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Eyal Desheh - CFO

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Michael Faerm - Credit Suisse, North America

Teva Pharmaceutical Industries Limited (TEVA) Teva Pharmaceutical Industries at Credit Suisse 2011 Annual Healthcare Conference Call November 10, 2011 3:30 PM ET

Michael Faerm - Credit Suisse, North America

Good afternoon. I think we will get started with our next presentation. We are very pleased to have with us Teva Pharmaceuticals. From the company we have Eyal Desheh, Chief Financial Officer and Kevin Mannix, the Vice President of Investor Relations. In this presentation, there will be a very brief set of prepared comments and then primarily Q&A. So don't be shy to put your hand up and get your questions in. Eyal?

Eyal Desheh

Alright, thanks Michael. Since I guess you've seen to many slides. Today I prefer to skip the long slide presentation that you've seen. You can see on our website and it’s not really telling you anything new and really answer a question which I think could be more valuable and of course we will also have a breakout session afterwards. So there would be ample time for those who didn’t have a chance to see us today, in person to ask questions in the breakout session and I definitely welcome that. So only just a few slides covering the third quarter.

The highlight of what we have said on the earning call, basically it was a good quarter with one exception and that is the US generic business. If we look at our business piece by piece, Teva today is comprised of a number of big pieces where the US generic business, where the US branded business, where our sales in Europe generic and brand but mostly generic, the brand piece is picking up and we have the international markets.

I will review these pieces, every piece of our business work well or exceptionally well with only one part was the US generics and we have mentioned on the earning call. We’re looking at an upside for Q4 or product which we cannot disclose, we still can’t. So please bear with me on that and the plan was to launch it early Q3. That plan didn’t happen because we did not receive the approval. We have a tentative plan to launch it in Q4, still didn’t receive an approval and we are waiting. If that will happen, that means $0.10 in our earning per share. Originally we had even a bigger amount for Q3, but as I said that part of our plan did not happen this time. It’s rare, but it does happen in the generic business.

Other than that, when we look at all the pieces of our business. Europe did exceptionally well in a pretty difficult business environment while picking up share we are especially happy with our performance in Germany where in September we became for the first time the number one generic company in Germany outpacing the historical number one. I hope that we will able to be hold this in Q4 as well and if not, we are very, very close since we acquired Ratiopharm, a little over a year ago. We picked up 6 full percentage points of market share over the number one player and we are very happy with the way our business performed in Germany.

We have very good performance in the UK, we have a very good performance in Italy. France was decent, not exceptional but decent and as you can see on the slide, there is the five major markets in Europe. We are 14% year-over-year with the rest of it, the total Europe on average, total Europe, we were 9%. Poland was down based on a large healthcare reform, Spain was flat, but all-in-all Europe was 9% up which was very gratifying.

We made a large investment in Europe and we are happy with the investment, the profit which we, do not report profit by geography, but profitability in Europe more than doubled year-over-year which is even more impressive and Europe became from a negligible contributor to profit, became a major contributor to profit of Teva overall and we see the improvement continuing. Very nice performance in other parts of the world, Latin America was 14% gross, Eastern Europe specially Russia was over 20% gross. These are all organic gross rates, and local currencies, and we are happy with that.

Our branded business was up 21% with growth both in Azilect and Copaxone. The respiratory business had nice performance, the only part that did not do very well there was the women’s health with the loss of exclusivity of Seasonique, but all the rest of the pieces of our branded business has performed exceptionally well in the third quarter.

We are very closely watching and monitoring Copaxone which is definitely the biggest product and the largest profit generator for TEVA and so far we’re happy with what we see. There’s an oral competitor in the market that is gaining share, doesn’t seem at this point to be at our expense. Copaxone continued to add prescriber, to add patients. Despite the competition, the market share with Gilenya taking seems to be up from increasing the market from naïve patient or patient that has been treated with other therapies and dropped off because it wasn’t successful or they couldn’t tolerate.

This is about half of the growth and the other half is the expense of better interferon. With Copaxone increasing and holding up nicely with nice increases in Europe, nice increases in the international markets. So we’re very happy, this was the first quarter, full quarter of sales for Taiyo in Japan which is a nice opening for this acquisition.

We also during this quarter you know solidify our business in Japan by acquiring the 50% ownership of our partners in the Teva Kowa joint venture and what we are doing we’re busy integrating the two company into one with a lot of cost saving to be realized by combining the production, bringing on board Teva raw materials or APIs which in Japan the local products are extremely expensive. It will take a couple of years to complete this turnaround, but we believe that within a couple of years we’ll have over a $1 billion business in Japan in a growing market with low generic penetration currently.

We are currently number two in this market, when we combined the two companies, we are number two in this market, very close to the market leader in the generic space and we believe if we will continue to grow the way we have, we could be the number one player within a year. So Japan looks very, very well. This was a particularly active period for business development, a strategic initiative.

The Cephalon closed a couple of weeks after the end of the quarter, but it is still within the reported period. This is for us a milestone of executing on our long-term strategy basically bringing additional pipeline and product portfolio to the Teva branded business and we have talked about it and talked about a long-term strategy.

