Teva Pharmaceutical Industries Ltd (TEVA) 2007 Q2 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 welcome everyone to the Bentley Pharmaceuticals quarter two 2007 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, everyone, and thank you for joining us for the second-quarter 2007 conference 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 1a called risk factors in the Company's annual report on Form 10-K for the year ended December 31, 2006 as well as Bentley's subsequent periodic reports filed with the SEC.

I would also add that the Company uses both GAAP and certain non-GAAP measures to assess performance. The Company's management believes these non-GAAP measures may also provide useful supplemental information to investors in order that they may evaluate Bentley's financial performance using the same measures as management. The Company's management believes that as a result the investor is afforded greater transparency in assessing the Company's financial performance.

These non-GAAP financial measures should not be considered as a substitute for nor superior to measures of financial performance prepared in accordance with GAAP. With that I will turn the call over to John Sedor, our President. After John's remarks I will review our financials and then we will take your questions. Please go ahead, John.

Thanks, Rich. And I want to thank each of you for taking the time to join our conference call today. I would first like to touch upon some of our key highlights for the quarter. First, we are very encouraged with the results thus far on our global nasal and clinical trials and the presentations that we made at this year's ADA meeting on Nasulin were well received. They dramatically increased our visibility for this potential new Diabetes treatment.

Secondly, we made important strides on the patent application to extend our protection of Testim which continues to enjoy strong sales. In the second quarter growth in Testim royalties drove a 12% increase in licensing and collaboration revenue. And perhaps most importantly, shortly after the close of the quarter we received a critical patent that broadly protects our intranasal drug delivery technology for peptides and proteins in addition to insulin.

And finally, in June we closed on approximately $15 million of financing, borrowing from a position of strength at an opportune time. I'll come back to these issues later in my discussion.

For the quarter we achieved an 8% increase in consolidated revenues to $31.2 million. Generic revenues reflected the impact of a full quarter of reduced selling prices due to the lower reimbursement rates implemented early in 2007 by the Spanish Ministry of Health. We were able to maintain our market share and increase sales volume in Spain through early price reductions on certain products in our portfolio. As a result our consolidated revenues on a constant currency basis were flat with the comparable quarter of prior year.

Looking ahead we remain optimistic about the Spanish generic market. Despite the pricing pressures Bentley is well-positioned to grow in Spain with a dedicated salesforce, extensive distribution network, broad portfolio of marketed products and new product launches. From a tactical standpoint our near-term challenges in the generic business relates to the new reimbursement rates in Spain that took effect on March 1st.

We decided to adopt an aggressive strategy, reducing prices on selected products in our portfolio affective February 1st to get a jump start on the competition, drive sales volume and ultimately gain market share in Spain. The results of this strategy have been mixed. We did increase volume but did not increase our current market share.

We've also been working to strengthen our long-term gross margins in Spain. We made progress during the second quarter in reducing costs in our Spanish manufacturing facility and looking ahead we expect that our new API facility in Spain will be completed by the end of this year and we should start seeing the incremental benefits of vertical integration on our key products in the first half of 2008.

As I mentioned earlier, we recently closed on approximately $15 million of financing. This was obtained through a loan agreement with one of our Spanish subsidiaries. These proceeds will be used to fund research and development and capital expenditures.

We continue to expand our generic business geographically and broaden our portfolio of commercialized products. In the first quarter we announced six new product approvals throughout the EU. Most recently in Spain we received approval for venlafaxine, the generic equivalent to Wyeth's depression treatment, Effexor. And in Ireland we received approval for Alendronate, the generic equivalent of Merck's Fosamax for treating bone loss.

Now I'd like to spend some time on our drug delivery business which is based on our patented CPE-215 permeation technology. Our first proof of concept with CPE-215 was with a small molecule, testosterone. Our first commercial product was Testim. Testim is marketed by Auxilium Pharmaceuticals and has currently achieved a 19.8% of share of the U.S. market for topical testosterone treatment.

