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Teva Pharmaceutical Industries Limited (NYSE:TEVA)

Q1 2011 Earnings Call

May 9, 2011 10:30 a.m. ET

Executives

Elana Holzman - Vice President of Investor Relations

Shlomo Yanai - President and CEO

Eyal Desheh - Chief Financial Officer

Bill Marth - President and CEO of Teva Americas

Gerard Van Odijk - President and CEO of Teva Europe

Yitzhak Peterburg - Group Vice President, Global Branded Products

Analysts

Louise Chen - Collins Stewart

Randall Stanicky - Goldman Sachs

David Amsellem - Piper Jaffrey

Chris Schott - JP Morgan

Shibani Malhotra - RBC Capital Markets

Marc Goodman - UBS

Ken Cacciatore - Cowen & Co

Ronny Gal - Bernstein

David Maris - Credit Agricole

Christopher Caponetti - Morgan Stanley

Frank Pinkerton - SunTrust

Eliot Wilbur - Needham & Company

Operator

Greetings and welcome to the Teva Pharmaceutical Industries Limited first quarter 2011 results conference call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Elana Holzman, Vice President of Investor Relations. Thank you. You may begin.

Elana Holzman

Thank you, Diego. Good morning and good afternoon everyone. Welcome to Teva’s first quarter 2011 earnings conference call. We hope you’ve had a chance to review our press release, which we issued earlier this morning. A copy of the release is available on our Web site at www.tevapharm.com. Additionally, we are conducting a live webcast of this call that is also available on our Web site.

Today we are joined by Shlomo Yanai, President and CEO, Eyal Desheh, Chief Financial Officer, Bill Marth, President and CEO of Teva Americas, Dr. Gerard Van Odijk, President and CEO of Teva Europe, and Professor Yitzhak Peterburg, Group Vice President, Global Branded Products.

Shlomo and Eyal will begin by providing an overview of our results. Please note that Shlomo will be referring in his prepared comments to non-GAAP gross margin, operating profit, net income and EPS. Eyal will provide additional detail on the items excluded on our non-GAAP results. We will then open the call for a 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 first quarter of 2011. During the first quarter we enjoyed double digit growth across the major financial parameters. Net sales reached $4.1 billion representing 12% growth over the first quarter of 2010.

Quarterly operating profit was $1.1 billion with net income of $936 million. This brought us to EPS of $1.04. As you can see, these results are in line with the guidance we shared with you in February that 2011 would build gradually. We continue to expect that growth will accelerate in the second half of the year.

I would like to share with you the highlights of the first quarter, a quarter, which I believe provides a good demonstration of the power of our balanced business model, our global presence and the successful imitative we took to expand our presence in high growth markets. Contribution from our branded annual PM businesses as well as from Eastern Europe, Latin America and Asia, play exciting roles in our long-term strategy.

In the US generic sales totaled $952 million. As you know, the comparable quarter Q1 2010 was a particularly strong quarter where we benefitted from new launches and sales of key products such as the generic equivalent of Mirapex, Eloxatin, Protonix, Adderall XR and Lotrel, which were absent or diminished in the first quarter of 2011.

As expected, we had no major launches in the US during this first quarter. In addition, quality issues in Irvine and Jerusalem led to a loss of approximately $100 million of sales versus 2010. To be clear, we do not view the challenges we faced in the US during the quarter as representing a trend. And in fact, we anticipate an improving trend for the balance of the year.

As you know, last month we resumed production in Irvine and I’m very pleased to announce that on Monday we release our first lot of Vincasar, which will be followed shortly by Zanosar. These steps along with others we are working on with the FDA drug shortage, will ultimately improve availability of Teva products for the US ingestible market.

This is the beginning of a process that will take the remainder of the year to complete. Furthermore, we submitted a complete response to the FDA’s warrant letter related to our all solid dose facility in Jerusalem after we completed the required corrective actions. We have requested that the FDA re-inspect this facility. Quality in Teva is Teva’s number one priority. As CEO it is my on top priority and it is Teva’s responsibility and it’s our privilege to provide patients around the world with access to high quality medications.

As you know, growing our generics business in Europe and high growth generics markets is a key element of our long-term strategy and during the first quarter our efforts in these regions brought forth fruit. In fact, during the quarter half of our generic sales came from this region. In Europe the acquisition and successful integration of Ratiopharm and our overall leadership position enabled us to grow our sales by 66%.

We grew organically in every key European market outside of Germany with especially high double digit growth in Spain, the UK and Italy. Teva is the number one player in all of these markets and poised for continued growth. We also experienced very nice growth in France and Poland. In Germany sales declined in low teens on the back of price reforms that occurred in the second half of 2010.

Despite these anticipated reforms Teva’s performance was markedly stronger than the competition. In terms of value, we narrowed the gap between Teva and the newest competitor by six market share points and we became the number one player in Germany by volume. In addition, according to the preliminary results of the most recent AOK tender, Teva won 20% of the tender value, representing significant improvement over last year.

Given this result and our current momentum, we are optimistic about the second half of 2011 in Germany. I’d like to point out that excluding Germany Teva achieved organic growth of 7% in Europe and we believe that we are very well positioned for growth in our European business in the second half of this year.

During the first quarter we also made good progress in our Eastern European business. For example, in Russia we enjoyed record sales of generics, which increased by 52% over the first quarter of 2010. Organic generic growth was 25%. We also had a very good quarter in Latin America, another high growth region where Teva has established a strong position.

We achieved organic growth of 16% over the first quarter of 2010. In Mexico we grew by 20% and in Argentina by 29%. Now for the first time I would like to discuss the progress we are making in Asia. In Japan, the world’s second largest pharmaceutical market, we enjoyed 29% growth in local currency or 43% in US dollars. As you know, we regard Japan as a key growth driver and we would continue to invest in building this important business.

