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Teva Pharmaceutical Industries Limited (NYSE:TEVA)

Q3 2009 Earnings Call

November 3, 2009; 8:30 am ET

Executives

Shlomo Yanai - President & Chief Executive Officer

Eyal Desheh - Chief Financial Officer

Bill Marth - President & Chief Executive Officer of Teva North America

Moshe Manor - Group Vice President, Global Branded Products

Gerard Van Odijk - President & Chief Executive Officer of Teva Europe

Elana Holzman - Investor Relations

Analysts

Randall Stanicky - Goldman Sachs

Scott Hirsch - Credit Suisse

Rich Silver - Barclays Capital

Chris Schott - JP Morgan

Greg Gilbert - Banc of America/Merrill Lynch

John Boris - Citi

Ken Cacciatore - Cowen & Co.

Ronny Gal - Sanford Bernstein

Elliott Wilbur - Needham & Co.

Mark Goodman - UBS

Operator

Greetings and welcome to the Teva Pharmaceutical Industries third 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)

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

Elana Holzman

Thank you, Diego. Good morning and good afternoon everyone. Welcome to Teva’s third quarter 2009 earnings call. We hope you had a chance to review our press release which we issued earlier this morning. A copy of the press release is available on our website at www.tevapharm.com. Additionally, we are conducting a live webcast of this call that is also available on our website.

Today, we are joined by Shlomo Yanai, President and 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 margins, 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 Webcast. Shlomo?

Shlomo Yanai

Thank you, Elana. Welcome, everyone and thank you for joining us today as we review Teva’s results for the third quarter of 2009. This was it superb quarter for Teva with record breaking results across the board, including record sales, gross and operating profit, net income, cash flow and EPS.

Teva’s net sales in Q3 reached a record $3.6 billion with gross margin of 68.2%. We approached the $1 billion mark in quarterly operating profit reaching $997 million, a 42% increase over the third quarter of 2008 and for the first time we crossed the billion dollar mark in quarterly cash flow from operations.

Net income in the quarter reached $806 million and all of this ultimately brought us to EPS of $0.89. Teva’s growth involves the top and bottom line in Q3 was driven by contributions from the across our many direct businesses and geographies as well as by the continued efficiency of the Barr integration, a subject that we will say more about after a quick review of the performance of our major businesses during the quarter.

In North America, we had an excellent quarter with Pharma sales of $2.2 billion up 34% over the third quarter of 2008. Sales were lead by our U.S. generic business which benefited from the launch of Generic Ortho Tri-Cyclen Lo and Generic Eloxatin as well as by continued sales of the generic version of Lotrel and Adderall XR and a solid performance from our base business.

Since the start of the year we have launched 17 new products in the US, representing annual brand sales of $11.5 billion. This has increased our product portfolio to a level in access of 400 molecules. Our pipeline now totals 210 files representing $113 billion of brand sales, 83 of these are files or certified representing the brand sales of $64 million.

The unparalleled breadth of our product portfolio and pipeline is a great advantage for Teva and enabling us to offer our customers by far the largest number of products under one roof. In Europe, Pharma sales in local currency were up by 28% and the US dollar by 15% over Q3 of ‘08, reaching a record $787 million. Sales were especially strong in Germany, Spain, Poland, in countries in Central Eastern Europe.

The European market remains a turbulent one, something you can see for instance, when it comes to market growth. Major markets like France, Spain, and Italy were exceptions that had grown by 15%, in actuality they grew only around 5%.

Despite this challenging condition in Europe, Teva managed to our market share in key markets and I’m pleased to report that our portfolio of products in Europe continues to strengthen and grow. As of September, we have received 880 generics approval in Europe during 2009.

Q3 was another excellent quarter for Teva’s international business, with sales in local currencies growing by 33% for all of 17% in US dollar to reach $463 million. Results were especially good in Russia, where we enjoyed very strong sales of products from Teva and Barr’s combined portfolios and in Latin America, with sales of seasonal medication were very strong.

Teva’s innovative business continued to grow in Q3, once again achieving record breaking sales of Copaxone, the world’s leading therapy for the treatment of multiple sclerosis. Global in market sales of Copaxone grew by 38% over the third quarter of 2008, reaching a $776 million.

Over 50% of this growth came from an increase in unit sales. Our global market share, which 30% in revenue terms and the gap between Copaxone and the next closest competitor has now risen to eight percentage points. In the U.S., in-market sales increased by 53%. Outside the U.S., Copaxone grew by 23% in local currency over Q3 ‘08.

Copaxone has demonstrated unsurpassed efficacy, safety and tolerability although more than 930,000 patient years of exposure and we continue to advance our research to ensure Copaxone position is the first line growth stand up and MS therapy levying to the future. I know that many of you have questioned about the possibility of a generic version of Copaxone.

We remain confident, that Copaxone we called generic competition a little bit the product lifecycle is minimal. To begin with, Copaxone is protected by multiple patents that will not expire until 2014 and 2015. As we know, Copaxone is an extremely complex that with the ingredients of which are difficult to fully characterize.

We therefore believe, that just like biology, any potential generic version of Copaxone must be evaluated in placebo-controlled clinical trials with clinical endpoints for the multiple sclerosis patients to establish the efficacy and safety to measure immunogenicity.