The current patent for Testim continues through June 2008 and, as I had mentioned earlier, progress continues on our pending application to the U.S. patent and trademark office. The USPTO issued a nonfinal action to which we responded to in late April. On July 19th we filed a supplemental response with amendments to our patent claims. We believe the response will be successful and a new patent will issue in late 2007 or early 2008 extending our protection for Testim to 2023.

But looking beyond Testim, now that our permeation technology has been validated for small molecules in dermal applications, we have been working to extend the technology to more complex molecules and compounds, especially therapeutic peptides for chronic diseases. This brings me to Nasulin which we are developing as our first therapeutic target in this area.

You may already know Nasulin is different from injected insulin or other new drug delivery approaches using granulated insulin powder. It is a stable liquid emulsion which delivers a convenient intranasal spray and is absorbed through the nasal mucosa. We believe that a convenient and painless intranasal spray has the potential for much better patient compliance and clinical outcomes than a routine of regular injections.

Nasulin entered Phase II clinical trials in the United States during the third quarter of 2006 and these studies are progressing well. During the first quarter of 2007 we received approval to proceed with a Phase II clinical evaluation of Nasulin with Type II diabetic patients in India. This study is designed for three months of administration of Nasulin. Our target is to enroll 90 patients and as of this week we have enrolled and randomized 75. We expect to finish enrollment within the week and anticipate this new study to be completed in early 2008. To date a total of 103 patients globally have received Nasulin. Of those patients 31 are Type I diabetics and 112 are Type II.

Three presentations on Nasulin clinical trials were presented at the annual meeting of the American Diabetes Association in late June. Our lead clinician on Nasulin, Dr. Sherwyn Schwartz, made an oral presentation on our study of Type I diabetic patients and two posters were displayed. The first was on our study of normal non-smoking and smoking subjects. The second pertained to our study to see if mild nasal congestion hindered the absorption of Nasulin. Our trial results to date indicate that Nasulin may have significant advantages over traditional insulin therapies.

As Dr. Schwartz reported, the results on Type I patients were encouraging when comparing Nasulin to regular and fast acting injectable insulin. Nasulin again demonstrated more rapid onset of action than both forms of injectable insulin. In patients who received Nasulin blood sugar reductions for two hours after eating were similar to patients who received regular injectable insulin. Results comparing the bioavailability of Nasulin to regular insulin again confirmed a 15 to 20% bioavailability over two hours and no serious adverse events were reported during this study.

The poster presentations reported further supporting data. In the study comparing smokers and nonsmokers Nasulin was absorbed equally, also demonstrating more rapid onset of action than fast acting injectables insulin. A large percentage of Type II diabetics are smokers and are precluded from using inhaled insulin and when Nasulin was administered to two different nostrils in healthy male subjects there was no significant difference in absorption between open and mildly congested nostrils. These trials showed that Nasulin is equivalent in several key measures to leading formulations of injectable insulin and has potential advantages over other novel drug delivery approaches.

Overall we view this year's ADA as a success for Bentley, especially when noting that this was our first major U.S. formal data presentation. In addition, we used the meeting as an opportunity to dialogue with a number of companies who have the potential to partner with us in taking Nasulin through Phase III to commercial launch. The positive results presented at the ADA have helped bring awareness of our technology and we are exploring all potential opportunities.

It is important to note insulin is among the largest and most challenging to administer of all peptides. The success we have achieved to date with this difficult compound underscores the value of our technology. This value becomes more compelling when you consider the many other therapeutic areas where the current treatment is an injectable peptide that is smaller and less challenging to deliver than insulin. These drugs could potentially become more widely prescribed and used when converted into a more easily administered format.

Most of these peptides are already in commercial use and others are in advanced development. We continue to seek partners with pharmaceutical and biotech companies to extend our drug delivery technology into the most promising of these clinical areas, either as new product launches, as part of product lifecycle management or as line extension strategies.