To conclude my review of the highlights of our generics business, TAPI, Teva’s API business, grew third party sales by 32% over the first quarter of 2010. As you can see, Teva’s global generics platform is enjoying growth in the high double digits and we believe that in line with our long-term strategy growth we will continue to see strong growth in these markets. Turning now to our branded business, let’s start with our respiratory franchise, which grew by 19% globally.

In the US our respiratory brands performed very well with ProAir and QVAR solidifying their number one and number two positions in their respective markets. ProAir crossed the 50% mark in TRX market share, an increase of two share points in the first quarter. QVAR averaged 22% TRX market share during the quarter, up more than three share points over Q1 2010.

In addition, we are on track to file on Nasal BDP HFA, formerly known as QNAZE, with the FDA this quarter. Most of our respiratory products were especially strong in Europe, growing by 46% over the first quarter of 2010 and driven by strong sales of QVAR. Let’s turn now to Azilect, in market sales of which grew by 16% over the first quarter of 2010.

Total prescriptions of Azilect grew by more than 22% and Azilect now is the leading branding product to treat Parkinson’s Disease in the US market. Finally, Copaxone - Copaxone continues to be the global leader among MS therapies and its efficacy and its proven safety and comorbidity profile continue to make it the first choice of physicians.

Copaxone’s global market share increased to 31%. In market sales of Copaxone grew 14% over the first quarter of 2010 to reach $907 million, outpacing the market growth of 9%. Copaxone’s share of TRX in the US was over 40%. The first quarter of 2011 has been an active one for Teva in terms of business development. Last month we announced a joint venture with Proctor & Gamble that we expect will make us a leader in consumer healthcare.

This unique alliance will enable Teva to participate in all three categories of pharmaceutical skill - branded, generics and OTC. And of course our planned acquisition of Cephalon will conform our branded business and will enable us to fulfill the second pillar of our long-term strategy, to expand our branded business into a diverse specialty pharma business and become a leading player in this area.

Before I turn the call over to Eyal, I would like to reiterate our guidance for 2011, which of course does not take into account Cephalon or any other acquisitions. We continue to forecast sales to be in the range of $80.5-90 billion and EPS in the range of $4.90-5.20. We had a solid start to the year and I would like to remind everyone that we continue to expect the second half of 2011 to be significantly stronger than the first half.

Thank you very much for your attention and now let’s turn the call over to Eyal for a detailed financial review of the quarter. Eyal.

Eyal Desheh

Thank you Shlomo and good day to everyone. I hope you’ve had the opportunity to review the press release, which we issued earlier this morning. We reported a solid first quarter for the year. Results for the most part, both the positive and the negative, were in line with expectations. Despite the many challenges of the quarter including the lack of significant new generic launches in the US, we delivered double digit growth in sales, non-GAAP operating profits, net income and earnings per share.

We continued to generate strong cash flow with cash flow from operations of $900 million and free cash flow of 513 million. Before I delve into the numbers I would like to touch on two technical topics. First, I would like to remind everyone that we are presenting GAAP and non-GAAP results. In our non-GAAP presentation we have excluded the following items this quarter - amortization of purchased intangible assets amounting to $158 million of which 151 million are included in costs, cost of goods sold and the remaining 7 million in selling and marketing expenses.

I’d like to remind you that we started recording amortization of Ratiopharm intangibles this quarter. An inventory step up of $10 million relating to the acquisition of Thermex and Inpharmasa, costs related to regulatory action taken in facilities of $50 million related primarily to the remediation of quality issues in Irvine, restructuring acquisition expenses of $22 million related primarily to the acquisition of Ratiopharm, impairment of assets of $11 million mostly in tangible assets related to the acquisition of Phar.

These expenses were offset by income of $4 million in connection from a provision for legal settlement and a related tax effect of $72 million. You should note that the items excluded in arriving at our non-GAAP results for the first quarter of 2010 are not identical to those in the current quarter. Please review our press release and related tables for a reconciliation of our GAAP numbers and more complete information.

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. Second, foreign currency, which played a minor role in our profit and loss results this quarter, was a greater influence on our balance sheet. In the first quarter foreign currency differences are a small part of the impact of approximately $27 million on sales and 7 million on operating income as compared to Q1 2010.

Teva’s diverse geographic presence continued to provide us with a good natural hedge that mitigates much of the risk involved in currency fluctuation and minimizes the impact on our bottom line. Foreign currency also had a positive impact on our equity. The weakness of the US dollar on March 31st primarily relative to the euro increased our equity by approximately $940 million compared to December 31, 2010.

Looking at our consolidated results for Q1, sales totaled $4.1 billion and increased 4% compared to Q1 last year. Sales in North America declined 11% due to weaker generic sales in the US. New generics had a particularly soft quarter primarily because several products that were major contributors to sales in the comparable quarter in 2010 had little or no sales this quarter.

And this was one of those quarters in which we had no major launches to offset this. But as we said when we gave our guidance last quarter, we expect new generics to grow above this level in each of the next three quarters. Europe grew 66% due mainly to the consolidation of Ratiopharm’s results but it’s important to note that we saw real organic growth in Europe on an organic basis as well.

In other words, calculated as if Ratiopharm and Terramix has been part of Teva already in Q1 2010, this is pro forma calculation. Total sales in Europe grew organically by 3% while sales excluding Germany grew 7%. Given the price reforms in Germany in the second half of 2010 our performance was marginally stronger than the competition.

We reduced the market share gap with the number one player on a pro forma basis from almost 10% in Q1 2010 to just over 4% in this quarter. And we believe that Germany will resume its contribution to European growth in the second half of this year. Europe is a tough and dynamic market, which provides great opportunities as our market leadership and our confidence in managing complexity give us a real competitive advantage in Europe.

