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Teva Pharmaceutical Industries Ltd. (NYSE:TEVA)

Q2 2007 Earnings Call

August 1, 2007 8:30 am ET

Executives

Shlomo Yanai - President & CEO

Dan Suesskind - CFO

George Barrett - EVP of Global Pharmaceutical Markets, and President & CEO of Teva North America

Bill Marth - President & CEO of Teva U.S.A.

Moshe Manor - Group VP of Global Innovative Resources

Analysts

David Buck - Buckingham Research Group

Rich Silver - Lehman Brothers

Corey Davis - Natexis Bleichroeder

Elliot Wilbur - CIBC World Markets

Mark Goodman - Credit Suisse

Ken Cacciatore - Cowen & Company

Randall from Stanicky - Goldman Sachs

Adam Green - J.P. Morgan

Ricky Goldwasser - UBS

Tim Chang - FTN Midwest Securities

David Steinberg - Deutsche Bank

Gregory Gilbert - Merrill Lynch

Louis Chen - Morgan Stanley

Presentation

Operator

Greetings ladies and gentlemen. And welcome to the Teva Pharmaceutical Industries Limited Second Quarter 2007 Results Conference Call. At this time, all participants are in a listen-only mode. A brief 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 Mr. Kevin Mannix. Thank you, you may begin.

Kevin Mannix

Thank you Diego. Good morning and good afternoon everyone. Welcome to Teva second quarter 2007 earnings conference call. We hope you’ve all had a chance to review our press release, which we issued earlier this morning. A copy of the press release is available on our website at www.tevapharm.com. Additionally, we're conducting a live webcast of this call that is also available on the website.

Today we are joined by Shlomo Yanai, President and Chief Executive Officer; Dan Suesskind, Chief Financial Officer; George Barrett, Corporate Executive Vice President of Global Pharmaceutical Markets and President and CEO of Teva North America; Bill Marth President and CEO of Teva U.S.A. and Moshe Manor, Group Vice President of Global Innovative Resources. Shlomo, George and Dan will begin by providing an overview of our results. We'll then open up the call for question-and-answer period.

Before we proceed with the call I would like to remind everyone that the Safe Harbor language contained in stoday's press release also pertains to this conference call and webcast.

I'd now like to turn the call to over Teva's President and Chief Executive Officer, Shlomo Yanai. Shlomo?

Shlomo Yanai

Thank you, Kevin. Welcome everyone and thank you for joining us today as we review Teva's results for second quarter of 2007. I'm delighted to announce that Q2, 07 was an excellent quarter across the board with record breaking sales amounting to approximately $2.4 billion. As I noted last quarter, the company's unprecedented growth in 2006 made it clear that 2007 would be a challenge by comparison. I'm very pleased to say that Teva took on this challenge and met it with great success.

Just as I did in the first quarter, sales in the second quarter actually grew, although the comparable quarter of 2006. A significant accomplishment considering the Q2, the Q2, '06 included the launch of Simvastatin and Pravastatin two of the largest launches in the history of U.S. generics. Although, we had forecast single digit growth for 2007, our performance this quarter brings us closer to achieving a double-digit growth rate for the year.

Our operating profit in Q2, reached $637 million with net profit of $515 million. And all of this ultimately brings us to EPS of $0.63. These results were driven by excellent performances across each of our business units in key geographies. In U.S. generics, we nearly matched our sales from the extraordinary second quarter of 2006, a major accomplishment.

In Western Europe sales grew nearly 13% and international sales were up more than 25%. And we had record-breaking end-market sales of Copaxone, which experienced a 23% increase in global sales. Our results in Q2 demonstrate, once again, the robustness of our unique balanced business model, as contributions for many business units enabled us to surpass our expectations for this quarter.

We also saw in Q2, the strengths of global supply system and the capabilities of our R&D operations, legal, and marketing divisions, which enabled us to execute a very successful launch of the Amlodipine Benazepril, the generic version of Lotril. A product we didn't originally anticipate launching until the third quarter.

Of course, there is much to say about this excellent quarter. George and Dan will provide you with more color on the markets and financials. Before I turn the call over to them though, I would like to share with you, some of what we have learned from this ongoing strategic review that I discussed with you on our last conference call.

The analysis we are undertaking is very comprehensive at both the macro and micro levels. And the more we begin, the more confident we are about opportunities for growth that lie ahead for us for our business. When we consider these opportunities in light of Teva's market leadership, robust generic pipeline, competitive market position and capabilities in developing and delivering important new products, we are very excited about our prospects for continuous profitable growth and our analysis is reenforcing our vision for our company in which generics continues to form its backbone.

Indeed, the future looks very bright for generics across the globe, in North America, in Europe and in the rest of the world including very appealing emerging markets. Of course, Teva's business model also includes our thriving innovative and respiratory businesses and we have the additional major advantage of vertical integration through Teva's API, the industry's largest API business.

In summary, we are confident that we can continue Teva's long tradition of continuous profitable growth and given Teva's excellent track record, I'm excited about the possibility that we can achieve even more substantial growth in the years to come. And before we turn to George, just one last point.

