Teva Pharmaceutical Industries Ltd (TEVA) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Carly and I will be your conference operator today. At this time, I would like to will welcome everyone to the Bentley Pharmaceuticals quarter three 2006 earnings 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. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Mr. Richard Lindsay, Chief Financial Officer of Bentley Pharmaceuticals. Sir, the floor is yours.

Thank you, Carly. Good morning and welcome. As some of you know, I joined Bentley last September and this is my first earnings conference call with the Company. I am very pleased to be here and I look forward to building a long-term relationship with you as Bentley continues to execute its business plan in the coming years.

Before we begin, I would like to remind you that today's call will contain forward-looking statements. By their nature, forward-looking statements involve risk and uncertainties because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from these statements. For a discussion of the principal risks and uncertainties affecting Bentley, please see item 1a called risk factors in the Company's annual report on Form 10-K for the year ended December 31, 2005, as well as Bentley's subsequent periodic reports filed with the SEC.

With that, I will turn the call over to John Sedor, our President, and after John's remarks, I will review some results from the Q3 financials. Please go ahead, John.

Thank you, Richard. Good morning and welcome to today's conference call. I am pleased to co-host this call with Rich Lindsay, our newly appointed CFO. As you know, Rich joined us two months ago. Rich is a seasoned financial executive and an outstanding business strategist. We are very pleased to have Rich on board and confident that he will provide invaluable expertise to Bentley as it achieves its next phase of growth.

Okay, for today, I would like to discuss several events, significant events and the results of the third quarter. This was an important quarter for Bentley. We achieved a number of strategic milestones. We have strengthened our patent portfolio, advanced the clinical development of our intranasal insulin spray and continued the expansion of our portfolio of generic pharmaceuticals.

We have delivered a year-over-year gain in top line and excluding litigation and severance charges, we had a profitable quarter as we continued to increase investments in the development of our drug delivery technology.

We reported a net loss for the period, but it is important to note that the net loss for the third quarter included litigation and severance charges of $9.5 million. These charges stem primarily from a substantial agreement on the terms to settle an outstanding litigation with Ethypharm and its Spanish affiliate. We have provided details on this agreement in the earnings release this morning and they will also be included in our third-quarter 10-Q.

On this call however, I want to emphasize that our decision to pursue settlement with Ethypharm was based on our belief that it would have cost Bentley more to pursue this litigation than it cost us now to settle the claims out of court. We are confident that this approach is in the best interest of our shareholders and we want to put this matter behind us so we can focus and devote our time and effort to capturing Bentley's substantial business opportunities.

Revenues increased 7% year-over-year to $25.2 million. Key factors accounting for the year-over-year revenue included net product sales increase in Spain and continued growth in sales of Testim, the first marketed product containing CPE-215, Bentley's proprietary drug delivery technology.

Our core Spanish business continued its historic year-over-year growth in both revenues and new product launches. Testim was launched by our licensee in 2003 and since then, the product has captured approximately 18% of the testosterone general market. Based largely on Testim's performance, our licensing and collaboration revenues in drug delivery reached $2.3 million, an increase of 57% compared to the same period in 2005.

In the drug delivery business, we have achieved important milestones, including some that we discussed with you during our second-quarter conference call. I told you for example that we would expect to receive patents protecting both the intranasal insulin and Testim products within a year.

In September, we announced the issuance of our insulin patent. This was the first patent to issue from Bentley's comprehensive filings around the world for protecting our intranasal insulin and peptide delivery platform.

We also told you that before the end of the year, we expected to initiate Phase II studies in the United States for our intranasal insulin product. As you probably know, we issued that announcement this morning. We are very pleased with the progress because our intranasal insulin spray addresses a very large market with unmet clinical needs. A recent CIBC report estimates that the global market for insulin is approximately $8 billion and the clinical studies that we have conducted so far suggest that our product can provide improved treatment compared to other alternative delivery systems.

We have also made progress in the third quarter in preparation for the next step in the clinical development of our intranasal spray. We have secured capacity at Cardinal Health's new North Carolina facility for the scale up and manufacture of clinical supplies for the global expansion of our clinical trials. Beyond insulin, we continue to increase investments in the development of our patented delivery technology, CPE-215, a delivery platform that enhances permeation of a range of large molecules and offers the opportunity to deliver these drugs via non-injectable routes of administration. This quarter, we reported a 38% year-over-year increase in R&D spending.

Shifting now to our specialty generic business. As you know, one of our key strategic goals is to continue to expand our successful generic footprint in the Spanish market and throughout the U.S. -- or E.U. We also plan to enter the U.S. market. We see these markets as a significant growth opportunity to leverage and diversify our Spanish product and technology assets. As many of you know, sales outside of Spain have increased substantially. Over the past two years, our revenues outside of Spain rose dramatically from 16% of total revenues in 2004 to 22% over the first nine months of 2006.