Sales in our emerging markets, Eastern Europe, Middle East and Africa, Latin America and Asia, grew by 26% with significant growth in key markets such as Russia with 25% organic growth for generic sales, Mexico, 20% and Japan, 29% growth all in local currencies. As a result, our sales our now significantly more diversified geographically with North America accounting for 51% of sales, Europe for 33% and Eastern Europe, Middle East, Africa, Latin America and Asia combined for 16% of sales.

Non-GAAP operating income reached $1.1 billion, up 11% compared to Q1 2010 and benefitted from strong gross margins, tight expense control and the take back of Copaxone royalty in North American sales from Synosis. Non-GAAP net income reached $936 million, up 13% compared to Q1 2010. Non-GAAP fully diluted earnings per share were at $1.04, up 14% compared to Q1 2010.

The weighted average share count for the fully diluted, non-GAAP earnings per share was 902 million shares. As a result of the early redemption of the 1.75% convertible debenture, we had no add back this quarter and this also reduced our share count by an additional 15 million shares. Now let’s discuss profit margin and operating expenses.

Non-GAAP gross profit margin which excludes amortization of purchased intangible assets, inventory step up and costs related to regulatory action taken in facilities, was 58.8% in the reported quarter compared to 58.4% in the quarter last year. Non-GAAP operating margin reached 27.3%, similar to the 27.4% recorded in Q1 2010.

Net R&D expenses were up 15% compared to Q1 2010 totaling $239 million or 5.9% of sales. The growth in net R&D expenses over the comparable quarter last year is attributable primarily to greater investment in our branded R&D. Growth R&D, which includes participation of third parties, was $265 million or 6-1/2% of total sales.

Selling and marketing expenses excluding amortization of purchased intangible assets totaled $825 million this quarter or 20.2% of sales compared with 20.4% of sales in Q1 2010. As already mentioned, the decline in selling and marketing expense as a percentage of sales resulted primarily from the termination of payments to Synovia Mentis, which were recorded as sales and marketing expenses in the past, also by higher royalty payment in connection with certain generic products sold in the US and by the addition of ratifying branded generic business.

Total G&A expenses this quarter were $221 million or 5.4% of sales compared with 5% of sales last year. We recorded $38 million of net financial expenses in Q1 2010 compared with 27 million in the comparable quarter of 2010. The increase in net financial expense resulted primarily from higher interest expenses due to the debt incurred to finance the Ratiopharm acquisition and to a lesser degree expenses incurred in connection with heavy activities.

The non-GAAP tax provision for the first quarter was $121 million on pre-tax non-GAAP income of approximately 1.1 billion. Our current estimate of the non-GAAP annual tax rate for 2011 is 11% compared to 15% for 2010. The low, non-GAAP tax rate for 2011 resulted from a particular mix of products that are manufactured in geographies where Teva benefits from tax incentives.

This is not a rate we currently expect in 2012 and beyond. The estimated tax rate for 2011 GAAP results is 6%. Now let’s have a look at our cash flow. Cash generated from operations this quarter totaled $900 million, up 2% compared to Q1 2010. Our free cash flow excluding gross capital expenditures of $234 million and dividend payments of $203 million partially offset by proceeds from the sale of certain assets of $50 million amounted to $513 million.

Free cash flow was influenced by payment on account of the Ratiopharm integration program accrued in previous quarters coupled by a higher dividend payment following the dividend increase we declared in February and higher capital expenses. During the quarter we bought back approximately 7.9 million shares at an average price of $54.41 per share for a total of $400 million.

Since we started this buyback program, which our board approved in December 2010, we bought 9.8 million shares for a total of $500 million, reflecting an average price of $50.54 per share. Let me remind you that we did not buy shares during Teva’s blackout period, which started on March 22nd and ends tomorrow.

At March 31st cash and marketable securities totaled $1.1 billion, down approximately 500 million from December 31st as we used cash in the quarter to pay for the acquisitions of Terramix and Informata as well as to repurchase shares and continue to pay down our debt. Our total outstanding loans, bonds and convertible debentures stood at $6.8 billion and financial levers as of March 31st was 23%, slightly down from 24% at the end of December.

DSO days sales outstanding improved to 46 days this quarter compared to 53 days in Q1 2010. We calculate DSO after netting out from the receivables our sales reserves and allowances. Inventory days stood at 195 days up from 180 days in the previous quarter or 183 in Q1 2010 due mainly to foreign exchange differences.

Net capital expenditure reached $184 million this quarter compared to 208 million in Q4 2010 as we continued to invest in production capacity. Dividends - Teva’s board approved its quarterly net dividend amounting to approximately $207 million. On a per share basis our dividend, which was declared in Israeli shekels, is 0.8 shekels per share. Based on the rate of exchange on Monday, May 10, 2011, of the shekel to the US dollar, this translates into approximately 0.2 cents per share.

Thank you all for your time and attention today and now we would be glad to take your questions.

Question and Answer Session

Operator

Thank you. We’ll be conducting the question and answer session. (Operator Instructions) Our first question comes from Louise Chen with Collins Stewart. Please state your question.

Louise Chen

Hi. The first question I had was with respect to Copaxone and Lovenox. I wanted to understand how you view your options with respect to what you could do with these products. Are there any circumstances where you would consider settling with Momenta for these drugs because there has been a lot of discussion about that?

Shlomo Yanai

Good morning Louise, how are you? Just wanted to let you know on the Momenta - to clear this up, there have been and there are no settlement discussions at this time. We’re really enthusiastic about our case and we look forward to the upcoming trial.

With respect to Lovenox our Lovenox file is alive and well but as you know, we’re not going to comment further on it until such time that we get the approval.

Louise Chen

Okay. And then my follow up question is just on generic competition for Copaxone in the EU. Can you remind us also when you’re going to (rates back from standard fee in the EU) and the P&L impact of that?

