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Teva Pharmaceutical Industries, (TEVA)

Q2 2006 Earnings Conference Call

August 8, 2006, 8:45 a.m. EST

Executives:

Israel Makov, President and Chief Executive Officer

Moshe Manor, Group vice President, Global Innovative Resources

Dan Suesskind, CFO

William Marth, President & CEO, Teva Pharmaceuticals USA

George Barrett, Group VP, North America, President & CEO, North America

Kevin Mannick, Director Investor Relations

Analysts:

Robert Bonte-Friedheim, Citigroup

Rick Silver, Lehman Brothers

David Woodburne, Prudential Equity Group

Elliott Wilbur, CIBC World Markets

Andrew Foreman, W.R. Hambrandt

Ron Miguel, Sanford Bernstein

Greg Gilbert, Merrill Lynch

Norman Fidel, Alliance Capital

Ken Cacciatore, Cowen & Co

Randall Fenicki, Goldman Sachs

David Buck, Buckingham Research

Operator

Greetings ladies and gentlemen and welcome to the Teva Pharmaceutical Industries Ltd. Second Quarter 2006 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press * and 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Kevin Mannick, North American Director of Investor Relations of Teva Pharmaceuticals Industries. Thank you, you may begin Mr. Mannick.

Kevin Mannick, Director Investor Relations

Thanks a lot Dan. Good morning and good afternoon everyone. Welcome to Teva’s Second Quarter 2006 Earnings Conference Call. We hope you’ve all 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 which is also available on our website. Today, we are joined by Israel Mackoff, President and CEO; Dan Suesskind, Chief Financial Officer; George Barrett, President and CEO of Teva North America; Bill Marth, President & CEO of Teva USA; and Moshe Manor, Vice President, Global Innovative Resources. Israel, George, and Dan will begin by providing an overview of our results. We will then open up the call for a question and answer period.

I’d also like to remind all of you that we will host a special quarterly luncheon tomorrow in New York. For those of you who haven’t received our invitation or have not RSVP’d yet, please call 215-591-8726, and if you’re unable to join us we are conducting a live webcast of the event, which will also be available on our website.

Before we proceed with the call, I’d like to remind everyone that the Safe Harbor language contained in today’s press release also pertains to the this conference call and the webcast. I would now like to turn the call over to Israel Mackoff, our President and CEO, Israel?

Israel Makov, President and Chief Executive Officer

Thank you, Kevin, and thank you all for joining us today as we announced Teva’s results for the second quarter of 2006. From every possible angle and thanks to contribution from all of our business units second quarter 2006 was Teva’s best quarter ever; one, because of financial results, major strategic accomplishment, and tremendous operational achievements. For the first time in our history, we crossed the $2 billion mark in quarterly sales. We reached $2.172 billion. This mark is a milestone for Teva. This quarter also gave us an opportunity to drive significant benefits in our bottom line as our adjusted net income for the quarter exceeded $0.5 billion to reach $541 million, another first to Teva, and we broke records in all our profit margins with an adjusted gross profit margin of 55%, adjusted operating profit margin of 33%, and adjusted net income margin of 25%. Given such numbers, it will come as no surprise to you that we achieved record breaking quarterly sales in all our geographies; North American, Europe, and International.

Of course the highlight of the quarter was our unprecedented launch of simvastatin, the generic version of Zocor. This was the largest product launched in the history of the generics history both in volume and in dollar terms. The tremendous success of this launch demonstrated the capabilities that Teva has developed over many years beginning with a swift integration of the product from IVAX into Teva, the legal strategies we employed to ensure our exclusivity, to the preparation we made in a very short time frame for what would become the largest ever generic launch to satisfying our customers huge demand for the product on the very first day of its launch. You can imagine what kind of logistical operation this entailed. Several dozen truck loads of products rolled out of our premises directly to our customers within the first 24 hours of launch.

Generic penetration in the simvastatin market is the fast that we have ever experienced, already exceeding 72%, and Teva is demonstrating its leadership in the market place once again as our simvastatin has captured over 70% of the generic market for the strength we offer an unprecedented achievement.

In addition to the enormous launch of simvastatin, we had very successful launches in U.S. of pravastatin, finasteride, and a few other smaller products during the quarter. This is probably the time to mention Teva’s leadership position in the U.S. generics grew by 8.9 million prescriptions and 14.9 million total prescriptions in the second quarter. That is about three times the rate of growth of the number two company. This figure suggests that we are not only maintaining but in fact strengthening our leadership position in US generic. In terms of our entire business, both branded and generics, we have made the pharmaceutical industry bigger ahead of our closest competitor by 80 million total prescriptions on an annual basis.

Parallel to the launches in the U.S., we had 38 additional launches spread across nine different markets in Europe. These are relatively small products but every single product launch requires a great deal of operational attention and resources and therefore more than three dozen successful launches in one quarter is an operational feet we can be proud of.

Despite the operational challenges created by so many launches in so many geographies, we were determined to ensure that nothing would slow the process of consolidating IVAX’s supply chain into Teva and in fact we proceeded right on track with hardly any overlapping products remaining in our entire manufacturing network by the end of June. By transferring products to other sides, we have been able to increase efficiency and reduce complexity in our global supply chain. In all, we have so far transferred 160 products from one side to another in North America, Europe, and Israel. We have done all of these despite the fact that our new state of the art plant in Jerusalem which we had expected would be fully operational earlier this year is still idle awaiting FDA inspection.

The bottom line is that with the acquisition of IVAX, we have created a supply chain of efficiency, scale, and geographical spread unprecedented in our industry. Our ability to rationalize and integrate such a complex system at the speed at which we are doing it is I believe another trademark of Teva.

We had a record breaking quarter in Europe as well achieving record sales and adding a cluster of five small countries to our European market since second quarter 2005. In U.K., our second largest generic business, we increased our market share not withstanding continued price erosions and now doubled those of our nearest competitor.

