Teva Pharmaceutical Industries Ltd (TEVA) 2004 Q2 法說會逐字稿

Good morning, my name is Crystal and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Teva Pharmaceutical 2nd quarter 2004 results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer period.

If you would like to ask a question during this time, simply press star, and then the number 1 on your telephone keypad.

If you would like to withdraw your question, press the pound key.

I would now turn call over to Dorit Meltzer, Director Investor Relations.

Please go ahead, ma'am.

Thank you, operator.

Good morning and good afternoon to all of our guests.

I am pleased to welcome you all to our 2nd quarter 2004 financial results conference call.

As we are all in the middle of a long and hot summer and looking forward to our [ Inaudible ], we at Teva are happy to be here with you today to bring some refreshing news.

We hope you all have had the chance to review our press release.

Your host today will be Israel Makov, President and CEO, Dan Suesskind, CFO, Bill Fletcher, President and CEO of Teva North America, George Barrett, President and CEO of Teva USA and Moshe Manor, Vice President Global Products.

I would like to remind our friends in North America that we will host a quarterly luncheon on Thursday, August 5th in New York.

For those of you who haven't received our invitation or have not yet confirmed, please call us in Israel at 972-39267-554 or in Teva USA at 215-591-8912.

Before I turn the call over to Israel Makov, I would like to remind everyone that the Safe Harbor language contained in today's press release also pertains to this call and to the webcast.

In the Q around A session, we would like this time to kindly ask you to try to ask one to two questions and if we have more time, we will do a second round.

Israel, would you like to begin, please?

Thank you, Dorit.

Good morning and good afternoon and thank you for joining our 2ndquarter conference call.

We had another excellent quarter in the highly successful 1st half of 2004.

We are pleased with our record high sales of $1 billion, 176 million and net income of $230 million.

This quarter nearly every one of our businesses had record results.

We had record sales in our cogeneric business in the U.S. and Europe, as well as in our International generic operations.

Global sales of API and inmarket sales of Copaxone also reached an all-time record highs.

I am also pleased to report that the integration of Sicor is well underway and that Sicor's performance is already accretive.

The strengths of Teva business model is what enabled us to achieve sustainable profitable growth consistent with our strategic goals.

This quarter's record sales and profits and the seemless integration of Sicor highlights our ability to focus on our strategy, while at the same time executing our carefully constructed work plans.

Within this strategy, our core business is generics and I would like to address this portion of our business first.

We continue to feel very positive about our core business generics.

It is not surprising that the competitive landscape continues to evolve along with the enormous demand for generic drug.

The presence of authorized generics is just one byproduct of this.

While other generic players may see these competitive forces as a threat, we see an opportunity.

As the momentum for consolidation increases.

We have built a business model designed to provide relative advantage and facilitate leadership in this highly competitive business segment.

I would like to say a few words about authorized generics.

Hatch Paxman carefully provided exclusivity incentives aimed at encouraging companies to bring lower cost medicines to Americans at the earliest possible dates.

We continue to believe that when a brand company is allowed to launch a branded product with a generic label doing a generic first file of exclusivity period, it undermines the intent of the law and denies the American consumers, as well the generic first filer the full benefit envisioned by congress.

We will continue to pursue all legal means to try to stop this practice.

Having said this, we recognize that today this is a part of our competitive landscape, and we are uniquely positioned to continue to successfully compete.

A market share polls indicate we are consistently able to use our global operating strengths and our strong customer relationships to assure that we are a major player in most launches.

Furthermore, because of our unique business model with its broad portfolio and its global and diverse business mix, we are to a great extent able to mitigate the effect of this new competitive factor.

A constant flow of new products continue to be the critical success factor for leadership in this business.

We have built the most powerful engine of new product growth in the industry.

Teva's product line is products awaiting FDA approval which is the largest in the industry contains 111 products, 56 of which are part [inaudible] and 22 of which are first to file.

Hundreds of additional products are in various stages of development in our vast global R&D operations for the different countries in which we operate.

Remember, our closest competitor has less than half of the pipeline we have.

The unpredictability of the regulatory and legal systems leads to a significant uncertainty associated with launch dates.

The size and diversity of our pipeline help us to mitigate the impact and help us consistently reach our world target.

A few recent examples might help illustrate the value of our pipeline.

We were indeed disappointed and somewhat surprised that a district court decision on queneprine went against us and we were disappointed that the FDA did not include us among those companies entitled to share exclusivity on [inaudible].

But we were able to negotiate an earlier than expected launch date for Carboplatin and pleased with the earlier than expected ruling on Oxycodone.

Furthermore, our geographic diversity in our operations in the API level of our generic business better equip us to successfully execute our strategy and overcome the fluctuations that are a normal part of our business.

But a full appreciation of Teva also requires an understanding of what we are doing outside of the U.S.

Although the recent court of appeals decision to stay Alpharma's launch of Gabapentin in the U.S. could potentially delay Teva's U.S. launch, we have already launched a leader in Gabapentin market in the UK, Germany, Holland, and Italy, and we are awaiting other European launches, and, remember, Teva is a major supplier of Gabapentin API grow worldwide.

And I have noted in the past, growth of internal API sales is a good indicator of the future growth and profitability of our finished [ Inaudible ] generic business.

This is because a fully integrated product is a greater and more stable contributor to the bottom line and also give us -- gives us a competitive advantage in the market.

In this regard, Q2 was a record quarter for API with $104 million in internal sales, which account for 46% of [ Inaudible ].

We continue to emphasize the development of our API pipeline which currently includes approximately 185 products.

