Teva Pharmaceutical Industries Ltd., Q4 2008 Earnings Call Transcript

Teva Pharmaceutical Industries Ltd. (NYSE:TEVA) Q4 2008 Earnings Call February 17, 2009 8:30 AM ET

Executives

Elana Holzman - IR
Shlomo Yanai - President and CEO
Eyal Desheh - CFO
Bill Marth - President and CEO, Teva North America
Gerard Van Odijk - President and CEO, Teva Europe

Analysts

Randall Stanicky - Goldman Sachs
Greg Gilbert - Banc of America/Merrill Lynch
Ronny Gal - Bernstein
Ken Cacciatore - Cowen and Company
Chris Schott - JP Morgan
David Buck - Buckingham Research Associates
Rich Silver - Barclays Capitals
Corey Davis - Natexis
Michael Tong - Wachovia Capital Markets
Caius Christoe - Morgan Stanley
Elliot Wilbur - Needham & Company

Operator

Greetings, and welcome to the Teva Pharmaceutical Industries Fourth Quarter 2008 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Elana Holzman of Teva Pharmaceutical Industries. Thank you, you may begin.

Elana Holzman

Thank you, Diego. Good morning and afternoon everyone. Welcome to Teva's fourth quarter and full-year 2008 earnings call. We hope you have had a chance to review our press release, which we issued earlier this morning. A copy of the press release is available on our website at www.tevapharm.com. Additionally, we are conducting a live webcast of this call that is also available on our website.

Today we are joined by Shlomo Yanai, President and Chief Executive Officer; Eyal Desheh, Chief Financial Officer; Bill Marth, President and CEO of Teva North America; Moshe Manor, Group Vice President of Global Innovative Resources; and Gerard Van Odijk, President and CEO of Teva Europe.

Shlomo and Eyal will begin by providing an overview of our results. We will then open the call for question-and-answer period.

Before we proceed with the call, I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this conference call and webcast. Shlomo?

Shlomo Yanai

Thank you, Elana. Welcome everyone and thank you for joining us today as we review Teva's result for the fourth quarter and full-year 2008 and provide outlook for 2009.

2008 was an extraordinary and exciting year for Teva. It was a record breaking year across the board. For sales, adjusted net income and of course, cash flow. I believe that especially against the background of a troubled world economy, our results this year emphasize the fundamental strength of solidity of Teva's balanced business. Our balance of geographies and product lines provide us a natural hedge against risk and enable us to deliver continuous profitable growth, even under challenging market conditions. Our strong result under this conditions also I believe highlight the many advantages that Teva enjoys as the global generic leader. Our expertise in leveraging economies of scale and our ability to provide a quick and agile response to changing market conditions.

Before I describe the year in a greater detail, I would like to briefly review our results for the fourth quarter. Teva's net sales in Q4 reached a record breaking $2.8 billion with gross margin of 56%. Our operating profit was $704 million with adjusted net profit of $634 million and all of this ultimately brought us to the adjusted diluted EPS of $0.76. All in all, this was an excellent quarter which provided a strong end to the year.

Now let us turn to the full-year of 2008, a year in which we had record sales of over $11 billion which reflects 18% growth year-over-year. Record operational profit of $2.7 billion, record adjusted net income of $2.4 billion and record adjusted EPS of $2.86 exceeding our most recently updated EPS guidance of $2.79 to $2.85.

We also had record cash flow from operations of $3.2 billion and record free cash flow of $2.2 billion. I would also like to mention that even after we spent approximately $3 billion of our own cash for the acquisition of Barr, we ended the year in a very strong cash position with over $2 billion of cash in hand ready to be deployed for [Group] Financial and growth purposes.

Our record breaking results in 2008 were driven by contribution from across our company. In the US, we had a record number of Paragraph IV product launches in 2008, including those of Lamotrigine, Budesonide and Risperidone. These products like many of our launches last year were based on Teva's own API and were brought to market in a very timely way, thanks to the nearly seamless combination between API, legal, R&D, supply chain, operations and many other divisions of our company.

In 2008, we expanded our leading market share in the US among all pharmaceutical companies, both generic and brand, to 16.4% of total prescriptions. Among generic companies, Teva leads with 24% of total prescription. 2008 was also a good year for our European business where sales grew by 13% backed by strong euro throughout most of the year. And Eyal will give more details on the precise effect of currencies.

As you know, 2008 was a turbulent year in the European market and we found in each of the countries we are operating, different challenges and opportunities. In France, for example, we are outperforming the markets and nicely increased our market share during 2008. In Spain, one of our high priority countries, we launched 30 new products and significantly increased our market share through the successful integration of Bentley Pharmaceuticals.

We also saw some unfavorable effect of the changes in Europe, especially the nature of the tenders in Germany and the Netherlands. But I am pleased to say that we were able to a large extent, overcome these hurdles winning 20% of the value of the AOK tender in Germany and in the Netherlands managing to increase our leading market share to 34%.

Our business in Europe is already substantial and our presence and leadership in this critical region continued to grow during 2008. We launched over 125 new products in the top five European market including 30 products in the UK, our leading European market.

We are also very excited about the ways in which Barr or actually Pliva's business will enable us to grow in Europe, especially in Poland and Germany. In Poland, the combined company will become the number three player in the generics market. In Germany, the combined portfolio of the two companies will allow us to become a top five player.

I would also just like to mention that as part of our long-term strategy, we increased our R&D efforts in the EU in 2008 enabling us to more than double our number of submissions. This will of course be a major growth engine for us in the years to come.

Overall, we remain very optimistic about the future of generics in Europe, a market with the population of nearly half a billion with relatively low generic penetration and with government and other players coming under increasing pressure to lower the cost of Healthcare.

2008 was also an excellent year for our international business, where sales were up by 28% over 2007, driven by especially strong results in Latin America where sales were up 20%, and in Russia where sales grew by 75%.

Turning now to our respiratory business; 2008 was a record year for sales of our inhalers. As the US conversion from CFC to HFA-based inhalers accelerated and reached completion during Q4, ProAir ended the year with a market share of 59% of the total albuterol market in the US.

