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

Goldman Sachs Healthcare Conference

June 10, 2014 05:00 PM ET

Executives

Eyal Desheh - Group EVP and CFO

Analysts

Amanda Lynam - Goldman Sachs

Unidentified Analyst

We're going to get going. So good afternoon everyone. I’m really delighted to have with us here Eyal Desheh, the Executive Vice President and CFO of Teva. Eyal returned to his position of Teva’s Group Executive VP CFO in February after having served as Teva's acting President and CEO since October 2013. Previously from 2012 until October 2013, Eyal served as Group Executive Vice President and Chief Financial Officer. So a lot to talk about, a lot of exciting things happening in your Company, and good news.

Eyal Desheh

I’ve been CFO since July 1, 2008.

Unidentified Analyst

All right. Well somebody got that wrong. All right. You’re right.

Eyal Desheh

It’s been longer than that.

Question-And-Answer Session

Unidentified Analyst

Maybe it's still longer than that. Anyway. So first question for you, Eyal; Teva has recently announced a new organizational structure and senior leadership changes with ahead of brands and ahead of generic. Talk about that new structure. Is the new management structure a prelude to a break up? What does it mean? If it doesn’t mean a breakup, what sort of operational improvements should be accomplished through this change? What is the meaning behind the change?

Eyal Desheh

Swear to God, when we were drafting the announcement and one of the things I said.

Unidentified Analyst

You knew what I’m going to say, when are you going to break up?

Eyal Desheh

Somebody -- I didn’t know it was going to be you. Somebody’s going to ask us if this is the preparation for breakup? It’s not, absolutely not. I think this is something which, in my view, and I’m representing my personal view; it’s long overdue. Teva has been managing its generic business with four generic regional leaders reporting to the CEO, which makes the CEO practically ahead of generic. That’s a wrong structure. And the decision we’ve made -- two decisions made. One, to combine the generic group under one leadership that will be able to determine the right agenda, the right set of priority, how do we grow the business, and how to we benefit from being a generic -- the world generic leader, and not managers in four different heads of a single master that don’t always talk to each other or collaborate with each other. So that’s what -- to change organization, to have this as one group -- although it was always one business, but make it one group.

The second one, which is extremely important and gratifying is to recruit Siggi Olafsson in order to lead this effort and I'm really happy that Siggi is joining Teva. Target lost, we won and I’m sure that he will be a great addition to our management, which by the way was also kind of reduced or contracted to nine members of the management team. We had 15 members in the management team, great people but difficult to make decision in a group of 15. And so I'm personally really looking forward to working with Siggi. His reputation is great in a marketplace and now we've been hearing nothing but praise from investors that we met with today about him and about what kind of a great benefit this will be to Teva and especially to our generic business.

So this is not a preparation for a split up. Teva’s businesses are connected and this connection very, very strong. We have one production, one supply chain, one R&D group that developed the products. Our NTE program sits in between the generic and the specialty business and you have to have the knowledge of both in order to really create a program and not just a product here in a program and a product there. And this is what we’re doing. Our sales in most geographies are combined other than in the United States.

In the U.S. we have two very distinct separate group, a generic group and a specialty group, which just started. But elsewhere in most countries our sales are combined. So there’s a lot of collaboration between our specialty group and our generic group. This is definitely by no means a preparation to split a Company. On the contrary, this is a move to strengthen the company.

Unidentified Analyst

You’ve now worked under three different CEOs in less than three to four years, I believe. And most of us haven’t met Erez, but can you share with us what makes him different from his recent predecessors? I think that most of us were again very delighted to see Siggi join Teva. So speed in decision-making and ability to attract top talent seem to be straight for their test. So that’s great. But in your opinion, how is this CEO different from the previous CEOs, just based on the limited amount of time you've had so far?

Eyal Desheh

Well, you know over the past -- I have returned to Teva. I was in Teva. I was deputy CFO from 1989 to 1996 and I returned after 12 years outside. But since the return I had the privilege to work under four CEOs, including myself. So I do have some benchmarking comparison. I think Erez is a great leader. He has all the capabilities of -- and the materials that leadership are made off. He has been in transformation situations, transformed two companies, smaller than Teva but complicated. Sometimes complexity and size don’t always go hand in hand. He is a people's person. He gets you noticed. He can attract talents. He can make tough decision. It wasn’t an easy decision to go to four leaders of our generic business and to tell them I've our chosen someone else to lead it. That’s a tough call and you have to be a strong person to face people and then also retain them.

