Teva Pharmaceutical Industries Ltd (TEVA) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Teva Pharmaceutical Industries Ltd.

first quarter 2007 results conference call.

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

A brief 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 of Teva Pharmaceutical Industries Ltd.

Thank you, Mr.

Mannix, you may begin.

Thank you, Diego.

Good morning and good afternoon, everyone.

Welcome to Teva's first quarter 2007 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're conducting a live Webcast of this call that is also available on the Web site.

Today we're joined by Shlomo Yanai, President and Chief Executive Officer; Dan Suesskind, Chief Financial Officer; George Barrett, Executive Vice President, Global Pharmaceutical Markets and President and COO of Teva North America; Bill Marth, President and CEO of Teva USA; and Moshe Manor, Group Vice President of Global Innovative Resources.

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

We'll 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 today in New York.

For those of you who haven't received our invitation or have not yet RSVPed, Please call us at 215-591-3056.

If you're unable to join us, we'll be conducting a live Webcast of the event, which will also be available on Teva'sWeb site.

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

I would now like to turn the call over to Teva's President and Chief Executive Officer, Shlomo Yanai.

Shlomo?

Thank you, Kevin.

Good morning, everyone, and thank you for joining us.

I am delighted to welcome you all to Teva's quarterly conference call and to my first report to you as President and CEO of Teva.

Because this is my first opportunity to speak directly to all of us -- to all of you, I hope you will indulge me as I depart somewhat from the usual format of the call.

Today, I will give you just a brief summary of the quarter, George and Dan will provide you with more color and detail, and then I would like to share with you some of the basic premises that underlay my approach to leading Teva.

Let me begin with the quarter.

I am very pleased to report that we have had an excellent start to the year, with first quarter results that were stronger than we anticipated, something which make us feel quite positive about the remainder of 2007.

Our sales in the first quarter reached $2.08 billion, with operating profit of $446 million, net profit of $342 million, and EPS of $0.42.

Now before I describe what specifically drove these results,

I would like to take advantage of my unique situation this quarter, as the CEO who on one hand now has full accountability for this company, but who on the other can claim no credit for its success in the first quarter.

Indeed, these results belong to our superb management team.

What I am able to see quite clearly from this perspective is how perfectly Teva's first quarter results demonstrate the uniqueness of this company and what market leadership really means at Teva.

After the company's manager leap in goals in 2006, it was clear that 2007 would be a challenging -- a challenge by comparison.

And yet, in the first quarter, sales actually grew by 24% although over the first quarter of 2006 and continue to show significant market leadership.

Ultimately, the quarter ended with strong performances across all our geographies in North America, in Europe, and in the other markets that comprise our international business.

In the U.S., we benefited from high demand for our generic products and despite no major launches in Q1, we continue to see strong signs of leadership.

In fact, new prescriptions grew by 10% over the previous quarter.

We enjoyed especially robust sales of oxycodone.

Furthermore, demand for the products in our respiratory franchise continue to grow with our ProAir inhaler retaining an even higher share of the market than we have anticipated.

In Europe, sales were strong in Q1, with especially solid performances in the U.K.

and France.

And in Germany, the number one healthcare market in Europe, we saw the beginning of a very encouraging shift throughout generic substitution.

For the first time, health insurance providers began to take action to reduce cost, shifting the decision from physicians to payors by soliciting tenders on certain products.

We are encouraged by our results from this tender even though our participation in this first bid was relatively minor and we are even more encouraged by what the health insurers' move seems to signal, that ever-increasing pressure on payors is leading to changing dynamics in the European health care markets, in ways that we believe are especially favorable for Teva as a generics company that is both back integrated and has a strong market presence.

Q1 was a strong quarter for our international business, with especially strong performances in Latin America and Israel.

As I mentioned earlier, it was an excellent quarter for our respiratory products, with our ProAir inhaler retaining a higher share of the U.S.

market then we expected.

Demand for our respiratory products across all our markets continues to increase as the shift from CFC to HFA-based inhalers continue to accelerate.

Our respiratory business remains one of our important growth drivers and we expect to see continued growth in this segment.

Last but not least, it was a strong quarter for our innovative business.

Copaxone's end market sales grew by 22% globally, crossing the quarterly $400 million mark in sales for the first time.

Azilect, our second innovative product, for the treatment of Parkinson's Disease, has been off to a good start, particularly with the movement this order specialist and we look forward during this year to increasing our presence and demand in the community of neurology.

Now that we have reviewed the highlights of the quarter, I would like to give you some sense of my underlying principles as well as my initial observation of Teva.

To begin with, after two months in office, I can say with great confidence that I've inherited an outstanding management team, a driven and determined team which embodies Teva's leadership values.

I am very fortunate to have not only their knowledge, experience, and talent but their support and cooperation in leading this company into what I believe will be an even more prosperous future.

During my transition period, I had the opportunity to take part in managements' discussions and assessments of the business environment.

Having participated in this process, and as a believer in continuity, I am committed to all of their decisions, and I take full responsibility for fulfilling them.

My number one responsibility, of course, is generating value for our shareholders, and I'm keenly aware of this responsibility to all the investors who have placed their trust in Teva.

As a CEO who believes strongly in growth as the key value driver, I have started a process to explore how we might enhance Teva's strategy in order to do so.

The purpose of this process is by no means to reinvent our strategic will, rather, as a new CEO, my goal is to consider how best to focus our efforts my goal is to consider how best the focus our efforts to seize the opportunities we would face in the coming years and to seize them even more completely and quickly, especially as I foresee great opportunities for growth in generics.

