Earnings Call Transcript - TEVA Q2 2025

Operator, Operator

Hello, and welcome to the Teva Pharmaceutical Industries Limited Q2 2025 Earnings Conference Call. My name is Alex, and I will be coordinating today's call. Now, I will turn it over to Chris Stevo, Senior Vice President of Investor Relations. Please proceed.

Christopher J. Stevo, SVP, Investor Relations

Thank you, Alex. Good morning and good afternoon, everyone. On this call, we'll be making forward-looking statements, and we disclaim any obligation to update those statements after today's call. If you have more questions about our forward-looking statements, please feel free to see our disclosures under SEC Forms 10-Q and 10-K. Also during today's call, we'll be often referring to sales growth in local currency as well as sales growth, excluding the prior year results of our recently divested Japanese business venture. So please bear that in mind. And with that, let me turn it over to Richard.

Richard D. Francis, CEO

Thank you, Chris Stevo, and welcome, everybody. Good morning. Thank you for joining the call. I'll be joined today with Eric Hughes, my Head of R&D and CMO, who will be walking you through the pipeline; and Eli Kalif, CFO, will go through the financial update. So starting with, as I always do, the pivot to growth slide. Next slide, please. The 4 pillars of our pivot to growth slide. We've been executing this since 2023, and I'm pleased to say it has delivered continuous growth, and we enter our 10th consecutive quarter of growth. Now I'll give you an update on how we're doing on all of these pillars today. But you'll see on deliver on our growth engines, our innovative portfolio of AUSTEDO, UZEDY, and AJOVY continues to perform really well. On step-up innovation, Eric will walk you through how excited we are by our late-stage pipeline and how we're progressing that very quickly. On sustained generics powerhouse, you'll see that our generics business is stable. I would remind you this reflects strong prior year comparisons and some phasing, but I'll go into that in a bit more detail later on. And on focus the business, we'll give you an update on the Teva transformation programs that we announced in Q1 and at our Capital Markets Day, and you'll see that we're well on track to deliver the savings that we committed to. Now if you move to the next slide, revenues were up to $4.2 billion, up 1%. And I think not only is this the 10th consecutive quarter of growth, but what I'm particularly pleased about is where this growth is coming from. And as you'll see throughout the deck, this is driven by our innovative portfolio of AUSTEDO, AJOVY, and UZEDY. This has enabled us to have good strong growth of our adjusted EBITDA up 7% and our non-GAAP EPS up 10%. And our net debt to EBITDA is just over 3. So if we go to the next slide, a slide that I do like to show externally and internally because after many years of sales decline, we are in our 10th quarter of consecutive growth. It's also a good slide just to highlight that prior comparison year that we have. In Q2 '24, we had 11% growth. And so that's just worth noting. But we remain committed and confident that we're going to hit our mid-single-digit average growth rate that we committed to for our '27 targets. And the average growth rate is between 2023 and 2027. So let's go into a bit more detail on the revenue. So the revenue, as I said, was up 1%. But if you look, I'm excited about where this is coming from. AUSTEDO at just below $500 million, up 19%. UZEDY up 120% at $54 million and AJOVY, a very strong 31% at $155 million. Our Global Generics business declined 2%. And just to reiterate what Chris said, this is excluding the Japan divestiture. And I'll go into a bit more detail as to what's driving this generics, but I would remind you of the strong comparison year that we had last year. Now on TAPI is down 11%. And I'd say in terms of Q2 results, I would say this is more of an anomaly and not indicative of TAPI's normal results. There are several things that have impacted the seasonality and just timing of shipments, but we expect TAPI to grow for the full year. So now going into the innovative portfolio in a bit more detail. As you can see, AUSTEDO grew 22% in the U.S., our major market, up to $495 million. Because of the strong results, we're in a position to narrow the range here, and we brought up the bottom part of the range to $2 billion. This performance was driven by good TRx growth and particularly growth of XR, which you'll see has been fueling our growth in our milligrams, which is up 34%. This is important to understand because as we grow our XR, which we see as very beneficial for patients and their compliance and their adherence, it does obviously change the dynamics around TRx. And that means the number of scripts that will come through will be less because people move to XR. And we've explained that a number of times. I just wanted to reiterate that. Now as we move on to UZEDY, another strong performance. I'm really excited to be in a position to raise the guidance to $190 million to $200 million, up 120% year-on-year. This just shows the good capability that we have in our U.S. team to execute, but also the good product profile. As Eric and I often talk about, the physicians really like UZEDY. It's easy to use. It gets to therapeutic levels within 24 hours, subcutaneous. It isn't required to be kept refrigerated, and it's in a prefilled syringe. As you can see, we've made real progress in competing in the risperidone market and in the long-acting market. But now to continue this impressive growth, we want to move to actually compete in the broader market of schizophrenia. We'll be looking for patients to benefit from this on other molecules currently. Now this impressive performance of UZEDY, I think it's worth just reminding everybody that we will be filing olanzapine and we'll be in a position to launch our long-acting olanzapine next year. The capability we've built in this team, the knowledge of the patients, the physicians, and the payers give us real optimism that we can develop a world-class long-acting franchise in schizophrenia. Once again, I'd like to move on to AJOVY now, our third and final of our innovative portfolio. We've got a bit of a trend here. We've increased the guidance here on AJOVY as well because of the strong performance. So