Teva Pharmaceutical Industries Ltd (TEVA) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Bentley Pharmaceuticals first-quarter 2006 earnings conference call. At this time all participants have been placed on the listen-only mode, and the floor will be open for your questions following today's presentation. At this time I would like to turn the floor over to your host, Mr. Mike Price, CFO. Sir, you may begin.

Good morning, and welcome. This is Mike Price, Chief Financial Officer for Bentley Pharmaceuticals, and I am joined on the call today by John Sedor, our President. Before we begin I would like to remind you that today's call will contain forward-looking statements with respect to business conducted by Bentley Pharmaceuticals. By their nature forward-looking statements and forecasts involve risk and uncertainties because they relate to events and depend on circumstances that will occur in the future. There are a number factors that could cause actual results and developments to differ materially. For a discussion of those risks and uncertainties, please see the Company's annual reports on form 10-K for the year ended December 31, 2005. And with that I will turn the call over to John.

Thanks, Mike. Good morning, and welcome to today's conference call. For those of you who may not know Bentley, Bentley is a specialty pharmaceutical company with two distinct areas of business focus. First we have core specialty branded and generic pharmaceutical business centered in Europe. That business continues to generate strong revenues and has been growing year-over-year and has been outpacing the European market. In fact, as a testament to that continued growth, we have obtained 12 new product approvals in the first quarter. In addition, we have partnerships in place to pursue generic opportunities throughout geographic Europe as well as in the United States. Many of these drugs coming off patent in the next three to five years are blockbusters and the anticipation of the products coming off are significant. We see significant opportunities to continue the expansion of this business on a global basis.

Our second business and distinct business focuses on the commitment to the expansion of our drug delivery business, which currently includes a licensed product, Testim, that incorporates our proprietary CPE-215 drug delivery platform. We have a second application of our proprietary drug delivery platform, an intranasal insulin product now in clinical trials in yet. The intranasal insulin product is now a major focus of our R&D effort. We see this only as a significant stand-alone product opportunity but also we see that it validates our CPE-215 potential use as an platform for delivering other peptides and large molecules.

As a result we are investing the majority of our R&D dollars in this area throughout the balance of 2006 and for the near future. Other applications of CPE-215 and our nanotechnology programs are longer-term objectives for the business. Combined these two distinct businesses offer the potential and opportunity to return significant value to shareholders for both the near and long-term. This new strategy and commitment toward a higher level of return is reflected in our first-quarter financials. Our revenues were up once again a healthy 17% over this period a year ago. And up 24% when you adjust for currency fluctuations. Our generic business continues to see a larger portion of its revenues coming from outside of Spain.

You will see that our investment in R&D has more than doubled this quarter over the same period in 2005. This reflects our plan to advance our intranasal insulin product through the clinical stages in various parts of the world. These are dollars reinvested from the profits of our generic business and will have an effect on future earnings. The Company's management and the Board of Directors believe that the value to shareholders is best built by reemploying a portion of our organic revenue growth to support our focused R&D commitment in drug delivery.

We chose to do this rather than going too quickly to outside licensing or funding sources for the Company. This approach has been the subject of considerable thought internally since I joined the Company. It has also been a part of a comprehensive strategic review and planning process involving an outside consultant, which began early in the fourth quarter of 2005. Before we go into more specific details on the financials, I promised I would update you on this process so that you can better understand the context for our decision-making today and as we move forward.

Our goal in reviewing the business was to focus on the factors that could affect our business both in the near and long-term and how those factors aligned with approaches to increase shareholder value. In this process we evaluated the Company's current business model and came up with several strategic options that appear most likely to support our business objective and performance over time. As a first step in this process we made the strategic decision to develop and grow the specialty generic business and drug delivery business as separate unit, each having distinct needs and opportunities for short, mid and long-term benefits. We recognize that our assets represent two distinct businesses with fundamentally different drivers. On the specialty generic side we're focusing on expanding the generic business throughout Europe and into the United States, leveraging our core business through organic growth with a number of priority products.

