Teva Pharmaceutical Industries Q4 2005 Earnings Conference Call Transcript (TEVA)

Teva Q4 2005 Earnings Conference Call Transcript (TEVA)

February 28, 2006

Executives

Israel Makov, President and Chief Executive Officer
Moshe Manor, Group vice President, Global Innovative Resources
Dan Suesskind, CFO
William Marth, President & CEO, Teva Pharmaceuticals USA
George Barrett, Group VP, North America and President and CEO, Teva North America.
Kevin Mannick, Director Investor relations.

Analysts

Rich Silver with Lehman Brothers
Tim Chang with Metaxis Bleischroeder
Dimi Tomsulis, with UBS
Ken Cacciatore with Cowen
Amy Deegans with Susquehanna
Michael Tong with Wachovia Securities
Elliott Wilbur with CIBC World Markets
Randall Fenicki with Goldman Sachs
David Woodburne with Prudential Equity Group
David Licorice with HSBC
David Marris, Bank of America

Presentation

Kevin Mannick, Director Investor relations.

Good morning and good afternoon everyone. Welcome to TEVA’s Q4 and full year 2005 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 are conducting a list web cast of this call which is also available on our website.

Today we are joined by Israel Makov, President and CEO, Dan Suesskind, Chief Financial Officer, George Barrett, President and CEO of TEVA North America, Bill Marth, President and CEO of Teva USA, and Moshe Menore, VP of Global Products.

Israel and Dan will begin by providing an overview of our results. We will then open up the call for a question an answer period. Before we begin, I’d like to remind everyone that the safe harbor language contained in today’s press release also pertains to today’s conference call and the web cast. I would like to now turn the call over to Israel Makov, our President and CEO.

Israel Makov, President and CEO.

Thank you Kevin and welcome everyone. And thank you for joining us today in the review of Teva’s results for the fourth quarter and for the year of 2005. We had a great quarter and an excellent year and when we consider our achievements in the context of 2005, I believe we can even . We reached many all time highs in both the quarter and the year. We ended the 4th quarter with records sales of $1.4 billion, supported by strong performances across our company. Our operating profit of $361 million was again a new record, as was our quarterly net profit which reached $305 million. This was a fitting end to a record breaking year for us. Our sales reached an all time high of $5.25 billion. 2005 was the 7th consecutive year in which we hit new sales records and the first year in which we crossed the $5 billion mark.

Yet another milestone in our annual net profit as we crossed the $1 billion mark for the first time to reach $1.72 billion in annual net profit, or 20% of our total sales. We also generated approximately $1.4 billion in cash from operations in 2005. and we broke the $1 billion barrier in several other areas as well. I will just mention that our in market tests of copaxone approached $1.2 billion, making copaxone the first drug. We also crossed the mark in our sales of generics in Europe, as well as in overall sales of .

While of course we enjoy speaking of breaking the $1 billion barrier we’re even more pleased about what lies behind these numbers and that is the strength of our business and our leadership in each of these areas.

In 2005 we continued to lead the US generic market by a very nice margin. We enhanced our position in Europe as one of the leading companies. We increased our leadership gap in the ADI industry and we became the leading provider of therapy for multiple sclerosis patients in the US, the largest MS market.

Our operational strengths were also quite evident in 2005. to mention just a few items, this year we produced 22 million tablets, submitted 150 new files for product registration around the world, entered new markets and . We supported several major launches in the US, and many, many other smaller launches in many, many other countries.

Now, I would like to give you some more information about our major businesses and I would like to spend some time discussion the Ivax integration. Our largest market, the US, was also our toughest market in 2005. As you all know, there were few opportunities for new product launches, more companies trying to enter the market and thus even more intense competition than usual. We managed this challenge very well, however, by extracting the maximum value out of each our smaller number of product launches and by creating additional opportunities through the strength of our portfolio.

Indeed we continue to be the largest generic drug marketer in the world by a nice margin. In 2005, Teva dispensed 250 million generic prescriptions in the US, an increase of 32 million prescriptions compared to 2004, and 40 million prescriptions ahead of our nearest competitor. In 2005, many of our patent cases resulted in settlements and each of these settlements has increased the likelihood of generic launches going forward. A win for us and for American consumers. And each of our settlements has increased predictability for the disputing process. In short, a win, win, win scenario.

In Canada, submitted a record of 34 files in 2005. and they successfully launched 13 products, many of them based on Teva’s API, thus increasing our already significant presence in the Canadian market. This is a very good illustration of how our local companies can resources to accelerate their growth.

It became increasingly clear in 2005 that the convergence of several forces increased the complexity and decreased the predictability for generic . And also, for those who dispense . At Teva who have always built a balanced business model, specifically designed to meet these sorts of challenges. Our geographical spread and the scale and scope of our operations and product lines, including our vertical integration. An excellent illustration of our balanced business model is the significant contribution of our European business made through the growth of our topline, coupled with bottom line contributions in 2005. we enhanced our leadership position in key markets and our maturing product line enables us to enjoy very successful launches of 146 products during the year, including strategic products such as anungulate in the UK, the Netherlands and Hungary. Anungulate together with helped the least of our highest selling products for the year.

We launched 44 new products in the fourth quarter alone. And will do many of these launches of the same molecules in different markets, each one still presents a stand alone launch and each market is quite different.

We achieved circles in all of our major European markets and achieved quarterly highs in the Netherlands, France and Hungary. In the UK we had record sales for the year. We are the number one company volume wise providing the highest number of packages to the national health service. And I’m pleased to report that we’ve also begun operations in 5 new markets in Europe, Portugal, Switzerland, Sweden, Slovenia and Spain and it looks like we have recovered all the beginning with this. We sold many legislative agendas in the Europe this year and are producing healthier costs, a few of which are even aimed at reducing the cost of generics. But, we believe that we will continue to benefit as European governments will increasingly promote the use of generic drugs to solve their healthcare dilemmas.

