Earnings Call Transcript - TEVA Q4 2024

Operator, Operator

Hello, and welcome to the Fourth Quarter and Full-Year 2024 Teva Pharmaceutical Industries Earnings Conference Call. My name is Alex, and I'll be coordinating the call today. I'll now hand it over to your host, Chris Stevo, SVP of Investor Relations. Please go ahead.

Christopher Stevo, SVP, Investor Relations

Thank you, Alex. Good morning and good afternoon, everyone. I'd like to remind you briefly that we're going to be making forward-looking statements on this call. Any statements we make are as of today only and we undertake no obligation to update these statements afterward. And if you have any questions about forward-looking statements or other risk disclosures, please see our SEC filings under Forms 10-K and 10-Q. And with that, let me turn it over to Richard.

Richard Francis, CEO

Thank you, Chris, and good morning, good afternoon everybody. Thank you for dialing in for the call. I'm really excited to talk to you today about the 2024 performance of Teva and the outlook for 2025. As usual, I'm going to go back to the strategy, the Pivot to Growth strategy, what we set out in 2023 and what we accomplished with this strategy in 2024. As you remember, it's based on four pillars: deliver on our growth engines, step up innovation, create a sustainable generics powerhouse, and focus the business. I'm really pleased to say that we've made really good progress across 2024 on all of these pillars. AUSTEDO had another great year, up 34%. UZEDY had a very strong year, beating its target of $100 million, at $117 million, and AJOVY grew at 18% and reached the $0.5 billion mark. And step-up innovation, we saw great progress there by Eric and his team. Obviously, we saw the results of Duvakitug at the end of last year, where we think we have best-in-class and best by design. In Olanzapine, we had the full safety data set. So we now know we don't have any PDSS in this patient population in this trial. And DARI, we've really moved fast into the clinic with our ICS/SABA and 91% of sites are recruited. On the generics business, all regions are growing for the second year straight, which is good. Our product launches have shown good performance to drive that growth. And then on focusing the business, it was good to see external endorsement of the improvement of Teva with all the credit ratings improving their outlook for the company. It's also good to see that our TAPI business is back to growth, having shown four quarters of growth and full-year growth. So we had a really good start and made excellent progress on the Pivot to Growth strategy. And how does this translate into growth? Well, as you see, we have now achieved eight quarters of growth after a number of years of decline. So there’s a consistency here that pleases me. Congratulations to the team. Just to highlight for transparency, we have indicated that one-off payment we got from Sanofi in Q4 2023. But this performance puts us on track to hit our 5% CAGR that we committed to in 2027. Now to give you a bit more detail, and the numbers that drove the 9% revenue growth, I'll go into that in detail. But let's start at the high-level P&L. We had $16.5 billion in revenue, which is up 9%, at the high end of our outlook; adjusted EBITDA was $4.8 billion, also up 9%; and our non-GAAP EPS was $2.49, up 10%. Free cash flow was up 10% as well at $2.1 billion. It's good to see that our net debt to EBITDA is now close to touching 3. I remind you all that we issued guidance up twice throughout the year. This performance is strong, one we're very proud of. Let me now delve into more details about what’s behind this. All three of our businesses grew. Our innovative business, generics, and API saw excellent performances, led by AUSTEDO up 36%, close to $1.7 billion. AJOVY was up 18%, as I said, just over $0.5 billion. UZEDY at $117 million. The generics business closed at $9.5 billion, up 11%, and API at 3%. So across all our businesses, we achieved the 9% growth. Now let’s focus on the innovative business first. Regarding AUSTEDO, I want to clarify that we are on track to hit our $2.5 billion target by 2027. Strong TRx growth of 34% led to a US revenue of $1.642 billion. A nice contribution is coming from the rest of the world now, starting to kick in with $46 million. Because of this confidence, we have our outlook of $1.9 billion to just over $2 billion for 2025. There's still a huge unmet medical need. Of the 800,000 patients who suffer from tardive dyskinesia, only 6% are on treatment. So we see a long runway for this product. Now moving on to UZEDY. I'm really pleased with what the team has achieved here, underscoring the quality of our differentiated product and our fantastic field team. We exceeded our guidance of $100 million with full year sales of $117 million. We're planning to reach $160 million in 2025. As we move on to AJOVY, I'm very proud of that product. People were uncertain about its potential; however, the team has demonstrated its capabilities, even in a highly competitive market across all our regions. The 18% growth indicates our teams' ability to capture market share and we’ve consistently grown across regions. Congratulations to the team. We're giving guidance for AJOVY of $600 million for 2025. A robust contribution from our innovative business is expected as we move into 2025. Now let's talk about our second pillar, step-up innovation, which Eric will detail further—but I must mention it because I’m excited. Looking at our late-stage products such as Olanzapine, ICS/SABA DARI, and Duvakitug, these are all entering a market with significant unmet medical needs. Olanzapine will likely hit the market in 2026, ICS/SABA DARI around 2027, and Duvakitug will follow a year or two later. We’re entering Phase 3 this year with Duvakitug and will be discussing some indications. Our early-stage pipeline is also promising. Notably, our anti-IL15 and anti-PD1-IL2 were developed by the same team that created what we believe is best-in-class TL1A Duvakitug. We’re very excited about this pipeline. Eric will go into further detail. Moving on to our third pillar, we’re creating a sustainable generics powerhouse, starting with our biosimilars. We’ve built a broad portfolio of 18 assets and executed several partnerships last year to further enhance this. Between now and 2027, we plan to launch seven biosimilar assets in the United States and four in Europe—building significant momentum for our biosimilar business, which will also contribute to both top and bottom-line growth towards our 2027 targets. Regarding the core generics business, we’ve had another strong year, seeing growth across all regions. We've improved our capabilities and our focus operationally, allowing us to launch new products on time more frequently. Our supply chain has improved, ensuring timely market supply. Efforts made in 2024 will continue to enhance efficiency and reduce COGS, making us more competitive in the long term. Our generics business grew by 11%. Allow me to provide a bit of detail on regional contributions. All regions stepped up to drive this 11% growth. The US team had another strong year; Europe sustained mid-single-digit growth, which is commendable given its size. International markets consistently delivered double-digit growth at 15%. Now addressing the final pillar, focus the business, which pertains to TAPI. I am delighted with the progress the TAPI team has made, transforming this business from decline to growth, and we have confidence in maintaining mid- to high-single-digit growth. The third-party business and pipeline are expanding significantly in 2024, and we anticipate continued growth in 2025, along with the divestment process. Now talking about capital allocation, we’re committed to ensuring that as we generate more cash, we’ll prioritize debt repayment as our number one goal. Then, we'll invest in our growth engines, as evidenced by the robust returns we’re seeing with AUSTEDO, AJOVY, and UZEDY. With this promising pipeline, we must also make sure we allocate capital to maximize potential opportunities, especially since some programs may address multiple indications. This summarizes our business activities for 2025. I'll now hand over to Eric to illuminate our pipeline that we’re so excited about.

