Teva Pharmaceutical Industries Ltd (TEVA) 2007 Q3 法說會逐字稿

At this time to come I would like to welcome everyone to the Bentley Pharmaceuticals 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) Thank you.

It is now my pleasure to turn the floor over to your host, Richard Lindsay, Chief Financial Officer. Sir, you may begin your conference.

Thank you. Good morning, everyone, and thank for joining us for the third-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 us on today's conference call. I will be highlighting four key points for the quarter. First, I will provide an overview of our third-quarter performance. Second, I will provide an update on our generics business. Third, I will discuss recent developments in our drug delivery business; this will include an update on the status of the Testim patent in the United States and a progress report of our product development pipeline. Finally, my comments this morning will focus primarily on our plan to spin off Bentley's drug delivery business and create two separate organizations.

With the challenges facing the generic industry, both our drug delivery and generics businesses performed well this quarter. Corporate revenues were up 9% to $27.3 million, or 1% on a constant currency basis.

In drug delivery, we strengthened our basic patent protection for our primary source of revenue, Testim. In addition, we laid the foundation for further future revenues by obtaining additional broad patent protection for our drug delivery platform and by continuing to make good progress in the clinic with our potential new diabetes treatment, Nasulin.

In generics, unit volume in our Spanish market was up from the third quarter this year -- third quarter from last year; and we have made important strides penetrating markets outside of Spain. Although lower reimbursement rates in the Spanish market continue to affect our revenues and gross margins in the third quarter, the net product revenues outside of Spain increased 25% from the third quarter last year.

Our announcement of product approvals in France and Ireland last week reconfirmed our commitment to expand our presence throughout Europe.

Historically, we see lowest generic volumes of the year in the third quarter, and the lower volume results in relatively lower gross margins as compared to the rest of the year. In the near term for our generics business, we are moving out of a seasonally weak quarter with strong momentum in orders, which we expect to translate into solid revenues for the fourth quarter.

Looking long term, we intend to strengthen our gross margins in Spain. We expect that our expanded API facility in Spain will begin commercial production by the end of this year, and we anticipate seeing the incremental gross margin benefits of vertical integration in certain key products in the first half of 2008.

Recent progress in our drug delivery business illustrates that we are continuing to build value in that core business through a variety of strategies. We significantly expanded and enhanced our intellectual property position in the third quarter.

In July, we were granted a new US patent that provides broad coverage for our intranasal drug delivery platform and includes the delivery of both therapeutically effective peptides and proteins. This patent adds an additional 20 years of coverage in this important area, allowing us to offer this to prospective partners and broaden the scope of our business opportunities.

Turning to Testim, in August we receive a European patent for testosterone gel technology in Testim. This patent provides us 20 years of protection, extending our coverage well beyond the expiration dates of the existing patents.

Our pending US patent application to extend Testim patent is making good progress. We filed a response to the US PTO in July with amendments to our patent claims. This response was successful, and we are pleased that we recently received our notice of allowance for the US patent. We expect the new patent to issue late this year or early in 2008 and extend our protection for Testim in the United States to the year 2023.

I can't emphasize enough the importance of these events. Testim, which you all know is the first product to come out of our drug delivery pipeline, is selling well in the United States and international, and is a primary revenue generator for the drug delivery franchise.

I am happy to report a 45% increase in drug delivery revenues for the quarter. Royalties for Testim has resulted in a $1 million increased to $3.1 million for the quarter.

Our second pipeline product, Nasulin, is showing steady progress through Phase 2 clinical trials. As you know, we reported the findings from three of our clinical studies at the American Diabetes Association Meeting in Chicago in June, and we are pleased with the results.

On administration, Nasulin has a very fast onset of action, within 3 to 6 minutes, and reaches a peak concentration in the bloodstream within 15 to 30 minutes. This rapid-on profile is faster than both regular insulin and the rapid-acting insulin analogs, and may more closely mimic the profile of insulin released by a nondiabetic pancreas.

