Teva Pharmaceutical Industries Ltd (TEVA) 2002 Q1 法說會逐字稿

Good morning and good afternoon to all our guests. Thank you for joining us to discuss Teva's results for the first quarter ended March 31, 2002. At this time if you do not have a copy of this mornings release please call Ami Akalia at 9723-926-7281 or Steve Silver 212-701-1816 and a copy of the release will be either emailed or faxed to you immediately.

With us on today's call are Israel Makov, president and CEO; Dan Suesskind, CFO; Bill Fletcher, president and CEO of Teva North America; and Dr. Aaron Schwartz, Vice President of Global Markerting. Please note that the safe harbor language contained in the press release also pertains to this call and to the web casting. Before I turn the call over to Israel I would like to remind everyone that we will host our quarterly luncheon tomorrow. Tuesday, April 30, and we kindly invite you to join us. For those of you who have not yet received our invitation, or have not yet confirmed, please call us in New York at 212-701-1802, or in Israel at 9723-926-7281. It is now my pleasure to introduce Teva's president and CEO, Mr., Israel Makov.

Good morning and welcome to our quarter conference call. I hop you have all had a chance to go over our release. I will provide further analysis of the results in a few moments. First quarter was a very strong quarter for Teva at the bottom line, and right on target on the top line. Our sales grew 11 percent reaching $545 million the second highest quarter in our history. Our net profit grew 56 percent, reflecting the strategy we had outlined to you whereby the growth rate of our net profits exceeds the grow rate of our sales. In the last few quarters however growth rate of our net profit has even exceeded even the growth rate of our own strategic target. The growth in sales of the sales of the first quarter was entirely organic growth powered by our u.s. generic business,

and API. Our large U.S. portfolio of generic products and our strength in customer relationships considered to solidify our leadership in this market. This leadership is demonstrated by our 17 percent increase in new generic sales for the quarter. Our focus on R&D and new product development is reflected both in our spending and in the number of trials approved and pending at the FDA. Currently our FDA pipeline comprises 62 products.

In Canada as we already told you our focus on profitability is temporary impacting our market share. Copaxone continues its march forward, enjoying an enhancing it unique positioning as the sole non-interferon treatment for MS. We are very pleased with the success of our European launch and the recently published new scientific data demonstrating the tremendous long-term benefit of this product for ms patients. Last week we launched Copaxone in a ready to use pre-filled syringe in the u.s. which we believe will make a big improvement in the daily lives of people with ms. In the Israeli market we are doing quite well considering the continued recession and recent devaluation of the shekel. We are increasing our market share in a mature and competitive market. Also in our Israeli operations we had one of our most efficient and productive quarters ever. In Europe our sales continued to advance in local currency in virtually every market. As you all know we are in the process of buying Bayer's generic business in France, which we hope to complete by the end of this quarter. Bayer Classic the third-largest generic company in France and we are excited about the opportunities this acquisition will afford us in the growing French generic market as well as strengthening our overall European generic position. We continue to seek opportunities to increase our generic franchise through acquisition in Europe and North America. This was a strong quarter. A favorable product mix together with ongoing operational synergies resulted in relatively high growth margin. We expect the coming quarters to be in line with the guidance we gave you at the beginning of this year. At this time we are comfortable with current sales estimate and EPS consensus for the coming quarters. However if some of the favorable conditions we experienced in the first quarter continue, and FDA grants our approvals in a timely fashion, you can count on additional upside during the year. Now I would like to hand over the phone to Don who will review the results with you.

Thank you Israel. Good morning to you on all continents. I hope that you had time to have a glance at our results, which highlight again our consistent delivery of results. Another quarter with a positive surprise. I won't say again what Israel said, that it was a great quarter, but I would like to say that Israel is our newly-appointed CEO and this is the first time that he leads this quarterly report. Congratulations and I hope the quarters will be better and better. Before I try to walk you through line by line, first the highlights. We achieved a net income of over $85 million which works out to 64 cents a share, fully diluted, compared to 40 cents recorded in the first quarter of 2001. I'll refer to the amortization of goodwill later. An increase of 60 percent. Net income increased 56 percent. This quarterly net income annualized represents a return of 24 percent on average equity. While EPS grew over 60 percent quarter-over-quarter, sales increased by 11 percent.