Let’s turn now to Azilect, which had an excellent sales quarter. Sales in Azilect grew 39% of the Q3 ‘08 led by strong sales in the U.S. in major European Markets. Global in-market sales grew by 45% in local currencies. In September, the New England Journal of Medicine published results from the budget trial. The article has also concluded the way from the benefits of early start treatment with Azilect benefit that were not achieved when the start of treatment was delayed and one milligram per day dose of Azilect may have a disease multiplying effect.

We will be working with the FDA to incorporate and the review this finding and other results from the study. We expect to file a supplemental NDA, a supplemental NDA with the FDA in 2010. Of course, this got timing of any notification to Azilect’s label is subject to the FDA review in the global causes.

Turning now to our global business respiratory business, sale reached a record of $243 million, up 37% over Q3 08. The increase was driven primarily by strong sales of ProAir in Teva in the U.S. As the U.S. serve, our market continues to grow growing by 7% in Q3, ProAir is maintains its leadership position with 56% share of its market. We’re also excited about Teva’s growth during 2009.

Teva achieved the number two market position in each class. The market share in NRx of 17% up from 13% in 2008 and I’m pleased to report that in October, we began Phase III trial of nasal beclomethasone dipropionate HFA for the treatment of allergic rhinitis, the most common allergic disease in the U.S. and abroad. Teva’s women’s health business reached sales of $103 million, an increase of 10% of Barr’s comparable sales in the third quarter of 2008, supported by our introduction of Plan B One-Step in July.

As I mentioned earlier, we are continue to make great progress in the integration of Barr, a transaction, which closed only 10 months ago and outset of the process we set very ambitious goals including an ambitious timetable for the integration. Thanks to the outstanding work of the combined Teva and Barr teams, we are exceeding many of these goals, working more quickly, more efficiently and ultimately realizing even more synergies than we had targeted.

As I told you last quarter, we now expect to realize $500 million in annual synergies on the acquisition by 2011. We have made great progress in integrating Barr supply chain in many geographies into Teva’s global supply chain, something that is also enabling us to eliminate production order and streamline operation.

As the Barr integration in our numerous other successful acquisitions although the years demonstrate, business development is one of Teva’s core competencies. I know that there has been a great deal of stipulation about what Teva’s next move might be when it comes to merger acquisitions.

So I would like to take a moment to address the question that I think light of the top of this speculation and thus that is what does Teva hold for acquisitions today? The short answer is that our approach has not changed. As always we continue to see opportunities to enhance Teva’s growth and our competitive position, whether it’s through expanding existing activities or through entering the new geographies, businesses or market segments or offering new products.

A new value of acquisition, our ProAir remains to any acquisition must be outspending strategic fit supporting our leadership position. It must contribute to positive growth, it must offer opportunities of significant synergies and most importantly any acquisition must have strong financial justification and must become accretive to EPS within a reasonable time, which for Teva means by the end of the first year after closing. Our expertise in targeting, acquiring and integrating companies has been a key driver of our success and we continue to do so in the future.

Finally today, I would like to review our financial outlook. We are very proud of the results of the first nine months of the year, which have viewed the revenues of more than $10 billion in EPS of $2.43. Based on our performance during the first three quarters and our outlook for the fourth quarter, we now expect 2009 EPS to the range of $3.30 to $3.40, compared to the previous range of $3.20 to $3.40.

Looking forward to 2010, we expect EPS to be between $4.40 and $4.60. This is on the strength of a number of factors including our generic launches in the United States, which will kickoff on January 1 with the launch of Generic Imitrex. The most visible generic launch opportunity as you know is the exclusive launch of venlafaxine, our generic version of Effexor Xr, which is scheduled for July 1. Other important drivers for 2010 will be the completion of the take back on Copaxone from Sanofi-aventis in North America, beginning April 1, and enabling synergies from the Barr integration.

Last, but not least, I would like to take this opportunity to invite you to join us in New York on January 5 where we will be discussing our updated strategic outlook. We are very excited about what those, the near and long term future holds for Teva and I’m looking forward to sharing our vision with you.

Thank you very much and now I will turn the call over to Eyal for a more detailed financial review. Eyal.

Eyal Desheh

Thank you, Shlomo and good day everyone. I hope you’ve had an opportunity to review the press release we issued earlier today. As you can see, the positive momentum in our business continued into the third quarter of the year and we’re reporting today another record quarter for Teva in terms of sales, GAAP and non-GAAP operating income, net income and non-GAAP EPS there’s a lot of record. Equally important, cash flow and free cash flow reached record highs.

These results were driven by a good product mix, tight expense control and continued progress with our integration with Barr. During the quarter, we also work to strengthen the balance sheet and to improve our financial leverage even further. Before we go into the numbers I would like to remind everyone that we are presenting GAAP and non-GAAP results, in a non-GAAP presentation we have excluded the following items this quarter.

Amortization of purchase intangible assets and inventory step up totaling $147 million of which $138 million are included in COGS and the remaining $9 million are in sales of marketing, $47 million in restructuring costs, these cost partially reflect the integration of our facilities in Germany with total Barr operation in Germany and we moved our operation into Barr and closed down our offices while reduced headcount of the Teva employees, these expenses are part of the P&L and part of the EPS as we do when we get closed down the Barr facility.

$37 million in impairment of assets these amount result primarily from the write off of product rights, $13 million in legal settlement in connection with the product of four litigation and in addition, the related tax benefits of $87 million. You should note that the items excluded in deriving at our non-GAAP result in the third quarter of 2008 are not identical to those in the current quarter.

On the one hand in Q3 2008 we did not have legal settlement, impairment and restructuring expenses and we have a lower level of amortization, but on the other hand we excluded a payment of $100 million we received as a settlement from an institution, which was offset by acquisitions of in process R&D and the write-down of auction rate securities.