We believe intranasal drug delivery can be a real benefit to patients who are resistant to treatment with the injectable pharmaceuticals. Developing these opportunities is a strategic focus for Bentley. That is why the recent patent received for intranasal technology is such an exciting development and one of the highlights of the Company's since our last quarterly call.

The new patent extends proprietary protection for our technology to a broad range of peptides beyond insulin for the next 20 years. We expect the comprehensive protection provided by this new patent to generate even greater interest in Bentley's technology. We continue to be excited about Bentley's potential for future growth and we look forward to sharing our progress with you. I'd like to thank you and now I'd like to turn the call over to our CFO, Rich Lindsay, for a discussion of our second-quarter financials. Rich?

Thanks, John. For the second quarter 2007 consolidated revenues were $31.2 million, an 8% increase from $29 million reported in the second quarter of 2006. Specialty generics revenues of $28.5 million were up 7% for the quarter driven primarily by the impact of favorable foreign exchange rates. Revenue declines from mandated reductions of reimbursement rates in Spain were offset by new product introductions and export sales.

Revenues of $2.7 million from the drug delivery business were up $294,000 or 12% versus the second quarter 2006 on increased royalties related to Testim sales. Expressed in constant currency consolidated revenues were up 1% versus the comparable quarter in 2006. Consolidated gross profit for the second quarter 2007 was $15.4 million a set% decrease from the standpoint much in dollars reported in the second-quarter 2006.

Consolidated gross margins for the second quarter of 2007 was $15.4 million, a 7% decrease from $16.5 million reported in the second quarter of 2006. Consolidated gross margins were 49% and 57% for the quarters ended June 30, 2007 and 2006, respectively. Specialty generics gross profit of $12.7 million was down 10% for the quarter primarily due to mandated reductions in reimbursement rates in Spain and a $120,000 reserve for Simvastatin inventory obsolescence.

The inventory reserve is specifically related to Simvastatin inventories that are not expected to be utilized prior to their expiration date due to slower than expected sales in the United States. The prior year Specialty generics gross profit includes a $460,000 benefit resulting from a lower than expected pharmaceutical tax assessment imposed in Spain. Gross margins of the Specialty generics business were 45% and 53% for the quarters ended June 30, 2007 and 2006, respectively. Drug delivery gross profit in the second quarter of 2006 included a benefit of $479,000 resulting from a change in estimate in the recording of Testim royalty revenues.

Consolidated operating income for the second quarter 2007 was $1.9 million compared with $4.9 million reported in the same quarter of the prior year. Lower operating income resulted primarily from the reductions in Specialty generics gross profit, exchange rate effects and increased generics operating costs and increased research and development spending related to Nasulin clinical trials. These reductions in operating income were partially offset by the absence of litigation expenses reported in the second quarter of 2006.

Operating income for Specialty generics of $4.7 million for the second quarter 2007 was down to 30% from a comparable quarter of 2006. Operating loss from drug delivery of $2.7 million for the second quarter 2007 was up 53% from the comparable quarter of 2006. Pretax income for second quarter of 2007 decreased 56% to $2.2 million from $5.1 million reported in the comparable period of 2006. The provision for income taxes declined 39% to $1.5 million from $2.5 million reported in the second quarter of last year as the result of lower pretax income and a lower effective tax rate for the Specialty generics business.

Pretax losses generated by the drug delivery business are subject to a valuation allowance and as a result are not offsetting pretax income generated by the Specialty generics business for the purposes of determining the provision for income taxes. This has the effect of increasing the consolidated effective tax rate for GAAP reporting purposes for the Company. The Company's consolidated effective tax rate for the second quarter was 68% compared to 49% in the same period of the prior year. The effective tax rate in the specialty generics business was 31% for the second quarter compared to 37% in the same period if 2006.

