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Teva Pharmaceutical Industries Limited (TEVA -0.04%)
Q2Â 2019 Earnings Call
Aug 7, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by and welcome to today's Second Quarter Financial Results. [Operator Instructions] I must advise that this conference is being recorded today, Wednesday the 7th of August, 2019.
And I would now like to hand the conference over to your first speaker today, Kevin Mannix, Senior Vice President, Head of Investor Relations. Please go ahead, sir.
Kevin Mannix -- Senior Vice President, Head of Investor Relations
Thank you, Cache, and good morning everyone. Thank you for joining us today to discuss our second quarter 2019 financial results. We hope you've had an opportunity to review our earnings press release. A copy of the 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 through Teva Investor Relations app.
Please note that the discussion on today's call 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 and facilitates analysis by investors in evaluating the Company's financial performance, results of operations, and trends. A reconciliation of GAAP to non-GAAP measures is available in our earnings release and in today's presentation.
To begin today's call Kare Schultz, Teva's Chief Executive Officer and Michael McClellan, Teva's Chief Financial Officer, will review the second quarter results. Question-and-answer session will follow the presentation and joining Kare and Mike on the call today is Brendan O'Grady, Teva's Head of North America Commercial.
And with that, I'll now turn the call over to Kare. Kare, if you'd please.
Kare Schultz -- President and Chief Operating Officer
Thank you, Kevin. Good morning, everybody. Thanks for calling in. We had very nice quarterly results that we would like to present to you; we have seen revenues of $4.34 billion, which was in line with our expectations. We saw a GAAP diluted loss per share of $0.63 and a non-GAAP diluted EPS of $0.60 and we saw non-GAAP EBITDA of $1.14 billion. The free cash flow was $0.17 billion. And basically we are seeing what we also saw last quarter, a stable North American generics business. It's of course supported by a long list of new launches and the ongoing effect of the portfolio optimization that we initiated some 1.5 years ago.
We also see the continuous strong growth of AUSTEDO, having sales of $96 million in the second quarter, up 30% over the first quarter and continuing a very, very good trend. We are satisfied with the TRx Share on AJOVY and we are very happy about the launches that we are undertaking right now in Europe.
On the restructuring plan, we see a spend base reduction completely in line with our plans, which basically means that we will achieve the two-year target of a $3 billion reduction compared to 2017. And we also see a small reduction this quarter of our net debt. And just for your information, we did make a scheduled reduction in the gross debt by paying down $1.6 billion in July. And as you can see, we are reaffirming the 2019 financial guidance and this goes, of course, for all elements of the guidance.
If we go to the historical development of revenue and profitability, I'd just like to remind you of the situation in late ' 17 when I joined where we saw generic competition coming in on COPAXONE and we basically knew that revenues were going to fall roughly $4 billion on a yearly basis and that's also what you see, you see the quarterly revenue coming down from some $5.3 billion to $4.3 billion, but you also see now the beginning of the trough, as I've been calling it, the trough of '19 which is basically where the revenue stabilizes.
You also see that the gross margin that was coming down is also stabilizing now, just above 50% and the operating margin stabilizing now around 23% which is of course not our long-term target. Our long-term target, as I'll get back to, is 27%. So we still need to see improvements there. Talking about the trough, let's look at the operating profit.
If we look at that in the same historical period, then you also see the very big effect of the revenues declining and us only being able to take down the cost quarter-by-quarter, but still the effect now is that we are stabilizing the operating profit at around roughly $1 billion per quarter. And you see that the net income is around $650 million right now and that results of course in the earnings per share stabilizing right now around $0.60.
Now this is, as I've said before, this is what we expect to be the trough year. It's not that there will be a dramatic turnaround in the coming years, but the trend lines will slowly change and we will start to see a moderate increase in revenues and moderate increases in EPS going forward. But just to remind everybody, this year will be the lowest year in terms of operating profit and also on terms of average earnings per share.
So, just to give you a little bit of color on the spend base reduction, this is a massive undertaking. This is the whole organization reducing by more than 10,000 people in a very, very short time span. This is divesting or closing some 20 factories around the world. So a major undertaking and I'm happy to say that everything is being executed according to plan.
And the simple math of the spend base in the first half is that we spent $6.6 billion, which basically means that the yearly equivalent is $13.2 billion, and our target, as you know, is $13.3 billion, which is a $3 billion less this than this actual spend we had in 2017. And this of course includes everything, so there is nothing excluded or any tricks there. So it's a really nice development and we can see that everybody is executing according to the plan.
Now, if we move on to the drivers of future growth, we have two main drivers, AJOVY and AUSTEDO and we are very happy about the strong launch we've had of AJOVY. We still have above 20% TRx share in US and we have just started the launches in Europe. We've seen a moderate decline in the NBRx share. We think it's related to a couple of factors, one being the fact that we've stopped the full pay down on old scripts, which means that some scripts where we are not covered, actually do get declined at the pharmacy level and we also see that in some cases, the patients do prefer an auto injector and therefore of course we are eagerly waiting the approval and the launch of our own auto injector for AJOVY.
If we turn to AUSTEDO then, we continue to see very, very strong growth of AUSTEDO both in terms of prescriptions and in terms of sales, of course there is always some quarterly variances, but we think that the numbers we see here are very much a reflection of the true situation in the marketplace. It's well covered by basically all health plans and the gross to net situation is also very stable. So this is really exciting for us.
If you think about the patient numbers here in the script we have right now is equivalent to a little more than 8,000 patients on the drug and it's a combination of Huntington's chorea and tardive dyskinesia. And as I've said before, our estimates are that there is around 500,000 people in the US suffering from tardive dyskinesia. So in that sense, you can see we are only scratching the surface with this therapy for the moment and we have very, very good reception among specialists and among patients.
The drag on our business, if we go to the next slide, is really the development in COPAXONE. There is nothing new here. And you can see we had a pretty linear volume decline, which has been more or less stable. Of course again, here, we have some quarterly variations and that's of course because we have a volume decline and we have increased rebating over time in order to maintain this volume. And that means that the quarters can go a bit up and down due to various rebates, rebate accruals, and so on.