We believe that Teva business model is going to be stand on three now four business pillar, the generics, global generic business, global branded business. Biosimilars which is going to have an impact on our business model a few years later and now the OTC with the joint venture that we have closed just couple of weeks ago or less than two weeks ago. We closed a deal with Procter & Gamble and launched the TEVA and Procter & Gamble Over-the-Counter joint venture. When we look at the numbers Q3 suffered from a tough comparison in the Q3 last year and I am now going to review them. You've seen the number Q3 of last year, like all of 2010 Q3 was an exceptional quarter with the launch of Venlafaxine, huge profits and very large sales. So competing with that organically was tough comparison but when we are looking at the results compared to Q2, we see improvement in all fronts sequentially from one quarter to another.

Just a few words and then we’ll open it up for questions. As you see the pillars, the generic is doing, is making progress in the emerging markets and outside of the US where most of the growth is going to happen in the next few years with very solid sales in Europe. Branded business continue to grow both in sales and profit and the addition of Cephalon will give us opportunities that we wouldn’t have in the past and the OTC as a growing business from a relatively small base, we believe this joint venture is going to reach [$4 million] towards the end of this decade. So it is the fast growing nicely profitable business for us.

Thank you for listening to the very short slide presentation and Michael let's go for questions.

Question-and-Answer Session

Michael Faerm - Credit Suisse, North America

Okay we’ll get started with Q&A. We have a mic in the back so feel free to raise your hand and we’ll get the mic over to you. I’ll get it started with a question. Common topic of conversation lately has been capital allocation and in your recent call you talked a little bit about seeing less of an emphasis on large acquisitions going forward and perhaps more consideration being given to returning capital to shareholders. So could you talk a little bit about your thoughts on how you think about capital allocation going forward?

Eyal Desheh

First of all, let’s identify to solve the problem and not try to avoid it. Stock price does not reflect what we and many of our shareholders believe is the right value and the question how you improve stock performance other than convincing all of you to buy it, because it does reflect a lot of upside opportunities. One of that is that we’ll buy our shares; we have been buying shares and eliminating not just buying, but also eliminating shares from the count by way of early redemption of convertible debenture over the past 12 months. All-in-all, we invested close to $1.8 billion in buyback and in early redemption of convertible.

We’re getting pretty close to the end of our buyback program, $1 billion buyback program; our board will probably discuss it again and given the lower share price is not out of question that we’ll continue to buyback shares. I can’t tell you by how much and over how long of a period, but lets talk about the source, where this is going to come from.

We plan to generate about $3 billion in free cash flow in 2012 and we’ve already said that Michael mentioned that we have no plans to go for another major acquisition in 2012. If at all we would do a complementary acquisition in one of the emerging markets, but we are not talking about billions of dollars to be invested in these kinds of acquisitions. So we’ll have free cash, this free cash should it could be allocated between buying back share and buying back debt.

Teva has a very good reputation with the debt market. Earlier this week on Monday we raised $5 billion from the market which were very nicely priced and we believe that maintaining that reputation, that good relationship with the debt market and with bond buyers is very important. So we now have to continue to leverage the company and will go to do allocate cash probably to buy back again, the Board will have to approve a plan before we start to execute and to reduce our leverage and start to pay back some of our debt.

The bonds of course are fixed so they are not going to be paid, but some of our bank debt is floater rate arrangement that can be paid at any time, and we plan to use some of the money to pay it back, and some of it to go to the market with another buyback program which will be based on our cash generation.

Michael Faerm - Credit Suisse, North America

Any questions from the audience, alright down here front?

Unidentified Analyst

You said that the impact of Gilenya on Copaxone has been pretty minimal, which somewhat attributes to the fact that Gilenya is not necessarily the easiest drug for physicians to use in comparison with Copaxone. Do you expect that Copaxone will be similarly unaffected by the next launch mainly BG-12?

Eyal Desheh

Can you raise the voice a little on the last question?

Unidentified Analyst

The question was basically, you have seen very little impact on Copaxone from Gilenya, do you expect that there will also be similarly small impact when BG-12 launches?

Eyal Desheh

Well look at the oral agents for MS treatment and there is no doubt that overtime we will see more penetration of oral treatment. It’s Gilenya or be BG-12 when it will come to the market, I can’t anticipate when, but probably late at 2012 or early 2013. It seems to be a decent product. What we see from Gilenya it’s something that we have talked about before the introduction of the first oral product is expanding to markets.

In the US alone, there are between 400 to 450 diagnosed MS patients; 250 of them are treated. It means that there are about between 150 to 200 patients which are not treated and for many of them it’s not a financial issue, I mean, they have the insurance to pay for those expensive treatment. It’s about not being able to adjust to needles; it’s about not being able to adjust to a product. The human body reaction very different ways and you just can’t predict it and it’s different for one person to another. So not everyone can adjust to the treatment and people that don’t tolerate don’t get treated.

