Teva Pharmaceutical Industries Ltd (TEVA) 2006 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Teva Pharmaceuticals Industries Limited second quarter 2006 earnings results conference call.

At this time all participants are in a listen-only mode.

A question-and-answer session will follow the formal presentation. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Kevin Mannix, North American Director of Investor Relations of Teva Pharmaceutical Industries.

Thank you.

You may begin, Mr. Mannix.

Thanks a lot, Dan.

Good morning and good afternoon, everyone.

Welcome to Teva's second quarter 2006 earnings conference call.

We hope you've all had a chance to review our press release which we issued earlier this morning.

A copy of the press release is available on our Web site at www.tevapharm.com.

Additionally, we are conducting a live webcast of this call which is also available on our Web site.

Today we are joined by Israel Makov, President and CEO, Dan Suesskind, Chief Financial Officer, George Barrett, President and CEO of Teva North America, Bill Marth, President and CEO of Teva USA and Moshe Manor, Vice President, Global Innovative Resources.

Israel, George and Dan will begin by providing an overview of our results.

We will then open up the call for a question-and-answer period.

I'd also like to remind all of you that we will host a special quarterly luncheon tomorrow in New York.

For those of you who haven't received our invitation or have not RSVP'd yet, please call us at 215-591-8726 and if you're unable to join us we are conducting a live webcast of the event which will also be available on our Web site.

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

I would now like to turn the call over to Israel Makov, our President and CEO.

Israel?

Thank you, Kevin, and thank you all for joining us today as we announce Teva's results for the second quarter of 2006.

From every possible angle and thanks to contributions from all our business units, Q2 '06 was Teva's best quarter ever, one we trickled for natural results, major strategic accomplishments and tremendous operations and achievements.

For the first time in our history, we closed the $2 billion mark in quarterly sales to reach $2.172 billion.

This marks a milestone for Teva.

This quarter also gave us an opportunity to drive significant benefits in our bottom line, as our adjusted net income for the quarter exceeded half a billion dollars to reach $541 million, another first for Teva.

And we broke records in all our profit margins with an adjusted gross profit margin of 55%, adjusted operating profit margin of 33% and adjusted net income margin of 25%.

Given such numbers, it will come as no surprise to hear that we achieved record breaking quarterly sales in all our geographies: North America, Europe, and international.

Of course, the highlight of the quarter was our unprecedented launch of Simvastatin, the generic version of Zocor.

This was the largest product launch in the history of the generics industry, both in volume and in dollar terms.

The tremendous success of this launch demonstrated [inaudible] capabilities that Teva has developed over many years, beginning with the swift integration of the product from Ivax into Teva, the legal strategies we employed to insure our exclusivity, to the preparations we made in a very short timeframe for what would become the largest ever generic launch, satisfying our customers huge demand for the product on the very first day of its launch.

You can imagine what kind of logistical operation this entailed, as several thousand truckloads of product rolled out of our premesis directed to our customers within the first 24-hours of launch.

Generic penetration in the Simvastatin market is the fastest we have ever experienced, already exceeding 72% and Teva is demonstrating its leadership in the marketplace once again as our Simvastatin has captured over 70% of the generic market for the strengths we offer and unprecedented achievement.

In addition to the enormous launch of Simvastatin, we had very successful launches in the U.S. of Pravastatin, [Penestoride] and a few other smaller products during the quarter.

This is probably the time to mention that Teva's leadership in the U.S. generics grew by 8.9 million prescriptions and 14.9 million prescriptions, total prescriptions in the second quarter.

That is about three times the rate of growth of the number two company.

These figures suggest that we are not only maintaining but in fact strengthening our leadership position in U.S. generic.

In terms of our entire business, both branded and generics, we remain the pharmaceutical industry's leader ahead of our closest competitor by [18] million total prescriptions on an annual basis.

Parallel to the launches in U.S, we had 38 additional launches spread across nine different markets in Europe.

These are relatively small products but every single product launch requires a great deal of operation and attention and resources and therefore, more than three dozen successful launches in one quarter is an operational feat we can be proud of.

Despite operational challenges created by so many launches in so many geographies, we were determined to insure that nothing would slow the process of consolidation, of consolidating Ivax's supply chain into Teva's, and in fact, we proceeded right and quick with hardly any overlapping products remaining on our entire manufacturing network by the end of June.

By transferring products to other sites we have been able to increase efficiency and reduce complexity in our global supply chain.

In all we have so far transferred 160 products from one site to another in North America, Europe and Israel.

We have done all of this, despite the fact that our new state-of-the-art plant in Jerusalem, which we had expected would be fully operational earlier this year, is still idle, awaiting FDA inspection.

The bottom line is that with the acquisition of Ivax we have created a supply chain of efficiency, scale, and geographical spread unprecedented in our industry.

Our ability to rationalize and integrate such a complex system at the speed at which we are doing it is, I believe, another trademark of Teva.

We had a record breaking quarter in Europe as well, achieving record sales and adding a cluster of five small countries to our European market since Q2 '05.

In the U.K., our second largest generic business, we increased our market share notwithstanding continued price erosion [inaudible] now double dose of our nearest competitor.

Our combined sales in what we call our international business, those geographies outside North America and Western Europe, were extremely strong in the second quarter reaching $296 million, up 149%.

Ivax, of course, was the major contributor to the sales growth.

As we saw in Q1 as well, our international business is playing an increasing role accounting for 15% of our total pharmaceutical sales.

Important for us strategically as it provides more geographical balance to our business model and constitutes a significant additional growth engine for Teva.

It was also a good quarter for API, Teva's active pharmaceutical ingredients.