2005 was also a very good year for our international group which has responsibility for markets outside the US, western Europe and Israel. We achieved new records both for sales and profits and the magnitude of our international operations is going to increase in the years to come, especially as we expand our presence in other markets through the Ivax acquisition. In Israel we expanded our position not only as a leading generics company but also the leading provider of a broad range of pharmaceuticals and related services to the Israeli healthcare market.

In 2005 we continued to expand our synergies with ATI, achieving our highest level of vertical integration in our history. More than 50% of our API was applied by TAPI, this is Teva API, and more than 50% of TAPI’s output was from . And we expect that we will take more and more of our API out in deals to come, thus enhancing our overall competitive edge .

We continue to build our portfolio of API products which now includes more than 224, actually 250 products, including those we got from Ivax and we are adding 15-20 new products each year. In 2005 we added 20 products to this list.

And now, I would like to turn to our innovative business. 2005 was both an excellent and an exciting year for Teva on the Innovative side. Let’s begin with copaxone. Copaxone became the market leader in the US, the largest of Teva’s markets, and continued to grow rapidly in Europe and other . Copaxone was the fastest growing MS therapy in terms of global sales in dollars; in the US we took the lion’s share of the market increase in dollar value, 54%. Also in the US, Copaxone has not yet taken the lion’s share, but it was the fastest growing therapy, with gross of 27%, year over year.

It is copaxone’s track record of long term efficacy and that has made it the market leader. In fact, copaxone has the longest providing efficacy and safety of any disease modification MS drug on the market. And only copaxone had demonstrated throughout the clinical trials, that 9 out of 10 patients are still walking after 10 years.

Our second innovative product, Agilect, for the treatment of Parkinson’s disease, was launched in Israel and then in Europe and is currently available in 8 countries including the UK and Germany. We are now very pleased with the very enthusiastic reception Agilect is getting from the medical community, especially considering what a mature market this is. Of course, we have only just begun our sales of Agilect. In the US, Teva continues to work with the FDA to gain final marketing approval of the product. The process is taking longer than we anticipated. Meanwhile, we continue to enroll patients in our study, the largest clinical study to investigate disease modification in Parkinson’s.

With the great success of Copaxone, the promising launch of Agilect and our rich innovative pipeline, Teva’s innovative activities are providing even further balance to our business model and differentiating us in even more dramatic ways from our generic peers.

And, I would like now to turn to what without a doubt was the most exciting even for Teva in 2005, the Ivax acquisition. We have already discussed at length the great strategic advantages of this deal and the ways in which it will expand Teva’s leadership role and of course strengthen the internal balance of our business model. We plan to capture 100% of the opportunities this acquisition presents, including realizing every single sales synergy, offering more products to more customers in more markets, realizing every single cost synergy, and realizing the synergies that lie in our combined technologies, our pipelines and product offerings and making sure that no product opportunity is lost.

We began strengthening our comprehensive integration immediately after signing. More than Ivax managers began investigating all of the potential benefits and challenges this merger would bring and how we could ensure the most effective and rapid integration. Although there was much we could not yet we were able to begin building the strong conceptual framework for combining our companies. As results we were able to hit the ground running the moment the deal closed. In every market where Teva and Ivax have operations we are going to deliver a management team chosen from the very best of both companies. They comprise what we believe is the finest extended management team in the industry.

In Russia and the Czech Republic, for example, where our combined operations in each market exceeded $100 million and $80 million, respectively, the team leaders came from Ivax and the management team is composed of both Teva and Ivax. In England and France, the leaders are from Teva, again with combined management group. In markets where we did not have combined operations, as in some markets in Latin America, the team remains unchanged.

The entire combined teams operations of Ivax have joined our organization and are now integrated into our supply system. And in our plans for operating, specifically as we launch products, we are making sure that we progress as one team.

Our ability to do so is very much enhanced by the entire Ivax management team. We are gratified that former members of the Ivax board, James Ivax vice Chairman and Neil , Ivax President and COO, have been such supporters of the combination of our two businesses. James, in fact, is taking the role in the integration progress of the Ivax .

And of course we are delighted to welcome to join our board of directors, Vice Chairman and look forward to his many contributions.

As you know, the scale of this integration is huge. Our combined company has vast operations in more than 50 markets as well as 44 pharmaceutical on the manufacturing side, 15 generic R&D side and 17 API side, around the world. As we speak, our teams are preparing the combined work frame that can also to give you guidance in America.

These achievements in 2005 provide us with excellent momentum for moving forward. Our integration teams are working hard to reach all of our objectives for the Ivax integration by forming what we call at Teva our execution. That is, excellence, execution and reward. Because we realize that the ultimate measure of the value we create will be judged not by ourselves but by those who receive this, we believe execution should focus on our customers. And our customers will see the value when they receive service and support when we provide them with the maximum number of opportunities and minimize the cost of doing business. We are committed to all of this and more. And just one final note. We are excited about the prospects for 2006, especially the important launch we will have starting in Q2 and developing throughout the year.

I thank you as always for your attention and interest and I will now turn the call over to Dan, our Chief Financial Officer.

Dan Suesskind, Chief Financial Officer.

Thank you Israel and good day to all of our friends in whatever time zone you are. I hope you had a chance to review the excellent results, topline, bottom line that we released this morning. We are summarizing today a quarter and the year which ended only 59 days ago, but seems like a decade back in the history of the company. Following the Ivax acquisition, we are today a different company in many respects, financially, geographically, in terms of complexity and not least in terms of our potential. But we have to the history and therefore I will walk you in a minute through our 2005 numbers.

