down $2.2 billion, which is actually a gross pay-down of $2.5 billion, but the currency has gone against us by about $300 million. We originally said we'd pay down about $3.5 billion this year. I think with the free cash flow guidance range, we will probably try to pay even more now.

The currency of course will be the wild card in that. So, I could see us going down another $1.3 billion to $1.5 billion by the end of the year. And we're still on track to meet our goal of 4 times by the end of 2020.

But of course, that relies on the fact of us generating enough cash to cover maturities in the next two-and-a-half years as well as seeing a stronger EBITDA as we go into 2020 and we get past the COPAXONE trough.

So, we still feel confident that we're on track for it, but there are some moving parts that we will be keeping a close eye on and we will be managing over the course of the next two years.

In terms of additional asset divestments, we are still looking at a couple of assets that we have – we have made public that we are no longer really looking at the Anda business. We're going to keep that and run it. We are still looking at Medis and there's a few other minor assets. But we really don't see that as the huge lever to de-lever.

It's really about generating organic cash flow and raising the EBITDA over time, so that we can get our ratios down to where we want to be..

Thank you..

Next question?.

Thank you very much. The next question comes from the line of Ami Fadia from Leerink Partners. Please go ahead..

Hi, good morning. Thanks for the question. I had two questions. Firstly, just a clarification on fremanezumab. You indicated that patients will have the option to either self-inject or have the dose injected at a healthcare professional's office.

Now, how would that impact how the drug is reimbursed between the prescription benefit versus something like a buy-and-bill? And secondly, just with respect to Celltrion, could you give us a little bit more color around what gives you confidence that they will be able to address FDA's questions around the warning letter in the coming months, thereby triggering another FDA inspection? Or are you really telling us that irrespective of whether or not they address their issues, based on your conversations with the FDA, you still think that they'll come back for a re-inspection for fremanezumab? Thank you very much..

Thank you very much, Ami. I'll try to explain how we see the Celltrion issue first, and then Brendan will talk about the thing about the injections and the reimbursement. So, the way we see it with Celltrion is, of course, they need to be in a good state of GMP, and we believe that they are and they have remedied the outstanding issues.

But that's of course up to the FDA re-inspection to assess that. And what needs to happen is they need to have a re-inspection and there needs to be a PAI, pre-approval inspection, of fremanezumab API manufacturing. Now, on the API manufacturing, of course, we've been following that closely for the last years since it's crucial for fremanezumab.

The actual 483 that Celltrion had last year in June, I believe it was, was actually on their finished pharmaceutical manufacturing.

And of course, they have done everything needed to remedy those deficiencies that they had and they have of course had to inform FDA on an ongoing basis of what they were doing like any other manufacturer would have to do it.

And they have to report to the FDA that they have now completed their remediation plan as they are ready to take a re-inspection. So, they have of course done that, and that is why that we say that we expect that there will be a warning letter re-inspection and a pre-approval inspection in the coming months.

And of course, then any approval and launch is then on the assumption that Celltrion has done a good job and they are in a good state of compliance and that FDA will find this when they do the re-inspection and they do the pre-approval inspection. And based on that, we're saying that we expect approval and launch before the end of this year.

So, I hope that clarifies it.

Now, Brendan, could you explain about self-injection and injection at a clinic and reimbursement and so on in the U.S?.

Yeah, sure. Just let me jump in on that. So, we expect that these products being self-injectable products will go through the pharmacy reimbursement. So, we're not necessarily saying that this is a medical reimbursed product, but these are all self-injectables. But they will also likely go through specialty pharmacy distribution.

So, I think what we're saying is that for patients that want a quarterly option and that may not want to inject it themselves and are likely seeing their neurologist or their physician for migraine once every quarter, that option exists and there's a way to do that through specialty pharmacy distribution or other channels.

And I really don't want to say much more about our reimbursement strategy other than that..

Okay, thank you..

Thank you very much. The next question today comes from the line of Rohit Vanjani from Guggenheim Partners. Please go ahead..

Great. Thanks for taking the question. I just wanted to – I'm sorry, another question on fremanezumab. I think last time, you had said the API site where that was being produced had not been inspected.

So, as part of the PAI, will this – the inspection of the API site be the first time that that's being inspected? And then secondly, you mentioned that 80% of products – 80/20 rule, 80% of products moving and 20% taking a price increase.

Has that 80% of the products moved yet? And if not, is that a 2018 or a 2019 event?.

Okay. Rohit, thanks for the questions. I'll address the fremanezumab API thing, and then Brendan will give you a flavor on the U.S. generics pricing. So, the pre-approval inspection of fremanezumab, the way you have a pre-approval inspection done on an API site is that you have to have your manufacturing up and running.

So, you've got to make sure that you're actually producing fremanezumab when the inspectors come to the site and they have a good look at everything that's going on. And since this is a pre-approval inspection of a new product, then obviously that process has not been inspected before.

But of course, you can also judge from the portfolio that Celltrion has that their API facility as such has been inspected before. So, that's really the situation on that one..

Yeah. So, let me address the other question on the 80/20 rule. So, the list differs by customer. So, there is some overlap of course. But to just generally answer your question, it's probably more of a 2019 event than it is a 2018 event as we work through the list with each individual customer..

Okay, thanks..

Thank you for that, Brendan. I think we will have time now to take one last question..

Thank you very much. The last question today comes from the line of Ronny Gal from Bernstein. Please go ahead..

First, thank you very much for sticking me in, and since it was done before, congratulations, Kåre, on a very successful quarter. I got two. The first one I've got COPAXONE for Brendan. Brendan, you've talked about the potential additional pressure coming in from Sandoz.

But speaking to payers, it does not seem like anybody is too excited about getting a product from a facility in McPherson when there is like a warning letter every year or so.

So, the question is until you get additional competitors, do you really expect that Sandoz product to be a pressure or are you assuming there'll be other products coming in before the end of the year? And second, switching over to fremanezumab, I know you heard a lot about this today.

Brendan, I understand you guys expect the product approved by the end of the year.

But as we think about the payer cycle of adoption of anti-CGRPs, how late can you be without beginning to see an impact on your final market share? Do you have to be there for the 2020 contracting cycle in early 2019? Or if something happens and you need to be a little bit later, do you still you can get to where you need to be on that market share for this product?.

Yeah. So hi, Ronny, and thanks for the question. So, let me address the COPAXONE question first. So, beyond Sandoz, we don't expect any other generic competitor coming to the market of 40 milligram this year. So, we're expecting the Sandoz/Momenta product here in the first half as they've communicated and we'll see how that shapes.

I think we've built that into our plan. If you look at the market share that we hold today, about 85%, we will likely cede some share and some price, but I think it'll be right according to what we've planned. In regards to the question on frem, I think that if we launch in the second half of 2018, we'll be there on time for the 2019 formulary cycle.

We've – payers are aware of where we are. They've been asking questions. So, I think we'll be right in the mix with everybody else. My expectation is that payers will wait until all three products are on the market before they make their formulary decisions for 2019.

And I would expect that because this is a new class of drug and this is a – these are new products that most payers will try to take a look at this and give patients and physicians the flexibility to choose what product is right for them. And so, hopefully, this is a push towards access for patients..

Thank you..

Thank you very much everybody for listening in. This concludes our Q&A session. And we look very much forward to talking to you again three months from now. Goodbye..

Thank you very much. That does conclude the conference for today. Thank you for participating. You may all disconnect..