But if you really look at the underlying trend, then you could say that we are sort of having a losing half of this, of the value of the business on a yearly basis and that's also what we are expecting for this year. So we are still expecting to have revenue of around $800 million in the US this year. And then of course, which we don't show here on this slide, but which you can see in our numbers, we have a relative stable situation in Europe with a moderate decline. We had a win with the European Patent Office, so that we are more optimistic now about maintaining a solid COPAXONE business in Europe.
Now, with all the operational elements performing well, everything being on track it is of course -- I would say interesting and to some extent frustrating that we have seen a significant drop in the share price and the market capitalization of the Company. And for me personally, being many years in the industry and having a very strong commitment to compliance believing that compliance in all elements and at all levels of the business is a prerequisite for having a successful pharmaceutical business it is maybe especially annoying to be involved in two legacy legal situations.
As you all know, we are involved in an opioid litigation and we are involved in investigations on allocations of price-fixing. We do of course, in these situations, always assess what is in the best interest of the Company, our shareholders and we act upon that. We have, of course, done extensive documents -- research discovery together with external law firms. And so far, with all the evidence that we have in our hands, we deny any liability, because we have not seen any evidence of us having any misconduct in the opioid situation or any misconduct in the price -- pricing area.
So, we will continue to defend ourselves and we do not see the opioid situation, which is a very tragic situation in the US, we do not see that as a situation that will be solved by litigation. We think there is a more systemic need for change, which is the way to improve that situation for patients going forward.
On the pricing, we do collaborate of course with the DOJ in their criminal investigation. We have been collaborating with them since 2016, and as I said in our discovery process, we have not found any documentation that sort of substantiates the allegations. So we continue to defend ourselves denying these allegations.
Now if we look at the business going forward and our financial targets for the business going forward, then I'd just like to repeat these. We have talked about them before, but just so that everybody knows what our long-term plan is and one key element is, as I've said in the beginning, to improve the operating margin.
Now, that happens by a lot of elements. One element is of course that you optimize your product portfolio, the gross margin on the products you're selling, you optimize the manufacturing cost of the products you sell, and you make sure that you have a good and strong overall margin development. As I showed you earlier, we are at the level of 23% right now and we want to improve that up to the level of 27%.
The cash to earnings is quite simple, because we need the cash in order to reduce our debt and of course we have a long-term plan to keep on reducing our debt. The simple math is that, right now, we're probably having net earnings of some $650 million per quarter. That's $2.6 billion a year, 80% of that -- that's roughly just around $2 billion. So as you see, we are also guiding $1.6 billion to $2 billion on the cash flow. So we're really aiming at getting to that level, where we, on a consistent basis, generate most of the result.
With cash, there will always be quarterly fluctuations with a big balance sheet as ours. Of course there are quarterly fluctuations. But on a yearly basis, it's very important that we meet this target of the 80% cash to earnings. And that is important because we need to reduce the debt. As you know, our net debt-to-EBITDA ratio right now is about 5 and we really want to get it below 3. And the only way to do that is generate cash and pay back the debt.
So we will continue to use all our cash flows to really pay down debt. And as I've also stated many times, we do not plan to raise equity, we plan to continue to use cash to reduce the outstanding debt. And we think that's the best way to create value for our long-term shareholders.
Now with these financial targets, I'd like to turn it over to Mike, who will go through the financials in detail.
Michael McClellan -- Executive Vice President and Chief Financial Officer
Thank you, Kare, and good morning everyone. As always, we will start with a review of our GAAP performance on Slide 15. Teva posted a quarterly GAAP loss of $689 million and a loss per share on a GAAP basis of $0.63 for the second quarter of 2019. As we will detail on the next slide, the GAAP results were mainly impacted by legal settlements and impairment titles.
So turning to Slide 16, in the second quarter, we experienced non-GAAP adjustments amounting to an impact of $1.3 billion on net income. These adjustments consisted primarily of $646 million provision for legal settlements. This is mainly related to opioid litigation as well as the impairment of intangible assets and product rights amounting to $460 million and amortization charges of $285 million for the quarter. Similar to what we had in Q1 of 2019.
So, now turning to our non-GAAP performance on Slide 17, which shows a solid performance for the quarter, quarterly revenues were $4.3 billion, a decrease of $364 million or 8% nominal 5% net of FX compared to the second quarter of 2018. The decrease was mainly due to generic competition for COPAXONE as well as the decline in the revenues from TREANDA/BENDEKA, ProAir, lower revenues in Europe, and a decline in Japan. This was partially offset by higher revenues from AUSTEDO, AJOVY, QVAR and our Anda business in the US.
Compared to Q2 2018, we experienced a negative FX impact of $125 million. Net of FX, revenues in Q2, 2019 decreased by $240 million. Gross margin was 50.5% compared to 49.7% for the same period in 2018. The improved gross margin was driven by improved profitability of our North American generic business and to a lesser extent by the discontinuation of our OTC joint venture, which had a part of its profit share recorded previously against cost of goods sold. This improvement was partially offset by the decline in sales of COPAXONE.
Operating income in the quarter declined by 18% compared to the same period in 2018. The decrease was mainly attributable to the decline in COPAXONE and other specialty brands as well as lower income other income, which declined by $106 million. This was mainly due to legal recovery of lost profits that we booked in Q2 of 2018, which did not repeat. These declines were partially offset by our ongoing cost reduction program.
Non-GAAP earnings per share in the quarter was $0.60, $0.18 lower than the same period a year ago. The decrease was mainly due to lower operating profit partially offset by lower finance expenses. We will dig deeper into the trends in revenue and cash flows later in the presentation.
So turning to Slide 18, we've been highlighting for several quarters now including in our 2019 guidance provided in February, the impact of the stronger US dollar on our results, as approximately 50% of our revenue come from sales denominated in non-US dollar currencies. We see that exchange rate movements during the second quarter of 2019 had a negative impact of $125 million on revenue, while the impact on operating profit was smaller at $47 million.
The main currencies relevant to our operations that decreased the most in value against the US dollar were the euro, UK pound, and Russian ruble. We do expect that the US dollar will remain strong for the remainder of this year.
