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Executives

Elana Holzman – Senior Director, IR

Shlomo Yanai – President and CEO

Eyal Desheh – CFO

Gerard Van Odijk – Group VP, Europe; and President and CEO, Teva Pharmaceuticals Europe B.V.

Bill Marth – President and CEO, Teva North America; and President and CEO, Teva Pharmaceuticals USA, Inc.

Moshe Manor – Group VP, Global Branded Products

Analysts

Randall Stanicky – Goldman Sachs

Ronny Gal – Bernstein

Greg Gilbert – Bank of America-Merrill Lynch

Rich Silver – Barclays Capital

Ken Cacciatore – Cowen & Company

Elliot Wilbur – Needham & Company

Mark Goodman – UBS

John Boris – Citi

Corey Davis – Natixis

Scott Hirsch – Credit Suisse

Tim Chiang – FTN Equity

Chris Schott – JP Morgan

David Risinger – Morgan Stanley

Teva Pharmaceutical Industries Limited (TEVA) Q2 2009 Earnings Call Transcript July 28, 2009 8:30 AM ET

Operator

Greetings and welcome to the Teva Pharmaceutical Industries second quarter 2009 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. Thank you, Ms. Holzman, you may begin.

Elana Holzman

Thank you, Diego. Good morning and good afternoon, everyone. Welcome to Teva's second quarter 2009 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 web cast of this call that is also available on our website.

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

Shlomo and Eyal will begin by providing an overview of our results. Please note that Shlomo will be referring in his prepared comments to non-GAAP gross margin, operating profit, net income, and EPS. Eyal will provide additional detail on the items excluded from our non-GAAP 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 web cast. Shlomo?

Shlomo Yanai

Thank you, Elana. Welcome, everyone, and thank you for joining us today as we review Teva's results for the second quarter of 2009. This was a very good quarter for Teva with record-breaking results, including record sales, gross margins, operating profit, net income and EPS.

Teva’s net sales in Q2 reached a record $3.4 billion with gross margin of 58.5%. Our operating profit was $981 million with net income of $742 million, and all of this ultimately brought us to EPS of $0.83.

Eyal will provide the rest of the details and the numbers. I would just like to add that we are especially pleased with our growth in sales in Q2. Despite the ongoing negative foreign exchange effects, which in Q2 took nearly a quarter of a billion dollars from our top line. Overall, I believe our results this quarter provide quite a clear demonstration of the strength of Teva’s growth momentum.

Our growth in Q2 was driven by contributions from across our many businesses and geographies as well as by the excellent progress we are continuing to make in the Barr integration.

In North America, we had very good quarter with sales of $2.1 billion up 36% over Q2 ’08, led both by sales of our branded products and by our US generics units. We are especially pleased with the results of our exclusive launch of generic Adderall XR, which has already achieved 58% market share and is continuing to grow.

Our product offering in the US is the strongest it has ever been. We are continuing to enjoy strong sales of products from both Teva’s and Barr’s generic portfolios, and we have made great progress in integrating the two portfolios and in leveraging Teva’s marketing, sales and distribution capabilities to further enhance the performance of the combined portfolio.

In Europe, sales were up by 20% in local currency over Q2 ’08 to reach $732 million. Sales were especially strong in Germany, Spain and Poland. Despite the turbulence that we have experienced this quarter in individual European markets such as Italy and France, as we look to the future, we remain very optimistic about our European business. Our growth strategy is focused on achieving the market leadership and we believe that Teva is uniquely well positioned to succeed in Europe, which has a total population of over 490 million and where there is still relatively low generic penetration in many markets.

For Teva international business, Q2 was another excellent and record-breaking quarter with sales growing by 35% in local currency to reach $481 million dollars. The results were especially strong in Russia and Latin America. Teva’s international businesses are a major growth driver, and I believe that our strong results quarter after quarter give us good reason to be extremely optimistic about the potential and the future of this business.

Teva’s innovative business continued to grow in Q2 once again achieving record-breaking sales. Copaxone grew 21% over the second quarter of 2008. In the US, in-market sales increased by 32% further widening the gap between Copaxone and the number two product. According to IMS data, our market share in TRx reached new record high of just over 38%. Outside the US, Copaxone grew by 5% or in terms of local currency by 26% over Q2 08.

We expect Copaxone to continue to outpace the market growth and perform extremely well. And of course Teva remains extremely committed to continuous research and development of our innovative neurology portfolio. In June we announced completion of patient enrolment in the Bravo trial in the second Phase 3 clinical trial to evaluate the effect of oral Laquinimod on the treatment of multiple sclerosis.

Oral Laquinimod is a novel once-daily oral immunomodulatory that if successful has the potential to become the preferred therapy for relapsing MS patients offering the best benefit to risk ratio in terms of efficacy, safety and tolerability. This was also an exciting quarter for Azilect, which had in-market sales of $55 million growing 31% over Q2 08.

Turning now to our global respiratory business, sales reached $189 million, up 13% over Q2 ‘08. The increase was driven primarily by strong sales of ProAir in the US, which maintained its market leadership position with 58% market share. We are continuing to work very hard on developing novel brand for our global respiratory franchise to further strengthen our position in this key area. Later this year, we plan to begin Phase 3 trials for nasal beclomethasone, dipropionate HFA for the treatment of allergic rhinitis, the most common allergic disease in the US and abroad.

As you know, we extended our specialty pharma portfolio through the addition of Barr’s women's health business, where in Q2 sales grew 4% to reach $80 million. During the quarter, we introduced our extended cycle oral contraceptive LoSEASONIQUE. And just this month, we introduced the one-pill emergency contraceptive, Plan B One-Step. We believe that this business has outstanding prospects for growth. We are targeting various means by which we can expand our offerings both in the area of oral contraceptives and in other areas of women's health. And we also plan to leverage Teva’s global footprint to take much of this franchise to Europe and to our international markets.