In the next few years, we intend to add approximately 20, 25 products each year to our API product portfolio.

This is a rate -- this is a rate of productivity which I believe is unprecedented in our industry and is yet another indication of our leadership.

In addition to record API in North American sales, we saw excellent sales growth in all of our geographic locations this quarter.

In Europe, Israel, and in our International operations.

Even before factoring in the effect of the Sicor acquisition which has even further boosted our international business.

The Sicor acquisition has already provided additional strategic balance both in terms of our product mix our global positioning.

Our business is also diversified by the growing presence of our innovative offerings.

We have an unique strategic advantage created by our access to and from foundation to Israel science.

We have record global Copaxone in market sales this quarter.

According to [inaudible] Copaxone's U.S. market share reach a new milestone of 30% in June, and we captured 53% of the overall TRX market increase quarter over quarter.

Within the framework of our commitment to developing new treatments for MS patients, we entered into an agreement this quarter with Active Biotech for the development and commercialization of [Inaudible].

We are currently awaiting house vote approval for this transaction.

If the development of this product is successful, it will result in an oral treatment for MS.

Currently, we continue our efforts to develop an oral version of Copaxone, and I vow to commence a Phase II trial which will test the efficacy in higher oral doses than those already started.

Just a few weeks ago we received an approval letter for [inaudible] from the FDA which is a major milestone on the road to launching this unique product for the treatment of Parkinson's Disease.

Before we receive final approval for this product we need to address a number of FDA questions to which we will submit written responses in early Q4.

Currently we will discuss several laboring issues with the FDA.

We are looking forward to meeting with the FDA to discuss these issues and expects to have a better sense of the next steps and time line following these discussions.

I would like to say a few words about our increasing opportunity in bio generics.

I recently attended Teva's biogeneric facility in China, Mexico and I was very encouraged by what I saw.

These together with the scientific base we have in Israel, our IP expertise and the industrial know-how stemming from our large-scale industrial [inaudible] Operation in Hungary is an excellent base for us to grow and become a leader in this emerging field.

In summary, our company record results this quarter are due to the commitment and hard work of the entire Teva organization.

Our profitable growth is consistent and stable.

In the last six quarters, we have exceeded this exceptional stability in our quarterly margins.

Gross profit of between 46% to 47%, operating profit of 24% to 25%, and net profit of 18% to 20%.

Last but not least, we will remain comfortable with the annual guidance we issued last quarter.

Thank you, and I would now turn the call over to Dan, who will review the financials with you.

Dan?

Thank you very much, Israel.

Good day to all our friends and in whatever time zone you are.

I hope you had a chance to review our -- the excellent results we released this morning.

While they are simple and straightforward, meaningful comparisons can only be made after eliminating the one-time gain in the comparable quarter and on the six-month basis, after factoring out the one-time expenses of Q1 '04 which mainly relate to the Sicor acquisition.

As we feel this adjusted results are more indicative of Teva's results than the recorded GAAP figures, my analysis hereafter will be based on the adjusted results, i.e., the reported figures before the one-time gain in charges.

And along this lines, I walk you through our Q2 account.

Because Sicor is only consolidated since January 23rd of this year, this is the 1st full quarter that includes Sicor results.

We are reporting a gain top and bottom lines at an all-time high.

Sales are approaching $1.2 billion, up 54% from Q2 of '03 and net income reached $230 million, up 67%.

EPS on a positive share count reached 35 cents compared to 25 cents in Q2 of '03, up 40%.

And now down the P&L line items.

As mentioned, sales reached $1.176 billion, an increase of $412 million or 54% over compare quarter. 95% of this is growth is currency neutral.

Close to half of the increase was led to Sicor consolidation, which ended sales mainly the U.S. generic business but also through the API and the rest of the world businesses.

More than 50% of the increase in sales comes from the historical "Teva."

A quarter with a nice organic growth.

Most of this increase was contributed by newly launched generics predominantly in the U.S., but also in Europe and as well Corpaxone.

In connection with the currency effect, it should be noted that the impact on our bottom line is mitigated for natural hedging, which is supplemented by hedging instrument.

The outcome of the letter is recorded in the financial -- in the finance expense line item which I will come to later.

As a result, while the depreciation of the Euro and other currency have full impact on our top line which in this quarter was moderate, the effect of currency movements on our bottom line was, again, rather minimal in this quarter. 64% of this quarter's consolidated sales were in North America. 26% in Europe, and 10% in the rest of the world.

Approximately 60% of what we classify under the rest of the world was sales in Israel.

The other rest of the world saves benefited from Sicor sales to these regions.

In the U.S. where we increased our generic sales by 74% this quarter, Teva USA and Sicor sold 17 products that were not sold in the comparable quarter.

The most significant being Oxycodone and Carboplatin.

There were products we launched earlier than expected and others we expected to launch and did not.

We once again demonstrated the importance of our deep pipeline of collaboration with other companies, as well as Teva's broad product basket.

In Europe, we continue to benefit this quarter mainly in the UK from products launched toward the end of '03, including some products like Avapentine, which are based on our own API.

Our overall -- [ Inaudible ] increase at a very high rate with gross in most of the major markets that we operate.

Global inmarket sales of Copaxone amounted to $226 million, an annual run rate of $900 million.

This is a 28% increase globally.

USA sales increase 24% over the comparable quarter to $150 million.

And non U.S. sales mainly in Europe increased faster at 37% to $76 million.

Non U.S. sales account now for 34% of total global inmarket sales.