As indicated in the past, we present non-GAAP figures to show you how we, the management team and our Board look at our financial results. Looking at consolidated results, sales of $3.55 billion, an increase of 25% compared to Q3 last year. The Barr acquisition contributed to growth in sales in all of Teva’s geographies, particularly in the US, Russia, Poland, Germany and Croatia.

Similar to the first six months of the year, foreign currency differences adversely affected sales this quarter by $160 million or 6% as the dollar strengthen against certain foreign currency compared to the third quarter of 2008 primarily Hungarian Forint, the Russian Ruble, the Euro, the British Pound, the Polish Zloty and Israeli Shekel. When we eliminate the foreign currency impact for the quarter, consolidated sales actually grew by 31% in local currency.

Pharmaceutical sales in Europe grew 16% in US dollars and 28% in local currency while pharmaceutical sales in our international markets grew 17% in US dollars and 33% in local currency. Non-GAAP operating income was up 42% compared to Q3 2008 reaching $1 billion and benefited from strong gross margin and tight expense controls. This quarter, foreign currency differences also had an adverse effect an operating profit of approximately $25 million.

The negative impact on operating profit resulted primarily from the strengthening of the US dollar relative to the Russian Ruble, the British Pound and the Polish Zloty geographies in which we have higher sales than expenses, partially offset by modest evaluation of the Israeli shekel against the US dollar where we have higher expenses than sales. Non-GAAP net income was strong up 28% to 30% Q3 ‘2008 despite higher finance expenses and a higher tax rate, which were planned, both resulting from the acquisition of Barr.

Non-GAAP fully diluted EPS were $0.89 per share up 16% compared to Q3, 2008. Similar to the previous quarter, we had approximately 78 million more shares this quarter than in the third quarter of 2008 in our GAAP earnings per share calculation, due primarily to shares issued in connection with the Barr acquisitions. The housekeeping points related to the EPS calculation. You will find share count details in the press release we’re issued today and add back for the non-GAAP EPS calculation is $10 million.

Now let’s discuss profit margins and operating expenses. Non-GAAP gross profit margin which excludes amortization of intangible assets and the inventory step up of 58.2% in the reported quarter compared to 54% in the comparable quarter of 2008, but similar to non-GAAP gross profit and the first two quarters this year. The improvement in gross margin was contributable to higher contribution of sales from our branded and independent franchises as well as improved gross margin in the U.S. generic base business.

Non-GAAP operating margin reached 28.1% up from 24.6% in the comparable quarter last year driven primarily from strong gross margin and partially offset by higher sales and marketing expenses. Net R&D expenses reached $195 million or 5.5% of sales. Despite lower net R&D expenses and percent of sales the number of our generic fasted mission has substantially grown this year compared to 2008. In the U.S. as well as in Europe and international markets, however this is not just volume but also value.

A year ago, we had 58 Paragraph IV with the FDA which we believe to be certified, representing brand value of $42 billion. Today, we have 80 fulfill missions which we believe to be first to be certify representing brand value of $54 billion. The pipeline has also enabled us to keep R&D expenses lower than we had originally anticipated and when we committed to a plant we double our Generic R&D input and output for 2007 levels by 2012 and we expect Q4 R&D investment to be higher than in the past two quarters.

Sales and Marketing expenses excluding amortization of intangible assets total $662 million in the quarter or 18.6% of sales compared to 17.1% of sales in Q3, 2008. These higher sales and marketing expenses are the results of two main factors, a contribution of Barr business which is characterized by higher sales and marketing expenses and higher contribution to sales of Copaxone, which resulted in higher payment with Sanofi-aventis.

Total G&A expenses this quarter were $212 million or 6% of sales compared to 5.5% of sales in Q3 last year we will increases resulted primarily from litigation expenses. We reported $52 million of financial expenses in Q3 compared with $17 million in non-GAAP financial expenses in the comparable quarter of 2008.

The higher financial expenses resulted from debt incurred in connection with the Barr acquisition; financial expenses were down $9 million from the second quarter this year as the result of decrease in our debt over the past two quarters. The non-GAAP tax expense provided for Q3 is $136 million compared to $52 million in the third quarter of 2008. We now estimate our annual rate of tax for 2009 on a non-GAAP basis to reach 16%, compare with the rate of 10% in 2008. The increase in the tax rate from 2008 to 2009 resulted primarily from effect of Barr’s effective tax rate is higher than Teva’s.

Now let’s have a look at our cash flow. Cash generated from operation exceeded $1 billion for the first time. Our free cash flow excluding Capital Expenditure of $195 million and cash dividends of $126 million amounted to a record of $704 million, the strong cash flow was driven by a reduction in working capital.

On September 30, our cash remained unchanged from three months ago at about $2 million in cash and marketable securities. Our total outstanding loans, bonds and convertible debentures ceded $5.8 billion down a $1 billion dollars from the balance as of the end of June.

During the quarter, we repaid approximately $800 million of debt including the remaining balance of the bridge loan we took from the Israeli banks to finance the acquisition of Barr. This quarter, an additional $168 million of our half percent and quarter percent of convertible debenture is doing 2024 were converted given the principal amount of these bonds at approximately $182 million.

I would like to remind you again that a conversion did not impact the fully diluted share count and earnings per share calculation and these shares were already included in the diluted share count calculation before. The $1 billion debt reduction, during the quarter together with our equity growth, including our financial leverage from 34% as of December 31, 2008 to 23% as of September 30, a level that is lower than our leverage as of September 30 last year, which was prior to the acquisition of Barr.