Teva has long been committed to providing safe, affordable, life saving generic products and we are thus very enthusiastic about the legislation under consideration in the U.S. Congress, which would help bring affordable biologic medicines to the U.S. market. And we believe that efforts such as those of the U.S. Congress reveal a growing awareness of the real solutions that generics can offer to patient as well as payers.

In fact, one of the important insights from our ongoing strategic review has been that biogenerics will be a long-term growth driver for Teva. We are committed to the field of biogenerics and are already marketing a number of biogeneric products in our international geographies. We submitted our first biogeneric file with the EMEA earlier this year and just last week we submitted a file in Switzerland, the first biogenerics filings in that country. Teva is thus very well positioned to capture the many opportunities that we believe will be available in biogenerics. Thank you all very much for your attention, and I will now turn the call over to George. George?

George Barrett

Thanks Shlomo, and good morning everyone. I'd like to take a few moments to provide a bit more detail on our performance in Q2. As Shlomo mentioned, our Q2 was stronger than we had anticipated, and we got excellent contributions from all markets. Teva U.S.A. our U.S. generic business showed real strength in Q2. Posting numbers, which were very comparable with last year's Q2 results. Considering that last year's Q2 included the exclusive launches of Simvastatin and Pravastatin and finasteride is quite and extraordinary accomplishment. And speaks to the health and resourcefulness of this business and our people, as well as, to the strength and replenishment capabilities of our pipeline.

Teva U.S.A. launched 19 products in the first half of 2007. And our pipeline of products waiting at the approval includes the 153 products representing $90 billion in annual sales. 80 of those applications are paragraph four’s and a full 50% of those paragraph four’s are products where we believe that we are first to file, and the brand value of those files is about $37 billion.

Our prescription base is expanding with annual growth of over 40 million prescriptions when compared to the comparable prior 12 month period. Price erosion on our U.S. generic base business appears to be stable with erosion rates comparable to rates we’ve seen in most recent quarters at below 10%. On the product side, the largest contribution came from our exclusive launch of generic Lotrel, which we launched somewhat early than anticipated.

This has been a very successful launch with generic penetration at over 80% and our market share in excess of 90%. In addition, we continue to get strong contribution from Oxycodone, which benefited from the exit of several players to the market, and some effects of Phenadine, which has been void by a severe allergy season. I should note that those of you following IMS at state for Oxycodone will continue to see prescriptions for company who have discontinued shipping. This is normal and we should expect to see their prescriptions flowing through for sometime.

Finally, I would note that our new Jerusalem plant is up and running, and our other manufacturing operations which support the U.S. business have expanded output and improved service level. We anticipate a good second half for U.S. generics. Novopharm our Canadian business had a terrific quarter. The best since its acquisition by Teva, fuelled by our launch of venlafaxine our generic version of Effexor XR, which has been a single source generic launch. Our European business showed excellent growth in the top line and in profits. We got particularly strong contributions from the U.K., France and Germany.

Our U.K. business is demonstrating the capabilities of a market leader, and continues to build off its strong customer base and broad portfolio. Our French business is answering the call by the government for increased utilization of generics and at the same time, we are increasing our market share and our profitability to our product offerings and our commercial focus, which is making us a more attractive supplier for pharmacies.

The German market continues to undergo enormous change. As the AOK the largest health insurance in Germany expands its tender system. We have had good success with the first AOK tender, and look forward to the next tender later this summer. That should actually be happening very shortly, which will include 83 additional molecules. Naturally government pressures to reduce healthcare costs across Europe, brings some challenges as we've seen with the price reductions, which affected all companies in Hungary. With the forces of cost containment are generally cabled us and our growth in Western Europe reflect business.

Our key markets outside of the U.S. and Western Europe showed good growth in Q2. Largest contribution to growth came from Latin America where our businesses in Chile and Venezuela gave us the most significant increases.

The countries of Central and Eastern Europe also made significant contributions to growth, although the government sponsor dealer program in Russia brought some price pressures in one segment of the Russian market. Through our sales force and our portfolio branded generics, we are positioning ourselves in the Russian market and we are optimistic about our prospect there.

With additional contribution from Czech Republic and Poland, our overall performance in CEE was strong. A few comments about our respiratory business and our innovative Products, before I pass the call on to Dan.

We continue to get excellent contributions from our new respiratory business. And as you know there have been some interesting and noteworthy dynamics in this market. We’ve had good respiratory performance in Europe, most notably in Italy, France and U.K., which is going through its own CFC conversion of inhalers.

Although this is a much smaller and different kind of opportunity than the U.S. albuterol conversion, it is a dynamic we intend to capitalize upon. In the U.S., the conversion from CFCs to HFAs was progressing rapidly throughout the end of 2006 and in the early 2007, driven largely by shortages of CFC-based albuterol products.

During Q2 we did see some additional CFC material make its way into the market temporarily slowing the conversion process. You may recall that I mentioned this possibility during our earnings call in May.

Nevertheless, today the conversion rate is 53% and our ProAir brand is captured over 60% of the FHA market. Although there's no way to predict with certainty, based on our best estimates, we're hopeful the conversion rate at year-end will approach 70% a number bit lower than 75% we predicted earlier in the year.

In summary, our ProAir brand we continues to do well, we've added substantially to our productive capacity and we believe that we are well positioned to benefit as the conversion continues through 2008.