I'm pleased to report that our integration of Barr is continuing to run ahead of schedule and as I previously reported we are realizing more synergies from this combination than we had initially forecasted, and we are realizing them more quickly than we expected, higher than [ph] $300 million of synergies, which we initially announced for the $400 million we announced in February, we now expect to realize closer to $500 million in cost synergies in the third year. I'm also pleased to report that in the second quarter the acquisition became accretive.

Before we turn to our outlook for 2009 and 2010, I would like to say a word about Teva’s financial strength. During the second quarter, we improved our financial position by paying down approximately $1 million of our debt. In addition holders of our convertible debt elected to convert over $700 million of those convertible bonds during the quarter. This brought our financial leverage down from 34% to 27%. And we expect by the end of the year to reach the same financial leverage that we had before the Barr acquisition or even better.

Finally, I would like to review our outlook for the reminder of 2009, 2010 and beyond. As you know of course, legal and regulatory complexities made the timing of our product launches somewhat uncertain. That said, we are extremely pleased with the results of the first half of this year, which have yielded revenues of more than $6.5 billion and EPS of $1.54. And we continue to be excited about the potential launch opportunities in the second half of this year. Therefore we are reaffirming our guidance for 2009, which we provided at the beginning of the year.

We continue to expect the second half of 2009 to be stronger than the first half with quarterly net sales and EPS results improving sequentially. We expect EPS in 2009 to be in the range of $3.20 to $3.40. Looking forward to 2010, last quarter we provided guidance of EPS of 40% to 45% over our 2009 projected guidance. Now that we have greater visibility to 2010, we believe that we will be at the higher end of this range and that EPS will increase at least 35%.

This is on the strength of a number of factors including our launch of venlafaxine, our generic version of Effexor XR as well as additional launches in the US, the completion of the take back of Copaxone from Sanofi-aventis in North America, and enhanced synergies from the Barr integration, which as I just mentioned we now expect to be approximately $500 million.

But our growth does not stop there, later this year we intend to provide you with an updated long-term outlook for the company. We are looking forward to the opportunity not only to update the 2012 outlook we provided in February 2008, but to take detailed look at the years 2013 to 2015. The significant amount of analysis and planning already conducted by all of our units gives us great confidence that Teva will continue the growth momentum.

Thank you very much and now I would like to turn the call over to Eyal for a more detailed financial review. 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. Following a strong first quarter, the positive momentum in our business continues and we are reporting today a record quarter for Teva in terms of sales and non-GAAP operating income, net income, and earnings per share.

Similar to the first quarter, the results were driven by a good product mix, tight expense control, and continued progress with our integration with Barr. During this quarter, we strengthened the balance sheet and improved financial leverage with the reduction of our debt by $1.7 billion. Most of this reduction was achieved by paying down approximately $1 billion in short-term debt and by conversion of $719 million of convertible debentures to equities. This brings our financial leverage down to approximately 27%.

Before I go into the numbers, I would like to remind everyone that we are presenting GAAP and non-GAAP results. In our non-GAAP presentation, we have excluded the following items this quarter, which are primarily related to the acquisition of Barr, $76 million of inventory step-up; amortization of purchased intangible assets totaling $151 million, of which $143 million are included in cost of goods sold, and the remaining $8 million in sales and marketing expenses; $42 million in legal settlements, $10 million in restructuring charges and in addition the related tax effects of $58 million.

You should note that the items excluded in arriving at our non-GAAP results in the second quarter of 2008 are not identical to those in the current quarter. On the one hand in Q2 2008, we did not have an inventory step up expense, and we had a lower level of amortization, but on the other hand we wrote-down option rate securities.

As indicated in the past, we present non-GAAP figures to show you how we as management and our Board look at our financial results. Let me begin by highlighting how foreign exchange differences continue to play a significant role in our results throughout this quarter.

Similar to Q1, foreign currency differences has greatly affected sales. This quarter it was by $256 million or 9% as the dollar strengthened against certain foreign currencies primarily the euro, the Hungarian forint, the British pound, and the (inaudible). The Russian ruble, the Israeli shekel and the Canadian dollar all compared to the second quarter of 2008.

When we eliminate the foreign currency impact for the quarter, consolidated sales actually grew by 29%, with pharmaceutical sales in Europe growing by 20% in local currencies and pharmaceutical sales in our international markets growing by 35% in local currencies.

As I mentioned to you last quarter, we believe this is an important measure of our business as we managed countries in their local currencies and measured those sales and profits accordingly. However, it is important to note that foreign currencies had a negative impact of less than 1% on operating profits. Teva’s diverse geographical presence continued to provide us with a good natural hedge that mitigates much of the risk involved in currency fluctuations and minimizes the impact on our bottom line.

Looking at consolidated results in US dollars, sales totaled $3.4 billion, an increase of 20% compared to Q2 last year. Non-GAAP operating income was up 44% compared to Q2 2008 and benefited from strong gross margin and tight expense control.

Excluding the items detailed above, non-GAAP net income was strong, up 25% compared to Q2 2008 despite higher finance expenses and higher tax rates as planned, both resulting from the acquisition of Barr.

Non-GAAP fully diluted earnings per share rose $0.83, up 15% compared to Q2 2008. In the second quarter of 2009, we had approximately 75 million more shares than in the second quarter of 2008, which are part of our earnings per share calculation, due primarily through the shares issued in connection with the Barr acquisition.