As we look at the fourth quarter and beyond, our plans include the following. One, we plan to continue expanding our revenue base beyond Spain, building on our proven formulation capabilities in solid oral dosage and micro-encapsulation. We will use these capabilities to launch a series of hard to manufacture generic products. We see considerable opportunity in the E.U. for profitable application of our generic pharmaceutical know-how.

Two, we plan to expand our generic foothold into the United States market. Our first development program with Perrigo continues to progress through the regulatory stage and concurrently we are in discussions with other prospective partners.

Three, we plan to boost our investment in the research and development of drug delivery technologies, especially CPE-215. We believe that these investments will lay the foundation for significant and sustainable long-term growth. Beyond the successful application of CPE-215 in testosterone and encouraging development of insulin, we will identify a series of additional opportunities for improved delivery of large molecules.

Bentley's accomplishments and our strategic direction positions us as a differentiated specialty pharmaceutical company pursuing large market opportunities with a business model that mitigates development and investment risks.

Now I would like to turn the call over to our CFO, Rich Lindsay, for a discussion of the third-quarter financials.

Thanks, John. As John has mentioned, third-quarter consolidated revenues of $25.2 million were $1.6 million higher than those reported in the third quarter of 2005. Approximately half of the increase in revenues was attributable to licensing revenues with the remainder related to net product sales.

Historically, third-quarter net product revenues are slower than other quarters due to the business slowdowns related to the European holiday period. Our expectations for net product sales were further challenged by a delayed cold and flu season and a change in Spanish law prohibiting certain sales promotional practices, which had a short-term impact to sales early in the quarter.

Immediately prior to the implementation date of the new law, our competitors offered unusually favorable promotions and customers' inventories rose as they took advantage of those promotions. This had a negative impact on our sales early in the quarter. We believe customers have worked through their inventories and our net product sales for September and October have returned to normal levels. We expect fourth quarter to be back on a growth track.

Gross profit increased 8% to $13.4 million compared to third quarter of 2005. Increased revenue offset increased additional manufacturing, personnel and depreciation expense, but was not sufficient to keep gross margins from declining to 48.5% in Q3 from 49.7% reported in the third quarter of 2005. The increased manufacturing costs were part of the plant expansion in Spain.

Operating expenses for the quarter were unfavorable to the comparable quarter in 2005 largely due to litigation and severance costs totaling $9.5 million. Sales and marketing expenses were comparable to the same quarter of 2005. General and administrative expenses increased approximately $800,000 primarily due to $600,000 in severance costs along with share-based equity compensation, which was not included in the comparable quarter of 2005.

R&D expenses were up as planned to support further development of our intranasal insulin product. We expect fourth-quarter spending in R&D to increase over third-quarter levels to further support clinical trials.

Litigation includes estimate settlement and related defense costs of $8.9 million for the quarter and $10.3 million year-to-date. We estimate that half of the settlement will be paid before the year-end followed by four annual payments of $1 million.

A net loss of $7.2 million for the quarter and $3.4 million year-to-date was reported with loss per share values of $0.33 and $0.16 respectively. Corresponding values for 2005 for third-quarter net income of $2.5 million and $7.3 million year-to-date.

I want to highlight the 2006 third-quarter loss includes $10 million in litigation, severance and share-based compensation cost components. Overall, fluctuations in foreign currency had a $156,000 negative impact on earnings for the quarter and $445,000 negative impact on earnings year-to-date. And with that, Carly, I'd like to open up the call for questions.

(OPERATOR INSTRUCTIONS). Randall Stanicky, Goldman Sachs.

Two questions. First, when you talk about the slowdown to sales of third parties and that being due to timing and that reversing as we look forward, should we expect that to go back to a run rate in the levels of Q1 and Q2 and then maybe can you put that into context of an overall expectation for top-line growth as we look forward to next quarter and beyond? And then I have one more follow-up.

We do expect back to a normal growth rate in Q4, including the sales outside of Spain.

Okay. But in terms of a run rate from Q1, Q2, is that a proper expectation in terms of getting back to the levels of closer to $9 million to $10 million from the $7-ish million that we are at right now?

Yes, I believe that's true.

It's John. Yes, Randall, we see ourselves coming back to that same run rate.

That's helpful. And John, actually I had one question, a bigger picture question for you. You mentioned last quarter about an interest, a strategic interest in the U.S. That has been something you have been talking about for a while and you mentioned it again on the call today. Can you just detail any progress on that front firstly? Then maybe secondly, a couple of the U.S. manufacturers, competitors in the U.S. are having some challenges. As you look at the landscape and that dynamic, I guess does that help you or hurt you in your thoughts and intent in terms of coming to this market in a bigger way?