Eric Hughes, CRO

Thank you, Richard. I first wanted to start off by expressing our excitement about the announcement of our top-line results for the duvakitug program last month. The data speaks for itself, demonstrating great dose response in both ulcerative colitis and Crohn's disease. These treatment effects are the highest reported for this mechanism of action. So, great work by the team, and we're very excited to show these results. This was a validation of what we've been asserting about the fundamentals of this program. Duvakitug exhibits high potency in vitro, shows high selectivity for the DR3 receptor, and has low anti-drug antibodies. Moreover, it provides rapid, profound, and prolonged suppression of free TL1A levels in serum, consistently demonstrating a favorable safety and tolerability profile to date. We are looking forward to presenting this as late breakers for ulcerative colitis and Crohn’s disease at the ECCO Conference on February 22nd in Berlin. So, great work by the team. Moving to the next slide, I could say this speaks for itself, but I want to walk through this as it’s a critical slide for our duvakitug program. TL1A is produced by various cells including mucosal and immune cells. The release stimulus for free TL1A comprises both microbial and non-microbial signals. TL1A acts as a key amplifying signal, binding to multiple immune cells that secrete various cytokines and trigger diverse signaling pathways. It also interacts with fibrotic cells impacting fibrosis and fibrotic matrix maturation. So, what does this mean? It helps illustrate the potential for various indications that this program could explore, from Crohn's disease to idiopathic pulmonary fibrosis. We’ve listed a number of marketed products, demonstrating the impact of such programs on patients globally. Remember, these products only hit specific subsets of these signaling pathways. It's genuinely exciting to envision what a compound like duvakitug could accomplish by targeting this amplification signal across diverse cellular pathways. This represents a tremendous portfolio and product, believing the future is very bright for the advent of this new class of mechanism of action. Moving on to our dual-action rescue inhaler program, which is a significant program for Teva. It’s critical to note that about 11 million people in the US continue to use a single agent albuterol for asthma exacerbations. This is a substantial population, with GINA guidelines advocating a dual-action rescue inhaler. Teva is proud to introduce an easy-to-use dual-action rescue inhaler, a dry powder inhaler device. Why the dry powder inhaler device matters is that, unlike metered-dose inhalers, it requires no priming, no shaking, and no hand-breath coordination. It's straightforward—open, inhale, close. This product is user-friendly for both children and adults. Our Phase 3 program is large, with over 2,000 patients, measuring asthma exacerbations in a three-arm study. Our focus this year is on enrolling—the sites are over 91% operational. This project will be a major focus for R&D this year. Additionally, the olanzapine LAI program is on schedule, and we expect our last patient visit imminently at the end of this month. We aim to present the complete safety database in the second quarter at a conference, with an NDA submission planned for the latter half of this year. I want to emphasize how far we’ve come in innovative programs at Teva over the past two years. All these programs are now dosing or due to dose across different indications. The DARI program stands as our largest Phase 3 study yet at Teva. We are ahead with site initiations, and Duvakitug’s strong-end-of-year presentation leaves us eager to collaborate with Sanofi for the Phase 3 initiation this year. Our anti-IL15 now extends to celiac and vitiligo, while we are also treating patients in our anti-PD1-IL2 oncology program. It's been a remarkable two years, and I look forward to more milestones this year. Now, I will pass it off to Eli.