I see generics as the backbone of Teva's business, and when I'm saying generics, I mean in their many forms around the globe.

I believe that the opportunities in the generics industry are huge and that as the generic industry leader, Teva is in a unique position both to capture and to maximize these opportunities, a truly exciting position to be in.

Teva also has a thriving business beyond generics, and indeed you will have seen in our first quarter results the significant contribution this part of our business can make.

We are committed to continuing to develop this business and in fact, just yesterday, we announced promising results from our Phase II oral Laquinimod trial.

Over the last month, I had the great pleasure of meeting with some of you.

During these meetings, I was very pleased to find that many of you share our vision of Teva as a growth company.

I also heard that you would like us to be more respond and I will do my utmost to provide you with as much as information that we can make public, without of course harming our commercial interests.

I very much value your input and feedback and I look forward to getting to know more of you and to hearing more of your insights and ideas as we take a course into what I believe is a very promising and exciting future.

And as for the near future, in recent months we've been able to gain increased visibility on some of our key, near-term value drivers.

Given this and given my great confidence in Teva's capabilities, I am optimistic about the remainder of 2007, And thus I am pleased to announce that we are raising our full-year guidance from $2.07 to $2.19 to the new range of $2.20 to $2.30.

Thank you all very much and now I would like to turn the call over to George, who as you know now is part of the Office of the CEO and assumes responsibility as Executive Vice President of Global Pharmaceutical Markets in addition to serving as President and COO of Teva North America.

George will provide us additional detail on Teva Global businesses.

George?

Thank you, Shlomo, and good morning, everyone.

Shlomo referred to some of the key drivers for the Q1 results and I would like to take just a few moments to provide a bit more color.

Teva U.S.A., our U.S.

generic business, had a very strong quarter.

Will the big exclusive launches of 2006 are now fully competitive, the beginning to 2007 looks robust.

Teva USA has captured 25% of all of the generic prescription growth, which occurred between Q4 of 2006 and Q1 of this year.

Furthermore, we have been able to retain significant market share of some key products, including Pravastatin, Simvastatin, and Sertraline.

Regarding pricing on our base business, we are encouraged at the low rate of erosion that we've seen in the back half of 2006 has continued into the first part of the year, with erosion rates tracking below 10%.

During this quarter, we gained increased visibility on the changes in the oxycodone market.

As a reminder, we launched oxycodone ER in March of 2004 after a lower court finding that the patent was unforcible.

That decision was reversed by the federal circuit and remanded to the lower court.

As we have previously announced, we entered into a agreement with Purdue that required we exited the market for exchange for full release.

However, the term of that exit was tied to various events.

We now have better quality on these events, and as we discussed in the March press release, we know expect to remain in the market for at least the balance of 2007.

In addition, we did benefit in Q1 from the exit of two players from the market.

Furthermore, we now expect that we will be in the sole generic position for some period between June 14 and the end of the year.

Although we will be somewhat dependent on the amount of raw materials that is allocated to us by the DEA.

Our pipeline continues to be full with 150 ANDAs waiting approval at FDA, representing $90 billion in brand value.

Of these, 42 are products for which we believe that we hold the right to exclusivity, representing $35 billion in brand sales.

Our European business is becoming more robust and balanced and we saw this at work in the first quarter as solid growth in the U.K., France, and Germany and other markets more than offset the impact of a price buyback instituted by the Hungarian government.

Shlomo noted an important change in the German market.

I would only add that although a relatively small number of compounds were included in the initial bidding process, the reach of this program is quite significant, covering a third of all German citizens and it's reasonable to assume that the program will expand and we are well positioned to utilize our portfolio, our supply capability, and our existing infrastructure in Germany to participate in this opportunity.

Our international group performed well with the largest contribution coming from our Latin America businesses.

Argentina led the way for us in terms of growth in Q1 with other countries providing strong support.

It is worth noting here that while in Europe we see some strong regional forces, the markets of Latin America still move very independently of one another.

Having said this, we possess strong regional capabilities, including a local manufacturing network, which will allow us to compete effectively.

Moving to our business beyond generics, I would like to highlight just a few things.

Copaxone is off to a great start to the year, our market share has increased, and our program to support our franchise is progressing.

Just this past week, data was published supporting several of our initiatives.

Our Phase II study on a 40 milligram daily dose of Copaxone showed a 38% greater reduction in inflammatory disease activity as measured by MRI to the brain.

In addition, patients taking a 40 milligram dose of Copaxone experienced a reduced mean-on-trial relapse rate of 77%, when compared to annual relapse rate of 62% with the 20 milligram.

This week at the American Academy of Neurology, data was presented which explored the benefits of combination therapy with Copaxone and other existing drugs, a treatment approach that holds great promise for the MS community.

Finally, Laquinimod, our oral drug for MS licensed back to biotech showed good Phase 2b results relapsing MS patients treated with an oral dose of Laquinimod showed significantly reduced MRI disease activity by 38%.

We expect to initiate its Phase III program in the second half of this year.

Azilect, our treatment for Parkinson's disease, has entered an important second phase, we've done very well with the movement disorder specialists.

We're now working to broaden our message to the community neurologists and the marketing program is in place to drive this initiative forward.

Finally, a few quick comments about our respiratory business.

Of course the conversion of albuterol products from CFCs to HFA propellants in the U.S.

has been a major story.

We're positioned to capture this opportunity.

The conversion process continues to move at a brisk pace and we work hard to prepare the commercial strategy and the capacity to respond to this need.