Moving to our days sales outstanding amounted to 50 days this quarter compared with 47 days in Q2 2009 and 55 days in Q3 2008. We calculate DSO as they always do after netting out from the receivables, that sales reserves and allowances provision. Inventory days were 195 days similar to the comparable quarter last year to June 2009 figure of 198 inventory days will be sorted by the inventory step up release. Net Capital Expenditures, reached $195 million this quarter compared with $170 million in Q3 2008 and $148 million in the previous quarter.

During this quarter, we executed on a number of plans to expand certain securities especially in Israel and the Czech Republic. We continuously evaluate our facilities moving production from one location to another closing down inefficient and in expensive facilities and expanding others to maximize production efficiency and profitability.

For example, during the quarter we announced closing the facilities in Ireland and our Barr facility in the Czech Republic, while investing in the others I just mentioned. Last but not least, dividends, yesterday Teva’s board approved a quarterly dividend amounting to approximately $140 million on a per share basis our dividend, which is declared in Israeli shekel was 0.6 Shekels per share. Based on the rate of exchange yesterday, the Shekel to the Shekel US dollar, this translates into approximately $15.09 per share.

That concludes my comments. Thank you all for your time and attention today and now we’ll be glad to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now conduct a question-and-answer session. (Operator Instructions) Our first question comes from Randall Stanicky with Goldman Sachs; please state your question.

Randall Stanicky - Goldman Sachs

Great, thanks guys. Just one question and then a follow-up, Shlomo, based on your comments today around M&A, should we read that to see any change in your interest in either generic versus a brand deal or the size of potential deal?

Shlomo Yanai

No, my message was actually nothing has been changed. Our strategy is as I explain many times that our major business is India, generic arena. This is where we see more potential to growth. We have in addition a very interesting and very profitable branded business, which we NIOSH and going to grow as well and a lot of important things of how we are evaluating and how we are targeting and later how we are integrating the acquisition and Teva is an accretive company, we’ll continue to acquire companies in due time, so I don’t want to raise any speculation on any other kind of misunderstanding about the Teva future.

Randall Stanicky - Goldman Sachs

Okay, fair enough. Then a follow up that maybe for Eyal, on the lines in the R&D spending in general, how do you think about the JV investment and in the reimbursement that line items down ran a little bit from the last quarter to this quarter. So, as we think about modeling over the next several quarters how should we think about the contribution from those two angles?

Eyal Desheh

This quarter, we had a much smaller reimbursement was about $8 million, which reduced our R&D expenses quarterly as far as I know there’s nothing much left from these reimbursement and everything in the future will be done jointly by the contribution for the two companies equally, the last of the two statements.

Randall Stanicky - Goldman Sachs

So, how much should we expect you to contribute to the JV going forward on a quarterly basis?

Eyal Desheh

In terms of our investment and our share investment by view I repeat the question I don’t think that we ever communicated on a product line by product line level, but on an annual basis we’re talking about tens of millions of dollars, not hundreds.

Randall Stanicky - Goldman Sachs

Okay, thank you.

Operator

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

Scott Hirsch - Credit Suisse

First, you noted that in the gross margin expansion or in the gross margin in general you saw at least partly part of that was driven by better gross margin in the US base generic business and I’m kind of curious how pricing situation is overall.

Shlomo Yanai

Bill, will you take this?

Bill Marth

Sure, thanks for the questions, Scott right now, the base business has been very strong, obviously you do know that some of our competitors have had some issues in the market so we have been able to pick up some of those products and we’ve picked those up in our pricing and not at previous pricing so we’re looking for both share growth as well as some positive pricing trend, as well as the things that Teva does everyday with driving down its API cost and driving up the sufficiency, so all of those have combined to make the base a little bit more profitable.

Scott Hirsch - Credit Suisse

What is your flexibility in pricing for Copaxone compared to I guess the Avonex and Betaseron, Rebif? Is there still more room for pricing flexibility?

Moshe Manor

Well, I think at this point in time that we are priced competitively. We don’t want to be the lowest price in the market nor are we necessarily the highest, so we’ll wait and take our time and see what happens with the market.

Scott Hirsch - Credit Suisse

Then just lastly, does settlement legislation here change the way you think about at risk launches, post 30 month stays? Does this model change in the future in anyway?

Moshe Manor

The thing about the legislation that’s currently out there is it almost favors Teva in the situation that we are able to launch our product at risk and at that point in time all of the settlements we have recently entered, you go back to ethinyl estradiol, Ortho Tri-Cyclen® Lo if all been the same sort of settlement which is totally appropriate within the current legislation which is a date of entry settlement, so in a strange sort of way, if the settlement Bill goes through, I’m pretty well convinced the only people who will be able to settle will be Teva.

Scott Hirsch - Credit Suisse

Interesting. Okay, thank you.

Operator

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

.

Rich Silver - Barclays Capital

Just on Copaxone, it seem likes it’s increasingly difficult to forecast, at least for us year-over-year we’re looking at 11% growth and you reported 53% year-over-year growth and there was only about a 10% price increase. Can you help us reconcile the script in the sales growth and what might account for this other than price and I have one follow-up.

Shlomo Yanai

Hi Rich; first of all, you should see that a different quarter of 50% of the Copaxone growth came from quantity, not from price. I think that this is a very good example to show the quality of the Copaxone in the long term with more holistic point of looking and I think that Copaxone will continue to increase to get as the safety, which is a very important part.