As we indicated in the past, we expect to talk to you about the new future in May of this year, concurrently with the release of our Q1 ’06 numbers. The first quarter in which we will report combined results of Teva and Ivax. And we will not at this stage be presenting any material forward looking data on the combined company. We thought it would be prudent not to hold our traditional quarterly lunch in New York. We will however extend this call somewhat. So after this introduction, let me dive into the data of ’05.

Before walking you through the various line items I want to highlight, the critical success indicators of this quarter, all of which were a record high.

Sales of $1.4 billion, up 6%, causing annual sales to break through the $5 billion mark for the first time and totaling $5.250 billion, up 9%. Net income, which for the first time exceeded $300 million to $305 million, up 9% and annual net income for the first time broke the $1 billion mark to reach $1.07 billion, representing a 20.4% margin on sales.

EPS of $.45, which resulted in annual EPS of $1.59, comfortably within the range we offered in February ’05.

This compares with $.41 and $1.42 respectively in ’04, after retroactively adjusting for the dilution of contingent convertible bonds. The 2004 annual figures are before one time items relating to the acquisition.

As you know, I usually focus on the quarter just ended and not on the year. I will also follow this road today. Having just summarized the main annual figures. And from the highlights to the details.

As I mentioned, quarterly sales reached $1.401 billion, an increase of $78 million or 6% from the comparable quarter. Currencies, almost exclusively had a $37 million negative in sales. In connection with the currency effect, it should be noted that while the strength in exchange rates fully effect the topline, the impact on our bottom line is mitigated through the natural hedging effect of having operations with a relatively strengthened or weakened currencies. This natural hedging is supplemented by hedging , the outcome of which is recorded in the expense line item which I’ll come to later.

breakdown of sales. 62% of our consolidated sales were in North America. 28% were in Europe and 10% in the world outside of these two geographies, including our own market, Israel, which accounts for slightly more than half of the 0% of the rest of the world.

Most of the increase in sales was contributed by newly launched generics, predominantly in the US but also in Europe as well as the growth of Copaxone and API sales.

This was another period in which our balanced business model demonstrated its strength. While certain generics were slightly down from the ’04 comparable quarter, which was our all time high quarter mainly due to the launch of , the increase sales of our innovative business, mainly copaxone, our European business and the 3rd party api sales ensured that our total sales were on track.

In Europe, our European generic sales increased at almost 10%, with growth in most of the major markets in which we operate. We continue to benefit this quarter from the products we have launched since q4 of ’04 like Arenganade in the UK and the Netherlands and the production of Repalzore and in the UK this quarter.

Global market sales of Copaxone this quarter amounted to $323 million. This is a 24% increase globally with Copaxone sales growth this quarter once again exceeding by far the global MS market growth rate.

In market US, Copaxone sales increased 26% over the comparable quarter to $220 million and non-US sales increased 19% to $103 million. Non-US sales for Copaxone this quarter accounted for one third of global in market sales. We continue to increase market share both in North America and Europe. in the US in Q4 we reached our highest quarterly market share of 34% in terms of .

As to API, API sales to third parties amounted to $141 million, up 24%. Our overall API sales including sales to our own pharmaceutical businesses amounted to $295 million and increased by 20%. Third party sales increased from last year at a much higher rate, compared to the growth of internal sales.

We anticipate that internal sales of API products compared with existing business units will continue to grow and that the acquisition of Ivax has created significant opportunity for Teva’s api business. To the extent that Ivax was previously a major customer of our API business, the consolidation of Ivax into Teva will mean that some portion of 3rd party sales will turn into internal API sales.

One line item down in the P&L is gross profit, which amounted to $676 million or a gross profit margin of 48.3% in the quarter. This compares with 47% and 47.2% in the fiscal 2004 and 2005 respectively. As I have indicated in past quarters, swings in the quarter to quarter gross margins are due to changes in the products and geographical mix of our businesses.

This quarter’s margin is even slightly higher than the 45-48% band which we have presented as an indicative range so often in the past. at this time by the introduction of Fexofenadine in Q3 and Zithromycin in December. But we do not feel that this should change our indicated normative gross margin range on Teva’s stand alone basis. Obviously, the consolidation with Ivax will at least initially more or less reflect the average of the gross margin of the 2 companies, adjusted for the quarter to quarter changes in geographical strength as well as the inventory step up in Q1.

And form gross margin to R&D. Our growth requires allocating every increasing resources to R&D. in this quarter, growth R&D, the best way to measure our R&D efforts, exceeded for the first time the $100 million mark, up 4% from the comparable quarter. 7.3% of sales both for the quarter and for the year.

SG&A increased 15% from the comparable quarter, reflecting also a higher percentage of sales – 15.5% compared with 14.2% in ’04. we have seen an even higher relative SG&A rate in Q3 of this year, reflecting a change in the product mix including the participation in the profits of Fexafenadine, which was launched in Q3 and including expense related to the introduction of Agilect in the various markets.

While in general the trend of SG&A expenses have should decrease over time, quarter to quarter variations along the general trend. The annual rate converged on 14.5% in ’04, compared with 15.2% in ’05.

As to Q1 ’06, we will for the first time expense employee stock options. We expect the annual charge to amount to approximately $50 million, most of which will fall under SG&A.

And to operating profits.

Operating profit actually summarizes all of the above and was a record high this quarter with absolutely $361 million and as a percentage of sales, 24.8. also here I would say that the normal level of Teva’s pre-acquisition business is along 25% on sales.

The next 2 line items, financial expenses and provision for taxes, deserve some explanation, as both were relatively out of line for the recent quarter. These two expense line items trend in opposite directions, offsetting each other to a large extent.