Today, 55% of total RXs are filled with HFA product and we retain a 65% share of that segment.

Of course, the competitive dynamics are changing somewhat as this process unfolds, but we do expect to retain a significant share as the conversion continues.

Our Teva Specialty Pharmaceuticals business, TFP, as we call it, has also done well with our inhaled corticosteroid, QVAR, positioning the drug for those cases where small particle size will allow proper deposition into the small areas of the lung.

We now hold approximately 12% of the inhaled corticosteroid market.

As it relates to our growth actuated product, which remains in approvable status at FDA, we've been asked by the agency to complete some in vitro studies and to conduct a label comprehension study to demonstrate that patients can effectively use this technology based on the labeling.

Given the time associated with doing this study, We would hope for a final approval in 2008.

Of course, our respiratory business is a global one.

In Europe we are beginning to roll out our respiratory business from our historically strong markets in the U.K., France, and Netherlands.

In addition, we expect to participate in a CFC HFA conversion in Europe, but this time in beclomethasone rather than Albuterol, and on a smaller scale.

Our breath actuated products, using our Easy Breathe technology, are well-received in Europe, which bodes well, both for continued European growth as well as for opportunities for us in the U.S.

That concludes my remarks, and I'll pass the call back over to Dan.

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

We are here today to report the results of Q1 '07, if first quarter to follow the best year in Teva's history.

After Teva's huge leap in growth last year, many wondered what would follow and some believe that '07 would mark the end of Teva's growth story, but as you have already heard and seen, our results in Q1 are better than even we anticipated and significantly higher than the comparable quarter last year.

EPS of $0.42 compared with $0.37 last year.

As Shlomo described it, Q1 is an excellent start to a very promising year and I believe it is also a perfect demonstration of what Teva 's scale, along with our balanced business model allows us to achieve.

'07 is a different sort of year than '06.

In '06, our success was based very significantly to a very significant degree on the launches of a very few major products.

In '07, our results will be driven by contributions from many products in many geographies and for many different elements of our business.

Before I describe the results of the quarter in detail, I would like to point out that my comparisons to '06 will be based on the as-adjusted figures of '06.

In other words, our '06 results after taking out the IVAX acquisition-related charges.

We strongly believe that these as-adjusted results, which are the results used by our management and our board, provide a better indication of Teva's operations and trends.

In addition, the quarter-to-quarter comparison is not fully an apples-to-apples comparison because IVAX was consolidated for only two months in Q1 of '06.

Let me now begin by pointing out the financial highlights of the first quarter as compared to the first quarter of '06.

Sales were up 24% to $2.1 billion, adjusted operating income was up 21% to $446 million, adjusted net income was up 20% to $342 million, and adjusted EPS was up 14% to $0.42.

We again generated very significant cash flow from operations, amounting to $499 million for the quarter with free cash flow amounting to $278 million.

And with that overview, lets start the line-by-line analysis and starting with sales.

As I mentioned, sales reached $2.1 billion, an increase of $407 million year over year.

Total sales this quarter include a benefit of approximately 3% derived from currency affects.

But currencies had almost no affect on our earnings.

Our U.S.

generic business was the big three drugs in 2006.

Simvastatin, pravastatin , and sertraline no longer carry their exclusivity pricing.

Oxycodone and Bupropion XL were the important drivers in our results in this quarter.

In addition, we launched three generic products in the U.S.

during the quarter.

Pharmaceutical sales in western Europe, including Hungary, which represented 25% of global sales, grew 37% to $521 million with currency affects contributing about 13% to the total sales.

Teva's most significant market in west Europe continued to be Hungary, U.K., and the Netherlands.

The most significant increase in sales this quarter came from the U.K.

and France.

Both in absolute and percentage terms.

France is now Teva's fourth largest market in western Europe.

Growth in sales in Germany were also significant in percentage terms, but in absolute terms, German sales are still not that material.

These positive trends in Europe were partially offset by the negative impact of new pricing regulations in Hungary and in Italy.

In our international pharmaceutical sales business, by which we mean sales outside of North America and western Europe, we grew from $262 million in Q1 of '06 to $340 million this quarter, an increase of 30%.

Sales in Latin America grew more than 50% over Q1 of '06 and in this region, did not benefit from any currency affects.

Sales in the CE, central and eastern Europe, grew 39% and included an 11% of positive currency effect.

Sales in Israel, which is a relatively stable market, grew 15% with positive currency affects contributing 9% to Israeli sales.

Our global marketing sales of Copaxone amounted to $401 million.

This is a 22% increase over the comparative quarter.

Sales in the U.S., a much more mature market, increased 18% to $260 million and non-U.S.

sales, mainly in Europe and Canada increased at a much higher pace of 31% to $141 million.

Non-U.S.

sales of Copaxone now account for 35% of total global end market sales.

In the U.S., much of the Copaxone sales go to reflect the price increases in August '06 and January '07.

But the gross also included a global increase of approximately 5%.

Our global respiratory business really stood out this quarter with sales exceeding $190 million.

This represents more than doubling of our sales from the corresponding quarter of '06.

The increase was mainly fueled almost entirely by substantial increase in sales of ProAir, Albuterol HFA in the U.S., caused by Teva's leadership, which enabled it to increase its market share in the faster than anticipated conversion to nonCFC--based inhaler products.

In fact, sales in our total U.S.

respiratory business quadrupled as compared to Q1 of '06.

As to Teva API business, first third party business, this quarter, third party sales of API amounted to $148 million, reflecting essentially no change from the comparable quarter of '06.