Two more comments before I go into the line-by-line analysis. The first relates to the amortization of goodwill. This is the first quarter in which according to the new rules we did not amortize goodwill. A straightforward comparison would use restated comparative figures for Q1 of 2001 by eliminating the amortization there as well. But the rules do not allow such a restatement. At the bottom of the P&L which we have released today you can see the effect of roughly $4.6 million, or 3 cents a share, on the quarter. Thus, after restatement of 2001 results the increase of EPS works out, quote unquote, "only" at 49 percent. By the way, according to our best estimate, the new regulations, 142 and 143, will not have a negative impact, or as it's called, impairment, when we release our figures in June according to the rules. We compare this time apples to apples. We are talking about the same group of companies we had in the previous comparable quarter, having executive our latest acquisition, Novafarm, in Q2 of 2000. Canadian market comparables are still unfavorable by decision. By decision to sacrifice sales for profitability, as Israel mentioned. But of course strong growth of our U.S. sales has helped by products manufactured by Novafarm for the U.S. The increase in U.S. generic that Israel mentioned reflects also an increased market share and a relatively mild average net price erosion of our base business.

We launched four products in the U.S. during the quarter, which was quite successful. In the first half of the quarter we still had exclusivity for

, and

exclusivity we managed to practically maintain market share. In addition, the expected price erosion for

stabilized quickly. We are still the sole generic supplier of Coistreol (sp) which was introduced during the first quarter of 2001 even without having a formal exclusivity. Coistreol (?) also contributed nicely to this quarter's margin and is a good example of the benefits our vertical integration. And as for Copexal, market sales of Copexal amounted to $109 million in the quarter, an increase of 48 percent over the comparable quarter. Due to the initial launch in Europe, for the first time the U.S. accounts for less than

percent of global in-market sales of Copaxone.

The increased in-market Euorpean sales represents mainly Germany assisted by some smaller european markets. Copaxone in Italy, another large market, was launched this quarter. This quarter means Q2. Our API third party business continues its growth and with $61 million sales increased 33 percent over the comparable quarter. Much of the increase is attributable to

, the active ingredient of Nevacor, which was genericized in December 2001. Normally, increased API sales are a good indication for further expansion of the generic market. These third party sales account however for only about 60 percent of the API total output with the balance representing the important strategic depth that API offers Teva's pharmaceutical businesses. All in all 62 percent of Teva's consolidated sales were to North America, 23 percent to Europe, and 15 percentthe rest of the world including Israel. In our new organizational structure Israel and the rest of the world are in the same class. For comparative purpose however Israel accounted for $61 million in the quarter, an insignificant increase over the comparable quarter in dollar terms, accounting for 11 percent of total sales. In our consolidated sales, we achieved, in spite of the strengthening of the U.S. dollar, our importing currency, strengthening in most of our markets, namely Europe, Israel, Canada, and the much smaller South America. Rest of the world sales were down in the quarter, reflecting the instability in some of our non-core markets. We try to avoid shipping to markets where the chances of being paid are relatively low.

Our gross profit for this quarter was 43.8 percent, a substantially higher margin compared with the margins we experienced the past. This, as Israel said, reflects the favorable product mix and the favorable pricing environment. The favorable product mix is obviously subject to the timing and sequence of FDA approvals. As you know, guessing the FDA approval pattern is not a science but an art. So the sequence and timing of approvals includes a lot of uncertainty. The more favorable average pricing erosion in the quarter could indicate a trend toward the positive. We feel however that for the sake of being on the conservative side one should see the average sustainable gross margin going forward being closer to the 42 percent than to the 44 percent.

