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Executives

Eyal Desheh - CFO

William S. Marth - President & Chief Executive Officer Americas

Analysts

Chris Schott – JP Morgan

Teva Pharmaceutical Industries Ltd. (TEVA) 30th Annual J.P. Morgan Healthcare Conference January 10, 2012 12:30 PM ET

[Q&A session only]

Question-And-Answer

Chris Schott – JP Morgan

Great. Good morning, everybody. I’m Chris Schott, Pharmaceutical Analyst at JP Morgan. I’m very pleased to be introducing Teva this morning. From Teva we’ve Eyal Desheh, the company’s CFO, as well as Bill Marth, who is President and CEO of Teva Americas.

We are going to do a format today, it’s going to be more kind of a Q&A type of format. But I was going to have Eyal make some quick opening remarks and I will go to kind of some interactive questions from there.

Eyal Desheh

Well, thank you very much. Good morning, everyone. We’re always happy to be here at JPMorgan, in San Francisco, and we appreciate the crowd. Thank you for coming to listen to us. Without too much of introduction, first of all, we have our Chairman of the Board, Dr. Phil Frost, here with the audience. We’re thrilled. Here you go. And we will be happy to take your questions.

This is a new era for Teva. I’m sure that everybody is aware of that. The company is changing fast and we believe that definitely into very right direction. There is a huge platform of generic branded and over-the-counter drugs was with a very large global footprint and I believe that we’re operating behind a very solid strategy to lead Teva to further and additional growth in the next few years to come.

So with that, Chris, shoot your questions.

Chris Schott - JP Morgan

Sure. Well, maybe just to kick off on that topic, I mean, if you can just maybe discuss that the Company has obviously gone through quite a transformation these last few years becoming much more of a global entity, much more of a kind of balanced brand generic Company between Ratiopharm and Cephalon. Can you just talk about some of the challenges of managing this much broader portfolio to basically ensure we continue to see this high level of execution we’ve been kind of used to seeing from Teva historically and what you’ve kind of – what structural changes you kind of – you feel like you need to – you’ve made and still need to make to continue to execute on this kind of a more global strategy?

Eyal Desheh

You know maybe I will give a few data points. Then I will allow Bill to give some more details of that question. I think it’s a key question. First of all, when you look at Teva today, with a plan for about $22 billion in 2012, 55% of that is generics, 37% of that is branded. So the sizes of these two big pieces are pretty, pretty close. And then there is about 5% of OTC which is growing faster than the rest of the business and the rest – all the other, most of the distribution.

Now when we look at geographical spread, 25% of our business is U.S generic business. This 25% used to be much bigger. Teva today is a very, very well diversified company. Our generic business in Europe is almost equal in size to our generic business in the U.S. We have more branded products sold in the U.S following the Cephalon acquisition than generic product. With over $8 billion of branded products for 2012, this is a very, very large and solid piece of the business. So Teva is changing. It’s changing rapidly and is going to according to its strategic roadmap regarding execution and managing in a complex environment. Bill, maybe you can have …?

William S. Marth

Yeah. I think Eyal, you actually described it quite well. You know Teva is pursuing a strategy now that it’s relatively simple. Our mission is to bring medicine to patients around the world, no matter what means that is. I think that many people have continue to think of us as a U.S generic company and we’re a globally diverse company that really is the world’s leading generic company with $12 billion of generic revenues and a very large specialty pharma company at $8 billion with that mission to bring medications to patients around the world.

The challenges that sometimes exist – bringing those two poles together are really executional on the generic side. It’s a very executional business. And we’re excited about this business because it is a very local business. People often wonder why just Teva has a – have a particular expertise in generics around the world. Why can’t we do it any better than any large pharma company, and that’s an excellent question.

And I think that answer lies in our view that generics are a very local business. Now there are some major hubs when one thinks about Western Europe and when one thinks about the Americas, certainly large hubs. But when you think of Chile, when you think of Peru, when you think of Poland, when you think of Russia, these are very local markets and we have a – we’ve managing them in a very local manner. And that, Chris, at times is a challenge, but we think it is worth a challenge and we do a great job there.