In addition, the API division sold $189 million worth of raw materials internally to Teva Pharmaceuticals operations.

In the first quarter of last year, sales of our API division reflected larger volumes of material at higher prices, mainly to Teva's own operations, but also to third parties in support of the huge finish those product launches in subsequent quarters.

In fact, quantity-wise, Teva's API sold in Q1 of '07, 16% more in than Q1 of '06 and 10% more sequentially.

Stepping down one line in the P&L to gross profit, gross profit margin in this quarter, 49.9% compared to 47.1% in the comparable quarter.

So in these two quarters, in effect we have the high and low ends of the band of 47 to 50%, we indicated last year as Teva's gross margins going forward.

The high level of gross margin this quarter reflects a change in mix resulting primarily from increased sales of the respiratory products and sales from what we call our international markets, where many of the products are sold as branded products, with correspondingly higher margins, but also reflect improved margins in our other businesses, mainly in Europe.

From gross margin to R&D.

Net R&D increased by 31% to $135 million.

This record number reflects the importance that Teva places in its R&D activities.

More than half of this amount went to generic R&D.

SG&A, which reached $456 million this quarter represents 21.9% of sales, where significantly higher than the level of the first quarter of '06 and on a percentage basis, slightly higher than Q4 of '06.

The absolute amount of SG&A in the first quarter of this year was lower than the $478 million recorded in the first quarter of '06.

This level of SG&A expenditures principally reflects the higher rate in sales in branded markets and branded products and offsets some of the higher gross margins achieved in these markets.

SG&A also includes profit sharing with some of our patents in the U.S.

as part of settlement agreements on a few products, which were substantially higher than in the comparable Q of '06.

In addition, Teva's successful introduction of Azilect in the U.S.

non-U.S.

market generated higher sales and marketing costs.

And to operating profit, in this quarter, it amounted to $446 million, 21% -- 21.4% of sales and up 21% from Q1 of '06.

This reflects the higher gross margin on the one hand, and the higher R&D and SG&A as a percentage of sales on the other hand.

Financial expenses for this quarter at $28 million were about two times the expense of the comparable quarter, but in-line with the average quarterly financial expenses in '06 Q1 of '06 included only two months of financial expenses related to the financing of the IVAX acquisition, compared to a full quarter in '07.

In addition, as you know, the swings in this line item principally reflect hedging activities, which are partially offset in other line items and in some instances, are more than fully offsetting in these line items.

Our provision for taxes amounted to $75 million so 18% of pretax income.

Our best estimates at this early time of the year of the expected annual tax rates that we will face.

This is in-line with a 19% rate in the comparable quarter of '06, but substantially higher than the 15% rate provided for fiscal '06.

The geographical origin of our earnings, in particular, the increased share coming from the U.S.

as well as some of our territories with a higher tax rate is the main reason for this higher rate.

The higher financial expenses and the higher tax rate resulted in net income of $342 million or a net margin of 16.4%.

EPS reached $0.42 compared to $0.37 in '06.

Cash flow from operations amounted this quarter to $499 million.

Our free cash flow after CapEx and dividends amounted to $278 million.

Part of this free cash flow was used for our share repurchase program.

You may recall that the $600 million share repurchase plan was approved last November.

During the first quarter of '07, we spent $152 million on share buybacks so that as of today, a total of $386 million was spent to purchase 11.7 million shares for an average price of $32.90 per share.

Our working capital decreased sequentially from December by approximately $190 million and at the end of the quarter amounted to $3.4 billion.

From here to some working capital items.

First, days sales outstanding in receivables.

These decreased from 58 days in December to 54 days in March of '07.

We have calculated these after netting out from the receivables the sales reserve and allowances, to the so called SR&A.

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 have used the net figure.

Total SR&A as of March 31 '07 amounted to over $1.6 billion, an increase of $98 million from December.

Over 92% of the total reserves are from the U.S., up $94 million from December of '06.

Inventories increased sequentially by 11% to $2.1 billion with days sales in inventory increasing to 173 days reflecting increased inventories in the U.S.

market, most due to seven anticipated product launches and the efforts to enhance customer service levels.

For the convenience of our audience, I would again like to mention three figures relating to our share count so we are all on the same page.

For the first quarter of '07, our average share count for the purpose of calculating fully diluted EPS was 827 million shares.

Our share count for calculating fully diluted earnings per share going forward as of March 31, '07, is approximately the same 827 million shares as the buyback affect was offset by the higher share price.

And the count for calculating our market cap is approximately 764 million shares.

Just one word of clarification regarding the guidance that Shlomo gave.

As always, the guidance given by us does not include any major acquisitions or business development effects.

Last item, dividend.

Yesterday, the board approved the first quarter dividend amounting to a total of approximately $79 million.

On a per-share basis, our dividend was maintained in Israel shekel terms, which translate at the current rate of exchange to $0.10.

This reflects an increase in U.S.

dollar terms from the last dividend payment, due to the declining value of the dollar since the date of our last dividend.

Thank you all for your time and attention today.

Now we will be glad to take your

Thank you.

[OPERATOR INSTRUCTIONS] Our first question comes from Tim Chiang with FTN Midwest Securities.

Please state your question.

Thanks.

I had a question about ProAir and the oxycontin products.

You expect pricing to continue for both products this year?

Also, can you comment about the share.

Obviously you've got an enormous share in the ProAir market, and I would assume that you'll have a dominant position in oxycontin.

How does the DEA quota sit with oxycontin at this point as well?