And I think he has the ability. He’s a strategic thinker, a person that has strong interest in marketing. Lot of experience in marketing, although originally he was a CFO and CPA by his educational training. But he has a unique way to think marketing in everything the business does, the under said business structure. He makes fast decisions but after reviewing all the facts and listening to older element people. So the circle that supports decision making is not huge but it’s a circle of one person. So he does consult with people and he has one of the steepest learning curves that I have seen in anybody. And 3.5, 4 months in Teva, he really, really knows lot about the Company. I've seen people that were years here and didn’t possess the knowledge that he has. Of course he was on the Board for five years. So he’s not new to Teva. But we’re a complicated Company, comprised many, many, many details, its people and pipelines and portfolio of plans and operational aspect and financial aspect. So it’s a complicated company. You want to really master and be able to manage, you have to learn and I really appreciate these capabilities and by the way also [indiscernible].

Unidentified Analyst

As Teva has a previous CEO.

Eyal Desheh

I guess so.

Unidentified Analyst

Can you share with us your high level impression of where is this Company going over the long run? As you said, Teva is a complicated company with lots of different businesses, different geographies. Is there room to meaningfully reshape the Company, to simplify the structure through divestitures and finding the growth drivers through M&A. Or do you see the changes being more incremental in nature?

Eyal Desheh

First of all, one of the reasons for the organizational change is to simplify, to add smaller number of groups, smaller number of managers that are making decisions, simplify decision making process and simplify organizational structure and more than anything else, the processes; the processes by which we work and operate the Company. That way it’s complicated. The Company was created by a series of mergers and acquisitions. We managed to accumulate 75 manufacturing facilities. We are reducing this number as we speak. If we will and this will take more than three or four years. We will really be completely determined. We can reduce this number to half of what we have today, and the remaining facilities will be efficient, productive and of course of the highest quality, which is very important.

You ask me where is Teva headed. And I think that’s probably the most important question, which really consumes us today and we’ll be spending a lot of time in small group on strategic design and where we want to go. Don’t expect revolution. We have a generic arm which is now going to be much more focused and much more integrated and combined and we have a specialty arm and we have demonstrated just last week that we’re committed to building our specialty arm and focus on areas of expertise and one of them is pain, with the acquisition of Labrys.

So over the past couple of weeks we've done two moves, which are important to strike [ph] both the specialty arm and the generic arm, and we’ll continue to do so. I believe that Teva has a unique future in the generic business. This is the core. This the heart of the Company. We’re going to strengthen the generic. We’re going to expand our generic business. We’re going to continue to lead the generic industry and there is plenty of room to grow.

There is room to grow in established markets and there is room to grow in emerging market. We are ready to make the investment and do the right acquisition in order to grow and improve our most top line, but mostly it’s about bottom line management. And we’re ready to hire, recruit the right people everywhere in the world in order to expand our footprint over there.

In the specialty arm, which is the second big arm that we have, we’re committed to CNS and CNS is pain. Its autoimmune diseases and its psychiatry. We're committed to respiratory and we’re also committed to selective other opportunities including oncology where we do have an interesting pipeline of early and relatively advanced project that we’ll continue to develop and bring to market. And let’s not forget the third part, which is OTC, very, very promising and successful joint venture with Procter & Gamble. The two companies together are bringing different kind of knowledge and expertise to create one very unique JV that is outgrowing anyone else in the OTC business so far since its formation about 2.5 years ago. So that’s where we're headed.

Unidentified Analyst

Just coming back the hiring of Siggi. Is this a signal that you’re going to try to replicate the Actavis business model and do transformative deals, which he was a big part of that or is Siggi's hiring a stronger commitment to the generic side of the business versus specialty? How do you see it? What should we be reading into this hiring?

Eyal Desheh

I don’t think this is the signal to anything other than bringing on board the best managerial talent in the industry in order to help us really solidify and grow business. You can't read into this that we will do transformative deals. We’ve done those in the past, and I believe we said that we’re going to continue to do those in the future when opportunity arises and it’s not about copying a business model.