It’s again and again pulled by this product to the MS patients. Now on the other hand, I don’t think that you should take this quarter, which we are very proud of as the kind of the quarter that will give you a new Barr of our growth rate of Copaxone. I think Copaxone continued to grow, but sometimes and again as you will know a quarter is not the right way to measure a Copaxone future. Moshe, if you would like to add on to that please jump in.

Moshe Manor

I think the growth in Copaxone as we see it in the U.S. and outside the U.S. is mainly driven by quantities and share growth and I think Copaxone as of the uniqueness, we believe that Copaxone will continue to grow and continue to out pace market growth in all of the rest of the year and in 2010 as well.

Rich Silver - Barclays Capital

Historically, the inventory levels have been relatively low, so can we still assume that again this difference, which doesn’t seem to be accounted for by price has nothing to do with any kind of inventory changes?

Bill Marth

Yes Rich, this is Bill Marth. No, we haven’t seen any inventory changes. Right now we’re in the 20 days area, 21, 22 days inventory is out there. So it’s remained fairly constant. So we’re pretty happy with that.

Rich Silver - Barclays Capital

Okay, just one follow-up on R&D. Eyal, on the last call, when R&D spending seemed to come in a little lower because of the longer reimbursement, you said for the year a 6.8% to 7.2% range for full year R&D spend as a percentage of revenues is a good number. Is that still the case?

Eyal Desheh

No, I don’t think so. I think I mentioned that in my opening comments, the thing what we have done during the year, we looked at R&D and the throughput of R&D, what we got from the Barr acquisition, the level of [performance] that we have, how can we deliver more without expanding resources and I think that the 7% average that we predicted for the year.

I will not have a clear number in our strategic plan. We are planning to peak at around this time and then to start leveling down. I think we peaked a little earlier and the number is good, but it could be somewhat lower; having said that, Q4 is going to be definitely higher than Q3 in absolute numbers and probably also in percentage of sales, because we’re planning a lot of activities both on the generic and beyond generic part for Q2, but we do not make up to do at 7% from R&D margin.

Rich Silver - Barclays Capital

So next year, do you think that would be still at 7% or below that number?

Shlomo Yanai

We are not yet on the 2010 because we are in a planning process, but let me jump in here by emphasizing one thing that I believe that it’s important to say when we are talking about Teva’s R&D. We remain committed to our plan to double our generic R&D out groups from the 2007 level, when we initially launched our strategy for the next years. As for this year, I can assure you that we doubled the number of our submissions and what counts or what really counts, is the output and not the expense.

As Eyal said, part of the Barr pipeline has enabled us to keep the R&D expenses lower. Now to a certain degree in the R&D, we will double the output for our R&D, so our future is safe and actually even bright, but when it comes to other part of our R&D, that could ramp up the level of investment or expenses in R&D, because as Eyal said, we have also innovative R&D product and Bio-G product and some specialty R&D activities as well.

Rich Silver - Barclays Capital

Thank you.

Operator

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

Chris Schott - JP Morgan

Great, thanks. First question is just can you elaborate a little bit on the trends you’re seeing in your Western European business and I guess, I had a bit of turbulence still in the French market. I guess, specifically what you’re looking at to turn these markets around for Teva and I said, a follow-up from there.

Bill Marth

Eyal, would you take this question please?

Eyal Desheh

Yes, Bill, with pleasure. First of all let me say, if you look at what the overall European dynamics has been as exactly it’s been turbulence, but there has been some clear spots of good news in there as well. Altogether we could say that, we are very happy with the performance as mentioned of our business in Poland, which is by the way the only European market that hasn’t gone into recession.

We are very happy with what’s happening in Germany. We’re growing our business there and we’re seeing our position in around about the number five position in the marketplace being cemented there. Three, we see our Central European business taken up extremely well, the branded part of that business, is branded generics markets. We are really performing very well, we’re growing our share in places like Hungary, but in many other markets in that area we’re doing extremely well and although there is a slowdown of the economy in some places, even a bad situation with negative growth, we’ve continued to grow our share there.

We are continuing to build on the success of the acquisition last year in Spain of Bentley and we’re growing our business there and although the total market is slightly behind our expectations, we expect that to pick up, because there is a clear growing demand for the sort of medicine that we bring to the market. The generics market is clearly underdeveloped there, but then turn to Markets like the U.K. and the Netherlands, where there is much more of price competition.

We see in these markets that in particular in the trade and the wholesale, there is a lot of tension and there’s a lot of margin being squeezed out and in those circumstances, we are doing very well. We’re growing our share in both of these countries, because our offers to the market is exactly the right blend between pure commodity and more specialty products and our customers share in all of these markets is going up and our pharmacy share is going up and our overall market share is growing.

France is a case where the market has gone down, has not been growing as fast as we hoped it would be. We expect some changes in the next year from the government, which would give some more focus to growth there again. In that circumstance, we have taken a very firm Number three position now, where we have been pitching for that for the last year and a half.

We took it, we’ve taken it and we are now stable on the Number three position and are looking up for the next one and then finally, we’ll take the market which is the most difficult one to assess at this stage which is Italy. In April, there was a change of policy before April that was very turbulent, unmanageable and unpredictable situation in the Italian market.