Net income for the second quarter was $710,000 or $0.03 per diluted share compared to $2.6 million or $0.12 per diluted share a year ago. Net income for the second quarter of 2007 includes a benefit of $0.01 per share from favorable fluctuations in foreign currency. Consolidated EBITDA declined 40% for the second quarter 2007 to $3.8 million from $6.3 million reported in the comparable quarter last year. Specialty generics EBITDA of $6.3 million was 20% lower than prior year. Drug delivery EBITDA of negative $2.5 million declined 55% from negative $1.6 million reported in the comparable quarter of 2006.

In June our Spanish subsidiary borrowed US$14.8 million, approximately EUR11 million, the proceeds will be used to help fund our capital research and development projects. The loan carries a variable interest rate equal to the euro interbank offered rate plus 0.5%. Payments commence in December 2008 and Indians December 2013. As a result cash, cash equivalents and marketable securities increased to $36.8 million at June 30, 2007 compared to $15.6 million at December 31, 2006. During the second quarter we invested $2.3 million in fixed assets and $0.6 million in drug licenses. This compares to additions of $4 million in fixed assets and $0.3 million in drug licenses during the second quarter of 2006.

For 2007 we are reaffirming our previous guidance for research and capital expenditures. We expect consolidated research and development expenses to be in the range of 15 to $16 million with a focus on continued development in the Nassau. 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, manufacturing efficiency projects and investments in additional drug licenses. I would like to open the call up for questions of now, Carly.

(OPERATOR INSTRUCTIONS). Randall Stanicky, Goldman Sachs.

I have a couple of questions. Just first, looking at the drug delivery business losing about $2 million to $3 million, $2.5 million in this quarter, whereas on the other side we look at the Spanish generics business run rating close to $25 million in EBITDA. I guess two questions. One, when do you stop losing money? And I guess it's a spending related question, but when do you stop losing money on the drug delivery side? And then I guess secondly, as you think about these two separate businesses what's the long-term strategy here? Then I have a follow-up.

Yes, when you start losing money on the drug delivery is really the time when you pick up that partner or Phase III trials. Most of the expenses on that side are related directly to clinical trials and R&D support. And as part of an anticipated deal structure we would have that big pharma partner pick up those expenses and at that point the Company would, on a consolidated basis as well as on a business segment basis, be in a profitable situation.

And what's the time frame for that?

The time frame for that is -- what we anticipate is somewhere around the completion of the Phase II trials which we've talked about happening sometime in early '08. Plus or minus a few months would be the time where we think that the big pharma partners would be the most interested in structuring a deal.

And then once you have a deal in place what's the next step? Is it continued investment in the drug delivery business or are there other things in terms of what you're thinking about for that business?

As a John talked about in the call, the insulin piece is kind of the first step and there are a number of other peptides that would be very interesting to use with our technology. What we don't anticipate is heavy cash burns on those products like we had with the insulin product. But a lot of that is really going to depend on what our partner's situation would look like going forward.

Randall, just a comment on it. If you take a look and I mentioned in my presentation that there are a lot of opportunities -- insulin is an extremely difficult peptide and the fact that we are able to deliver it and the success that we've had so far makes these other peptides that are either commercially available or in development real opportunities either to create relationships with other pharmaceutical companies or biotech companies to develop their peptides.

So as a result of the ADA we've had -- it was very encouraging, we spent a lot of time talking to people, not just on insulin but also on what our technology can do for us. And just to ad, with the issuance of this patent, this broad patent that covers peptides and proteins, it really provides some real value to this technology now.

I guess just on the spending in the quarter, I mean looking at SG&A we saw -- it looks like, if my model is correct here, but a $1.3 million increase. What's the reason for the increase? I want to look at selling and marketing, but also SG&A was up substantially. Is that the current run rate in terms of spending on those line items going forward at least the way we should be thinking about it?