Finally, as Shlomo mentioned Copaxone continues its tremendous growth worldwide. We continue to capture a significant percentage of the new patient starts as well as the switches.

Our support for MS franchise has taken a few steps forward. In May, we completed enrollment of large base rate 40 milligram trial, entitled Forte and we have met with the FDA regarding the start of our Allegro study, our Phase III trial on Laquinimod, an oral agent for MS, which will begin later this year. We will provide more details on the study designed at a later day. We will provide more details on the study design at a later date.

Azilect, our treatment for Parkinson's disease continues to grow more rapidly in Europe than in U.S. However, our U.S. market share among key opinion leaders in Parkinson's and movement disorders is disproportionately high relative to overall share.

This is an important leading indicator, and much efforts are directed at bringing the Azilect message across to the community of neurologists. Our managed care program is building momentum.

Azilect is now covered in 55 of the top 58 healthcare programs in the U.S., many with a Tier-2 formula repositioning. These factors combined with excitement about our ongoing Adagio study for disease modification, gives us good reason for optimism that Azilect business is on the right track. Of course, I'll be glad to take some questions after Dan covers the financials. Thanks for your time and now I turn the call over to Dan.

Dan Suesskind

Thank you, George. And good day to all our friends through on the world. We appreciate you taking your time to share with us our pride in reporting this excellent quarter. George gave an overview of our various business, activities. And I'll describe how these are translated into figures.

Before I describe the quarter's results in detail, I would like to point out that my comparisons to '06 will be based on the as adjusted figures of '06. In other words on our results for 2006 after factoring our charges relating mainly to the IVAX acquisition and impairment of assets.

One more general comment before we delve into the figures, in this quarter as well as in the next quarter we are going to be making comparisons against very strong quarters, usually characterized as tough comparisons.

And now to the financial highlights of the second quarter. Second quarter of '07 net sales were up 10% to $2.4 billion compared to the second quarter of '06. Net income was $515 million and adjusted EPS was $0.63. We again generated very significant cash flow operations amounting to $437 million for the quarter with free cash flow amounting to $256 million in the quarter.

In the first half of '07, we generated more than $0.5 billion of free cash flow increasing our cash and other liquid assets to an all time high of $3.1 billion. Our as adjusted numbers for the second quarter of '06 were higher than our GAAP results by $31 million on the gross profit level due to the step-up of IVAX inventory.

This step-up, together with some other identified items, had a $52 million impact on bottom line resulting in a $0.07 higher EPS than reported GAAP figures in the second quarter of '06.

This is a quarter in which the comparison to the as adjusted figure is tougher than the straight GAAP-to-GAAP comparison would have been. And with that overview, let's start the line-by-line analysis and starting with sales.

As I mentioned, net sales reached $2.4 billion, an increase of $214 million year-over-year. Total net sales for this quarter include a benefit of approximately $0.03 derived from currency effects. However, currencies had almost no impact on our earnings.

Compared to the first quarter of '07, net sales were up $306 million, or 15% with currencies contributing 1% to sales.

U.S. Generic is not only our largest business, but also the market in which we have had some of the largest products released. In the second quarter of '07, sales of Amlodipine, Generic Lotril, and Oxycodone were major contributors in offsetting the loss of its activities on the huge Q2, '06 launches. Compared to Q1, '07, sales of U.S. Generics were up by more than 40%.

Pharmaceutical sales in West Europe, including Hungary, which represent 25% of global pharmaceutical sales, grew 13% to $556 million from the comparable '06 quarter and 7% sequentially.

There was no significant markets in Western Europe continue to be the U.K., the U.K., Hungary and the Netherlands. The most significant increase in sales these quarter were in the U.K., which for the first time, became our largest generic market in Europe.

In France, Spain and Germany, we also achieved nice growth. In France, our fourth largest market in Europe ever benefited from successful product launches, the expansion of customer-base through new partnerships and reduction in discount levels.

Growth in sales in Germany were significant in percentage terms reflecting important positive trends in the market, but in absolute terms, German sales are still less significant than sales in Teva's other major markets in Europe.

These positive trends in Europe were partially offset by the negative impact of new pricing regulations in Hungary and Italy. In Hungary, despite changes in the healthcare market during '07, which caused price reduction, Teva Hungary successfully increased its market share. In Italy, the market has further moved to substitution resulting in increased competition in the marketplace.

International Pharmaceutical sales by, which we mean sales outside of North America and Western Europe grew 26% reflecting strong performances in Latin America, Central and Eastern Europe and Israel.

Global in-market sales of Copaxone amounted to $436 million. This is a 23% increase over the comparable quarter. Both inside and outside of the U.S. And it's the highest growth rate we have experienced in the U.S. in many quarters. It is worth noting that this includes significant growth in what is generally regarded to be a relatively mature market.

Once again, this quarter, our global respiratory product business performed very well with sales exceeding $180 million. This presents a 49% increase in sales over the second quarter of '06. The quarter in which we began to benefit from the conversion in the U.S. to non-CFC based inhalers.

Turning now to API, Tevas AVI business. API sales to third parties this quarter amounted to $143 million reflecting almost no change on the comparable quarter in '06. APIs internal Internal sales of raw materials to Teva Pharmaceutical operations amounted to $191 million.