Our combined sales in what we call our international business to those geographies outside North America and Western Europe was extremely strong in the second quarter, reaching $296 million or 10%. IVAX of course was the major contributor to this sales growth.

As we saw in first quarter Israel, our international business is playing an increasing role accounting for 15% of our global pharmaceutical sales, important for us strategically as it provides more geographical balance to our business model and constitutes a significant additional growth engine for Teva.

It was also a good quarter for API – Teva’s Active Pharmaceutical Ingredients. In the second quarter, we achieved the highest level of vertical integration in our history supporting all of our major new product launches. API is another major source of synergies in our integration for IVAX.

Our excellent execution of the integration once again demonstrated our unique M&A capabilities. I told you previously that we expected the IVAX acquisition to become accretive during the first year and I’m delighted to tell you today that IVAX has already become accretive and is expected to be accretive for the whole year and thereafter.

Turning to our branded business, Copaxone continued to expand its leadership with a global in-market sales totalling $353 million at 22% rise over second quarter 2005. Hence, in US the largest market increased by 19% and outside the US rose by 26%. Indeed, Copaxone was the only product which significantly outpaced the market’s growth.

And once again, last quarter several important scientific studies provided further evidence of Copaxone long-term efficacy and safety.

Furthermore, few studies reported on patients who did not benefit from low or high dose interferons, who after switching to Copaxone experienced significant additional reduction in relapses and were clinically stable. In addition, Teva recently presented results from a study which showed the patients taking a new generation higher dose of 40 mg of glatiramer acetate, the active ingredient of Copaxone had a greater reduction in MRI disease activity accompanied by greater reduction in relapse rate. A large global phase III study to confirm these results has just been initiated.

We are extremely excited about the recent US launch of Agilect, our treatment for Parkinson’s disease and the second product to come out of our proprietary pipeline. We believe that the quality and quantity of clinical data and the fact that Agilect is indicated for LD treatment as well as adjunct therapy in advanced stage Parkinson’s, combined with each once day dosing provides us with unique competitive advantage in the market place. Parkinson’s is a challenging disease and we are directing our efforts to address the need of Parkinson’s patients. You may recall that we have initiated a phase III clinical trial which studies the drug’s potential effect on the disease progression. We will elaborate on these as well as on the rest of our innovative pipeline at our innovative R&D day in New York in September.

With IVAX acquisition, Teva has entered the exciting area of respiratory product. In the US, we have grown our share of Qvar and expanded our albuterol HFA franchise. We repositioned the product as ProAir in anticipation of our launch of a breath actuated product. In June, we submitted a package to the FDA which we believe answers any question for breath actuated inhalers and we are hopeful for a launch in 2007.

Our respiratory business in Europe is robust and growing, particularly in the U.K. We are working to bring our product and technologies into new markets and are enthusiastic about our upcoming launches of breath activated…in Germany and France and breath activated albuterol easily in Germany.

And now, I would like to share with your our strength of the trajectory of our business from now to the end of the decade. As you know, our considerable annual growth rate in recent years has brought us to a point where we are at today. Announcing our first ever quarter with over $2 billion in sales and $500 million in net income; this is an achievement we are very prod of and one which reminds just what a large company we are now. Even at this new much larger size though, we remain quite positive about the prospects for our continued growth. Let me elaborate.

Our core business has been and will continue to be generics. In line with other analysts, we expect the global generic market to grow in excess of 10% per annum. It’s growth will be driven by two major and powerful factors -- demographics that is the aging population and the burden of the ever rising healthcare bill which will continue to increase the demand for generics around the world. We believe that the power of these drivers will only increase over time and we expect Teva as the industry leader to significantly outpace the global generics market growth. Indeed, Teva is ideally quick to do so. We have the broadest product line and the deepest pipeline as well as the best global network of R&D to continually fuel this pipeline. We have the largest and the most efficient global supply chain which includes a level of vertical integration unmatched in our industry. We are able to leverage our geographical coverage, our scientific know how, and starting, creating, and defending intellectual property. Needless to say we also plan to use these capabilities for further geographical expansion.

Furthermore, we believe that the industry is experiencing a long period of consolidation, a process we expect will accelerate over the foreseeable future and Teva is leading this process. We have proven over the years our ability to generate significant synergies and value from our M&A activities, something we demonstrated once again with IVAX. And as the industry consolidation progresses over the next three years, we intend to continue to be an active participant with contributions from acquisition supplementing our…it’s worth keeping in mind that in acquiring IVAX, we acquired some crucial additional growth ventures both in terms of geography and product line. We acquired a strong business in Latin America. This is currently a $500 million business which we expect to grow into $1 billion business within the next four years. We also acquired an excellent respiratory line which is now a $400 million business, which we expect to grow gradually into a $1 billion business by the end of this decade. Combining all these elements together with our innovative business, we expect Teva to continue to follow a solid growth trajectory with an annual compounded growth rate in the mid-teens.

2006 is shaping to be an exceptional year; one that will serve as a spring board for our growth. I’m pleased to inform you that we expect the full year 2006 sales to be around $8.5 million with adjusted earnings per share to range between $2.15 to $2.25 per diluted share. This is compared with our previous estimate of adjusted earnings per share of $1.82 to $1.90 and as additional $0.20 to $0.025 for the exclusivity of simvastatin per diluted share.

2007 and 2008 will be solid years with all the growth engines as we’ve spoken about including our pipeline in the US serving as significant drivers abroad. We have said that in US, we expect to launch between 70 and 80 products over the next period. The distribution of this product over the two years is not yet completely clear, but our current analysis suggests that the more significant revenue will be generated in 2008. This is still a fluid situation and it would therefore be premature for us to provide specific guidance at this time for 2007.