we're up from $600 million to $630 million to $640 million, that range. I often say this, but it is worth reiterating, I'm really impressed with our ability to execute in what is a very competitive market. Not only are we facing all CGRPs, but it is a competitive injectable market as well. But the team, whether it's in the U.S., Europe, and international markets, continue across many of these areas to grow our market share and to show a level of competitiveness. Now moving on to our second pillar, which is step-up innovation. This is a slide that I will not go into a lot more detail. So I'll just highlight a couple of things which I'm particularly pleased about is, one, the late stage of this pipeline. We have products either coming to the end of Phase III and about to be filed or in the middle or about to start with duvakitug. What I'd also draw your attention to is two of these products can be in multiple indications. Duvakitug is one, and anti-IL-15 is another. If you just take them with the indications we've listed here and take the totality of this, this pipeline will generate peak sales of over $10 billion. That is really exciting for any company, but a company in the transition to a biopharma company like Teva, I think that's particularly exciting. If you go on to the next slide, that's where I think I can really reiterate our confidence in hitting our 2027 numbers from an innovative point of view of $3.5 billion to $4 billion because obviously, we'll be launching olanzapine next year, and you've seen the momentum we have in UZEDY. As we get to 2030, we've said we'll have greater than $5 billion of innovative sales. I remind everybody that we expect to see AUSTEDO continue to grow to 2030 and beyond UZEDY. We've shown the performance of AJOVY, but that will be joined by olanzapine, DARI Dual-action Asthma Rescue Inhaler, and duvakitug. The thing to remember as well is that as we drive this innovative portfolio, we are changing our profitability because these are very different levels of profitability than our generics business. Now moving on to our third pillar, our generics powerhouse. As you can see here, the generics business performed at 2% across our global business, and I remind everybody that there was a tough comparison year where we had an 11% growth in the prior year. I've put up here a 2-year CAGR just to show that when we think about generics, we think about this on a multiyear period because, obviously, some years we have more launches than others, but let me just give you a bit more detail here. In the U.S., this was driven by two things: our prior year comparison where we launched Victoza, and we had a big launch with Victoza in the U.S. in Q2 2024 as well as some phasing and timing of shipments of generic Revlimid. If you exclude these, our U.S. generic business grew. That just shows the healthiness of the business we have in the U.S. From an EU point of view, we did actually grow the business 8% in the prior year, which is high for such a big business. So although that growth has come down, it reflects the phasing of new product launches, some tenders, which only happen on a 2-year basis and some competitive stock-outs, which we took advantage of last year and are no longer there. But we remain very confident about growing our generics business going forward. For the full year, we're reiterating that our guidance for our generics business will be flat to low single digit. The confidence going forward is based on the fact that we have 15 complex generics to launch, multiple other generics to launch across our EU and international markets as well as 8 biosimilars, which we'll be launching between now and 2027. Talking about biosimilars, let's move on to biosimilars now. As you can see, it's an exciting time for our biosimilars. We’re seeing good sales momentum in the U.S., and that's been driven by our established brands as well as new launches with SELARSDI and generic SOLARIS that we launched in Q1 of this year. I’d like to remind you, we have a portfolio play here, and so we have more launches to come. In fact, we have five additional launches in the second half of '25 and to '27. Our ability to hit the goal of generating $400 million of additional sales by 2027, which we announced at our Capital Market Day, we remain very confident about, and it's good to see that our strategy of a portfolio play is starting to play out. Now moving on to the final pillar of our pivot to growth strategy on focusing the business. I just wanted to give you an update on where we are in the Teva transformation. As you know, we announced that we're transforming Teva as we had to become a world-class biopharma company. To do that, we put together a modernization program, which will allow us to generate $700 million of net savings, and this is after the reinvestment in our innovative pipeline and our innovative portfolio. We also committed to deliver 2/3 of this by the end of '26. You can see by this slide that we're well on track. We've already achieved 20% of this 2/3, showing you we have good momentum, good execution, and delivering on these savings. Now moving on to TAPI. I do want to give you a brief update on the deal here. The deal is still in active and advanced discussions. While I'm disappointed that I cannot provide a definitive update at this time, my main focus is on delivering the best outcome for our shareholders, and we'll reach the final decision in the third quarter. Before I hand the baton to Eric, I just wanted to give you an update on how we feel about the full year and our guidance for 2025. We're confident to hit our guidance in 2025, and when you think of it from a revenue point of view, the way we’re going to get there has slightly changed, and I think it's in a positive way. Our innovative portfolio is going to overdeliver on what we thought at the start of the year, and we've raised guidance across all of the products, AUSTEDO, UZEDY, and AJOVY, totaling an additional $95 million for the year. Our GX business, as I said, we predict will either be flat or low single-digit growth, and because of that, we believe from a revenue point of view, we will hit our mid or slightly below our midpoint of our revenue guidance, but Eli will go into a bit more detail on that and the confidence we still have in our EBITDA and our EPS. With that, I'll hand over to Eric.