In Q2 we achieved the highest level of vertical integration in our history supporting all of our major new product launches.

API is another major source of synergies in our integration Ivax.

Our excellent execution of the integration once again demonstrated our unique M&A capabilities.

I told you previously that we expected the Ivax acquisition to become accretive during the first year and I am delighted to tell you today that Ivax has already become accretive and is expected to be accretive for the whole year and thereafter.

Turning to our branded business, Copaxone continued to expand its leadership with the global end market sales totaling $353 million, a 22% rise over Q2 '05.

Sales in the U.S. the largest [inaudible] market increased by 19% and outside the U.S. rose by 26%.

Indeed, Copaxone was the only product which significantly outpaced the market's growth.

And once again, last quarter, several important scientific studies provided further evidence of Copaxone's long-term efficacy and safety.

Furthermore, two studies reported on patients who did not benefit or from low or high dose [inaudible] who, after switching to Copaxone experienced significant additional reduction in relapses and were clinically stable.

In addition, Teva recently presented results from a study which hoped that patients taking a new generation, higher dose of 40-milligram [inaudible] that the active ingredient of Copaxone had a greater reduction in [MRI] disease activity, accompanied by a greater reduction in relapse rate.

A large global Phase III study to confirm these results has just been initiated.

We are extremely excited about the recent U.S. launch of Azilcet, our treatment for Parkinson's disease and the second product to come out of our proprietary pipeline.

We believe that the quality and quantity of clinical data [inaudible] that Azilcet is indicated for both LD treatment as well as [inaudible] therapy in advanced stage Parkinson's.

Combined with once daily dosing provides us with unique competitive advantage in the marketplace.

Parkinson's is a challenging disease and we are directing our efforts to address the needs of Parkinson patients.

You may recall that we have initiated a Phase III clinical trial which studies the drug's potential effect on the disease progression.

We will elaborate on this as well as on the rest of our innovative pipeline at our innovative R&D day in New York in September.

With Ivax acquisition, Teva has entered the exciting area of respiratory products.

In the U.S. we have grown our share of Qvar and expanded our Albuterol HFA franchise.

We repositioned the product as ProAir in anticipation of our launch of the breath actuated product.

In June we submitted the package to the FDA which we believe answers outstanding questions for the ProAir breath actuated [inaudible] inhalers and we are hopeful for a launch in 2007.

Our respiratory business in Europe is robust and growing, particularly in the U.K.

We are working to bring our products and technologies into new markets and are enthusiastic about our upcoming launches of breath activated [inaudible] in Germany and France and breath activated [Salbutobul EasyBreath] in Germany.

And now, I would like to share with you our sales of the trajectory of our business from now to the end of the decade.

As you know, our considerable annual growth rate in recent years has brought us to a point where we are at today, announcing our first ever quarter with over $2 billion in sales and $500 million in net income.

This is an achievement we are very proud of and one which reminds us just what the large company we are now.

Even at this new much larger size though, we remain quite positive about the prospects for our continued growth.

Let me elaborate.

Our core business has been and will continue to be generics.

In line with other analysts, we expect the global generic market to grow in excess of 10% per annum and [inaudible].

This growth will be driven by two major and powerful factors: Demographics, that is the aging population and the burden of the ever rising healthcare bill which will continue to increase the demand for generics around the world.

We believe that the power of these drivers will only increase over time and we expect Teva is the industry leader to significantly outpace the global generics market growth.

Indeed, Teva is ideally equipped to do so.

We have the broadest product line and the deepest pipeline as well as the best global network of R&D to continually fuel this pipeline.

We have the largest and the most efficient global supply chain which includes a level of vertical integration unmatched in our industry.

We are able to leverage our geographical coverage, our scientific know-how and our savvy in creating and defending intellectual property.

Needless to say, we also plan to use these capabilities for further geographical expansion.

Furthermore, we believe that the industry is experiencing a period of consolidation, a process we expect will accelerate over the foreseeable future, and Teva is leading this process.

We have proven over the years our ability to generate significant synergies and value from our M&A activities, something we are demonstrated once again with Ivax, and as the industry consolidation progresses over the next few years, we intend to continue to be an active participant with contributions from acquisitions complimenting our [inaudible].

It's worth keeping in mind that in acquiring Ivax we acquired some crucial additional growth engines, both in terms of geography and product line.

We acquired a strong business in Latin America.

This is currently a $500 million business which we expect to grow into a billion dollar business within the next four years.

We also acquired an excellent respiratory line which is now a $400 million business, which we expect to grow gradually into a $1 billion business by the end of this decade.

Combining all these elements together with our innovative business, we expect Teva to continue to form a solid growth trajectory with an annual compounded growth rate in the mid-teens.

2006 is shaping to be an exceptional year, one that will serve as a springboard for our world.

I am pleased to inform you that we expect the full year 2006 sales to be around $8.5 billion with adjusted earnings per share to range between $2.15 to $2.25 per diluted share.

This is compared with our previous estimate of adjusted earnings per share of $1.82 to $1.90 plus additional 20 to $0.25 for the exclusivity of Simva per diluted share.

2007 and 2008 will be solid years with all the growth engines I've spoken about including our pipeline in the U.S. serving as significant drivers of growth.

We have said that in the U.S. we expect to launch between 70 and 80 products over that period.

The distribution of these product over the two years is not yet completely clear, but our current analogy suggests that the most significant value will be generated in 2008.

This is still a fluid situation and it would therefore be premature for us to provide specific guidance at this time for 2007.