Let’s say in 2007, we plan to surpass our global 2006 rate despite an expected decline in our US generic sales as a result of the loss of exclusivity on these products launched this quarter, we expect to compensate for these with our U.S. pipeline increases in other parts of our business. In other words, we will once again demonstrate the strength of our balanced business model.

I am very confident that Teva’s core strength, our global reach and diversity, intellectual property, and unrivaled breadth of our generic portfolio along with our specialty pharma, R&D pipeline, and global supply chain give us a truly unique position from which we will continue to take a leading share of the growing market. And all of this makes me look forward to the tremendous enthusiasm and anticipation of a very bright future for Teva. Thank you. I will now ask George to brief you on the U.S. market.

George Barrett, President & CEO, Teva North America

Thanks, Israel. This was an extraordinary quarter for our U.S. generic business in many ways. This was the first full quarter that IVAX commercially integrated into Teva U.S.A. running as one business under Bill Marth’s leadership. We saw a continued increase in prescription demands for our products and it was a quarter which saw the introduction of some key new products culminating with a fantastic launch of simvastatin in the last day of the quarter. Teva U.S.A. organization and the entire global support system from our APIs through manufacturing helped us accomplish a successful launch, the largest in our history and frankly in the industry at large. All of this was accomplished in the face of some meaningful challenges.

Israel mentioned our commitment to keeping our facility rationalization program on track and the challenge of doing so while launching some of the largest products in our history all without having our new Jerusalem plant available to us. To add to the challenge, we also had to compensate for a significant reduction in supplies from the Puerto Rico facility acquired as part of the IVAX transaction. Due to longstanding issues at this plant we conclude that we needed to significantly reduce complexity at that facility and to minimize any dependence we had at that site. We have already moved over 20 products from…other manufacturing sites in the Teva network.

In addition, we made the decision to temporarily discontinue several older products in order to alleviate pressure from the supply chain. We felt that this was a small price to pay in order to maximize the potential of our new launches and the planned launch of our generic Zoloft, which will occur this quarter.

The success of the U.S. launches were particularly important as we had to absorb price declines on some relatively newer key products including fexofenadine, azithromycin, and propofol which reached a more competitive stage of their life cycle.

I would like to take the next few minutes to make some comments relative to our U.S. generic business, specifically the demand side, the pricing environment, the behavior of branded companies, and finally to describe some of the tools we use in competing and leading in this environment.

As Israel highlighted, the demand for generics is growing. The underlying reasons for this growth are well understood -- demographic changes, consumers increasingly participating in healthcare spending decisions, and most recently in the U.S. the inclusion of previously uninsured or underinsured patients into the system.

Let me focus just briefly on the last issue. Early indications suggest that Medicare Part D is having an impact on the demand side. IMS data shows that overall pharmaceutical volume has already increased by 2% or 3% coming from patients now receiving drugs under Part D. It is logical that the impact on generic demand is more profound. When we eliminate our new products from the equation we still see an 11% increase in Teva’s total Rx year over year on a rolling 12-month basis. I should add that when we add new products it’s over 17%. Some of this growth must be fueled by Medicare Part D.

As it relates to pricing, in recent weeks we have heard executives from different companies give differing views on pricing, and there is good reason for this. Each company experiences price erosion differently, largely because price is so sensitive to the portfolio composition. For example, a company dependent on a few products will feel significant price pressure when one or two products experience competition. Conversely, a company’s portfolio is heavily biased before its older more mature products may field a slower rate of base erosion. Teva has a rather unique mix. We do indeed have hundreds of products which are mature and have already experienced the heaviest price erosions. However, we have also launched more than 50 products over the past two years. These products are becoming part of a base and because they are adding more volatile stage as it relates to price, they naturally contribute more to the rate of erosion.

Let me give you some specifics for Teva’s line. Our rate of price erosion eliminating the more recent launches, which experienced a more step-function change, has been in the high single digits/low doubt digit range. This number has been consistent over the past 18 months. As I have mentioned on recent earnings calls, this rate is higher than for the prior two-year period when erosion was more in the mid-single digit range.

With regard to new products, the number and makeup of the competitor group and to some extent as with simvastatin, the size of the opportunity can impact price. Many of you have asked whether the low price of generic Mobic or less recently on generic Celexa signals an eroding environment. I would point to the generic launches of Captopril in making any fix, enalapril in 2000 and lisinopril in 2002, to highlight the fact that products with known and clear patent dates, low entry barrier, and multiple approvals on day one have historically sold at discounts, which can approach 95% of brand price. This was not a new phenomenon.

Let me underscore that despite the competitive prices on these products, Teva’s cost structure allows us to make decent margins on these products. Let me be clear. We do operate in a highly competitive environment; while we are not modeling an improvement in price over the near term, we are not seeing a further deterioration of prices to our portfolio.

Finally, as it relates to innovative behavior, there is no doubt that the stakes have become increasingly high for innovators facing the loss of bad protection. It is clear that originators will compete fiercely using a broad arsenal to prevent the loss of income associated with the generic launch against their brand. Although the program between United Healthcare and Merck, which received so much attention, could be seen in this context, it appears to have had negligible impact on the success of our simvastatin launch. The excellent generic penetration combined with our conversation with managed care executives has reinforced our view that payer to the promotion of generics as central to their efforts to reduce pharmaceutical cost for them and for their customers. Having said this, we should continue to expect that brand companies will try new and creative ways to delay generic launches and to minimize the impact from generic introduction. Although we cannot anticipate each of these, we devote enormous time to assessing potential moves and we have strategically built the tool to best ensure our continued leadership.