It is our belief that a focus on this strategy will more quickly drive enhanced valuation. We believe this plan must be aggressive but also stepwise and completed with a consideration of a variety of global market, manufacturing and scientific factors. The number of steps that we will take to build returns in our generic business include: building upon the core generic business in geographic Europe and further expansions of business into the United States. Growing our high-value specialty generic business, leveraging our internal API, difficult to make formulations and the expansion of our niche high margin product. And finally expanding our novel generic drug development programs involving 505B2 applications as well as specialty pharma products in the United States.

As Bentley progresses into the U.S. generic market we will once again be prepared to define growth steps that will make the most sense. With our proven expertise in formulation, development and manufacturing efficiencies, the Company has already established a clearly differentiated, competitive and growing EU focused specialty generic business. While we are pleased with our pace of growth we are not satisfied with simply maintaining this status quo. We see significant opportunities to leverage this expertise as we make further plans to enter new markets. With numerous blockbusters coming off patent in the next three to five years we have continued opportunity to take a leadership position in the production and distribution of those difficult to make specialty generics throughout Europe.

We also see expansion opportunities that include advancements into the development of our proprietary drug delivery technologies to address the significant needs for improved deliveries of hormones and large molecules such as peptides and protein. We are nearing the end of our program to complete the U.S. scale up of clinical manufacturing supplies for Phase II and Phase III studies of intranasal insulin. We plan to complete all pharmacokinetic and pharmadynamic studies for supporting expanding clinical research.

We plan to conduct further Phase II clinical trials in India and parallel in the United States over the next 12 months. And we are preparing for Phase III trials. While the goal of our generic business is to continue top and bottom line growth by entering new markets, we need to balance the R&D expenditures as advancements of the higher margin drug delivery business evolves. We have made the decision to support our best opportunities in this business by investing profits from the generic business into R&D for our platform drug delivery technologies.

As stated in this morning's release, we have more than doubled our investment in the research and development of our drug delivery technologies in CPE-215 in particular. We believe that these investments will lay the foundation for significant long-term incremental increases in Bentley's growth. Beyond the successful application of the development of insulin, we have identified a series of additional product opportunities in what promises to be an expanding large molecule drug delivery effort. Overall we are excited about the direction of the Company, and we enter the second quarter 2006 in a very strong operational and financial position. We now have a portfolio of over 103 generic and branded generic products and a growing pipeline of 112 products and dosages pending approval in Europe. We have assets totaling $133 million with approximately $28 million in cash. We continue to leverage our core strengths on a broader geographic scale through license and supply agreements for distribution of our products ex-U.S., which has also been significant drivers of our revenue. With a clear strategy for both our businesses, Bentley is positioned extremely well for continued mid and long-term growth. Thank you, and Mike, would you like to do the financials now?

Thanks, John. Our revenues in the first quarter of 2006 increased 17% to $28.3 million from $24.2 million in the year ago period. At constant currency rates our revenues would have totaled about $30 million, representing growth of 24%. Our growth in the quarter was driven by strong net product sales to licensees and increasing sales of our top-selling products, Omeprazole and Simvastatin. Our sales outside of Spain have increased to 31% of total revenues in the first quarter of 2006 compared to only 19% in the first quarter of 2005. And our royalty revenues from sales of custom increased to about $1.6 million in the quarter an 87% increase over the prior year period.

Our gross margin on net product sales remained relatively consistent at 51% compared to the first quarter of 2005 and also represents an improvement over the fourth quarter. As alluded to by John, we've made significant investments in our research and development this quarter. Research and development expenses increased by about $1.6 million to $2.9 million in the quarter, primarily for the advancement of our intranasal insulin program. We are focused on the development of our proprietary technologies and plan to continue our investments throughout the year.

As the timing of our development activities are uncertain and dependent upon several different factors, our increased research and development efforts may impact certain quarters to a greater degree than others. However, our plan is to fund these research efforts with our earnings and our cash flow. It should also be noted that R&D expenses included a charge of about $140,000 for stock based compensation expense.