2008 was an outstanding and exciting year for Teva's innovative business. Let me begin with Copaxone. In 2008, Copaxone became the world's number one therapy in terms of net sales for the treatment of MS and it remains the leader. Copaxone enjoyed record breaking global in-market sales of $2.3 billion with growth of 32%. In the US, in-market sales increased by 26%, outside the US in-market sales increased by an extraordinary 43%.

Copaxone also led the market in the US, both new and total prescriptions. In the US, it grew by 10.5% year-over-year in terms of total prescriptions. Copaxone continues to outpace the market growth and we expect it to remain the leading therapy for MS and continue to grow.

And as we look towards the future of our MS franchise, I am also very pleased to announce that the FDA has granted our request for Fast Track designation of Oral Laquinimod for the treatment of MS which may mean that this product's time to market may be significantly shortened.

This was also an excellent year for our second innovative product Azilect, sales of which rose 46% during 2008. The promising result of several studies of Azilect during the year have also made us very optimistic about Azilect's future. As you will recall, the result of the ADAGIO and [inaudible] studies may lead to Azilect's label being modified and allow it to be more broadly prescribed. We have submitted the results to the [impairment] study to the FDA and expect to finalize the submission of the ADAGIO study in the first half of 2009.

To conclude my review of our performance during the year, I would like to mention that we made a major effort during 2008 to increase efficiency, helping us to improve our performance when it comes to expenses, despite our increased R&D spends. Our ability to respond quickly and with agility is a great advantage for us as we work to adapt ourselves to current market conditions and further improve our competitiveness.

2008 was also a year of a major strategic achievement for Teva, and I would like to share with you just some highlights of the progress we have made recently towards realizing our long-term strategic goals.

And I have said on numerous occasions, we believe biogeneric is both the next wave of technology and the next wave of generics. And we intend to become a leading player in this field. Leadership in biogeneric is indeed one of the pillars of our long-term strategic goals and we achieved a milestone in 2008 with the launch in Europe of our first biogeneric product, Tevagrastim.

We also made significant stride in building our biogeneric knowledge base, capabilities and infrastructure. One of our important strategic acquisitions during the year was CoGenesys, a leader in cutting-edge technologies in biotechnologies. In less than a month ago, we took a huge strategic step in accelerating the pace of our biogenerics activity by entering into a joint-venture with Lonza, a Swiss company that is best-in-class in the development and manufacturing of biologics.

We believe that Lonza's expertise combined with Teva's global experience in brining drugs to market, puts us in the best position of any company in the pharma industry to capture the opportunities and attain the leading position in biogeneric.

This joint-venture will provide us with outstanding infrastructure, infrastructure that would otherwise require great investment of both cash and time to build. This way we will focus on the largest and most important biologics, products which represent most of the current biopharmaceutical market, value of $30 billion. We expect to begin to reap the fruits of the joint-venture with Lonza in 2014; we anticipate seeing the first fruit of our other investments in biogenerics at the beginning of 2013.

In 2008, we also made excellent progress on expanding our geographical footprint and accelerating our leadership in key markets. As you will recall, we entered into a strategic partnership with the Kowa Company to create a leading generic pharmaceutical company in Japan. The company has begun operation, and we expect that it will reach sales of $1 billion by 2016.

We have been receiving extremely positive responses from both the government and the market to our new Japanese initiative and we are very excited about Teva's opportunities in this important market.

And as I mentioned earlier, our acquisition of Bentley provides us with firm platform for establishing leadership in Spain an important market with relatively low generic penetration. And of course, the most important strategic development of this past year was the acquisition of Barr. We are very pleased to have closed this deal at the end of 2008 as originally planned, despite the massive changes that occurred in the market between the time we signed the definitive agreement and the closing.

And now I am pleased to report that we are making excellent progress on the integration. The more we learn about Barr's business, the more excited we are about the synergies and the strategic advantages that this combination will create.

As you will recall, when we announced the acquisition, we told you that we are expected to see cost synergies at the end of the third year totaling $300 million. We are now targeting over $400 million in the third year.

Furthermore, we now expect the acquisition to become accretive to GAAP earnings in the third quarter of this year, three quarters after closing rather than during the first quarter as we originally announced.

And now I would like to provide guidance for 2009.

We expect our sales in 2009 to be between $14.1 billion and $14.6 billion. It is important to bear in mind that in this uncertain economic and foreign exchange environment, exchange rates have strong impact on our revenues.

The numbers I just provided are, of course, based on current exchange rates. Just for the sake of comparison, if we were to project our 2009 sales according to 2008 exchange rates, they would be in the range of [$15.16] billion to $15.65 billion. And as for earning per share, we expect EPS in the range of $2.85 to $3.05.

As you can see, we expect 2009 to be a great year, I would like to mention that because we are speeding up our integration above, we expect to see most of the integration expenses in the first, and to a lesser extent the second quarter, a period when we will, of course, not yet be realizing synergies from the acquisition. In addition, we expect this to be a back-end loaded year in terms of product launches. The combination of these two factors creates a somewhat unbalanced year and we expect to see sequential improvement over the course of the year.

2009 is also building momentum for a great 2010. We are not going to provide guidance for 2010, but our initial projection indicates that EPS will increase by 30% to 35%, over our 2009 projected EPS.

And now just one more note about the guidance. In order to enhance investors' overall understanding of the company's past financial performance and prospects for the future, we have decided to make an additional adjustment to our non-GAAP earnings to reflect the exclusion of amortization of the intangible assets what is commonly referred to as cash EPS.

In a few moments, Eyal will give you a detailed explanation of the new non-GAAP presentation which we will be using going forward. And he will also provide you with the necessary details to reconcile between the two presentations.

And now I will turn the call over to Eyal. Eyal?

Eyal Desheh

Thank you, Shlomo, and good day to everyone. I hope you have had an opportunity to review the press release we issued earlier today. This was another strong quarter for Teva ending an exceptional year.

I would like to take the next few minutes to review with you the results in detail. Before I delve into the numbers, I would like to note briefly that we are once again presenting GAAP and non-GAAP results for the quarter and full-year of 2008 inline with the format we used in the past.

For Q4 2008, we excluded the following items from our GAAP results, $992 million of in-process R&D in connection with the acquisition of Barr. $272 million related to the impairment of financial assets primarily option rate security, and $107 million related to the impairment of intangibles and other assets primarily in connection with product rights acquired through our acquisition of Sicor, and $17 million representing the net expense in connection with few legal settlements in the quarter. $75 million paid out and $58 million received. In addition, the related tax effect of $66 million.