I would like to close by highlighting some of these tools. One, the size and breadth of our new product development program gives us not only a chance to participate in a larger number of launches but also allows us to mitigate the risk associated with any one compound. We have invested in our basic science and in our legal capabilities to help us develop and depend non-infringed products. We had increased our global reach to reduce the risk of operating in one legal and regulatory environment. We have invested in technology so that the next-generation products are within our technological universe. We had increased our patent portfolio particularly on the active pharmaceutical ingredient side to give us our greatest protection against IP risk. We have increased our commitment to vertical integration to reduce cost and eliminate upstream sources. We have continued to focus on our global supply chain efficiency and quality in order to ensure that we can sustain high levels of reliability, service, quality, and profitability in a complex environment. We have used acquisitions such as IVAX to reinforce each of these strengths.

I hope this gives you some insight into the environment in which we find ourselves and how we have positioned ourselves to compete. Now, I’ll turn it back to Dan.

Dan Suesskind, CFO

Thank you very much, George, and good day to all our friends around the world. I hope you have had a chance to review the excellent figures we released this morning. If you have, I believe you have found that they are significantly better than most of us expected.

This quarter we have recorded acquisition and other related charges amounting to $65 million pre-tax and $53 million after tax. After deducting these expenses, net income amounted to $488 million and fully diluted earnings per share to $0.59. I will refer in the following analysis only to the adjusted figures as we believe that the adjusted results provide better indications of Teva’s operations and trends.

Excluding these charges, our adjusted net income reached $541 million, representing 25% of sales with EPS of $0.66. Let me give you a synopsis of our figures. As compared to the second quarter of last year, sales are up 77%, net income is up 124%, and EPS is up 83%. For the first time we exceeded quarterly sales of $2 billion, gross profit of $1 billion, and net income of $0.5 billion. The run-offs included $31 million which was less over from the first quarter of ’06 where we recorded another $64 million of step-up inventory resulting from the IVAX acquisition. Please note a consideration of the reported GAAP net income and EPS for these adjusted numbers in Appendix 1 of our press release, which is available on our website. And with that I will take through the adjusted results line by line beginning with sales.

As I have mentioned, sales reached $2.272 billion, an increase of $945 million year over year with a negligible currency effect. The most significant impact on global sales in the second quarter was made by our major product launches in the U.S., a quarter which succeeded what we sometimes refer to around here as the five quarters of all of 2005 where we had no significant launches. These major launches impacted our breakdown of global sales by substantially increasing the U.S. component, but we also had significant increases to our European sales and a dramatic increase in our international sales, which more than doubled quarter over quarter, mainly as a result of adding new markets or expanding sales in existing markets in Latin America, Central and Eastern Europe, primarily from IVAX.

Total international sales which include as well amounted in the quarter to $301 million, increasing its share in global sales to 14%. Europe sales while growing 38% contributed only 24% to the global sales while North America the global sales increased to 62% in the reported quarter. The major launches in the U.S. not only impacted our breakdown of global sales but also had a major effect on the consolidative margins because they both increased the rate of the U.S. to significantly higher margins and reduced Europe’s rate in its traditional lower average margins.

Global market sales of Copaxone amounted to $353 million. This is a 22% increase over the comparable quarter. U.S. sales increased 19% to $231 million and non-U.S. sales, mainly Europe and Canada, increased by 26% to $123 million. Non-U.S. sales account now for 35% of total global in-market sales.

As to Teva’s API business, sales to third parties amounted this quarter to $145 million, up 14%. In addition, the API business saw $210 million worth of sales internally to Teva’s pharmaceutical operations. Remember, that API sales to IVAX, which in the past were recorded as third party sales, are this year recorded as internal sales. These internal API sales represent the highest level of our strategically important vertical integrations. Just as in this quarter we recorded substantial earnings from launches of products in our pharmaceutical business made with internally supplied APIs from prior quarters, I think you should view the high level of internally sourced API in the second quarter as a good lead indicator for future quarters when we finish those pharmaceuticals that these API sales support will be launched.

One line down in the P&L to adjusted gross profit; gross profit amounted to $1.203 billion. This reflects an adjusted gross margin of 55.4% in the reported quarter compared to 47.4% in the comparable quarter and is far outside Teva’s regular change of 45% to 48%. While this should not be seen as a sustainable level, we do expect to achieve gross margin above the normal band also in the second half of ’06.

And from gross margin to R&D; net R&D increased by 33% to $121 million. This record number represents the importance that Teva is giving to its R&D activities and demonstrates the combined R&D effort following the IVAX integration. SG&A, which reached $376 million this quarter, represents 17.3% of sales. This is a substantially higher percentage of sales compared to Teva’s standalone previous quarters, which in fiscal ’05 averaged 15.2%, but is lower than the first quarter of ’06. To a large extent this increase reflects the consolidation of IVAX’s significant branded business and operations in many branded generic markets, which require substantially higher selling and marketing costs.

In addition, Teva’s innovative business generated higher sales and marketing costs in support of the growing Copaxone franchise and the greater introduction of Agilect in U.S. and non-U.S. markets. Going forward, the gradual realization of synergies as well as the future growth of Teva should reduce the percentage of SG&A line items from sales. However, we do not expect to return to our historical levels of 15% as we said due to the increase operations in branded generic markets as well as the new branded businesses. The option expensing which was introduced in 2006 and accounts for $30 million a quarter are mostly included in SG&A.

Adjusted operating profit amounted this quarter to $707 million or 33% of sales compared with 25% for fiscal ’05. The quarterly interest paid on our current $4.6 billion of long-term debts plus interest in our short-term debts amounts to about $50 million, to be partially offset by the yield on our cash and quasi cash balances which currently stand at about $1.65 billion. As you can see, financial expenses this quarter amounted to an exceptionally high $57 million, substantially higher than the normal level, reflecting mainly the negative impact of currencies and hedging activities on certain P&L and balance sheet items, due to the currencies’ fluctuations from the beginning of the quarter through the end of the quarter. Some of these amounts are offset in other line items, the underlying assets, and some will be reversed in the next quarter. Going forward, we would expect the typical financial expenses, net of currencies and hedging activities which fluctuate from quarter to quarter to be in the range of $30 million to $35 million.