Turning to Slide 19, I'd like to highlight some of the revenue trends we've seen throughout the different segments and regions. Starting with North America, I'd first like to highlight our North American generic business, which continued its solid performance, reaching sales of $946 million in the quarter, supported by a diverse portfolio and further stabilization of the business.
QVAR also continues to perform well in the second quarter with $60 million in revenue. We do see sales of TREANDA/BENDEKA that are in line with the trend we saw in the first quarter of 2019. The decline versus second quarter of 2018 was mainly due to increased competition of another bendamustine solution known as the Big Bag.
Revenues in Europe declined by 6% compared to the first quarter, mainly due to lower sales of generics including OTC products that are stronger in the first quarter due to the cough and cold season. Our international markets were down 6% compared to the second quarter of 2018, mainly due to FX, sequentially from Q1, sales were up 11% due to stronger performance of generics and a seasonal impact that we see in these markets.
Lastly other sales were up 6% compared to Q2 of '18 and 8% sequentially. This line primarily consists of sales of API to third-parties and certain contract manufacturing services. The increases are primarily due to stronger sales in our API business.
Turning to Slide 20, free cash flow of the quarter was $168 million, a decrease of $192 million versus the first quarter of 2019, primarily to the expected accounts receivable working capital drag that I described back in February, when we provided our 2019 guidance. The effect of this drag was especially seen in Q2, as the accounts receivable working capital declined from an inflow of $206 million in Q1 to an outflow of $286 million in Q2, a swing of nearly $500 million between the quarters.
On Slide 21, we present a bridge between Q2 EBITDA and the free cash flow. And here you can see the overall working capital effect, I described. We do expect free cash flow to improve significantly in the second half of the year, mainly due to the receivable drags dissipating, the annual bonus payments of $390 million in the first half not repeating, and inventories coming down due to normal seasonality.
Turning to Slide 22, we ended the second quarter with a net debt of $26.6 billion and a net debt to EBITDA ratio of 5.72. As you may recall, during April, we also entered into a $2.3 billion unsecured syndicated revolving credit facility, which replaced the previous $3 billion revolving credit facility that we had. This new RCF can be used for general corporate purposes, including repaying existing debt. As of June 30 2019, no amounts were outstanding under the RCF, and as of today, we have $500 million outstanding under the RCF.
So now turning to our financial outlook for 2019 on Slide 23, today we are reaffirming all aspects of our annual guidance that were first presented in February and reaffirmed in May, including earnings per share in the range of $2.20 to $2.50 and free cash flow for $1.6 billion to $2 billion for the year.
Where we end up in the ranges of the full year will depend on the performance of the branded products, especially COPAXONE and AJOVY, the timing of generic launches, foreign exchange rates especially the euro, and our expense management.
At this point, I would like to address a second press release that you may have seen this morning. For personal reasons I have decided to resign from Teva and relocate my family. This is a very, very difficult decision for me. But as many of you know, when you move to a new country, it's always a challenge and when family issues come up that make it difficult to sustain that, sometimes you have to make a decision that's in the best interest of your family.
This decision has no really influence from the situation of Teva. We do have our business challenges, but I am really convinced that the employees, management and Board of this Company are doing the right things to address this challenge, to put Teva on a solid footing and allow us to grow in the future.
I'm fully committed to the next three months with the Company through the earnings call on November 7th of 2019 for the third quarter and I will do everything to support core, the Board, and the Company in finding and training my replacement. So I wanted everyone to know that this is really a personal decision and it's been a difficult one for me, but one that I really felt I have to make.
Kare Schultz -- President and Chief Operating Officer
Yeah, and on that note, I'd just like to thank Mike for his tremendous efforts and for the very, very good working relationship we've had since I started at Teva. It's been a real pleasure to work together with Mike and I wish Mike and his family all the best in the future. And we will still be working together for the next three months, so it's a little early to say goodbye to Mike, but you'll get a chance, if you want to do that after the third quarter.
So with that, we will move into the Q&A.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Your first question comes from the line of Randall Stanicky from RBC Capital Markets. Please ask your question.
Randall Stanicky -- RBC Capital Markets -- Analyst
Great, thanks very much. Kare, just because it seems to be the primary issue in the stock, I appreciate the comments around the opioid situation and last quarter, in May, you made some comments that you wouldn't be surprised if t this went to the Supreme Court, and then the next month, Teva in June, settled the Oklahoma case. So what is Teva's stance here? Are you opened to more broad settlements and as you call out exploring alternatives to litigation, is that what you mean there? I'm just trying to get a sense of Teva's strategy going forward. Then I have one follow-up.
Kare Schultz -- President and Chief Operating Officer
Okay, thank you for that question. In any specific litigation situation, we try to assess what's in the best interest of the shareholders and of the company and the specific analysis of the situation in Oklahoma is what led to our settlement. In that connection, we did not admit any wrongdoing or any responsibility. We still believe that the right solution to the opioid issue is not through litigation. We still deny any wrongdoing. We don't think we broke any law, or did anything wrong.
But it is a very serious issue, of course, affecting lots of people in a very negative way and it does make sense for a society to take action and improve this situation. Going forward, we will take a stand that we have not done anything wrong, but that we would like to participate if there is a way, in a holistic way, to improve this situation to the benefit of the American people going forward. Now, what kind of solution that might be? It's too early to speculate.
Randall Stanicky -- RBC Capital Markets -- Analyst
Okay, that's helpful. And then secondly, on AJOVY, it came in light of consensus. Can you just A; confirm if the $150 million in revenue or sales outlook for the year still stands and B; just talk about the competitive dynamics and where you think gross to net is settling out at? Thanks.
Kare Schultz -- President and Chief Operating Officer
Yeah. So maybe I'll give a brief comment and then Brendan can give some more color to it. Overall, I'm very happy about the launch of AJOVY. We are above 20% TRx and we think that that's a very nice and good start. There are some swings right now among all the three competitors on the sales we book per quarter, simply for reasons that we have a lot of -- I guess all of us coupons, pay downs, lot of elements going into the gross to net, which are more complicated in the early phases than it will be once the market settles down.
So we are in the phase of, let's say increasing the ratio of scripts that get paid for, therefore improving the gross to net, and we're also in the phase of course of continued roll out to more and more target doctors and so on. But maybe Brendan you can give a few more comments to it.