At the same time we’re developing our world class specialty pharma company and that of course largely is in the U.S and our challenge now is to bring that, that specialty pharma company more globally. As we take back COPAXONE in Europe and as we grow around the world, we now need to have the capability to do brands globally. So those are many of the challenges, Chris.

Chris Schott - JP Morgan

Great. And Bill, if we can just maybe talk about the U.S generic business. When I think about 2012 and some of the guidance that you laid out on the call, we got obviously Lexapro, but we’ve got a big year for volume but lot of the opportunities have multiple players [take one], a lot more competitive markets. Should we think of that as an anomaly that or is this kind of a changing dynamic with the U.S market where it maybe a bit less exclusivity driven going forward and its just kind of a changing dynamic in that market? Can you shoot of any thoughts you’ve got there?

William S. Marth

Yeah. Couple of really good questions buried in there. First of all, 2012 is quite unusual year. As I’ve said on our call, we can have up to 40 different launches in 2012. I don’t think that’s likely that we will launch all 40 products and it can be worth as much – as $30 billion of innovator value. That’s a tremendous amount of competition. The only exclusivity we see in the year is as Citalopram and – two big comments. The U.S generic business is a large and important business for Teva moving forward and it will remain a large and important business for Teva for a long time. But it is changing. The competition for Paragraph IV is increasing. The complexity of products themselves, the patents are getting tougher. So there are less exclusivities. But we see a real change coming in the U.S. We see another wave of volume coming in with Obamacare, as exchanges move in 2014 and beyond we still see a movement of 20 million, 30 million plus covered lives.

And that’s a big difference when one thinks about a covered life versus a non covered life when you think about utilization. So we see – and most of that prescribing that’s going to be done in the compliance and persistency that will come from these new patients coming in on covered lives will very much – about 80% we believe, will be generic.

So we see another wave of volume and I think moving forward, executionally going back to the first point that is what’s very key for us. Execution, managing our cost as we look to get our cost down, we have a number of strategies that we believe that we can lower our costs base $4 or $5 a thousand below what it is today, which will probably drive somewhere between $200 million and $300 million additional to the bottom line over time. But these are the kinds of exercises we need to do to make sure that we’re in the right position to compete in the U.S market going forward.

Chris Schott - JP Morgan

And along those lines, as we just think about the U.S generic market evolving when Teva is obviously got global scale, [you got] a lot of initiatives for talking about reduce costs. How do you see the smaller players industry [just been] share kind of trending over the next few years as the environment does get more difficult as you do need to have this really low cost structure that execute? How do you think about that and how does that affect Teva’s business in terms of what competitive responses you might be seeing there?

William S. Marth

Yeah, I think most people would think that if cost – its all about cost structure, which is – it is about cost structure and execution, then it would favor the Indian market. And really from our view it does not. We pursue a big-to-big strategy with very large players in the U.S market. We’ve over 400 products. We’ve approximately 200 more filed with the agency, worth about a $100 billion of value. If you look at the total value that’s left in the U.S market it’s about $300 billion market, if you back-off what IMS applies to generic today that’s about $50 billion, these are marketed at about $250 billion. If you take BioSim – biologics away from that, which we’re chasing in a different strategy in the BioSim’s. You still have almost $200 billion market and we’ve about $100 billion in that file, we need another $100 billion to go.

The point is we've a very, very large portfolio, almost third larger than our closest competitor. And when you think of many of the Indian competitors, you’re talking about companies with product lines that are 30 and 40 products versus our 400 or even Sandoz has a very large line, Mylan has a large line, Watson – I think that gives you a strategic benefit moving forward, I think we believe that that’s very important as well as having the right kind of cost base to be able to complete in a more commoditized market.