With that said, in 2007, we plan to surpass our global 2006 sales despite an expected decline in our U.S. generic sales as a result of the loss of exclusivity on the huge products launched this quarter.

We expect to compensate for this with our U.S. pipeline, together with the increases in our other parts of our business.

In other words, we will once again demonstrate the strengths of our balanced business model.

I am very confident that Teva's core strengths, our global reach and diversity, intellectual property and unrivaled breadth of our generic portfolio, along with our specialty pharma, R&D pipeline and global supply chain give us a truly unique position from which we will continue to take a leading share of the growing market.

And all of this makes me look forward with tremendous enthusiasm and anticipation to a very bright future for Teva.

Thank you.

I will now ask George to brief you on the U.S. market.

Thanks, Israel.

This was an extraordinary quarter for our U.S. generic business in many ways.

This was the first full quarter with Ivax commercially integrated into Teva USA running as one business under Bill Marth's leadership.

We saw a continued increase in prescription demand for our products, and it was a quarter which saw the introduction of some key new products culminating with the fantastic launch of Simvastatin in the last days of the quarter.

The Teva USA organization and the entire global support system from our API through manufacturing helped us accomplish a successful launch, the largest in our history and, frankly, in the industry at large.

All of this was accomplished in the face of some meaningful challenges.

Israel mentioned our commitment to keeping our facility rationalization program on track and the challenge of doing so while launching some of the largest products in our history, all without having our new Jerusalem plant available to us.

To add to the challenge, we also had to compensate for a significant reduction in supply from the Cidra Puerto Rico facility acquired as part of the Ivax transaction.

Due to longstanding issues at this plant we concluded that we needed to significantly reduce complexity at the facility and to minimize any dependence we had on this site.

We've already moved over 20 products from Cidra to other manufacturing sites in the Teva network.

In addition, we made the decision to temporarily discontinue several older products in order to alleviate pressure from the supply chain.

We felt that this was a small price to pay in order to maximize the potential of our new launches and the planned launch for generic Zoloft, which will occur this quarter.

The success of the U.S. launches was particularly important as we had to absorb price declines on some relatively newer key products including Fexofenadine, [Azrythomycine]and [Propophol], which reached a more competitive stage of their life cycle.

I would like to take the next few minutes to make some comments relative to our U.S. generic business, specifically the demand side, the pricing environment, the behavior of branded companies and finally to describe some of the tools we use in competing and leading in this environment.

As Israel highlighted, the demand for generics is growing.

The underlying reasons for this growth are well understood.

Demographic changes, consumers increasingly participating in healthcare spending decisions, and most recently in the U.S, the inclusion of previously uninsured or underinsured patients into the system.

Let me focus just briefly on the last issue.

Early indications suggest that Medicare Part D is having an impact on the demand side.

IMS data shows that overall pharmaceutical volume has already increased by 2 to 3% coming from patients now receiving drugs under Part D. It is logical that the impact on generic demand is more profound.

When we eliminate our new products from the equation, we still see an 11% increase in Teva's total RX's year-over-year on a rolling 12-month basis.

I should add that when we add new products it's over 17%.

Some of this growth must be fueled by Medicare Part D.

As it relates to pricing, in recent weeks you have heard executives from different companies give differing views on pricing, and there's good reason for this.

Each company experiences price erosion differently, largely because price is so sensitive to the portfolio composition.

For example, a company dependent on a few products will feel significant price pressure when one or two products experiences competition.

Conversely, the company whose portfolio is heavily biased towards older, more mature products, may feel a slower rate of base erosion.

Teva has a rather unique mix.

We do indeed have hundreds of products which are mature and have already experienced their heaviest price erosion, however, we have also launched over 50 products over the past two years.

These products are becoming part of our base and because they are at a more volatile stage as it relates to price naturally contribute more to the rate of erosion.

Let me give you some specifics for Teva's line.

Our rate of price erosion, eliminating the more recent launches which experience a more step function change, has been in the high single-digit, low double-digit range.

This number has been consistent over the past 18 months.

As I have mentioned on recent earnings calls, this rate is higher than for the prior two year period when erosion was more in the mid single-digit range.

With regard to new products, the number and makeup of the competitor group and to some extent as with Simvastatin, the size of the opportunity can impact price.

Many of you have asked whether the low price of generic Mobic, or less recently on generic Celexa, signals an eroding environment.

I would point to the generic launches of [Capitril] in 1996 and [Nalopril] in 2000 and [Lysenipril] in 2002 to highlight the fact that products with known and clear patent dates, low entry barriers and multiple approvals on day one have historically sold at discounts which can approach at 95% of brand price.

This is not a new phenomenon.

Let me underscore that despite the competitive prices on these products, Teva's cost structure allows us to make decent margins on these products.

Let me be clear.

We do operate in a highly competitive environment and while we are not modeling an improvement in pricing over the near-term, we are not seeing a further deterioration of prices for our portfolio.

Finally, as it relates to innovative behavior, there's no doubt that the stakes have becoming increasingly high for innovators facing the loss of patent protection.

It is clear that originators will complete fiercely using a broad arsenal to prevent the loss of income associated with the generic launch against their brand.

Although the program between United Healthcare and Merck, which received so much attention, could be seen in this context, it appears to have negligible impact on the success of our Simvastatin launch.

The excellent generic penetration combined with our conversation with managed care executives has reinforced our view that payors through the promotion of generics as central to their efforts to reduce pharmaceutical costs for them and for their customers.

Having said this, we should continue to expect that brand companies will try new and creative ways to delay generic launches and to minimize the impact from generic introduction.

Although we cannot anticipate each of these, we devote enormous time to assessing potential moves and we have strategically built the tools to best insure our continued leadership.