Shlomo Yanai

(Unintelligible) - we don’t feel there is an immediate threat to what we’re doing with Copaxone. There is one company that is moving forward with this and we think that based on Copaxone and what they are trying to do, we don’t think it’s really a case.

Operator

Thank you. Our next question comes from Randall Stanicky with Goldman Sachs. Please state your question. Randall Stanicky, your line is open.

Randall Stanicky

Sorry about that. Eyal, just on the earnings progression into 2Q just so there is no confusion this quarter, how should we think about that trajectory going forward?

Eyal Desheh

How should he think about what?

Shlomo Yanai

Can you repeat the question?

Randall Stanicky

Yes. How should we think about the 2Q EPS progression going forward just so that there’s no confusion in terms of ease of progression and trajectory throughout the rest of the year?

Eyal Desheh

Got you. I’ll just remind, we don’t provide specific quarterly guidance. However, we said very clearly at the beginning of the year when we provided guidance for the year so far I think we are correct, that the first half will be slower than the second half.

I think we said approximately 40% of EPS will come in the first half. And we definitely see it this way. Second half will see major improvement and we’ll see that in all parts of the business and I think there is no change to what we have guided originally.

Randall Stanicky

Okay. So just so that we’re clear, we should be looking if the buyback map has a 2Q that is similar to 1Q, would that be a fair statement?

Shlomo Yanai

On the buyback, we’ll probably continue with the buyback program that we have, buying when the market allows us. But remember the buyback in a current quarter you have to average this and you never have the full effect. The full effect will only be in the next quarter.

Randall Stanicky

Okay. And then a follow up for bill, I heard you guys talk about $100 million impact from Irvine year over year. But if we just look at the generic and other line in the North America number it looks like if my math is right it was down $338 million sequentially. Can you just help us understand what drove that sequential decline, understanding that you had a couple of facility issues and a lack of generic launches? But was there anything else in there that we should think about?

Bill Marth

Yes Randall, thanks for the question. When you look at year over year you are missing Mirapex pramipexole, you are missing about $113 million; Protonix or Pantor we lost about $93 million in top line sales, Lotrel about $45 million and the Oxaliplatin or Eloxatin about $44 million. And then what's really begin to be a hangover for us that the first Q1 dextroampheatmine mixed salts, the Adderall XR about $97 million over the year and of course sequentially in second quarter where we are not getting sales.

Now we expect that to even out over the next couple of quarters but as you know the DEA has been having some issues with quota and that continues to be a drag.

Randall Stanicky

I mean was there anything else just thinking about 4Q versus what you reported in 1Q that would be driving that sequential downtick or is there I’m just trying to think of it seems like a big number relative to year-over-year impact?

Bill Marth

Sure. The fact is that there are no launches and again we don’t have quite the same amount of Adderall being shipped quarter to quarter. We are in the latter half of the exclusivity. Our customers are beginning to wind down their inventories. So we had significantly less sales in venlafaxine, again didn’t pick up on our Adipex ER.

We had some of the issues with respect to Jerusalem and about 53 million that we did not get from Irvine. When you add it all together you get to your number.

Randall Stanicky

Okay. That’s helpful. Thanks Bill.

Operator

Thank you. Our next question comes from David Amsellem with Piper Jaffrey. Please state your question.

David Amsellem

Thanks. Just a couple regarding Jerusalem - can you provide more color on the steps taken to address the FDA's issues? And when you talk about the slowdown in that facility, can you quantify what the impact is and how that will impact the P&L as the year progresses?

Bill Marth

Yes David. It’s Bill Marth. With respect to Jerusalem, I think Shlomo laid it out fairly well but let me say that our laboratories have been fully remediated. We've gone through them and they have been certified and they are back online. It did create a slowdown for us but we have addressed all the issues and are very excited about asking the - we have in fact asked the FDA to come back in and we're looking forward to a re-inspection.

So we're getting back on an even path. What we don't know at this point in time is we've had no approvals from Jerusalem although we've had none to have yet this year. We would like to get that re-inspection in so that we can get approvals from - we assume that at that point in time the approvals from Jerusalem will continue.

David Amsellem

Okay. And then a question on the Cephalon transaction, regarding the synergy target - given that Cephalon had near $1-1/2 billion in operating expenses and a product portfolio that's maturing on the whole, is it possible/conceivable that the 500 million of synergy target is conservative, and also that the year three timing is also conservative?

Eyal Desheh

This is Eyal. First of all, we believe it's very possible by year three. We have mapped as much as we had time and we had time to do a pretty thorough due diligence on the Cephalon expense structure. We can clearly see us integrating the company in an efficient way and extracting synergies of $500 million at least by the third year after following the acquisition.

And that is after we assume that we keep the product portfolio without closing any major R&D projects. It's mostly on the G&A side, we'll integrate two companies and eliminate the expenses of the public company. The generic piece in Europe, the (unintelligible) part, which will be fully integrated with our European generic activities and activities are outside.

Sales and marketing combine with our sales and marketing forces both in Europe and in the US, which we have a nice sales team. And all that leads us to believe that the 500 is a very, very reasonable assumption even on the careful side.

David Amsellem

Just as a quick follow-up - what's the extent to which you are going to downsize the Cephalon US sales force? And then how much of that infrastructure do you think you can pare back?

Bill Marth

Yes. David, we are not going to go into that level of detail at this point in time. Remember that we just announced the purchase but we've looked at the synergies and we are pretty confident there. I would always remind that I think, as Shlomo has well said before, when we think about synergies, the synergies aren't necessarily just on Cephalon’s side.

When you think about what we've done in Europe with Ratio and that Ratio largely became our backend in Europe and Teva became the front end, the synergies can come on both sides. So we are very confident on the synergy side. It's a great company. We are very excited about getting it and we think we got it at a very reasonable price for both the Cephalon shareholders and of course for our shareholders.

