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Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA)

UBS Global Healthcare Conference

May 19, 2014 01:00 PM ET

Executives

Eyal Desheh - EVP and CFO

Analysts

Marc Goodman - UBS

Marc Goodman - UBS

So for our next session, thank you very much Eyal Desheh who is the CFO of Teva for joining us. And Eyal has been at the Company a long time. Actually I guess off and on you were there, for the past six years and you were there -- you missed 12 years and then you were there for six or seven years before that?

Eyal Desheh

Right. That was seven years. My first role was Deputy CFO. Then I was out for 12 years where I was CFO of two other Israeli NASDAQ listed company and I came back to Teva exactly six years ago.

Marc Goodman - UBS

Terrific, so we’re going to do this session more interactive. I’m going to ask a few questions and Eyal is going to answer than and I thought we would try to do as much as we can to stay away from Copaxone, just for this session. You guys can ask all the questions you want in the break out. But maybe we can start with the emerging markets. Talk about some of the most important markets that you participate in. How those markets are growing so far this year and how Teva is doing in those markets?

Eyal Desheh

Okay. First of all, like everything in our life, nothing is uniform. We talk about the emerging market. They’re not all the same. We split it to three major areas and even these areas have subcategories. Latin America is one. We’re doing very well in Latin America. We’re present in most of the Latin American countries; not enough in Brazil, a market that we have been looking at for a long period of time and the ability to grow significantly in Brazil. We’ll probably have to go through some kind of a business development activity. It’s a target market, it’s a growing market. Prices of assets in Brazil has been high economically, looking a little better now, I hope also the currency. But in other Latin American countries I believe that we good presence.

Latin America we know not the most stable. Economically currencies has been jumping up and down and are impacting the business and the results. But by and large, it’s an area of growth and Teva is growing nicely. We have a very ambitious and important program of introducing our specialty products in Latin America. Right now we’re selling mostly Copaxone and a little bit of Azilect but we are now in the process for introducing many of our other specialty products into the Latin America countries that will add another dimension in addition to the branded generic product that we’re selling there.

So this is Latin America, definitely a land of opportunity. Some of the economies are large. Mexico is a large and growing economy in terms of pharmaceutical consumption. We’ll probably be close to the 10 largest countries within 5 to 10 years from now in terms of pharmaceutical consumption. And we have a representation there but again some room to grow. So that’s Latin America, definitely an area where organic growth is happening, will continue to happen, with some room for business development growth.

Second area is Eastern Europe. Russia is the center. Actually the two large countries in Eastern Europe or former USSR, Russia and Ukraine two of them, as we all know again are going into some geopolitical issues and in between them it does have an impact on the economy. But we do believe that these are economies which are growing. The standard of living, the quality of living is improving and that means more medicines consumption. We have built a very, very nice and growing business in both of these countries and the neighboring countries around them, and we’ll continue to focus over there. I believe that there it’s mostly organic growth. We do have a very solid base, very broad product portfolio in most of these countries and what we need to continue to do is what we have been doing; growing the business there.

And there will be always some highs and lows as a result of the political situation, the economical situation, the currency situation, the ruble which today I believe is around 32 and 34, 35 or as low as 36, was as high as 29 couple of years ago, highly dependent on oil and gas prices and we’re impacted. But definitely places where we have strong representation, we are a major participant in the pharmaceutical industry and markets in these territories and we’ll continue to grow the business there mostly organically.

And then there is Asia. They have more than half of the population of the world lives. And Asia is first and foremost China and India, the two major countries. In India we have production, in China we have our small presence, definitely two major opportunities. I will put China first. I believe that India with so many of local generic companies, so Teva to introduce market requires special circumstances. With China, China is a huge opportunity, how to do this in generics, nobody have been successful yet. We believe that the Chinese economy and the Chinese pharmaceutical industry is improving, is going through two quality revolutions. The government is very mindful of health, of the health of its population and we believe that it could open up an opportunity for us to be major player in Chinese market. It will take time -- like everything that has to do with China, time and patience are probably the most important parameters. We have patience. We don’t have time. But we’ll try to manage between both of them. So these are the three areas and then of course there are the other Asian countries where we’re active, we’re selling, we’re going organically, could require some business development activities.

But one thing and I’ll finish with that -- that important to understand in emerging market. There are no companies that can give you instant presence by acquiring instance presence in these markets. They are country by country, market by market and that requires a lot of activity and we are looking. We believe that this is where most of the growth in pharmaceutical will come from. That’s okay. Most of the growth in pharma world is going to come from emerging market and we believe that a special focus is required and we are prepared to do this.