Since April, there has been a fix of discount regimens in retail there’s also been a low penetration of generics and that’s disclose was it is today is good in terms of stability of the market. We have captured our market share back to about 17%, where at the number one position although is very fluctuating month by month, and we expect from that position onward that the Italian government should set out clear direction for the future of those markets we’re in a good position to benefit from that when that market goes and picks up again.

All in all, you can say on the European business that, we have the good combination of our commercial presence in all of these places I just mentioned to capture the changes, but we also have this R&D machine that is helping us to launch at a high frequency yield needed products and I think that’s one of the main driver for us in doing it better than our competitors.

Chris Schott - JP Morgan

Great, thank you. Just a follow-up on just the U.S. side, on the U.S. generic business, can you comment specifically, did you see any benefit from EpiDex supply interruptions with the Q3 results or is that more of an opportunity we should think about in Q4 and beyond? Thanks.

Eyal Desheh

Thanks for the question, Chris. The EpiDex share, you don’t see it show up in our share right now. EpiDex did have products in the market. They were blocked in bringing further products into the market. We overlapped on 60 some different products and we think we did pretty well there. I think you’ll see the share gains in the future. We’re now looking to drive our share in the U.S. generic market to around 25% up from where it currently is, so we think that we’ve done pretty well with that.

Chris Schott - JP Morgan

Great, thank you.

Operator

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

Greg Gilbert - Banc of America/Merrill Lynch

Thanks. First for Eyal and Shlomo, just to avoid any speculation, can you tell us which financial metrics and time periods you will specifically be discussing on January 5?

Eyal Desheh

Yes, when we talk about our strategic plan between the January 5 and the end of 2016 and in terms of financial metrics, I’m afraid we’re not going to be very innovative, we’re going to talk about sales, expenses, profit, business drivers, how the company is going to look like, engines of growth and everything you talk about when you discuss strategy.

Greg Gilbert - Banc of America/Merrill Lynch

Great, thanks.

Eyal Desheh

I hope that answered.

Greg Gilbert - Banc of America/Merrill Lynch

Yes, certainly and then my follow-up is about Copaxone. Do you have any update on the high concentration Copaxone and if not, when will we get that and then Shlomo, you talked about Copaxone patents in 2014 and 2015. The 2014 ones in the Orange Book, can you expound on the patent or patents that go to 2015 and those non-Orange Book patents or patents in other countries? Thanks.

Shlomo Yanai

Moshe, would you lend a voice on the patent issue on ‘14, ‘15, and then we’ll get back to the rest of your question.

Moshe Manor

So the question on the patent outside the U.S., that’s for 2010 and ‘15 and my another question on the going touch and then...

Greg Gilbert - Banc of America/Merrill Lynch

I’m sorry, I was just making sure there were no patents in the U.S., that you were alluding to that go past 2014, is that correct?

Moshe Manor

Yes. Definitely and above the injection volume, actually we already completed the enrollment of the study about 150 patients and we’ll have the results at the end of this year or the beginning of next year and based on the results we’ll make a decision out and move forward with the project as well.

Greg Gilbert - Banc of America/Merrill Lynch

Thanks.

Operator

Our next question comes from John Boris with Citi; please state your question.

John Boris - Citi

Thanks for taking the questions. First question just back to M&A, I think in your criteria, Shlomo that you laid out one of the most offer new products, can you be a little bit more specific you had indicated a preference for branded products relative to generic products. So is that a bit of a change from your last commentary and then you provide any insight into the size of the deal that you’ve in the past collared, the size of the type of the deal that you’re going to do, but can you provide any insight into that and then I have a follow-up for Bill.

Shlomo Yanai

Can you be so kind and repeat the first part of the question, because we hear it here very badly.

John Boris - Citi

Sure. It has to do with M&A, the criteria that you outlined as far as your approach to acquisitions. I think you indicated, Shlomo, to offer new products. Can you be a bit more specific about your preference for branded products relative to generic products and again your former stated you’ve indicated you wanted to drive your branded share as a percent of total sales higher?

Then on size of deal, you’ve collared the size of the type of the deal that you’re interested in doing. Can you provide any commentary as to whether your previous statements about size of deal are still intact or whether you’ve changed that and then I have a follow-up for Bill Marth.

Shlomo Yanai

Okay, first of all, the criteria that I mentioned are the same criteria for buying or acquiring the companies or acquiring products. They are the same that the rationale is the same rationale. As I said, we’re going to discuss more about our strategy on the January meeting and we will cover there of course an update, a strategic vision for the timetables, the time range that Eyal just said, i.e., till 2015.

Generally speaking, I can say that we see even in the non-current future, Teva major business of the generic business and of course, we’ll grow in also in parallel percentage or awfully speaking the same ratio our blended in the blended business in the blended business, we will put some more focus and what we call the specialty segment where we believe there is a good future for Teva.

Because we’ll maintain our growth strategy and I’m sure that we will enhance and do some enhancement in those part of the business, but this is generally what I can comment on acquisition now. Regarding the size is not I think the real issue. The real issue is the strategic fit and the economics and the accretion element as I mentioned before, these are the three major components that we are looking for and definitely based on our capabilities and our strategy, we will hit or try to stick to these criteria.

John Boris - Citi

Okay, thanks and for Bill, on Prevacid, how you’re thinking about that opportunity? How it’s shaping up in terms of how you’re going to capitalize on not only the capsule formation, but an update on the legal situation around the OTT formulation?

Bill Marth

Yes, John as you may know, right now on the OTT, that is still before the Judge and we have not heard from her yet so we are hopeful that we will hear before November 10, and that’s probably about all we can say on that. With respect to the capitals of course, we do expect that it will launch on November 10. We have the attentive at this point in time.

