Teva Pharmaceutical Industries Ltd (TEVA) 2006 Q4 法說會逐字稿

Good morning. My name is Lynn and I will be your conference operator today. At this time, I would like to welcome everyone to the Bentley Pharmaceuticals Q4 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 session. (OPERATOR INSTRUCTIONS)

It is now my pleasure to turn the floor over to your host, Richard Lindsay, Chief Financial Officer of Bentley Pharmaceuticals.

Thank you. Good morning, everyone, and thank you for joining us for the call. 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 risks 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 1-A, 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, President, and after John's remarks, I will review our financials and then we will take your questions.

Thank you, Rich. Good morning and welcome to today's conference call. What I'd like to do this morning is first give you an overview of 2006, cover our key milestones in the fourth quarter of 2006, and then finish with our priorities and strategies for 2007.

2006 represented our sixth consecutive year of top-line growth. Total revenues for the full year increased 12% to $109.5 million. This was up from $97.7 million in 2005, and was a balanced performance across our strategic businesses and generics, as well as royalties from Testim, a testosterone gel containing our CPE-215.

Furthermore, we continued a sixth consecutive year of profitable operations in 2006, which offset a $7.5 million litigation charge and increased investments in the development of our drug delivery platform, anchored by CPE-215.

Now let me review some key milestones in the fourth quarter. First, with respect to our generics business. During the period, our generic business increased 10% to $24.8 million, as we expanded our geographic footprint in the EU. Our generic operation, anchored in the Spanish market, now spans more than 14 countries, with 23% of our generic revenues coming from outside of Spain.

In addition, we also took an important step in positioning Bentley for entry into the U.S. market. In December of 2006, we reported that the FDA approved our manufacturing facility in Spain for the production and supply to the U.S. market of the cholesterol-lowering drug simvastatin.

Now with respect to our drug delivery program, in the fourth quarter, we continued to benefit from strong Testim royalties. Testim, a gel developed using our permeation enhancer CPE-215, and marketed by Auxilium Pharmaceuticals. Testim's market share of gel segment reached 18.3% in December of 2006, versus 16.3% in December of 2005. In the fourth quarter of 2006, Testim provided licensing and collaboration revenues of $2.3 million.

It is important to note that Bentley's ongoing investment in our novel drug platform continues to achieve milestones, the most critical being the expansion of our intranasal insulin, Nasulin, which entered Phase II trials in the U.S. These Phase II studies are being conducted at the DGD Research Inc. of San Antonio, Texas, under the direction of Dr. Sherwyn Schwartz as principal investigator. It is important to note that Dr. Schwartz is an expert in the field of diabetes and endocrinology, and is a leading investigator in various alternative methods for insulin therapy. We are very encouraged by Nasulin's clinical performance to date.

Nasulin will be strongly positioned to address the unmet needs of patients in the $8 billion global market for insulin. All indications are that the current inhaled insulin products leave room in both clinical benefit and patient compliance and convenience. We believe that Nasulin addresses all of these issues.

In 2006, we settled all outstanding litigation with Ethypharm Spain, Ethypharm France, for $8 million. $4 million was paid in the fourth quarter of 2006, and the remaining $4 million will be paid annually over the next four years. We also incurred a charge of approximately $3.4 million for related legal defense costs that occurred in 2006.

Now let me discuss our four key priorities and strategies for 2007. One, in 2007, we will face pricing pressures in Spain. We are no strangers to this situation and we plan to address it with new product launches, increased market penetration, and reduced production costs. At the same time, expansion beyond Spain into the larger European market will remain a key driver of our strategy.

Two, the FDA's manufacturing approval for simvastatin represents an important, but just a first, step in our entry into the U.S. market. Although the hypercompetitive simvastatin market is not expected to yield significant profits to our generics business, the entry has added to our capabilities. And it is important to note that we will only broaden our U.S. market presence when we can be assured it will drive sustainable shareholder value. We believe, however, that our differentiated products, our competitive manufacturing costs provide us a foundation that will allow us to compete.