Brendan O'Grady -- Executive Vice President, North America Commercial
Sure, happy to Kare. So if you look at the US market, the CGRP market is a very competitive one, not surprising with three launching so close together. We've taken a little bit different approach than I think some of our competitors have. We've tried to focus on profitability for the asset. So we've approached payers in a very specific way and we've grown our coverage to about 70% acceptable coverage, which we think is good to achieve our financial goals.
We added Aetna as -- on their preferred formulary July 1. So we continue to build formulary access and we're in negotiations now for 2020. So we think we'll have the access that we need to get to our financial goals. As Kare mentioned, we stopped doing the co-pay buy down for plans that had AJOVY in exclusion list or an NDC block that impacted our new-to-brand share. And due to the overwhelming demand that we've seen, we actually sacrificed some samples in Q2 to make sure that we had ample trade stock.
So as a result of doing both of those things, it impacted our new-to-brand share. We expect our new-to-brand share to recover in the second half of the year and of course we're anxiously awaiting the approval of our auto injection device and the launch of that device, which we expect in the next six months. That will be a second stimulus, really a second phase of our launch and we expect a significant boost to our new-to-brand and our TRx share as a result of that. [Speech overlap] As for the gross-to-net, I won't really comment on that because I think every company probably has their own -- their own gross-to-net there, but it's stable at this point.
Kare Schultz -- President and Chief Operating Officer
And then, I'd just like to be very specific in answering your questions about $150 million. I think it's likely that we will be slightly shy of the $150 million on AJOVY. On the other hand, I think then on AUSTEDO where we set a target of $350 million. We'll probably be significantly above that. So all in all, you could say new product sales where we were estimating $0.5 billion, we'll probably be slightly above the new product sales target for the year.
Randall Stanicky -- RBC Capital Markets -- Analyst
Okay, great, that's helpful, thanks Kare. Thanks guys.
Operator
Thank you. Your next question comes from the line of Akash Tewari from Wolfe Research. Please ask your question.
Akash Tewari -- Wolfe Research -- Analyst
Hey, thanks so much. So number one, we noticed that you took a $646 million payment for legal settlements and loss contingencies that was specifically related to opioid-related matters. Can you help us contextualize like we're seeing headlines that like distributors are proposing a $10 billion settlement. And today you're taking a relatively small legal fee for opioid-related matters. Why is there this kind of disconnect and why do you have this confidence that the settlement amount will be kind of in the $600 million range, and on the multi-billion dollar range?
And maybe just on the CGRP for 2020, consensus numbers are near $300 million, which imply a pretty significant script acceleration and you were mentioning that maybe 2019 numbers may come in a little lower. How much do you think long term Wall Street models need to come down on CGRP and how big is kind of the EU opportunity for this class and for AJOVY? Thanks so much.
Kare Schultz -- President and Chief Operating Officer
So, I think Mike will address the first question and then I'll take the second one.
Michael McClellan -- Executive Vice President and Chief Financial Officer
Yeah. So let's be clear that what we have in our Q2 is an accrual, which is related to -- the $646 million is related mainly to opioids. You do have the $85 million settlement for Oklahoma in there. And based on the settlement for Oklahoma, what it does from a purely technical accounting perspective is that, once you've settled one of these cases, you do show a disposition at least to consider other settlements. So we went through a very thorough process of trying to normalize, first the Oklahoma settlement as being the first one, there is usually a premium attached to that and then see with all of the other cases what, from a range of possibilities, we could have in terms of future settlements.
It's a pretty wide range, and what happens in terms of accounting is, if you have a range, and you have no point on that range, that's more likely than any other, which we don't know at this point. We don't have enough information based on current situation to know where this is going to go, you end up booking the low end of the range and that's what we've done. So, at this point, as we saw from Kare's presentation, you know, we still don't see that we have a huge liability in this case in terms of causing this epidemic, but we do know that there is a lot of cases going on and there is a likelihood that some of these could settle in the future.
So that's where the number comes up. The number that you see externally is everyone's speculation, nobody actually has something concrete at this point other than speculation of rumors that they hear about different competitors, might be interested in or extrapolation of the two small data points you have, being our settlement in Oklahoma and Produce settlement in Oklahoma. So it's very complicated and that's how we ended up with the numbers that we have.
Kare Schultz -- President and Chief Operating Officer
Thank you, Mike, on the CGRP market and our revenues in 2020, it's too early to give a firm guidance. But the simplistic math is we have around 10,000 normalized scripts per week right now and that's after they spending [Phonetic] in the market. So very simplistic assumption is that from now, it might be around 20,000. If you move to 20,000 per week with a gross price of $575 million, with a significant gross to net deduction, then I'm sure you can do the math and you will probably get to that number, which is pretty close to the overall number you mentioned.
Akash Tewari -- Wolfe Research -- Analyst
Got it. Thanks so much.
Brendan O'Grady -- Executive Vice President, North America Commercial
Then Europe also -- so in Europe...
Kare Schultz -- President and Chief Operating Officer
Yeah. In Europe, we are having the first launches as we speak. And in Europe so far, we are seeing a -- I would say positive pricing environment, which means that we're seeing prices which are similar to the US, which is normally not the case in Europe and we see very good reception in the first countries. It's too early to say what the long-term potential be, theoretically, of course, the prevalence of migraine is identical in Europe and US.
The population is bigger in Europe, but there are more hurdles to reimbursement. So long term, you could speculate that the potential is roughly of the same size in Europe as in US. But due to the way reimbursement works where it's country by country negotiations, you typically have a slower ramp up of volumes in Europe, because you sort of get approval for reimbursement country by country, and this is a process that can take anywhere from one month to three, four years.
Akash Tewari -- Wolfe Research -- Analyst
Great, thanks.
Operator
Thank you. Next question comes from the line of David Amsellem from Piper. Please ask your question.
David Amsellem -- Piper Jaffray -- Analyst
Hi, can you hear me?
Michael McClellan -- Executive Vice President and Chief Financial Officer
Yes, sir.