As indicated in the past we present non-GAAP figures to show how management and our Board look at our financial results. As Shlomo mentioned, we had another quarter of record revenues with more than $2.8 billion in sales, an increase of 11% compared to Q4 last year. Excluding the items detailed above, non-GAAP net income grew by 11% to $634 million in Q4, and non-GAAP earnings per share was up 10% to $0.76.

On a GAAP basis and as a result of the above mentioned items, we recorded a net quarterly loss of $688 million and a loss of $0.88 per share on a per share basis. For the full-year of 2008, sales grew by 18% to $11.1 billion; non-GAAP net income grew 22% to $2.4 billion and non-GAAP earnings per share was up 20% to $2.86.

Without excluding all the large charges I just described as well as some other charges we discussed in previous quarter, such as the in-process R&D relating to our CoGenesys acquisition. On a full-year GAAP net income was $635 million and full-year GAAP earning per share was $0.78.

Before going into some more details, let me highlight two major elements affecting our results this quarter. Foreign exchange differences in our US distribution of Copaxone. Foreign exchange differences played a major role throughout the year and most of this quarter, impacting sales and profits as well as our balance sheet.

Unlike the first three quarters in 2008, in Q4, foreign currency differences adversely affected sales by approximately 5% or $130 million as the dollar strengthened against mosst foreign currency, primarily the British pound, the euro, the Hungarian forint, the Canadian dollar, and Latin America currency compared to the fourth quarter of 2007.

Foreign currencies also had a $28 million adverse impact on operating income, primarily resulting from the strengthening of the US dollar relative to the British pound and the euro on one hand and strengthening of the Israeli shekel relative to the dollar on the other hand.

For the full-year, foreign exchange differences, compared to 2007 rates had a positive impact of $227 million on sale, but a negative impact of $65 million on operating income.

As in the past three quarters, the change we made in the distribution of Copaxone in North America increased sales this quarter compared to Q4 last year by $181 million and was practically neutral to operating income.

Let me now review of our main business units. Pharmaceutical sales in North America, which includes sales of generics, Copaxone and Azilect and our respiratory products grew by 16% over the fourth quarter last year, and for the full-year grew by 19%.

The growth of Copaxone sales and the successful launch of Lamotrigine, Bupropion 150 milligram, risperidone and the Budesonide as well as strong sales of Pantoprazole and Amlodipine, Benazepril launched last year contributed to the 2008 results.

Pharmaceutical sales in Europe in dollar terms grew by 1% compared to Q4 2007, as these sales were the most negatively affected by the strengthening of the US dollars in recent months. Net inflow of foreign exchange impact, pharmaceutical sales in Europe in the local currencies grew by 14% this quarter. For the full-year, pharmaceutical sales in Europe increased by 13% reaching $2.8 billion. In local currency, sales in Europe grew by 6% for the year.

International pharmaceuticals sales grew by 13% over Q4 last year. Our international sales continue to grow mainly due to the strong sales across our main geographies, Latin America, Israel and Russia. In local currencies, pharmaceutical sales in our international market grew by 19%. For the full-year, international pharmaceutical sales increased by 28% compared with 2007 and in local currencies, sales were up by 23%.

Copaxone, as Shlomo said, had a record quarter and year. Global in-market sales totaled $595 million. This is a 37% increase over the comparable quarter for the world's leading MS treatment.

For the full-year of 2008, global in-market sales of Copaxone increased by 33% to $2.3 billion with US in-market sales increasing by 26% to reach $1.4 billion and non-US sales increasing by 43% to $884 million. Two-third of the growth in the US Copaxone in-market sales was driven by price increase, while one-third of the growth was driven by volume increase. In Europe and the international markets, most of the growth was driven by volume increase.

Azilect had both a good quarter and a year in which it continued to gain market awareness and market penetration. Although, starting from a relatively small base, in-market sales grew by 46% for the year and reached a level of $51 million in the fourth quarter and $175 million in 2008.

Our global branded respiratory business, which is included in the North America, European and International sales figures had sales of $259 million in Q4, up 37%, main contribution came from the increase in the sales of ProAir in the US. Annual respiratory sales reached $778 million in 2008 compared to $742 million in 2007. These results do not include the Budesonide, which is included in our generic business.

Gross profit margin was 56.1% in the reported quarter compared with 52.3% in the comparable quarter of 2007. The improvement in gross profit margin is attributable to many products of our business, higher Copaxone sales partially resulting from the fact that we now record a 100% of the Copaxone sales in North America, higher respiratory product sale, especially ProAir and a better generic product mix. Gross profit margin for the full-year of 2008 was 53.9%.

Net R&D expenses reached $215 million or 7.5% of sales, up 28% compared to Q4 last year. In 2008, we invested a total of $786 million in R&D, which was 7.1% of sales. This increased investment reflects our strategic goal to double R&D output. Approximately 40% of R&D investment in 2008 was in generic and 40% beyond generic initiative, innovative products, respiratory and biogeneric.

As you can see in our earnings release issued this morning, starting this quarter and in order to improve data transparency, we will break out our SG&A expenses into two parts; sales and marketing and G&A.

Sales and marketing expenses totaled $498 million in the quarter or 17% of sales compared to 14% of sales in Q4 '07. The higher sales and marketing is in line with our plan and resulted primarily from the termination of our distribution agreement with Sanofi-aventis regarding Copaxone in North America as of March 31, 2008.

The net impact of the termination of the distribution agreement on the sales and marketing totaled $178 million in the fourth quarter. G&A expenses totaled $182 million, or 6% of sales. For the year, G&A expenses grew by 5% and were also 6% of sales as compared to 7% of sales in 2007. This reduction of G&A as a percentage of sales is part of an expense control initiative that we took. This has enabled us to increase R&D spending while maintaining our high operating margin. We recorded $296 million of financial expense in our Q4 2008 GAAP results, compared with only $3 million of financial expenses in the comparable quarter in 2007.