Three, we will continue to strengthen our intellectual property portfolio across our broader drug delivery business as we pursue additional applications of CPE-215. The technology, validated with the marketed product Testim and very promising data from Nasulin, has broad application to the universe of peptides and hormones, where a noninjectable formulation would have considerable market potential.

Four, we will continue to aggressively pursue clinical development of Nasulin. As reported in our February 20,2007 press release, expanded Phase II studies are underway. We expect to complete Phase II studies in India by the end of this year, and with a good part of the U.S. Phase II studies also substantially completed by the end of 2007.

I am often asked by our shareholders why is the Company investing in intranasal insulin. And I believe it is important for me to take a moment to explain. Bentley's investment in Nasulin as an alternative to injectable insulin has the potential to create significant value to the Company's shareholders. The market for insulin is approximately $8 billion, as I mentioned before, and is dominated by injection delivery methods. While effective, injections are often not welcome by patients, and this leads to noncompliance and, in many cases, severe clinical impacts.

An alternative delivery method to injectable that was well accepted by patients would expand the insulin market, improve patient care, and decrease the long-term burden to the healthcare system. I personally believe that Nasulin could be the gold standard for the next treatment in diabetes.

Bentley is well-positioned to develop this alternative delivery method of insulin, using our extensive expertise in membrane permeation enhancement. The Company's CPE-215 technology has already been demonstrated as effective and safe in a testosterone gel marketed under the trade name Testim. We believe this technology is also effective in administrating insulin across the nasal membranes.

Given the following -- the record of safety of insulin and CPE-215, the long history and acceptance of nasal spray administrations, the convenience of Bentley's device and strong bioavailability, the extensive expertise Bentley has in membrane permeation enhancement, and very encouraging clinical trials results to date -- we believe that developing Nasulin provides an investment opportunity for the Company with a very attractive risk-reward profile.

With these four objectives in mind, we entered 2007 with a renewed level of confidence in Bentley's future. Our success in meeting the past challenge further validates the strength of our balanced business model. And the combination of these two businesses enabled Bentley to pursue large, high-margin market opportunities with least financial risk.

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

Thanks, John. For the fourth quarter 2006, consolidated revenues were $27.1 million, a 7% increase from $25.2 million reported in the fourth quarter of 2005. Specialty generics revenues of $24.8 million were up 10% for the quarter, driven primarily from favorable foreign exchange rates. Expressed in constant currency, revenues were up 1% versus the comparable quarter in 2005.

Revenues of $2.3 million from the drug delivery segment were down $367,000 or 14% versus the fourth quarter 2005. This quarter-to-quarter comparison of revenues includes a $1.1 million royalty income pickup recorded in the fourth quarter of 2005, when the Company changed its method for estimating Testim royalty revenue during that quarter.

Consolidated gross profit for the fourth quarter of 2006 was $14.4 million, an 11% increase from $13 million reported in the fourth quarter of 2005. Specialty generics gross profit of $12.1 million was up 17% for the quarter. Expressed in constant currency, gross profit of specialty generics increased 8% versus the comparable quarter in 2005. This was partially offset due to the decrease in royalty revenue from the drug delivery segment, as previously discussed. Gross margins of the specialty generics segment were 49% and 46% for the quarters ended December 31, 2006 and 2005, respectively.

Consolidated operating income for the fourth quarter 2006 was $2.9 million compared with $4.4 million reported in the same quarter of the prior year. The lower operating income primarily resulted from the increased R&D expenses of $1.5 million; recognition of share-based compensation costs of $502,000, which were not required to be recorded prior to 2006; and $645,000 of fourth quarter legal expenses to finalize the Ethypharm settlement, previously reported in the third quarter of 2006.