Now let us discuss profit margins, which were at record levels this quarter and operating expenses. Non-GAAP gross profit margin, which excludes amortization of intangible assets and the inventory step-ups was 58.5% in the reported quarter compared with 54.7% in the comparable quarter of 2008, but similar to the non-GAAP gross profit in Q1 this year.

The improvement in gross profit margin is attributable to the successful launch of generic Adderall XR, and a higher contribution to sales from our branded and innovative practices, including Copaxone and Azilect respiratory sales, especially ProAir and women health products.

Operating margin was 28.9% up from 24.2% in the comparable quarter last year. The increase resulted from three main factors, strong gross margin as I just discussed; positive effects of foreign currencies; and lower R&D expenses. Speaking of R&D, net R&D expenses reached $169 million or 5% of sales. The low net R&D number this quarter resulted from reimbursement of approximately $40 million from our joint-venture with Lonza. We announced the joint venture with Lonza earlier this year to develop, manufacture and market a portfolio of biosimilars. This joint venture became operational during the second quarter and as part of the agreement related to R&D expenses incurred by Teva prior to the finalization of the agreement were contributed and reimbursed by the joint venture.

Despite a decline in net R&D, gross R&D expenses this quarter increased compared to Q2 last year, and we remain committed to our plan to double R&D output from 2007 level by 2012.

For the full year, factoring out the reimbursement from the joint-venture, Teva’s R&D expenses are at a run rate of approximately 7% of sales. I will also like to point out that Teva’s shares in the joint-venture expenses; approximately $20 million is reflected in the line-item called share gain losses from associated companies, which is below the operating profit line.

Sales and marketing expenses, excluding amortization of intangible assets, totaled $641 million in the quarter or 18.9% of sales compared to 17.5% of sales in Q2 2008, and a similar percentage in the first quarter of this year. Similar to the higher gross margins, this higher sales and marketing expenses are the result of higher contribution to sales of our innovative and branded franchises.

Total G&A expenses this quarter were $197 million or 5.8% of sales compared with 6% of sales in Q2 last year. We reported $61 million of financial expenses in our Q2 2009 results compared with $9 million of non-GAAP financial expenses in the comparable quarter of 2008. The higher financial expenses resulted from debt incurred in connection with the Barr acquisition.

Similar to Q1, the tax rate provided in Q2 2009 was 17% of pretax non-GAAP income. We continue to estimate our annual tax rate for 2009 at 17% compared with the rate of 10% in 2008. The increase in the tax rate resulted primarily from the fact that Barr’s corporate tax rate is higher than Teva's, and in 2008 we did not include Barr.

Now let’s have a look at our cash flow. Cash generated from operations amounted to $658 million. Our free cash flow, excluding capital expenditure of $148 million and cash dividend of $134 million, amounted to $376 million. The lower cash flow from operations was driven by two main factors, first timing of significant US launches versus collection which will come in the third quarter; and second, during the second quarter we paid approximately $80 million of Barr integration related expenses, which we provided for as part of the Barr purchase price accounting and was not reflected in the income statement.

On June 30, we had approximately $2 billion in cash and marketable securities. Our total outstanding loans, bonds and convertible debenture stood at $6.7 billion, down from $8.4 billion at the end of March. During the quarter, we paid approximately $1 billion of our debt, approximately $800 million of our bridge financing loan, and approximately $200 in other short and long-term debt.

As of June 30th, the remaining bridge loan amounted to $630 million. We remain committed to paying down the full amount of the bridge loan by the end of the year, and expect to pay down most of it by the end of the third quarter.

During the quarter 0.5% and 0.25% convertible debentures issued in 2004 has a conversion window. Through June 30, approximately $354 million of the 0.5% bond and $365 million of the 0.25% bond were converted leaving the principal amount of these bonds at approximately $350 million combined for the two series.

Subsequent to the end of the quarter, an additional $90 million were converted. So now it is below $300 million, which is left to be converted. I would like to remind you again that the conversion did not impact the fully diluted share count and earnings per share calculation and these shares were already included in the diluted share account calculation.

In total, we reduced debt by $1.7 billion during the quarter, including our financial leverage for 34% at the end of March to 27% at June 30. We now believe that by the end of the year our financial leverage may stand at 22% lower than our pre-Barr position, which was 24%.

DSO, or days sales outstanding, amounted to 47 days this quarter, compared to 51 in Q1 2009 and 54 days in Q2 2008. The small sequential decline do not reflect significant differences in collection level, rather our DSO is impacted by foreign currency changes resulting in these small changes from one quarter to another.

We calculated DSO, as we always do, after netting out from the receivable the sales reserve and allowances, whereas our accounts receivable and SR&A did not change materially, the decline in DSO resulted primarily from higher sales.

Inventory days were 188, down from 191 days in March 2009 and down from 228 in December. Similar to DSO, there isn’t a demonstratable will difference in inventory level, rather the sequential decline we have seen in the past two quarters, and inventory base resulting from the sale of Barr inventory, which was reported in our books at market value rather than cost known as the inventory step up.

Gross capital expenditures reached $151 million this quarter compared with $180 million in Q2 2008, and down from $160 million in Q1 2009. The acquisition of Barr added production capacity and reduced investments in capital expenditures compared to the 2008 level.

Dividends, yesterday Teva’s Board approved a quarterly dividend amounting to approximately $144 million. On a per share basis, our dividend, which is declared in Israeli shekels, was 0.6 shekel per share. On the rate of exchange on July 27, which was yesterday of the shekel to the US dollar, this translates into approximately $0.157 per share.

That concludes my comments. Thank you all for your time and attention today. And now we will be glad to take your questions. Operator, please go ahead.