We continue to increase our market share both in America and in Europe, in the U.S. in June for the first time we reached a monthly market share of 30%.

As to API, sales to third parties, which also benefited from the inclusion of Sicor's API business amounted to $122 million, up 31%.

In addition, the API business sold $104 million worth of raw materials internally to the pharmaceutical business of Teva.

The API business portfolio now includes 185 products, including about one-third products coming from Sicor.

One step down the P&L to gross profit, which amounts -- which amounts in this quarter to $553 million or a gross profit margin of 47%, similar to the 47% in the comparable quarter.

And from gross margin to R&D.

Gross R&D rapidly achieved as well as planned growth, requires allocating increasing resources to R&D.

In this quarter, across R&D, the best way to measure our actual R&D effort reached $91 million compared to $55 million in Q2 of last year.

As a percentage of sales, gross R&D represented this quarter close to 8%.

This level is in line with our strategic goals. [Inaudible] growth rate of participations from our strategic partners and Israel chief scientists, net R&D increased by 80%, a higher rate than gross R&D and represent 7% of sales.

We expect to maintain this rate going forward.

With the sharp increase in sales, SG&A as a percent of sales this quarter amounted to a relatively low rate of 14%.

The same calculation for the entire 1st half of '04 was 15%.

We believe there is sustainable level of SG&A expenditures is around this range.

This quarter, financial income more than offset financial expenses so that we recorded net financial income amounting to $1.8 million.

This quarter, we made, as I mentioned, gains on hedging activities, which are recorded under financial expenses as an income item while the erosion of the protective assets liabilities appear in other line items as a cost in the P&L.

As announced Friday, the .75% $360 million converts.

This is a high coupon compared to the blended .35% we are paying on the $1.1 billion of converts that were issued in January of this year.

We expect the bond holders of the $360 million convert to convert their bonds resulting in 16 million shares to be issued.

This will not have an impact on our EPS since the shares underlying these bonds were already included in our fully diluted EPS calculations as of Q3 of last year when the contingent convergent price of about $26 a share was achieved.

The provision for income tax amounts to 23% of pretax income, higher than the 20.7% provided for the comparable quarter.

The increased level of tax reflects Sicor's consolidation, most of Sicor's income is taxed in the U.S. at rates higher than Teva's preacquisition average.

This way is our best estimate for the annual rate and is identical to the rate provided for in Q1 of this year after factoring out the one-time charges.

All that leads us to our all-time high net income of $230 million, up 67% from last year.

EPS based on -- on this net income works out at 35 cents on the split share base.

Cash flow from operations amounted to $247 million, which is another all-time high achieved this quarter.

In the quarter we spent $73 million on Cap Ex, close to half of it was covered by depreciation, and only yesterday we approved a 2nd quarter dividend amounting to approximately $30 million, which on a share -- on a fair share basis worked out at 5 cents based on today's rate of exchange.

The same level as in the past two quarters splits adjusted.

Shareholder's equity reached $4.5 billion on June 30 of this year.

This is an increase of 5% or $212 million for March, resulting from this quarter's net income, net of the dividends paid, and negative to inflation differences.

Inventories increased during the quarter by $20 million, and receivables by $83 million.

However, the ratio of day sales in the inventory shows a decrease compared to June '03 and DSO, the receivables part of that, remain at an identical level when compared to June 2003. $1.9 billion or 73% of our total interest-bearing debt at June 30 is long term.

The major portion of the short-term debt which amounted to '07 million in the same date represents the $360 million convert due 2021 of which the call was just announced.

The expected conversion of this debt will obviously not only reduce our outstanding debt but will also substantially increase our shareholders equity and our borrowing capacity.

The approximately $1 billion in cash and quality cash on our books on June 30, plus the extended growing capacity will provide us with a substantial war chest that will enable us to take advantage of opportunities in our consolidating industry.

Working capital June 30 amounted to $1.8 billion compared to $2 billion at the end of '03 but higher than in most of '03.

To sum up, we just completed an excellent quarter, both with superb results top and bottom, but not less important, with an even better financial position.

For the convenience of our audience, I would like to mention two figures before we open up for Q & A so that all of us are on the same page.

These relate to our share count.

As for the 2nd quarter of '04, our share count plus split for the purpose of calculating fully diluted EPS was 664 million shares, and for calculating our market share, this is now at 612 million shares.

And with this, I would like to open our conference call to q&a.

Thank you very much.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad.

We will pause for just a moment to compile the Q & A roster.

Your first question comes from the line of David Moskowitz with Friedman Billings and Ramsey.

Yes, thanks, good morning.

Number one, could you guys just refresh us on how much Oxycodone exclusivity you have left?

And can you talk about the competitive environment after exclusivity is gone.

And, also, I think there was some concerns after the 1st quarter in terms of the pricing environment, sort of on the macro side of things and the generic environment, as well as inventory issues at wholesalers.

Can you speak to that as well?

Thanks.

George.

Good morning, David.

Good morning, George.

Hi.

You asked couple of questions.

One was about the exclusivity timing on Oxycodone.

It will expire in September.

The second question I was writing as you were asking.

The second question you had asked, you talked about pricing which I will get to in a moment.

I also asked about what you guys think the competitive environment is going to look like post exclusivity on this product.

That is a good question. [ LAUGHTER ] You know, at this point, it is hard to predict.

We have listened carefully to the public statements of -- certainly of Endo, and I think it is probably better answered by them.

We, of course, will prepare ourselves for an end of exclusivity and a competitor, but at this point it is not clear what their plans are and, again, we will have to watch and be prepared.