Net income for the fourth quarter of 2006 was $4.4 million, or $0.19 per diluted share, compared to $3.7 million, or $0.16 per diluted share a year ago. As a result of finalizing the terms of the Ethypharm settlement, the Company recognized favorable income tax impact of $2.7 million, or $0.12 per diluted share, that was included in the reported net income for the fourth quarter of 2006. Net income for the fourth quarter of 2006 also includes a benefit of $0.02 per share from favorable fluctuations in foreign currency.

On the balance sheet, cash, cash equivalents, and marketable securities were $15.6 million at December 31, 2006; $21.3 million at September 30, 2006; and $32.8 million at December 31, 2005. The Company invested $3.2 million in fixed asset additions and $1 million in drug licenses during the fourth quarter of 2006. For the year ended 2006, the Company has invested $15.3 million in fixed asset additions and $2.8 million in drug licenses.

For 2007, we expect consolidated research and development expense to be in the range of $15 million to $16 million, with a focus on continued development of Nasulin. Our estimate for 2007 capital expenditures will be between $13 million and $16 million. These asset additions will include the completion of our API facility, various manufacturing efficiency projects and investments in additional drug licenses.

Now I would like to open up the call for questions.

(OPERATOR INSTRUCTIONS) Randall Stanicky, Goldman Sachs.

This is actually [Sarah Berkowitz] for Randall. I just had a question on -- a couple of questions, I guess the first on the impact from the change in reimbursement in Spain. Should we still assume your original estimate, that if we looked at 2006, you had said the impact would have been 10% to 12%, based on 2006 volume? Is this still an appropriate estimate for the impact (multiple speakers) '07?

The price changes actually are effective today. So given what we know today, I think that 10% to 12% is probably still a good number to work off of. These price reductions, if we look at the detail, affect about 85% of our Spanish portfolio.

Okay. And John, you had mentioned some initiatives that you have in place, such as cost initiatives, new launches, increasing volume, that potential players might drop out of the Spanish market due to these new pricing issues. How long should we expect for these initiatives to really impact the P&L? Could we see any benefit in 2007?

I will start and then have Rich jump into it. Clearly, we started our initiative last year, as a matter of fact, taking a look at all of our API costs, all of our manufacturing efficiencies. And strategizing from the impact of 2003, where -- when I said we're no strangers to it, we had already been planning after 2003 of how do we improve the efficiency in our manufacturing. And Rick mentioned to you on his conference call the investment in capital for efficiency.

So we are on our way to that. Those things are being implemented today. We're looking at driving not only expansion in the Spanish market, but we are also driving, as I mentioned in my comments, into the larger European market. Those initiatives have -- they just did not start and they won't start March 1. They started some time ago to drive it.

Rich, do you want to make a comment on what you might think -- when you start seeing the results of those things?

The timing question, I think, is an important one, given that some of these things had been put in motion previously, but you won't see the effects, I would say, in the first and second quarter. The API facility, for example, and the cost reductions that you'll see in our raw materials, you probably won't see -- towards the end of the year. Some of the market expansions are also timed at different points throughout the year. So unfortunately, we won't see those at the same point in time that we will see the price eruption start to take effect in the second quarter.

Okay, and just one more question. You had mentioned that your generics sales [X gain] for 2006 were 23%. Is there some type of a target you could give us for 2007?

I don't think we're comfortable with the target, given the uncertainty in the markets right now. But clearly we can start to update that after Q1.

Okay, thank you.

[Barry Blank], Murphy and (indiscernible).

Got a couple of questions. The first one, since you finished the Phase II in India and you are doing Phase II work in the United States, shouldn't this attract a strategic partner, one of the major pharmaceuticals, considering the tremendous market that insulin has? If that has happened, have you been talking to anybody at this point in time?

That is a great question, and I will address it -- two things are happening. One, these clinicals are going on, and you know they are -- there is a major ADA meeting end of June of this year, and we have submitted our clinical trials to that and they're to be presented by Dr. Schwartz. Dr. Schwartz, candidly, is the person that has evaluated all these alternative methods and he will be presenting for Bentley.

Once these are publicly presented, we can look to see furthering our communications with third parties. But the other part of it, we have been in discussions for some time with various numbers of people with respect to this -- large cap pharma guys.