Of course, we have heard that Sandos is going to be the AG that’s about all we’ve heard, so it’s a very fluid situation. We hope it will be favorable for us and we’re cautiously optimistic.

John Boris - Citi

Thank you.

Operator

Thank you. Our next question comes from Ken Cacciatore - Cowen & Co; please state your question.

Ken Cacciatore - Cowen & Co.

Hi, guys, thanks. Bill, can you comment on the Shire litigation concerning Adderall XR, if can you put context around that seems like you’re not satisfied with the amount of products you’re getting? Also maybe could you give us a regulatory update on Lovenox, for both and you if you’re aware of anything surrounding your competitor?

Eyal, I believe original revenue guidance was $14.1 billion $14.6 billion in 2009 and that clearly seems like if you’re going to be falling below the range? Can you just give us some sense as to why that is? I think that was even currency adjusted, did we just miss a launch that you thought you were going to have in your numbers or maybe put a little bit of context around that? Thank you.

Bill Marth

Maybe we’ll start with the revenue. Shlomo, do you want to take that one?

Shlomo Yanai

Ken, let me first take the one on the top line forecast. I’m sure that as we know, this has been and continues to be a very volatile year, especially when it comes to a foreign exchange rate, as you just seen just the first three quarters of this year, we experienced a negative effect of our top line of $670 million, only this quarter we said $160 million negative impact.

So this was very volatile and developing which makes it very difficult to provide a precise projection regarding the top line this year, but back to your question, I would say that we expect to be in the neighborhood of $14 billion and definitely we’ll do our best even though the dollar from moving part even though FX and others as you mentioned that we would be in our numbers.

Ken Cacciatore - Cowen & Co.

Great and then maybe Bill’s quite maybe…?

Bill Marth

Yes, Ken, good morning. On the Adderall, right now, obviously we don’t like to comment on ongoing litigation, but what I would say is that it’s a very simple situation of we think the agreement is quite clear that Shire needs to supply us what we’ve requested and we don’t think they’re doing a very good job at that so I think I’ll leave it at that. Your second question was with respect to Lovenox.

Again, I wish, I had a Crystal ball and could tell you exactly that when that approvals come and I can’t really comment too much for the other players in the market. I’m not sure where Momenta is right now and I’m not sure about Amphastar. What I do know is that we see application progressing very nicely. We’re getting very normal questions back around labeling and all of the typical stuff. So we do see activity and very positive activity.

Operator

Thank you. Our next question comes from Ronny Gal with Sanford Bernstein; please state your question.

Ronny Gal - Sanford Bernstein

Good morning. Thank you for taking my question. First, I’m looking at my model and looking at your range for 2010, therefore 40 and 4.60 and thank you very much for providing it, but there seems to be a lot that is still in litigation and I was wondering if this is essentially your best guess now, but if obviously litigation cases work the way through the court in 2010, the possible range of outcome is much wider than 40 then 4.40 and 4.60 and I do have a follow-up.

Shlomo Yanai

Ronny, hi, it’s Shlomo. Again to apologize, we hear your voice very turbulent, so if you can be so kind and repeat your question?

Ronny Gal - Sanford Bernstein

Sure. I mentioned that, you gave us a nice guidance, the 4.40 to 4.60 next year, but there seems to be a lot more that is still in some of the courts right now and I was wondering if this is simply the number you’re willing to commit to now and if things work through the courts obviously your guidance will have to change?

Eyal Desheh

I think now we heard you well, thank you. It’s Eyal, I’ll take that and Bill you may jump in and add, because you’re on of course in the United States, but it’s a simple standard answer. I mean, we tried to risk adjust our business plan. We know that we’re now going to win every case, but we know that we are going to win some. We try to bring everything into consideration and be sure that we know we are predicting.

They’re moving parts, I mean there’s no doubt and it could go a little higher and it could even go a little lower, but there are other parts in our business, which are not intended for litigation. So that’s where we are and at this time of year we are all busy and finalizing our work plan, working how to do, making sure that what we predicted early this year is still valid and they are in the middle of the evaluation. Bill, do you want to add something on the litigation part?

Bill Marth

Yes, Ronny, just a couple of follow-ups. I mean of course and we talked over and over again about the venlafaxine and people know that, but there’s a lot of other cases out there such as we feel pretty good about Angiomax, Gemzar. We’ve already talked about Mirapex comes at the beginning of the year. We’re very hopeful on the appeal on Vista and Temodar is just to name a few is an exciting opportunity for 2010.

Ronny Gal - Sanford Bernstein

Very good and second I guess this is more of a global question. You kind of there was a nice discussion there quite earlier about potentially pushing up the R&D a little bit towards the 7% rate year throughout, but if kind of looking at your business model once they’re branded, two third generic and looking at the branded R&D of around 15% and I know you want to keep your R&D level low, but it looks thinking about your investment rate, shouldn’t as R&D line be closer to 10% as opposed to closer to 7% two or three years out?

Shlomo Yanai

No, I don’t think so. I think that the more we look into our future and you’ll remember that we are willing to maintain the ratio, roughly the current between the branded business and the generic business. We believe that we will do more than okay in the current numbers. It’s important to emphasize that from my perspective, its expectative is the name it’s not the end.

The end is where we are willing to grow, what are the products we would like to develop and we come to the conclusion, that this is the products or this is what we would like to be in then we will dedicate the plans or whatever is needed in order to be there. Right now, we think that we are doing it, we are achieving our target without R&D and we have a different kind of R&D in Teva in the like level. So you should not expect us to go into the finish kind of with numbers.