Our G&A expenses increased by about $1.5 million when compared to the comparable prior year quarter and represent about 16% of total revenues compared to 12% at this time last year. These additional costs include legal costs, strategic planning initiatives and the recording of stock based compensation expense for stock options issued to our employees. We recorded about $300,000 of non-cash compensation expense as a component of G&A in the first quarter of 2006.

I would like to take a minute to discuss the impact of currency fluctuations on our financial statements. Currency fluctuations decreased our first quarter revenues by about $1.7 million and also decreased our gross profits by about $900,000. It had the effect of decreasing operating expenses by about $420,000 and income taxes by about $150,000. As a result, it decreased our net income by about $325,000, which had the effect of reducing our diluted earnings per share by a little more than $0.01. While currency fluctuations have the effect of dampening our operating results, they have the effect of increasing our assets and liabilities on the balance sheet by about $1.1 million as the euro strengthened during the quarter when compared to December 31, 2005, and it continues to strengthen through the second quarter.

As we continued growing revenues and earnings and generate positive cash flows, it is no surprise that our balance sheet remains very strong. Our assets total $133 million at March 31st, and we have about $28 million in cash. We've seen an increase in our receivables due to our increased sales outside of Spain, which typically have negotiated payment terms which are longer than our domestic Spain sales. At the same time we have continued to increase inventory levels to meet expected demand for our products in the future.

We have deferred upfront payments totaling about $3.4 million from our licensees outside the U.S. These payments have been treated as deferred income on our balance sheet and will be amortized into income over time as we sell our products to these customers under those agreements. While significant in absolute terms we use deferred license revenues represent a very small portion of the revenue streams we expect to generate under those agreements from sales products to those customers.

In regards to guidance going forward, it is our expectation that revenue growth for the second quarter will be in line with the first quarter growth of this year. As you can see we are excited about the prospects for our future, and with that I would like to open up the call to questions.

(OPERATOR INSTRUCTIONS) [Mike Reard], [Samco Capital]

It sounds like you're making good progress on your insulin research. I just wonder there was a lot of talk in the past about the toenail and fingernail fungus and about the water-soluble acetaminophen. Could you give us a quick update on those, please?

First, again, we are excited about results we are seeing on our intranasal insulin, and that is why we as management and the Board have really decided to focus our efforts and resources in that area. We are not -- and that is where the main part of our investment is going. We still have our acetaminophen and our lacquer in our portfolio. It is an opportunity for us to license it to other companies. But right now we are staying to a very tight focus on our insulin products so we can expeditiously get it through Phase II and into Phase III.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) Mark Taylor, Roth Capital Partners.

Good morning, John. And Mike. I have a number of questions, and I guess my first -- I guess maybe I want to ask if I have time for eight or nine questions or if you prefer I ask them off-line.

No, Mark, why don't you go ahead and we will see how many we can get to.

I think we can do that but just so we don't consume other people's time on this.

I understand. Cut me off if you want. The first question would be on the approvals you received 12. Sounds great. Where they launched in Q1, or did you get a price approval and now waiting for pricing?

We are waiting for pricing, Mark.

Thank you. Second question now Spain, we were a little concerned in Q4 because it looked like Spain had really been declining, and this is outside of export. But it looks up strongly this quarter, which is great. My question is can that growth continue, Spain alone?

Mark, I think it can. As a matter-of-fact I don't know if you heard, but I gave some guidance at the end indicating that I think our growth during the second quarter is going to be similar to the growth rate that you saw in the first quarter. We do think that the prospects for growth are good, both in Spain and to our export customers outside of Spain.

Okay, great. Next question, I noticed that your partner went ahead and rolled that deferral through the P&L on Testim, and you didn't elect to take that yet. Can we expect that next quarter because it is there?

I noticed that they did that, Mark, and you're referring to the fact that Aecidium changed their revenue recognition methodology when they reported results this quarter. We did see that. We have not had a chance to look at the data, but we plan to do that this quarter. We want to make sure that we analyze it and assuming that it supports a change in methodology, we would do that most likely in the second quarter. And I think that we would pick up the revenue at that time.