Eli Kalif, CFO

Thank you, Eric, and good morning and good afternoon to everyone. I will begin my review of our 2024 financial results focusing on fourth-quarter performance. I will follow up this with the introduction of our non-GAAP outlook for 2025 and some of its important assumptions to help you understand our financial guidance for this year. In the fourth quarter of 2023, Teva entered into an exclusive collaboration with Sanofi to develop and commercialize Teva's anti-TL1A asset, Duvakitug. As we communicated previously, Teva received an upfront payment of $500 million in the fourth quarter of 2023, which we recognized as revenue. This payment positively contributed $500 million to both our revenue and free cash flow, affecting adjusted EBITDA positively by approximately $430 million. During this presentation, I will discuss certain results, including revenue, profits, and free cash flow for the quarter and the full year of 2024, excluding the impact of this upfront milestone payment in 2023 to provide a like-to-like comparison of our financials. Starting with our Q4 GAAP performance; fourth-quarter revenues were $4.2 billion, a decrease of 5% in both US dollars and local currency compared to the fourth quarter of 2023. Excluding the Sanofi payment, revenue increased by 7% in both US dollars and local currency. This increase was driven by strong growth from our key innovative products: AUSTEDO, UZEDY, and AJOVY, growth from our generics across all segments globally, and sales of certain product rights. In Q4 2024, we recorded a GAAP operating loss of $29 million compared to a GAAP operating income of $755 million for the same quarter last year, primarily due to the Sanofi payment and goodwill impairment charges related to our API reporting unit. Our GAAP net loss and net loss per share were $217 million and $0.19, respectively, primarily driven by the decline in operating income. The total non-GAAP adjustment in the fourth quarter of 2024 was $1.033 billion, including an impairment of long-lived assets of $517 million and a $280 million goodwill impairment charge for the same business. Moving to our non-GAAP performance: Our fourth-quarter revenue was approximately $4.2 billion, while our annual revenue in 2024 reached $16.5 billion, an increase of 8% in US dollars and 9% in local currency compared to 2023, excluding the contribution from the Sanofi payment. Our non-GAAP gross profit margin was 54.8%, compared to 58.2% in Q4 2023. Excluding the upfront payment in 2023, our gross profit margins improved by approximately 150 basis points year-over-year, influenced by ongoing improvements in our portfolio mix, primarily stemming from AUSTEDO and the sale of certain product rights. As communicated previously, divestitures related to legacy brands align with our long-term profitability strategy. Despite significant FX headwinds impacting revenue and gross profit, we observed a gradual improvement in our gross profit margin. Our non-GAAP operating margin was 27.6% in Q4 2024, slightly below the fourth quarter of 2023, as higher operating expenses were a percentage of revenue, which reflects our planned investments in R&D and sales marketing to drive growth in innovative products while accelerating our pipeline. Our quarter ended with a non-GAAP EPS of $0.71 compared to $0.69 in Q4 2023, driven mainly by higher operating income. Our free cash flow in 2024 was just over $2 billion, close to our guidance range, growing by 10% compared to 2023, excluding the Sanofi payment, driven by higher net profits and ongoing improvements in working capital management, notwithstanding higher legal payments. As a reminder, our free cash flow in 2024 included $522 million in litigation payments, which rose by $57 million compared to 2023. We are committed to deleveraging as we execute the next phase of our Pivot to Growth journey. In 2024, we continued to reduce our net debt, reaching approximately $14.5 billion at year-end. Our gross debt was $17.8 billion, down from $19.8 billion at the end of 2023, reflecting the repayment