In the second quarter of last year, API sales reflected the support for huge finished loads for those products launches of both Teva and it's competitors in the subsequent quarters. Volume-wise, Teva's API actually sold 19% more in the second quarter of '07 than in the comparable quarter of 06.

Stepping down one line in the P&L to gross profit, gross profit margin reached 52.1% in the reported quarter compared to 55% in the comparable quarter on an as adjusted basis. Extraordinary launches that we have mentioned in both quarters resulted in margin exceeding the range of 47 to 50, which we indicated last year would be Teva's normality range of gross margins going forward.

In fact we expect that our fiscal '07 gross margin will be at the high end of the range and may even exceed it's likely, reflecting not only some key exclusivities but also the increased contribution of branded products and branded markets to our overall product mix.

And from gross margin to R&D. Net R&D amounted to $137 million compared to $120 million in the comparable quarter. Growing faster in sales. More than half of this amount went to generic R&D. SG&A, which reached $469 million in the quarter, represents 19.7% of sales, was significantly higher than the level of the second quarter of '06, both in dollar and percentage of sales terms. It is significantly lower in percentage terms compared sequentially to the preceding two quarters. This level of SG&A expenses principally reflects the higher rate of sales in branded market and of branded or promoted products among our total sales and offsets some of the higher gross margins achieved in these markets.

SG&A also includes payments on partners' product, which in the reported quarter reached about 4 times as much as the comparable Q in '06. In addition there was a step-up function increase starting in Q3 of '06 in the marketing expenses associated with Teva's successful introduction of Azilect in the U.S. and non-U.S. markets. It is worth noting, that although it is still only a minor contributor, Azilect's bottom line entered the black for the first time this quarter.

Operating profit this quarter amounted to $637 million or 26.7% on sales. Financial expenses for the quarter were only $8 million compared to $57 million in the comparable quarter, the highest ever in Teva's history. As you know, this line item includes our interest expenses, mainly for long-term debt, which is off set by interest income from growing liquid assets. Since our liquid assets grew approximately $1.5 billion compared to Q2 of '06, we have had a correspondingly decreasing net interest expense.

In addition, this quarter hedging activities reduced finance expenses in contrast to Q2 of '06. These activities, once again, principally explain the difference between our current normative net interest expense of around $15 million, 1-5, a quarter and the reported figure. As we have explained in the past, the hedging results are partially offset in other line items. Our provision for taxes amounted to $130 million in this quarter or 18% of pretax income, our best estimate of the expected annual tax rate and no change from Q1 of '07.

In the comparable quarter, the provision of tax reached 16.7% of the as-adjusted pretax income. The geographic origin of our earnings, in particular the increased sale coming from the U.S., as well as some other territories with higher tax rates, is the main reason for this higher rates. All that resulted in net income of $515 million and net margin of 21.6%. As we already mentioned, cash flow from operations amounted this quarter to $437 million. Our free cash flow of the Cap Ex of $106 million and dividends of $75 million amounted to $256 million. You may recall that last November, a $600 million share repurchase plan was approved.

During this quarter, we did not spend any amounts on share buybacks, so that as of today about $214 million of the original $600 million of consolidation for share buyback is still unutilized. Our working plan increased sequentially for March by approximately $600 million, and at the end of the quarter amounted to $3.9 billion. Inventories were up $63 million in terms of days down from 173 to 168. Net receivables, net of SR&A were up $292 million. DSO, down from 54 to 48 days.

As you know, we recorded receivables on a gross basis and recorded the sales reserve and allowances, the so-called SR&A under current liabilities. But in order to facilitate a more meaningful comparison with some of our peers, we recorded receivables net of these reserves, we net out this figure as well. Total SR&A at June 30, '07, amounted to $1.6 billion, practically no change for March 31, with about 92% of the total reserves coming from the U.S. Late payables were flat, down from 53 to 48 days. Our shares of equity at June 30th, exceeded for the first time, $12 billion and our leverage measured as debt to debt plus equity stood at 0.31. Our outstanding debt at June 30th, amounted to $5.5 million, of which 72% represented long-term debts.

For the convenience of our audience, I would again like to mention three figures relating to our share count so that we all remain on the same wavelengths. For the second quarter of '07, our average share counts for the purpose of calculating diluted EPS was $828 million. Our share count for calculating diluted earnings per share going forward as of June 30th, ‘07 was approximately $831 million shares and the count for calculating market cap is approximately $769 million shares.

For the purpose of calculating diluted EPS and add back of about $6 million should be taken into account. On July 30th, the board approved a second quarter dividend amounting to a total of approximately $75 million. On a per share basis, our dividend was maintained in Israeli shekel terms at 0.40 shekel which to inflate at the current rate of exchange to $9.2.

Thank you all for your time and attention today. I would now like to turn the call back over to Shlomo for some additional brief remarks before we take your questions. Shlomo, please.

Shlomo Yanai

Thank you, Don. As we had entered the second half of the year, I remain confident and optimistic about our prospect as all key aspects of our business are on track and performing well. As you had heard today, we had originally envisioned a slower start to 2007 with momentum building over the course of the year.