And to financial expense. These fluctuated considerably in the past quarter, with the two compared quarters of ’05 and ’04, demonstrating the largest swing. $16 million income in Q4 of ’04 and $10 million of expenses in the previously reviewed quarter.

As we have explained in the past, while net interest is positive and increasing over time due to increased deals on our cash and quasi-cash, while much of our debt carries fixed interest, the quarter to quarter we’ll see large swings reflecting mainly erosion and hedging activities .

We have also said in the past that income or expenses from hedging activities are partially offset by other line items which enjoy or suffer from the influx of currency movement on the base assets. The influx on the financial income expense line items is however highlighted as this line item is of relatively small magnitude compared to sales, cost of goods and other P&L line items, where these incomes and expenses as the case may be, are partially offset.

As you may expect, this line item financial expenses, will increase substantially as of Q1 ’06, as our interest bearing assets decrease and our borrowed amounts increase, due to the acquisition of Ivax. The annual interest payment on the $2.9 billion, amounts to about $110 million, including issuance costs.

In estimating our financial expenses going forward one has to take into account that we need approximately $1.75 million of our interest bearing liquid assets for the Ivax transaction. Our cash and quasi-cash investments demarked for the securities, now subsequent to the acquisition, is around $1 billion.

And from here to the provision for taxes. At the end of q3 we adjusted our provision for taxes to our then best estimate for the annual rate at 19.5%. now, that we’ve completed the year and did our annual final calculations, we dropped to an even lower rate of 18.1%. this reflects predominantly the shift in product and the mix of income in the fourth quarter and a correction for the year, the possibility of which I mentioned in our Q3 conference call.

Last, the tax rate provided for q4 is 13.7%, an exceptionally low rate, although you may recall that in the proceeding quarter, Q3 of this year, the tax rate was also low, 15.9%.

Going forward, as we start reporting Teva and Ivax combined; the tax rate is initially expected to be the average of the current tax levels of both companies. Further out, this average should decrease over time as we increase the optimization of our plants which have been built in Israel and Hungary in low tax areas. One of our challenges will be to optimize our global production from a tax point of view. All of that leads to our all time high net income of $305 million for the quarter. Net income increased 9% vs. the comparable quarter and annual income increased 11% to $1.72 billion.

And to EPS. Based on our average quarterly share count of 682 million shares, plus the aggregate of expenses related to the converse of about $2 million, this was at 45% compared with 41% in the comparable quarter. For the year, we reached EPS of $1.59 which net of one time charges and income in ’04 was up 12%.

At this point, I would like to walk you through our share count so that all of us are on the same page in calculating EPS. As mentioned above, our average share count for the purpose of calculating fully diluted Q4 ’05 EPS is 682 million shares. This is net of shares . Going forward, our current share count for the purpose of operating EPS, taking into account the shares issued to Ivax shareholders and the diluting effect of the converse in options, amount to a total of 835 million shares. For calculating our market cap, the share count excluding the diluted influx of options and is now post-Ivax at 753 million shares.

Cash from operations amounted this quarter to $259 million. In this quarter we increased our working capital, accounts receivable plus inventory minus accounts payable, by $110 million, while in the two previous quarters these decreased. The major share of this increase in working capital reflects increases in in the US mainly as a result of the Zithromycin launch towards the end of the quarter. Our free cash flow for the quarter after deducting capex of $83 million, half of which was by depreciation, and quarterly dividends of $39 million, amounted to $138 million, bringing the total free cash flow for the year to over about $900 million.

We have just announced an increase in our quarterly dividends of $.07 per share, up 12% from the dividend level we had distributed in the last four quarters. Total dividend for the year amount to $174 million, compared to $134 million for 2004.

And to our balance sheet. Shareholders equity at year’s end for the first time exceeded the $6 billion mark at $6,042,000,000; this is an increase of $63 million from December ’04. inventories at year’s end were lower than at the end of 2004 by 172 million, while both and the were higher, 293 and 241 million respectively. Inventory days are significantly lower in December ’05, 142 days compared to 167 in December ’04. Estimated Days outstanding receivables, this remained practically at the same level as in December ’04. we have calculated this, after netting out the sales reserves and allowances, the so-called SR&A, from the receivables. Although we record receivables on a gross basis and we record the SR&A on the current liabilities, in order to facilitate a more meaningful comparison with some of our peers, we record receivables net of these reserves, to have used the net figure. Total SR&A at year’s end was $733 million, about 90% of which are from the US, up $140 million from December of ’04.

At year’s end, $1.8 billion or 83% of our total interest bearing debt was long term. During the quarter we raised $350 million and 5 year market currency syndicated bank loans. Our short term debt decreased slightly during the quarter from $390 to $376 million.

Our liquid resources at year’s end amounted to approximately $2.3 billion and our leverage of equity worked out at 26%. The last line items on our March ’06 balance sheet will obviously undergo a very substantial change due to the Ivax acquisition. An approximation of the balance sheet can be extracted from the pro forma balance sheet that we established for September 30, ’05. on a pro forma basis, combined Teva and Ivax and to the best of our expectations at the time it was published, the balance sheet as well as the preliminary estimate of the purchase price allocation and In this pro forma balance sheet, the equity reached $8.3 billion and the leverage was 39%. As you know, last month we raised approximately $2.9 billion, including the green shoe, about half in trade debt. both S&P and Moody’s reaffirmed the ratings that will be in these respectively.

With this, I would like to complete my formal notes. I would like to thank all of you for the time and attention today. And we will be now glad to take your questions. Thank you very much.

Operator:

The first question is from Rich Silver with Lehman Brothers.

Rich Silver.

Can you hear me? Good morning. You talked about your manufacturing sites, R&D sites as well. Can you give us some sense of what the plans are? Whether you plan to maintain all of those sites or over the next year whether we should expect some rationalization.