David, I think also in -- with this type of schedule II product, the DEA implications that any significant changes in terms of -- of market share are highly unlikely.

Because it is so controlled.

And likely to be more gradual in nature, just because of the factor Bill just described.

I think that is evidenced in your penetration into the market at this point.

That's correct, that's correct.

Thanks.

Also the pricing environment and potential inventory issues?

Pricing first.

I would describe the environment today, at least on the base business, the products that are not newer, let's say not 12-month-old products, as reasonably stable.

Very small year-over-year decreases, pretty much as modeled.

I would say it's a relatively stable pricing environment on the base.

We have certainly seen aggressive pricing on new products.

Cipro was an extreme, but not anything totally surprising on a product with that many market players.

As it relates to inventory, again, I will restate what we said last quarter, that we are not being affected by any material change in inventory policy at the customer level.

As you know, wholesalers have talked about inventory policies for really for the last two years, at least a year, and -- and from our standpoint, there is not having any effect on our business at this moment.

Thanks.

And congratulations on a solid quarter.

Thank you.

Your next question comes from the line of Elliot Wilbur with CIBC World Markets.

Good morning.

Congratulations as well on another good quarter.

First question has to do with the commentary in the press release on Rasagiline.

Would look to suggest that the likelihood of a late '04 launch seems to be unlikely now.

I am just curious what comments you can make in terms of additional developments there.

What we should be thinking about in terms of your launch expectations there.

Thank you for your question.

We are now in the preparation of a list of questions that we have an approvable letter and we are going to submit it -- we will be ready to submit it to the FDA at the beginning of the 4th quarter, and at the same time, we are going to meet maybe earlier we are going to meet with the FDA and only then we will be able to give a better clarity on the timing of the launch -- approval and launch.

Q4, theoretically we can still get an approval in Q4, but it is because we are submitting where we will be ready only in the beginning of the quarter.

It is highly unlikely we are going to [ Inaudible ] -- and we don't have yet a timeline for approval.

Okay.

Then let me ask one follow-up question.

Probably for Bill and George.

If I do the math correctly looks like Sicor revenue run rate was above $200 million.

Obviously very strong contribution from Carboplatin.

And I am just curious, you know, if you can provide maybe some commentary sort of on how successful you have been in terms of negotiating some longer-term contracts there, you know, whether or not you think this business is going to be -- going to be able to hold on to this business come October or do you think -- you know, you are seeing more just kind of, you know, short-term uptick of your product.

Yeah, Elliott.

On run rate, I don't know how to comment on your -- on your numbers.

I don't think our -- -- they are not connecting for us.

I will go to the second question and, again, when you are talking about run rate of the Sicor business, obviously not just the U.S. business.

So you have the whole mix of businesses that came into us from Sicor so Dan can probably better speak to that overall.

As it relates to Carboplatin, it is off to a pretty good start.

We are getting some contracts in the -- in the oncology network, in the -- in the oncology segment which is where most of this product is going to go.

We do feel like we are well-positioned for the onset of competition when that occurs.

You know, to what extent you retain exactly what you have is very hard to answer.

As you probably know in the oncology segment, we are, of course, competing against the brand as well, so we are already in an environment in which we are competing for contracts with the innovator, but the product is going well.

We are pleased with the uptake.

It is, of course, very hard to track, as you know, when you get into the clinics getting very clean data is a little bit difficult but we are pleased with the launch of the product and we like our positioning.

Remember there will be multiple dosage forms here and we are at the moment a player both in the [inaudible] Product and in the solution.

So we like our positions.

Elliott, sorry, was your question $100 million -- is that what your question was? $100 million a quarter?

Um --

I think he said 200 --

for total Sicor, I think coming up with a number of $200 million.

Not sure exactly what the split is between finished Dose, API and nonU.S..

I see, okay.

We will have to go off-line to figure that out quite frankly because we -- we have already, of course, put it into the various business units.

What is sure is that the base business of Sicor continues to grow very strong.

Doing very well.

And maybe since you opened up that avenue, Bill, let me ask you one quick follow-up here in terms of any color you can provide on the base business performance of, you know, Teva's USA's generic business year-over-year.

Absent the Sicor contribution.

Yeah, we had a very -- we have had a very good period.

A good 1st half, a good 1st quarter and good 2nd quarter.

So our base business is actually in good shape and we are getting those contributions, as you know, from Oxycodone and from Deproprime which was launched late Q1.

Okay, thank you.

The next question comes from the line of David Maris with Bank of America.

Hi.

Couple of questions.

Israel, you mention earlier in your comments that the authorized generics could accelerate consolidation in the sector and that may be a good thing.

If you could kind of describe why that -- that may be a good thing and not negatively impact Teva if some of the companies facing this -- this competitive threat start to lower prices on a more accelerated basis.

And you beat consensus by 3 cents, but did not increase the number of the guidance for the year and I think a press account is saying you might at another forum or you might not or something like that.

Could you just be clearer on what is the philosophy -- I mean you have a long, long history of beating guidance and raising guidance, but what is the philosophy of not increasing it by at least the amount that you raised.

And third, on margins, the addition of Sicor, would that have been additive to margins and why didn't we see a sequential uptick in the margins?

Thanks.

Let me start by authorized generics.

I think that authorized generics will increase the level of pressure on certain companies.

Specifically those with -- with, I will say a small pipeline.

And this will accelerate the consolidation process in the marketplace in the consolidation process we are looking for leadership position and we can increase our share in the market, which is -- it is a little indicator either by acquisitions or by just increasing -- increasing our markets shares for sales.