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 very much guys for the question. Just on the Barr synergies have been a lot more than even you initially expected. Can you maybe comment on an additional acquisition that you've been talking about? You know, if it is not on the generic side can you talk about maybe where those synergies would come from your ability to drive top line and how we should think about any potential cost synergies, and then I have a follow up?

Shlomo Yanai

Randall, hi, it is Shlomo, I am not sure I well understand the second part of your question. Could you be so kind to make it more clear?

Randall Stanicky – Goldman Sachs

Sure, I guess first is your interest still -- update us on where your interest from the acquisition perspective is and then how should we think about any possible accretion from a deal if it happens to be on the branded side versus the generic side.

Shlomo Yanai

You take it Bill.

Bill Marth

Yes, Randall. I think your question is centered more about you know, are we going to continue bouncing around the generic space or will we move towards specialty or some other area, and I think what Shlomo has clearly said before is that, you know, we believe that the same type of capabilities that we have developed in the generic market, we can also apply to specialty or some other area that we might go after.

Now, this doesn't mean that Teva’s is going to necessarily run out tomorrow and chase down specialty companies. We've always said that we are going to be looking at products, technologies, and companies, but I think as you think of companies moving forward you should not limit your thinking to just generic companies.

Randall Stanicky – Goldman Sachs

And then so if we think about the new outlook for EPS, which is now better than 35% is there anything for deals factored into that number or just the organic? Still organic?

Bill Marth

Yes, it's still organic.

Randall Stanicky – Goldman Sachs

Okay, and then just my final question. Should we still think about the current or your previous revenue range for the year, it was $14.1 billion to $14.6 billion as the appropriate range as we think about top line?

Shlomo Yanai

Well, first of all as I reaffirmed our guidance at the beginning of the year, it is of course referred to the guidance, but what we should bear and what we should try to look of course is how we are going to see the foreign exchange in the coming six months. So it would be uncertainty related to foreign exchange. This is where we are heading and that's what we should adjust in case if things are going to changed in our turbulent world today, but I would like also to add to your previous question and just to make sure that we are on the same page. Teva’s strategy is consistent and we are going to continue with our strategy as we see (inaudible) strategy and yes we have a very balanced (inaudible), which we are proud of and we will try to of course enhance in coming years with continuing momentum of growth and adjust it.

And with that we are exploring, we have examined many different possible opportunities, but as I always used to say when it comes to acquisitions Teva acquires companies only if it fit to our strategy.

Randall Stanicky – Goldman Sachs

Okay, so and I'll jump off. There has been no change than to your previous stated areas of interest for possible (inaudible)?

Shlomo Yanai

(inaudible) we stick to our strategy and when we are going to add some modifications, we will definitely let you know and I just said towards the end of the year we are going to address you on our strategy for the coming years, so you will have another opportunity to briefly dive into the strategy of Teva for the coming years.

Randall Stanicky – Goldman Sachs

Okay, great. Thanks Shlomo.

Operator

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

Ronny Gal – Bernstein

Good morning, and thank you for taking my question. A couple of quick ones on the branded side, and just to follow on on Randall's point, on the branded side, I know you guys can pretty much handle any kind of acquisition on the generic side, but when you think about the branded side, which is an area where you did not make large acquisitions before, about how big of an acquisition do you think is appropriate for you just in terms of the kind of amount of money you're going to put at risk in one deal. Is this essentially as big as the generic businesses or would you be looking to get something smaller and I got a quick follow on.

Shlomo Yanai

Ronny, first of all I think that the balance business model is the current ratio. Should of course move a little bit here and there, but generally speaking the 70-30 or the 65-35 that will be the breaking [ph] point or flexion point. That's how we see the business of Teva, this is our strength, and this is our core competence. Having said that one of our core competence is acquisitions and integration and the know-how how to do things, and I believe that we can do the same that we did for so many years in so-called generic companies, also in specialties in some other business unit that we would be interested in.

Ronny Gal – Bernstein

Okay, and quick follow on regarding 2011 and 2012. I know that you are still working on your numbers, but one of the things that I was when I talk to investors, is if you're going to have such a wonderful growth in 2010, will it not be exceedingly hard or get better number in 2011. We have seen similar concerns few years ago after the wonderful 2006, where there were a lot of concerns about 2007. I don’t know if you can at this point comment about this?

Shlomo Yanai

Let us wait, we would be patient, and the time will come with a whole big picture and will give you an holistic overview on how we see the coming years. This is more than one subject to refer to and we would be more than happy to do it towards the end of the year.

Ronny Gal – Bernstein

Okay, thank you very much.

Operator

Thank you. Our next question comes from Greg Gilbert with Bank of America-Merrill Lynch. Please state your question.

Greg Gilbert – Bank of America-Merrill Lynch

Thank you guys. I wasn't going to ask an M&A question but your comments have ticked my interest in that and you have talked about interests in generics and specialty and potentially other areas what are the so-called other areas that you would consider other than biologics?

Shlomo Yanai

Well, for the time being I think it is above generic, specialties, and biosimiliars.

Greg Gilbert – Bank of America-Merrill Lynch

Okay, thanks for that clarification. For Eyal, first of all do you have a number for sales growth for the total company excluding the Barr acquisition at this point for the quarter?

Eyal Desheh

No, but I'm sure we can do the exercise with the base as last year base, but we don't measure the Teva part separate from the Barr part. It is fully integrated six months into the closing of this transaction. It is almost hard to distinguish between the two different companies. So there are no two parts. I think you -- if you want to take the base for last year don't forget to add -- to reduce from that base about $100 million, which included products that we stopped selling as a result of the transaction and an one-time $53 million that Barr had in the Q2 of 2008, and then of course had the impact of foreign-exchange for the comparison. That is an easy exercise. Those are the two parts. There are no two parts. It is one company.