I don’t think that you can replicate the business model that’s of acquisition because acquisitions are mostly opportunistic. You have to have a triggering event. You have to have the right targets. You have the strategic phase and the right economics. When it's all come together people are willing to get bought. And we had a short conversation this morning about style which is not being hostile style. We like to work with the company which we acquired and Teva has made probably acquisition than anybody in our industry. Last three years, we've slowed down a little bit but that doesn’t mean that we’re not looking at acquisition, large and transformative acquisition as a means to really create value to our shareholders, expand our presence in the world where we're active and improve profitability and bottom line. We definitely are going to do that. But the opportunity has to be right.

Unidentified Analyst

Switching gears to Copaxone, clearly the Company has been very successful switching patients from 20 mgs to 40 mgs and you’re now with over 40% conversion rate. At this point what is your appetite to execute on a hard switch?

Eyal Desheh

Our appetite is to protect the franchise. Heart switch is one means of doing that. We’ll do it, if at all when the time is right. We are very attentive to the news of our patients. Our patients are very important to us. We talk to patients. We talk to the doctors. And we’re constantly evaluating this. I think right now less than 50% of patients are on 40 milligram, it’s early. The discussion is ongoing. We keep all the options open and of course we’ll notify the FDA and the market, if a decision like that whatever be made.

Unidentified Analyst

What are the conditions that would make you commit? What are the conditions? What used to be in place to make that decision?

Eyal Desheh

Right now, I don’t think that we can define the condition in terms of your market share which is a living a number. There is a no magic number. We’ll have to evaluate. We’ll have to listen to our patients. We don’t want to leave patients without treatment and a heart switch can create that -- we don’t have 100% coverage for the 40 milligram and we don’t want to leave some of our patients without treatment. We’re very committed and loyal to them as they are to us. So give us time, we’ll make a decision like that if at all when the time is right and hopefully it won’t be necessary because people will switch and move to the 40, which is a much more convenient product. There’s no question about that.

Unidentified Analyst

It seems that the ramp has slowed a bit, moving to the 40. What can you do to further accelerate that ramp?

Eyal Desheh

First of all, our estimate was that 50% of patient will switch by year-end. And we're getting pretty close that and we still have like 6.5 months to go. So we're very happy with the run rate. Accelerating, a lot of this has to do with paperwork and bureaucracy and reimbursement at convincing all the payers and all the insurers to reimburse 40 mg. I think that’s key. That’s where we’re working, we have people working on that. The patients are aware. Their level of awareness is high, level of awareness of their doctor is high. Everybody has seen the results of the GLACIER study that clearly demonstrates the convenience and the ease of use of the 40 or the 20. So all the motivations are there. A lot of this has to do with administration. And there'll always be a few patients that will stick to what they're used to and will not want to make a change. We are all like that sometimes. But I believe that most patient eventually would switch to 40. It’s a better product with the same level of treatment. So why shouldn’t we do it.

Unidentified Analyst

If a generic is approved and your competitors believe that the only issues that are pulling up in approval are administrative and procedural. So we'll see what happens. But if a generic is approved, what programs do you have in place to keep patients on three times weekly? And what role do you see payers playing, enforcing conversion to cheaper generics.

Eyal Desheh

First of all we need to see a generic approval and a generic launch. Remember under -- at this time, any launch would be at risk and I’m not going to make decisions for other people that are talking about market formation, whatever that means but we'll have to see that -- we have to see at first generic product launch, first.

First of all I believe that any patient that has switched to 40 will stay on 40. I also believe that the launch of a generic product will create another strong wave of switching to 40 because most patients that we know, we’ve heard them, we've heard the doctors, are resistant to using a generic. They would prefer to -- all prefer to use the original product. And we’re talking about the combination of multiple sclerosis which is a very unique disease and Copaxone which is a very unique product. People prefer to switch to the original. So I believe that will be another driver to move into the 40. And Teva is doing whatever we can within the means that we have of course in order to work with the patients and work with the doctors and make it easier for them to make a decision to switch.

Unidentified Analyst

Let me, beyond Copaxone, let’s -- are there any more -- other questions, right here? Right in the front?

Amanda Lynam - Goldman Sachs

I am Amanda Lynam from Goldman Sachs. So obviously you talked a lot about M&A today and that was a topic on the first quarter conference call as well. You are higher rated on the corporate credit side than a lot of your generic competitors. If you were to consider a sizeable acquisition, under what circumstances would you use equity to fund it? And are you committed to keeping your single ADAT ratings or would you move down to BBB? Do you think that you could function effectively with a BBB ADAT rating?