This amount includes a $247 million charge against our portfolio of auction rate security. This charge was calculated based on our internally developed model as well as work done by an outside evaluation expert. The principle amount of our auction rate security bond portfolio is now $450 million including $13 million we received through the acquisition of Barr. Whereas the net amount at which we now carry this portfolio as of December 31, 2008 stands at $98 million, approximately a half of this amount represents auction rate security based on municipal bonds and government guaranteed student loans.

The December 31st balance is after giving effect to a cumulative total of $343 million of P&L charge and a cumulative total of $9 million provided in our balance sheet under other comprehensive income. Let me also remind you that last quarter we recorded income of $100 million received from a financial institution in connection with our auction rate security portfolio. We also recorded in this quarter a $25 million charge resulting from a decline in the market value of certain equity investments.

The tax rate for the full-year of 2008 applicable to our non-GAAP results was 10% compared with a rate of 17% for 2007. Accordingly, the tax rate provided for the fourth quarter reflects just over 6% of non-GAAP pre-tax income. As we have indicated earlier this year, the reduction in the effective rates from 17% in the prior year to 10% in 2008 mainly reflects product launches in the US during 2008 which to a large extent were developed and produced in Israel as opposed to a different mix in 2007. The 2008 tax rate in our GAAP figure was 22% reflecting $1.4 billion in-process R&D expenses for the year which are not tax deductible.

Now let’s have a look at our cash flow. We had a record quarter with cash generated from operations amounting to $969 million compared to $545 million in Q4 last year. Our free cash flow after capital expenses of $179 million net and dividend of approximately $90 million amounted to $700 million, also a record. Total SR&A at December 31, 2008 amounted to $2.7 billion, an increase of almost $0.5 billion from September 2008.

Approximately, $400 million of this increase is coming from Barr, about 96% of the total reserves are from the United States, up $146 million from September 2008, most notably due to the provision for chargeback's for new products. Gross capital expenditures reached $181 million this quarter essentially flat compared to $178 million in previous quarter.

CapEx in 2008 totaled $681 million mainly reflecting previously discussed planned capacity expansion to support our strategic growth plan.

Our financial leverage measured as debt-to-debt plus equity at December 31, 2008 increased to 34% from 24%, following the additional debt incurred in connection with Barr acquisition. We expect the financial leverage to return to the pre-Barr acquisition level by the end of 2009.

Now about our dividend; yesterday, Teva's Board approved the fourth quarter dividend amounting to approximately $127 million. On a per share basis, our dividend which is declared in Israeli shekel was increased by 33% from 0.45 shekel to 0.63 shekel per share.

Based on the rate exchange on February 16, which was yesterday of the shekel to the US dollar, this translates into approximately $0.15 per share per quarter. As Shlomo indicated, we now expect to reach $400 million in cost synergies from the Barr acquisition by the end of 2011, up from $300 million we initially estimated. In our presentation tomorrow, we will provide additional color on the Barr synergies.

Before opening the call for question, I would like to provide additional detail on our guidance for 2009 and on how we intend to report our numbers going forward.

As all of you know, until and including today, Teva reported non-GAAP results by adjusting for certain items including acquisition related costs such as inventory step-up and in-process R&D as well as impairment of financial assets and legal settlement.

Many of you requested, so we considered providing non-GAAP figures in which we also exclude the amortization of our acquired intangible assets. Given the spec, following the Barr acquisition, our amortization of acquired intangible assets have reached a material amount. And the fact that these write-off will fluctuate from one quarter to another, we decided that we would accommodate your request in our non-GAAP disclosure going forward, we will exclude amortization of intangible assets from our quarterly and annual results.

In addition to the amortization of acquired intangible assets and presenting its non-GAAP measures, Teva will continue to exclude the same items already mentioned as we did in the past. In order to provide you some clarity on reconciling our future non-GAAP data with our GAAP financial, and to allow you to see the impact of the exclusion in our guidance for 2009, let me highlight for you the items that we expect to exclude in 2009 in presenting our non-GAAP results.

Inventory step-up in the amount of approximately $270 million divided mostly over the first and the second quarter of 2009, and amortization of acquired intangible assets in the amount of approximately $470 million; possible restructuring expenses resulting from the Barr acquisition and the offsetting tax effect of approximately $250 million.

I would now like to reiterate guidance for 2009. Shlomo provided EPS guidance of $2.85 to $3.05. These numbers compare with what we provided as our guidance in the past, and reported our results in 2008.

Commencing 2009, we will also exclude amortization which has been included in our cost of goods sold and sales and marketing expenses. We therefore expect non-GAAP earnings per share to be in the range of $3.20 to $3.40 excluding these items. After the call, we will issue a detailed press release regarding our guidance.

2009 is expected to be backend loaded year with sequential improvements for one quarter to another. Launch of new generic products and acceleration of cost synergies resulting from the Barr integration, which are expected later in the year will influence the development of Teva.

Let me share with you a few more data points regarding 2009. Our gross profit margin, and this is based on the presentation of our new guidance format, the non-GAAP guidance format. Our gross profit margin is expected to average between 55% to 58%. This number did not include inventory step up of approximately $270 million and amortization of approximately $360 million. R&D expenses would be between 7% and 7.5% of net sales.

Sales and marketing will increase as percentage of sales compared to 2008 due to the fact that we will have four full quarters of payments to Sanofi in the US. And in 2008, we only had three quarters. But keep in mind that starting April 2010, these payments will end all together. We expect sales and marketing to be between 16% and 18% of sales. This number does not include amortization of approximately $120 million.

G&A as a percentage of sales for the year is expected to be just under 6% in 2009. Finance expenses are expected to be between $200 million and $250 million. Tax rate on our non-GAAP number is expected to be at the high teens, and we believe that a fully diluted number of shares in 2009 should be approximately 915 million shares.

We also have to add back about $50 million for earnings per share calculation, resulting from the treatment of convertible debentures. The increase in interest expenses from convertible debentures is included in the finance expenses which I mentioned before.

It is important to mention that these ranges are our current best estimates and actual results could vary based on business conditions, exchange rates and other elements.

Just to be clear, in 2008, non-GAAP results we issued today and discussed on this call, do not exclude the amortization of intangible assets from our previous acquisitions. However, going forward, we will exclude amortization of intangible assets from all previous acquisitions from our results.