Eric A. Hughes, Head of R&D and CMO

Thank you, Richard. As mentioned, we are pleased to report that we have three Phase III programs underway, each with a significant chance of success and a large patient impact. Our schizophrenia program using olanzapine LAI targets a diagnosed patient population of 4.7 million. Our DARI program for asthma could affect 39 million diagnosed patients. Additionally, duvakitug, which we consider a potential best-in-class TL1A molecule, has the capacity to treat 4.1 million patients. Our Phase III programs are progressing well, and we also have a promising Phase II program involving emrusolmin for multiple system atrophy, and an anti-IL-15 treatment for celiac disease and vitiligo. We are very encouraged by both the Phase III and Phase II initiatives. Our olanzapine LAI program is on schedule for the expected submission in the fourth quarter of this year. We will be presenting our full maintenance data out to 48 weeks and the second study period regarding both efficacy and safety in the third quarter. To date, we have not observed any PDSS, and we are satisfied with the current maturity of our data, all of which remains on track. I'm enthusiastic about our dual-action rescue inhaler program, which is a significant asthma study focused on asthma exacerbations, and our enrollment is on schedule to be completed by the end of this year. Duvakitug, in collaboration with Sanofi, is also progressing well. This is a major study with each indication over a span of one year, testing two doses and involving over 1,000 patients for both ulcerative colitis and Crohn's disease. We expect to begin that Phase III program in the fourth quarter of this year. Our emrusolmin program is advancing as planned, having started enrollment at the end of last year, and this robust Phase II placebo-controlled study has enrollment exceeding our expectations; we aim to have it fully enrolled by 2026. We recently announced a partnership with Fosun Pharma, a strategic collaboration to accelerate our PD-1 IL-2 initiatives, leveraging the growing infrastructure and unmet medical needs in China. This partnership aligns with our Pivot to Growth strategy. Our anti-IL-15 program is also on track. We believe we have a differentiated anti-IL-15 molecule featuring greater potency, favorable pharmacokinetics, and low levels of antidrug antibodies. We're eager to present biomarker data at our Capital Markets Day demonstrating the potential protective effect of our molecule on gut health, as evidenced by our data showing gut lining protection with a single dose of anti-IL-15. We are excited about these findings. Lastly, I want to highlight our anti-TSLP IL-13 program, which is an AI-generated antibody with a novel dual specificity for both IL-13 and TSLP targets. We see this as a proactive approach to treating type 2-driven diseases, and we look forward to initiating human studies in the first half of 2027. Now, I will pass it over to Eli Kalif.