Eyal Desheh

I’m not sure I’ve heard everything, about the leverage and --

Amanda Lynam - Goldman Sachs

Would you basically -- would you take a rating, would you use debt to fund a substantial transaction and take a rating downgrade or would you defend your single A rating with equity?

Eyal Desheh

First of all, rating, A-minus rating is important to us, still getting A. It’s important. We've been loyal and committed to our bondholders. We know [indiscernible] if rating goes down and we’ve been active in the bond market for years and I think we’ve made good of our promises to our bondholders. It’s a great tool to ensure the best cost of capital. Thankfully the basic interest rate today are lower. They are remaining low. So and ask me, again -- without playing interest rate analysts here, I think they will remain low for a while.

So definitely we are committed. We're trying to keep within the boundaries of A-minus. That said, opportunities to create value could lead to some higher leverage. I don’t want to predict. There is nothing that is imminent that I could talk to about right now. Transformative acquisition with high level of synergy, usually come with their own cash flow generation. So we’ll try to make sure that acquisitions that we’ll make in the future will enable us to maintain the A minus rating, but it’s not something I can promise.

Unidentified Analyst

I wanted to go back to, just a base business. Clearly Copaxone has been the driver of the Company’s growth, at least for the last several years. And you could -- if you could walk through -- if you excel Copaxone, the business has been less robust and in fact I would argue that it’s been disappointing. Last year Copaxone beat by $500 million, yet you came right in the middle of earnings guidance because of weakness in other parts of business. So can you talk about what you’re seeing in terms of the organic growth of Teva excluding Copaxone that’s going to drive the Company going forward?

Eyal Desheh

Okay. If you put Copaxone aside, there are other pieces. One is the generic business. We talked about it earlier. We believe that there’s a lot of growth potential in our generic business. It depends on a number of factors that we have to execute well, even say execute better. And then first of all, the portfolio selection under development brings -- and the future of the next three to five years in generic is about complex generic. Teva excel in the area of the large kind of large Paragraph IV blockbuster, did it better than anyone else. When we came to competing complex generics, we still have to improve some of our execution capability. And we’re working on this right now. And I believe that we’re very focused on formulating and developing complex generic, also looking at some acquisition in that area. There are small companies…

Unidentified Analyst

Can you give some specifics, what specific complex of the…

Eyal Desheh

Complex generic are the products which are not the simple small molecule cell okay. These are indictable other technology, [indiscernible], infusions and complicated products with complicated formulation, which you usually find very few competitors, and a higher level of profitability as sustainability of profit as opposed to the simple tablet that can be launched at a relative higher price and erode. The prices erode very, very quickly.

So they behave differently and it takes longer to develop, more efforts to develop. FDA usually takes longer to approve Copaxone as a -- when it will be a generic, it will be complex generic, another example for complex generic. Rovanox is an example for complex generic, but there are many, many product which are smaller than are -- that are complex generic. We believe that in the next few year complex generic will present most of the opportunity and generic at the U.S. market.

By the way you look at 2014, I think our -- you can definitely see the improvement in our generic performance, a combination of the ability to bring product to market early and win on the legal front, which is also I believe very, very important.

Last one is Celebrex. It’s a December '14 product launch but it’s a $2.2 billion product with six months exclusivity and there are very few like this in the market. We won against a few other, [indiscernible]. So that’s the focus. I believe we can grow the business in the United States.

In Europe, the focus will be different. In Europe -- the level of profitability in Europe is lower when you compare Teva generic business profits, at top level profit or profitability. Compare to our competition, we see that our profitability is lower, mostly because Europe is a very big piece of our business.

The level of profitability in Europe is lower. We are already over a year, exiting the non-profitable part of the business. We are -- we stop participating in low profit for no profit tender mostly Germany, Spain is also another country that adopted the tender system. We will reduce our level of revenues, but we’re willing to increase our profit. And it takes time to do it. We’re now going to sell it across. We're going to reduce some of those sale. We're going to cut the long tail of products which are not generating profit. We’re going to improve the profit in Europe.

Emerging markets, a whole different ball game, a story. These are branded generic market, which are growing very nice for Teva. A lot of the growth in generic in the past few years came from our emerging market. We’re going to expand our presence. We're going to look for additional acquisitions in these markets and we’re going to continue to grow the business. It has to rely on very strong back-end.

One is production. Again, we’re talking about people, the Head of our Global Operation, Carlo is an excellent operation man that really knows how to run the production machine. And we see improvement. We’re going to reduce costs and improve productivity and profitability and most of our cost reduction program is designed to hit the generic business.