The G&A piece of it, you have three major components that are driving that. One is that you had a 7% increase in -- just due to exchange rates in the operational costs in Spain. So exchange rates are playing a piece of that. A second piece of it is you have some normal wage increases, inflation increases that happen not just in Spain but also in the U.S. And the third piece of it is that in that G&A component is where Spain pays the Ministry of Health for filing fees for new products. And those filing fees have increased during the quarter and would be attached to future revenues as well. So that's where the increase in G&A is coming from. The sales and marketing piece of it also, unfortunately, is subject to that fact of the exchange rates on the euro as well as on some normal inflation costs.

But that's hedged out with the top line as well to see an impact, right?

Right.

What about -- just last question and then I'll jump off. In terms of the gross margin, obviously it was down and you gave some rationale why. How should we think about the business from a profitability or a gross margin perspective going forward on the generics business? And then I guess the second part of that is do you see a noticeable uptick in gross margin in what you said was the first half '08, some of the vertical integration comes online?

What I saw in the second quarter is we had the full impact of the price reductions and it hit us particularly hard on our lead product which was Omeprazole. So product mix is going to play a big part in what happens to the gross margins on that business going forward. Now what we have counteracting that is new product introductions as well as rising export sales. So it's difficult to say what the product mix is going to look like in Q3 and Q4, but we can say with some certainty that it is going to be a factor.

So I mean, looking back at '06 we were around 50%; in fact early in '06 we were above 50% on the product side, now we're at -- last quarter 46, went down to 44. Is that broadly how we should be thinking about it or could there be further pressure going forward?

Again, without having a crystal ball to see what the product mix is going to look like it's really difficult to say.

Assuming the product mix stays in the form it's in right now is that a run rate going forward?

Yes, if you hold everything else being constant you would expect that it would be somewhere in that 40 range.

In other words the impact from the pricing cuts is fully reflected in the profitability for the quarter?

Yes.

Okay. Thanks a lot.

David Maris, BAM.

Hi, Jim and John. I have a couple questions. The stock is down 15% despite the more you talk about nasal insulin and I think you're the only company that aspires to be [nectar]. But during the last four or five, six years the stock has been roughly where it is now and you have this interesting nasal delivery thing. But as Randall has highlighted in a few notes, the generic business alone may be worth twice what your current stock price is. He's raised it and you didn't address it really directly. I've been in meetings where other shareholders have brought it up to you that, well look, you would be better off being two separate companies.

You're -- it's sort of like you're trying to mate a kangaroo with a mink to get a fur coat with pockets. You're doing something that's impossible, it's rarely, rarely done successfully and doesn't seem to be working. So when will you just kind of come to the realization that masking the earnings of the generics business doesn't make any sense even if you're investing in something worthwhile? That it's better off being separate? Are you making any plans, are you exploring that at all?

David, let me just comment a couple things. First of all, I love your analogy. Years ago, up until we got into the clinical trials on Nasulin the Company, with respect to the drug delivery, had not -- was working its way through the value of this drug delivery. And as we go forward and we continue to get encouraging results and positive results from the clinical studies that we're doing globally, now we take a look at the Company and drug delivery in a different light. All I can say to you, David, is that the management here and our Board of Directors are constantly assessing strategic alternatives for the Company.

But are you currently in the process of evaluating that? You say you're constantly doing it. Again, I mentioned that it was -- and people who haven't been in meetings with us should realize it. I say it with good intentions of that I think that you'd be worth a lot more as separate companies, but if the Company is not really moving down that path then investors should know that.

David, this is Rich. The question that you're asking and the analysis that's supporting it is recognized by the Company and management in particular. But unfortunately we're not in a position that, even if we were doing this or not doing this, it's kind of that we can't confirm nor deny. It just wouldn't be appropriate to comment on that question at this point.

Fair enough. Thanks.

Mike Krensavage, Raymond James & Associates.

Good morning. What were the issues that stopped other companies' efforts to develop nasal insulin in the 1980s and 1990s? And then what are you doing to manage around those? And the other question is what is the pH of Nasulin for the data that you presented? Because I believe your patent is for pH of 4.5 or below. Thanks.