The enhanced gross margin flows all the way down to the bottom line with the increased Copaxone sales having an additional effect on reducing the tax rate. The effect of the higher gross margin and the reduced tax rate on the EPS is estimated to be around 3 cents a share. Gross R&D after exceptionally high Q4 returns to the roughly normal $40 million level spent in the proceeding four quarters. Participation in R&D expenses were significantly lower this quarter and we also expect them to be relatively low going forward, reflecting our agreement with our strategic partners with respect to financing primarily the expensive phase three of our innovative R&D program. In the last quarter of 2001, participation included also the last payment of $3.75 million for

following the approval of Copaxone in France. Net R&D for the quarter reached $35 million, an annual rate of about $140 million. SG&A as a percentage of sales remained in the quarter on the 2001 level of 17.5 percent. Elimination of goodwill which is part of SG&A, of goodwill amortization, was roughly offset by a further provision for a doubtful debt in Argentina.

Financial expenses decreased substantially from Q1 of last year, reflecting the availability of lower cost resources and generation of cash flow. Other income is close to our multiyear quarterly average. Our tax rate for the quarter, of 17.6 percent, is somewhat lower than our average. As mentioned earlier, this was affected by a higher rate of Copaxone sales during the quarter. This was another nice quarter in terms of cash generation. Cash from operating activities reached $103 million. In the whole of 2001 we generated $273 million. Working capital decreased by $90 million to $1.75 billion. Following a strategic decision by Teva, we continued to increase our inventories in the quarter by about $30 million, and the same time cut about a quarter of source on Boeing of roughly $50 million. Cap-ex, at $27 million in the reported quarter, equals roughly the average quarterly spending of 2001.

Total shareholders equity at the end of March exceeded $1.4 billion, an amount similar to our interest-bearing debt. What can you take away from the analysis of this quarter, as to the expedited quarterly development in the rest of 2002? We maintain our observation that we made in February, that the quarters are expected to improve sequentially. We have reported for the fist quarter fully diluted EPS of 64 cents which exceeds the consensus by about nine cents. We should probably see 61 cents rather than 64 cents as a benchmark going forward in estimating the second quarter results. We reiterate what we said in February as it relates to the rest of the year, that we feel comfortable with the consensus with a possible upside. At least in the reported quarter we achieved this upside and if these trends continue we should continue further possible upsides during the rest of the year. With this I would like to thank you for your patience.

That completes the formal part of our presentation, and we are now open up to questions.

The first question comes from Eliot Wilber of CIBC world markets.

Good afternoon everyone and congratulations on another terrific quarter. First question is for Dan. Dan, can you repeat the two factors that you felt accounted for three cents of the upside of the bottom line of the quarter

We said that we had a very favorable product mix, and some increased sales of Copaxone.

Okay, and the product mix is obviously what drove the upside of the gross margin relative to your estimate of the more sustainable rate?

That's right.

Okay question for Bill on the pipeline if you could break out for us the number of paragraph four application you have pending now and of those what number you expect or believe you are first to file one.

We have $5.5 billion on first to file, Elliot, the number of Paragraph Four's is my recollection, about 36. About 18 we reckon we are first to file on.

Can you give us the split between North American and non-North American Copaxone sales?

... In dollar terms , the U.S. Copaxone sales were $86.2 million, and the total sales were $108.6 million.

Okay, the $86.2, is that North America?

No, that's U.S.

The next question comes from Richard Silver of Lehman Brothers U.S.

Nice job on the quarter. Couple questions, first on the forward-looking statements. You are saying 61 cents would be the base for the first quarter, and so you are looking for sequential growth from 61, or is 61 cents that you are guiding to for the second quarter.

The answer is 61 is the base from which the growth should be calculated. 61 is the so-called representative one for Q1.

Okay, my second question is, Israel at the beginning of the call mentioned sales, consensus sales estimated being unchanged. Can you comment on that? I didn't know there was a range out there you were providing or that was well know, and what that might be and how, if it has changed, how would it have changed?

The number is not changed if you refer to estimates of several analysts, they are all in the range of $2.35 billion to $2.34 billion, this is the range, and we just say the estimates are there, we just say we don't suggest a change.

Third question, on strength of u.s. business, maybe Bill you can provide a little more color that. Anything in the quarter that would suggested this was a one time that would not be repeated in the second quarter, those numbers were very strong, was there buy in or is this a good number to build the U.S. business from?