Greg Gilbert – Bank of America-Merrill Lynch

And on the lines of JV, given that this is a new part of the model going forward, first, why wasn’t the $40 million reimbursement excluded from non-GAAP and is the $20 million loss below the line a good run rate to use in the next few quarters?

Shlomo Yanai

Well, first of all for the $40 million, we declined when we moved into what you guys called the (inaudible) model. We define very clearly what we are going to exclude for the non-GAAP results, and we follow this very strictly. So this kind of one time pluses or minuses are not included and we will continue to report them in our non-GAAP result. As to the number, it is a one time item. In the future, what most of the R&D that was done in Teva, and that will belong to the combined joint venture, was already contributed with my having few more millions down the road, but not as many. What you see that below the line $20 million our share in associated companies that was not consolidated that is a direct result of this one-time, this is a 50% part of that $40 million.

In the future at least for the rest of 2009, we are not going to see these kind of numbers, the numbers that will be our share of the extent of the joint venture are going to be significantly lower. Now, you know (inaudible) to be included, which will be a part of Teva R&D expenses and that's how you have to look at it.

Greg Gilbert – Bank of America-Merrill Lynch

Okay, thanks guys.

Operator

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

Rich Silver – Barclays Capital

Yes, hi. Just a couple. Back on R&D area just to make sure I heard correctly. Did you say going forward that is 7% of revenue ratio was the correct number?

Shlomo Yanai

Yes, you heard me correctly. Approximately again it should be 6.8% or 7.2%, but because it is not rocket science, but this is where we believe our average will be for the year.

Rich Silver – Barclays Capital

Okay, and then you mentioned on certain areas in Europe, Spain and Italy, where there have been some challenges, can you elaborate and provide a little bit more of an outlook for those countries?

Shlomo Yanai

Gerard, would you take this one?

Gerard Van Odijk

Yes. I'm happy to do so. Across Europe you're seeing that governments have been trying to counter the impact of some of the economic crisis settlements by pushing on the healthcare budget. You also see consumers holding back on their spending, particularly in markets where co-payment is a relevant issue, and on top of that we've seen quite aggressive and active competition from our competitors.

So to be specific on Spain, we see that the growth of the generic market has been less because of some competitive developments in there and some pressure on price, both in government and competition. If you look at Italy, the government has implemented from the 30th of April a whole new way of discount teams in controlling the dynamics of the Italian market, which has made everybody very unsecure in the market.

In France, there is fierce competition between the top five companies. In the UK, they are doing relatively well, in Germany, you are aware of the kind of that business that is kicking in now. So just give you a flavor of that. Central Europe has a lot of impact from the crisis as well. Within all of that we have done very well. We have grown our share in spite of the pressure on prices and from competition. We've grown our share; we held our share in many of these places. We are growing our top line. But of course it is in an environment that is slightly less buoyant that it was previewed to be about 12 months ago.

In terms of recovery, we believe that in Italy it will take a few months before it is all cleared out and then I'll be in a better position to comment on that and what really happened. As a matter of fact, given the situation in Italy it can only improve the penetration on generics. It is so low that there must be a way out for us in getting more generics in the market. The same story applies for Spain. So these two markets are very optimistic that it will recover and in France, outside of the competition on which I, of course cannot comment, saying that these things happen. The underlying demand for the generics in that market is still very healthy. So we should expect it to pick up as well.

Rich Silver – Barclays Capital

So, when you're talking about competition in France, are you referring to some price competition that could continue?

Gerard Van Odijk

Oh yes, the question is about whether it will continue or not. That would be speculative but there are a few companies that are -- there are some large (inaudible) -- and it's about the sharing. I think there are four or five companies currently competing for this share. We are number three. We are clearly number three. We also took number three about six months ago, and we stayed there and now we are increasing the gap.

And after (inaudible) which is the local player in Ireland, we are number three. So it is difficult to predict whether this technique of gaining share will stay in place. I don't expect that but it is a bit unpredictable to speculate on the strategies and tactics.

Rich Silver – Barclays Capital

Just one last one on women's health. It seems like quarter-to-quarter there was a decline, is that a function of buying patterns which we had previously seen when Barr was a standalone company?

Shlomo Yanai

Rich it is Shlomo. With respect to it being a decline no, we don't really see it that way. There was a little bit of destocking with respect to some of the non-promoted brands, small amount and we did slowdown plan B a bit, and because of the launch, the anticipated launch of (inaudible), but other than that there was a gain year-over-year.

Rich Silver – Barclays Capital

Thank you.

Shlomo Yanai

Rich, if I may add on Europe, because I think it is important as Europe has a great potential for growth for the future of both, because of the size of this region, and for the lower level of generic penetration. It is important to look at it from a more broad perspective. If you look on our position in Europe, we are right now the number one player out of the seven-eight countries of Europe. We are the number one in UK, Italy, and Netherlands. We are number three as Gerard just said in France, Spain, Holland and lately also in Hungary.

So we are strengthening and enhancing our position market share wise in this important region of the world and at the end of the day the economy is going to recover and generics because of the same pattern that we see in every developed country and Europe is not excluded. So we believe that we are strengthening, regaining market share and definitely the future for growth there is there and we are going to grab it.

Rich Silver – Barclays Capital

Thank you.

Operator

Thank you. Our next question comes from Ken Cacciatore with Cowen & Company. Please state your question.