We are going to go ahead and model that, then, because it was $1.2 million to them.

I think that's reasonable.

Next question on this Testim patent, any idea when that new one will issue in the U.S.? We noticed that it issued in Canada, so we are hopeful that you will see that soon here. Any color there?

No, Mark, you know how patents are. We are expecting it to be approved anytime, but you know patents are. It's like waiting for grass to grow. But we expect it to come; we have no indication when it's going to come.

Hopefully before '08 when the other one expires. And then Perrigo agreement I noticed in the 10-K that was one product. Is it one or is it more than one?

Mark, that started out as a multiproduct agreement. We have fenced that with Perrigo and negotiated one product out of that agreement. It is still a flexible agreement and other products can be added but for today it is a one product agreement.

Okay, thank you. Next question really nice gross margin pick up to 51%. Can we expect that to continue?

Margins are always dependent upon the mix of products we have, and I can tell you that one of the things that benefited the margins this period were nice, strong export sales. And I think to the extent that we continue to do that, I think you can expect us to see continued strong margins.

Okay, because Jim indicated to me that the export was higher margin than domestic. Is that the case?

I can tell you that they are relatively comparable, and some are higher and some are lower. It depends on the specific product.

Okay another question on the legal, what does that refer to?

If you go look at the legal proceeding section of the 10-K you will see disclosures related to litigation that was brought by [Edapharm] both in Spain and in the U.S. and while we feel very confident in our position and feel like we are going to prevail in litigation we have to make sure we cover all of our bases and protect ourselves and we are happy to spend a lot of legal dollars to do that.

Right, is that in discovery stage or can we expect a trial?

It is proceeding toward trial. We are in the discovery phase.

All right. Thank you. And then on the -- okay, so G&A, right, can you give me the tax effect of this compensation -- this SFAS 123? We kind of see it as $0.02, but then again we are not sure if part of that is taxed over in Spain and part of that goes tax-free here. Can you give any color on that?

I think in round numbers it is $0.02, Mark. I think that most of it is resident here in the U.S. where we have no tax benefits of the losses that we have. So I think if you wanted to model it out you would be safe assuming that there is no tax impact on that and it's primarily U.S. related.

So you made our number. It is just the $0.02 would have caused you to be down a little bit, which is non cash.

Yes.

And then I noticed cash was down from 34 7 down to 28 and fixed assets up, so we assume you're spending that $10 million on CapEx?

We spent about between 3 and $4 million on CapEx during the period. There were also some tax payments made during the period as well related to option exercises. And we generated about $1.6 million in operating cash flow during the period.

Thank you excellent, and then on the R&D spend to John, I mean this is great that you are reinvesting. Any idea how we should look at that R&D line going forward? I mean are we going to see that continue to grow? Can you give us some percent of revenues or something like that?

I'll tell you where (indiscernible) Mark. We are pushing this through as efficiently as we can, depending on what the -- how the FDA deals with the issues and all that. But to answer your question I would expect you would see probably about the same rate of spend going forward for the year, nothing exceptional above it, but I would tell you that we'd probably have about the same spend.

Two more, and again thanks so much for giving me this time. Almost last, but on the export line, can you break that down? Are we seeing a lot of Lansoprazole there, or what is happening?

I can tell you that the same drivers that you see in Spain are really driving the growth outside of Spain, and that's Omeprazole, Simvastatin, those are probably the two primary ones, but it also does include Lansoprazole.

Okay, and is there a catalyst to that line out there like new approvals in France or somewhere that is sizable, that we can kind of key on or would you prefer not to comment?

I would like to stay away from that one if I could, Mark.