Marc Goodman - UBS

You mentioned on the quarterly conference call that the specialty pharma business is under appreciated. I was curious, do you mean that the pipeline is under appreciated, you mean the base business is under appreciated, or both maybe you can expand on that a little.

Eyal Desheh

Let me first give you the some of the high level numbers. Our specialty business today is about $8 billion per year. That’s what it was in 2013 and half of that is Copaxone. Copaxone is responsible for two-thirds of the profit in this business and the rest of the business generate one-third of the profit by and large, okay, more or less. Very natural Copaxone, one large product towards the autumn of its life, very little R&D invested, sales and marketing, yes, we did increase it and even substantially at the beginning of this year with a launch of the 40 milligram but it will all slow down, expenses I mean. And the other half is comprised of 20 different products. Some of them are mid-sized like TREANDA, like Azilect, like some of the respiratory product ProAir, Qvar, some of them, Nuvigil which is a small to mid-sized product, some of them are smaller and growing.

We are focused in two major areas. We’re focused on CNS and three parts of CNS, one is the neuro, the generative diseases, the other pain is pain and the third one is psychiatry. And we are building a franchise in all these three areas by pipeline development and we do have an interesting pipeline. A lot of this is in advanced stages and also by looking outside for in-licensing, acquiring, there are a lot of small companies that are developing very interesting product in these areas and we’re constantly looking at opportunities. We have done a couple over the past few months, added two products to this portfolio, Adasuve for schizophrenia and Zecuity for migraine and we will continue to do that. We believe especially that the pain area is extremely interesting, continues to deliver unmet need and with some innovations and lot of NTEs which we develop in that area, will come to market.

We will probably have a new product in pain in the market, every year from now to 2018 or 2019. Most of them are not very large and not blockbusters, are mid-sized product, $200 million, $300 million, $400 million, $500 million but you put them all together and you can really create significant value and to use the same sales team which is very important.

The second part where we focus is respiratory. Most of that is in-house development. We have been working on this for many, many years. We are now beginning to get approval. The first one we got in Europe for Spiromax product which is an innovative inhaler, which is more safe, more secure and more convenient for patients. And we believe that these products will deliver on our program and last year we have shared our plans for the respiratory segment with the market on the way to deliver a few billion dollars in sales within three to four years. So respiratory is the second focus.

We do have some products in oncology. We don’t believe that this is an area Teva should focus and compete. We don’t have advantage. That’s again for the big boys in oncology. We will be opportunistic there, but this is not an area of focus. This is our specialty program. We are adding a lot of NTEs, which are specialties of 505(b)(2)s protected by patents and by data exclusivity and a way to bring new product based on known molecules to the market for better safety, better ease of use, efficacy, compliance. We have more than 10 products under development right now, most of them in the areas of expertise that I mentioned, and this comprises of our specialty program. You’re right. We do believe that it’s underappreciated, but over time I believe that this value will be unveiled an unlocked.

Marc Goodman - UBS

So we had webinars on the NTE portfolio last year on the respiratory. You have a new CEO. Has there been any change in any of that; or all those programs are still moving forward? And you mentioned oncology, which I guess is a different tone than six months ago. So does that mean the oncology stuff is being halted, or how should we think about this?

Eyal Desheh

The changes, if there are any changes -- you can call them modification. You always modify. But there is no change from the strategy as, of course, presented over the past two years. By the way, also on oncology, we always said that we are more opportunistic than holistic in oncology, and this is a different type of game, and not exactly our area of expertise.

Marc Goodman - UBS

So let’s talk about the generics business for a second. When you think about global generics, what do you think is the growth rate between now and the end of the decade? So what’s the CAGR for the markets that you participate in today and how Teva will perform?

Eyal Desheh

Looking at all the data, IMS have their own prediction. We come up very similar to them. We believe that in established markets, U.S. and Europe, you could expect mid-single digit growth over the next five to 10 years. It's not going to be linear. There are years with more expiration of exclusivity of products. There are years with less. We know that the big wave of blockbuster is by and large behind us, but we can still see products at $1 billion - $2 billion, sometime $3 billion that expire with exclusivity that goes to one of the large four generic players that can accelerate the growth rate year in or year out. But by and large about, around 5% plus or minus. Emerging markets will grow faster. Emerging market, again, as I said before, they are not exactly all the same, but some market could grow at the teens, some market at the high single-digit, and that’s where we believe most of the opportunity for growth exist. And you look at analysis, and how big China is going to be five years from now, how big some of the Latin American or the Eastern European market is going to be five years from now. It's clear they are taking a bigger role in global generic.