I think that we are less vulnerable with our huge pipeline.

I think that in the past, we even expressed an idea, you know.

We played with the idea that maybe for us it would be better even to have no [ Inaudible ] For Teva specifically but we never pursued it too far.

So I think the consolidation process basically is going -- is helping us to increase our leadership position, not only in the U.S. but those in other markets.

We actually entered into the generic business.

We started our global operation in '95.

Because we foresaw at that time a consolidation -- a global consolidation process in this business, and this is how we became a global player.

With regard to the guidance and the model that we are using and the fact that we are surprising the market, well, we are not planning to surprise the market every quarter, what we do is we make a risk adjusted estimate for the quarter.

As you know we have so many moving parts which we are able to -- to -- to use and manage and grow without distractions, although we had major distractions at a single product level.

And, therefore, this is our forecast.

This is our estimate.

We are generally speaking, well, conservative in our attitude, normally in the -- in the highly -- when you have this -- such high level of uncertainty at a product level you want to be conservative, and we are conservative, and we always execute better than we estimate.

And, therefore, probably you have this -- this surprises, but we don't plan -- we don't plan these surprises.

When we say this is what we want to -- this is what we expect, this is what we expect to.

And then we also don't want to change the -- the guidance, you know.

And this is not a material change.

Now if there is an upside, is there any upside, you know, to change the guidance, of course we will let you know, but I am not going to change the guidance by one or two cents every quarter just because we made -- we made -- you know, we did better.

I said the guidance for the year is the guidance for the year.

If there is an upside, I will -- we will raise the guidance, but we are not going to change the guidance every quarter by one or two cents because of a better execution, and if the gap is becoming too large, then we can -- maybe we will do something about it.

I see that Dan want to say something.

Dan, what do you want to add?

The fact that we put out the guidance only three months ago, I don't think the tolerance, of one or two cents, we should change it.

As much as we didn't change it, I guess you don't have to change your guidance

Well, just to be fair -- the stock is down 5%.

I imagine that some of that is investors saying, if you surprise by 3 cents, and you don't add it to the rest of the year, then you are de facto bringing down the rest of the year by 3 cents.

I know what you are saying but, we are surprise and a slush factor and there's whatever.

But all things being equal, people look at that and say I think the Company must be more conservative for the 2nd half than just adding this in.

First of all, as far as we could tell from the consensus, it is two cent surprise but that's not important.

You have to take into account that they should look also at the -- at the other side in the -- in the guidance that we gave.

Our earnings will be this year almost 50% higher than last year on sales which are about one-third more, which is quite a substantial step and I don't think that in such numbers you should adjust your -- your guidance every three months with a small tolerance.

Regarding two of the other question you asked about, the margin, Sicor has a better margin than -- than the rest of our U.S. business.

It didn't show up in -- in this quarter possibly because of rounding, but also because of lower margins that we had in this quarter in Europe.

Mainly because of -- of mix.

We have in Europe different businesses and the mix is changing from quarter to quarter, and actually Sicor more or less made up for the lower margins in Europe.

Also the -- we are talking about the pharmaceutical side of Sicor, when we compare the U.S.

Sicor to the -- to our U.S. business, the API business of Sicor has a lower margin than our API.

So that also had some impacts on the margin.

But basically the pharmaceutical side of the generic, pharmaceutical side of Sicor has a better margin at present than our Teva USA average.

Thank you very much.

Your next question comes from the line of Richard Silver with Lehman Brothers.

Thank you.

Perhaps on a more positive note, drivers of the 2nd-half growth.

Obviously we have had some important new product introductions in the 1st half of the year.

As you look forward, would you expect some additional product introductions that would also be fairly material in the 2nd half without obviously disclosing what those might be?

Well, Rich, good morning.

I can give you a little bit of color on the U.S. generic side.

Obviously we just received approval of Medroxy Progesterone which will be a very nice product and for us a very interesting product because it will allow us to use our sales force on the clinic and hospital side that we acquired from Sicor, as well as the retail side which we will do through our traditional USA business.

That is a product that has significant sales in both clinic and retail.

So we are looking forward to the launch of that product.

There are several other products that are part of our pipeline that are not in the public domain, and so we are hopeful that we will have a few interesting drivers as we go into Q3.

Okay.

And then just a couple of quick follow-ups.

Longer-term positive.

You obviously had a big increase in R&D spending this quarter.

Dan did say this was a level, I believe, in absolute dollars.

Correct me if I'm wrong, whether it was absolute dollars or percentage terms that would be a level sustainable going forward.

Can you give us some detail as to what is behind that increased spending and if we can see some noticeable increase in generic filings in the next, you know, nine to 12 months as a result of that increase in spending?

The -- what I said is that the rate - the 8% on sales rate is what we seen sustainable and not the absolute amount.

Most of the increase is on the generic side of our R&D.

Which you can, I guess, fairly directly assume that it is related to the numbers of applications we will file with the FDA.

And lastly --

And with other agencies.

You know I think, Rich, the whole globalization and the productivity we get from a global approach to generic R&D is really kicking in, and we are seeing an increase in submissions across the globe.

So, Bill, does that mean that the mix in terms of both spending and submissions is actually shifting a little bit more toward rest of the world?

I think it is getting less and less germane to ask that question, to be honest.

The U.S. obviously remains the driver of our generic R&D pipeline.

Right.

But what we are able to do is to leverage that into -- into Canada, into Europe, and now more and more into Latin America.

Okay.