Good morning, Tim.

It's George.

Let me try to take those.

First on the DEA quota, we're in relatively good shape now.

As you probably know, this is a drug that's very tightly regulated and the DEA is basically on a no expansion of product into the system approach, so it's sort of zero sum game.

They want to make sure with a comes from one player goes to the other, but no more.

Right now in relatively good position.

They're depending on exactly how the demand plays out, we may have need for more material.

We'll obviously petition the DEA for that material and hopefully we'll have an update to get that allocation.

Price did go up late last year, which really began to affect us during this year.

Because that price has to roll out through the trade, you may see some progressive move, but that's probably just the price increase rolling to the system.

As it relates to ProAir pricing, right now it's relatively stable.

We're not modeling in a price increase at this moment.

Obviously, it's an unusual dynamic at work with the conversion occurring.

At this point we're not modeling any particular increase on that.

You had another question about ProAir that was not pricing, Tim?

Well, can you basically supply even more share in this market -- I guess you're at two-thirds of the market on the HFA side --

Look, right now that's a pretty hefty share and at the current rate of penetration of the HFA, supplies get pretty tight for us.

We have ramped up production several times.

We have another increase that will probably start to benefit us late in the year, but I think there's some likelihood that share will moderate a little bit.

That's a very high share.

We'll see some movement as other players ramp up their capacity and I think we should assume some moderation of share.

Okay, great.

Thanks a lot.

You're welcome.

Our next question comes from Robert Bonte with Citigroup.

Please state your question.

Hi.

Thank you for taking the question.

It's Robert Bonte-Friedheim speaking.

Wondering if you could give us a bit more detail perhaps down on SG&A, where there any oneoffs in SG&A spending at all this quarter?

There were no oneoffs, although the splitting of earnings on those products where we have partners is not something which is the same every quarter.

One other affect which increased the percentage of SG&A is that much of the SG&A are fixed costs and since we had lower sales, about 10% lower sales compared to the last quarter, obviously it increases the percentages.

Got you.

If I may, a follow-up question on topline.

Now in the quarter, I think your non-U.S.

operations were very, very strong, the U.S.

operations were strong, but your North America ones were strong, but still significantly lower than fourth quarter.

Is there anything we should worry about, because it seems to a little bit contradict what George was saying about U.S.

share market gains and pricing.

It's George.

We simply had exclusivity that moved from Q4 to Q1.

We actually feel very good about what's going on in our U.S.

generic business.

Exclusivity expired early February.

Yes.

Were there any notable chargebacks in the quarter at all affecting maybe reported sales?

Nothing of worthwhile noting.

Just a reminder, Simvastatin lost its exclusivity late in Q4 and then sertraline in Q1.

Was there any notable shelf talk adjustment at all in the quarter?

No.

Okay.

Thank you very much for taking the questions.

Thank you.

Our next question comes from Randall Stanicky with Goldman Sachs.

Please state your question.

Thanks for taking the questions.

I just have two and a follow-up on the last question.

George, can you just comment on what we've been hearing from some of your supply chain customers regarding an actual increase in pricing following an initial crash after exclusivity, and how that's impacting your view of your 47 to 50% margin band for the year?

Randall, I'm not exactly sure what your question is.

Probably going to turn it to Bill to discuss the market situation.

Could you just rephrase the question again so we make sure we're clear?

Right.

Some of your supply chain customers have been talking about an initial crash of pricing, generic pricing, which is actually then picked up following the removal of smaller competitors after a short period of time.

And you're referring to --

Some of the larger products, with respect to sertraline and simva.

Let me let Bill describe as best he can how we see the situation out there in these products.

Maybe that will help.

I would say, Randall, there wasn't really anything unanticipated in, quote, a crash in pricing.

Any product like sertraline with 14 different competitors or any product with Simvastatin with 10 plus competitors, we experience a significant decline in pricing.

And that occurred as people came in and many people are finding themselves leaving the markets.

They sell their original validation batches and they leave.

I think the important point, which George will talk a little bit at the luncheon today is really who ends up with the share and who holds the share.

I think we're going to talk a bit about that more moving forward.

Were you suggesting that you were hearing pricing was going up, is that what you said?

Are you surprised, now that you sit with close to 40% plus or minus share with some of these big products, were you surprised with the level of pricing you're at right now relative to where you initially expected it to fall out?

I would say no, Randall.

I think we're where we expected to be with price and we're very pleased with our share and I think it's very reflective of our market position and how customers feel about our ability to supply these very large molecules.

Okay.

Let me ask one more question.

On the raise in guidance, if we just take the -- if my math is right for the remainder of the year, it implies approximately $0.61 per quarter.

Can you give us some color on quarterly variation and some of the push-pulls that we should be thinking about in terms of distribution for EPS throughout the remainder of the year?

We initially said last quarter that it's more back end loaded.

I think we see that a little bit more flattening than we said earlier in the year.

In terms of Q2 being similar to third and fourth quarter?

Yes.

Okay, that's helpful.

Thanks a lot.

Thank you.

Our next question comes from Rich Silver with Lehman Brothers.

Please state your question.

Good morning.

Dan, do you think you could also help us out a little bit on what really is or are the drivers of this raised guidance?

Is it oxycontin, is it ProAir, is the gross margin?

Just a sense of topline gross margin and the components of what would account for that kind of increase in guidance?

Look, I think -- first of all, it's not a single item.

It is more a combination of a few factors.