Ken Cacciatore – Cowen & Company

Great, thanks. I just had a question on the Adderall XR Citizen Petition, if there has been any new communications between yourself and the FDA, any thoughts you can give us and whether you've included or not included it in the 2010 guidance, and Shire has publicly talked about maybe the best thing of the product, maybe any thought you can add to that or maybe any of your interests, and then also if you could comment on your Fentanyl share seems to be remaining relatively low and some thoughts on when we might see some further penetration in that market?

Shlomo Yanai

Yes, Ken. Just a quick one. With respect to Adderall of course we are really happy with the share, and I think last week release, which are now two weeks old, are about 58.6% share on our weighted at 70% share. So I think that is exactly where we wanted to be. With respect to the Citizen Petition, we really don't want to comment on the Citizen Petition. I don't really have any more knowledge on the Citizen Petition than you do or anyone else at this point in time, and then with the other question was -- the Fentanyl, the Fentanyl as we've been telling you, we are going to move up that share. We had so far a business in (inaudible) and RiteAid. We also are pursuing some other business. Currently we don't -- I don't have it secured yet, I wish I had it in the numbers, but I don't have it secured yet, but we believe we will be there as the share as we said we would be.

Ken Cacciatore – Cowen & Company

Okay, and then for Gerard, you know as you said you talked about all the different various countries. There are different competitors in each country and it still seems like a pretty fragmented market. It sounds a bit like the US in the mid-90s and eventually that -- the marketplace got consolidated. Should we just be continuing to assume you're going to be selective and how you put together your European strategy there might be you know, quite a bit more consolidation and smaller players fallout or how should we look 5 years forward in this European market?

Gerard Van Odijk

Yes, I think -- I think it will be unavoidable to see some of the smaller players either disappear or being eaten by the bigger players. What you will end up seeing I guess in 5 years in Europe is 3 or 4 main players. You will see a handful of more regional players that are specialized in a few markets or that are specialized in some specific technologies and so that will be the picture, which has a lot (inaudible) we see in the US. I think that the main element of time influence here is the fact that the unification and harmonization of markets across Europe has just taken its time. So we are still dealing with products that as I said before the change of the century and therefore there is a lot of diverse way of filings and stuff going on since the late 90s and early this century. You see that there is much more stratification and comparability and discipline on how the legislation has been implemented in terms of regulatory procedures. So you will see much more of this coming together in the next few years. And people will therefore either stop selling or they will sell that business to someone else or you will see people specializing and surviving.

Ken Cacciatore – Cowen & Company

Thank you.

Operator

Thank you. Ladies and gentlemen due to time constraints please limit yourself to one question and one follow-up question. Our next question comes from Elliot Wilbur from Needham & Company. Please state your question.

Elliot Wilbur – Needham & Company

Thanks, good morning. Maybe just following up on the acquisition thing there, and specifically for Bill, you talked in the past about basically expanding your healthcare business to roughly a $1 billion sales market. I'm just wondering maybe if you could just give us a little more color in terms of how you plan to get there, just, you know, more of an organic or inorganic target. You're talking about expanding your therapeutic footprint across women’s health, and if this includes sort of a combination of brand and generic initiatives?

Bill Marth

Well, it doesn't include generic initiatives. It is really branded Elliot. I think the issue really is about developing really a broad basket across the market, you know, the that market segment. When you are thinking about women’s healthcare and the OB/GYN's office, there are many areas for us to look into just besides just contraception. Hormone replacement therapy and you can go further afield into fertility. You can also think about urinary incontinence and a variety of other areas that are in this particular basket. Women in general will use their OB/GYN as their per se general practitioner so that I think we can get broader reach with our rest in that secured division.

Elliot Wilbur – Needham & Company

Okay, and then a follow up question, it is probably for you as well Bill. I guess you know recently we see you know more and more occurrences of systemic GMP issues across the generic industry and, you know, obviously in certain product situations you're kind of a direct beneficiary there, but I guess in thinking about you know the customer base. Do you think that there is, you know, there has been a shift or is there you know potentially going to be a shift in terms of, you know, the supply-chain focusing more on quality and reliability vis-a-vis price, and we might actually see sort of an inflation of the quality premium.

Bill Marth

Yes, I think the only thing you can say there quality is an issue, price has been a predominant factor for quite some time, but we've always talked about the fact that you need to have price combined with the ability to supply and quality, and I think that all of our purchasers today are really thinking about all those aspects, when they are making their purchases.

Elliot Wilbur – Needham & Company

Thank you.

Operator

Our next question comes from Mark Goodman with UBS. Please state your question.

Mark Goodman - UBS

Bill, could you please give us a sense of US new product launches that we should expect in the second half. Can you also give us a sense of what to look for, and then secondly just respiratory pipeline. Can you give us a sense of how many products are in the pipeline? You mentioned one, which is only the first time you kind of mentioned something, which actually started my interest in the respiratory and so is there a pipeline of 10 products across the board that we should expect launching in the next five years or, just give us a sense of the magnitude of what's going on in the respiratory pipeline?

Bill Marth

Okay, well let's start off first of course with the generic launches. Of course, I can't and I won’t list for you all the products. I mean when you think about the total launches that remain that we can potentially launch in 2009. We still have about 25 that we can do worth about $23 billion of innovative value, about 10 of which are active (inaudible) force. So you never know exactly when they are going to come.

It is not the names you absolutely know, the (inaudible) of course has appeared before, but that is a situation and everyone is waiting for the FDA to act but there are products in litigation like amphetamine. Other products like lansoprazole that are not in litigation that we know has a date certainly of November 10. We also know the ODT of course is in litigation, and that we expect -- we hope to get a ruling before that, and also hope to get through oxaliplatin before then. (inaudible). But there is a whole bunch of others, but (inaudible) still remains out there and you know we still believe there is the number of launches that are still very likely within 2009. The second question with respiratory, I don't think we are going to go out and disclose coming Phase 3 yet. We disclosed one. We told you they are there, we are going to do this one at a time.