Eliyahu Sharon Kalif, CFO

Thank you, Eric, and good morning and good afternoon to everyone. I would like to start today with the following key messages that demonstrate our consistent execution over the last few quarters, including Q2. First, Q2 came in with a solid performance driven by our fast-growing innovative portfolio despite tough year-over-year comparables of our generics business. Second, we continue to improve and strengthen our balance sheet, more specifically, reduced our working capital days and leverage, which was recognized by the leading credit rating agencies in their most recent upgrades to Teva's credit ratings. Third, we remain confident in and on track for achieving our 30% operating margin target by 2027 and have already made tangible progress in implementing targeted programs to deliver approximately $700 million of net savings by 2027. Lastly, while we continue to wait for clarity around potential U.S. tariffs on pharmaceuticals, including further details on what was announced earlier this week for Europe, we have absorbed the already confirmed tariff into our 2025 guidance, which remains unchanged. Now moving to Slide 30 to review our Q2 2025 financial results, starting with our GAAP performance. Please note that throughout my remarks, I will refer to revenue growth in local currency terms unless I specify otherwise. I would also like to remind everyone that on March 31, 2025, we closed the divestitures of our business ventures in Japan, which marketed mainly generics products along with some legacy innovative products. This divestiture was consistent with our strategy to focus on profitable growth as well as our capital allocation framework. During the presentation, I will refer to certain results that exclude the contribution from this Japan business venture from Q2 2024 to provide you with a like-for-like comparison of our Q2 2025 financial results. For your reference, we have a slide in the appendix showing the contribution from the business venture from Q1 2024 through Q1 2025, the last quarter in which we consolidated the business. Our Q2 results were solid with revenue of approximately $4.2 billion, growing 2% in U.S. dollars or 1% in local currency, excluding the Japan BV. As Richard highlighted earlier, this was our 10th consecutive quarter of growth, driven by continued strong momentum in our key innovative products, AUSTEDO, AJOVY, and UZEDY, despite tough prior year comparables in our generics revenue. GAAP net income and EPS were $282 million and $0.24, respectively. FX movements during the quarter, net of hedging effects, positively impacted revenue by $49 million but had a minimal impact on operating income compared to the second quarter of 2024. Now looking at our non-GAAP performance. Our non-GAAP gross margin, excluding Japan, increased by 130 basis points year-over-year to 54.6%. This increase in gross margin was higher than our original expectation, driven by a positive shift in portfolio mix, especially with AUSTEDO's continued growth and the impact of the sale of certain product rights in Europe, partially offset by lower revenue from legacy innovative products like COPAXONE. Non-GAAP operating margin increased by approximately 170 basis points year-over-year to 27.1% and benefited from lower R&D expenses in the second quarter of 2025, mainly due to a decrease in nonrecurring milestone payments for certain biosimilars collaboration. Overall, we ended the quarter with a non-GAAP earnings per share of $0.66, an increase of $0.05 or 10% year-over-year. Total non-GAAP adjustments in the second quarter of 2025 were $486 million. This included approximately $154 million of restructuring costs, mainly related to optimization of the Teva Global organization and operations in connection with our ongoing transformation programs. Our free cash flow grew strongly by 47% to $476 million, mainly driven by higher net income as well as working capital improvements. Turning to Slide 31. We continue to strengthen our balance sheet to support our Pivot to Growth strategy and the journey towards investment-grade credit ratings. During the second quarter, we refinanced approximately $2.3 billion of near-term debt maturities, mainly in 2026, 2027, and 2029 to better align them with our free cash flow generation. Importantly, we did that while keeping our post refinancing cost of capital at similar levels, demonstrating our improved credibility and profile in the market. This significant ongoing improvement in our balance sheet is recognized by the leading credit rating agencies. All three major agencies have upgraded Teva's credit ratings over the last 12 months, including 2 rating upgrades prior to the refinancing in the second quarter. Our gross debt reduced to $17.2 billion at the end of Q2 compared to $17.8 billion at the end of 2024 due to the repayments of $1.4 billion of notes at maturity, partially offset by exchange rate fluctuations. Our net debt was $15.1 billion, and the net debt to EBITDA remained just over 3x. As I highlighted during our Capital Market Day in May, we are on track to achieve a 2x net debt to EBITDA by 2027 and an investment-grade rating while still making deliberate investments in the business to execute on the accelerated phase of our Pivot to Growth journey. Moving to Slide 32, as we announced last quarter, we are transforming Teva with the targeted programs to deliver sustainable margin improvements without compromising our ability to innovate and invest in our long-term growth. These programs are expected to deliver approximately $700 million of net savings between 2025 and 2027. These transformation programs, together with the ongoing portfolio shift towards high-growth and margin innovative products provide a clear path to achieving our 30% operating margin targeted by 2027 by expanding gross margin to be between 57% to 58%, while keeping operating expenses in the range of 27% to 28% of revenue despite continuous investment in the business. We have kicked off these programs to transform our operation with tangible progress already in place as of today. We expected roughly 2/3 of the $700 million savings to be realized between '25 and '26, including approximately $70 million of initial savings in the second half of this year. The savings in the second half translated to an annualized run rate of approximately $140 million or about 20% of the overall net savings target. With a clear action plan of these programs, along with our expected growth trajectory led by our innovative portfolio, we are confident in growing adjusted EBITDA in 2026 and in 2027, both in U.S. dollars and margin terms. In relation to these programs, we recorded approximately $150 million of restructuring costs in the second quarter and expect an overall cash outflow of $70 million to $100 million in 2025. Both the expected savings in the second half and these cash outflows are already considered in our full year guidance range for 2025. Moving to the next slide for our 2025 non-GAAP outlook. As I mentioned earlier, our performance in Q2 and the first half has been solid, delivering revenue growth despite tough prior year comparables and improving margins and cash flow while making significant progress on our transformation programs to achieve our 2027 financial targets. Based on our year-to-date results and the current view of the second half, we are reaffirming our 2025 outlook range for revenue, operating profit, and adjusted EBITDA while increasing the lower end of our EPS range by $0.05. Let me provide some color on the assumptions that we have factored into our guidance, starting with revenue. First of all, our innovative portfolio is delivering very well across our 3 key products: AUSTEDO, AJOVY, and UZEDY. With a strong first half performance, we have increased our combined guidance for them by approximately $100 million at the midpoint. With increased expectations of our combined 2025 revenue outlook for these 3 products, it's around $2.9 billion versus $2.3 billion in 2024, reflecting growth of approximately 23% year-over-year. Second, FX movements have favorably impacted our revenue since the beginning of Q2, mainly due to the weaker USD versus the euro. While our hedging programs offset some of these FX benefits, overall, we do see a net positive impact on our revenue guidance range as compared to our May guidance. However, as Richard discussed earlier, we expected our global generics revenue for a full year in 2025 to be flat to modestly growing in local currency as compared to 2024. This is mainly due to tough prior year comparables and increased competition on product launches as well as the delay in timing of certain generic launches. Overall, with the pluses and minuses I just talked about, we still expect our revenue to be in our 2025 guidance range of $16.8 billion to $17.2 billion, although based on our current trajectory, we are likely going to be around or slightly below the midpoint. Moving to the other elements of our financial outlook. We continue to expect our non-GAAP gross margin to be between 53% to 54% for the full year. Given our year-to-date gross margin performance, we expect our gross margin for the year to be above and at the midpoint of this range with a sequential improvement from Q3 to Q4. We are also reaffirming our non-GAAP outlook for adjusted EBITDA and operating income. As reflected by the increased revenue outlook, we expect to continue strengthening our innovative portfolio in the second half, combined with the expected savings of approximately $70 million from our transformation programs and the FX benefit. These factors are expected to offset the impact of relative softness in generics. Therefore, based on what we know today, we expect our non-GAAP operating income, adjusted EBITDA, and EPS to be at the midpoint of our guidance range or above. Accordingly, we are raising the lower end of the EPS range by $0.05 to the new range of $2.50 to $2.65. Our free cash flow guidance range remains the same, between $1.6 billion to $1.9 billion. Now let me provide some additional thoughts on the quarterly phasing for the rest of the year. Overall revenue is expected to ramp up through the rest of the year. Although Q3 faces a tough comparison, especially in generics due to the prior year new product launches, we expect sequential improvements in the fourth quarter, driven by an expected increase in our innovative product revenue as well as phasing of generics revenue. We also continue to expect our operating expenses to be between 27% to 28% of revenue. Given the phasing of a certain investment in S&M and R&D, we expect OpEx to increase sequentially in Q3 before stepping down in Q4 to be consistent with our full year range. Moving to the next slide, our capital allocation strategy is consistent, clear, and designed to fuel our long-term growth while strengthening our balance sheet. Our improving free cash flow generation and portfolio optimization position us very well to achieve our net debt-to-EBITDA target for 2x by 2027 and to sustain that ratio thereafter. We believe reaching that leverage target and an investment-grade rating will allow us to explore different ways to return capital to our shareholders. Finally, before I conclude my review of the second quarter results, I would like to reaffirm our 2027 financial targets. Based on the progress to date and our continued focus on execution, we are confident that we are on track to achieve these targets. With that, I will now hand it back to Richard for his closing remarks.