There's been a whole series of reasons why other companies have not been able to deliver intranasally. One key one is their formulation, they have stabilizers in them and that has caused them some issues not only with the delivery of the product but also with the FDA who does not look favorably on putting stabilizers in this type of product. The pH issue, just -- let me just clarify that issue is that it is an acidic pH, but, just so you and the listeners here understand, that once the Nasulin enters the nasal mucosa it is quickly neutralized and there is really no effect of the pH on it.

We have our director of research and development here. Fred, would you like to add anything to that?

I'd be happy to comment additionally. My name is Fred Feldman, I'm VP of R&D. And Mike, what you commented on in terms of prior history of nasal administration is completely correct, people have tried to deliver insulin by nasal administration in the past, decades ago, and they haven't been successful. And the reason they haven't been successful is because either the bioavailability was extremely poor and not relevant in terms of clinical administration or a commercial benefit or patients suffer nasal irritation when efforts were made to overcome the low bioavailability by the incorporation of harsh detergents.

We have been well aware of that and exactly those reasons are why we chose a different formulation mechanism and I included the excipient which we have CPE-215 which has decades of safety and use and human use in both the foods and cosmetics industries and where we have in the last years added supplemental data on safety and toxicity studies that indicate that there are no adverse affects from it.

Additionally, in the past nasal administration formulations, as John has said, have incorporated harsh stabilizers as antimicrobial agents and our formulation and device has been able to find ways to eliminate those so that there are no effects of those as well. It may be interesting in looking at that also for you to remember that last year FDA's guidance for nasal spray products was for those products which incorporated those agents to remove those. We have been aware of the impact of agents like that and have eliminated them from our program years ago. And so we believe that where others have not been successful in this area that we can be well successful and so far all of our clinical studies are consistent with that.

Okay.

(OPERATOR INSTRUCTIONS). Kenneth Smith, Lenox.

Good morning. I wonder if you could tell us when there might be another -- when we might expect see some additional information released on the progress of the Nasulin? You had that ADA presentation; are we going to have to wait until the Phase II trials over or might there be some other event coming up for us to learn more about the actual progress?

Ken, one of the things is we're in clinicals right now. These clinicals are in process. So we'll probably see the results and start putting out the results on this thing probably late 2007-2008. As I mentioned to you, the Indian studies will be completed early in 2008.

Okay. Can you explain why the R&D is tilted so much towards the second half of the year -- compared to the first half?

Ken, this is Rich. The first part of the year the trial activity that we had had a fewer number of patients, whereas, as we've talked about, this trial in India has -- patients in full enrollment is going to be somewhere around 90 so that's really where the costs are coming from is on a patient-by-patient basis.

Okay. So those costs are in your R&D?

Yes.

Yes, exactly.

Okay. And if I could switch over to the generic business. Do I understand you to say that the API facility really isn't going to make any -- provide any benefit to your cost structure until next year or is there going to be -- is it going to come on stream in a phase-in fashion or what can we expect there?

What we expect is we should see some impact in the last part of this year and a full year's impact in 2008.

Is that facility taking longer to bring on than you had earlier thought?

We are experiencing some delays in that and there's also an issue of once we have it online and we have the product certified to go through it we still have to work through some existing supply. So for that to translate into the gross margin line we will have to deplete what we have purchased basically.

Okay. And that's what the balance of the CapEx are for, to complete that facility basically?

A good portion of that, yes.

Okay. All right, thank you.

(OPERATOR INSTRUCTIONS). Gentlemen, we appear to have no other questions. I'd like to turn it back over to you for any closing remarks.

I'd like to thank everyone for participating in the call. Again, this has been a challenging quarter with the full impact of the pricing in Spain. But the excitement of the drug delivery and the new patent applications, we continue to be very positive on Bentley and Bentley's future growth. I appreciate your participation and if you have any other further questions you can contact us directly here. Richard?

Thank you, everyone.

Thank you.

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