In order to facilitate a better comparison between our future and former presentation of non-GAAP results, you will find on our website, a reconciliation table, covering quarterly and annual results from 2006 to 2008, showing how the exclusion of amortization of intangible assets will have affected our results for these periods.

Thank you all for your time and attention today. And now, we will be glad to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from Randall Stanicky with Goldman Sachs. Please state your question.

Randall Stanicky - Goldman Sachs

Great, thanks guys for taking my questions. A couple of brief ones, Eyal, just to clarify, does the 320 to 340 range, does that exclude all of Teva's amortization or just specific parts of that?

Eyal Desheh

Yeah, that includes all amortization including the ones that relates to acquisition made in the past. You will see we are providing all the details for comparison on our website a little latter after the end of the call. We had about $140 million of amortization in 2008 from prior acquisition and Barr, of course, is adding a significant number. But that excludes everything.

Randall Stanicky - Goldman Sachs

Great and then going forward, when you update guidance that's the number we should look for to be updated, is that correct?

Eyal Desheh

Yes, absolutely.

Randall Stanicky - Goldman Sachs

Okay, great. And then last question, in terms of the specific line items of guidance that you gave for 2009, I guess I did not hear if you gave R&D. But the question is, should we expect any meaningful quarterly variation around those ranges, is there anything that we should be thinking about?

Eyal Desheh

Yes, of course, this is not a triumph and the business is going to vary from one quarter to another, both level of expenses and level of revenues. As we said, the year is going to improve from one quarter to another. Both in terms of margins and in terms of results, the margins that I gave you are average for the year but its going to vary.

Randall Stanicky - Goldman Sachs

And did you give the R&D?

Eyal Desheh

The R&D ranges between 7% to 7.5% of sales.

Randall Stanicky - Goldman Sachs

Perfect. Thank you.

Eyal Desheh

You're welcome.

Operator

Our next question comes from Greg Gilbert with Banc of America/Merrill Lynch. Please state your question

Greg Gilbert - Banc of America/Merrill Lynch

Thank you. First the US question for Bill, whether or not you are building it in your model, can you discuss the potential for the pricing environment to improve in '09 versus '08 in terms of the typical shrinkage rate on the base business you have been seeing and perhaps comment on some of those factors. And then I have one for Gerard if he is on the call?

Bill Marth

Thanks for the question, Greg. Right now we have seen pricing remain stable for, I feel like I have been saying this for a long time. I guess I have, for the last two years. We have not really changed our model at all, I do not anticipate that at this time. And we think that taking cautious approach is the right thing to do.

Greg Gilbert - Banc of America/Merrill Lynch

In terms of Europe can you talk about growth on constant currency excluding Bentley, and then Gerard, perhaps you can talk about what you see as an exciting growth opportunity in Europe in '09 perhaps the most exciting versus the biggest challenge that you see in the European climate in '09. Thanks.

Shlomo Yanai

Gerard.

Gerard Van Odijk

Yes, Shlomo.

Shlomo Yanai

Gerard can you take this one.

Gerard Van Odijk

Yes, I will. Thank you, Greg. First of all I think it's a very mixed picture across Europe. And if you take UK, the underlying growth is coming back. If you remember, '08 was the year in which the government took out 400 million sterling out of the system which all companies were seeking compensation for that; we did very well in that circumstances. I believe that many if not all of our competitors. So that is not going to happen in '08 in '09 again. So it means that growth in '09 we will do better versus '08.

The second good news I think should be coming from Germany, is the AOK will play out as we are currently expecting it to play out in terms of the tender, we should be able to reap the benefits of our performance offering in that tender. In combination, of course, the factors we should see from bringing together the Pliva AWD business bringing them together with the Teva business in Germany.

Thirdly, France is looking very hopeful. We have been extremely good and successful in the last year in terms of our competitiveness. We have turned around that business to be one of the most competitive element of our franchise in Europe and we are doing very well there. We catch up on [Sando]. We are number three in the market. I am sure they will not sit on it, so it will continue to be a very tough market but we are doing well in beating the marketplace there.

Spain, with Bentley we have almost 10% market share now. We have the answer to all of the different dynamics in the different parts of the Spanish market. We expect the Spanish market to continue to grow in the next few years in the double-digit, low double-digit or mid double-digit, so between 10% and 15% and maybe a little bit above that depending on who you are.

It's a little bit high, or a little bit lower, but their tariff is very attractive and I think with our portfolio of products, launches and also with our commercial offerings that are adjusted to the part of the country that you are in in Spain, we believe we have exactly the right answer to the opportunities in Spain.

And then finally the one that is a bit uncertain is Italy. Italy is a marketplace in which we did well this year. Although it was a very tough environment, we have seen a low penetration of generics. We have seen a very competitive atmosphere at the retail level. I believe Teva within the circumstances did very well. We used our strong position in the marketplace with our partners, with our portfolio, but it hasn’t been moving as much as we would have hoped for, and I think that's true for the whole generics market.

I think the government is not clear in its policy towards generics, and that means that the market is not growing as much as it could be. So, that's the marketplace that I don’t expect too much growth from this year. The other four I explained.

Another interesting one I think we should mention here is Poland. With the acquisition of Pliva business in Poland, Teva is number three in the generics market and number six in the total Polish market, we are a serious player, we have got a wonderful breadth and depth of portfolio of products, we got a very strong commercial set-up there and lineup of people on the ground as well as in the marketing groups.

We've got OTC business there, and we got the factories, we've got a very, I would say nice range of access that should allow us to make that business drive. And I think given the pressure in the economy, there will be a trend towards generic in general and that's part of the world and if we are right in line we should be able to benefit from that.

Shlomo Yanai

Yes, just to answer the question about the contribution of Bentley, from the 14% growth in the quarter in the European currency, Bentley contributed approximately 3%.

Greg Gilbert - Banc of America/Merrill Lynch

Thanks for the clarification.

Operator

Our next question comes from Ronny Gal with Bernstein. Please state your question.

Ronny Gal - Bernstein

Good morning folks. Couple of them, First, regarding R&D percentage, I think you mentioned it will stay somewhere between 7% and 7.5% of revenue. I was kind of wondering if you think it will remain in that way or are we are looking to raise it overtime? I am kind of thinking with the percentage of revenue you are trying to generate from innovative businesses, you should conceivably move more towards a branded business like investment in R&D, and then I got a follow-on for Bill.