Understand. And then just last kind of a philosophical question I mean this is really a pretty good quarter. It is excellent. I think this is great what you're doing too reinvesting in the delivery. But sort of philosophically have you given thought to spending or truly making the businesses separate? It seems to me that if you spinout your drug delivery then you will get biotech analysts and probably be able to raise capital without burdening the Spanish business. And on the contrary if you spinout the Spanish business you will have pharmaceutical analysts in Europe following you and maybe that will provide better transparency altogether. And maybe better shareholder value. Is that something down the road you would consider?

Let me tell you where we are at, Mark. First of all, we are extremely pleased with our first quarter. I mean it was a strong quarter for us. It was going right in the direction that we anticipated. Right now we are pleased with the model. We are pleased with the model as it stands right now because it does allow us to continue to have exceptional growth in the generic business and affords us the opportunity to invest in our drug delivery. Where we are taking drug delivery to some really critical points in the near future. So right now our model as we see it today -- is we are pleased with, and we don't see -- we haven't made any moves to separate or do anything forward.

And Mark I would like to add that John alluded to the fact that we went through the strategic planning project and we had a consulting firm in here, and I have to tell you it was a fun project and its not completed yet, but it has been a fun project because we've really done as John says a deep dive. And it's been fun to analyze the businesses and really drill down. And the one thing that we did recognize is that we have to recognize and represent we have two separate businesses that are very distinct and they have drivers that are very different. And I think that we're doing a good job of recognizing that, and we want to make sure that we're very transparent about that with the shareholders going forward.

And Mark you're pretty insightful in your observation is that clearly we have an extremely successful generic business that is outpacing the market, and it has the real opportunity of entrance into new markets including United States. And we have an exciting late stage; we are in development of our drug delivery not early stage development, which is in itself very exciting. So the observation is that we've got to clearly -- and that's what I try to do in my opening remarks -- is to clearly have our investors understand that we have two distinct businesses and for the investor right now the strong growth and performance of the generic company is really allowing us to really enjoy moving forward in the higher margin, higher potential drug delivery business. So and if at some point in time do we take a look at what does that mean long-term, clearly we will the Board and the management here will take all those things into consideration.

Thanks for your time; congratulations on the quarter.

David Taylor, [David C. Taylor]

Thank you. I missed part of the presentation. I was cut off, but could you comment on the tax rate that you accrued in the quarter?

I'd like to comment.

David, can you hear us because you're breaking up.

I'm on a cell phone. Sorry, the landline just die on me in the middle of the call.

Well hopefully you can hear my response. I would like to comment on the tax rate. The effective tax rate on a consolidated basis, as you can see is about 67%, and that is because it is driven by high profits in Spain, but also the higher level of investment here in the United States. Consequently the tax rate on our European earnings was 35%, but we did not get the benefit of the losses here in the U.S. because we are not able to demonstrate that we can be profitable with beyond the shadow of a doubt on a go forward basis.

Going forward for the rest do you expect the tax rate to be up approximately at this level?

You know, it is really hard to predict exactly what the rate is going to but I can tell you it is probably going to be higher than that statutory rate of 35% because again, we're going to see the continued investment in research and development in Q's 2, 3 and 4, and as a result you are going to see higher losses in the U.S. without that tax benefit. So I think it will be higher than it has historically been. I'm not sure that it will be as high as the rate you see in the first quarter, which is 67%.

Thank you.

Patrick Kirksey, Trusco Capital Management.

Good morning, gentlemen. Thanks for taking my call. Just in terms of looking at the non Spain revenues, it was down quarter to quarter from $9.6 million to $8.8 million, and that is just a small reversal in the rising trend that you had seen over the prior several quarters. Was this kind of a quarter to quarter seasonality thing and do you think that quarter on quarter growth in non Spain revenues will resume from here? Can you provide some color there?

I think if you take a look at our revenues that are generated outside of Spain, including our royalty revenues here in the U.S. you will see that they increased to 31% of total revenues compared to 19%. However, if you carve out the U.S. revenues from that and just take a look at ex-Spain revenues and discount the impact of foreign currency fluctuations I think you will see the revenues actually increased in this quarter compared to the same quarter of a year ago. And we expect to see that continue to increase.