Chris Schott - JP Morgan

Okay, a question for Eyal. Can you just talk about capital allocation going forward and how you’re thinking about the mix of, with the shared repo and dividend versus debt pay down versus acquisition? And I’ve got a few follow-up questions from there, but just how are you balancing those three kind of uses of capital?

Eyal Desheh

Sure. Looking at the next three years, we’re going to generate between $15 billion to $17 billion of cash flow from operations. And we need to allocate this in the most efficient way most for the company and our shareholders. So we look at this, we took a very comprehensive look at capital allocation and did some benchmarking, what are the companies of our size and our industries are doing. I looked at the numbers which is more-or-less anywhere between 40% to 50% of cash flow generation to be allocated to shareholders by way of share buyback and dividend payment.

We announced as you all know, a $3 billion share buyback program to be allocated over [few] years, but there’s nothing preventing us from doing it much faster. It’s a completely flexible program. We can use our excess cash to accelerate it, we’ll see the opportunity, so this is completely open and it depends a lot on the business development opportunities, Teva is a growth company.

We also see utilization of cash generation to grow the business and to continue and create growth engine by way of outsourcing new products into branded business by going to the emerging markets where most of the generic growth on the next 10 years is going to happen.

So this is, I believe a very well balanced program taking advantage of low share price and buyback shares, $3 billion, about 8% of our share and we can do it fast with the cash that we've. We took a very balanced approach and look also at the interest of our bond holders, who would like to see solid balance sheets as well.

So the whole thing I believe came out as a balanced program, a flexible one. We’re going to increase dividend with the Q4 announcement as we do every year. So, the plan I think is we’re very well set for the next few years.

Chris Schott - JP Morgan

When I think about that capital allocation, given where your stock prices, I mean, should we be thinking there’s a pretty high hurdle for business development at this point and it seems like you’ve got a very, very attractive kind of, your own shares are very attractive in this mix. Is that influencing what you’re kind of – what you look at for bus-dev or …?

Eyal Desheh

Chris, I think the key word here is, is the right balance. I believe and we talked about this when we gave our guidance for 2012. I think in the near future at least in 2012 the big deals are not going to be – are not going to happen. I mean, the Ivax, the Barr, the Ratiopharm, the Cephalon deal, each one of them anywhere between $5 billion to $7.5 billion, I don’t see Teva doing that.

I think we've created a huge infrastructure with enormous growth engines, now we need to utilize them. But smaller deal, local deals, product deals, you can expect that to continue to do that, but the order of magnitude it’s going to be smaller than what we've seen in the past. And yes, does it compete with return on investment with buyback? It does. But the nice thing about balancing is that you have to take care of the long-term as well. So, and I think we’ll have it all in our plan.

Chris Schott - JP Morgan

Thanks for that. Thinking about Teva’s business and margin structure over time, I think some of the comments we’ve been – Bill has made, maybe about the Paragraph IV business, maybe becoming smaller percent of the business over time. I think Teva’s commented that COPAXONE similarly maybe a smaller percent of the business as we think about 2012 and going forward. What can Teva do to maintain its margin structure, given what seems like two of your higher margin businesses maybe shrinking as a percent of the total company as we think about the next three to five years?

William S. Marth

Yeah, let me just start. There’s two things, Chris. Number one, COPAXONE, will likely peak in 2012 based on our projections. We just took a price increase couple of days ago, but we’ve actually done quite well in 2011 where we actually gained patients and there were really only two therapies in the United States to gain patients in 2011 according to our statistics and that was both COPAXONE as well as [Covonia]. And so, we just – though we’ve to think about the reality and this is going to become a crowded market with many more therapies coming in, so we believe it will begin to wane. But as COPAXONE begins to slow, we also should get addition from other parts of our pipeline. We’re still very excited about the Cephalon purchase and many of the products that were within that pipeline.

There are some, Omacetaxine that we believe that is a friendly agency now, we believe we’ll get approval in relatively near future and that’s a new oncology product again, very fine margins, a very good therapy for third line CML.