Shlomo Yanai

If I may add on that David, you should remind that Teva has a very long, successful history of integrating companies in a very successful ways. Usually we are conservative when it comes to how much synergy we are going to drive out of any acquisition and usually we are exceeding the number that we are providing in the announcement.

I know that this is a different kind of acquisition but I would like to remind you that we have been there. We already integrated the respiratory part when we bought IVAX. We integrated the women’s health business when we integrated the Barr and we have a $4.5 billion business in branded business. So we know something on that as well. So we are very confident that we will do the integration the right way and we will generate at least the number that we told the market on synergies.

David Amsellem

Okay. Thanks.

Operator

Next we have Chris Schott from JP Morgan. Please go ahead with your question.

Chris Schott

Thanks. The first question was just looking at sales for the remainder of 2011. I guess if we take the low end of your top line guidance it looks like you need to average about 4.8 billion of quarterly revenue. That’s 700 million higher than you set up.

Can you just elaborate a little bit more on the drivers that we should think about to see that type of sales acceleration and just how comfortable are you with your top line range at this point?

Eyal Desheh

Well, looking at where we are from now I think we are very comfortable. We re-did the guidance as you have read it. It's in the press release for the first time and we do see the US generic business recover from the current Q1 level with some of the launches coming in the second half of the year, as we have already said.

Continued growth in Europe and Europe is well positioned for nice growth in Q2 and definitely in the second half as Germany will also contribute to the growth in Europe. Our emerging markets business is going on or progressing very, very nicely. So when we look at all the parts and definitely the branded business is doing well. The API, although small, is doing well. So when we look at all the pieces we are pretty confident at that level.

That, of course we said, is a subject to foreign exchange. As the euro will reverse on the rate, that could have an impact on top line but not so much on bottom line. But as things look now yes, I think that guidance looks very reasonable to us.

Bill Marth

Chris, this is Bill Marth and I just want to remind that we still have Zyprexa coming through the back half of the year, products like Levaquin, Aricept, Nasacort - there are a variety of products left to launch for the balance of the year in the US markets.

Chris Schott

Okay. Great. And just as a follow up as we are talking about guidance and I know you've talked a little bit about this but can you comment on your 2012 targets and how this sets the old impacts that guidance especially top line?

I guess, what I'm looking at here is adding Cephalon to your 2011 range, I mean it implies not a whole lot of organic growth going on here. So I’m just wanting to hear your latest thoughts about how 2012 is looking at this point.

Shlomo Yanai

Yes. One thing that we've done on 2012, you’ll remember last year we provided guidance and we believe that this guidance is definitely in place, probably will be narrowed when we get to the 2012 summary and numbers. At that time we will have more details on how Cephalon really integrates within our business and we will provide more details.

But right now what we have provided originally a year ago or a little more than a year ago on 2012 definitely holds and we'll reserve right to go back to that later on this year.

Chris Schott

Thanks.

Operator

Thank you. Our next question comes from Shibani Malhotra with RBC Capital Markets. Please state your question.

Shibani Malhotra

Thanks for taking the question. I just wanted to follow up on Chris' question. I know you don't want to give us details on 2012 guidance but qualitatively I guess, which segments of Teva's business do you see organic growth coming from in 2012 or even later half of this year?

And then separately, does your guidance for 2012 assume further acquisitions, or could we pretty much get to the range which is Cephalon alone? Thanks.

Shlomo Yanai

Hi Shibani, Shlomo speaking. First of all, you may expect us to grow significantly in all the areas that I mentioned in my part - i.e. in Europe where I believe that what I guided you for the long term we may see and again, this is not a forecast for 2011. It's just looking for the longer range time.

An organic growth of the level of 7-9% and I believe it will be this number this year. I do believe that in Eastern European, Latin America, Asia you may expect high double digit numbers as this quarter presented in very nice way. So all in all, from the generic products and of course the US has been just jumping when Eyal reminded the audience on the coming launches in North America in the second part of the year.

So all in all, that's what you should expect for our 2012 as well. We are not referring today for potential next few launches but that will be taken care in a different time. In addition to that, definitely our latest announced acquisition Cephalon will bring us a very significant addition to our sales. I believe that there is a potential there to growth to grow sales in a very nice way.

You usually don't speak on sales synergies but I believe that we have a proven track record that we know how to do that as well. And definitely this time we are going to do it in the branded part. So all in all, I'm very optimistic about 2012. Back to your question.

Shibani Malhotra

Okay. So can you confirm you're not assuming additional acquisitions in your '12 guidance? And then just to follow up on potential new product launches at the end of this year or early '12, any of those dependent on the Jerusalem facility passing the inspection?

Shlomo Yanai

First of all, let me clear and I think I've said it regarding 2011 - the guidance is not including any acquisition. As for the future, I think that I would like to leave that when we will be there and I don't want to comment on any future potential acquisitions.

You know what, when we will do the acquisition, we'll of course do the necessary update or change in guidance as is necessary due to the kind of the acquisition that we are going to have in the future. For the second part of your question, Will, would you like to take this one of our future launches?

Bill Marth

Yes. With respect to future launches, I think the only ones we are really talking about for the US market right now are Zyprexa, which you all know and should happen in the back half of the year, as well as Levaquin, donepezil Aricept and the Nasacort AQ to just name a few.

Shibani Malhotra

Okay. Great. Thanks.

Operator

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

Marc Goodman

Yes. Could you tell us what your current expectations are for Irvine sales for the full year? And second, can you help us understand this consolidation impact of Japan? What was the impact in the quarter and should we expect that impact for the full year?

Shlomo Yanai

Bill, you take the first one and then Eyal will take the Japan part.

Bill Marth

Yes. The impact from Irvine or actually the future sales from Irvine are quite minimal Marc. Moving forward we should get to about $100 million run rate. That’s a run rate by the end of the year. We just started to ship the Vincasar and Zanosar.