In the recent months we gained more clarity of how the year may evolve and we saw some interesting developments as we described, and especially I described both in the U.S.

in specific products, which came in and we weren't exactly sure when they would come in.

Developments in Europe, so that it's a combination of things, but it's really -- after the '06 year, we really felt that we need some more clarity and this came in and we are already now four months into the year and we feel stronger based on these developments as we felt when we gave first guidance in February.

At least quantitatively, can you at least tell us on some of the operating expenses what ranges we can expect, either in absolute dollars or percentage of revenues and maybe even some sort of revenue guidance, if you can't pinpoint anything qualitatively that's driving this --

I'm sorry, can you repeat that please, sorry?

If you can't pinpoint anything qualitatively that would account for this raised guidance, maybe you can give us some parameters on -- quantitative parameters such as SG&A as a percentage of revenues, R&D, or even maybe topline and gross margin, just some sense there?

Okay.

First of all, I think much of our increased guidance is actually based on margins.

Our margins this quarter were higher than we initially expected and we see them strong also going forward.

It is more a margin issue than a volume or a topline issue.

I would say that our R&D margin or percent of sales was perhaps a little higher this quarter than it will be in the rest of the year.

I generally hope that SG&A as a percentage of sales will be slightly lower the rest of the year, depending obviously on our profit sharing, which is sort of an extraordinary item, if you want to call it, within the SG&A.

And these will be the main drivers, qualitatively.

And so you're also not making any new assumptions on products that haven't been introduced, where the probability may have increased?

At least what we have done in this quarter is already -- on this we have already clarity and there's no question regarding that.

And they gave -- this gave us already a few cents above what we initially expected.

So this we have already in our pockets.

Okay.

Just one more on respiratory.

You mentioned the conversion from CFC to HFA in Europe.

Our understanding was that has been taking place for some time.

You make it sound like it's something that's actually more in the future.

Can you elaborate and perhaps any way you can give us some sense of the $193 million, how much of that is U.S.

versus Europe?

That would certainly be helpful.

The majority is U.S.

It used to be -- a year ago it was the other way around.

By far this quarter, and actually already in the previous quarter, it's by far more U.S.

than outside the U.S.

And Rich, your comment is exactly correct.

This process has been underway and just really just reminding us that this is an opportunity we continue to try to pursue.

And just one more.

Since margin so important, Dan, are you saying that you'd been talked about this range of 47 to 50, so can we assume that certainly the higher end of that is sustainable and you're not going to see this quarter being somewhat aberrant and then we're back down to kind of the middle of that range?

Because that -- you've made it pretty clear that that's really the driver of the better-than-expected outlook.

Look, we gave a range because we feel that we have a normative range and it's very difficult on a quarterly basis to shoot at an exact number.

But I assume that it will be better -- throughout the year better than the lower end of the range and the first quarter has already caused that.

Okay.

Thanks very much.

Thank you.

Our next question comes from Gregg Gilbert with Merrill Lynch.

Please state your question.

Thanks.

I have a couple.

First, Dan, couldn't you find $1 million more of cash flow?

I knew this question was coming and I apologize I didn't prepare an answer for that.

Seriously, Shlomo, now that you've had some time to meet with some key stakeholders, what's your sense of how Teva should be prioritizing the uses of the cash flow in terms of share repurchases, dividends, and acquisitions?

And within acquisitions, how would you describe your current acquisition criteria and priorities at this point?

Thanks a lot.

I would say that Teva, probably in our size, is analyzing all the opportunities in this regard, is basically following two major considerations.

One, what is the strategic fit for the proposed acquisition?

I.e., whether it come along with our general growth strategy.

And then of course, what is the value proposition that this acquisition is offer?

At the end of the day, it's about creating value and about value propositions that we offer to our shareholders.

So this is the two major issues of major consideration that we're assessing any proposed acquisition.

And that's referring to any rumors or market rumors or any news regarding any potential acquisitions.

Okay.

I have a couple for George and/or Bill.

First on the legislative front.

How would you handicap near-term legislation on by the similars, AGs, and settlements?

And any other one I should have been asking you about.

Well, I'll start and I'll let Bill -- both of us have been active and I'll let Bill comment a bit.

As you know, the day is going to be very busy in Washington today and during the course of the week as PDUFA is discussed.

I think the likelihood we'll have some kind of generic biotech legislation still remains quite high.

Whether it will find its way in PDUFA is changing and probably with a perhaps lower probability today than it was a week ago.

As you know, this is a fast-moving subject.

And you also are probably well aware that PDUFA is one of those bills that has such strong support on a broad basis, that we'll see all kind of things attached to it.

Let's back up.

I would say on a general sense the likelihood of a generic biotech bill during the course of this year remains quite high.

As it relates to settlements, I think this remains an issue that attracts attention and I think it's certainly possible that we'll see some kind of attempt at doing some legislative fix related to the nature of settlements.

Although again those -- from what we're seeing, it seems quite more reasonable than it was perhaps a month ago.

Certainly some activity there.

Bill, I don't know if you want to jump in on any of these things.

Or AGs for that matter.

of all the things that are out there, biogenerics, the prospects are still increasing, and that's good.

Patent settlements, as George said, it's very likely something will happen and it will be much more reasoned.

And finally, patent reform is moving, but we think that will be very reasoned.

And the authorized generics piece is probably in my -- at least our view, the least likely to occur at this point in time.

Those are all the major issues that are moving at the moment.

Of course, we are looking for more guidance that will be issued in July, although not -- this is not actually what's happening on the Hill, but it will be coming out of CMS on the amp, the final guidance should be issued from CMS by July 1.