Richard D. Francis, CEO

Thank you, Eli. Thank you, Eric. So we go to the next slide, thank you. Delivering on the acceleration phase of our Pivot to Growth strategy. This is a slide that I like because it shows the potential that we have right in front of us here at Teva. As I've highlighted, our growth ambitions towards 2027 can be fueled by our innovative portfolio, AUSTEDO, hitting $2.5 billion. AJOVY continues to grow, and UZEDY continues to grow and will be joined by olanzapine, which allows us to have the ambition for $1.5 billion to $2 billion peak sales of our long-acting franchise in schizophrenia, and we aim to double our biosimilar business. But if you look beyond that, which I'd encourage you to do when you look at Teva as a biopharmaceutical company, you can see that AUSTEDO will continue to grow beyond '28 as will our long-acting franchise, as well as our biosimilars, and it will be joined by our dual-action rescue inhaler, which we think has peak sales potential of $1 billion, duvakitug in the indications that Eric has outlined, as well as emrusolmin. The path to continued growth is clear for Teva. If you go on to the next slide, when we bring it back to the thoughts around 2025 and beyond, we continue to deliver on our Pivot to Growth strategy, and I'm really pleased to show that the 27% increase in revenue from our innovative portfolio shows the strength of the capability we have there. We highlighted a very clear path to 30% operating margins and the ability to hit our other 2027 targets, and this once again is through this good, strong innovative growth, our stable generics business, and the ability to modernize and transform Teva in saving $700 million. Our innovative pipeline shows we have near-term catalysts with olanzapine submission and the start of our duvakitug Phase III results, but also the pipeline shows we have potential to continue to grow this company well into the future. Both Eli and I have highlighted that we're well on track for Teva's transformation. We've already achieved 20% of our $700 million of savings in the last few months that we've been executing this. With that, thank you for your attention, and I'll hand it to the Q&A.