What we’ve seen from Gilenya is that, Gilenya is increasing the market and there are many patients who are being put on the oral treatment. They could not tolerate either interferons or Copaxone or whatever it is there is in the market, so it’s going to market. It’s taking share mostly from beta-interferon. All we’ve seen since Gilenya was introduced to the market, we have added more than 5,000 patients to 100,000 patients under treatment that we [R&D] with. So basically, we do see an increase in patients under treatment with Copaxone.

I can’t predict for how long this is going to stay or assumption or an estimate and I think the reason number one is that oral product will begin at one point to take the not just share, share is a percentage thing but number of patients. Right now this is not happening but when we predicted that from $2.5 billion to $3.7 billion of peak sales in 2012 Copaxone sales will go down to $1.8 billion by 215, this is the main reason.

And while we look at this now, we will believe that we were a little too harsh with our self so it will be about $2 billion by 2015, but still product will be facing competition and it just makes sense that that side of the patients will be moved to other products.

That said, what we have experienced past year or so with oral treatment in the markets is that doctors are not too happy on moving the patients from Copaxone when the patient is well treated, is stable and lives a reasonable lifestyle and to try and test with new treatment. They are not doing that so quickly. They only do that in much faster with other products with patients don’t feel that well on the treatment with Copaxone as a injection, nobody likes that but people got used to it, so we see pretty nice stability so far. I hope that answered the long question with a long answer.

Michael Faerm - Credit Suisse, North America

Any other questions?

Unidentified Analyst

(Inaudible) Can you give us a bit more around the timelines of the bigger products that are coming off patent in Europe because I think we all have a pretty good idea of what happened in the U.S., but not in Europe and I am just -- even if you can't give me the precise date, you can probably give us the year or kind of half year around where you think that Zyprexa for example is going to go generic in Europe.

Eyal Desheh

Question was about major patents, major products that go off patents in Europe. Well, the big one is Lipitor and Lipitor is losing patent, country-by-country we began to sell it in some of the country, not in all of them but 2012 is going to be a big year for Lipitor patent expiration, not just in the U.S. but all over Europe. Clopidogrel is another large product which is now losing patent in Europe country-by-country. It’ll lose the patent in the U.S. 2012 -- middle of 2012 as well. But other than that there are many -- we are talking about 600 or 700 launches of new products in Europe in 2012 and most of them are not very large, most of them are not a Lipitor type but many, many products that are losing patents and are being launched, it doesn't happen altogether in all the countries in Europe. Most of the product have different patent filing dates in different countries but talking about 600 or 700.

Unidentified Analyst

This is another question about Europe and European healthcare reforms, up until a couple of years ago, generics were always seen as part of the solutions rather than part of the problem and so a lot of the healthcare reforms look to cutting branded prices and didn’t impact generics. In the last round of reforms, we’ve had price cuts for generics and we’ve had just as much as we’ve had price cut for brands. I wonder if you could tell us what you think the out look is for healthcare reforms and whether generics will continue to be hate in the same way as other pharmaceuticals in the European market?

Eyal Desheh

Okay. First of all I can guess from you accent that you are coming from that area but you probably know as well as I that Europe is not one country, and there are very different cultures that are very important they way doctors prescribed and people consume drug and very different governmental regulation country-by-country. So either from the UK with 70% generic penetration all the way to France, Italy and Spain which is in the low 30’s and Germany in the middle with about 50% generic penetration. We were looking at very different economy. But there is one thing in common in Europe, most of the house insurance program are government-funded, government paid and government are looking for way to save money on the budget, on the healthcare budget and what they do is one hand we see pricing reforms but they have their limits. I don’t know if we’ve seen that limit or not that more than 1000 pharmaceuticals companies in Europe, most of them are small and European government are also very sensitive to make sure that this industry stays alive and by pushing the prices down again, again and again they are putting that industry into risk and this is part of what they are looking at with pricing reforms. At the same time, there is a very strong drive towards using generics as compared to the branded product and we see volume growth all the time.

We see government directing the pharmacies, they are indicating the doctors to prescribe with all kind of methodologies to incentivize both the doctors and the pharmacist to prescribe generic. It will take time and we –it sounds in Europe or with 30% moving to 70% generic penetration, we will take years. It is not going to happen overnight, but it’s a trend that cannot be stopped. We see the same trend in Japan by the way, with 23% generic penetration. Like if you want to compare US and Canada, we are looking at something close to 80%. So the Europe has a way to go on volume price reduction as a result of healthcare reforms. We anticipate something on average between 3% to 5% per year and we don’t see that happening faster but again I don’t want to speak for European legislator.

So when we talk about growth in Europe of about the high single-digit growth in Europe, due to Dr. Gerard, our Head of our European business on the call. Earlier this month, this is what is based on. Increase in volume, modest reduction in prices, year-after-year-after-year, but we I think, everybody is aware of the fact that there is a limit, there is a floor for prices and I think we are getting there. We will take a few years and we will get there.

I think we have run out of time.

Michael Faerm - Credit Suisse, North America

I think we’ll need to stop there and we’ll be moving to the [Sedona] Room for the break out. Thank you.

Eyal Desheh

Thank you very much.

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