I'm just referring to the quarter on quarter, so you are saying that between 4Q and 1Q if you were to take out the currency impact the revenues would have gone up?

You know, I don't have a chart that lays out Q4 to Q1. I'd have to go back and take a look at that. I would be happy to discuss that with you after I take a look but we really compare our business to the same quarter of a year ago.

I understand.

There's a lot of seasonality that comes into play. For example the cough, cold and flue season was very mild and our sales of Codeisan, our biggest selling cough, cold and flu product actually declined in the first quarter by 38% compared to the first quarter of a year ago. So it is very difficult to make comparisons between the fourth quarter and the first quarter.

Well, I guess my next question was similar that the Spain revenues on a quarter on quarter basis saw a nice recovery after kind of going down for most of last year and that Spain revenues on a year-over-year basis were only down 1% compared to the down 6% last quarter. You think Spain has turned a corner now?

I think so. I think you're going to see good, strong growth on a go forward basis both in Spain and outside of Spain.

You know, in the United States there was flu season was nonexistent, and in Europe it was the same thing. And so if you take a look at Spain and its growth in the first quarter and as Mike said, the one product represents roughly $500,000, and I think the total flu just not going down to the nits and nats of it was close to $700,000. So to answer your question we see Spain being very healthy and continuing to grow.

Just one other quick question. I know that you have said that the margins on the revenues outside of Spain are greater than the inside of Spain revenues. But on a quarter to quarter basis your mix actually kind of shifted this quarter where last quarter Spain revenues made up 62% of your revenues. This quarter they were 69%. Last quarter non-Spain revenues were 38% of revenues, and this quarter they were 31,% yet you guys were still able to achieve a quarter on quarter gross margin improvement. So I am just curious as to maybe what is helping to drive that. Are you seeing better cost efficiencies in Spain or a positive mix shift in the Spain revenues?

It was a product mix issue. I can tell you that sales of some of our products for example, Simvastatin have higher margins than Omeprazole, for example. And it depends on the product mix that gets shifted that quarter but we were very pleased with the product mix and the margins for the quarter.

Great. Thanks, gentlemen. Good quarter.

[Jim Kerrigan], Luther King Capital.

I have a series of 37 questions, so just -- no, just one actually, I will make it easy on you. Let's get some more color on the insulin program specifically where you stand in India, what the process and timing is going to be in the U.S. and when we might see some data.

To give you some background, as I mentioned in my opening remarks that we've completed the PK, pharmacokinetics and pharmadynamics in India. We have applied the -- our partner who is extremely excited about this, Biocon, who is like the third or fifth largest manufacturer of insulin really sees the value in this and driving it forward. The timing is they now have to get the protocols approved to move forward on the Phase II; the only timing that I really can give you without trying to predict how any of these global governments are going to work, is we'll see this happening in the second quarter or third quarter of this year some time.

Okay, and then in the U.S. one more time because I know you mentioned that.

And the same thing. The U.S. is fine, we are working with, we've had meetings if you followed it, Jim, we've had meetings already with the FDA. They have given us some directions on it. We are same time frame we're waiting to move forward getting this information into them and then we will be going into Phase II's.

Thank you.

And Jim it is not that I am being -- trying to not give you information on it. It is just hard to predict what the regulatory agencies are going to ask for. You get there, and then they want another study or something done, but everything right now seems to be all in line. As I mentioned in my opening remarks, all the preparation for the clinical supplies are completed. So now we are just ready to get the approval to move forward.

Okay, great. Thank you.

[Manny Reissner], Wachovia Securities.

My question has already been answered. Thank you.

Thank you. There appear to be no further questions at this time. I will turn it the floor back over to you for any further closing remarks.

I just want to close and thank everyone for participating on it because we had a great quarter. We're excited about the company. We see that we have two distinct businesses, and we are using the successful growth of our generic business to allow us to invest in the drug delivery business, which in best interest for all shareholders will deliver higher value to them. So we are just excited about it, and as Mike has given you some guidance on the second quarter, we're very positive toward the future of the company. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.