Israel Makov, President and CEO.

We have about 44 manufacturing sites and 15 or 17 R&D sites. And, we are now making plans for each of the sites. Some of the plans are for upgrading the sites and actually expanding the sites and some of the plans are to rationalize the operation and the sites. I won’t give you details in terms of the number sites that we are going to either upgrade or to rationalize, and also I have to tell you that this is not a very fast process because it’s regulatory approvals and so on and so forth. So once we make it internally known to the workers who are going to leave and who is going to stay.

Rich Silver.

And then on that gross margin which as you pointed out was certainly at the high end of the range, even exceeding the range, can you give us just a better sense of how much of that was driven by North America vs. Europe, which you did mention did see a number of new product introductions? In terms of the quarter to quarter swing.

Israel Makov.

I would say that without the introductions that we have seen in the US, we would be back to around the norm that we have shown in previous quarters; it is roughly 47%.

Rich silver.

Okay and then lastly, can you provide any detail on the R&D number and why that was up sequentially?

Israel Makov.

It was up sequentially relatively little but we indicated that we passed for the first time the $100 million mark, but it wasn’t that much of an increase quarter over quarter.

Rich Silver.

And just one more, and that is on Agilect. Other than what you mentioned from the press release on the call, can you give us some additional details as to the discussion with the FDA and what your best guesstimate now might be for final approval?

Israel Makov.

We have a dynamic dialog with the FDA and we do not even try to focus, to make an estimate when it’s going to end. In the but we cannot give you any timeline.

Rich Silver.

Okay. Thank you.

Operator:

The next question comes from Dimi Tomsulis, with UBS.

Dimi Tomsulis.

Good morning, just a few questions. Can you talk about the pricing environment in the 4th quarter in the US generics business? And given the strong launches and contributions of Fexafendine and Zithromycin in that quarter, which is the base business to apply of those contributions? That’s the first question. The second question may be for Israel, can you just give us some commentary or color now with some of those moving into the German market and you’re more aggressive with large acquisitions. Has this changed the European dynamic for Teva at all? What sort of inroads do you think some of those local providers might be making into the European market and will it be similar to the US? And finally, with respect to is that coming in the next week or so?

George Barrett, President and CEO of TEVA North America.

Good morning Dimi it’s George. I’ll touch on the first one and then let Israel follow up. You asked about the pricing in Q4, I think I would generally characterize it as quite similar to what we’ve seen through much of the year. I would say it has not materially changed since our Q3 call and at that time we had mentioned that the rate of base erosion was somewhat higher in 2005 than the prior year. I would say that as we completed the year that it confirmed. There are certainly individual products that we knew during the course of the year would experience competition like Gavapentin, where there’s significant erosion. But as we look to the face of the business, we probably had a slightly higher rate of erosion in 2005 than we did the prior year. The only noteworthy change late in the year was a drop in the price of Oxycodone, as you may remember the Ivax/Purdue relationship resolved and we ended up with a new player and with a new player you can experience some new dynamic in the market. So we had a bit of erosion there. But otherwise, as I said, characterize it as generally a higher rate in ’05 than in ’04.

Israel Makov.

Let me comment on the Europe, actually on Germany. We said many times that we are interested to do something more than we are doing now in Germany. But we also said that we are going to buy a company, the appropriate company at the right price, at an opportune time. We have seen many companies in Germany, we have reviewed many companies in Germany, but none of them met our criteria for acquisition. We have patience and we are not by other influence into the German market like the last company you referred to the case. And we will be there when we think that the time is right and when we have the right opportunity. It doesn’t change our dynamics in Europe. in Europe we are growing. Europe is big, Germany is the biggest market but, Europe is big and we are making very good progress in Europe. we have still a long way to go and in this way we have also Germany .

George Barrett, President and CEO of TEVA North America.

Dimi, can you just repeat the last part of your question?

Dimi Tomsulis.

Just and how with respect to the upcoming panel meeting, I guess the expectation of the market is that will be back on just your thoughts on how it may or may not effect capacity.

George Barrett, President and CEO of TEVA North America.

Firstly, I’m not sure that we’ll e back. Obviously we’re watching the advisory committee carefully, as you are. So it’s hard to know exactly the result of that. It think our view is that we do feel confident that this hearing is going to address and certainly needs to address some unanswered questions about the safety of future. Some very important questions about how you measure the treatment risks vs. the benefits and what kind of patient screening criteria you have before using the drug; how you establish safe duration, how you predict the onset of PML. So there are very important questions that we feel certain will get addressed there and how to project the outcome of that is one that we can’t visit today.

Dimi Tomsulis.

Okay, thanks.

Operator:

The next question comes from Ken Cacciatore with Cowen.

Ken Cacciatore.

Thanks. A couple of questions. George you have in the press release 160 product applications. If I recall and correct me if I’m wrong, pre the purchase of Ivax, I think you had 140, Ivax I believe had 60, that adds to 200 and now we’re at 160. Is this just a rationalization of the 2, picking the A&DA that you want to go forward with? What’s the explanation or do I have the number incorrect?

George Barrett, President and CEO of TEVA North America.

The numbers are probably correct. The challenge is that its very difficult to add one and one equals two here because you’ve got ins and outs both in terms of program and their own program in the last few months, in addition to the consolidation of the program. So what you’re looking at in these 160 products is in fact the now rationalized combination of the two programs where we eliminated from those numbers the overlap. Although as I’ve said in the past calls, some of those overlaps that we’re actually eliminating numbers can be qualitatively very important because they add to the positioning in a couple of cases that are very important for our filings of the drugs. So what you’re looking at actually here is the consolidated, rationalized R&D program.