Mark Goodman - UBS

All right, thanks.

Operator

Thank you. Our next question comes from John Boris with Citi. Please state your question.

John Boris – Citi

Thanks for taking the question. I guess along the lines of the M&A payment and the balanced business model that you're looking to create Shlomo going forward. I guess a question for I guess maybe more directed towards Bill in North America, as far as your percent of branded sales, can you just comment on what percent of your products come from branded sales, and then is there a certain percent of your business going forward that you would like to see coming from branded products going forward. Also on the North American revenue, can you provide any color as far as percent of generic sales that were sold in the quarter and the growth upon generics in North America. And then on the international side of the business Gerard can you speak at all to the breakout of the international sales and the growth in some of those markets in constant currency? Thanks.

Bill Marth

Yes, John. I think they are going to limit you to 12 questions.

John Boris – Citi

I am really sorry.

Shlomo Yanai

Before I turn to Bill I think it is important to get back to our fundamentals what I call the Teva balanced business model. When it comes to segment of business it is about 75 generics including the API business that we have and 25 branded business, where we have of course now the branded Copaxone, but we also develop some other brands regarding our respiratory and women health businesses. We look at this ratio on this business because we believe that this is a good balance between two different business models that actually have synergies and more than that in between. When it comes to geography, as you know, 60% of our businesses roughly speaking are coming from North America, and we have about 16 from Europe and we are developing in a more rapid pace, the international business as we see this as our growth or the one of the most successful growth drivers of the future. So you may expect that our international businesses should grow and take more part of the pie in the coming years, and with that I would turn to Bill.

Bill Marth

Yes, John we are not going to necessarily breakout the numbers here on the branded business for North America. I think that Shlomo had said well in the sense that our branded business is about 25%, we are about 75-25% business today. The larger portion of the sales today in the US are definitely generic, that's for sure, but I don't think as Shlomo has said we want to look at this as a North American thing.

As we move forward whether the ratio for Teva is 70-30, 65-35 it really doesn’t matter. We need to expand this not just to North America, it is not just only North American business, it is a global business.

Operator

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

Corey Davis - Natixis

Thanks. First on copaxone, what I'm seeing for the quarter was 15% volume growth and if revenue grew, just US revenue grew 21%. That would be 6% on price. A, is that close and B, is that similar in Europe, and C, I think it is the last question, the contribution from copaxone to net income in this quarter above or below the revenue contribution at about 20%.

Eyal Desheh

Yes, Corey, you're saying that you're looking at the growth on copaxone being about 15% on a -- are you looking at a unit basis, dollar basis or...

Corey Davis - Natixis

Sorry, I'm trying to build up the components of the revenue growth in the US of 21% and from volume growth. It looks like it's around 15%, which would leave 6% on price.

Eyal Desheh

Now, the unit shifts were about 10.8% of you know, the -- if you look at TRx that's about 11%.

Corey Davis - Natixis

So the rest is on price?

Eyal Desheh

The rest is price. The balance would be price.

Corey Davis - Natixis

And on Europe?

Moshe Manor

And in Europe, this is Moshe, Europe most of the growth is unit driven growth. So we don't see any effect on the prices other than the FX of course.

Eyal Desheh

Yes, there is a 20% headwind of FX and then a lot of -- most of the increase was on quantity and not on price.

Gerard Van Odijk

In Europe, we grow unit by 28%.

Corey Davis - Natixis

The gist of the question is how much longer is the price growth sustainable as all the MS therapies come closer to Teva’s average in price?

Eyal Desheh

Well Corey, I think the answer to that question is that we can't answer that. You know, at this point in time we have always been a price follower, and not a price leader and so we continue to do that. We have the number 1 therapy both globally and of course in North America. So we don't think it is appropriate that we be the lowest priced product. So we'll continue to follow where the market goes.

Corey Davis - Natixis

And then last part of that question is contribution to net income versus revenue, is it higher or lower?

Eyal Desheh

Yes, Corey, you know that we do not provide separate to the product line by their profitability or contribution, which is for commercial reasons, but you could assume obviously that our branded business and that includes copaxone and Azilect is more profitable than the generic business, but contribution to profit is higher than its contribution to sales and because we talked about 25-75 in sales, the proportion in profit or in operating profit leaves a little more towards the branded (inaudible). We are not breaking the numbers.

Corey Davis - Natixis

Presumably that will go up as the Sanofi royalty goes down over time?

Shlomo Yanai

Can you say it again please?

Corey Davis - Natixis

The profitability presumably will go up as payments to Sanofi go down?

Shlomo Yanai

Well, next year as he now there is a kick back from Sanofi-aventis, where we stop paying them royalties in the US market. Of course that will include profitability of copaxone, (inaudible) I will agree with them and the exodus comes to an end, (inaudible) but this is something that you have been calculating and paying them in the US today 35% royalties on sales, and sales we have disclosed in the public, which is exactly the number of course, 2010 numbers, not…

Corey Davis - Natixis

Great. That helped. Thank you.

Shlomo Yanai

You are welcome.

Operator

Our next question comes from Scott Hirsch with Credit Suisse. Please state your question.

Scott Hirsch - Credit Suisse

Hi there, what are your thoughts on the future of settlements, Solodyn in the past quarter, are we going to see more creative solutions in the future?