The other things that we believe will come out in the pipeline, in the relatively near future is things that can be as helpful as TD Hydrocodone, we believe that’s another product that will get approved and can be a $300 million, $400 million, $500 million product in a couple of years. Again those are great margin helpers as well as improving our margins in our Japanese business as we move forward. That was a business that we acquired, almost a $1 billion business, and we think there’s a number of things we can do in the Japanese business to bring that up to a better margin level.

So I think we've lots of opportunities, we’ve great margins for that in a growing Latin American business. I think Eyal said it very well when he talked about diversity. And that diversity within our P&L helps.

Eyal Desheh

Yeah, maybe just a few data points here because I think Bill covered it very well. We have – part of our business is commoditizing, its – I call it value added commodities because the margins are relatively high. But we should expect it to be, that COPAXONE is going down, not as fast as we thought initially, we believe it will be quite slower than what we thought two years ago, and we already talked about that.

On the other hand, they’re the growing parts of the business, both in volume and in margin. We’ve revolutionized Europe. Europe today is up to the profit level of the U.S. generic business and it was a great opportunity. Some people look at Europe and see risk, we see opportunity. We see increased branded generic business in Europe, we come with higher margin than the regular GGX and we’ll see branded products and respiratory products some of the Cephalon’s product all going to be launched in Europe in the next three to five years.

So, there is nice opportunities in Europe, in aging population of half a billion people that present a very large opportunity for the likes of Teva with our footprint all over that continent and then the Japanese business which Bill mentioned is going to improve its margin from 12% to over 20% within a couple of years. I believe we know how to do it.

So it’s about volume, it’s about the cost structure which we invest a lot in making our plan efficient. Going East with production infrastructure and which gives us tremendous tool to compete with local companies which is doing the same, but we've a huge pipeline and a very large product portfolio. So all that will probably maintain the margin level at more or less at today’s level, maybe it’ll touch higher with OTC business becoming a bigger part, and with profitability in OTC around 25% operating margin will take that a few points higher and that’s how we’re seeing.

William S. Marth

Chris, there’s one other thing that …

Chris Schott - JP Morgan

Sure.

William S. Marth

… that I want to mention on the U.S. market and that’s we did say that we think that there’ll be less Paragraph IV – less Paragraph IV effectiveness due to NCEs and a whole lot of other reasons. Now that doesn’t mean that, the margins in U.S. go away as well. There is still a number of complex products that we think that although the opportunities that present itself in that $200 billion basket of products that we’re chasing, there’s still a lot of complexity in there. So, you find products that are like Budesonide, the mixed amphetamine salts, [you take dural – let’s say enoxaparin], other products like that, that are difficult to manufacture and more sustainable on their margins. So, those exist as well.

Chris Schott - JP Morgan

Sure, sure. Bill, if you could just comment on Lipitor, the generic market? Just two questions here. One, how attractive of a market do you see this post the exclusivity period? And then second, there has been a lot of noise in the market in terms of Pfizer’s efforts to protect their brand in a kind of post-generic world, just any thoughts you’ve about what implications that might have, how successful in your view those efforts have been, would be appreciated?

William S. Marth

Yeah, we see the Lipitor market, the Atorvastatin market is a great market, it’s been doing very, very well. There is a lot of hoopla out there about what Pfizer is doing, I think they’re doing what you would naturally expect any branded company to do to protect their franchise as best as they can, hoping to make some money. But at the end of the day, they’re spending a lot in their coupons, they’re still giving ads this morning and yet our numbers show that the generics are closing in on 70% of the market.

So, we see great progress with our partner Ranbaxy, we’re very excited about the deal. It was a tremendous co-operation between two really good companies that were able to bring this product to the market, and we’re excited about it. We don’t -- there are no real strategies, Chris, here that we didn’t see with respect to Effexor or Venlafaxine. It’s pretty much the same strategies, but they’re just been heightened a lot more, there’s a lot more PR, maybe there’s a few more bells and whistles, but in the end of the day, I don’t think it’s going to prove to be any more effective, with respect to what the market will look like after 180 days, hard to say. At this point in time, the only approvals are Ranbaxy’s and ourselves, Teva’s. So, we’re hoping for a really good market on day 181 but, I guess we’ll see when we get there.