I'd like to close by highlighting some of these tools.

One, the size and breadth of our new product development program gives us not only a chance to participate in a larger number of launches but also allows us to mitigate the risk associated with any one compound.

We have invested in our basic science and in our legal capabilities to help us develop and defend non-infringement products.

We have increased our global reach to reduce the risk of operating in one legal and regulatory environment.

We have invested in technology so that the next generation products are within our technological universe.

We have increased our patent portfolio, particularly in the active pharmaceutical ingredient side to give us the greatest protection against IP risk.

We've increased our commitment to vertical integration to reduce costs and eliminate upstream sources of risk.

We've continued to focus on our global supply chain efficiency and quality in order to insure that we can sustain high levels of reliability, service, quality and profitability in a complex environment.

We have used acquisitions such as Ivax to reinforce each of these strengths.

I hope this gives you some insights into the environment in which we find ourselves and how we position ourselves to compete.

Now I'll turn it back to Dan.

Thank you very much, George, and good day to all of our friends around the world.

I hope you have had the chance to review the excellent figures we released this morning.

If you have, I believe you found that they are significantly better than most of us expected.

This quarter we have recorded acquisition and other related charges amounting to $65 million pretax and $53 million after-tax.

After deducting these expenses, net income amounted to $488 million and fully diluted earnings per share to $0.59.

I will refer in the following analysis only to the adjusted figures as we believe that the adjusted results provide better indication of Teva's operations and plans.

Excluding these [inaudible] charges, our adjusted net income reached $541 million representing 25% of sales with EPS of $0.66.

Let me give you a synopsis of our figures.

As compared to Q2 of last year, sales are up 77%.

Net income is up 124%, and EPS is up 83%.

For the first time, we exceeded quarterly sales of $2 billion, gross profit of $1 billion, and net income of half a billion dollars.

The [ones-off] included $31 million of inventory step-up which was left over from Q1 of '06 where we recorded another $64 million of step-up in inventory resulting from the Ivax acquisition.

Please note the reconciliation of the reported GAAP net income and EPS to these adjusted numbers in Appendix One of our press release which is available on our Web site.

And with that, I will take you through the adjusted results line-by-line beginning with sales.

As I've mentioned, sales reached $2.275 billion, an increase of $945 million year-over-year with a negligible currency effect.

The most significant impact on global sales in Q2 was made by our major product launches in the U.S, a quarter which succeeded what we sometimes refer to around here as the five quarters of 2005 where we are no significant launches.

These major launches impacted our breakdown of global sales by substantially increasing the U.S. component but we also had significant increases to our European sales and a dramatic increase in our international sales which more than doubled quarter-over-quarter mainly as a result of adding new markets or expanding sales in existing markets in Latin America, Central and Eastern Europe, primarily from Ivax.

Total international sales, which include Israel, amounted in the quarter to $301 million increasing its share in global sales to 14%.

Europe sales while growing 38%, contributed only 24% to the global sales of our North America where [inaudible] global sales increased to 62% in the reported quarter.

The major launches in the U.S. not only impacted our breakdown of global sales but also had the major effect on the concern that [is] margin because they both increased the rate of the U.S. with significantly higher margins and reduced Europe's rate in its traditional lower average margins.

Global end market sales of Copaxone amounted to $353 million.

This is a 22% increase over the comparable quarter.

U.S. sales increased 19% to $231 million and non-U.S. sales, mainly Europe and Canada, increased by 26% to $123 million.

Non-U.S. sales account now for 35% of total global end market sales.

As to Teva's API business, sales to third parties amounted this quarter to $145 million, up 14%.

In addition, the API business sold $210 million worth of raw materials internally to Teva from [inaudible] operations.

Remember that API sales to Ivax, which in the past were recorded as third party sales, are this year recorded as internal sales.

These internal API sales represent the highest level of our strategically important vertical integration.

Just as in this quarter, we recorded substantial earnings from launches of products in our pharmaceutical business made with internally supplied APIs from prior quarters, I think you should view the high level of internally sourced API in Q2 as a good lead indicator for future quarters when the finished dose pharmaceuticals that these API sales support will be launched.

One line down in the P&L to adjusted gross profit.

Gross profit amounted to $1.203 billion.

This is [inaudible] an adjusted gross margin of 55.4% in the reported quarter compared to 47.4% in the comparable quarter and is far outside Teva's regular change of 45 to 48%.

While this should not be seen as a sustainable level, we do expect to achieve gross margin above the normal bend also in the second half of '06.

And from gross margin to R&D.

Net R&D increased by 33% to $121 million.

This record number represents the importance that Teva is giving to its R&D activities and demonstrates the combined R&D effort following the Ivax integration.

SG&A which reached $376 million in this quarter represents 17.3% of sales.

This is a substantially higher percentage of sales compared to Teva's standalone previous quarters which in fiscal '05 averaged 15.2% but is lower than Q1 of '06.

To a large extent this increase reflects the consolidation of Ivax's significant branded business and operations in many branded generic markets which require substantially higher selling and marketing costs.

In addition, Teva's innovative business generated higher sales and marketing costs in support of the growing Copaxone franchise and a greater introduction of Azilect in U.S. and non- U.S. market.

Going forward, the gradual realization of synergies, as well as the future growth of Teva, should reduce the percentage of SG&A line item from sales, however, we do not expect to return to our historical levels of 15% due, as we said, to the increased operations in branded generic markets as well as the new branded business.

The option expensing, which was introduced in 2006 and accounts for about $30 million a quarter are mostly included in SG&A.