I will answer the two-part question. We are continuing to -- we are, as a mentioned in this conference call, we are continuing to have discussions with other parties and entry into the United States. You are right. In the United States, the generic industry is going under extreme competition.

One of the things that we're really focusing on is not coming in with a broad portfolio of generic products; we are coming in with a very selective hard to make targeted product. In the discussions that we are having with concurrent new partners here, those are the type of products that we are talking about in establishing entry into the United States. But they are -- you are right. It is becoming an extremely competitive market in the United States, but we feel that in one sense it is to our advantage because we do have proven technology and in some cases a technology that is superior to some of the competitors out there.

David Cohen, Midwood.

Can you reiterate your comment about inventory levels at your customers and any color around this timing of shipments? I missed that part in your commentary.

Certainly, David. What has happened is that due to the change in promotional practices, the competition gave some really deep deals to our customers. The customers responded. Normally they don't carry more than a few weeks of inventory. They tend to have fairly small shops. In Spain, there are around 66,000 pharmacists, all independents. As a result, they took advantage of those deals. They built up some inventories in the first couple of months of Q3. As a result, what we have seen is that the sales activity has gone back to a normal level. They have worked through those inventories and our most recent IMS data suggests that it didn't change the marketshare position of any of the suppliers in Spain. So we think that this was a short-term impact and we have every expectation based on recent sales data that we are back to normal growth levels.

So the inventory swing or investment that was there, that pertained to Spain. You guys actually did pretty well in Spain.

We did well in spite of that.

Okay. Then separately though on your export business, is that a separate issue? Is there an inventory issue there or is there something else there?

The sales outside of Spain tend to be larger shipments and subject to timing. In this particular case, we had a couple of large shipments that did not make it in Q3 on a comparative basis. So that is not related to an inventory issue.

What is the outlook for those shipments? I mean are there orders in place? The shipments haven't been shipped?

I think our Q4 is looking pretty strong.

David, to answer your question, yes, the orders are in place; it is just a timing issue.

Another question. On the U.S. market entry, what more can you say -- I guess what detail can you give us about your entry with Perrigo at this point? What does that look like?

Actually I can't give you too much because we have an agreement with Perrigo not to discuss it, but I can give you the fact that it is moving through the regulatory pathways and moving very positively.

Let me ask you another question and then get back in the queue. The severance and share-based comps, what is the magnitude of those two elements of the non-recurring costs?

Could you restate --?

Yes. You said I think it was a total of $10 million between litigation settlement, severance and share-based comp. If you break out the piece that is just severance and share-based comp, what do those amount to?

Okay.

Individually.

The termination costs are around $600,000 for the quarter and the share-based comp is around $500,000.

(OPERATOR INSTRUCTIONS). David Taylor, David P. Taylor & Co.

I have two questions. Can you quantify the size of the orders that got deferred from the third to the fourth quarter? And then similarly, could you discuss timelines in terms of the nasal insulin product, as well as the inclusion of any progress with Perrigo in the U.S.?

It is our policy not to disclose or try and forecast or give specifics around individual orders.

Well, this isn't a forecast. This is a historic item that was deferred from the third into the fourth quarter you said.

We talked a little bit about -- like I said, we had about $1 million of that stuff on a Q3 to Q3 comparison in that swing and I think at this point, I don't want to give any more guidance on those numbers because they are orders. They haven't been confirmed sales yet.

What was your question again on Perrigo?

I was asking for timelines on both the relationship with Perrigo going forward and with the research and regulatory matters on the nasal insulin product timeline.

Actually I can't give you a timeline on Perrigo because Perrigo would not be very happy if I did that. And then on the intranasal insulin, I can tell you that we are in Phase II studies. We are in the premier center for this type of work and we are continuing to move forward on the intranasal insulin. We will probably be completing those in the next 12 months.

The Phase II studies?

Yes.

Assuming they are successful, would you immediately launch a Phase III?

Our strategy has always been, so you know, the reason we put out the press release is because just recently we looked at the initial data from the Phase II and they continue to be extremely promising. We would continue with the Phase II and then at some point in time we have said it in conferences that we would look for a large cap pharma company to take over the Phase III going forward.

So you would not launch a Phase III on your own?

No. We would not.

(OPERATOR INSTRUCTIONS). Gentlemen, there appear to be no other questions. I would like to turn the floor back over to you for closing remarks.

Thank you, Carly and I would like to thank everyone for joining us on this call and look forward to speaking with you later on in the quarter on our Q4 results.

Thanks for your participation.

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