As to the provision for income tax, in the first quarter we provided for 19% on adjusted earnings, which was then our best estimate of our annual rate. We now adjusted annual rate to 17.5% which mainly reflects our exclusive launch of simvastatin, something which was not certain when the first quarter figures were released. The quarterly tax rate provided on the adjusted earnings this quarter is consequently 16.7% including a catch up for the first quarter.

All that leads to our adjusted net income of $541 million at 124% from last year. As to the adjusted EPS, based on this adjusted income to which about $6 million were added back related to the convert, it works out at $0.56 on a larger share base.

As to cash flow from operations, which amounted this quarter to $1212 million, this relatively low amount mainly reflects the impact of new product launches highlighted by simvastatin at the very end of the quarter, which resulted in an increase of our working capital due mainly to substantial increase in accounts receivables. These receivables should turn into cash in the third quarter.

We increased our working capital sequentially by $492 million to about $2.7 billion. The free cash flow which is calculated as cash flow from operations net of capital expenditures and dividends amounted in the quarter to $66 million.

As to day sales outstanding and receivables, this decreased from 60 days in March ’06 to 59 in June ’06. We have calculated this after netting out the sales reserves and allowances, the so called SR&A from the receivables. As you know, we record receivables on a gross basis and record the SR&A under current liabilities, but in order to facilitate a more meaningful comparison with some of our peers who record receivables we have used the net figure. Total SR&A at June 30th was $1.27 billion compared with $978 million on March 31st, about 93% of which came from the U.S. Total increase in SR&A from March was $291 million. The launches created substantial SR&A.

Inventories increased by 5% to $1.8 billion with day sales and inventories up from 144 to 163 sequentially. Due to the high margins of the new launches there was no corresponding decrease in inventory as the simvastatin sales were stated in the inventory at cost. This quarter CapEx amounted to $90 million compared with a quarterly average of $77 million in fiscal ’05.

Yesterday, the board approved a second quarter dividend amounting to approximately $60 million. On a per-share basis, our dividend based on the current rate of exchange of the Shekel to the Dollar amounts to approximately $0.77.

As to our debt, $4.6 billion or 82% of our total interest bearing debt at June 30th is long term, of which $2.6 billion is in converts and $2 billion in straight, fixed or floating interest debts. The debt to equity ratio stands on this date at 0.36. Shareholders’ equity at June 30th ’06 reached $9.9 billion.

Now, for the convenience of our audience, I would like to mention as we did before, three figures before we open up for Q&A so that we are all on the same page as it relates to our share count. As for the second quarter of ’06 our average sales count for the purpose of calculating adjusted fully diluted EPS was 834 million shares. At the end of the second quarter our share count for calculating fully diluted earnings per share going forward is approximately 834 million. And for calculating our market cap, it’s approximately 765 million shares.

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

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you would like to ask a question, please press * and 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. Your may press * and 2 if you would like to remove your question from the queue. In the interest of time, we do request that you limit yourself to one question. Our first question today is coming from Robert Bonte-Friedheim of Citigroup Investment Research; please proceed with your question.

Robert Bonte-Friedheim, Citigroup

Hello everyone and congratulations for an outstanding quarter. Just a very quick question, Dan, we spoke in the past, could you just confirm to us that there’s nothing working in the charge back that we should be concerned about as we go forward?

Dan Suesskind, CFO

It’s confirmed.

Robert Bonte-Friedheim, Citigroup

Okay, and the second question, Dan, as we go forward as we look into the rest of the year, what kind of provisions have you made for the self-buck adjustment on the big launches in the quarter on pravastatin and simvastatin?

Dan Suesskind, CFO

We usually do not give out those details, but as I mentioned in my prepared remarks usually launches have a very high bearing on the increase in the SR&A. I gave the figure of the increase and we are consistently following the same formulas for the providing for the different line items of SR&A, and we did the same also this time.

Robert Bonte-Friedheim, Citigroup

Last question, did you get any synergies from the IVAX acquisition in the cost of goods sold in this quarter?

Dan Suesskind, CFO

I would say that if at all it was it was very limited on the cost of goods sold and predominantly we had, as we usually have initially in new acquisitions, it’s more on the SG&A and R&D; although in this case, simvastatin was an exclusive of IVAX and their recreated synergies with Teva.

Israel Makov, President and Chief Executive Officer

Let me just add, Robert, there were major synergies this quarter with the API component of Teva in the simvastatin.

Robert Bonte-Friedheim, Citigroup

Thank you, Israel.

Operator

Our next question is coming from Rick Silver of Lehman Brothers; please proceed with your question.

Rick Silver, Lehman Brothers

Just a couple, can you give us an update on the launch plans for generic Zoloft?

Israel Makov, President and Chief Executive Officer

George…

George Barrett, President & CEO, Teva North America

Hi, Rick, good morning. What we can provide is really what we said which is that we do expect a launch in the third quarter. We had anticipated that we might regret at this point we are not quite ready, but we still look forward to that launch.

Rick Silver, Lehman Brothers

Dan, you provided an idea of guidance on SG&A, can you do the same of R&D?

Dan Suesskind, CFO

I would say that R&D should be in the range of 6% to 7%.

Rick Silver, Lehman Brothers

Okay, thank you.

Dan Suesskind, CFO

This is obviously generally speaking when you have exceptional allowances like that they distort some of the picture, but if we talk on an average that should be the rate.

Rick Silver, Lehman Brothers

And when you talk about the accretion from IVAX, are you looking at this including generic Zocor?

Dan Suesskind, CFO

Yes.

Rick Silver, Lehman Brothers

And if you excluded that would it be accretive?

Dan Suesskind, CFO

Probably not at that stage.