That will be interesting.

Lastly, can either of you comment on any movement in the marketplace on Lovenox, there's been some speculation of late.

Wanted to know if you were hearing anything in the trade and if there was anything to update regarding your program?

We've heard the rumors that have been recirculated and have no facts, nothing, actually.

We have no facts to provide any color on that.

Thank you very much.

It is Dan.

We are running late and I really urge you to limit your questions to one per person.

Choose the most pressing one and ask us and we will try to be as short as we can in our responses, because we want to get as many people that want to ask us questions.

Thank you very much.

Thank you.

Our next question comes from Ricky Goldwasser with UBS.

Good morning.

My questions are actually -- or a question.

First of all, just on ProAir, just a clarification.

Is the market share moderation that you're expecting as a factor of capacity, or are you seeing any changes in the market base associated with formulary changes on the ProAir, such as United?

And I'll just put another question there, on the pricing environment, what are you seeing any changes in the marketplace associated with formulary changes on the higher end, such as United, and given it's a flow-off, just put another question there, flow-off in the pricing environment.

What are you seeing as pricing for the older generics, not the new generics coming out of 180 day exclusivity, but for the older products in your basket?

Thank you.

Hi, Ricky.

It's George.

As it relates to ProAir, I think the assumption of a moderating share really relates to the fact that we really got a very early move on this market.

Other players are and have been ramping up some capacity and I think it's natural that there'll be some jostling for position, number one.

Number two, as I mentioned, the rate of penetration of the HFA has been quite rapid.

And we are keeping up right now from a capacity standpoint to retain this share.

Obviously, there comes a point where we're pressing up against our capacity constraints.

So I think there are a couple of forces at work here.

It's really not -- there's no formal way to describe exactly what will occur, except to say that it is reasonable to assume that there would be some moderation of share.

It's a combination of a behavior of the marketplace and some tightness on capacity as the ramp-up occurs.

Obviously, we'll be thrilled if we continue to retain the share, but we've assumed a slight moderation.

And on the pricing, I think -- I might have covered that.

I think I covered that in my remarks on the older products that we're seeing a rate of erosion on the base that is better than we have seen in the early part of '06 and certainly better than we had seen in '05 and running just short of 10% on erosion of the base products.

Our next question comes from Corey Davis with Natexis Bleichroeder.

Please state your question.

Just one.

Do you think the recent Supreme Court's decision could have an immediate affect on any of your ongoing litigations?

It's a good question.

Corey, it's very new.

We are still really analyzing the Supreme Court decision.

Certainly on the surface, it does look like it is probably favorable to us.

It seems to argue that the federal circuit had applied too rigid a standard to the high of obviousness, but we really need to digest this and then we'll have a better read whether it has a direct impact on any of our cases.

That's all I had.

Thanks.

Next question comes from David Buck with Buckingham Research Group.

Please state your question.

Yes, thanks.

One quick one for George.

Can you give us a sense of your view of the generic prior to the May 15 decision we're expecting.

For Shlomo, can you give us comment on the guidance that was put out by your predecessor for 2008 and 2009, the 250-plus for 2008 in terms of EPS?

Thanks.

David, unfortunately, my answer will be very efficient.

It's really not something I can provide any more clarity on at this point?

Is it actually in the guidance at all for this year?

As you know, all of our new product program is essentially risk-adjusted in various ways through our planning process.

Obviously, I can't give you the individual break down by product, but we contemplate all products that we look out and how to adjust the risk on each of them.

It's Shlomo now.

I believe in continuity.

Unless we are giving any notice for change, everything is intact, including what my predecessor said to you in previous occasions.

Okay.

Thank you.

Our next question comes from Mark Goodman with Credit Suisse.

Please state your question.

Yes.

North America, if you look at -- you back out the pharma from total sales, looked like API was pretty weak.

Can you talk about why so weak in the quarter, it's been weak in the past couple quarters, and what your expectations are there for the year.

And Dan, can you repeat the comment you made about the settlement agreements in the SG&A comments please?

Hi, Mark, it's George.

On the API side, I don't think there's anything particularly noteworthy to describe here.

Our business externally and internally is very much tied to the flow of products.

Usually with some of lead time in effect, sort of a lag in time.

Right now, certainly internally, our packy, as we call it, has been done incredibly well in getting us products and products ready for launch in terms of raw material and from everything we can see are doing very well in the market with their third party customers.

I think it's more just the nature of the flow of products than anything else that I could point to.

But it looks like it's going to be down from last year pretty substantially.

Is that the case we should be thinking about for the full year?

First quarter is unchanged.

And the first quarter last year was a very good quarter, so I can't tell if it's -- I don't think it should be down.

Okay.

Not to third parties.

And your second question was about the SG&A?

Mark?

He's gone.

Oh, we lost him.

Okay.

Our next question comes from Michael Tong with Wachovia.

Please state your question.

Hi, thanks for taking the question.

Actually a follow-up to a previous question for Dan.

You talked about the margin being better than you had previously expected and hence the revised guidance.

Can you give me a little more color as to whether that's a U.S.

phenomenon or an internal -- international phenomenon and whether that's coming from better pricing, fewer competitors, or better allocation of fixed overhead?

First of all, it is not concentrated in one area.

Certainly in the U.S., as we have seen, it was already mentioned by George, both oxycodone and bupropion came in this quarter and they're relatively higher margins.

But it is not -- it is not really one single phenomenon.

Our next question comes from Ronny Gal with Bernstein.