The great thing about this quarter, the U.S. business, is the u.s. business that is so strong rich. We are seeing increased market share across the product line. Obviously we got

and

introduced this quarter. Meformin was a good addition to the product range,

will be a little slower addition to the product range. They were the only real one time things if you like, and eve they I wouldn't really regard as one time. The business is very strong. Customers are moving to us very positively, and as you know we are very confident at the moment.

So you would assume there will be sequential growth, particularly as the first quart tends to be your weakest quarter historically

Yes we are looking for sequential growth and we are looking for a relatively positive pricing environment.

Last question for Dan. On SG&A spending and R&D spending going forward, any comment as to whether that SG&A as a percentage of revenues is going to gradually trend down or is that 17.5 percent number where you expect it to be the rest of the year, and also where are you looking at R&D spending and whether the decision to move forward with oral Copaxone, understanding its pharmacology studies only, what impact that would have on R&D.

Regarding SG&A, I think the general trend should continue going south. I assume that's what going to happen over the rest of the year. Regarding R&D, the $35 million or maybe slightly high is a good indication, on a net basis on what is going to happen as the quarter goes forward.

Next question is from Robert Bonty Friedheim of Salomon Smith Barney.

Congratulations on an outstanding quarter again. Couple of questions. Again on the gross margins, could you explain again why you think it will be closer to 42 than 44, considering that the first quarter historically is a relatively weak quarter, and given one would assume that factors contribute to the gross margin will only continue from here - new drug launches, economies of scale, getting both the Copley and Novafarm restructurings completed.

I won't tell you on what numbers I am writing checks today. We are guiding towards the 42 percent predominantly to be more conservative. It was quite an increase from historical figures, I think that if I maintain that it's conservative I think that's enough.

Within the gross margins, can you give us a bit of flavor how the different geographic areas contributed to the quarter?

I can tell you two places where we showed considerably better margins which are the U.S., and in Copaxone. Copaxone mainly because of the

, not the gross margin itself.

In Canada, can you give us a dollar idea of how much Canadian sales were down on the quarter, year-on-year?

We are not giving out figures by geography but I think it's important to say most of the sales were down because we decided to cut them, we sacrificed them in order to maintain reasonable profitability.

As some flavor, I would add that where as topline is lower, bottom line is actually a little better than last year, which underscores Dan's point

Thanks. Can you give us a bit of color on Europe in terms of profitability? Do you see rising profitability there on the bottom line?

I would say, in the U.K., which was responsible for much of the swings in Europe, the price has stabilized. And we increased sales due to quantity.

Can you help me out again on the EPS figure because when I do the numbers I can 62 cents of a fully diluted basis. Should I be adding back more from the converts?

It always comes back to the same question, that's right. We can do it over the phone another time, but let's do it.

The next question is from Jerry Tripple from Bank of America Securities.

Mazeltov on the quarter!

Although we are in New York it's always nice to hear Hebrew words

I wish we could use more. A couple questions. I didn't quite hear your plans for oral Copaxone going forward.

As was in the release, we have analyzed the results of the big study, and it's quite evident there are a number of issues that have to be clarified before we decide how to do. Because of that we are in the process of doing more pharmacological studies, some in virto and some in vivo, and only after that, which will take a year or maybe a little more, will we know exactly how to proceed with again big human studies.

What has to be clarified?

You have to remember the one big thing underneath the big

study. Sixty percent of all patients didn't experience even one relapse. If this is the case, this is very different that what has been observed in previous studies, where the placebo affect goes up to 30 percent but not more. Once you are in this situation obviously the basic thing you are looking for, such as different relapse rates, affect on MRI, are very difficult to elucidate, and because of that we want to go back to more basic issues. And try to find out issues of the solution, issues of immunological effect, etc., just to make sure that despite the big placebo affect, the basic positive effect we've seen in animals and some of the patient cohorts is a real phenomenon and what's the best war to proceed further.

If I can, I'd add that we are continuing the studies because we believe that based on that studies we've seen oral Copaxone could be effective and we need to be sure that the next trial we are going to do is better designed based on the information we want to achieve on the studies we are currently conducting.