Operator, Operator

Our first question for today comes from Umer Raffat of Evercore ISI.

Unidentified Analyst, Analyst

This is JP for Umer Raffat. Congrats on a good quarter. Our question is regarding AUSTEDO and the IRA negotiation. Is it possible to share any color on what's the range of discounts that you guys are expecting? How this compares to the first round and give us some details, if possible?

Richard D. Francis, CEO

Thanks for the question. Unfortunately, I'm going to give a very boring answer. We're not going to comment on anything to do with the IRA because we are in the middle of negotiations with CMS. So you'll have to wait until we get to a conclusion of that before we make any announcement.

Unidentified Analyst, Analyst

Okay. And if I may, a second question. Do you guys expect any impact from the tariffs announced in Europe this year?

Richard D. Francis, CEO

I'll hand that to Eli, but I would just remind you when we're on the Q1 earnings call, we talked about the work we had done in preparation for tariffs. The team have done very comprehensive work to understand how we can mitigate the impact on our business. That said, there's a lot of ambiguity about what has really occurred with these tariffs. We're very keen to understand the detail of what is included, what is not included and then obviously, which one of those mitigation plans we can put in place. But with that, I'll hand it to Eli, who will give you his perspective as well.

Eliyahu Sharon Kalif, CFO

Yes. Thanks, JP, for the question. I just want to remind that over 50% of the products that we're selling in the U.S. are actually manufactured in the U.S. We have 8 sites and also our leading product, AUSTEDO, is manufactured in the U.S. As part of the rest of the world, we have very limited exposures on China and India. When we're actually looking at Europe, and even if we were thinking about Israel, as Richard mentioned, we are trying to understand how this is going to play in between generics or innovative. I would say that we have a very, very flexible and full value chain in terms of our manufacturing and how we're able to manage this one. Most importantly, we're also trying to learn about the timing that this will enable the companies to implement, is it a 1 year or 2 years or 3 years. Overall, I think that we are positioned very well in terms of all the work we've done so far, and currently, we don't see any meaningful impact.

Operator, Operator

Our next question comes from Ash Verma of UBS.

Ashwani Verma, Analyst

So just on AUSTEDO, like good to see the acceleration here. I wanted to get a sense on the BID to XR conversion. You're already seeing that more than 60% in new patients. But when can we see that type of share be replicated in all patients, not just new patients? That's one. And then secondly, can you provide a little bit more color on the tariff impact on U.S. versus Europe? You said that it's absorbed in your 2025 financial guidance, but how does that impact your P&L going forward? I know they called out some exclusion of certain generics. If you can shed some light on what that constitutes.

Richard D. Francis, CEO

Thank you for your questions. I'll partner with Eli to address this. Starting with AUSTEDO, I'm pleased to see its strong performance, which is up 22% in the U.S. as the team continues to execute effectively and demonstrate our commercial capability. Regarding XR, you are correct; we are seeing new patients transition to XR. Some patients are switching from BID, but I believe it’s clear that AUSTEDO XR will become the main medication used. It requires some time, as there’s no need to change stable patients. However, there is considerable interest from our physicians in using XR for new patients due to reasons related to compliance and adherence, so we’ll provide interim updates on this progress. The future outlook for having a majority of patients on XR is promising. As for the tariffs, concerning your question about their long-term impact, particularly in Europe, I want to emphasize that there is still a lot of uncertainty. For instance, we are unsure about the status of certain generics. Our strategy regarding tariffs has always been conservative. We discussed our mitigation plans in Q1, and as Eli mentioned, we approach this comprehensively, adopting a cautious perspective to ensure our business can handle the tariffs without negatively affecting our P&L going forward. There is still uncertainty, and we need to monitor how this unfolds, but I'll pass it back to Eli to highlight some additional points.

Eliyahu Sharon Kalif, CFO

Yes, Ash, so when you mentioned our guidance, I want to repeat again, we have absorbed the already confirmed tariff into our 2025. Overall, we’re looking at our supply chains, our ability to build inventories, manage our manufacturing steps, we don't see any meaningful impact for the short term. As I mentioned, we will see how the administration manages the timing to implement those tariffs. Once those happen, that will allow us to manage it very thoughtfully.

Richard D. Francis, CEO

And Ash, apologies, I forgot your last question.

Ashwani Verma, Analyst

Just on the exclusion of certain generics, if you can shed some light on what that actually constitutes?