In addition, the data was announced at the ADA not only shows a rapid-on profile but also shows a rapid-off profile for Nasulin. A rapid-off profile is important because, by comparison, other insulins usually continue to persist in the blood after the meal; and this residual level of insulin is responsible for hypoglycemia. We believe the rapid-off property of Nasulin may contribute to decreasing the incidence of hypoglycemia, which is a major problem with current therapy.

We are continuing to explore the novel properties and clinical benefits of Nasulin over the next several quarters; and as a way to demonstrate superiority of Nasulin as a therapy for diabetics and to maximize the value of Nasulin to prospective licensing partners, we will provide further details and directions on these additional studies during our next quarterly review.

Nasulin continues to be on schedule in advancing through Phase 2 clinical program that is ongoing in India. The study enrolled Type II diabetic patients who have previously been treated with only oral medication, and did not have sufficient glycemic control, and who are at a point of deciding when to begin insulin therapy and what type of product to utilize.

It is a three-month trial with insulin taken by nasal spray three times per day prior to each meal along with their standard therapy. We have completed full enrollment in this study. At this point, 66 patients have completed the full three months of participation.

We expect this study to be completed by the end of this year, with analysis of data and study reports completed in the first quarter of 2008.

Although the study will not be completed until early 2008, what I can say -- that interim results look encouraging. Only three patients so far have dropped out of the study. No patients have dropped out of the study because of safety concerns, nasal complications, or adverse reactions related to Nasulin.

These results, combined with our previous Nasulin toxicology studies in two animal species and the four years of human safety data from Testim, taken as a whole should provide tangible evidence to the diabetes community that the intranasal delivery of insulin is a safe alternative to injectable insulin and the other noninjectable insulins currently in development.

Our US clinical studies of Nasulin have been shorter in duration to answer specific questions, but the results have been no less encouraging. We have gained valuable product-specific insight regarding Type I and Type II diabetic patients; examined the effort of smoking on intranasal administration; and have established formal pharmacokinetic comparisons with regular and very fast-acting insulins. The time to maximum blood concentration appears faster than any marketed insulin preparation. The absorption has been the same in smokers and nonsmokers.

We have been in regular discussions with pharmaceutical companies regarding potential late-stage development and commercialization partnerships for Nasulin. We expect these discussions to become more numerous and meaningful in 2008 as more clinical data becomes available.

Now, looking beyond testosterone and insulin, we continue to believe that our CPE-215 technology can provide therapeutic and commercial advantages for the delivery of other complex therapeutic molecules that address a wide variety of metabolic, neurological, and other serious medical conditions. In particular, intranasal drug delivery with CPE-215 for permeation enhancement promises to be highly beneficial to patients who are noncompliant to treatment with injectable pharmaceuticals.

We continue to seek opportunities to expand our internal pipeline of proprietary products and to partner with pharma and biotech companies to license our drug delivery technology for new product launches, as part of product lifecycle management, or as line extension strategies.

Now, I would like to spend my remaining time discussing our plan to separate our drug delivery business from our generics business. Well over a year ago the Company initiated an intensive review of our business in an effort to identify a strategy or strategies that could deliver greater value to our shareholders.

The process considered many structural alternatives with assumptions of current and future markets and operational aspects. It became clear that the generic and drug delivery businesses have very different business models, key performance drivers, and ultimately shareholder expectations.

Operating separately would enable each company to execute a strategy more effectively, benefit from greater managerial focus, provide a more transparent story to current and prospective investors, and compete even more effectively in its respective sector.

Timing of this separation became the next consideration. For the drug delivery business to perform as an independent unit, it would need strong revenue opportunities and a viable operational plan with sufficient financial resources and strategies to achieve its goal.

As you heard, our first product Testim, which was outlicensed, had a 45% increase in royalty revenues of $1 million. Our second product Nasulin continues to make significant progress in Phase 2 clinical trials and even has the potential to be a superior product for the management of diabetes. Based upon our internal investment in clinical development, drug delivery has the potential to share a much greater portion of the proceeds from any outlicensing arrangement.

Finally, we continue to expand our patent protection for our core platform technology. We have given the drug delivery business the opportunity to create an internal pipeline of high-value proprietary products for ourselves and for our partners.

Based upon all these factors we believe that drug delivery has reached the critical mass necessary to drive value for our shareholders and as a stand-alone product development company.