But what we actually experienced in the second quarter were overall very strong results. Based on our strong first half and the opportunities, we see in the second half of the year we now feel even more confident that our full year EPS will reach the higher end of the new guidance of 220 to 230 that we announced in May. Thank you all and we will now be very happy to take care of your questions.

Question-and-Answer-Session

Operator

(Operator Instructions) Our first question comes from David Buck with Buckingham Research Group. Please state your question.

David Buck - Buckingham Research Group

Yes. Thanks. Just a couple on U.S. generics business for George, can you talk about how the pricing outlook maybe changing? You mentioned the base business declines were sort of inline, but can you talk a little bit about how consolidation and some of the discounting generic programs like the Wal-Mart and Kmart might be affecting pricing.

And can you talk a little bit about the outlook for Oxycodone ER, whether or not you're expecting any ability to stay on the market beyond this year and maybe the outlook for generic Fosamax flexibility into next year? Thanks.

George Barrett

Hi, David, yeah. Well I think as I mentioned, the base erosion rate has been relatively stable now, probably for nine months, 12 months. We're not seeing any particular sign at the moment that that will change. You mentioned some of the market forces that have been occurring with some of the big moves in the retail trade.

That is again, part of our normal day-to-day life and we're certainly always working very tightly with those large market makers. But at this point, I don't think I show you to any change in direction. It's always difficult for us to predict pricing and we try generally to away from it.

But the pattern that see right now is one that relatively stable. As it relates to the Oxycodone, I think we had said, and I don't think I'd change it at this point, that we expect to be in the market at least to January. At this point there's no other data that would make me change that.

David Buck - Buckingham Research Group

And then on Fosamax, any update there just in terms of expectations?

George Barrett

I'm sorry in terms of what?

David Buck - Buckingham Research Group

In terms of generic Fosamax are you still expecting to have accessivity, shared accessivity on both strengths?

George Barrett

Yes, we do.

David Buck - Buckingham Research Group

Okay. Thank you.

Operator

Our next question comes from Rich Silver with Lehman Brothers. Please state your question.

Rich Silver - Lehman Brothers

Couple questions, first for Dan on the SG&A outlook, can you give some sense of the base that we should be using? I understand that the third party payments were certainly some part of the number and what we should expect going forward, and I have a couple other questions.

Dan Suesskind

I think we should use that number this quarter as a starting point, but from there, descending gradually and creating some efficient, more efficiencies, although those extraordinary numbers if you can call them, which are actually not the ordinary SG&A may disturb this curve.

But generally speaking, we should be sent from this level, certainly not to the 15, 16% we have seen in the past before we acquired Ivax, because of different business mix, but certainly getting lower than that.

Rich Silver - Lehman Brothers

So, to give sense of the magnitude of those payments without explicitly telling us what they are, can we assume that they should come down commensurate with the sales of those generic products where you do have, third party payments?

Shlomo Yanai

Yeah, they should, but they maybe replaced by others.

Richard Silver - Lehman Brothers

Okay. And then, maybe George, if you can give us some details on, in terms of Germany and you mentioned that the next tender is coming up and can you give us some sense of the magnitude of that relative to what has already been accomplished on the tender side?

George Barrett

Yeah, Hi Rich. What I can tell you about the tender, and again, we're expecting at any day, it may come in today in fact, is a group of molecules, 83 is the plan. That is a larger group. This is an expanding program. Now I would, certainly should add, we don't have every one of those 83 products in our product line.

So, we'll participate in some segment of that opportunity, but I think the opportunity is expanding. We’ve done well in our work in the first stages of this program. And we're feeling very good that this is a unique opportunity for us to expand our presence in Germany and look forward to getting that data and then we'll participate at that time that comes in.

Richard Silver - Lehman Brothers

And just on the respiratory business, global number, would you say that the U.S. number is at this point, still north of 60 or 70% of that total number?

George Barrett

Yeah.

Richard Silver - Lehman Brothers

Okay, thanks very much.

George Barrett

Okay.

Operator

Our next question comes from Cory Davis with Natexis Bleichroeder. Please state your question.

Corey Davis - Natexis Bleichroeder

Thanks very much. I think following on Shlomo's last comments there, given the strong Q2 and your comments about the upper end of the range of guidance for this year and in the context year ongoing strategic review, to give you more or less comfort in the numbers you've thrown out before for 2008 and 2009?

Dan Suesskind

Well, we are not changing any of what we said I think last February. The number we provided at that time is still valid.

Corey Davis - Natexis Bleichroeder

And I guess, I don't know who's best to answer this one, but it seems like a lot of the paragraph 4 litigation cases are now going beyond the 30 month stays and would you say that's working in your favor by forcing the brand companies to request more preliminary injunction and perhaps give your more settlement negotiation leverage and I'm thinking mostly about the imminent protonics decision?

George Barrett

Yes. Corey, again, without divulging too much about our legal strategies, couple of things are worth noting. You certainly are seeing as companies approach as end of 30-month stays you're seeing some examples of the panholder moving forward with the preliminary injunction. We've seen that in that recently.

We’ve seen that was Lotral and so, what you're describing is in fact something of a pattern that we're seeing. There is often some tremendous value in our getting a chance to engage in this litigation process and get good insights from the court in how they see the case. I think you’re describing a phenomenon on that, that certainly I think is an ongoing part of our system.