David Amsellem -- Piper Jaffray -- Analyst
Okay, sorry about that. So just a couple of quick ones. One, I may have missed this earlier, but can you comment on Forteo. And as we're getting into the fall, any thoughts on contribution and then further feelings [Phonetic] on the competition. So that's number one.
And then secondly on AUSTEDO, I'm trying to get a sense of how you think penetration will evolve? This is a fairly untapped market and I guess the question is, as the footprint of both Ingrezza and AUSTEDO grows, do you expect more restrictive control on the part of payers as the VMAT2 class grows here and longer term, will you have to contract more aggressively, does it become more of a zero sum game between you and Neurocrine? So help us understand your long-term thinking there. Thanks.
Brendan O'Grady -- Executive Vice President, North America Commercial
Sure. So I'll take the Forteo question first and then I'll work into AUSTEDO. So in regards to Forteo, I'm not going to really comment on specific product launches for the rest of 2019. To-date, we've launched 27 -- actually I think maybe 28. We launched ZIAC last night, so that's launching today. So I think it's 28 generic launches year-to-date, we have another 12 to 15. So, that will bring our number into the 40s range for the rest of the year. So we're right on plan where we want to be with new product launches in generics.
The only ones that I will specifically comment on is RESTASIS that I get asked quite often. We're ready to go. We're awaiting word from the FDA that could be imminent. We'll wait and see. It's -- the updating be unpredictable, so you never really know. And the other one is EpiPen Junior. EpiPen Junior is imminent, we'll be launching that within the next couple of weeks and we'll have that in the channel for the back-to-school season. So that's kind of how generic will look for the rest of the year.
In regards to AUSTEDO, as Kare mentioned, it is a very big market in TD, it's about 500,000 patients. We have just scratched the surface. I think you can see from the uptake that AUSTEDO continues to enjoy, there continues to be acceptance in the market and we're quite pleased with the product's performance. I think that in regards to payers, we have very good formulary access among payers with a stable gross to net. And I think that the dynamics will allow AUSTEDO to continue to grow in both tardive dyskinesia and Huntington's disease without any significant controls going forward.
David Amsellem -- Piper Jaffray -- Analyst
Thank you.
Operator
Thank you. Your next question comes from the line of Elliot Wilbur from Raymond James. Please ask your question.
Elliot Wilbur -- Raymond James -- Analyst
First question for Kare, going back to the Company's longer term or I guess objective target margin of around 27%, given where you are currently 23%, seems like the leverage with respect to additional cuts from SG&A and R&D are obviously not what they were over the past couple of years. It really has to come as a result of product mix benefit or continued plant rationalization.
And just trying to think about sort of a timeline with respect to that target, I mean, is it reasonable to assume kind of a 50 basis point to 75 basis point improvement in gross margin over the next several years or do you think that's a range you could actually do better than. Then, I want to ask a question of Mike, with respect to -- obviously you've reiterated free cash flow expectations for the year, but wanted to confirm in fact that your capex objectives are still the same? Thanks.
Kare Schultz -- President and Chief Operating Officer
So, you're absolutely correct that in order to achieve the improvement on the operating margin. The majority of that improvement will not come from a reduction in R&D and SG&A. We can still maybe optimize a little bit, but that's really not where it's going to come from. It has to come from the combination, as you said yourself, product mix, where the growth of AUSTEDO and AJOVY will help us and then continued improvement of the manufacturing costs, making manufacturing more efficient.
Now, we are not going to do a big splash restructuring, but we will do ongoing optimization of our manufacturing footprint. I said before and I'll repeat now, that once the restructuring program is fully executed, which will be at the end of this year, then we will share with you our longer term plans for how to optimize manufacturing going forward. And in terms of how much can this combination of product mix and manufacturing optimization, how much can that generate in term of improvements in operating margin and in terms of the improvements in gross margin, then it's my experience from having done other long-term projects of a similar nature that you can achieve somewhere between 50 basis points and 100 basis points per year.
It doesn't come linearly, because you do have some step changes when you change your manufacturing footprint or when you launch products in more markets and so on, but my expectation would be that we will be able to improve the margins in that range of between 50 basis points and 100 basis points per year going forward. And it's a long-term commitment, where you keep on doing this. It's a thousands of different activities and changes you do, but it's a sustainable improvement methodology and I believe that we'll be able to do that going forward.
Michael McClellan -- Executive Vice President and Chief Financial Officer
Yes. So in terms of free cash flow, clearly, we need to ramp up in the second half. We did see the first half was burdened by bonus payments in the first and second quarter as well as an accounts receivable drag and also the seasonality of inventory, we tend to stock up a little bit in the first half, and then it will decline in the second half, which is a cash aid, and that's usually due to the plant shutdowns toward the end of the year.
So we are still on track with our expectations for free cash flow, but we do have to ramp it up quite a bit in the second half. In terms of capex, we'll probably be a little bit lower than our original expectations. I think we expected 650-ish in that in the beginning of the year, we'll be probably closer to the $600 million. So some of that will contribute to a better cash flow in the second half. Next question?
Operator
Thank you. Next question comes from the line of Greg Gilbert from SunTrust. Please ask your question.
Greg Gilbert -- SunTrust -- Analyst
Thanks. I'll ask my two right up-front. First, Brendan, you have commented on generic Forteo and NuvaRing in the past. Can you comment on them further today or should we read into anything negative that you do not want to comment on those anymore. And then for Kare, bigger picture question, when you took the job you knew you were signing up for a major turnaround that would be painful in many ways, but I suspect you did not sign up for a massive opioid story that could take years to resolve and create investor concern about bankruptcy and stuff like that. So my question is, are you committed to sticking around to see this through? And assuming the answer is yes, how are you ensuring that key employees are willing to do the same? Thanks.
Brendan O'Grady -- Executive Vice President, North America Commercial
So I'll take the NuvaRing and Forteo question and then I'll let Kare answer. So quite simply, you know, we continue to work with the FDA with both NuvaRing and Forteo, and just because the unpredictability of when these may get -- you may get approved, that's why I didn't mention them. Certainly, they could be later this year or they could drag into sometime in 2020. So we don't really know at this point. We continue to work with the FDA and you know, as soon as we get approval, obviously, we will be ready to launch the products.