Rick Silver, Lehman Brothers

Okay, thank you.

Operator

Our next question is coming from David Woodburne of Prudential Equity Group; please proceed with your question.

David Woodburne, Prudential Equity Group

Thanks and again congratulations on a great quarter. George, in terms of the Zoloft, can I ask, is the delay due to capacity allocation or does it have anything to do with utilizing Teva’s API on that? Then, I’ll assume there’s a fair amount of Zocor in the second quarter, if you ignore the outcome of the legal appeal, what’s the best way to allocate the remainder of the exclusivity period for us?

George Barrett, President & CEO, Teva North America

David, I can’t provide more color on the Zoloft launch other than to say that we are not quite ready. I think that’s as much as I can share at this point. The second question was about the allocation, I’m not sure exactly what you’re asking?

David Woodburne, Prudential Equity Group

Well, obviously it’s a six-month exclusivity period, you sold a ton in the second quarter even though there were only basically seven days of that exclusivity period in the second quarter, so does it mean that you have another solid third quarter and almost none in the fourth quarter, or how should we think about the third quarter and fourth quarter?

George Barrett, President & CEO, Teva North America

I won’t want give complete clarity quarter by quarter except that we had an effective and strong launch. We’ll continue to hold our exclusivity through the third quarter and at some point at the end of the year, of course, that exclusivity will expire.

David Woodburne, Prudential Equity Group

Okay.

Operator

Our next question is coming from Elliott Wilbur of CIBC World Markets; please proceed with your question.

Elliott Wilbur, CIBC World Markets

Good morning, good afternoon, thank you for taking the questions. I’ll throw in my obligatory congratulations on a very strong quarter as well I wanted to ask a line of question around your revised EPS guidance. It looks like you’ve effectively taken up about $0.10 relative to what you had talked about in terms of the incremental contribution from generic Zocor exclusivity in connection with first quarter numbers, yet sales guidance actually kind of moved towards the low end of the range. Originally you talked about $250 million to $300 million top line impact and now we’re talking about $8.5 billion in total sales. So, I’m just wondering if you could reconcile that, maybe give us some clarity as to where things are not performing as well as you had previously suspected. It sounds like there are some pockets of weakness maybe in the IVAX business, maybe related to some production issues in the line, but if you could maybe just talk about why that sales guidance seems to be moving towards the lower end of the range that you had briefly talked about? Thank you.

Israel Makov, President and Chief Executive Officer

George, you want to start?

George Barrett, President & CEO, Teva North America

I have a couple of quick observations about the U.S. market, some of which we spoke to the new launches are going very well, we described a little bit about the base erosion. There are a couple of products, Elliot, that we’ve mentioned are particularly in their more competitive stage and some issues that come out of the supply chain issues described. By and large the direction of our U.S. generic business looks good, the prescription data looks good, but we had absorbed some issues which will affect us a little bit as we go through the year.

Israel Makov, President and Chief Executive Officer

I would say that our new guidance is a proper guidance. We didn’t circulate simvastatin from the rest of the business, we just calculated what we are going to do from now till the end of the year, and it includes all the parts of the business. I would say that I don’t think that we have weakness, but I think we have increased the bottom line. The top line is on the high side of our last guidance and it might be increased, but this is the way that we see it right now and I don’t think that we have any weak spot except you have to remember that in the U.S. on the one hand we have major launches and on the other hand we have major erosion of products that lost their exclusivity that fexofenadine, azithromycin, and propofol, which lost it earlier but has more competition right now, and a few other products. So, there is a balance here, but it’s not that we add 10% to simvastatin; it’s just that we add to our total range between 13% to 10%.

Dan Suesskind, CFO

If I may add, I don’t think that anyone can imagine the effort in such launches as we had this quarter and if anybody thinks that such launches can go without any sacrifice or something else he is mistaken. So, it’s not a question of weakness but more sacrificing one thing for a major other thing.

Operator

Our next question is coming from Andrew Foreman of WRH; please proceed with your question.

Andrew Foreman, W.R. Hambrandt

George, following on the questions about Zoloft, can you remind us the exclusivity and how that might relate to other competitors coming in after exclusivity, is it fair to say that if you launch around September 1st then you’ll get most of the first quarter ’07 exclusivity? And then could you also give us a little more update, a big picture George, on the size of the U.S. generic industry in terms of market share? From your comments from Medicare Part D, what do you see happening in terms of total prescription share volume in terms of expansion, I guess it was around 54% to 55%, going into ’06? What are your observations if any about the impact of the doughnut hole effectively being used up by the $23 million, are you seeing any increase in demand for generics overall, and what is Teva’s market share currently in the U.S. generic business? Thanks.

George Barrett, President & CEO, Teva North America

Good morning, Andrew. I’ll touch base on the first question. It’s very early I would say to show a truly predictive sort of systemic effect for Medicare Part D, although again we’re seeing all the good early signs. It looks like generic penetration has moved up probably into the high 50s. We really do see it moving past 60, I can’t give you a timing sense for that, but again we’re seeing some extraordinary movement throughout the system. I think Bill is probably the right person to give a quick comment on the sort of doughnut hole aspect of the Medicare program.

William Marth, President & CEO, Teva Pharmaceuticals USA

Hi, Andrew. With respect to the doughnut hole, it’s certainly an issue for the patients that run into it. We see it as an unfortunate part of the plan, but for us it’s helpful for generics because as some people enter into this space and they’re looking to fill prescriptions in a most cost-effective manner, and generics are certainly the choice for that.

Andrew Foreman, W.R. Hambrandt

George, you’re saying is that we’re in the high 50s in terms of share and going past 60, what is Teva’s market share run rate, because you indicated that you have an expanding market share relative to the base business?

George Barrett, President & CEO, Teva North America

I would say right now…again, this data can move very quickly particularly on the eve of a launch which just occurred, but probably at this point over 20 in prescription share.