We also considered any impacts of timing the separation might have on our generics business. It appears that timing was less of a factor for this business, given that the business is performing well despite the recent pricing pressures. Operationally, our generics business is generating cash and is well positioned to grow in Spain with a dedicated sales force, extensive distribution network, broad portfolio of marketed products, and new product launches.

As I mentioned, our generics business is accelerating its geographic expansion into growth markets beyond Spain. We have developed strong distribution relationships including recent license and supply agreements with large pharmaceutical partners such as Teva. With strong market forecast for the European generics market and current industry consolidation, our strategic review suggested that further strategic alternatives for our generics business should be investigated.

Therefore, following a recommendation from management we announced on October 23 that the Company's Board of Directors unanimously approved a plan to separate the drug delivery business from Bentley and explore strategic alternatives for our generics business. The Board and management believe that dividing Bentley into two independent and highly-focused companies at this time has the potential to enhance opportunities for both businesses and potentially generating greater value than under the current structure.

We plan to spin off the drug delivery business as an independent publicly-traded company to be known as CPEX Pharmaceuticals, Incorporated. We expect the spin-off to be implemented through a taxable stock dividend of all CPEX Pharmaceuticals common stock to Bentley shareholders.

CPEX Pharmaceutical plans to seek a listing on the NASDAQ capital market under the ticker symbol CPEX; and Bentley will continue to trade on the New York Stock Exchange under its current ticker symbol.

Upon completion of the plan, Bentley will consist entirely of the generics business. Until CPEX Pharmaceutical can fully establish its own operations, Bentley will provide transitional services including managerial, operational, and administrative support for a sufficient time. The key executive officers as well as the Board of Directors of each of the companies will be named prior to consummation of the plan.

We have engaged Deutsche Bank and Skadden, Arps to assist us with the process, and we are confident in their ability to create us the best structure and realize optimal value for shareholders. Given the consolidation we are seeing throughout the generic industry, we are anticipating a high level of interest in Bentley's business.

This is clearly an exciting time for Bentley. Our generics and drug delivery businesses are strengthening, and our stated strategy to separate these two businesses holds great promise for enhancing overall shareholder value.

Thank you, and now I would like to turn the call back over to our CFO Rich Lindsay for a discussion of the third-quarter financials.

Thanks, John. For the third-quarter 2007, total revenues increased 9% to $27.3 million from $25.2 million reported in the third quarter of 2006. Specialty generics revenues of $24.3 million were up 5% for the quarter, driven by the impact of favorable foreign exchange rates. Expressed in constant currency, total revenues were approximately 1% greater than the comparable quarter in 2006.

Reduced selling prices on the Company's Spanish pharmaceutical products following the implementation of price reductions by the Spanish government on March 1, 2007, continued to impact revenues. This was partially offset by rising generics revenues outside of Spain which, as a percentage of total generics revenue, increased to 26% for the third-quarter 2007 from 22% reported in the third quarter of 2006.

Drug delivery revenues were up $1 million or 45% versus the third-quarter 2007 on increased royalties related to Testim sales.

Consolidated gross profit for the third-quarter 2007 was $12.9 million, a 3.6% decrease from $13.4 million reported in the third quarter of 2006. Consolidated gross margins were 47% and 53% for the quarters ended September 30, 2007 and 2006, respectively.

Specialty generics gross profit of $9.8 million was down 13% for the quarter primarily due to mandated reductions in reimbursement rates in Spain. Gross margins of the specialty generics business were 40% and 49% for the quarters ended September 30, 2007 and 2006, respectively.

Consolidated operating income for the third-quarter 2007 was $367,000 compared with a loss of $5.7 million reported in the same quarter of 2006. Operating income for the third-quarter 2007 reflected $846,000 in professional fees related to the planned spin-off of the drug delivery business, as well as an increase of $650,000 or 32% in research and development expenses primarily related to Nasulin.

The operating loss for the third quarter last year included $8.9 million of litigation settlement charges and $600,000 of executive separation costs.