Kare Schultz -- President and Chief Operating Officer
And you're absolutely right that when I took the job, I was fully aware that there was a big challenge on the revenue side, where we would see revenue decline, which we've seen pretty much, as it was predicted, and that we had to push hard to get approvals, so that we could launch, you know, AUSTEDO, AJOVY and so on and start driving growth on products, which is a normal thing which, you know, all the jobs I've had in the industry, is a key element, of course. So optimizing costs drastically through the restructuring program, ensuring launching new products to drive future sales growth was a key element of it, and I think we're succeeding very well there.
At the same time, there was a huge step in managing the debt and doing the proper refinancing and so on, was also clearly an element. Now in all pharmaceutical companies there's also an element of litigation. And in my career, I've been part of several litigations that took long time. I remember some product litigations that went on for probably around 10 years in the US. So these things are, like you said, things that take a long time.
And when I joined, I did know, of course, that Teva had a long list of potential litigations going forward. I enterprise, as you correctly pointed out, to the political nature of the opioid situation in the US, and I'm also surprised about the way it has developed. I would say, I'm not the kind of guy who ever quits unless the job is done. So of course, I'll see it through, I'll get the job done. I have a five year contract. If I have to stay longer, I'll do it.
So from my personal point of view, I have this funny thing that I like it when it's difficult. I've always liked it better when it's difficult than when it's easy. So in that sense, I'm in a very heavy situation you could say, because it is definitely challenging and difficult.
When it comes to my colleagues, the best way to keep your colleagues is of course to be a good boss and give them the chance to work independently and solve their problems and issues, and that's what I'm doing, and I think it's remarkable that actually apart from Mike, who for personal family related reasons are leaving now. I have exactly the same management team as I appointed now nearly two years ago. So I'm not really worried about that. I am of course, very focused on how to manage these complicated legacy litigations the best possible way and we will continue to do that to the best of our ability for years to come into the future. So the short version is, I'm [Indecipherable] to the company.
Greg Gilbert -- SunTrust -- Analyst
Thank you.
Operator
Thank you. Your next question comes from the line of Umer Raffat from Evercore. Please ask your question.
Umer Raffat -- Evercore -- Analyst
Hi, thanks so much for taking my question. Kare and Mike, I want to apologize in advance, but this is a tough one. I'm sure you both appreciate that a CFO departure when cash flows are tough and the Company is going through its issues, investors won't exactly fully be satisfied with an explanation that Mike is just looking to relocate with his family. So I wanted to give you an opportunity to really address this beyond the prepared remarks.
And one sense, given where Teva stands, presumably Mike could be doing this job from anywhere, for that matter. So I'm sure you understand why Street won't be satisfied with what you guys shared so far and I just wanted to offer an opportunity to explain that beyond.
And also while we're at it, Mike, can you go over what percentage of maturities beyond 2019 need to be refinanced, and what's the incremental financing rate for that. Thank you very much.
Michael McClellan -- Executive Vice President and Chief Financial Officer
Yeah. So I'll address it. It's not prepared remarks. I am definitely making a personal decision and you can say you can do your job from anywhere, but you can't. You need to be with your teams. Unfortunately, you know it's -- Israel is not located that close to anywhere I need to be. And I've been doing this for two years. I've been commuting most of the time living by myself either in hotels or an apartment in Israel, and it's just not sustainable. So that's the whole story. If you want to read more into it, I can't stop you from it, but that really is the whole story.
When it comes to refinancing the maturities. Basically, we know that when we get to 2021 and 2023 those $4 billion debt stacks are probably little more than we're going to be able to generate organically. So we will try to get out in front of those. We're constantly watching the market to see when is the right time to refinance without drastically increasing our interest cost.
Unfortunately, in the last eight weeks the publicity and the trial by media from both opioids and the price-fixing has had a big effect on our spread. So we're looking at all the different options that we have, we don't want to do anything too hastily that becomes a permanent change in our capital structure or puts us in a bad position, in case some of these things work themselves out to be more positive than the Street and the speculators are currently looking at. But it's a very tense situation.
So we are managing it. We're in constant discussion with our Board, with management, with our banking partners, people watching the market. But in a quantum, we will probably need to refinance $2 billion to $3 billion in the coming years, and then potentially, maybe another $1 billion to $2 billion as we get to the 2023 maturity. So that's kind of what we'll be looking at. We need to find the right approach to do it, that's most beneficial for the company and hits the market in the right timing with the right story.
Kare Schultz -- President and Chief Operating Officer
And, Umer, if I can just add a little bit, because I understand your question about Mike's departure. And I think Mike doesn't really want to -- want to talk about intensive details, and I think we should respect his privacy. But he does have a very serious health issue in his close family, and the place where he needs to be for that reason, is not a place where he can function as the CFO of Teva. And I think it would be respectful not to go into more details. But it's really in that sense, relate to a very serious health issue. So -- not Mike, but in his family. And with that, I think we should move on.
Kevin Mannix -- Senior Vice President, Head of Investor Relations
Next question?
Umer Raffat -- Evercore -- Analyst
Thank you very much.
Operator
Thank you. Next question comes from the line of Esther Rajavelu from Oppenheimer. Please ask your question.
Esther Rajavelu -- Oppenheimer -- Analyst
Hi, thank you for taking my questions. I have a couple, the first one is on AJOVY and the launch in the EU? What kind of competitive dynamics are you facing there that are either similar to or different from the US? And how are you thinking about the ramp in that market?
Kare Schultz -- President and Chief Operating Officer
Yeah, so in the EU, let's say there are a couple things that are similar, in the sense that it's the same three products. It's the same three competitors with a little bit of a twist, because of course, it's Amgen in the US, it's Novartis in Europe, but it's also Lilly and it's also us. Now in Europe, the access is different in the sense that you don't have these competitive access negotiations, you basically have a situation where typically there's negotiations with the authorities, they decide on a certain price level and that's the price level given to a drug class, and that would then be the same, typically for these three drugs.