We are hopefully going to be shipping sometime over the weekend. It’s product by product working hand in hand with the agency. So I really wish I could tell you more than that but we are shipping what the agency drug shortage is asking us to ship first and that’s why we are bringing up the lines the way we are.

It's really a hand to hand process with FDA and so really I have to be a bit vague at this point in time. However, we should be up to that $100 million run rate by the end of the year.

Eyal Desheh

Regarding Japan the business there, we’ve consolidated to date a little over 50% of our sales, just a few tens of millions of dollars impact. Hopefully, one day we'll be able to consolidate everything but right now it’s just not possible.

Marc Goodman

And just one other question - you had mentioned earlier that there was a slow down in Jerusalem as you were trying to fix some of the issues. How much sales do you think that cost you in the quarter?

Bill Marth

Marc, it’s Bill Marth. Shlomo had put that in his speech. It was about $55 million that cost us for the quarter.

Marc Goodman

Thank you.

Operator

Our next question comes from Ken Cacciatore with Cowen & Co. Please state your question.

Ken Cacciatore

Thanks and Bill, this question is not meant to annoy you in any ways but I just wanted to ask on the settlement, Louise asked you a question about potential settlement. So just wanted to ask you, have you been approached? And this next part of the question maybe naïve, but what would be a reason why you all wouldn’t just compare terms, not reach a settlement but just compare terms to see if anyone is on the same page with each other?

And then just lastly for my question on BG-12, could you just describe what you all meant in your press release when you indicated that there may be different definitions of end points between BG-12, laquinimod and other studies? Thank you.

Shlomo Yanai

Bill, you take this first and then Dr. Peterburg the second one on BG.

Bill Marth

Thanks for the question Ken and I’m not annoyed but there hasn’t been any discussion. There really at this point in time have been no discussions so I guess there is no way to compare notes since there have been no discussions. So that's the simple answer.

We are enthusiastic about our case and we look forward to putting it on at trial in the later part of the year. So that’s where we remain on that so I will let Dr. Peterburg take the second part of the question.

Yitzhak Peterburg

So regarding BG-12 there is one thing I want to reiterate that in the absence of (unintelligible) we feel and we are saying it each time, it's very strongly advised not to compare between the clinical trials. And so we know the differences are differences that were on the primary endpoints between what we are looking and they were looking.

So the differences are changing and the baseline patient population and they were even on the definition of (EBSA). But at the end it’s coming back to the same issue that we say we have a wonderful product, we really believe in it. We think it's (a case) of the four pillars that are important for any MS oral and we think that based on that we are looking forward after opening, you know, if we need still to look into Q3 (unintelligible) at this time and we are sure that we will have a very good product.

Operator

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

Ronny Gal

Good morning and thank you for taking my question. Firstly, I'm almost certain that you guys went back and recalculated the Laquinimod results using the endpoints as defined as the primary endpoint that was defined for BG-12 that is, trying to first realize the as they define it. I was wondering if you wouldn't mind sharing that number with us.

Second to Bill, Bill I think you guys are coming back to the market in the US or increasing your manufacturing capability. Apotex just announced today they now ship their product to United States. There has been some stability in the market for a while but are we really going to start facing more pricing pressure as two fairly large manufacturers come to the market?

And third, on the biogeneric, I'm not quite who wants to take it. My understanding of this, very nice uptick with G-CSF in Europe, can you confirm that and perhaps give us an idea about the run rate for the numbers there? And can you confirm that you will be in the market by the end of 2013 on both, your primary, your first-generation G-CSF as well as albuminated competitor Neulasta?

Shlomo Yanai

So let me - I would love to go back and do all this calculation but first of all, I need to understand exactly what the competitors are doing. You know this whole issue the of the way (unintelligible) - it masks everything and we cannot give an answer even to ourselves.

So I can only say again and again we are waiting for (Babel). It’s another several months. We are sure that (we will have) what we think is a very good product and we are in the next phase most probably we'll have a product with a new mechanism of structure that could deal and most probably deal with a most important thing that’s now is in a mess.

The question of how to get patients out of the (woods), let them go into it. So it's not enough information - we would love to hear more information about our competitors but most probably they have their reasons so we don't know all the information about it.

Bill Marth

Ronny, with respect to the Apotex question, it's an open question, right, if they are going to come back to the market with a complete import ban. So I think that they are going to probably come back to the market in some sort of orderly way. And I think the progress will be slow. I don't think customers will flock to them and they are going to come back to our product.

But I would remind that only a small part of our product was really affected. There was a slowdown, there was not an import ban on our product. So I think that customers will be cautious as Apotex moves back into the market. I don't expect that price stability is going to be immediately upset.

Shlomo Yanai

And what was the third question regarding the G-CSF, Ronny?

Ronny Gal

I only asked two parts, first one on an idea about the run rate in Europe. My guess is that you've taken based on the numbers a leadership role on G-CSF in Europe. Very quickly, can you comment about the run rate and how much did that influence the European growth this year, year over year?

And in the United States can you confirm you expect to be in the market at the latest by the time the composition of matter patent expires on both Neupogen and the Albuminated G-CSF?

Shlomo Yanai

Okay. So Gerard will take the European part and be followed by Bill on the US.

Gerard Van Odijk

Thank you Ronny for a G-CSF question. Yes, we’ve seen gradually increasing penetration across Europe of G-CSF. There will be a slow within classical generics you can imagine. We attend to business across Europe and even then it is taking some time to get penetrated - still doctors need to prescribe actively.

The business is nicely growing and I think it’s more than doubled year on year but it’s still a small number. So if you would like me to give you an indication of whether or not that’s been a driver for our performance in Europe, the numbers are simply too small for our overall business to really move the dial.

So it’s moving in the right direction. It’s moving slower perhaps in terms of penetration than one would have thought but it’s moving in the right direction across Europe but not a big number.