Marc Goodman - UBS

So if the U.S. and Europe are growing 5%, does that mean Teva can also grow around that level?

Eyal Desheh

Yes. But if you look at what we have done in Europe over the past few years, and this is something that we have talked about -- started to talk about -- this is about three years ago, no, just maybe a year or two after the acquisition of Ratiopharm, which made us the biggest player in generic in Europe. And we are looking at what we call the profitable growth. We have exited some of the low profit or no-profit tenders in some of the European markets, and we are focusing on the profitable part of generic business. And many parts of generic in Europe is profitable. There is lot of volume business that doesn’t generate profit and we are no longer there. And on the parts where we are, it's profitable, it’s growing and I believe that we are having the right focus now in most of the country.

Marc Goodman - UBS

So can you talk about the cost-cutting program just a little bit? You mentioned $2 billion. There is 500, that’s going to reach the bottom line, it’s mostly coming from plants, shut downs of plants and stuff. So excluding the plants, I mean how much is -- first of all, how much would be coming from procurement and shutting down plants relative to the SG&A line? Is it 75%-25% or is it 50%-50%?

Eyal Desheh

It’s more 75%-25% than 50%-50%. And the majority of the cost reduction is coming from operations and production. Over the year, we’ve accumulated 75 manufacturing facilities. Some of them are subcritical mass, some of them are not efficient enough, some of them are located in expensive locations. And we’re looking -- we have a program to optimize that. Move production to lower cost area, move production to larger and more efficient manufacturing facility that can really deliver that competitive capability that low cost is bringing and for us this is nothing short of being strategic. It’s the ability to compete on the generic business while maintaining the high level of quality. Quality is key, and when we look what happening in this country and probably less visibility here, but same thing we’re seeing in Europe where the regulators are having a very hard look at quality of products are coming from the different countries and the emphasis is there.

So maintaining quality is key to success and focusing the business on larger facilities but it’s not just that. Procurement we are buying about $10 billion of products and services every year. And we regrouped our procurement efforts under one leadership and we believe that we have the ability to save as much as 10% from them, overtime. It doesn’t happen immediately. You can’t open at all the contract. You can’t renegotiate everything at the same time. But working efficiently in procurement could save us close $1 billion overtime. So these are two center pieces.

Then on the SG&A, we are revolutionizing our IT system. It will take another three to four years. Teva will be completely on SAP. Today we have four ERP systems, inefficient, expensive, doesn’t deliver the right data to manage the company and creates a lot of manual work. In four years it will all be under one SAP system, another huge project, which is running in parallel.

Marc Goodman - UBS

And will save how much money that program itself?

Eyal Desheh

First of all we’ll have to spend money on the program in order to save money. But efficiency in IT system -- we’ve probably be able to save as much as 20% to 25% for the cost of IT. And a lot of indirect impact on how you manage the organization. So this is where the majority is going to happen and SG&A, yes, there are many-many efforts in SG&A specialty on the sales and marketing area facility management. And there is not a single place where we operate that we don’t touch.

Marc Goodman - UBS

Last question on M&A. You mentioned obviously emerging markets is an area you focus on. So if you’re going to spend $2 billion, $3 billion, $4 billion let’s say on a deal, it’s a relatively decent-sized deal, is it more likely to be on the branded space or on the generic space?

Eyal Desheh

First of all Marc, I want to emphasize one thing and make it very clear. M&A acquisitions are a good way to expand the business. We focus on what we call the fix the Teva foundation. Transforming Teva has started all from becoming more efficient and growing organically. And then we’ll add acquisition. We’ll look at the opportunities and there are. There is consolidation in the generic space. There are opportunities in the emerging market that we talked about and there are areas to grow our specialty business in our areas of expertise. We’ll grow mostly through in licensing deal or requiring small companies that had products that have very, very good strategic fit with our portfolio and with our ability to bring it to market and sell. So we’re not limiting our self to one area but I want to answer, it’s to fix the Teva’s foundation and transform the Company to be much more efficient and faster growing is key to our success and acquisition will complement that.

Marc Goodman - UBS

Thank you, Eyal. We’re going to move across the hall and continue the discussion in a more interactive Q&A.

Eyal Desheh

Thank you very much and then you can ask the Copaxone questions.

Question-And-Answer Session

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