And then you have, you could say, more of a similarity in that then you compete on disseminating the clinical information informing doctors about the opportunities and so on, and in that sense, it's quite similar. So I would expect that longer-term we will see the same solid uptake country by country. The hurdle is, as I've said before that before we get general access in a market, the National Health Authorities because typically you're talking about nationalized health systems. So the National Health Authorities, they need to make up their mind on at what level and for which population they want to reimburse this therapy. In this case, it's pretty obvious, that it's of course people suffering from chronic migraine and it's preventive therapy for migraine.
So you're probably talking about these four migraine days a month on average, and we do expect that we will get good access. And once we get access, it will typically be for all three players. So it's a more level playing field in terms of access. And then of course you have the same kind of promotional activity, clinical, scientific activity, as you may have in other markets.
So our expectation in terms of final market share is kind of similar to what it is in the US. So we are expecting in Europe and US, to have somewhere between 20% and 30% market share, that's our best guess.
Esther Rajavelu -- Oppenheimer -- Analyst
Got you. Then I have two more quick ones. Going back to that Slide 5 in your presentation, where you talked about the gross margin improvement. How much of that year-over-year improvement was related to manufacturing efficiency versus the product mix or pricing? And then, are there geographic variability to the improvements? And then my last question is on the CFO search, have you initiated the search and what kind of timing are you expecting, given where you are today?
Kare Schultz -- President and Chief Operating Officer
Yes. So I can't really give you the fine details on the margin development, but I can tell you that we are seeing improvements in the gross margin from manufacturing, both in the US, but also in the European market, and I can tell you that there is still a drag element coming from the loss of COPAXONE sales and there is, of course, some improvement coming from the new launches.
So I won't get into the finer sort of detailed numbers. They're, of course relatively small, those swings. As you can see, it's not a major change. It's more the trend line and it's more the fact that by doing the constant optimization of the portfolio and the manufacturing, we do believe we can do this 50 basis points to 100 basis points per year improvements going forward.
In terms of the CFO search, we had just initiated that and we hope, of course, to identify somebody so that once we get to the full year reporting in February, we will have a new person onboard. Mike is here to do the third quarter. So we think we'll have a good and solid situation.
Esther Rajavelu -- Oppenheimer -- Analyst
Thank you very much.
Operator
Thank you. Your next question comes from the line of Ken Cacciatore from Cowen and Company. Please ask your question.
Ken Cacciatore -- Cowen and Company -- Analyst
Great, thanks. Mike, I know we have you next quarter as well, but sorry to hear you're leaving and obviously hoping all the best for your family. Kare, I hate to revisit the opioid situation, but just trying to understand, if you could help us understand some of the nuance besides just that Oklahoma was first. Is there some way you can describe why that made more sense and how it could be nuanced different from others.
And then also, as part of that obviously Teva bought Cephalon a while ago, so that brought ACTIQ and FENTORA. So just trying to understand the differences in the settlement between the generic component that led to these settlements or may be your exposure versus the brand exposure that you took on with the Cephalon acquisition, so maybe we can better understand why a generic quote unquote manufacturer would have reached a settlement as opposed to continue to fight.
It would seem if you're just supplying generic drugs and not selling them that you wouldn't want to -- you would want to continue to litigate but trying to understand if there is something going on on the branded side that really more forced your hand. Thank you.
Kare Schultz -- President and Chief Operating Officer
Yeah, so let me answer the last part of the question first and then I'll get back to the overall. The last part of your question is whether there is anything with these brands that was specific in in the Oklahoma case and made us do the settlement. That's not the case at all. I can actually tell you I mean totally that in the 10-year period that was discussed in Oklahoma. I think we had 247 scripts, on the whole of those two products in Oklahoma. So that is a non-issue whatsoever.
However I had to step back to the beginning and say this is a political situation. This is a political situation where people are pointing to somebody to blame for the opioid epidemic in this case they point to manufacturers and what's different between the Oklahoma apart from the fact it was the first, very few companies were in that case, as you know, only three companies.
The first company had settled, so there were only two companies, left. It is a local judge in Oklahoma. It's not part of the federal court system. it's a state court. The MDL case which is coming up now is in the federal system. It's like 85% of the volume of plaintiffs. So from our point of view, you could say, it's a better time to fight or to get a global settlement in the MDL case in Ohio than it was in Oklahoma.
So it was a specific assessment of the situation that led us to the conclusion that it was in the best interest of the company and the shareholders to do the settlement in Oklahoma, not because we believe we have done anything wrong whatsoever or have any direct responsibility whatsoever and not because there was anything with the two special products we have, which are really developed for terminally ill cancer patients.
Ken Cacciatore -- Cowen and Company -- Analyst
Thank you.
Operator
Thank you. Next question comes from the line of Liav Abraham from Citi. Please ask your question.
Liav Abraham -- Citi -- Analyst
And then secondly, just coming back to AJOVY, even if you're going to do slightly shy of a $150 million in revenues this year, you still anticipating a significant ramp in revenues in the back half of the year. So maybe you can address how you get there. Is it going to be a change in strategy? Are you going to start a DTC program? What is going to get you to that significant ramp in the second half? Thank you.
Michael McClellan -- Executive Vice President and Chief Financial Officer
So thanks, Liav. I'll take the first one. That settlement is meant to encompass -- that settlement accrual is meant to encompass everything. And as I described earlier, it's more of an accounting perspective on a wide range that we've taken a booking there. So we'll monitor this as we go along and see if there is any change necessary. But given the information we have today and the way we see this, this is what we've recorded in Q2.
Brendan O'Grady -- Executive Vice President, North America Commercial
So I'll take the next question regarding AJOVY and the ramp in the second half of the year. So if you look at from Q1 to Q2, our paid prescriptions increased from 40% to 60%, we will -- we continue to see that increase during Q3. So it's a mix of transitioning patients from free coverage to paid reimbursement, as well as continuing to gain new patients. So as we go through Q3 and we go through Q4, we'll continue to see that dynamic improve. As I said, our payer coverage has improved and we continue to convert patients. So that's how we'll get to our year-end number.
Liav Abraham -- Citi -- Analyst
Thank you.
Kevin Mannix -- Senior Vice President, Head of Investor Relations
Next question.
Operator
Thank you. Your next question comes from the line of Chris Schott from JPMorgan. Please ask your question.