Operating income from specialty generics for the third-quarter 2007 was $3.1 million compared with a loss of $3.8 million for the comparable quarter of 2006. Operating loss from drug delivery of $2.7 million for the third-quarter 2007 was up 40% from the comparable quarter of 2006.

Pretax income for the third-quarter 2007 was $310,000 compared with a pre-tax loss of $5.5 million in the comparable period of 2006.

Pre-tax 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 provision for income taxes declined 47% to $911,000 from $1.7 million reported in the third quarter of 2006. Please note that the tax deduction for the $8.9 million litigation charges reported in the third-quarter 2006 was deferred until a settlement was finalized late in that year.

Net loss for the third quarter was $601,000 or $0.03 per share compared with a loss of $7.2 million or $0.33 per share a year ago. Net loss for the third quarter of 2007 includes a benefit of $0.01 per share from favorable fluctuations in foreign currency.

Consolidated EBITDA improved to $1.9 million for the third-quarter 2007, compared with a loss of $4.3 million reported in the comparable quarter last year. Specialty generics EBITDA improved to $4.5 million compared with a loss of $2.5 million in the third quarter of 2006. For the first nine months of 2007, specialty generics EBITDA was $18.1 million.

Drug delivery EBITDA was negative $2.5 million in the third-quarter 2007 compared with a loss of $1.8 million in the comparable quarter of 2006.

In June 2007, our Spanish subsidiary borrowed $14.8 million, approximately EUR11 million. The proceeds are being used to help fund our capital for research and development projects. The loan carries a variable interest rate equal to the euro interbank offered rate plus 0.5%. Payments commence on December 2008 and end in 2013.

As a result, cash, cash equivalents, and marketable securities increased $39 million at September 30, 2007, compared to $15.6 million at December 31, 2006.

During the third quarter, we invested $7.5 million in fixed asset additions and $1.8 million in drug licenses. This compares to additions of $12.1 million in fixed assets and $1.8 million in drug licenses during the third quarter of 2006.

Turning to the outlook, we are reaffirming our previous guidance for full-year 2007 R&D expenditures. We expect consolidated R&D expense to be in a range of 13 to $16 million with a focus on continued development in Nasulin. Due to delays in timing of planned capital projects, we currently expect to invest 11 to $13 million in 2007 compared to our previous estimate of 13 to $16 million.

We expect to complete the balance of these capital investments in 2008. These asset additions will include the completion of our API facility, manufacturing efficiency projects, and investments in additional drug licenses.

This concludes our prepared remarks. Joining us for the Q&A period is our CEO Jim Murphy and our head of R&D, Vice President Dr. Fred Feldman. Operator, you can open the call for questions now.

(OPERATOR INSTRUCTIONS) Randall Stanicky of Goldman Sachs.

Great. Thanks, guys, very much for the questions. I just have a couple. Obviously, a very big step as you think about shareholder value creation here in terms of announcing the split. Just on that topic, John, one of the things that you mentioned in your prepared comments was a high level of interest.

Is there any color that you can provide in terms of either interest that you have seen historically over the last year or interest that you are seeing now?

How, as we look from the outside, how do we think about that in the context of obviously a very active consolidation space within the generics industry broadly?

Let me just talk with respect to, Randall, to us. It is really too soon to even comment on any of the interest or what level of interest that we see.

But let's go back to what I have seen in the last 12 to 18 months in the industry. There has been the efforts to continue to consolidate -- the Barr acquisition of PLIVA; the Mylan acquisition of Merck.

Europe is a very attractive market. It is actually more stable than the US market. So you have a lot of players, both from the United States and outside of Europe that have shown interest in getting into these markets. So I believe that consolidation will continue, but to give you any comments on where we are at on the process is probably premature.

Understand. How about thinking then from -- and maybe, Rich, this is directed to you. As we think about the EBITDA outlook for the business, is there any -- obviously, this is a seasonally slower quarter, which we have obviously seen historically in the results.

Is there any color that you can give us as we think about next year, trying to run rate? Obviously, not this number, but get some sort of forecast out there.

Then additionally, thinking about the gross margin, obviously lower unit volume this quarter. Where do we go in terms of gross margin now that we have reflected some of the Spanish pricing cuts, and then when we move forward in terms of picking up in some of the generic unit volume?