Richard D. Francis, CEO

We don't fully understand the specifics of this situation. As you've likely noticed from the headlines, there is some confusion regarding what is included and what is not. I echo Eli's points and we are seeking more clarity to understand the potential impact, how we can mitigate it, and what that process looks like over time. There is still a bit of uncertainty, but we are optimistic that we will gain clarity soon, allowing us to effectively manage the situation. There is still a lot that is unknown.

Operator, Operator

Our next question comes from Matt Dellatorre of Goldman Sachs.

Matthew Michael Dellatorre, Analyst

Congrats on the continued progress. Maybe starting with duvakitug, could you all share anything on the broader development program or when we might expect updates there, in particular, how competitor programs are informing your indication expansion strategy? Will we see Phase IIb IBD maintenance data later this year, and if so, what do you want to see there? Lastly, for the long-acting olanzapine, is there a possibility for a priority review?

Richard D. Francis, CEO

Matt, thanks for the questions. I'll hand those straight over to Eric.

Eric A. Hughes, Head of R&D and CMO

Sure. Thank you, Matt, for the question. For duvakitug, we're working very closely with our partner, Sanofi, on choosing the indications we'll go into. We'll announce those once we've initiated the study. So that's something that you have to stay tuned for. Right now, we're super focused on getting the Phase III started, which we've checked all the boxes. We've got all our ducks in a row, and those studies will be starting right on time; that’s our main focus. With regards to the Phase II data, that's actually maturing right now. That's a 44-week follow-up from our Phase II study that we'll be finishing up towards the end of this year, and we’ll present that data in the first half of 2026. That’s important data. The maintenance of the effect in this patient population is very important. These patients suffer from a chronic disease that usually they start a therapy, they fail that therapy and have to move on to the next. Durability will be very important, and we look forward to that data. Regarding the olanzapine LAI, we don't anticipate having a priority review for that program. That's why it's important to get that study wrapped up and submitted as soon as possible. That’s what we're focused on now, and we anticipate that approval in 2026.

Operator, Operator

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

Jason Matthew Gerberry, Analyst

So on AUSTEDO, revenue growth seems to be tracking volume growth but not reflecting the benefit of mix in the milligram shift. I'm wondering if you can speak directionally to how that is impacting gross to nets. As we think about this IRA process, is it against the price point at the start of the year such that if you are increasing your gross to nets effectively, that's sort of front-running any IRA discounts in the future? As for the tariffs, if it is a China-focused policy on national security, could you outline what percent of key starting materials come from China? If 1.5 years is sufficient time to move things around so that there is not a heightened reliance on China for key starting materials?

Richard D. Francis, CEO

Thank you for your question, Jason. Regarding AUSTEDO, the inquiry was about the relationship between TRx milligrams and revenue. The correlation isn't perfect, and there are timing factors to consider. From the data we have, we are seeing what we anticipated regarding the shift to XR. This transition is affecting TRx due to a decrease in the number of prescriptions, and we are observing it unfold as expected. AUSTEDO XR is becoming the leading medication used. We launched XR in the second quarter of 2024, which caused a minor disruption. So, when comparing to previous years, that may be something you've noted. However, I want to emphasize that we are very confident. I prefer not to discuss the IRA pricing issue yet since negotiations are still ongoing. The best approach regarding the IRA is to make an announcement once everything is finalized.

Eliyahu Sharon Kalif, CFO

Jason, I think the question you asked about China on the tariff: there is almost nothing that we are actually bringing from China. Four years ago, we closed and sold the API business there. We are really, really not depending on anything there. Nothing. I cannot even provide you a percent.

Richard D. Francis, CEO

I think that’s why when Eli talks about the strength of our supply chain, we've taken actions to ensure we are not reliant on certain geographic areas. We did that ahead of what has happened, putting us in a strong position to manage the future better.

Operator, Operator

Our next question comes from David Amsellem of Piper Sandler.

David A. Amsellem, Analyst

Two for me, one on generic Revlimid, one on UZEDY. First on generic Revlimid, I wanted to clarify your comments on the total revenue guidance. How much of where revenue lands this year is a function of Revlimid being light in 4Q? Help us understand the dynamics as we move through the back half of the year regarding the product. I understand that the situation is fluid, but help us understand how to think about generic Revlimid in 3Q and 4Q. Secondly, on UZEDY, with the bumped-up guidance, would you say that even that is conservative, given the growth in prescription volumes based on third-party data? I understand that there's the Medicare Part D redesign, but given how it's growing, what's your view on the extent to which even your new range is conservative here?