And then Israel -- Israel's prepared remarks, he did not mention what the dollar value of the pipeline is now.

He did give us actual numbers of products pending approval at the FDA but not a dollar value.

Rich, in the U.S., it is $72 billion at brand sales.

That's 111 filings.

And of that we have 56 are paragraph 4s, 22 are, we believe, first-to-file representing $19 billion in brand sales.

Okay.

Thanks.

And just on oral Copaxone.

These Phase II -- the product going back into Phase II at a higher dose.

Can you give us some sense of the timing on when there might be even some top-line results?

I would say that if it all goes well, we should -- we should expect top-line result towards the end of this decade. 2009, 2010.

Okay.

Thanks.

Your next question comes from the line of Greg Gilbert with Merrill Lynch.

Thanks.

First, couple of U.S. questions.

Follow-up on Carboplatin, George.

Are there any structural impediments to gaining more market share than you have?

You know, APP is confident in their ability to gain share although they are not with you first.

I was wondering if there is any contractual or any other structural impediments to being more dominant in that market.

As follow-on to that, is there any chance we can get closure or more clarity at least on the Gabapentin stay before the hearing in December?

All right.

On Carbo, I am not sure I described a lot of structural impediments.

We do have some contracts.

It is not uncommon that there are right of first refusal components to contracts.

My sense is that share will not move easily.

I appreciate APP's confidence, and that's -- that's fine.

We will obviously see how the marketplace unfolds, but we feel like we are very well-positioned.

We've got a good sales force.

We've got good product and I think very, very strong trade relationships.

So I am feeling really good of where we are in Carbo.

Will you stick with the Bristol product beyond October?

I will not give complete clarity on -- on the supply chain issues.

Okay.

But I think in the short term, we will assume that is the BMS product.

Okay.

As it relates to Gabapentin, when you say closure, tell me what -- a little more specifically what you are asking, Greg?

Can you tell us what the milestones are between now and figuring out what the deal is?

I have only heard about a December hearing at the appeals court level.

Any other pertinent dates or expedited potential?

Right.

Some of this, of course, is in Alpharma's hands.

And we know that they are looking at all possible remedies and may seek relief of the stay, which I think is something we ought to expect, at least that attempt.

Whether or not we will be able to achieve relief from this stay is not clear.

I don't know if there are any particular milestones other than that legal remedy or attempt at that legal remedy.

The other date, as you mentioned, as of December -- a December date.

And then a bigger picture question on consolidation for Israel and the rest the team.

Curious as whether Teva would consider an acquisition in the U.S. even if the Company would not be enhancing its capabilities.

I guess in other words, would you do a deal where increasing market share and further in consolidation in the industry were the major push.

Just a question about your philosophy.

Our philosophy is we will do a deal that we -- that will enhance our capabilities, but we will also do a deal that will increase our market share if it makes sense economically, and we have done such deals in the past.

Thank you.

Your next question comes from the line of Robert Bonte-Friedheim with Smith Barney.

Hi, good afternoon, everyone.

A couple of quick questions.

First question, now your European growth was quite staggering both year on year and quarter on quarter even in Euros.

Can you give us a bit of a view of which markets, which drugs drove that?

Second question.

You said this before, Dan, but if you would just give us an update on the tax rate outlook for '04, '05, and '06.

You said this year would be high and comes back down in '05 and '06.

If you can just reaffirm that.

And the last question may be one for George.

Do you see any sign on the horizon for a competitor on Medoxy Progesterone.

Thanks.

Do you want to start?

Sure, I can start with Medroxy Progesterone.

We are not at this point, Robert, seeing any specific which is always of course a dangerous thing to say because we don't have clarity on this, but at this moment we do not see anything specific out there in terms of a competitor.

Regarding the tax rate, both in Q1 and Q2 of this year, we provided for 23% of tax.

Which this higher tax rate compared to last year reflects mainly the consolidation of Sicor.

Our tax rate is a -- is a blend of many tax regimes around the world, anywhere from zero tax to over 40% tax, and obviously the average blend -- the blended tax rate depends on -- on the brand of our business.

Everything being equal, what we see as a moving part and having an impact on decreasing taxes is our Copaxone in Israel, which, over time, will reduce -- will reduce some of the tax rate due to new tax concessions that we get on a new plan that we have been, after we have lost those concessions a year ago from the previous plan.

So everything being equal, the Copaxone should have an impact -- a downward impact, not gigantic but downward impact.

With regard to you, Rob, the main drivers were Hungary, United Kingdom, France, and some other countries.

Any drugs -- any drug launches in particular?

Because, I mean, you will -- I think quarter on quarter in Euros your sales in 1nd quarter up 20% on 1st quarter and that's kind of an unusual seasonality in the drug business?

Well, we've launched Gabapentin in Italy.

We have launched Gabapentin in Italy.

And we have a very good position with Gabapentin all over Europe.

I mentioned it in my opening comments.

Which is an important part in, important driver for this quarter.

Okay.

Thank you, and one last question if I may.

I promise the last one And that is on Agilect, is there any risk that the FDA might want to see additional clinical work from you folks before issuing the final approval?

We don't have any conditional requests for clinical trial, but we will be in a -- in a position to answer this question, not at the risk the FDA will require, but at the risk that we may decide to go into additional work if -- if our discussions on [ Inaudible ] will not satisfy us.

Thank you very much, Israel.

Your next question comes from the line of Corey Davis with JP Morgan.

I just want to go back to Gabapentin for a second.