Two other questions. First, what impact on the introduction of

have you seen in the U.S. market, and second, for bill, you thoughts on the timing of the introduction of Augmentin?

Jerry my crystal ball is a little murky when it comes to timing the introduction of new product, but I'd guess the common wisdom looks to December of this year for an Augmentin introduction. What was your first part of the question?

What, with the introduction of

in the United States, what have you seen so far? What have your sales people come back with?

We are still very positive about the growth of Copaxone. We regard the interferon's as a class and relatively simple to each other, we offer the preferred alternative, which we think has much better data on a long-term efficacy basis, and now that we've just introduced the PFS prefilled syringe we are obviously concentrating on the growth of our own product we just got information this morning for the latest week which shows we increased our new prescriptions to 23.8 percent, an increase of 1.1 point, so we are very happy with the progress of Copaxone and at the moment we don't see any significant negatives from the introduction of

.

So what is Sarono spending that $30 million on?

I think you have to ask Viagen.

I would like to add, everyone asks, what will be the impact of

on Copaxone? I think first, the introduction of

into the U.S. will help us to differentiate Copaxone from the rest of the interferons. That's number one. Number two, then I think you have to ask Sarono, what are their concerns regard in the introduction of Copaxone to Europe? Because I think we are doing better there than they are doing here in the U.S.>

The next question is from Chaim Israel with Natural Xanax

All my questions have been answered.

The next question comes from Paul Woodhouse with Merrill Lynch.

Good morning. Could you follow up your answer on Copaxone with reference to the European launch so far, a sense of what's happened in Germany. Clearly the numbers have been pretty good. How about market share?

I'm afraid I can't give you too much as in Europe and especially in Germany you don't have the detailed figures you have in the U.S. What I can tell you is that actually the product was on the market for an umber of years. But the formal launch was in October of last year and we are seeing sequentially month by month increase and we have exceeded our own plans by 30 to 40 percent our own plant which was quite ambition. This is just a guess, I want to warn you, if we started our market share in German of 7 to 8 percent, it's probably getting closer to a double digit now.

Thank you. In North America can you give us a little history of the U.S. generic performance? The 17 percent in this quarter, what was the performance in the last two or three quarters before that? In Canada are we yet at the point where sales have bottomed?

The answer to the second question, Paul, is yes. I said we would have another one or two quarters that were negative in the comparables in the top line. But I really do feel this quarter is the last of those. Or very slightly. Slightly up, slightly down. Going back our comparables in the U.S. we have been, we saw a little acceleration in this quarter but we were, as Israel said, 17 percent, we've been between 15 and 20 percent as long as I can remember in the last couple of years.

One final question. There is obviously a lot of court activity going on. Can you give us any kind of update on what you think is coming next with the Remeron, Alltrim, possibly Augmentin? Fletcher: On Remeron three is a court hearing in the next week or so. We've asked for a summary judgement. In Augmentin, we are challenging of course a couple of patents, in a June-July time frame. The common wisdom, as I said to Jerry, is absent a positive surprise, December looks to be the date.

Next question is from Raquette Levinson of Bank of Holland.

My questions were fully answered.

Next question is a follow up from Richard Silver of Lehman Brothers.

Bill, you mentioned there would be a court hearing and you'd already asked for a summary judgment. Do this mean we should assume at that hearing the judge would make a decision at that time on ruling against Akso Nobel with a summary judgement/

Not necessarily Rich. We can't predict what the judge will do or how long the judge will take. It varies from ruling almost immediately, to ruling at some point in the future. We can't predict.

Your final question is also a follow up from Jerry Tripple at Bank of America securities.

I feel honored

You should

Did your sales of Copaxone in this quarter in the U.S., did that include any inventory stockpiling of the

?

No.

It didn't or it won't.

No, it didn't include any inventory effect. We didn't launch until this quarter.

Thank you, all of you. And we will be happy to see you tomorrow at lunch and as we said, details can be followed up with Thompson in New York or Teva in Israel.