Richard D. Francis, CEO

Thank you for your question, David. The revenue guidance for Revlimid is influenced by multiple factors and is not solely dependent on Revlimid itself. It also takes into account upcoming product launches in the U.S. and other markets. We have seen strong sales growth in our biosimilar business in the U.S. as well. I want to make it clear that the ordering patterns for Revlimid have shifted. Previously, we relied on one large order each quarter, but this pattern is becoming more short-term due to increasing competition. We anticipate this shift will be more noticeable in Q4, particularly as competitors enter the market towards year-end. As a result, predicting revenue flow is becoming less certain. However, our generics business remains stable, leading to less volatility than we initially expected. We are excited about UZEDY's potential and plan to explore its application in other molecules. We have high confidence in this product and its future prospects. We will also continue to assess our position and keep the market informed.

Operator, Operator

Our next question comes from Chris Schott of JPMorgan.

Christopher Thomas Schott, Analyst

Just two for me. On the top line guidance, obviously, great to see the higher branded guidance. But just coming back to the slower generic growth, is there any read across as we think about 2026 and beyond for that generic business? Or is what you're talking about here just some more timing and shorter-term dynamics? My second question for me was another one on guidance. Obviously, very strong gross margin performance this quarter. Part of that is mix, part of that may be more onetime. Can you just update us on expectations for second-half gross margins given the new product mix? Just how should we be thinking about that progressing over the next few quarters?

Richard D. Francis, CEO

Chris, thanks for the question. I appreciate that you see the good branded growth. The generics guidance does not change our long-term trajectory for generics. We will be flat to low single digits in 2025 as we previously indicated. This includes navigating through tougher comparative periods from 2024 and the competitive landscape. To give some context, we had a great year in '24. Regarding gross margins, we will be above the midpoint up to the higher range. The three main products, AUSTEDO, AJOVY, and UZEDY, yield higher margins. We are not planning to take our OpEx down. We will keep investing as we proceed forward.

Eliyahu Sharon Kalif, CFO

Yes, Chris, if we look at Q2 by itself, 54.6%, 110 basis points coming from three main elements: product rights sales in Europe, FX tailwinds, and the Japan business, which was dilutive to our gross margin by at least 30 basis points. Backing this out shows 53.5%. If you look at Q1 at 52.8%, adjusting for this gives us 52.5% to 53.5% on the sustaining business that we had. We expect that our gross margin for the year will be above the midpoint and close to 54%, while the full year will be at the higher range.

Operator, Operator

Our next question comes from Les Sulewski of Truist.

Leszek Sulewski, Analyst

A couple for me. First, can you provide some puts and takes around the EBITDA margin in the second half? Is this level sustainable or a high watermark for the year? Second, as you're progressing across the cost reduction initiative, are you finding additional opportunities for savings beyond the $700 million? Could you provide some cadence around primary areas of focus? Lastly, how are you thinking about capital allocation, perhaps around share buyback opportunities and second, business development expansion and M&A?

Richard D. Francis, CEO

Thank you, Les. I'll tag team some of those with Eli. I'm pleased you've seen the EBITDA performance. Growing the top line is critical for long-term shareholder value, but it also depends on executing well with an innovative portfolio. Our ability to keep growing our innovative portfolio allows us to drive EBITDA and EPS. On cost reduction, our modernization programs are continuous in scope. We aim for agility in operations, making deliberate capital allocation decisions. We're currently focused on achieving that $700 million target and always look for further opportunities to enhance performance and drive business growth. On capital allocation, we consider various options, including M&A and shareholder returns, depending on timing and market conditions.

Eliyahu Sharon Kalif, CFO

In terms of EBITDA, we expect to be above the midpoint, close to the higher range. The three main products are yielding solid revenues and higher margins. We’re continuously investing in the business, which will enable a profit flow to the bottom line. We recorded approximately $150 million of restructuring costs in the second quarter and expect cash outflows of $70 million to $100 million in 2025, which supports our transformation initiatives.

Operator, Operator

Our final question for today comes from Keonhee Kim of Morningstar.

Keonhee Kim, Analyst

Just a quick one on the SELARSDI progress. I just wanted to ask how the product rollout is going. Do you know if the landscape is similar to what we saw with HUMIRA, where it will take some quarters before the biosimilar really picks up? Or does this kind of space look a little differently?

Richard D. Francis, CEO

Thanks, Kim, for your question. Every biosimilar can play out slightly differently. Biosimilar HUMIRA is different from biosimilar SELARSDI and biosimilar STELARA. We're aware of these dynamics and execution. Our team is doing well, so we see it as a good opportunity. This portfolio strategy aims for 20 biosimilars. We don't need all to be superstars to achieve our goal of doubling our biosimilar revenue to $800 million by 2027. Good start with SELARSDI, and good performance overall. Thanks for your question. I think we’ve gone over a bit, so I apologize for that. We wanted to ensure we answered as many questions as possible. I appreciate your time and interest in Teva, and I look forward to catching up with many of you over our roadshow. Thank you very much. Goodbye.

Operator, Operator

Thank you all for joining. You may now disconnect your lines.