Would you and Alpharma be willing to negotiate with Apitex, give them a cut of the deal in order to get them to drop the suit or does this make economic sense just to wait out the appellate decision, is that a possibility.

And does the possibility of a Ivax launch influence that decision?

Corey, I think we would probably not comment on that point.

All right, fair enough.

And maybe since nobody has asked about Copaxone impending competition, I will ask kind of a general question.

Do you think it would be reasonable to assume that Copaxone can continue to grow in the U.S. in 2005 or should we kind of consider a slow decline with the introduction of the new competition?

In the past, Corey, we have said this is a market that is relatively slow to change, and it is a market in which at least in Copaxone's terms is a relatively satisfied market.

And so we would not anticipate at this time any decline in Copaxone sales.

Of the 28% growth in quarter, how much was from price and how much was from volume?

We had a price increase of 8.5%, which went into effect at the beginning of the -- of the 2nd quarter.

I haven't done the exact math, Corey, but that is sort of the basis -- that price increase was effective for the quarter.

Still a healthy chunk of that growth coming from volume.

Oh, certainly.

I mean -- yeah, absolutely.

Record volume.

Great, thank you.

I think -- it is Dan.

I think we can be more aggressive on Copaxone than what Bill has said.

It is not that we don't not only anticipated the climb, we certainly anticipate a continuation of the growth of our Copaxone business, in spite the forthcoming Antegren.

The worst that can happen to us if the introduction is faster than everybody expects and they [audio interruption] of experience in the MS market, then our growth rate will slow somewhat, but we are not nearing low growth.

Okay.

Got it.

Thanks -- actually one more if I can sneak it in.

How much does the Oxycodone this quarter -- I am not quantifying it but a big number of Oxycodone that was stocking and should it be sequentially down next quarter?

I would say because of the nature of the product, stocking would be very limited.

Possibly a very diminimus effect, but I would say because this is so highly controlled the DEA is reluctant to ever let too much material to go into the pipeline so the stocking effect is somewhat diminished.

Good.

Thanks.

Your next question comes from the line of David Buch with Buckingham Research.

Yes, hi.

Good morning.

First question is for Dan.

Can you give us a reminder of how you are handling the contingent converts you have outstanding, not the ones you are calling but the other traunches in the EPS guidance and how should we look at the share count next year?

A question for Israel on pricing in Europe.

Can you give us some sense of what the pricing trends are in your major markets, you know, I know there has been some pricing concern about Germany where you are not as focused, but can you just give me some overview of pricing in Europe.

Thanks.

Regarding the contingent conversion, we have outstanding today three series of diventures.

One is going to be called -- was actually called last Friday, which is a $36o million and another one $450 million.

Both of them are already -- have already the full dilutive effect since last year as I mentioned since the contingent convergent price was already met last year.

So these two, the one which is called now, and the -- and the third which is outstanding, even if this -- if the change in the approach, the continued conversion will kick in which I am not at all sure and I am not sure if it will kick in on existing -- on existing series, but we are -- we are -- we are fully dilutive already with this year's.

The only series where we may have an effect is -- as I said if it comes in, also in existing sales is our last convert which is the $1.1 billion.

This will have an effect of less than 4% on our EPS.

Okay.

And is your expectation that that may be something in 2005?

Should we be modeling that for '05 modeling, additional share count?

I usually -- usually you don't model in things which didn't happen yet.

Okay.

This is an egg which was hardly laid.

Okay.

But, you know, we -- you should do that -- like with any other company where they -- they convert.

And on pricing in Europe, Israel?

In Europe, we don't see -- we haven't seen in the last quarter any increase in the price pressures.

There is a pressure on prices in Europe in the generic market.

It has increased maybe in Germany, but we are not -- as you know we have very small player there and also in Germany to increase -- I mean the price pressure started actually at the beginning of -- in the last -- in 2nd part of last year, and it is still there, and we are doing pretty well in some of the markets, in spite of the price pressures when we -- when we are able to -- to introduce to the market interesting portfolio.

We are doing very well in countries like the UK, Hungary, now in Italy and so on.

Okay.

If I can sneak in one question just on -- on Agilect and the sales force.

My understanding that Teva neuroscience was going to add 50 reps to prepare for that launch.

Has that happened yet or are those reps detailing Copaxone currently?

Yes, it did happen.

The end of last year, beginning of last year and they are detailing Copaxone.

As you can see, Copaxone is doing very well.

Sure.

Even if Agilect is delayed they still stay in force selling Copaxone.

Absolutely.

Terrific, thanks.

By the way, David, I think in terms of next year, if I am correct and Dan, wrong, -- correct me if I'm wrong, but for us to conclude that last convert, the price would have to get into the mid-40s which I guess everybody will be really happy with.

Sure.

The potential change in accounting I think is what is the concern.

But you are right, mid-40s I think would please a lot of people.

Okay.

Thank you. [ LAUGHTER ]

Mid-40s and more.

Your next question comes from the line of Henry Cobbe with Thames River Capital.

Good evening and thanks so much for taking the questions.

Coming back just to the fully diluted number of shares.

If you can just remind us of what the -- what the share price would be before we start including the 20, 24 series "A" and series "B," 30 million additional shares.

What share price would -- would trigger the inclusion of that inside the dilutive number of shares?

And the second question is just to confirm the 8% R&D spend.

Is that on a gross or net basis?

And the last question is just what the depreciation and amortization expense was for the 2nd quarter.

Thank you.

Can you repeat the question please?

You are difficult to hear here in Israel.

Okay.

The first question is at what share price would you include the 2024 converts inside the fully dilutive number of shares?