How far along do you think you would have to be before one of these large cap pharma guys makes a commitment?

If you remember what I just said, we are substantially going to completing our Phase II study. So it will probably be as you get closer to completion of the Phase II studies. Because, as you know, large cap pharma guys are conservative people. They want to see the facts. And our strategy has always been -- and I have mentioned it every time this question has been asked -- we are not going to carry this thing through the Phase IIIs. We will find the partner to take it further than -- take it into the Phase IIIs.

The exciting thing for me -- and honestly. when I look it Nasulin and I try to communicate my enthusiasm about it -- when you take a look at the injection and other alternate methods that are out there, Nasulin is just -- I mentioned in my words and this was what I believe -- is a gold standard in this treatment.

Okay, I just wanted to ask a question about your U.S. entry in generic drugs. What do you think the growth is going to be there in 2007? I don't know if you can elaborate on any new products that are in the pipeline or how many you think you're going to initialize in this year.

Clearly, we do have products in the pipeline. And I just wanted to make clear -- because the U.S. market is the largest market in the world. In that case, that being the case, it attracts every player in the generic business. It attracts large numbers of Indian players into the marketplace that have broad portfolios of products that they want to bring into the U.S. market. And they are all going after the big molecules.

The issue that we have and where we have a real advantage -- and I wanted to highlight it in the speech -- is there are several products that are difficult to make -- it is a matter of having the right technology to make it -- which have limited players in the marketplace. That is what we are focusing on.

And as I said, simvastatin came in and, candidly, there were some eight to 12 players in this market. And if you can say to yourself there's 15 real customers in the marketplace and you have eight to 12 players in the market, you can see how competitive it can be. But simvastatin, we do have a relationship with Perrigo, and they are marketing and selling this product.

So we're going to be very selective of what we bring into the market, and it is going to be products that are not easy to make and differentiated from this mass of products that are coming in.

Just got one more question. The sales of Testim, what percent of the market do we have? Is it improving? Are there any ancillary products that you would have in that same area?

Yes, we have taken a look at a couple other products. But I mentioned in my presentation that they have about 18.3% of the gel market right now.

Thank you very much, John.

(OPERATOR INSTRUCTIONS) A follow-up from Randall Stanicky, Goldman Sachs.

It's Sarah again. Could you just touch a little bit on Testim? And I think you have received a nonfinal rejection letter from the PTO office. If you could just talk about -- I understand this is pretty common to happen and kind of the timeline from which you expect to hear a reply, given there seems to be -- it seemed to take the PTO a long time to get back to you guys on the patent.

It really does. And I don't want to make any comments about government agencies -- but no, and I anticipated that question. It is a good question. I think it is good we get to discuss it.

This is just -- the patent is proceeding in a normal manner at the U.S. Patent Trade Office. And honestly, this is routine procedure for the Patent Office, to send questions during their application of it. This is their way of getting some more questions in. Right now, we're in the process of answering these questions, and we are very confident that the patent will issue at the completion of this evaluation.

Do you have any idea of timeline or --? How long does (multiple speakers) evaluation take?

Candidly, it is like trying to predict what the government is going to do, and I don't even want to venture into that.

Okay, and I know you don't usually give specific guidance, but I don't know if you could provide -- if we were looking at revenue growth over the next year, if you could give us a little bit of color. Are we in line to assume kind of a 4% to 5% decline in gross margins, similar to the second half of 2006, based on the lost volume? Because there appears to be pretty high fixed cost in the Spanish manufacturing plant.

Yes, the revenue guidance as a policy down from our Board is something that we do not really venture into. John did mention that we're going to try and offset as much as we can of this revenue loss through new market penetration and new products.

I think it is too early in the year to feel very comfortable where that number is going to turn out to. But clearly, we recognize that the value of the company is driven by growth and profitability.

Just one more question. Was there any particular dynamic that changed in Spain with lansoprazole revenue? It looked particularly late.