Ronny Gal - Sanford Bernstein

So do you believe that your current branded pipeline is wide enough to support your growth in the three to five years out?

Shlomo Yanai

Generally speaking, to where we would like to be, I believe so and definitely part of our long term future would be not only organic R&D in this respect but also to a certain degree some acquisitions that would compliment our immediate portfolio to support our future projected sales in our branded part of the business.

Ronny Gal - Sanford Bernstein

Thank you.

Operator

Our next question comes from Elliott Wilbur with Needham & Co.; please State your question.

Elliott Wilbur - Needham & Co.

Good morning and a question for Shlomo, if you could just comment on performance trends in the TAPI business in the quarter. I know during your last strategic review you talked about this being roughly a $1 billion business by 2012, but sales have continued to remain relatively soft.

I still think we’re tracking roughly around 2006 levels. So I’m just sort of puzzled frankly kind of given to strengthen the overall generic business worldwide, why we’re not seeing stronger performance trends in that segment? Then maybe just a follow-up question for Bill, if you could just give us kind of your latest read on where exactly we are with respect to Biologic’s legislation and what we should be looking for there?

Just maybe some color commentary on the notion that 12 years is a significant set back for the generic industry and thinking there is that while obviously, to longer period of time than what you hope, the reality is that at least economically, you could be looking at products that are multiples above kind of where they are in the seven year in the life and 12 year, so I’m wondering how damaging you really think that is, thanks.

Shlomo Yanai

Let me first answer the TAPI part of your question. You have to be aware that, when we acquire companies, actually, we also acquire part of our customers, so from that point of view, the Barr acquisition actually took a third party or external customer and make it a determined one.

So what you see in the TAPI numbers, actually the third party business or the external part of the business and I’m just giving it as an example, because as we grow the business, TAPI is more busy with supplying Teva’s internal needs and definitely in the same time we would like to grow our external business a part of the number that we see is, because that we actually move part of our customers into our internal universe. So we TAPI continue to grow the business, TAPI is the largest API producer in global terms and that’s basically what I can say on the TAPI product. Bill.

Bill Marth

Thanks for the question, Elliott. There was a couple of perspectives here on biogenerics. I mean, first as the Chairman of the Association I have to say that, you probably did see the letter we sent to the White House asking the Biologics legislation is stripped from healthcare reform, because we think with 12 years of exclusivity and really the troubles around the evergreen, it’s just not helpful.

It doesn’t really create any competitive situation for the generic industry, so that’s my Chairman in GPHA. That said, from a Teva position, we’re going after these products whether we have to do it through an ADLA or ADLA, and we’ve talked a lot about our filing or GCSF and again, we are hopeful that we will get that accomplished yet this year.

We are hopeful that we will get that accomplished yet this year. We are hopeful about products like Neugranin, which is the Albumin infusion, HCA to the Albumin infusion GCSF. So we’re going to go after these products one way or another as Teva. So as I’ve commented many times to the press, don’t feel bad to Teva. Teva is going to be in these markets regardless. What I would feel bad for unfortunately is for the American consumer, because I think they’re getting a bad deal.

Operator

Thank you. Our final question comes from Mark Goodman with UBS; please state your question.

Mark Goodman - UBS

Two questions; first, Bill, you talked about Adderall XR a little bit, but I guess I’m just a little confused. I mean was last quarter a big quarter of Adderall XR in this quarter, was it a very light quarter because of supply issues? Is that the way we should think about it and we’re hoping to get it back together in the fourth quarter?

Bill Marth

Yes Mark, I think you need to think about the supply issues as kind of post 180 day issues. This is going to be a tough market as far as supply I think. The way the situation is worked out right now. In supply side, there’s not a lot of inventory out there. So right now, we are hopeful that our litigation will shake some things.

Mark Goodman - UBS

Okay and then the other question has to do with the innovative business, some of the products, we seen a lot of press releases just over the past three or four months. Can you talk about just some milestones and things that we should watch for and on the innovative side when will we see products hit the market whether it’s Europe or U.S., just over the next 12 months, just give us a flavor for what we should see?

Moshe Manor

Yes. This is Moshe. I think first of all, as we discussed near term opportunities on the Copaxone and 0.5 M&A then we talk about the Azilect in ADAGIO and the results on the ADAGIO study and then the goals going forward. In addition, if you look at the innovative on the branded pipeline, I think we have a few interesting products, definitely laquinimod.

We believe that laquinimod is a huge potential for us and looking at the MS competitive landscape in the coming years. We have the private loan product that we’re going to see results in next year and this is a very interesting opportunity for us and other indications that we are developing with laquinimod. So all-in-all, this are relatively I think midterm opportunity and on the innovative side.

We need to remember that on the other segment as well we are developing other branches that respiratory as well we’re developing a few products on respiratory and we have a good development plan for our women’s health business going forward and definitely the biology is one of our growth engines let’s say beyond 2010 and ‘13 or ‘14 timeframe, so all-in-all if you look at the entire spectrum to branded activities, which means that we have a good pipeline and interesting robust growth going forward.

Operator

Thank you. I would like to turn the floor back over to Shlomo Yanai for closing comments.

Shlomo Yanai

Thank you all very much for joining us today and I look forward to seeing you in New York on January 5. Have a good day.

Operator

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 Q3 2009 Earnings Call Transcript
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