The second question is -- was 8% R&D is on a gross or net basis?

And the last question is the depreciation and amortization expense of the 2nd quarter.

I understood the first question.

Answer on that is in -- in the last series, we have two -- two trenches, and on one them it is about $45, and other one somewhere between, I think it is $48 or $49.

But I am sorry I still didn't get the second question.

I am sorry.

The R&D, the research expense, the 8% you gave, is that on a gross or net basis?

No, no, we -- we said we had this quarter 8% growth and 7% net, and we think that both numbers at a percentage of sales, both numbers are sustainable.

And they are in line with our strategic goals.

Yes.

And the last question is just on the depreciation and amortization expense for the 2nd quarter.

What was that number?

I think combined it is $50+ million.

Okay.

What is the amortization policy on the good will?

We -- amortizing over -- over different periods -- not the good will.

The product wise.

The good will is obviously not amortized since two years ago or three years ago.

I thought there was a good will arising on the Sicor acquisition?

Yeah, but the good will is not amortized according to U.S.

GAAP in the recent years.

Okay.

Only on product wise and most of this -- most of -- of the $20 million plus that we have in the amortization comes from that.

Okay.

Thanks very much indeed.

Thank you.

Your next question comes from the line of Tim Chang with Bligh Schroeder.

Hi, I just wanted to ask you if you can refresh my memory on the Welbutrin.

As I recall, you were paying a royalty to Andrex.

Where is that reflected in the P&L?

I think it is reflected in cost of goods.

Cost of sales.

Cost of sales.

And -- if I am correct, you -- you are no longer going to be paying that royalty to Andrex, is that right?

At the end of the 180 days, is that correct.

Will that help improve your margins potentially in the 3rd quarter at all or is it hard to say?

Certainly any eliminate nation of royalties is beneficial to us.

How do you guys look at that competitive market anyway?

I mean do you foresee this to be sort of a market where you are only going to have a couple of other players coming in?

Well, Tim, we would not expect a very crowded market.

There certainly is always the potential for a couple more players to enter.

Right now it is actually a fairly good product.

Pricing is holding up reasonably well.

There has been some conversion to the follow-on product that GSK launched although the launch of the generics and the 150 have slowed down that erosion of the SR.

So we have been doing very well on the 150.

Actually at about 50% market share.

And we were slower end of the market with 100 so we have a much smaller market share on the 100 milligram, but I would say it is a relatively -- relatively stable market now with the existing players.

As I said always the potential for more, but I would not expect an enormously crowded market.

Any chance that you could launch on a 200 milligram this year?

I would not comment on --

Okay.

And then one last question.

I noticed that the patent and trade-off has rejected the 2nd reissuance of the Lovinox patent.

Does that change your strategy in going after generic Lovinox at all?

All I can say is our strategy at this point is unchanged.

Okay.

Thanks.

We will take one more question.

Your next question comes from the line of Ken Kulju from Credit Suisse First Boston.

Yes, good morning.

Just two quick questions.

One at the strategic level you mentioned obviously the authorized generics and the consolidation opportunities that that eventually will afford.

Does Teva have an interest in building out also its branded pharmaceutical business, at least at the strategic level at the consolidation level, and then my last question just on oral contraceptives and your alliance with Andrex.

Can you give us an idea how many products you expect to have in the marketplace in '05?

Thank you very much.

George, why don't you start with the whole thing.

Yeah, Ken, it is a hard question to answer, and we certainly expect to have more products during '05.

I can't give you an exact number.

As you know right now we are still competing with a very, very thin line of two products, and I don't see at this point another one imminent, but do I expect during the course of 2005, you are talking about the next 18 months we expect to fill out that line a bit for sure.

And regarding entering into the branded generics.

This is not our strategy, and we -- the blended product that we develop and market are normally NCE, you know, innovative products.

And this is the answer.

Very good, thank you.

Ken, was that --.

Go ahead.

Ken, was that your question?

I understood the question --

In terms of the -- just from traditional branded pharmaceuticals in the context of Mylin and the King acquisition, would this be something that Teva would consider also in terms of looking more at the traditional branded pharmaceutical business as opposed to just the off patent ANDA driven generic business?

Not really because I think that our core business is generics.

We are doing very well in generics.

We are confident that we will continue to do very well in generics, and we don't have any relative advantage but just to, you know, to diversify to branded generics.

What is it there for us?

I think we are doing very well and will continue to do very well in generics.

This is our business.

Very good, thank you.

Before I turn over the call to Dorit, I just want to say that -- to quote one -- one of the analysts who was busy enough to put out a few hours ago a report on us and characterized this quarter as a "blowout quarter," and we expect to have the next two quarters the same -- the same blowout, and I think the last thing you should be worried about is the technical result of not changing our guidance, which is only three months old.

And with this I would like to turn it over to Dorit.

Thanks, Dan.

I am sorry, one small remark.

I was misquoted today in the media.

Obviously we don't reaffirm guidance in one form and change and address it again in a different way in another form.

I was just misquoted and I think in meantime it was even corrected in the media.

Sorry about that and please, Dorit.

Thanks, Dan.

This call has been taped and will available until August 10 at midnight eastern time and archived on our website.

For the replay please dial from the USA and Canada 1-800-642-1687.

For international callers, please dial 1-706-645-9291.

The best call to access the replay is 8804050.

For the webcast replay, please see our website at www.tevapharm.com and click the replay button.

Thank you very much for your time and patience.

This concludes today's conference call.

You may now disconnect.