Shlomo Yanai

Ronny, Shlomo, let me first answer you on where we are heading with the R&D expenses. As you may recall, when we launched the 20-20 strategy, we said that for a couple of years, we are gong to increase our R&D expenses in order to enhance our product portfolio and to capture the advantages that we found in that area.

So, it's not going to stay there for, I mean this level of expenditure will not be there forever. It's part of the 2X initiative for the coming year and maybe for another year, and then I can say that you probably will see us getting back to the 6.8%, 7%.

Ronny Gal - Bernstein

I am actually asking why it's not going the other way, Shlomo. I was wondering why it's not going more to a 10%. Given that a company which has almost derived half of its profit from innovative products, since you will be spending more on branded R&D or maybe this simply does not include acquisition that you intend to make.

Shlomo Yanai

No, it's about, first of all, the major of our business is generics. But in the innovative arena, we may increase some expenditure, depends on the level of the success of our R&D there. But as we see it now, and definitely if we will have to increase that, that means that we are in a good shape because it means that we are having some successful achievements, then we will stay in this level of expenditures.

Eyal Desheh

Ronny, if I can add something, you can very easily calculate them. I am sure you have done this already that we plan to spend more than $1 billion in R&D next year or this year, actually in 2009. The mix probably, I mentioned before, there was 60% generics and 40% all the rest. We will probably see more going into the beyond generic arena as part of this $1 billion. So, the mix is also going to change internally. And of course, this is with Barr and there are plenty of synergies over there.

Shlomo Yanai

Bill, do you want to add something?

Bill Marth

Yes, the only other thing I would say is again that level of the spending will depend on the opportunities as we have said, and a lot of that depends on biologics as well. So we will be funding that.

Ronny Gal - Bernstein

Okay, thanks. Bill, a couple of quick ones for you. If you can quickly review for us the Imitrex situation and if you can care to make a comment about the issue of the 30 month stay for the recent released antibiotic, I don't know what your thinking is on this matter?

Bill Marth

Well let's take the first one with respect to Sumatriptan. Sumatriptan, as you know, we launched last week. We were first to file as we won two patents and Ranbaxy just filed one already in the market. We launched with a ready deal with the four compliment of all strengths, we launched with all strengths. Ranbaxy launched with a single strength at 100 milligram. So, we are shipping our products, we are gaining share, we feel good. Right now, we are targeting roughly 40%, it should transition up to about 40% share and we will see where it takes us from there. The second piece, the 30 months stay on the antibiotics.

Ronny Gal - Bernstein

Yes.

Bill Marth

And what is the question?

Ronny Gal - Bernstein

Question is, if you can just give us what your lawyers are telling you about whether those products are eligible for 30 months stay or will you be able to come in earlier than that?

Bill Marth

I think it's still unclear at this point in time.

Ronny Gal - Bernstein

Okay. And one last question's a request, if you wouldn't mind putting on line the Barr numbers for fourth quarter just to ease our ability to transition the numbers forward?

Shlomo Yanai

The Barr number?

Ronny Gal - Bernstein

Yes.

Shlomo Yanai

I do not think we are going to put it online, Barr does not exist anymore as a public company and I can tell you that the numbers are more or less in line with their forecast. But I do not think I will detail you on that.

Ronny Gal - Bernstein

Okay, thank you.

Operator

Thank you. And next question comes from Ken Cacciatore with Cowen and Company. Please state your question.

Ken Cacciatore - Cowen and Company

Hi good morning, thanks guys. Question, Shlomo if you could repeat what your 2010 growth assumption was and I believe that was off of the GAAP figure, the 2.85 to 3.05, if you could let us know if that also was applicable to the cash figure and falling on that is the, can you talk to us about the amortization levels in 2010, should we assume that they are relatively constant or do they go down in 2010. And then I have a question for Bill as well?

Shlomo Yanai

Well first of all I gave the numbers, of course based on the old methodology that you used. But the percentage are the same percentage. So if you wish to do it the old way or the new way, you should just add 30% to 35% to our 2009 expected results.

Ken Cacciatore - Cowen and Company

Okay so roughly a 3.70 to 4.10 without holding you the numbers, are we working the math pretty much right on a GAAP basis.

Shlomo Yanai

Okay, if you are doing the math the right way ,you will be there probably.

Ken Cacciatore - Cowen and Company

Okay thanks. And Bill just on the US line, without getting into our specific numbers, versus yours, it looked like it was a little weaker than we would have thought with the Pulmicort booked, and before you answer that. I also want to get this into, say Eyal, if you just take the Teva standalone numbers for 2008 and add roughly a flat Barr in 2008, you get to the low end of that $14.1 billion guidance. Are you modeling this conservative or is the currency really took a pretty significant hit. Thank you?

Shlomo Yanai

Okay, Eyal, you want to take it first.

Eyal Desheh

I could tell you, I think you heard Shlomo, one of the major impact is the foreign currency? We have to remember what happened between the 2008 average foreign exchange rate and the ones that we expect today and we are not trying to speculate where foreign currencies are headed, we are taking the current rate $1.28 per year, for example, compared to almost $1.5 in 2008. That has an impact on top line but as you have seen that the bottom line is not suffering from that impact.

Foreign currencies change their directions, I will be very happy to take the addition to the sales. But this is the major impact. In 2008, foreign exchange rates, our sales forecast would exceed $15 billion from $15.1 billion to $15.6 billion.

Ken Cacciatore - Cowen and Company

Great.

Eyal Desheh

But it's all about foreign exchange rate.

Bill Marth

Ken, this is Bill Marth. With respect to your question on Q4 2008 versus Q4 2007, I would make sure your point before we talk specifically about Pulmicort that you remember Q4, 2007 included oxycodone, Welbutrin, and unless you forget there was that launch of Panto that we spent so much time on. So when you look at the two quarters, I think actually the fourth quarter of 2008 was very, very good. That notwithstanding, I believe, the majority of Pulmicort was recognized.

But I would also remind you that on Pulmicort price, don't be too aggressive, because when we launched Pulmicort we did not know that we would be exclusive in that market. We had Barr chasing us and in fact they actually did have some products in the channel.