Ken Cacciatore.

Did anything surprise you in that? Or are these about the number you thought they were going to put out?

George Barrett, President and CEO of TEVA North America.

These are roughly about the percentages we expected to see at a gross level when we looked at the probability of overlap and certainly we knew of the high profile products. So I’d say this is roughly what we wanted to see. Bill, did you want to add something?

Bill Marth, President & CEO, Teva USA.

Well there were a number of approvals that brought that number down.

George Barrett, President and CEO of TEVA North America.

So that’s what I said, the moving parts are approvals, filings and then the rationalization.

Ken Cacciatore.

Okay. One of the major opportunities for Ivax going forward was the generic, I mean was the albuterol, being a leading manufacturer of generic CFCs. It’s our understanding that the generic CFC pricing is increasing, that there’s worries about a supply issues coming from you all via Ivax. Could you discuss this opportunity and how you think broadly speaking the timing of this conversion is going to play out, understanding that the pulled generic CFC’s have to be out of the market by December of ’08. Can you give us a sense of what’s going on here and how you feel the transition is going?

To describe it as a transition might even be early. It’s a very interesting time. We are certainly seeing on our side depletion of the CFC gases and we’ve actually notified our customers that that’s going to expire. What’s happening around the rest of the market is still a little bit uncertain. Even if it’s one company that has a shortage, you sometimes see some interesting market behavior like cording and those kinds of things. So I would say that right now it’s a little early for us to tell you what the overall situation looks like and to make any predictions base on that other than to say that we’ve advised our customers that sometime in and around the summer, we’re going to be out of CFC gas. Of course we do provide albuterol in HAS formulation.

Ken Cacciatore.

Thanks and one last question. Just on Zocor, understanding that Ivax is pursuing trying to reclaim exclusivity, any timing of a ruling? Is there going to be more argument and should we have any expectations of I guess ?

George Barrett, President and CEO of TEVA North America.

Again at this point there’s nothing scheduled. So, I think we would expect given the timing of the patent on the drug that there’s some likelihood that it would be taken into account and this would move along, but at the moment we have no specific dates.

Ken Cacciatore.

Okay, thank you.

Operator:

The next question comes from Tim Chang with Metaxis Bleischroeder.

Tim Chang.

Just a couple of questions for George. Could you just provide an update on flonase an application that you inherited from Ivax? I was wondering what your expectations are for potential approval and launch? Could that occur in the 2nd half of this year? Also, could you just provide a quick update on the lexpropaten challenge? Have you had any discussions on the potential settlement?

George Barrett.

On the Flonase, as you probably know, we typically do not give you projections of approval timing prior to getting them. So I can’t give you any specific timing. You are aware that there’s been some interesting legal maneuverings in the last several days and with the PRO put in place, the court will have to hear as it relates to the preliminary injunction over the next few weeks. So this now adds a new dimension to it. One is the natural question of the approval process and the timing and the other is how is that going to link to the treatment of the legal case and the TRO and the various legal movements? So, now a lot of moving parts here. This is something we’ve grown to understand and anticipate but we certainly are findings ourselves often in these kinds of situations.

Tim Chang.

Let me just restructure the question. In terms of Ivax’s filing, how confident are you that this filing has basically been completed years ago? And that the FDA has done its best to review that application?

George Barrett.

All I can say for you on that Tim is that we have filed the product. Obviously when we file the product we believe the filing’s a strong one, we believe we defended it well. You know also that this is the kind of product that is actually very tricky and we hope that we’ve provided the data that will bring us an approval. But predicting the timing is difficult.

As relates to the Lexapro or any discussions with 3rd parties on settlements, that’s certainly something at this point that I couldn’t comment on.

Tim Chang.

Great. Thanks.

Operator:

The next question comes from Amy Deegans with Susquehanna.

Amy Deegans.

Yes, hi good morning and thanks for taking the question. I guess just a couple of quick ones. In terms of Ivax and they obviously have a number of innovative programs, could y9ou highlight which you see as sort of the most promising. Obviously there will be some rationalization and you’re not going to get into detail on that. But maybe highlight which you see as definitely promising programs going forward. And the other is just as relates to the settlement. You commented that in terms of the specifics of the litigation that you cannot comment specifically, but overall as you look at settlements going forward, are your goals really to sort of monetize some of the paragraph 4 challenges, whether its through a royalty stream or what have you and kind of get some extension over time of that income stream? Or, would you be interested in sort of co-promoted arrangements and expanding your ability to have more of an innovative product line, perhaps co-promotes on branded drugs that might give you more exposure there. And then finally just on generic biologic in Europe and how you see that opportunity developing over the next year. Thanks.

Moshe Menore, VP of Global Products.

On the Ivax innovative pipeline we are currently reviewing the innovative pipeline with Ivax. As you know they are mainly focused on neurology and oncology with the other products. We see some of the interesting products; we don’t have any of the innovative other than those currently in phase iii product launch. We completed the review related to the Ivax innovative with several innovative and we’ll create an innovate pipeline for Teva.

George Barrett.

Amy as it related to settlement. Our goal when we develop a product is to launch the product in the generic market. That’s what we do. Along the way when we are in patent disputes, then a lot things come into the story. How is the case unfolding, what’s the strength of the case? have there been activities along the way? For example, claims construction that may signal something about the nature of the case? what are the risk management issues? So there are times where we see settlement as a very viable tool that allows us to get to market with predictability and to create some kind of value. As it relates to using that to find value in other parts of our business, we have had a few deals where we’ve looked creatively at building on the relationship, ironically, that you develop with the company when you’re in these kinds of discussions. I know that sounds paradoxical, but that’s the reality of it. Is that you wind up looking at a lot of things in the business and when we find those opportunities to use that asset to help us build a relationship that creates something for another part of the business, we’re certainly open to exploring that.