Corey Davis - Natexis Bleichroeder

George, well I got you last question at the risk of asking give a forward-looking projection, do you think your share of the HFA Albudrol market is going to go upwards and more function of just continuing to gain more from the remaining CFC Albudrol?

George Barrett

There are a couple moving parts here Corey. One thing that we’ve done, that I think will help us, is that we have expanded our productive capacities. I think we have a little more wiggle room on the share side. Having said that, other players are seeing opportunity as well and so I think that we'll begin to see some shifting in the marketplace as other players begin to look to grab a portion of that business that's moving away from CFC.

So I think there's several dynamics at work. One is that, we've been seeing some CFC reentering the market during this past few months. We'll probably see again, some intermittent participation of the CFC product, but I think over the long-haul, even the midterm, I think we'll see that disappear.

We'll get our significant share there, that we’re better positioned in terms of capacity to do so, but I fully expect that there are some other players that will enter. As I said you before the likelihood that we’ll retain this exact share out phase relatively low, there'll probably be some moderation of share as we go forward.

Corey Davis - Natexis Bleichroeder

Great, thanks very much.

Operator

Our next question comes from Elliot Wilbur with CIBC World Markets. Please state your question.

Elliot Wilbur - CIBC World Markets

Thank you. Good morning or good afternoon. George, I was wondering if you could perhaps provide a little bit more color on a couple of the key based products, specifically Lotrel and Oxycodone. I guess, given some of the incumbencies that are out there on these particular products. I mean, how should we think about those progressing over the balance of the year relative to the run rate that we're at today, especially Lotrel.

I mean, do you think, the recent or ex-volumes that we see are sustainable through year-end? Should we expect those to drift downward? And on Oxy, I mean, it sounds like you can stay in the market till the end of ’07 or perhaps early ’08.

But how do we think about the volume trends as we sort of approach that date? Are we going to be effectively at zero when we hit that date or is there some sort of transition period at which you just basically stop shipping inventory and then it bleeds out after those dates?

George Barrett

Okay, Elliot, let me do this. I think probably, Bill Marth is here. So let Bill speak to both the Lotrel and Oxy story and I will turn it over to Bill.

Bill Marth

Yes, Elliot just a couple of things. On the Lotrel right now, we have approximately 85% of the Lotrel market has been converted to the generic Effexor and Albuteral. And we currently have about 92% of that market. Now that's a, that's a really, really large percentage of the market and, obviously Sandoz (ph) will be pushing more into that market over the coming months.

So we expected to sort out a little bit we still think we’ll hold a very good share, but we expect Sandoz we’ll do will be effective as they move into the market some. And the second question with respect to Oxycodone, Oxycodone has been an interesting story as you’d see our share has been pushing up now to about 70% of the market, as the pipeline drains from those products that were left over from Watson and also from Endo and a little bit from the impact flash Dava.

We should be -- we have the ability to stay in the market through January and I might add that there are some other triggering events within our structure of our settlement that may allow us to even be in the market beyond that. But at this point in time we don’t expect that. We'll be selling product till approximately January. But you will likely see product and TRX is showing up in the market beyond that period, as you’ll see today that Watson and Dava and Endos prescription still showing up.

Elliot Wilbur - CIBC World Market

Okay. I guess the message be always that in terms of that we look at your access, we wouldn't see the decline until after your determination date?

Bill Marth

That would be correct depending on the triggers that we hit.

Elliot Wilbur - CIBC World Market

Okay fair and just -- I just have one follow-up question for Shlomo as well. If you mentioned just doing a commentary I apologize I missed it but in sort of looking at your endorsement of the high end of the EPS guidance for your 230, and thinking about the second half of the year would suggest, roughly an even split between the two quarters. And I'm just wondering if that’s how we should be thinking about how the balance of the year is going to shake out in terms of the distribution earnings roughly even between the third and fourth quarter?

Shlomo Yanai

Well. as for the time being, we maintain our guidance exactly as I said it. As you all know, even that if we are confident and optimistic, there are still six months to go, and there are some moving parts, as well as, opportunities. So, I believe that what you should, consider right now as the guidance for the rest of the year, and definitely we will have a break through, we will update you. But it is not our regular practice to, update every quarter our guidance.

Operator

Our next question comes from Mark Goodman with Credit Suisse. Please state your question.

Shlomo Yanai

I would appreciate if every participate would limit themselves to one question please.

Mark Goodman - Credit Suisse

Okay. Well I guess, importantly for Oxycodone, do you have enough TEA quota to sell into this market appropriately, given what the prescription share are warranting here.

George Barrett

Mark again, I'll let Bill touch on that.

Bill Marth

Yeah Mark, we feel very good about the quota we have at this point in time. And we have petitioned for a little bit more and we don't have any expectation that we'll have any issues of receiving that quota.

Mark Goodman - Credit Suisse

And the pricing of that market, is it stable, going up?

Bill Marth

It's stable at this point in time.

Mark Goodman - Credit Suisse

And just quickly on HFA capacity, are you increasing that as well, so you'll have enough to warrant with the prescriptions you are going to get?