And the second part of the backend is the R&D; strong generic R&D. We need to strengthen our generic R&D. We’re doing that and together with a very strong and unified Commercial arm, led by Siggi, Operation led by Carlo and R&D led by Michael Hayden and Elizabeth Kogen who is the Head of our Generic R&D, I think we have a very, very strong team that will be able to produce business that you were right and I agree they’ve not performed as well as we expected over the past couple of years.

Unidentified analyst

In terms of M&A, what you have talked about, sounds like the areas that you would need to be better or where you see a lot of growth opportunities, emerging markets in the generic business. Is that the right way to look at it? And how would you define a transformative deal now in generics.

Eyal Desheh

You know acquisitions. Acquisition is a very -- it’s a very broad word. And yes, there are emerging markets that we’re targeting. Brazil is one that we've been targeted for years. Prices were high, currency was strong. This is changing now a little bit. Maybe there’ll be an opening of another opportunity. Mexico is another country where -- we have a pretty nice presence in Mexico but the market there is much-much a given than where we are, and we could do more. In Eastern Europe there was room for growth. A lot of this is organic growth, building a plant in Russia today that will help us reduce our cost (indiscernible) our foreign product duty in Russia. Local manufacturing has an advantage. So we're building a plant in Russia. It is a very large market for us in a fast growing Russia and its neighboring countries we are putting a lot of effort on Asia.

And Asia is not just China and India. It’s Thailand and Vietnam and Singapore and Hong Kong and Japan where we see a lot of opportunity to our businesses. Part of that will come from acquisition, but acquisition of not just emerging market. I mentioned before complex generic. There are many small companies in the United States which are developing a portfolio of complex generic products with unique capabilities that most large companies don’t have. With the right focus, some of these companies can be acquired and this is something that will be, will enable us to increase our portfolio, especially the injectable part, which has huge opportunity and a big void right now because of quality issues and we see the opportunity over there. So talk about acquisition. It’s not only about the large or small. Its quality wise, about building a portfolio, establishing presence in emerging markets. I mentioned before the acquisition of Lavre’s business, something that will come to market 2018, 2019 but this will become a product. It’s a mega blockbuster opportunity on a huge unmet need of migraine. So we’re committed to growing organically as well as by acquisition and by in-licensing of products.

Unidentified analyst

Erez had hinted on the recent conference call that there could be more to go on the $2 billion cost cutting plan. Can you provide a little bit more color? Did he mean going beyond the $2 billion or dropping more than $500 million to the bottom line?

Eyal Desheh

What he meant is the ability to drop more than 500 million to the bottom line.

Unidentified analyst

And where do you think that will come from?

Eyal Desheh

There’re two parts to this program. One is the cost reduction, which yesterday estimated at about $2 billion. We’ve already reached more than $600 million of that and we’re going strong because some of the reduction takes time to happen. Right now I will not commit to more than that. We’re working on our loans, of the new version of LRP, the Long Range Plan and that will probably not come to the market with updated numbers before the end of the year, but what we are looking at also at the same time and in parallel with the LRP is what are we going to do with this area. So originally we were planning on reinvesting $1.5 billion mostly in R&D which was, which still is expected to grow as very good marketing in order to bring new products to market. However we’re taking a new look at that and we’re asking where is the most efficient, productive and profitable use of money and what Erez meant is that we might look and reconsider the reinvestment and maybe reinvest less and take more to the bottom line.

Unidentified analyst

Would you reconsider on the R&D line which is a $1 billion and how do you do that if you’re adding another stool CNS to the portfolio of R&D products.

Eyal Desheh

I don’t think that I can provide any forecasts or predictions with numbers. We’re spending today something between $1.3 to 1.4 billion per year on R&D. We’re looking at opportunity to develop more products. It could require more money. We’ll work this by economics and by probability of success and if we see that our opportunities we can definitely increase, it’s about how do you build the right future and how you create maximum value for investors or to take this as a bottom line or invest into future, decisions that are either or binary. You only have one pool of money to do that. And we will evaluate all the possibilities in R&D because everybody prefers to invest in the future assuming that we have a reasonable probability of harvesting this investment and this is the way we’re looking at it.

Unidentified Analyst

Okay with that thank you very much.

Eyal Desheh

All right. Thank you. Thank you all.

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