Chris Schott -- JPMorgan -- Analyst
Great, thanks very much. I guess my first question was on the North American generic business, you've been set revenue just below -- a bit of below about $1 billion a quarter this year. Should we think about that kind of $1 billion run rate as a decent run rate for that business going forward or can we actually start to see that number grow over time, as some of these second half opportunities, if they come to fruition?
And then my second question was a bigger picture one, just thoughts on what we saw with the Upjohn Mylan transaction a few weeks back and how you think about transformational M&A at Teva, as you look about your product portfolio and geographic footprint. If there is a transaction like that and the right opportunity was available something that could make sense for the organization or are you really much more focused on just optimizing the portfolio that you have today? Thanks very much.
Kare Schultz -- President and Chief Operating Officer
Yeah, I'll give it a -- quick go with the generics and then Brendan can give some more comments and the I'll end up with commenting on the Upjohn Mylan thing. So I think the $1 billion quarter plus minus of course, depending on specific launches and so on, is a steady run rate. I don't see a big change that this will improve significantly, and I don't see a big risk that it will declined significantly. I think we'll be at around the $4 billion level for the years to come based on our strong portfolio with a lot of the launches coming up.
It is a fact that launches, they move in time, sometimes you launch earlier than you thought, sometimes you launch later than you planned. But on average, when the whole thing is moving, it sort of evens out, based on how many products you have in the pipeline, how many you're preparing to enter into the marketplace.
And that combined with the fact that we've seen a relative stabilization of the pricing environment leads me to believe that this $4 billion a year level for North America is, you know, a sustainable long term level. But Brendan, how do you see it?
Brendan O'Grady -- Executive Vice President, North America Commercial
I see it much the same way Kare. I think if you look at the quarters, you see that the North American run rate is anywhere between $900 million and $1.1 billion and that just largely depend upon the new product launches, how many you launched in a particular year? How many of them are high value launches? What the market looks like when you get there? So we've had quarters where we've been close to the $900 million; we've had quarters where we've been closer to $1.1 billion. So as Kare mentioned, you know, we kind of see this as a sustainable business going forward at around the $4 billion mark, give or take depending upon the launches in any particular year.
Kare Schultz -- President and Chief Operating Officer
And on the Upjohn Mylan merger, I would like of course to wish them good luck with it. It doesn't really change your operational environment a lot when you merge. And the two parties have of course worked together a long time including on EpiPen. And I would of course wish them good luck solving their manufacturing issues. But while they haven't been solved, I also just make a little commercial for the generic EpiPen which is available in all pharmacies and if it's not there you can just call Anda and get it.
So, nobody should be short on EpiPen this fall, thanks to the generic version that we're marketing. That thing aside, we're not really seeking transformational M&A. We're sort of going about it the long term way, improving our operational performance year-on-year working down our tests [Phonetic]. I do recognize this takes time and that the legal overhang now has a risk of it taking longer, but doesn't change the end game. The end game is to have a very strong and sustainable, profitable business.
Chris Schott -- JPMorgan -- Analyst
Thank you.
Operator
Thank you. Your final question comes from the line of David Maris from Wells Fargo, please ask your question.
David Maris -- Wells Fargo -- Analyst
Good morning., First, Mike, thank you for the candor about your planned departure, and please know that we all wish you and your family the best as you get through this. On the debt side of things, do you think you can refinance a significant amount of the debt prior to a settlement? And if so, what debt do you expect to refinance first? And if you wanted to help us understand what the kind of blended rate of the first tranche or stack of debt that you'd like to refinance, what the blended rate is of that and what you expect the current market to be for it? That would be that would be helpful. Thank you.
Michael McClellan -- Executive Vice President and Chief Financial Officer
Okay. No, thanks for your kind words. You know, I think as long as the overhang is there, it's going to be a little trickier, you know, with refinancing. But we do think that there are pathways to get the right quantum in the right timing to do it. If you look at our overall cost of debt, you know, most of this was borrowed back pre-Actavis acquisition at a very low rates, because the company was investment grade at that point, and the market was very buoyant.
So you'll be looking probably at taking out some of the 21, maybe even the 23. And, and it'll go from the roughly 3% interest rates that you see today, to anywhere, you know, six, seven, eight, nine depending on where the market is at the time we come in. And that's why we're going to be looking at this very cautiously. We don't want to overload the P&L with interest expense, because of a short term consideration of these litigations. But we will hope that they clear up a little bit in the coming months, at least in terms of what the quantum could be.
And what's the timeframe? You know, I think it's pretty clear that if major amounts are going to be expected from the industry that they're going to have to be over a long time frame. I don't think any of the players in the industry could handle large upfront cash amounts and if it becomes something more than to ways they've settled other large product situations where you've got a future, you know, excise tax on these kind of sales or things like that, that could also help.
So we don't know how this is going to resolve itself. We don't know the quantum. We will just be looking to tap the markets at the right time to optimize our situation, without trying to exploit too much the net gross.
David Maris -- Wells Fargo -- Analyst
Great, thank you very much.
Kare Schultz -- President and Chief Operating Officer
Thank you everybody for calling in. This ends our quarterly call.
Operator
Thank you. That does conclude our conference for today. To listen back to the replay of this conference, please dial 0044-3333-009785 and enter the conference ID 8260368 followed by the hash key. Thank you for participating. You may now all disconnect.
Duration: 66 minutes
Call participants:
Kevin Mannix -- Senior Vice President, Head of Investor Relations
Kare Schultz -- President and Chief Operating Officer
Michael McClellan -- Executive Vice President and Chief Financial Officer
Brendan O'Grady -- Executive Vice President, North America Commercial
Randall Stanicky -- RBC Capital Markets -- Analyst
Akash Tewari -- Wolfe Research -- Analyst
David Amsellem -- Piper Jaffray -- Analyst
Elliot Wilbur -- Raymond James -- Analyst
Greg Gilbert -- SunTrust -- Analyst
Umer Raffat -- Evercore -- Analyst
Esther Rajavelu -- Oppenheimer -- Analyst
Ken Cacciatore -- Cowen and Company -- Analyst
Liav Abraham -- Citi -- Analyst
Chris Schott -- JPMorgan -- Analyst
David Maris -- Wells Fargo -- Analyst