Operator:

The next question comes from Michael Tong with Wachovia Securities.

Michael Tong.

A couple for Dan, actually. One you previously mentioned about synergy and about $150 by the second year. Now that you’ve had a chance to look further into Ivax, is that still something that you stand by? And secondly, your prepared remarks you talked about optimizing manufacturing capability to minimize your tax rate. In your mind, what is the optimal contribution from the different regions of the world from a manufacturing perspective that would lead you to that lower tax rate?

Dan Suesskind.

As to the first question, we still stand behind the same numbers. If we have anything to change positively we may do it in may, but so far it seems that our estimates were on track. Regarding the tax, the main two areas where we have a low tax is in Hungary and Israel. In Israel, as you may know we have just inaugurated a new pharmaceutical plant which can produce up to 8 billion tablets with a 10 year tax holiday. In Hungary we have also tax holiday which goes into the next decade, so these are the two main centers where we try to change the weight towards them in order to reduce to the extent possible the blended average of the taxes.

Michael Tong.

Thank you.

Operator:

Our next question comes from Elliott Wilbur with CIBC World Markets.

Elliot Wilbur.

Good morning. My first is for George. I want to pursue the earlier line of questioning with respect to the additives in the portfolio. I understand there’s a lot of moving parts there but may be just in terms of broad brush stroke terms, if I think about this correctly, it looks like the overlap was maybe on a lot of commodity type products, which would be favorable, and it looks like you’ve kept a lot of the first of files. Is that kind of a fair assessment George on the combination of the Ivax and Teva portfolios?

George Barrett.

Yeah. I think that’s actually a good characterization. We wound up with overlap on many different kinds of products but certainly a fair number that you described as commodity type products and picked up some significant value in some of these interesting paragraph 4 cases and first to files.

Elliott Wilbur.

And I have a follow up question. On sort of an emerging industry issue, I guess. There’s been a lot of noise recently about the number of pending at the FDA and whether or not the OGD is going to be able to continue to effectively process those at the same pace we’ve seen historically. So, from your perspective at this point, have you seen any sort of slow down in terms of the timeline? Have you changed your modeling assumptions on some of your non first time generics? Or what are you thinking about the concept of some sort of a user fee program for the generic industry?

George Barrett.

Let me start and then I’ll let Bill jump on and talk a little bit about the user fee question. I’ll start just on the slow down issue. Statistically, the data probably doesn’t lie which is that there’s a backlog that is slowing technically the review time down. Having said that, I’m not sure that I can cite an instance where the actual review time has prevented the launch, for example, of a new generic drug. So, I think that the FDA is probably doing what they need to do to do some kind of triage and manage this backlog that they’re gotten. We’re typically not working, we try not to work in such tight timelines that we would be altogether affected by a time of a month or two. So I guess the answer is there is not doubt that the backlog is increasing and reviewing times are changing, but remember that we seem these days to be more effected not by review times but by actual final approval through all the legal stuff. And that may relate to observations…

Elliott Wilbur.

And on the user fee issue?

Bill Marth.

Yeah, Elliot, I’m not sure that backlog is the correct word to use there, that’s the only point I would add there. And don’t forget that generic companies file years in advance. So that always needs to be taken into consideration. Also with respect to your question about the user fees .

Operator:

Our next question comes from David Licorice with HSBC.

David Licorice.

Good morning gentlemen. Just a couple of quick questions going back to the manufacturing and research and development sites. You previously said that you had 44 manufacturing sites, 17 R&D sites. How many of those are located already in advantageous geographies?

Israel Makov.

Probably the minority. Now also, the geographies is not an absolute definition. Not every plant that is in Israel or in Hungary enjoys the zero tax effects and costs will change over time. We are trying to roll over those advantages with more investments, etc. But there is no such think. In Israel we pay zero tax, in Hungary we pay zero tax and in the rest of the world we pay normal tax.

David Licorice.

What about the tax rate specifically attributable to Copaxone? Can you give me what the effective tax rate is on that? Is that a big part of why the tax rate might have been lower this quarter?

Israel Makov.

No, but it definitely has an impact on the tax rate, but the effect on the specific tax rate for this quarter was a minimum.

David Licorice.

And if I may, just one final question.

Israel Makov.

The is minimal.

David Licorice.

Just sort of broadly speaking without getting the specifics of the Ivax merger now that you’ve had a chance sort of to review the different opportunities in different areas, can you speak very broadly and again not being specific in any way, speak broadly to any areas that you now see that maybe offer more significant opportunities than previously realized?

Israel Makov.

I can answer this question. I think that we are now quantifying the opportunities. I think that basically we have in the broad sense the opportunities that we saw before and these are substantial opportunities, these are not small opportunities. Even in we have initial opportunities or maybe less opportunities in a certain area, it doesn’t really change the global picture. That with in comparison to the beginning and just in the middle of our integration, we’re in the middle of exercising or starting to realize some of these opportunities, which as you know they are not immediate opportunities, however they will take time. But we haven’t made a quantitative comparison. But I don’t think that we have any major change in the opportunities, definitely not downwards.

David Licorice.

Thank you.

Operator:

Our next question comes from David Marris with Bank of America.

David Marris.

Hi, a couple of questions. One of the things that’s emerged on this call is this tax and manufacturing arbitrage of Hungary and Israel vs. the US with the Ivax acquisition. I don’t think this was really explored before. Can you give us some examples of just what the difference in manufacturing costs might be? Sort of round numbers or your average tax rate in the US of the blended company vs. in Israel and Hungary?

Israel Makov.