Bill Marth

Ronny, on the second part there is the two G-CSFs of course, the regular G-CSF which we call Neutrodice and that name will likely have to change. That product we have a complete response letter. We hope to respond to that in the third quarter and be in a position to launch that in 2013.

We also hope that by the end of this year and hope and anticipate that we will be able to file our albumin fuse G-CSF in the US by the fourth quarter of this year, putting us in a position potentially if all goes well to be in market with both products in 2013.

Ronny Gal

Okay. Thank you very much.

Operator

Our next question comes from David Maris with Credit Agricole. Please state your question.

David Maris

Good morning. Do you guys remember it was the couple of weeks posted F1 deal and when you go on the road all of us get the questions do you believe they said this and what do you think of that? So I want to turn it around a little bit and ask you especially in light of where the stock price is, after you go on a road show like this what are the takeaways or the concerns that you are hearing from investors?

And does it cause you to think about doing anything differently either message wise, management wise, strategy wise? Or do you just say well look, we are executing on how we have always executed and the stock goes up, the stock goes down. This just happens to be an out of sync period?

Eyal Desheh

Let me start and then Shlomo might like to add few things. First of all, if you are asking if we take it for granted our stock movement, no we don’t. We believe - I don’t want this to sound as a bit cliché, but our major role is to create value for our shareholders and as a public company there is one way to measure this value.

When we get on the road and we meet with inventors what we want to do is to make them understand the Teva business model, the short and the long, the strategic direction that we are taking, why we are taking the steps that we are taking, where is the value and how we believe this is going to - these steps are going to impact the Teva share value.

We never talk about share price. I don’t think it's our role. The audience of this call has better understanding in share prices. We talk about the business but we don’t ignore the fact that our shares is traded out there and it’s our responsibility to make sure that more of you believe that there is a great opportunity in Teva shares as we do and would buy the share to benefit from future fruits.

Shlomo Yanai

Yes David. Let me try to answer your very different kind of question. First of all, I think that the first feedback that we got from the market that they think that we did the right move with this acquisition. Some of them or some of your colleagues wanted to get more understanding on the strategic background of this acquisition and we provided - actually we reiterate the work we shared with you last year when we explained our strategy that this is about diversifying our business as we go to the future.

We took one step when we did the move in Europe and we are doing right now the second step, which is taking care for diversifying our branded business. As a company that believes in growth and as when we look into our future, we would like to maintain our growth and even to increase the pace - that was the two concerns that we had to make sure that we are taking care for going to the future.

And I think you asked the Ratiopharm, that we just proudly explained how well it has been integrated and how we can see the first fruit of this move, I do believe that we are going to see the same from the Cephalon integration. Second concern that we got was around whether we are able to generate the level of synergies, the 500, and whether we are able to integrate a different kind of business.

Everybody understands our track record in generics. Some of them question our capability or ability to do it with an innovative company. Here I have to tell you first of all that only time will tell but I have to share with you also that we have the full confidence that we can do it and we can do it successfully.

We did partially this kind of thing in the past. We have a long track record of doing integration in a different kind of way and that's why we are so successful in doing integration. We have the skills, we have the capabilities and we will do it together with Cephalon. And that's the recipe for successful integration.

So we are confident and we are looking forward to another successful move in Teva and that's basically as I said, what we think and how we shared with your colleagues in our road show, as you mentioned last week or the weeks before. That’s basically were the major takeaway of this short road show that we’ve done.

David Maris

Great. Thank you very much.

Operator

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

Christopher Caponetti

Hi. This is Christ Caponetti for Dave Risinger. I have three questions, very brief. First, what is your convention level on the Jerusalem facility issues being behind you very soon? Two, do you expect Germany to return to constant currency growth in the second half due to the recent tender wins?

And finally, what should investors be assuming for the fully diluted share count in the second quarter and later this year given that you still have 500 million left on the buyback? Thank you.

Shlomo Yanai

Okay. Let me take first your first question and then Gerard will answer the European questions to be followed up by Eyal on the last question on the shares. To answer your question on Jerusalem in a simple way, I believe it's behind us.

We of course have to wait until the FDA officially comes to do the requested re-inspection but to be very simple and very clear, I think we did all the corrective actions that we think we had to do and I think this is behind us. Gerard.

Gerard Van Odijk

Thank you Chris. Well, I think we were very happy with the Q1 in Europe and that was across Europe true and there were basically no surprises as far as the German market is concerned. You heard about our growth year on year. It’s very nice to also announce that our profitability even went even further up, it’s quadrupled over the same quarter across Europe.

So we had a wonderful quarter as far as that is concerned. Germany was no surprise for us. We planned for that. We planned for that when they announced the voucher formula deal, we planned for that when we announced our plans for the year because we knew that on the back of price reforms last year in Germany there would be a decline of the marketplace in the first seven to eight months of the year.

And that’s happening as we speak. How it declined, which is in the low teens is about half the decline that was reported by the number one player in the German market. So relatively we did very well. We became number one by volume and we’re on track to become number one by value if you look at the current trend that we see in the market. And as Shlomo already alluded to, we’re closing the gap quickly year on year.

So we know where we’re going and we expect the German market to really come back to growth in the second half of the year. The second reason also is the market itself will recover simply because you see (unintelligible) measures that were taken last year. The second reason why we’re optimistic is because an ingredient that we have in place, the revitalization if I may say of the dynamics around the Ratiopharm company since they were let’s say unleashed out of the selling process, we really see a reenergized group of people that are going out with the wind in the German market, that’s one.

The second point is of course the AOK tender win that we did very well this time. It still needs to be implemented but we believe it will help us tremendously in making a strategic position cemented on the shelves with every single pharmacy in Germany and you can build on the back of the business as well.

So we believe it can and will happen. We’ve got all our ducks in a row to do so, so we’re optimistic about Germany.