of $1.6 billion senior notes at maturity. Our net debt to EBITDA ratio improved to approximately 3 times, on track for our 2027 target of 2 times leverage. As demonstrated in this slide, the execution of our Pivot to Growth strategy along with our disciplined capital allocation over recent quarters has been recognized by leading credit ratings agencies. All three major agencies have upgraded Teva's credit ratings in the last six months, acknowledging our enhanced growth prospects and focus on strengthening our balance sheet. We remain dedicated to achieving an investment-grade rating per our 2027 financial targets. Out of the 70 global biopharma companies rated by S&P, Teva is one of only two with a positive credit outlook. A positive outlook indicates that an issuer's credit metrics are expected to improve. Now for the 2025 non-GAAP outlook: In line with the strong performance in 2024 and advancement in our Pivot to Growth strategy, we expect 2025 revenue of $16.8 billion to $17.4 billion, denoting a 2% to 5% growth from 2024, supported by robust momentum in our innovative portfolio alongside modestly growing generics. We expect gross margins to remain stable at approximately 53% to 54%. The 2024 gross margin benefited partly from certain product rights sales, and in 2025 we rely on sustained improvements in our innovative portfolio contributing to gross margin with optimization strategies offsetting adverse FX effects. Our non-GAAP operating income is expected to land between $4.1 billion to $4.6 billion, while adjusted EBITDA is anticipated between $4.5 billion to $5 billion, consistent with 2024 levels at the guidance midpoint. Finance expenses are expected to be around $900 million in 2025, reflecting a lower starting debt level and additional reductions throughout 2025. Our non-GAAP tax rates will be approximately 15% to 18%. This leads to a projected non-GAAP EPS in the range of $2.35 to $2.65. We expect free cash flow for 2025 to vary between $1.6 billion to $1.9 billion, marking a slight decline from 2024, primarily due to our intentional streamlining of accounts receivable securitization and higher legal settlement payments. We typically don’t provide quarterly guidance; however, we expect gradual revenue increases through the year, with the second half of 2025 likely outpacing the first half. Non-GAAP margins will also gradually rise throughout the year in line with revenue growth and our cost optimization efforts. This concludes my review, and now I’ll turn it back to Richard for a summary.

Richard Francis, CEO

Thank you, Eli. To conclude, if I go on to the next slide, please. The journey of Pivot to Growth continues, and for 2025, we'll focus on our four pillars. For AUSTEDO, aiming towards a target of $1.9 billion to $2 billion; UZEDY to $160 million; and AJOVY over $600 million. We are focused on delivering these growth engines. For step-up innovation, Eric's discussed the plan to kick off Phase 3, finalize indications, file olanzapine, and complete pediatric recruitment for DARI ICS/SABA. Significant milestones are set for step-up innovation. In the generics business, we’ll sustain the good work started in 2024 by timely launching 16 complex generics between 2025 and 2026 and ensuring our biosimilar launches go as planned in the US and Europe. We aim for enhanced efficiency within our business, ensuring a cost-effective supply chain. On focusing the business, as Eli said, prudent capital allocation will propel short and long-term growth for the company. This Pivot to Growth is an ongoing journey; the initial phase was returning to growth, and we need to ensure we build on this momentum with innovative portfolio growth ahead. There are many reasons to be very positive and optimistic because of the pipeline that’s emerging, the forthcoming biosimilars, returning generics growth, and implementing plans to increase margin expansion from a portfolio and efficiency point of view. A lot of reasons to be optimistic about our future. With that, I'll close and invite questions from the group.