I’ll address the tax question. The tax we pay in the US is the regular tax; we don’t have any special concessions there. So, in comparison to that, in our pharmaceutical plant in one of our pharmaceutical plants in Hungary and in new established chemical plant we are going to pay zero tax. As I said before, beyond actually flowing over to the next decade. In Israel I mentioned before the plant that we just inaugurated where we have 10 years of tax holiday. In our other plants in Israel, they are actually mixed plants, which means that some of these have a tax holiday and some where the tax holiday expired. So I would say that we have on the average of those plants, we have something in the teens.

David Marris.

And then are there also manufacturing costs differences or R&D costs differences that are sizeable?

Israel Makov.

We have of course a different cost both in the US compared to Israel or to Hungary. In the US . What matters is the productivity. it is not efficient you have to see what the productivity of the different in manufacturing and R&D and therefore we measure the effectiveness of the R&D or operations teams based on their costs and the productivity of these teams. And of course you have highly productive teams in all of these countries .

David Marris.

And then separately, for generic sales, if we take out the Copaxone and take out maybe this and that, Allegra, what would sales growth globally have been after acquisition in generics and then globally?

Israel Makov.

David, we really don’t make the comparison in this situation, you know. our company’s comprised of 146 launches in Europe and many launches in the US and the only thing that I can tell you is that in the last 4 years, the compounded growth of our topline was 26% and the compounded growth of our bottom line was 39%. And any…

David Marris.

You had provided a guesstimate about what the gross margin would have been without Allegra and without Zithromax. Is there any estimate of what the sales number would have been, just to give an apples to apples?

Israel Makov.

But we haven’t disclosed the sales of both.

David Marris.

Fair enough, thank you.

Operator:

The next question comes from Randall Fenicki with Goldman Sachs.

Randall Fenicki.

Thanks. A few follow-ups. First on Zocor. How does the timing of the play into market formation for both pricing and supply ahead of launch, first of all? And a second question just to follow up on the settlement question. Are you guys seeing larger pharma companies more interested or may more urgent in settling up on their patent risks vs. previous years? Does it feel like we’re going to see some more effexor-like deals in the near term?

George Barrett.

I’ll comment first on the Zocor. In terms of market formation, I think the key date here is really the patent expiration, which I believe is the 23rd of June. How this will be influenced by the legal question on exclusivity will inform the market on how it’s going to play out. It’ll dictate whether or not you’ve got essentially an open market where every player who’s got the approvable status can launch or the tentative status can launch or whether or not there’s going to be some sequencing of companies into the market based on exclusivities. And I think that will follow the normal pattern but we don’t yet know what that pattern is going to be until we’re clear on the exclusivity.

On the issue of settlements, you asked whether or not the originators are more prone to…is that the question?

Randall Fenicki.

We’ve seen a number of settlements on a lot of smaller compounds; Effexor is obviously a big one. There are a couple of compounds out there on the larger side that clearly there’s a focus on. From a big pharma perspective I feel like there’s more of an urgency and I guess getting some of that risk out of the marketplace.

George Barrett.

I think there are probably 2 things going on. One is that there may be and again I can’t speak for any particular company. We’ve heard several companies have different views on this, on the pharma side. But certainly companies are looking at the risk issue, no doubt. And, trying to assess the likelihood of success vs. the costs of losing. And I think each company makes its own judgments there. The other certainly significant component is that the FTC issues have become interesting in that you have these 2 circuit courts giving a different interpretation of what’s possible in a settlement than we’ve seen prior. I think it’s probably created an environment in which companies will look to see whether or not in that current environment there’s any more likelihood of success or settlement than they would have in the past.

Randall Fenicki.

Are there still a lot of opportunities for you guys to do more deals than you did with ?

George Barrett.

There are opportunities for us to launch product and in our pipeline if one of those product is a patent case and in that patent case the right set of circumstances come together then the answer would be in that case, yes.

Randall Fenicki.

Alright, thanks a lot.

Israel Makov.

As we are almost 80 minutes into the call, I suggest we take one more question.

Operator:

Our final question comes from David Woodburne with Prudential Equity Group.

David Woodburne.

Thanks and a nice quarter guys. Can you give us an update on the albuterol actuated inhaler, where we stand on that? And specifically on CFC propellants, the Ivax operations are they receiving US-produced propellants still? Or yet, I should say? Or are you still working on inventories or working off inventories of the European produced propellant?

George Barrett.

I’ll give you some color on the DAI but not too much. This is the breath actuated albuterol that has been in the Ivax pipeline. It’s a product we’re very excited about by the way. It is in approvable status and we are hoping that we’re making the kind of progress that we need to. We’re just obviously getting involved over the last few weeks since the acquisition and so it’s hard for me to give you a lot of information other than to say that we continue to be excited about the product as we were prior to closing the deal and we will now get very involved in trying to help bring that product to the finish line.

As it related to the CFCs, it’s really coming through the European allocation, that’s where the CFC gases are allocated from.

David Woodburne.

So you’re not getting anything from the US plant yet?

Bill Marth.

No. we’re not getting. Remember our CFC comes through the EU. That production is in Ireland. And so our allocation has to be approved by the EU. As we previously stated, sometime over the summer we will be phasing out of CFC, just because of the increase in demand and the lack of allocation. So we’ve come to that realization that we will not be able to do that.

David Woodburne.

Okay, great. Thank you.

Operator:

There are no further questions at this time. I will now turn the conference back over to Mr. Kevin Mannick for some closing comments.

Kevin Mannick.

Thank you Diego. We’d like to thank everyone for joining us today. We will be happy to take additional question offline if you have any. And Diego if you could please provide the replay information I’d greatly appreciate it.

Operator:

A replay of this conference will be available until March 7, 2006. to access this replay US dialers can call toll-free, 877-660-6853.

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