Adjusted operating profit amounted this quarter to $707 million, or 33% of sales compared with 25% for fiscal '05.

The quarterly interest paid on our current $4.6 billion of long-term debt plus interest in our short-term debt amounts to about $50 million to be partially offset by the yield on our cash and [inaudible] cash balances which currently stand at about $1.65 billion.

As you can see, financial expenses this quarter amounted to an exceptionally high $57 million, substantially higher than the normative level reflecting mainly the negative impact of currencies and hedging activities on certain P&L and balance sheet items, due to the currencies fluctuations from the beginning of the quarter through the end of the quarter.

Some of these amounts are offset in other line items, the underlying assets, and some will be reversed in the next quarter.

Going forward, we would expect the typical financial expenses net of currencies and hedging activities which fluctuate from quarter-to-quarter would be in the range of 30 to $35 million.

As to the provision for income tax, in Q1 we provided for 19% on adjusted earnings, which was then our best estimate of our annual rate.

We now adjust this annual rate to 17.5% which mainly reflects our exclusive launch of Simvastatin, something which was not certain when Q1 figures were released.

The quarterly tax rate provided on the adjusted earnings this quarter is consequently 16.7% including a catch-up for Q1.

All that leads to our adjusted net income of $541 million, up 124% from last year.

As to adjusted EPS, based on this adjusted income to which about $6 million were added back related to the convert works out at $0.66 on a larger share base.

As to cash flow from operations which amounted this quarter to 12 [hundred] $12 million, this relatively lower amount mainly reflects the impact of new product launches, highlighted by Simva at the very end of the quarter, which resulted in an increase of our working capital due mainly to substantially increase in accounts receivable.

These receivables should turn into cash in Q3.

We increased our working capital sequentially by $492 million to about $2.7 billion.

The free cash flow, which is calculated as cash flow from operations net of capital expenditures and dividends, amounted in the quarter to $66 million.

As to day sales outstanding in receivables, this decreased from 60 in March of '06 to 59 in June '06.

We have calculated this after netting out the sales reserves and allowances, the so-called SR&A from the receivables.

As you know, we record receivables on a gross basis and record the SR&A on the current liabilities but in order to facilitate a more meaningful comparison with some of our peers, we record the receivables net of those, we have used the net figure.

Total SR&A at June 30th was $1.27 billion compared with $978 million on March 31st, about [93%] of which are coming from the U.S.

Total increasing SR&A for March was $291 million.

The launches create substantial SR&As.

Inventories increased by 5% to $1.8 billion with day sales in inventory up from 144 to 163 sequentially.

Due to the high margin of the new launches, there was no corresponding decrease in inventory as the Simva sales were stated in the inventory at cost.

This quarter Cap Ex amounted to $90 million compared with a quarterly average of $77 million in fiscal '05.

Yesterday, the board approved a second quarter dividend amounting to approximately $60 million.

On a per share basis, our dividend based on the current rate of exchange of the shekel to the dollar amounts approximately $0.07.7.

As to our debt, $4.6 billion, or 82% of our total interest bearing debt at June 30th is long-term of which $206 billion is in converts and $2 billion in straight fixed or floating interest debt.

The debt to equity ratio stands on this date at 36.

Shareholders equity at June 30th '06 reached $9.9 billion.

And now for the convenience of our audience, I would like to mention, as we did before, three figures before we open up for Q&A so that we are all on the same page as it relates to our share count.

As for the second quarter of '06, our average share count for the purpose of calculating adjusted fully diluted EPS was 834 million shares.

At the end of the second quarter our share count for calculating fully diluted earnings per share going forward is approximately 834 million shares, and for calculating our market cap, it's approximately 765 million shares.

Thank you all for your time and attention today.

Now, we will be glad to take your questions.

Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. [OPERATOR INSTRUCTIONS] In the interest of time, we do request that you limit yourself to one question.

Our first question today is coming from Robert Bonte-Freidheim of Citigroup Investment Research.

Please proceed with your question.

Hello, everyone, and congratulations for an outstanding quarter.

Just a very quick question, Dan, we had spoken in the past.

Could you just confirm to us that the chargebacks, there's nothing, there's no, nothing working in the chargebacks that we should be concerned about as we go forward?

It's confirmed.

Okay.

And the second question, Dan, as we go forward as we look into the rest of the year, what kind of provisions have you made sort of for shelf stock adjustment on the big launches in the quarter on Pravastatin and Simvastatin?

We are usually not giving out those details but as I mentioned in my prepared remarks, usually launches have a very high bearing on the increase in the SR&A.

I gave the figure of the increase and we are following, we are consistently following the same formulas for providing for the different line items of SR&A and the same we did also this time.

Last question.

Did you get any synergies from the Ivax acquisition in the cost of goods sold in this quarter?

I would say that if all of this were very limited on the cost of goods sold and predominantly, we had, as we usually have initially in new acquisitions, it's more on the SG&A and R&D, although, in this case, you know Simva was an exclusive of Ivax and there we created synergies with Teva.

Good.

Thank you very much.

Let me just add, Robert, that there were major synergies this quarter with the API component of Teva in the Simvastatin.

Thank you, Israel.

Our next question is coming from Rich Silver of Lehman Brothers.

Please proceed with your question.

Just to clarify a couple.

Can you give us an update on the launch plans for generic Zoloft?

George?

Yeah, hi, Rich.

Good morning.

What we can provide is really what we've said which is that we do expect to launch in Q3.

We'd anticipated that we might be ready at this point.

We're not quite ready but still look forward to that launch.

Okay.

And then Dan, you provided an idea of guidance on SG&A.