Bill Marth

Certainly. Hi Scott, this is Bill Marth. With respect to settlements again, we're just reacting to the market. We know there are many settlements bills that exist today within both the Senate and the house considering settlements which has had a chilling effect in settlements today. All the settlements that we have just recently done being (inaudible) Solodyn, and now Ortho Tri-Lo, all being data of entry settlements, which have been -- would be legal within the toughest of the provisions that are offered out there today.

So I guess the answer, it is kind of a long answer, but to simply say that whatever the rules that are put in place by the government or the SEC, the market will adapt to that and that is what we are doing.

Scott Hirsch - Credit Suisse

Okay, and then just secondly is there any update on the Cozaar, Hyzaar versus the file status and if not, what are your thoughts on brands just going forward by listing patents?

Bill Marth

I think you know that we argued that rather recently, and we feel pretty good about the argument, we think the judge understood the issues very, very well. I think the judge understands the brand tactics here. So we feel pretty good about that argument and we hope to get a response fairly quickly.

Scott Hirsch - Credit Suisse

Okay, thank you.

Operator

Our next question comes from Tim Chiang with FTN Equity Capital. Please state your question.

Tim Chiang - FTN Equity

Hi thanks. I wanted to ask you about the Singulair patent challenge case. When do you expect a decision out of that court?

Bill Marth

Your guess is as good as ours. At this point in time there is no way of telling.

Tim Chiang - FTN Equity

Okay, and just one follow-up, I mean I wanted to get your thoughts on this whole exclusivity with biologics, I mean looking back at the exclusivity periods for just pharmaceuticals, it took a long time to sort of workout all the details. I mean what innings do you guys think we are in with this whole exclusivity debate for biologics?

Bill Marth

Well, I would say to that that I think we're still in the, we're still very much in the early innings. This was the first bill that came out and so there are several other bills and junctures we have to pass. The White House even over the weekend again advocated seven years vaccines out there with 5 years FTC to zero, and there of course we got all the senate and health committee as well. So I think there is a lot of balancing act yet to occur, but I think it is early in the game.

Tim Chiang - FTN Equity

Great. Thanks.

Operator

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

Chris Schott - JP Morgan

Great. Thanks. Just a quick question following up on that patent settlement discussion earlier, I guess the prospects from our industry perspective, does the prospect of patent settlement legislation slow down near-term settlement activity, accelerate near-term activity or really it had no impact, and I just have a quick follow up from there.

Eyal Desheh

Well, Chris I think the answer to that is kind of what I said in the sense of the industry rolls out whatever standard is set. If we will stay with the bright line with date of entry settlements, it almost seems like Teva will be about the only company that can settle, because we can launch at risk, we do launch at risk, and then we get to a point of date of entry settlement. So that almost doesn’t seem like a pretty good place to go, and again we are looking for a settlement bill that really is right for the American consumer, and we don't think a bright line bill is right for the American consumer.

Chris Schott - JP Morgan

Great, and a quick follow up just on the new formulation for copaxone, you mentioned on the last quarter's call. Give us a sense of where that study in terms of enrolment and are you on track to settle data with that by year-end? Thanks.

Moshe Manor

Yes, this is Moshe. We mentioned for this quarter we are embarking through the study of copaxone the 0.5 mL, and it is going as planned and we are planning to conclude this in the coming month, and if positive to submit it in 2010.

Operator

Thank you. Our next question comes from David Risinger with Morgan Stanley. Please state your question.

David Risinger - Morgan Stanley

Sorry about that. Thanks very much. Could you just discuss your gross margin trends in the United States, you mentioned 58% of the gross margin this quarter for the total company, but could you talk about US trends and then for the total company, I don't know if you provide this, but if you could provide some prospectives in your senior generics business, excluding the branded side of the company, what the medium-term outlook is for the gross margins? Thank you.

Eyal Desheh

We -- I could refer you to our consolidated and overall gross margins. We don’t break it on the geographical basis or we don’t break it as we said before on the product lines basis, but I could give you some information regarding the gross margin, the combined gross margin was 58.5%, which is the highest that we have reported in the past few years at least, resulting from -- mostly from a very good product mix. We had more branded, innovative, and new launches as part of our product mix, which created higher gross margins. There were some impact of foreign exchange where we introduced -- many of our products are introduced in a non-seller environment, but the gross margins that input was relatively small, but it is mostly driven by the right product mix, and by efficiency measures that we have been taking from the middle of last year. Many of them are Teva in general, and of course the Barr integration, with all the actions that we have taken is also helping us also reduce our cost of sales.

But again specifically for the geographies, we are not breaking that out and therefore Bill might consider fair to how you see the generic business in US, but not in terms of the gross margin, but I think…

Bill Marth

Yes, David. It is really tough for us to comment on that. We don't want to be decoyed here because the issue really becomes, we have a good solid base business, but we also have a very active paragraph IV business, which carries with it disproportionate margin, and it is really dependent on how successful we are in a particular year, in a particular quarter on our paragraph IV business. So as Eyal rightly said, there are mix issues. There are mix issues within generics, and it is not always just paragraph IV, it maybe those that are difficult or complex products. Recently we came to market with Ursodiol tablets. We happened to get there first ahead of other people, and so that helped us ultimately, and that helped us on the margin side.

If we had to get a more difficult product like enoxaparin, we hope at some point of time it improved. We think the margins there are more favorable. So it is a balancing act and it is definitely a mix.

David Risinger - Morgan Stanley

Thank you.

Operator

Thank you. Ladies and gentlemen, I will now turn the conference over to Mr. Yanai for some concluding remarks. Thank you.

Shlomo Yanai

Thank you, Diego, and thank you all very much for joining us today.

Operator

Thanks. Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you all for your participation.

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Source: Teva Pharmaceutical Industries Limited Q2 2009 Earnings Call Transcript
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