Eyal Desheh

Yes. On the share count - this is Eyal. Since the buyback is actually impacting on a weighted average then you don’t get the full impact in the quarter when you buy the shares. And we also have to make assumptions of how many shares we will buy in Q2, which is never a final decision.

Having said all that, I assume that anywhere between 895-897 million shares would be a good number for the share count. So it’s at least 5 million less than the 902 that we had at the end of Q1. 897 we’ll call it would be a safe number.

Christopher Caponetti

Great. Thanks very much.

Operator

Thank you. Our next question comes from Frank Pinkerton with SunTrust. Please state your question.

Frank Pinkerton

Thank you for taking the question if I ask one and fall off later. The first one is on multiple sclerosis and just generally in that category. As we’re seeing more and more products come to market but price increase is being taken, how does Teva ultimately look at managed care in that market? And with more products coming will some of the older generation products ultimately be at a discount? Or does managed care have any weight to kind of control pricing for some of those therapies? And then a follow up please.

Bill Marth

Frank, this is Bill Marth. I think the key in the MS market right now is those patients treated versus non-treated and where the orals are having an impact here. I mean there is about approximately 250,000 people that are treated and about 250,000 people that are for one reason or another either needle phobic, in denial, have failed on other therapies and just aren’t in treatment paradigms today.

And I think that those individuals of course are where the orals are likely to have an impact. Managed care at this point in time has had very little impact with respect to treatment paradigm in impact versus with any multiple sclerosis therapy. But over time I think as the treatment options open up there may be more pressure for prices to be somewhat mitigated.

So in any case, I think right now the real trend is to get more patients into the treatment paradigm.

Frank Pinkerton

Great. And then just as a follow up with the Cephalon acquisition, assuming that closes kind of two parts - number one, would Teva go to reporting segments say branded versus generic or something once that acquisition closes given the size of the branded business at that point? And then number two, could you just make any comments related to from a management standpoint given that branded will be much larger, how does Teva feel about the management in place or does there need to be a bolstering in management for the branded division? Thank you.

Eyal Desheh

Okay. On the accounting question this has not been determined yet. We need to give it a close look at determine based on segment reporting. Right now we don’t think that we have to but we need to look at it.

Shlomo Yanai

And as for management, this is Shlomo Frank. I think first of all as I pointed out when we announced the Cephalon acquisition, one of the major reasons that we were so attracted by Cephalon is the Cephalon people and the Cephalon team.

We believe that they have an excellent management team with a proven track record of bringing a product to the market. And we definitely, as we did always, we are going to take the best employees and to make decisions by merit and I believe that that will make part of the Cephalon or Cephalon will definitely help us to beef up the management that we need in order to have a successful leading specialty pharma business.

So we are optimistic and confident that together with the Teva people and the Cephalon great team we will make a great management that will take us to where we believe we are going to be.

Operator

Thank you. Our next question comes from Eliot Wilbur with Needham & Company. Please state your question.

Eliot Wilbur

Hi. Thank you. Good morning. Just a couple of Copaxone related questions - first, on the OUS performance in the quarter. How much of that was related to sort of one time bids, one time tenders? I know last year we saw a very strong performance of first quarter ex-US and then it tapered off in the next couple of quarters.

So I am just trying to get a sense of how much of that may be sustainable versus more of a one-time effect this particular period? And then if you could just remind us as far as the timing of and current structure of the Copaxone ex-US royalty agreement and how that is going to impact the P&L. And then for Bill, probably it will be a couple of months before we hear from you guys again and I think in this timeframe there is an action date pending on your latest iteration of a citizen petition regarding Copaxone and basically criteria for any potential ANDA application.

And I am wondering if just basically you think we should expect a repeat performance of what the FDA has done in the previous two occasions which is basically to say simply grant you what you are asking and move on from there?

Bill Marth

Eliot, this is Bill Marth. How about if we start with the last first and then we’ll flip back to Eyal? I think your question about the ex-US and the tender business - the Copaxone business ex-US was fairly flat this quarter and there was very little tender action. With respect to the citizens petition I think you got it about right.

It is our anticipation at this point in time that we are likely to get that citizens petition pretty much handed back to us without any activity on it as we do not believe there is anyone close to approval at this point in time. And I think the last part Eyal would take to that.

Eyal Desheh

Regarding the take back in Europe, it’s mostly in European countries. The only major country currently that we took back from Sanofi is the UK. Gerard will correct me if I am wrong. He is nodding with his head. The rest of the major markets between the second half of this year and 2011 I think Germany in the fourth quarter.

And basically it will have a positive impact both on sales, a little less than that on profit but positively on profit. As you’ve seen in our recent filing there is a 6% royalty associated with that. So its not a free lunch but will definitely give us some backwind on the top line and little on the bottom line also with the take back until its completed. It will be completed by the end of 2012.

Eliot Wilbur

And that’s pure impact? No impact on SG&A?

Eyal Desheh

Yes there is. It’s very similar on a smaller scale to what had happened when we took it from the Sanofi in the US but it's smaller. Overall the total impact on revenue probably would be 150 million when we complete it. We'll deliver higher gross profit as a result of that and higher sales and marketing because we will be doing it ourselves.

Overall to the bottom line from those numbers maybe half will stay on the bottom line or little less than that after the royalties and the sales and marketing expenses that we will have to fund ourselves.

Operator

Thank you. Ladies and gentlemen, we do not have any more time for questions. I will now turn the conference back to Mr. Shlomo Yanai for closing remarks. Thank you.

Shlomo Yanai

Thank you, Diego and thank you all for being with us today. As you have heard, we took significant steps during this quarter to deliver on our long-term objectives and we are looking forward to a significantly stronger second half of the year and again thank you all for being with us today.

Operator

Thank you. This concludes today’s conference. All parties may now disconnect.

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