Operator, Operator

Thank you. Our first question today comes from Yoon Choi of Evercore ISI. The line is now open. Please go ahead.

Umer Raffat, Analyst

Hi, guys. This is Umer filling in for Yoon Choi. I had a couple of questions, if I may. First, maybe just big picture, as it relates to the EBITDA trajectory going forward. I know there's clearly investments that will be made on the TL1A program. Just curious how the spend will break out for Teva versus Sanofi as it relates to the new indications, as well as the Phase 3 program. But then also there are some AUSTEDO headwinds coming as well from an IRA perspective. So how do you think about EBITDA trajectory going forward in general? And secondly, on the API business, I noticed in the reconciliation slides, there's some goodwill impairment as well as tangible impairment. Just trying to understand how your expectations on the API business pulled back in from a valuation perspective. Thank you.

Richard Francis, CEO

Thanks, Umer. We appreciate your questions. I think we'll tag team on this discussion. First regarding costs and EBITDA expectations, our partnership is designed to share both upside and costs for Duvakitug, leading to a 50-50 split in OpEx going forward. Your inquiry concerns costs as we transition into Phase 3 for inflammatory bowel disease and additional indications. This fundamentally relates back to capital allocation and ensuring we adequately fund priority areas; Duvakitug is one such priority. As we consider the business heading into 2027, as Eli has highlighted, we see ample opportunities for investment in demonstrably successful areas such as AUSTEDO, AJOVY, and UZEDY driving returns. For us, the aim is to continue to enhance EBITDA, achieving our 2027 targets while ensuring short-term investments for future acceleration. Eric, would you like to add anything?

Eric Hughes, CRO

The financial structure of our partnership with Sanofi is vital; it strategically enables us to realize the full potential of the Duvakitug program. Having a partner like Sanofi allows us to share costs effectively, securing this pathway.

Richard Francis, CEO

Thanks. Eli, do you want to address Umer's API business question?

Eli Kalif, CFO

Yes, Umer, regarding R&D spending; to put it simply, we estimate a 45% to 55% split between generics and innovative projects, but moving towards a third for generics and two-thirds for innovations now. In 2023 and 2024, we hovered below 6% of overall revenue, but aim to exceed that in R&D expenses for forthcoming years, including 2025. As for the API business, we classified it as held for sale as of December 31st, indicating potential impacts to our net asset classifications pending completion. We won't offer specifics on valuation, as our advisors are conducting evaluations, but fundamentally, there's no significant deviation from previous outlooks concerning the API segment's trajectory.

Richard Francis, CEO

Thanks for the question, Umer.

Jason Gerberry, Analyst

Hi, everyone. I appreciate the opportunity to ask my questions. I have a couple regarding the guidance. I want to clarify something. At your midpoint, you’re projecting sales growth of around $600 million, with approximately $300 million of that coming from AUSTEDO. However, it seems there isn’t much operating leverage reflected in the P&L. Could you help clarify that? Additionally, regarding UZEDY, in the latter half of last year, your sales totaled around $80 million, which translates to a $160 million run rate. As we consider the outlook for 2025, are you being conservative in your projections for that product, or are there potential Part D redesign elements that might hinder growth? Those are my questions. Thank you.

Richard Francis, CEO

Thanks, Jason, for your inquiries. I'll address your points in reverse. It’s true that UZEDY's solid team performance is appreciated. Acknowledging its substantial contributions in 2024, I'd like to draw your attention to Medicare Part D changes applicable from this January, which directly impact our performance. While we believe there's potential for strong prescription growth, these changes affect how we engage. Regarding concerns about operational guidance vs the outlook, the IRA redesign impacts not only UZEDY but also AUSTEDO. Even though AUSTEDO entered a phase-in, it's still affected. Legacy innovative products are declining, compounded by persistent FX challenges. Coupled with planned investments to capitalize on existing opportunities, we see mild influences on EBITDA structure. Eli can add specifics.