Please state your question.

Thanks.

Two quick ones.

First, the rest of the world sales have dropped sequentially over the fourth quarter from 361 to 340.

Is this a seasonality issue or is there something else going on there given the strength of the growth in that area?

Second, are we still on track to submit the first biogeneric in Europe in the first half?

Submit what?

The first biogeneric application to the MEA in the first half of '07.

Ronny, I don't know that we've provided complete detail for our submission plans for Europe.

I will say that the biogeneric activity is moving much more swiftly right now in Europe and that's an area where we should start to see some activity in the first half of this year.

The first part of the question was directed at you.

I would say that there's nothing significant in this change between the two quarters.

It's composed of so many markets that it's almost going to (inaudible).

Okay, thank you.

Our next yes comes from Ken Cacciatore with Cowen & Company.

Please state your question.

Hi.

My question is for Shlomo.

You were commenting that there's some rumors out there, so I'll ask you directly.

Have you bid on Merck KGA, and have you have bid on Merck KGA, what is the time line in which we will know if you were successful in your bid?

Obviously we cannot comment on any opportunities or market rumors, and you will excuse me if I cannot elaborate more in this regard.

Thank you.

Our next question comes from Louise Chen with Morgan Stanley.

Please state your question.

Two quick questions.

First in terms of the photograph 4, are there any important products that we should be looking for this year?

Secondly, what is the interest income and interest expense for the quarter?

Thank you.

There are a number of cases that are ongoing.

Again, I think things to watch for, they're certainly waiting, as was mentioned earlier, a ruling on asset backs.

There is a preliminary injunction hearing on [rotopine] benazepril, which is a generic Lotrel later this spring.

There are a number of cases, but nothing that is a critical single activity to watch for.

But certainly there is some cases out there in the public domain.

The second part of your question again?

The interest income and the interest expense for the quarter?

Interest income, Dan?

I'm sorry?

Interest income or expense?

As I mentioned in my opening remarks, the main swing in financial charges are usually and including this quarter our hedging activities, which stick out in a small line item -- relatively small line item like financial expenses where they are offset -- more or less offset in other line items.

So in terms of interest expense, we had practically the same interest expense as we have seen in the last quarters.

Obviously in Q1, we had lower interest charges because that was only -- we had only two months of the financing of IVAX, but besides that, there is nothing significant in our financial income or expenses save the fluctuation in the hedging activities and results of that.

Our next question comes from Will Sawyer with Leerink Swann.

Please state your question.

Good morning.

Thanks for taking the question.

A couple for George.

George, first on the HFA conversion process, when's your outlook on the conversion from here in the past couple weeks, looked like it stalled out.

And what role does the fact that physicians are writing prescriptions more for albuterol and also that CFC prices have increased quite a bit, in light of the supply constraints, how do you see that playing a role in the conversion?

The first part of your question related to the slowing in the last week or so.

I think we may see intermittently from time to time some small flow of CFC into the market.

There is one player that's had some supplies of CFC, and so that will at various moments slow the progression, but I think generally speaking, this process is in full motion, unlikely to be reversed.

But I think -- I think where we'll see some occasional slowing based on some flow material into the market.

The second part was really about the way the product is written.

It is an unusual product.

As you probably know, it's been available and known by its generic name for a very long time.

So you see a relatively high number of prescriptions written for albuterol rather than brand names.

It is a market that has some unusual characteristics, but as you know, our product is a brand, it was approved as a brand, launched as a brand, and is commercialized as a brand.

The last part of your question was about pricing.

I'm not sure I have anything more to add to what I mentioned earlier about price and HFA, which is we're not at this point anticipating any increase.

It is possible there'll be some price competition in that always occurs largely through the managed care, but right now seems relatively stable.

It's Dan.

I don't know how long the line is of people who still want to ask question, but we have to limit it to one more question and apology if there are anymore waiting in line, but we are obviously available to questions even beyond this Q&A period.

Thank you.

Our final question comes from Elliot Wilbur with CIBC World Markets.

Please state your question.

Thank you.

I guess I have to ask a halfway intelligent question now.

With respect to Copaxone franchise, 12 months ago a lot of us were worried about possibility of deceleration there, but the product has held up very well.

We're starting to get a lot more visibility now on pipeline products that maybe arguably don't have better efficacy, but they definitely have less onerous dosing profiles.

It seems like in terms of the growth of your MS franchise going forward, you definitely placed your bets on an oral product, first Copaxone and then laquinimod.

Are you also exploring other franchise extension avenues for Copaxone in terms of just improving the dosing profile, that maybe you haven't talked about.

I know there was some speculation a while back that you might looking at a transdermal formulation.

I'm wondering if you're not also exploring some longer-acting injectable technologies as well.

I think we are looking at this opportunity as well.

Currently, we have the 40 milligram as a daily, Copaxone is our main initiative and we continue to look at opportunity for Copaxone in different forms and different regimens, but currently we cannot report on any progress -- significant progress other than the 40 milligram and laquinimod for the MS franchise.

There are no further comments.

I would now turn the conference back over to management for any closing comments.

Hi.

This is Kevin.

On behalf of the Teva team, I would like to thank everyone for joining us today.

If you have questions, we're happy to take them offline.

We have our luncheon today here in New York, so please join us in person or participate via the Webcast.

Diego, I'd like you to, if you could, just provide the callback information.

Thank you, everybody, have a great day.

Thank you very much.

Thanks, all.

Thank you.

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Thank you.

This concludes today's conference.

Thank you all for your participation.