Shlomo Yanai

Ken, it's Shlomo. Let me just add one more comment on the foreign exchange impact on Teva as we are going into probably a very volatile, or unknown foreign exchange trend. Generally speaking, the foreign exchange would impact more of the top line rather on the bottom line, because there it's market is what it is.

Having said that, when it comes to be a bottom line part of the P&L, then it's both, our managerial efforts to manage it, and to certain degree to compensate by having our business a valid business model, then of course, by other managerial actions that we are taking in order to cope with the current situation. So, even though if you can see kind of a fluctuating top line, we believe that we would be able to absorb part of it and to manage the bottom line.

Operator

Our next question comes from Chris Schott with JP Morgan. Please state your question.

Chris Schott - JP Morgan

Great, thank you. On the M&A front, you've obviously just concluded a deal that involved adding additional leverage. Can you just comment on your interest in continued M&A especially with several generic assets potentially available and just maybe update us on your current M&A priorities. Then I have a couple of questions for Bill.

Shlomo Yanai

M&A by definition is part of Teva's strategy, but right now we are focusing on digesting Barr. We believe that this is the major effort for Teva for 2009. And having said that of course, we are scrutinizing all opportunities. And as we said, we probably are the most equipped company to capture opportunity if we come to the conclusion that this is the right opportunity and the right time.

Chris Schott - JP Morgan

Great, thanks. And just couple of quick questions, the HFA Albuterol market with ProAir, just the expectations of this market heading into 2009, that we are going to pass the conversion phase. How do we think about pricing in that environment? And then just finally quickly, Lotrel, does your guidance assume additional generic competitors there in 2009? Thanks.

Shlomo Yanai

Bill?

Bill Marth

Chris, thanks for the question. The HFA market as we said, we have got about 59% share right now. We are not necessarily projecting that we are going to continue to hold down that amount of share through the totality of 2009.

It's still great product, and it's converting; almost all CFC is gone and there are still few traces out there, but by and large it should be gone, so we see that’s going to smooth out. We did take a price increase as you remember in November, and now we have seen the competition has taken another price increase.

So, we are just keeping an eye on it. Right now we feel comfortable where it is, but obviously it's a completely branded market in our eyes, and will be subject to price increases from time-to-time.

The next question was on Lotrel, and right now you know that there are several players that may enter in the 30 month date somewhere around the March-April timeframe. One has to anticipate that there is potential for competition, but then of course, Sandos may bring some action, we will have to wait and see.

Chris Schott - JP Morgan

Okay

Operator

Thank you. Ladies and gentlemen due to time consideration please limit yourself to one question and one follow-up. Our next question comes from David Buck with Buckingham Research Associates. Please state your question.

David Buck - Buckingham Research Associates

Yes, thanks. Two quick questions, first on the international and particularly the Russian market, you talked about the outlook you are expecting in 2009 given the currency volatility we have seen, and what efforts you are making to protect that business?

And for Bill, a couple of quick US questions. First do you expect to have a self-manufactured generic Adderall XR in April and any update on Pantoprazole litigation? Thanks.

Shlomo Yanai

Hi, this is Shlomo. As far as your question about Russia, and I would, with your permission extend my answer not only for Russia, but all those countries that are facing a volatile economy situation. We enhanced our cash management policy and actions in this kind of countries. So, if you take Russia, the whole issue of hedging price increase increasing collection, credit policies and these kinds of methods that are used in this uncertain and volatile environment is part of our managerial effort. And we believe that Russia is the major and important country, will overcome this problematic time. But in the meantime when we will do both, we will try to increase our market share and of course protect our revenues.

David Buck - Buckingham Research Associates

Sure. Do you think it can actually be a driver of growth again in 2009 or do you think it goes the other way?

Shlomo Yanai

I believe that we will increase our market share in Russia. I would like to remind you that part of the Pliva acquisition is a substantial business in Russia. It put us among the first ten companies in Russia. And we would like to build our future base there as we see Russia is one of the future growth engines for the geography part of Teva.

Eyal Desheh

David with respect to Adderall XR, what I can tell you is we will be launching the product in April of 2009 and whether it would be our product or not, it would depend on whether you get an approval, but that notwithstanding we will be launching the product in April of 2009.

David Buck - Buckingham Research Associates

Okay. We haven't heard anything, I guess on the citizen petition?

Eyal Desheh

No. We haven't heard anything on the citizens' petition. And then the second part on Pantoprazole, we are pretty much where we were at the last time you and I spoke, that we are still waiting for the June 3rd decision and there has been no movement there. We don't anticipate a trial until either late 2009, or significantly into 2010.

David Buck - Buckingham Research Associates

Okay. Great.

Operator

Our next question comes from Rich Silver with Barclays Capital. Please state your question.

Rich Silver - Barclays Capitals

Yes. Just on the cost synergies, this $400 million in the third year, is that the run rate by the end? And the second question is the breakdown of the synergies, any further detail on that?

Eyal Desheh

Hi, Rich, it's Eyal. Regarding 400, we upped the number from an initial preliminary estimate of 300, this is by the end of 2011 of course, it has to build up. The products on the costs of sales and production streamlining of production facility that takes the longest, and it will take time. Yes, we do see some expenses leaving the system a little earlier and the numbers to be bigger than what we initially thought. It's clearly going to improve as we go along. With regards to some more details, I think I mentioned this in my part before, everybody on the line has been invited of course, to join us tomorrow, in New York, we will provide some more detail as to in what areas this is happening.

Rich Silver - Barclays Capitals

Okay. Just one more, which is on foreign exchange, just so I better understand. You talked about 2010, any assumptions, but for 2009, is the assumption constant currency, or are you are actually forecasting some change versus where we finished '08?

Eyal Desheh

Not sure, I followed the question.

Rich Silver - Barclays Capitals

Is the forecast based on constant currency?

Eyal Desheh

Yes, the answer is yes. The 2010 forecast?

Rich Silver - Barclays Capitals

No 2009.

Eyal Desheh

2009 forecast is based on the current exchange rate and some more conservative assumptions and part of the riskier countries we mentioned, Russia, places where we could expect currency to deteriorate a little further. We are a little extra careful, but by and large it's based on current currencies.

Rich Silver - Barclays Capitals

Thank you.

Operator

Thank you. Our next question comes from Corey Davis with Natexis. Please state your question.