Eli Kalif, CFO

Sure, Jason. From a financial perspective, while our anticipated operational performance indicates positive growth in generics and biosimilars, it doesn't necessarily correlate to significant EBITDA expansion, given operational expenses are rising alongside revenue growth. Our guidance reflects an intention to grow but signifies a manageable expense increase as well, with foreign exchange added as a contributing factor on our revenue trajectory.

David Amsellem, Analyst

Thanks. Can you give us a more detailed roadmap on how you're thinking about newer products that could make up for the impact of losing sales on Revlimid? Is it going to be mostly biosimilars weighted or complex small molecule weighted? Can you just talk about what specific products and what kind of products you think are going to make up for that shortfall for next year? And then secondly, I know you probably can't give too much detail on this, but regarding the lawsuit versus CMS, any color on just sort of timing for arguments and how we should think about next steps there? Thank you.

Richard Francis, CEO

Thanks, David. Your questions are important. We value the Revlimid performance, and while it implies future headwinds if we’re not vigilant. A macro view indicates robust growth rates for our innovative and ex-US segments, which might help counterbalance the challenges surrounding Revlimid. More specifically, two-thirds of our business isn’t in generics and is growing strongly and profitably. In the US, we’re looking toward 16 complex generics launches in 2025 and 2026—maximizing potential here is paramount. Additionally, a notable biosimilar pipeline is in store for 2025 and beyond. We're preparing to manage the inevitable drop-off while nurturing growth in various segments for long-term stability. If I shift the focus briefly to 2026, we recognized the challenge but aim to mitigate the impact by releasing numerous products, like AUSTEDO, UZEDY, AJOVY, and olanzapine. Well-planned investments will help optimize growth trajectories. Regarding the CMS lawsuit, I regret I cannot share precise details due to litigation processes, but we will keep you updated once we're able. Thanks for your engaging questions, David.

Balaji Prasad, Analyst

Hi. Good morning, and thanks for the questions. A couple from me for Eli and Richard. Firstly, on the free cash flow decline this year in guidance, nearly $200 million to $500 million of decline. Can you quantify the impact of this accounts receivable securitization program? Is this a one-off, or is this purely a timing issue? And should we expect a normalized curve into 2026? That's one. And two, probing further on the EBITDA guidance and trying to understand if we set aside generic Revlimid impact, is there any reason to think that the complex generics and biosimilars segment will be dilutive to EBITDA relative to their own profitability in 2024 with the new launches coming in? Thanks.

Richard Francis, CEO

Thanks, Balaji. Good to hear from you. Eli, I believe you might provide insight on the free cash flow query, then I'll respond about EBITDA.

Eli Kalif, CFO

Yes. We’re looking at $100 million to $200 million in cash flow due to the reduction in the securitization program, depending on our receivables mix through the year. This isn't a permanent shift, but a timing matter we expect will normalize as we advance into 2026. Regarding the EBITDA guidance, our outlook anticipates growth in generics and the biosimilar segment, contributing to overall profitability. Essentially, we don't foresee 2025 launches being dilutive concerning their respective profit margins. The upper end of our range reflects positive dynamics in product performance, ensuring EBITDA flows positively from revenue growth.

Ash Verma, Analyst

Yes, thanks. So I wanted to go back to the operating margin guidance one more time. So this year, you’re seeing 100 bps margin compression, which is in the opposite direction compared to where you're trying to get to 30% by 2027. So, are you still confident in the long-term outlook, given that you'll have more headwinds like Revlimid step-down in 2026 and AUSTEDO IRA impact in 2027? And then I have a follow-up that I'll come back to.

Richard Francis, CEO

Yes, Ash, I can assure you—absolutely. The primary drivers are our innovative portfolio. The momentum we have with our innovative product line significantly impacts gross margin, flowing down through the P&L. It's essential to recognize that our future sales composition in 2027 will differ from today, supported primarily by an innovative edge. To address concerns, AUSTEDO is expected to maintain robust growth, currently positioned to exceed our 2027 projection of $2.5 billion. The unmet medical need is vast; only 6% of relevant patients are on treatment. We also invest strategically in a value acceleration program that bolsters efficiency within operations. Improvements in gross margin across our generics business are essential, alongside new product launches. In our plan, we acknowledge an initial challenge, but ultimately embrace the structural changes leading to solid profitability growth.

Eric Hughes, CRO

Yes, I'd only add that by engaging in strategic investment, particularly where returns are substantial, we position ourselves to weather potentially challenging transitions effectively.