Chris Schott - JP Morgan

Okay. 2012 guidance, I know 2011 was a pretty controversial year for Teva. When I look at your targets for next year, it seems like you took it – very thoughtful, but pretty conservative approach when I think about, whether it’s COPAXONE, whether about a number of different elements of your business. Did you approach 2012 guidance any differently than you might have approached 2011 when I know we had some undisclosed commercial opportunities, we had some opportunities with Lovenox etcetera, just conceptually was there any different approach you took this year versus prior years?

Eyal Desheh

Well, I’ll put it this way. First of all these are very two different years. And 2011 we had strong headwinds, almost everything we did and it was – and we’re glad it’s over. I think that headwind slowed down considerably, end of fourth quarter, I think it -- it doesn’t go away completely, unfortunately, but I believe that in 2012, we got a little bit of a tailwind instead.

That said, yeah, it’s a careful approach. I’m not sure its conservative and I can’t put it on the scale, but I think we took a careful approach, the old rule that you build stock price by under-promising and over delivering it’s not going away. It’s there and we try to adopt it and on planning and being able to take risk and make successes. I think if we didn’t learn something from 2011, we’re pretty stupid.

William S. Marth

Chris, I’ll just follow-up that, a couple of things on the 2012 guidance that you have to keep in mind. We gave a very tight range to show confidence and I think that’s reflected in what people thought about -- what they thought about our guidance. I also -- I challenge the words conservative guidance, it’s a very good guidance. The guidance we gave is good guidance.

You’ve to understand that although there are, we did repurchase some shares and there were some changes there. A major product such as a Fenofibrate is not in that guidance, and that accounts for $0.15 to $0.20 depending on whose numbers you want to look at, but I want to point that out that, that is a very good guidance and we think it’s the appropriate guidance.

Chris Schott - JP Morgan

Great. Got about a minute left or so, but I should one -- maybe final question here, follow-on biologics and biosimilars. We’ve seen a number of players kind of rolling out their strategies, maybe some more traditional biotechs partnering with generic companies like we saw with Watson and Amgen. Can you just maybe give your latest thoughts of how you see the competitive landscape of all being for this market, I know there’s still a lot of guidelines and everything else seems to be rolled out, but just as that strategies get rolled out here, how do you feel Teva’s position relative to some of these other strategies?

William S. Marth

Yeah, I think they have an effective biosimilars program, I mean it’s going to rely very much on the U.S. market. The ROI is going to be here in the U.S. market. My personal belief is that this market here in the U.S. is going to look more like a non-differentiated branded market. Say, another PPI or something like that, you’ll need to do clinical trials, you’ll need to do physician awareness, you’ve to have the appropriate clinicals, physician awareness, maybe Phase IIIbs, Phase IV as we as we put the product in the hands of the physicians and an excellent managed-care strategy, something we’ve been actually [toying] with for quite some time with our TEV-TROPIN HGH, that’s the way we believe it pans out. Now waiting for guidance from Dr. Woodcock in the FDA and we were told that that guidance is going to come relatively soon.

We didn’t want to take a chance and wait for it, we filed those BLAs and we believe that we’re going to find out what this market is going to look like you know around 2013 when we come to market with our G-CSF and our Long-Acting G-CSF, but that’s the pivot point. We’ll see what this looks like. And this is a market that’s going to evolve over – I don’t think over five years, maybe even longer, over a decade. It’s going to take a long time and so, we’re excited to get into it and we think it’s a great opportunity for Teva.

Chris Schott - JP Morgan

Great. I think we’re about out of time here. Thanks very much for the comments.

William S. Marth

Thank you.

Eyal Desheh

Thank you all very much.

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