Andrew Foreman, W.R. Hambrandt

So, 20% of all U.S. generics prescriptions are coming out of Teva?

George Barrett, President & CEO, Teva North America

Yeah, roughly.

Andrew Foreman, W.R. Hambrandt

Dan, quickly on the IVAX integration, you had previous guidance which you said you might modify, any comments on that on the cost side please?

Dan Suesskind, CFO

I don’t think we can change it every quarter. As we said, there were a lot of synergies created through the introduction of simvastatin. I think when we get to the end of the year we may update our expectations on synergies.

Andrew Foreman, W.R. Hambrandt

Thanks, great quarter guys.

Operator

Our next question is coming from Ron Miguel of Sanford Bernstein; please proceed with your question.

Ron Miguel, Sanford Bernstein

Hi, good morning folks. Two quick questions that I just need to clarify; you mentioned, Israel, that in ’07 you expect a suppressed sales for ’06, does the same go for EPS? Second, you mentioned the mid-teens range for Teva, does that include acquisition or do you see that as organic growth?

Israel Makov, President and Chief Executive Officer

We consider the acquisition as part of our business, but of course if it doesn’t include any huge acquisition like IVAX we will change totally the scale of Teva, but in every year growth plan we will have both…or other companies that will give us added value in terms of product lines. So, this includes acquisitions which later on become part of our organic growth. Then, with regard to 2007 to 2006, we can definitely calculate that we’re going through different scenarios and we can increase the top line and we cannot give at this stage anything about the bottom line.

Ron Miguel, Sanford Bernstein

Thanks, I appreciate it.

Operator

Our next question is coming from Greg Gilbert of Merrill Lynch; please proceed with your question.

Greg Gilbert, Merrill Lynch

Thanks, I have a couple. Thanks for the additional color on today’s call. First for Dan, are you willing to provide us what simvastatin sales were in the quarter in the U.S. and the approximate margin of that?

Dan Suesskind, CFO

We have never done that in the past and I don’t want to create a precedent today. We usually don’t detail data on individual products.

Greg Gilbert, Merrill Lynch

Let me ask it in a different way, if you can speak to gross margin perhaps excluding simvastatin were you above your historical 45% to 48% range, and is there something structurally different about that?

Dan Suesskind, CFO

I suspect we would be in this range without simvastatin.

Greg Gilbert, Merrill Lynch

Thanks for that. George, the Zoloft deal between IVAX and Pfizer, I guess now Teva and Pfizer preclude Greenstone from launching during your exclusivity or should we assume that this is a pretty typical situation?

George Barrett, President & CEO, Teva North America

I think you should assume that it’s a pretty typical situation.

Greg Gilbert, Merrill Lynch

And lastly for Israel, a two-part question, one do you think it’s more important for Teva to take a hard look at proprietary company acquisitions longer term in addition to the typical sourcing of molecules in Israel? And secondly can you comment on the significance of setting up the office of the CEO earlier this year? Thanks.

Israel Makov, President and Chief Executive Officer

All right, let me first just make an advanced response to your question about the gross profit. Remember that we had a very successful launch of Zocor, but we had additional successful launches, not only in the U.S. but outside of the U.S. Although we did not really calculate what the range would be, we are not using these exercises to see what would be the gross margin with or without the Zocor, but the other launches also contributed to the high level of gross margin; it’s not only Zocor. This is number one. Number two, in terms of taking a hard look at proprietary companies, first I must tell you that we are very satisfied with our business model. We are not a generic company that is trying to become a proprietary company or an innovative company, and I don’t think that there is something we should be looking to imitate. I think that the proprietary business within Teva is increasing. We now have the respiratory business, we have a very rich pipeline of innovative products which we are going to present to analysts in September in New York, and we have a lot of work in biogenetics which is also a branded business, and I’m not precluding an acquisition that will support in the future one of these business lines, but we are not looking at an acquisition that will change Teva from a generic company to a totally branded company. Does that answer your question?

Greg Gilbert, Merrill Lynch

Yes thanks, and can you comment on the office of the CEO and the significance of that for the company?

Israel Makov, President and Chief Executive Officer

The office of the CEO is an important office in our organization. As you may appreciate, the complexity of our business is enormous. I think that there are very few companies in the pharmaceutical industry with a level of complexity that we have, and the complexity actually creates value for a potential opportunity. Now, in order to manage this complexity, we need to have the right organization, and I think that this office of the CEO is more to help me in running the business than to highlight candidates for a future CEO, although it doesn’t preclude this opportunity.

Greg Gilbert, Merrill Lynch

Okay, thanks a lot.

Operator

Our next question is coming from Norman Fidel of Alliance; please proceed with your question.

Norman Fidel, Alliance Capital

Thank you, and George I’m not going to let you off the hook so easily on the Zoloft question. When the final approval was announced for circulating the Zoloft I think the expected launch time was late July. So it does seem that it is delayed beyond that, are the issues exclusively supply related or is this also related to just trying to manage the growth since your period of six-month exclusivity is not jeopardized by a delay and it extends your rapid growth into he future if you delay that launch? Thanks.

George Barrett, President & CEO, Teva North America

Hi, Norman, and I’ll give a try and see if I can do it again here. We had as I said hoped to launch and have all of the products prepared for the kind of launch that we wanted by the end of July and we’re simply not there. So, as you know we had an enormous amount of product to put through the system, we had some late stage labeling issues that we needed to deal with, so we had a lot of work to do to pull this launch together and it’s very important when you launch with particular interest of satisfying customers to make sure you have an effective launch. We’re not quite ready and it was better for us to wait till we were ready for the optimal launch rather than to move prematurely.

Israel Makov, President and Chief Executive Officer

I would like to add one sentence, George, and as a method of policy we never delay launch of a product just because we want to have a better distribution of sales or profits in quarters. It’s not that. When we are ready we go. Therefore, because you asked this question, we never delay a launch just because we want to have better cosmetics to our results.