Yifeng Liu, Analyst

Hello. Thanks for taking my question. I've got two, please. One on capital allocation. You talk about business development opportunities. Given that you are already quite established in neuroscience and potentially in the future, immunology, are there any other therapeutic areas or spaces you are interested in branching out? And the second question is on Duvakitug and just wonder if you could share any other colors that you could on the upcoming Phase 3 development plan? Thanks.

Richard Francis, CEO

Hi, Yifeng, thank you for the insightful questions. On capital allocation within business development, our current focus in neuroscience and immunology spans numerous diseases, offering vast therapeutic potential. We've optimized our CNS capabilities, believing there's massive untapped opportunity within our existing infrastructure. Our pipeline already contains a wealth of immunological products, yet we certainly explore additional prospects. Rare disease is another avenue we believe holds promise for our therapeutic areas as we align with neuroscience and immunology. Further opportunities may arise, directed by strategic investment.

Eric Hughes, CRO

Thank you, Richard. As for the Phase 3 plan for Duvakitug, our collaboration with Sanofi is progressing well. We are diligently crafting our approach, adhering to FDA guidance with clarity regarding study requirements. Finalizing plans for the Phase 3 design revolves around the modeling and simulation results from earlier studies, which supports our confidence in Duvakitug's potential as we explore additional indications.

Glen Santangelo, Analyst

Yes. Thanks for taking my question. Hey, Eli. I hate to come back to the EBITDA guidance, but I did have a follow-up question. When you look at 2024, it looks like your operating expenses increased 9%. And if I'm doing my math right, most of it looks like it was an increase in sales and marketing versus R&D and G&A. And so, I'm kind of curious, embedded within that 2025 guidance, could you give us a sense for how much of an operating expense increase you're assuming this year versus last year and will it be more weighted towards sales and marketing or R&D? And then maybe as a part of that, could you talk about the impact that FX had in the top line and the operating profit guidance that you've given?

Eli Kalif, CFO

Thank you, Glen. In terms of operational dynamics, our G&A and sales/marketing expenses are indeed rising, which aligns with our growth ambitions. R&D remains a priority; however, our sales and marketing expense will be heavily weighted, supporting product launches and enhancing engagement. In terms of FX impact on the previous year, about $190 million or 1.2% impacted revenue, fluctuating about the same range moving forward with recent performance trends considered.

Richard Francis, CEO

Thanks for your questions, Glen.

Chris Schulz, Analyst

Great. Thanks so much. Just two questions for me. Can you talk a little bit more about the fourth quarter US generic business? I know the first three quarters saw very healthy growth. This quarter was a little bit less. I'm just trying to understand, is that just timing or something we should be kind of watching there? And my second question was coming back to the 2027, 30% operating margin target. Just tell me a little bit about what type of gross margins should we be thinking about for Teva in that time frame? I think we're all just trying to kind of bridge with what seems like a pipeline that really deserves investment, launching a bunch of important products. It seems like gross margins is kind of one of the levers there. And I'm just trying to get a sense of how big of a step-up we should be anticipating versus the targets for this year. Thank you.

Richard Francis, CEO

Thanks, Chris, for your inquiries. Regarding US generics, you noted the fourth quarter appearing lighter; Revlimid predominantly drives allocation towards Q2 and Q3. Notably, our launches helped, but the natural seasonal fluctuation remains an inherent focus for us. Concerning your gross margin inquiry, Eli will detail that, but it's integral to understand that the investment pacing over time will reflect our innovative portfolio's growth, affecting future gross margins. Additionally, I've emphasized the importance of continual measurement of investment vs revenue growth. Eli?

Eli Kalif, CFO

Absolutely. Our strategic OpEx input implies a push around 27% over the next few years, negotiating upward to 30% in operating margin by 2027, ensuring our gross margin rises as well. As Richard mentioned, our innovative portfolio acquisitions enhance investment pacing.

Richard Francis, CEO

Thanks, Chris. We truly appreciate your insights.

Operator, Operator

Thank you. At this time, we will take no further questions. I’ll hand back to the speaker team for any further remarks.

Richard Francis, CEO

Once again, thank you all for dialing into the Teva call. Thank you for your interest and your questions, and we look forward to giving you an update in a few months on the first quarter of 2025. Have a good day.

Operator, Operator

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