Can you do the same for R&D?

I would say that R&D should be in the range of 6 to 7%.

Okay.

Thank you.

This is, obviously, generally speaking, you know, when you have exceptional launches like that, they distort some of the picture but if we total them as an average that should be the rate.

And when you talk about the accretion from Ivax, are you looking at this including generic Zocor?

Yes.

And if you excluded that would it be accretive?

Probably not at that stage.

Okay.

Thank you.

Our next question is coming from David Woodburn of Prudential Equity Group.

Please proceed with your question.

Thanks and again congratulations on a great quarter.

George, in terms of the Zoloft, can I ask is the delay due to capacity allocation or does it have anything to do with utilizing Teva API on that?

And then I'll assume there's a fair amount of Zocor in Q2.

If you ignore the outcome of the legal appeal, what's the best way to allocate the remainder of the exclusivity period for us?

Yeah, hi, David.

You know, I can't provide more color on the Zoloft launch other than to say that we are not quite ready.

I think that's as much as I can share at this point.

The second question was about the allocation.

I'm not sure exactly what you're asking

Well, it's obviously a six-month exclusivity period.

You sold a ton in Q2 even though there were only basically seven days of that exclusivity period in Q2.

So does it mean that you have another solid Q3 and almost none in Q4 or how should we think about Q3 and Q4?

Yeah.

I'd only give, again, I don't think we can give complete clarity quarter-by-quarter except to say we had an effective and strong launch.

We'll continue to hold our exclusivity through Q3 and at some point at the end of the year, of course, that exclusivity will expire.

Okay.

Our next question is coming from Elliott Wilbur of CIBC World Markets.

Please proceed with your question.

Good morning.

Good afternoon.

Thank you for taking the questions.

I'll throw in my obligatory congratulations on a very strong quarter as well.

I wanted to ask a line of questioning around your revised EPS guidance.

You've, looks like you've effectively taken up about $0.10 relative to what you had talked about in terms of the incremental contribution from generic Zocor exclusivity in connection with the first quarter numbers, yet sales guidance actually kind of moves toward the low end of the range.

Originally you talked about kind of a $250 million to $300 million top line impact and now we're talking about $8.5 billion in total sales.

So I'm just wondering if you could reconcile that, maybe give us some clarity as to where things are not performing as well as you had previously suspected and it sounds like there's some pockets of weakness maybe in the Ivax business maybe related to some production issues and the like, but if you could maybe just talk about now why sales guidance seems to be moving toward the lower end of the range that you'd briefly talked about?

Thank you.

George, you want to start?

Yeah.

A couple quick observations about the [inaudible] market, I mean some of which we spoke to.

The new launches are going very well.

We described a little bit about the base erosion.

There are a couple of products, Elliott, that we've mentioned are particularly in their more competitive stage, and some issues that come out of the supply chain issues described, by and large, the direction of our U.S. generic business looks good.

The prescription data looks good but we had to absorb some issues which will effect us a little bit as we go through the year.

I will say that our guidance, our new guidance is a total guidance, we didn't separate the Simva from the rest of the business.

We just calculated what we are going to do from now until the end of the year and it's included on the part of the business, and I would say that I don't think that we have weak [inaudible], I think that we have increased the bottom line.

The top line is on the high side of our last guidance, and it might be increased but this is the way that we see it right now and I don't think that we have any weak spot except for you have to remember that in the U.S. on the one hand, we have major launches and on the other hand, we have the erosion of products that also major erosion in products [inaudible] lost the exclusivity like Fexofenadine, [Azitromycine] and [Propophil] which lost [inaudible] earlier but has more competition right now and a few other products so there is a balance here.

But it's not that we add 10% to Simva, it's just we add to our total range between 13 to [$0.10].

If I may add, I don't think that anyone can imagine the effort in such launches as we have had this quarter and if anybody thinks that such launches can go without any sacrifice of something else, is mistaken so it's not a question of weakness but more sacrificing one thing for a major other thing.

Our next question is coming from Andrew Forman of WRH.

Please proceed with your question.

Yeah, George, following on the questions about Zoloft, can you remind us on the exclusivity and how that might relate to other competitors coming in after exclusivity?

Is it fair to say that if you launch around September 1st then you'll get most of Q1 exclusivity, Q1 '07?

And then could you also give us a little more update, big picture, George, on the size of the U.S. generic industry in terms of market share from your comments from Medicare Part D, what do you see happening in terms of total prescription share volume in terms of expansion from, I guess, it was around 54, 55% going into '06?

And then what are your observations, if any, about the impact of the doughnut hole effectively being used up by the 23 million seniors?

Are you seeing any increase in demand for generics overall and then what is Teva's positive market share currently in the U.S. generic business?

Thanks.

Good morning, Andrew.

I'll touch base on the first two parts of that and maybe I'll turn it to Bill Marth to give a little more clarity on the doughnut hole.

All I can say about the exclusivity on Zoloft is that we expect to have it and it is not triggered until we launch.

I think that's sort of the defining characteristic here.

As it relates to the rate of generic penetration, it is certainly increasing.

It's very early, I would say, to show a truly predictive sort of systemic effect from Medicare Part D although, again, we're seeing all of the good early signs.

It looks like generic penetration has moved up probably into the high 50s.

We really do see it moving past 60.

I can't give you a timing sense for that but, again, we're seeing some extraordinary movement throughout the system.

I think Bill is probably the right person to give a quick comment on the sort of doughnut hole aspect of the Medicare program.

Hi, Andrew.

With respect to the doughnut hole, it's certainly an issue for the patients that run into it.