Bill Marth

Yeah Mark, we’ve done a good job our office people have done a good job in expanding our productivity capacity. So, we feel like we're well positioned there to handle any HFA opportunities.

Operator

Our next question is from Ken Cacciatore with Cowen & Company. Please state your question.

Ken Cacciatore - Cowen & Company

My question is on Lotrel. It's doing well this quarter. Can you discuss the sustainability of this product. I may be wrong but I believe Novardis in our call talked about capturing may be 30% share. Can you discuss the pricing environment, and maybe when your expectations are for additional competition?

Dan Suesskind

Let me tell you -- address that..

George Barrett

Yes sir go ahead

Dan Suesskind

Yeah this is going let me address that in sequence. You're right, as I’ve mentioned our share right now is about 92%, and its 85% of the total market. So, we feel good about that, Ken. And then the second piece of that is, what will Sandoz do?

Well, I don’t think that we should speculate particularly here on Sandoz other than the fact that they are good competitor. And we feel that they're certainly going to want to get more share. We see price very stable at this point in time, and we'll just react as they enter the market.

With respect to competition, we know that, there's a bolus of those dates, that 30 month dates for other competitors that are out in 2009. Although there may be one that’s in late 2008. But again, we can't always know everyone's 30 month date. I think you're best to ask them.

George Barrett

And Ken, just to follow-up, as the 30 month date could be -- could be affected in the event of ruling of invalidity. So, that's just always want to keep in mind.

Operator

Our next question comes from Randall from Stanicky with Goldman Sachs. Please state your question.

Randall from Stanicky - Goldman Sachs

Just a question for Dan, with now north of $3 billion in cash, limited buyback activity in the latest quarter, and with Merck KGA and now behind us. Can you just talk about uses of cash particularly as you look at M&A environment and maybe how you're thinking about adding assets to your current base? Thanks.

Dan Suesskind

So far, so far we are keeping these reserves for possible going forward M&A. And we'll see how that develops.

Randall Stanicky - Goldman Sachs

Has your view of interest in assets in terms of geography or deal size changed at all as you look where you want to add in, types of acquisitions?

Dan Suesskind

I think that geographically-wise we widen the spectrum and we're looking in more geographies, I guess that's it.

Randall Stanicky - Goldman Sachs

Okay, thank you.

Operator

Our next question comes from Adam Green with J.P. Morgan. Please state your question.

Adam Green - J.P. Morgan

Thanks, Good morning. Question for George on Wellbutrin XL. Could you comment on what you're seeing in the marketplace, some of the others players fully entered the market, I believe Watson only came in a few weeks ago and still not fully out there? And also if you could comment on the pricing environment pricing for that product as well?

George Barrett

Adam, I'll let Bill comment on that.

Adam Green - J.P. Morgan

Okay. Thanks.

Bill Marth

Yeah, Adam, we've seen Watson enter the market and we've seen and China enter the market. It's been an orderly transition. It's been a good orderly transition. It's hard to say much more than that.

Operator

Our next question comes from Ricky Goldwasser with UBS. Please state your question.

Ricky Goldwasser - UBS

Good morning. One follow-up an one question, regarding to guidance, Dan with eight months into the year, the trends that you are seeing, are you guys expecting EPS for the third and fourth quarter to be, down or flat sequentially, compared to the second quarter results that you reported today?

And then on, on the market share, I know at last quarter you talked a lot about how you've seen your overall market share trending up. On average, what is the market share that you are seeing now for the key products?

Dan S. Suesskind

I will let our U.S. colleagues to answer on market share regarding the EPS as, Shlomo indicated before. We limit our sales to a, more refined guidance for this year as we have mentioned and we are not breaking it down between the quarters.

One of the reasons is that, we have so many moving thoughts, which we don't, which we can't locate exactly by quarters, so we'd rather limit it to the second half of the year.

George Barrett

And Ricky, as it relates to the market share, of course we have got many markets. It's hard to know what you're referring to. I'll give you a couple of quick points of reference. In the U.S., our generic business today is about 11.7% of the total U.S. market in Scripps, which is up sequentially.

That's roughly between 19%, high 19% and 20% of the generic market. I would say in the product in which we compete, again, we don't compete on every product we're significantly above 30%. Obviously in other markets, we, vary tremendously. We got strong market share and particularly in places like the U.K. and Netherlands and Venezuela and smaller market share in places like Germany.

But in general, I'd say our market share is increasing and in important markets like France where we've had increasing share and Hungary, we've got an increasing share. So I'd say science in terms of overall market share throughout the global business are pretty strong.

Ricky Goldwasser - UBS

And if you focus on the U.S. market kind of in terms of this market share as offsetting some of the price reductions, what are the trends you're seeing there?

George Barrett

Well, as I mentioned, the price erosion at this point is pretty calculatable, we're getting good growth on our base of products. I think our production issues around the globe come out of a pretty tough year in 06. I think our prospects were increased growth or base of products look good.

We really do believe that this is an important part of what we do that having a significant presence with all of the major market makers is very much part of our value proposition and we're very committed to growing our share.

Operator

Our next question comes from Tim Chang with FTN Midwest Securities. Please state your question.

Tim Chang - FTN Midwest Securities

Thanks. I had a question about the HFA beclomethasone product. When do you plan on launching this product in Europe? What sort of potential market are you going after here?