Corey Davis - Natexis

Thanks very much. I appreciate your clarification on the growth rate for 2010, but I guess that begs the question. For a company of your size that's a pretty incredible growth rate on the bottom-line. So, where is the majority of that coming from? Is it mostly cost synergies, or is there a big component of revenue growth that you anticipate in 2010 as well?

Eyal Desheh

Okay, it's Eyal. Again without going into detail, we are focusing on '09, but we felt comfortable with 2010, and we probably ought to give it. It is based on basically three major factors. One, remember our agreement to pay royalties to Sanofi-Aventis on Copaxone, and on March 31, 2010. And from April 1, we are no longer paying debt. That’s one component. The other one is that we anticipate 2010 to be a pretty rich year in Paragraph IV and new generic product launches in the US, but also outside of the US. And in 2010, cost synergies on the Barr acquisition are expected to be higher than they were in 2009.

Corey Davis - Natexis

Okay, and then quickly on Lonza, the joint venture that you have set up, could you elaborate a little bit more on the details, is this a true 50-50 economic split cost and revenues of profits, and down the line what percentage of your biogeneric, bio-similar products will you have to split with Lonza versus the 100% economics to Teva?

Shlomo Yanai

Okay. First of all, the Lonza is a 50-50 joint-venture, we show the investment and we show of course, the revenues and the profit. We see it as a very excited joint-venture, as I said in my previous biogenerics future part in the conference.

I believe that this is a very compelling joint-venture. And we are targeting the majority of the big products in the industry for the timeframe of 2014-2016. The potential value of these products in bonded sales right now is about $30 billion. And this is actually where we are heading in this company JV.

Corey Davis - Natexis

Okay, thanks very much.

Operator

Our next question comes from Michael Tong with Wachovia Capital Markets. Please state your question.

Michael Tong - Wachovia Capital Markets

Thanks for taking the questions. The first one I have is with respect to the quarterly progression that you have talked about for '09. In terms of being back-end loaded, if we backed out the inventory step-up that's going to hit you heavy in Q1 and Q2. Are there going to be improvements in the rest of the business, in the back half of the year to account for that, or it's just the renewable of inventory step-up?

Eyal Desheh

I will take the beginning and Bill can add to that. First of all, this is based on backing out inventory step-up or backing out amortization. So it's one of the reasons why we are doing this, not to confuse everybody, this is net of debt.

Basically there are more generic launches in the second half of the year and Q2 than in Q1. And of course, the expense synergy with Barr will strive to be meaningful only in the second half of the year. It takes time to reduce cost, takes time to reduce number of people and we do this as you have seen already in a good fashion. So, for the second half of the year, it's going to benefit both from stronger business and new launches and low expense run rate. Bill, do you want to add anything?

Bill Marth

Yes, Michael, just to add some color to what Eyal said, I think he is absolutely right. We have more launches on the back-end. In 2008, we launched 28 products with approximately $12.5 billion of innovative value. In 2009, we anticipate launching a similar number, but the market value is about $19.5 billion. But, however, if you look at the total potential launches that you have in 2009, you have as many as 38 with a total value of $32 billion or almost 30% of our entire pipeline becomes available to us. So, there is a huge potential for the back half of 2009. And you know, as we have spoken so many times before we risk adjust for this model, but you know, that gives you some clarity on what we are looking at in our risk adjusted model.

Michael Tong - Wachovia Capital Markets

Great. And the second one is actually for Shlomo, about a year ago, when you talked about your five year strategy, I recall that in your view, growth in European business is going to be higher than in the US or North America. Given that you have Barr now, given what you saw in 2008, is that something that you are still seeing now or should we see a more balanced growth going forward?

Shlomo Yanai

I believe that if you net out the foreign exchange, that projection is still intact and is still valid. I believe the potential for growing generics in Europe is there, actually the higher the pressure of the peers on reducing the healthcare cost, you will see more friendly environment for generics. And all in all, case-by-case that is reflecting the European region. My projection in all perspectives and for the long run is there.

Michael Tong - Wachovia Capital Markets

Thanks very much.

Operator

Thank you. Our next question comes from Caius Christoe with Morgan Stanley. Please state your question.

Caius Christoe - Morgan Stanley

Good morning, thanks for answering the questions. Firstly a macro question. Given the tough global economic environment, the government is becoming increasingly interested in pro-generic measures and do you see governments in France and Japan showing more aggressive initiatives in 2009, 2010 to increase generic penetration.

And secondly Bill, how do you see the Fentanyl patch market playing out given the safety concerns of Resliaub patches. Has the FDA communicated at all, if they are ultimately willing to remove the Resliaub patch in the market?

Shlomo Yanai

Let me first take the first part of your question. I do believe that from the strategic point of view, the current world crisis is favoring generics. Again the pressure on government that are struggling with budgets and cost reductions in many areas. One of the most compelling ideas there is to do or to go more for generics. Generics is actually about the affordable drugs and it's about having the same quality for less price. So, what I am saying is that, either it will take a little bit time here and there, and you can see some differences between the reactions of government. I do believe that all in all, the current crisis will accelerate the generic penetration. And just let me give you a simple number regarding the US generics. Every percentage point in the US market for generic means less $7 billion for the patients there. So, you can see how big the potential is to balance budgets and to reduce the cost of healthcare in our current world. Bill?

Bill Marth

Good morning, Caius, and thanks for the question. With respect to Fentanyl, I think given following the prescription gain, people have been asking us where this share was and you see quite a bit of gain in the last few weeks and in fact every week, over the last four weeks you have seen at least a thousand prescription growth.

So, it's coming along quite well, we have gained share we thought we were going to gain and we are doing very well. That said, I have not heard that the FDA is necessarily going to be taking reservoir patches off. Although I got to say that there is a certain amount of customers that found the constant recall.

Caius Christoe - Morgan Stanley

Okay, do you think the FDA is actually potentially looking to have two stable metric supplies in the market before considering transaction?

Bill Marth

I am sure they have been receiving many complaints, and I am sure there is some concern there. How far they are going to go exactly with that, I can't tell you.

Caius Christoe - Morgan Stanley

Okay, thanks Bill.

Bill Marth

Thanks.

Operator

Our next question comes from Elliot Wilbur with Needham & Company. Please state your question.