Norman Fidel, Alliance Capital

Okay, thanks.

Operator

Our next question is coming from Ken Cacciatore of Cowen & Co; please proceed with your question.

Ken Cacciatore, Cowen & Co

Hi, thanks, just pulling back to Israel’s guidance on the mid-teens growth, you indicated that some of it was going to be inorganic, can you help us out a little bit to understand what percentage would be inorganic? Also, does this include the Copaxone U.S. take back right? Then a question for George on Zoloft, I understood that you maybe had to make payments to Pfizer via the previous IVAX agreement, if they launch and authorize generics, do you continue to have to make that payment to Pfizer, profit payments? Thanks.

Israel Makov, President and Chief Executive Officer

Let me answer your question. George, can you take over just a moment, answer the second part of the question and I’ll come back?

George Barrett, President & CEO, Teva North America

Ken, can you just repeat the Zoloft question?

Ken Cacciatore, Cowen & Co

Sure, on Zoloft it was our understanding that IVAX was previously going to have to make a profit sharing payment to Pfizer because of the original agreement, I was wondering if they are allowed to launch and authorize generics, do you have to continue to make that payment if there is a payment?

George Barrett, President & CEO, Teva North America

I can’t provide data or details on the agreement other than stated that IVAX and Pfizer had entered into a license agreement as part of a settlement of that litigation and we abide by all of our agreements.

Israel Makov, President and Chief Executive Officer

I apologize for pushing the question, George, but I add to attend to something here, but let me come back to your first question. Our forecast is based on a combination of many scenarios. It’s not one scenario of growth; it’s many scenarios of growth and we combine all of them into one forecast, and therefore it may include a few optional acquisitions, it includes the Copaxone, it includes everything. Our business is one business and we have many companies in our business and we have many scenarios of growth, and when we give a forecast it’s a combination of all of these scenarios. So, I can’t give you percentages and I can’t tell you right now the exact components of these forecasts.

Ken Cacciatore, Cowen & Co

Okay, thank you.

Operator

Our next question is coming from Randall Fenicki of Goldman Sachs; please proceed with your question.

Randall Fenicki, Goldman Sachs

Great, thanks, just quickly. Given the recent settlement, is Biaxin XL now in your forecast? And then separately, is the 45% to 48% gross margin range or band a range that we should be thinking about over multiple years given the consolidated company now? Thanks.

Dan Suesskind, CFO

Can you repeat the second half of the question?

Randall Fenicki, Goldman Sachs

Sure, the 45% to 48% range, is that a multi-year longer term target that we should be thinking about the consolidated company now?

Dan Suesskind, CFO

I will say that we are using that for the time being. I think it’s inclusive of IVAX, although as we said there maybe fluctuations around that; usually in the past we have seen only fluctuations going one way and that is north and not downwards. But as we said, it depends a lot on the product mix, the portfolio mix, the launch mix, etc., but I will say that if one should take a band this will be the band.

Israel Makov, President and Chief Executive Officer

And in recent years we’ve been mostly on the top end of the band, so you have to take it also into consideration, and next year we might consider it in our guidance regarding this band and be come up with something else.

George Barrett, President & CEO, Teva North America

As it relates to Biaxin for erythromycin, what we can share with you is that we did enter into an agreement with Abbot which allowed us to keep the products in the market and also allows us to reenter the market under certain conditions. I should say at this point it’s not that large a product and we would expect that there will be more than one player. So, in terms of expectations, I guess that’s the way to think about it.

Randall Fenicki, Goldman Sachs

Okay, great, thanks a lot.

Operator

Due to time constraints our last question this morning will be coming from David Buck of Buckingham Research; please proceed with your question.

David Buck, Buckingham Research

Thanks for taking the questions. First on gross margins with Dan, with the Jerusalem plant not yet on line and with the PAPI level of vertical integration higher for this quarter or presumably going higher, why wouldn’t there be an increase in the gross margin range? For Israel, can you give us some sense of what the overall branded sales of the company were in the quarter? You referenced the $400 million respiratory business, but why not give us a sense of overall what the branded sales actually were for the quarter? Thanks.

Dan Suesskind, CFO

As to your first question, as I had mentioned, with all the moving parts one of the moving parts is also something which you know we are awaiting already for quite a few months and did not get any approval for that yet, not even a revisit. So, as I said, once we are more settled on those moving parts, we’ll revisit again is the question and if we find out that the band moves somewhat, we will certainly give an indication. I don’t assume that it will be before the end of this year and maybe even later.

David Buck, Buckingham Research

On the branded side of the business?

Israel Makov, President and Chief Executive Officer

David, in my presentation I told you that our respiratory business in 2006 is going to be a $400 million business.

David Buck, Buckingham Research

Okay, fair enough, since you didn’t want to give it for the quarter, can I ask one more? Copaxone, can you give us some sense of when we’ll find out more about the buyout terms for 2008?

Israel Makov, President and Chief Executive Officer

Yes, when we closer to the year, we’re talking about 2008, we still have a long time to go.

David Buck, Buckingham Research

Okay, fair enough, thanks.

Kevin Mannick, Director Investor Relations

I would like to thank everybody for joining us on the call today. As always, we’ll be happy to take additional questions offline if you have any. We also hope you will join us in person tomorrow at our luncheon or listen into the webcast. Dan, if you could please provide the replay information I would greatly appreciate it. Thank you.

Operator

If you would like to listen to a replay of this conference, you may dial 877-660-6853 domestically or 201-612-7415 internationally. The account number is 3055 and the call ID number is 209542. This concludes today’s conference call. Thank you for your participation.

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Source: Teva Pharmaceutical Industries Q2 2006 Earnings Conference Call Transcript (TEVA)
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