We see it as it's an unfortunate part of the plan but for us it's helpful for generics because when people enter into this phase, they're looking to fill prescriptions in the most cost effective manner and generics are certainly the choice for that.

George, if you're saying that we're in the high 50s in terms of share and going past 60, what is Teva's market share run rate because you indicated that you were expanding the market share relative to the base business?

I would say right now we're probably, again, this data can move very quickly particularly on the heals of a launch which just occurred.

We're probably at this point over 20 in prescription share.

So 20% of all of U.S. generics?

So of 20% of all of the U.S. generic prescriptions are coming out of Teva?

Yeah, roughly.

And then Dan, real quickly on Ivax integration, you had previous guidance which you said you might modify.

Any comments on that on the cost side, please?

I don't think we can change it every quarter.

As we said, there were other synergies created through the production of Simva.

I think when we get to the end of the year, we may update our expectations on synergies.

Thanks.

Great quarter, guys.

Thank you very much.

Thanks.

Our next question is coming from Ronnie Gal of Sanford Bernstein.

Please proceed with your question.

Good morning, folks.

Two quick questions just to clarify.

You mentioned, Israel, that in '07 you expect to surpass sales for '06.

Does the same goes for EPS?

And second, you mentioned I guess mid-teens range for [Kager].

Does that include acquisition or do you see that as organic growth?

We consider the acquisition as part of our business, but of course if it doesn't include any huge acquisition like Ivax, we changed totally the scale of Teva, but we will probably in every growth plan, you know, we will have[ inaudible] or other companies that will give us added value in terms of product lines.

So this includes acquisitions which become part of our organic growth, then with regard to 2007-2006, we see where we can definitely calculate that we are going to in different scenarios, we can increase the top line and we don't -- we cannot give at this stage anything about the bottom line.

Thanks.

Appreciate it.

Our next question is coming from Greg Gilbert of Merill Lynch.

Please proceed with a question.

Thanks.

I have a couple.

Thanks for the additional color on today's call.

First for Dan, are you willing to provide us what Simva sales were in the quarter in the U.S.and the approximate margin of that?

We have never done that in the past and I don't want to create a precedent today.

We usually don't detail data on individual products.

Let me ask it a different way then.

If you can speak to gross margin perhaps, excluding Simvastatin, were you above your historical 45 to 48 range and is there something structurally different about that?

I suspect it would be in this range without Simva.

Thanks for that.

George, does the Zoloft deal between Ivax and Pfizer, I guess now Teva and Pfizer, preclude Greenstone from launching during your exclusivity or should we assume this is a pretty typical situation?

Yeah, I think you should assume it's a pretty typical situation.

And lastly for Israel, the two part question.

One, do you think it's more important for Teva to take a hard look at proprietary company acquisitions longer term in addition to the typical sourcing of molecules in Israel?

And secondly, can you comment on the significance of setting up the office of the CEO earlier this year?

Thanks.

All right.

Let me just first make a complimented [inaudible] response to your question about the gross profit.

Remember that we have a very successful launch of Zocor but we have additional successful launches, and not only in the U.S. but also outside of the U.S.

So although we did not really calculate what would be the -- we are not using these exercises to see what would be the gross margin with or without the Zocor, but I guess that the other launches also contributed to the high level of gross margin.

It's not only Zocor.

This is number one.

Understood.

Number two, in terms of taking a hard look at proprietary companies, first I must tell you that we are very satisfied with our business model.

We are not a generic company that is trying to become a proprietary company or an innovative company and I don't think that their business model is really something that we should be looking to to imitate.

I think that the proprietary business with [inaudible] is increasing.

We have now the respiratory business.

We have a very rich pipeline of innovative products which we are going to present to analysts and investors in September in New York and we have a lot of work in biogenetics, which is also a branded business, and I'm not precluding an acquisition that will support in the future one of these business lines, but we are not looking at an acquisition that will change Teva from a generic company to a totally blended company.

Does that answer your question?

Yes, thanks.

And can you comment on the office of the CEO and the significance of that to the Company or lack of?

Thanks.

The office of the CEO is an important office in our organization.

As you may appreciate, the complexity of our business is enormous.

I think that there are very few companies in the pharmaceutical industry with the level of complexity that we have and the complexity actually creates a potential value.

Now, in order to manage this complexity, we need to have the right organization, and I think that the organization is really, this organization with the office of the CEO is more to help me in running the business than to highlight candidates for the future CEO, although it doesn't preclude these opportunities.

Okay?

Thanks a lot.

Our next question is coming from Norman Fidel of Alliance.

Please proceed with your question.

Thank you.

And George, we're not going to let you off the hook so easily on the Zoloft questions.

When the final approval was announced for [inaudible] Zoloft, I think the expected launch time was late July, so it does seem that it is delayed beyond that.

Is this, the issue's exclusively supply related or is this also related to just trying to manage the growth since your period of six-month exclusivity is not jeopardized by a delay it extends your rapid growth into the future if you delay that launch?

Thanks.

Hi, Norman.

Yeah, I'll give it a try and see if I can do it again here.

We had, as I said, hoped to launch and have all of the product prepared for the kind of launch that we wanted by the end of July and we're simply not there.

So it really is, as you know, we had enormous amount of product to put through the system and we got through on some late stage labeling issues that we need to deal with and so we had a lot of work to do to pull this launch together and it's very important when you launch, particularly in terms of satisfying customers, to make sure you have an effective launch.

We're not quite ready and it was better for us to wait until we were ready for the optimal launch rather than to move prematurely.

Thank you.

I would like to add one sentence, George.