I'm sorry -- can you repeat that about lansoprazole?

Yes. Was there a change in the dynamics in the Spanish market for that product? Just if we looked across -- I know all of the products were a little bit light due to customers were not ordering ahead of the pricing changes. But lansoprazole looked to be particularly hit, and that is one of your newer products. Was there any change you saw?

Nothing that comes to mind. The lansoprazole and the omeprazole sometimes within certain quarters can substitute one for each other. The other one is that lansoprazole was a newer product, and in some of the markets in that case, we might have had some initial loading and some tougher comparisons.

Okay, thank you very much.

[Stephanie Hagerty], of (indiscernible).

I just have been watching what has been going on in Europe and with companies that are buying generic operations. And obviously, the valuations and multiple of sales and so forth have been pretty strong lately. We have Merck waiting to see what they are going to get for theirs.

I don't know how the Spanish market fits into this scheme of things over there, and if the Spanish market all by itself has some kind of premium or how it is viewed in Europe. Can you give us any color on that?

The Spanish market is an interesting market. It falls right into an 80/20. The top 10 laboratories that provide generic drugs have 80% of the market share. A lot of the players that you would expect are there, with ratiopharm, Merck, Bexal-Sandoz combination, are all up there in the top 10.

Bentley, in a market position -- combined Rimafar, Belmac, Rimafar and Davur, which is the company names that our Company trades under, it represents like a number seven position within that chain. Then from there, it drops down pretty rapidly on a market share percentage. So we think our Company is well positioned in that market. We have a very strong salesforce and focus on three different channels, which would be the hospital administrators, private care physicians, as well as the individual pharmacies.

We do think that there is some further room for some consolidation, and I think that because of these pricing pressures and a lot of the smaller competitors do not have the level of vertical integration across the raw material supply, that there could be even further room for consolidation in that market.

Just to address your other question about Europe, Spain is a large market in the European marketplace.

That I understand.

Right. So it is a large market and it is an attractive market for a lot of people. It is not easy -- and Rich mentioned -- it is not easy just to just plant a flag in there and say that you're going to go grab market share, because it is different than the U.S. marketplace, its relationships, its sales forces. And the entire European market is attractive to people.

The issue is, however, it is not an easy market to get into. And I talked about Indian plays -- many of the Indian players have taken a look at that and have not been real successful, because it is not a matter of just bringing a portfolio and putting your mat out to start selling these drugs. It is different.

So that is why you're looking at a lot of people evaluating the key players in these marketplaces, and there is a lot of consolidation going on.

Part and parcel of that -- I guess part of what I am trying to ask, is your operation in Spain attractive to the other players?

I knew that was where you were coming from.

Yes, obviously.

And Rich tried -- I asked you the question. Just let me tell you -- our strategy, and I said it, our business model is we're just -- I think our business model is this less financial risk model going forward. We think our generic business is strong. It is continuing to grow outside of Spain. It is getting stronger, and that is our focus and our strategy.

But it is an extremely well-performing, very good business, and you answer your own question. I will tell you we are not -- the Board or myself or the chairman, Jim Murphy, are not entertaining anybody to [talk about it].

I just wondered -- there's just been so much activity recently there.

Yes, clearly I watch it like I watch my children.

I'm sure you do. Thank you very much.

(OPERATOR INSTRUCTIONS) There appear to be no further questions at this time. I will now turn the floor back over to management for any closing remarks.

Thank you, Lynn. I just want to thank everybody for participating on the conference call. We are extremely pleased with the performance of the Company in the fourth quarter. We have, as I mentioned, our four key focus areas and strategies for 2007. We are extremely excited about the Nasulin product that we are continuing to focus on. And I guess I would turn it over to you, Rich, for any comments you might want to make.

Again, just reiterating, I would like to thank everyone on the call and look forward to speaking with you on the first quarter. Thank you.

Thank you. This does conclude today's Bentley Pharmaceuticals conference call. You may disconnect your lines at this time and have a wonderful day.