Yes, I would comment that I agree you that can't use a seasonally soft quarter like Q3 to develop a future running rate for EBITDA for the generics business. Year to date, like I mentioned on the call, we have about $18 million, a little bit better than $18 million for the first nine months that includes this very, very seasonally soft quarter.

John also added some color in his remarks that orders outside of Spain have picked up. We are looking at some geographic expansion that we did talk about earlier in the year, in some other countries, that should provide some solid revenue opportunities. So we are expecting that, Q4 going forward, that that EBITDA running rate will improve.

Is there any color specifically looking forward that you can give us in terms of either how to think about that EBITDA, how to think of the margin level?

Or even additionally, how do we think about -- I think you mentioned, John, eight approvals, recent approvals. As we think about the various countries, how do we think about the addition of new revenue helping either top line or margins with the API vertical integration coming on?

Clearly, let's just talk about the vertical integration. That will clearly help the gross margins going forward. Also the revenue lines, if we take a look at the approvals that we have gotten and approvals that are in the process right now, it will improve our revenues line. And as you get more through your facilities, it improves your gross margins.

So is it fair to say we go back to the upper 40s-% in terms of gross margin going forward? Or can you give us any more quantitative outlook?

Yes, I'm very reluctant to give a lot of hard guidance on the gross margin. Clearly at 40%, reflecting lower volume on some fixed manufacturing cost has depressed that not only below what we think the trend is but also below a comfort level.

I think that somewhere in the mid-40s would be most logical to be thinking about our gross margins. But also there would be opportunity, depending on market conditions, what we do with exports, those numbers can be improved.

So as always we have a crack operational team over there in Spain that are constantly looking for ways to increase efficiencies and generate cash out of that business. We have -- talking about our API facility, we are starting to do test batches through that facility that will provide a key API for our largest products, which should allow us to improve that number further in 2008. But beyond that, I'm very reluctant to give any further guidance.

Okay, I just have one more question then. It's more about timeline, and how should we think about the next three to six months? What are the next data points here over the next few months?

Then most importantly, how do we think about timing for a potential Nasulin outlicensing agreement coming within that? Is that something that discussions are still active and ongoing at this point? Any color, I guess, that you can provide there would be helpful.

Okay, I'm going to take the first part of that and talk a little bit about the strategic process that we are undergoing right now. Then the second part with regards to timing of the Nasulin, I'm going to turn that back over to John.

The process, we have got two processes going on concurrently at this point. One is the separation process, that the next major milestone will be filing a Form 10 registration statement with the SEC. The timing of that, we are targeting to get this done before the end of the year.

After that, how long it stays with the SEC is really a function of what the SEC does with it. But I would expect that the SEC will hold on to it for probably the better part of January, February, maybe even early March.

Then from there, we can expect the actual distribution approval going through the Board and effecting the distribution to take another few weeks. So, the math roughly puts you somewhere in the first half of 2008.

The other process, where we are looking at what other opportunities there might be for the generics business, is a little less mechanical. It will be dependent on what kind of interest we might see in the valuation and other factors that might come into play or as -- that will be introduced to us by our financial and legal counsel.

John, maybe you can give some comments on Nasulin.

Yes, Randall, after the ADA, and I tried to do this in my prepared speech to the group, is that after the ADA the interest in Nasulin picked up dramatically with a large number of companies. There is a high interest. What is -- and again, I tried to highlight in my presentation -- what is exciting is the superiority claim that we are seeing in this, with this product.

But that being said, signing with a partner is less of a function of timeline and more of a function of as we get the data going forward. Our partners are interested. It continues to build. And as we go along, gathering the data, it just allows that to move even faster. So we are excited about this on-off attribute of our product.

Okay, I will leave it there. Thanks very much.

(OPERATOR INSTRUCTIONS) At this time, there appear to be no further questions. I will turn the floor back to Mr. Sedor for closing remarks.

Okay, thank you, and I would just like to thank everyone for listening. We look forward to speaking to you again, updating you on the Company during our next quarter. Thank you and we will speak to you next quarter.

Thank you. This does conclude today's teleconference. You may now disconnect.