As a matter of policy, we never delay a launch of the product just because we want to have a better distribution of sales of profits among quarters.

It's not that.

When we are ready, we go, and therefore, because you asked this question and therefore, we never delay a launch just because we want to have better cosmetics to our results.

Okay.

Thanks.

There's always some risk to delay.

Yes.

Our next question is coming from Ken Cacciatore of Cowen & Company.

Please proceed with your question.

Just going back to Israel's guidance on the mid-teens growth, you indicated that some of it is going to be inorganic.

Can you help us out a little bit to understand what percentage would be inorganic?

Also, does this include the Copaxone U.S. take-back rights?

And then a question for George on the Zoloft.

Understood that you had a, maybe had to make a payment to Pfizer via the previous Ivax agreement.

If they launch and authorize generic do you continue to have to make that payment to Pfizer, profit payment?

Thanks.

Let me answer your question.

We are not -- excuse me?

George, can you take over, just a moment, to answer the first part, the second part of the question?

I'll come back.

Ken, I'm sorry.

Could you just repeat the Zoloft question?

Yeah, sure.

On Zoloft, it was our understanding that Ivax was previously going to have to make profit sharing payment to Pfizer because of the original agreement.

I was wondering if they are allowed to launch and authorize generic do you have to continue to make that payment if there is a payment?

Yeah, Ken.

I can't provide data or details on the agreement other than to say that Ivax and Pfizer had entered into a license agreement as part of a settlement of patent litigation and we abide by all of our agreements.

I apologize for transferring the question to you, George, but I had to attend to something here, but let me come back your first question.

Our focus is based on the combination of many scenarios.

It's not one scenario of growth, it's many scenarios of growth and we combine all of them into one focus and therefore, it may include a few optional acquisition, it includes the Copaxone, it includes everything.

Our business is one business and we have many components in our business and we have many scenarios of growth and when we give a focus, it's a combination of all of these scenarios.

So I can't give you percentages and I can't tell you right now the exact components of this focus.

Okay?

Okay.

Thank you.

We will take two more questions if there are more questions.

Our next question is coming from Randall Stanicky of Goldman Sachs.

Please proceed with your question.

Great.

Thanks.

Just quickly, given the recent settlement is Bax and [Excel] now in your forecast?

And then separately, is the 45 to 48% gross margin range or bend a range that we should be thinking about over multiple years given the consolidated company now?

Thanks.

Can you repeat the second half of the question [inaudible]?

Sure.

The 45 to 48% range, is that a multi-year longer term target that we should be thinking about for the consolidated company now?

I will say we are using that for the time being.

I think that it includes already Ivax, although as we said, there may be fluctuations around that.

Usually in the past we have seen only fluctuations going one way and that is north and not downwards, but as we said, it depends a lot on the product mix, the portfolio mix, the launches mix, et cetera, but I will say that if one should take a bend, this should be the bend.

Yes, and in recent years, we've been mostly on the top end of the bend, you know?

So you have to take it also into consideration and we might next year reconsider our guidance regarding this bend and maybe come with something else.

Randall?

As it relates to Biaxin [Clerathromicine] what we can share with you is that we did enter into an agreement with Abbott which allowed us to keep the products in the market and also allows us to re-enter the market under certain conditions.

I should say that it's at this point not that large a product and we would expect that there'll be more than one player.

So in terms of expectations, I guess that's the way to think about it.

Okay.

Great.

Thanks a lot.

Due to time constraints our last question this morning will be coming from David Buck of Buckingham Research.

Please proceed with your question.

Yes, thanks for taking the questions.

First on gross margin for Dan.

With the Jerusalem plant not yet online and with the [inaudible] level of vertical integration higher for this quarter but presumably going higher, why wouldn't there be an increase in the gross margin range?

And for Israel, can you give us some sense of what the overall branded sales of the Company were in the quarter?

You've referenced the $400 million respiratory business but why not give a sense of overall what the branded sales actually were for the quarter?

Thanks.

As to your first question, as I mentioned with all the moving parts, one of the moving parts is also the plant in Jerusalem which you know we are awaiting already for quite a few months and didn't get anything pull for that yet, not even a visit, so as I've said, we are going, once we are more settled on those moving parts, we will visit again the questions and if we find out that the band moved somewhat, we will certainly give an indication.

I don't assume it will be before the end of this year and maybe even later.

Does that answer your question, sir?

That does.

On the branded side of the business?

Technical difficulties -- inaudible.

Are we -- we're having a hard time hearing.

We're breaking up.

Yeah, I want to make sure that we're hearing that.

Sorry, sorry, sorry, my mic was closed.

David, in my presentation, I told you that our respiratory business in 2006 is going to be a $400 million business.

Okay.

Fair enough.

Since you didn't want to give for the quarter can I ask one more on Copaxone?

Can you give us some sense of when we'll find out more about the buy out terms for 2008?

Yes, when we get closer to the year.

We're talking about 2008.

We have still have a long time to go.

Okay.

Fair enough.

Thanks.

Are you closing, Kevin?

Yes, if that's it if we are all done with our questions, I'd like to say --

Yeah.

I think we are done.

I'd like to thank everybody for joining us on the call today.

As always we'll be happy to take additional questions off line if you have any.

We also hope you will join us in person tomorrow at our luncheon or listen into the Webcast.

Dan, if you could please provide the replay information I'd greatly appreciate it.

Thank you.

If you'd like to listen to replay of this conference, you may dial 877-660-6853 domestically or 201-612-7415 internationally.

The account number is 3055 and the call ID number is 209542.

This concludes today's conference call.

Thank you for your participation.