George Barrett

Tim, we're actually selling that product. The dynamic is quite different. You're really looking at a product of CFC converting to the very same product on an HFA formulation. In Europe the dynamic is much more complex, on its beclomethasone because you have got movement not just from have CFC products, HFA, but across the steroid market. It's a little bit more of a complex story, but we are selling today. But the distribution of where those switches are going is quite different.

Tim Chiang - FTN Midwest Securities

Is there any chance that you'd bring that over to the U.S., as well?

George Barrett

That particular product in the U.S. is not likely to be sold here, but we are certainly expanding our pipeline of products for the U.S., and inhaled cortocosteroids market is one that's targeted.

Tim Chiang - FTN Midwest Securities

Okay, great. Thanks.

Operator

Our next question comes from Dave Steinberg with Deutsche Bank. Please state your question.

David Steinberg - Deutsche Bank

Thanks. With regards to your albuterol HFA, it showed colors in discounting initially. As your conversion crosses over 50%, will there be more or less discounting going forward? And I think you mentioned there, maybe you wanted two more entrance, how many entrance do you expect going forward?

George Barrett

Yeah, David. Today, we compete, of course, alongside of Shearing and with GSK and with Sepracor on HFA-based albuterol products in the SABA Short-acting beta agonist market. There are -- in the CFC, we have, again Shearing to work which appears to be winding down and the Armstrong business. So, those are the, sort of, major players in the SABA market.

I would say today the pricing is relatively stable. Again, always difficult to predict there's an opportunity that players are looking at and the question is what will be the most effective mechanism of competition in going to that market, the combination of promotional and pricing, and it's hard to predict that. But today, I would say that the pricing environment is relatively stable, but we still have time ahead of us.

David Steinberg - Deutsche Bank

Okay. And George, just a quick follow-up. Your A&D has been on file for quite some time, any light at the end of the tunnel, any thoughts on FDA action in the next year or so?

George Barrett

David, I wish I could give you some very specific point of reference here, but I can't. I don't know that there's anything new to update. We're still waiting for the FDA to draw conclusions about how it wants us to move forward in this product.

David Steinberg - Deutsche Bank

Thanks.

Shlomo Yanai

As we are approaching 9:30, we will take two more questions.

Operator

Our next question comes from Gregory Gilbert with Merrill Lynch. Please state your question.

Gregory Gilbert - Merrill Lynch

Thanks. George, to clarify that last answer to the question. You don't expect any other HFA players in the foreseeable future, do you in Albuterol? You had mentioned additional entrance earlier.

George Barrett

Yes, Greg. Again, I was talking specifically about our entrance of CFC product, CFC materials. Of course, it is possible that there would be an additional entrant at some point in the HFA category. That's not something that we see right now in front of us, but I certainly wouldn't preclude that possibility.

Gregory Gilbert - Merrill Lynch

Great. And my question is for Shlomo. Has the company become any more focused on business development on the brand side since your arrival or would you say that the approach has not changed since your arrival, and that it remains an important component, but of similar size relative to generic and geographic efforts? Thanks.

Shlomo Yanai

Well, I don't think that we are changing our approach or our strategy, so to speak. I think that -- thinking on a global expansion, which is part of our growth strategy anyway, will take us more to countries where you see more branded generics. But having said so, bear in mind that some of these countries are right now in transformation of switching to a more close to the U.S. model of generics, even though that they are not yet there.

So, you should see this kind as a generic with varieties of business models, which basically are following the same notion of providing lower price, affordable medicine. This is the key issue here and that's why we believe that we can grow in a more rapid pace in those parts of the world based on our experience in generics.

Operator

Thank you. Our final question comes from Louis Chen with Morgan Stanley. Please state your question.

Louis Chen - Morgan Stanley

Hi. My question is with respect to the KSR ruling, have you re-evaluated any of your patent challenges in light of that, and if so, what are some that might benefit?

George Barrett

Well, Louis, I don't think I would go through specific cases with you, but I think very clearly the KSR ruling has a bearing on the entire patent world, for sure and clearly in Food and Drugs, there's no question that it will have some impact, particularly as it relates to the assessment of obviousness in patent challenges.

So, we have been looking very carefully at the case, we've been looking at the case carefully in the context of particular products that we have and filings that we have and pieces of litigations, and there's no question that this is a noteworthy ruling.

Operator

Thank you. I will now turn the conference back over to Mr. Kevin Mannix.

Kevin Mannix

Thanks, Diego. On behalf of the Teva team, I'd like to thank everyone for joining us today for our quarterly conference call. As always, if you have any additional questions, we're happy to take them offline. Thanks again.

Diego, could you please provide the callback information?

Operator

Yes. Thank you.

To access a replay of this conference, dialers in the U.S. can dial 877-660-6853. Once again, for U.S. dialers, 877-660-6853. For international dialers, you can dial 201-612-7415. Once again, international dialers, you can access the replay by dialing 201-612-7415. You can use account number 3055 and conference ID number 248467. Once again, account number 3055, conference ID number 248467.

This concludes today's conference. Thank you all for your participation. All parties may disconnect now.

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Source: Teva Pharmaceutical Industries Q2 2007 Earnings Call Transcript
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