Teva Pharmaceutical Industries Ltd (TEVA) 2008 Q1 法說會逐字稿

Good morning. My name is Natasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bentley Pharmaceuticals first-quarter 2008 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, Richard Lindsay, CFO. Sir, you may begin.

Thank you, Natasha. Good morning, everyone, and thank you for joining us. 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. A number of factors could cause actual results and developments to differ materially from the 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, 2007. Please also see the risk factors and the amended Form 10-K filed with the SEC by CPEX Pharmaceuticals on April 11, 2008, as well as in the preliminary proxy statement relating to the acquisition of Bentley by Teva Pharmaceuticals filed with the SEC on April 25, 2008. We encourage our shareholders to review updated versions of these documents as they become available.

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 investors 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, Bentley's President. After John's remarks, I will review our financials, and then we will take your questions. Please go ahead, John.

Thanks, Rich. And thank you, everyone, for joining us this morning. I will be covering four topics in my remarks this morning. I will start with a brief update on our plans to spin off our drug delivery business as a new company, CPEX Pharmaceuticals, and the proposed acquisition of Bentley's specialty generics business by Teva Pharmaceuticals. I will then briefly discuss first-quarter operational results in our generics business. Following that, I will close my remarks with an update on our drug delivery businesses.

Turning to the proposed spinoff, CPEX filed an amended Form 10 with the SEC on April 11 and expects to file a second amendment this week. You can find additional information about the transaction in the most current CPEX Form 10, which is available on the SEC website.

Following the spinoff, Bentley will consist solely of the generics business. Pursuant to a definitive agreement signed on March 31, Teva will acquire Bentley following the spinoff, subject to certain conditions being satisfied. The boards of both Bentley and Teva have unanimously approved the transaction. Completion of the spinoff is subject to various conditions, included to, but not limited to, the CPEX Form 10 being declared effective by the SEC and approved by our Board of Directors.

The proposed merger does not require approval by the shareholders of Teva, but is subject to approval of Bentley's stockholders. On April 25, we filed a preliminary proxy statement with the SEC for the special meeting of stockholders required for this purpose. This proxy is available on the SEC website.

Completion of the merger is subject to some other conditions, including, but not limited to, the completion of the spinoff of CPEX and European anti-trust review. Although subject to certain closing conditions, as I have just outlined, we expect this spin and merger transaction to be completed by the third quarter of 2008.

Now for the first-quarter update, our generics and drug delivery businesses both performed well. With solid sales of generic products in Europe and growth in drug delivery royalties from Testim, Bentley's total revenues grew 27% from the first quarter of 2007 to $40 million. Adjusted for the rising value of the euro, total revenues were up 13% on a constant currency basis.

Touching briefly on generics, we again reported strong sales in the first quarter of 2008. Generics demand in Spain remains solid, and our subsidiaries have been aggressive in launching products into the growing Spanish market. Although lower reimbursement rates are continuing to affect our revenues in gross margins in Spain, unit volume increased 5% from the first quarter of 2007.

We have continued to expand our generics business beyond Spain in order to capitalize on growing demand in other European markets. Generic revenues outside of Spain was our major growth driver this quarter, increasing 55% from the first quarter of 2007. Bentley is positioned to capitalize on additional European generic opportunities. As previously announced, in the first quarter our European subsidiaries received approvals to market their omeprazole product through their licensees in major markets of Germany, Italy and other EU countries.

I will now turn to the drug delivery business. As I indicated in our last review, our strategy in this business is focused on four key value drivers. These include first, maintaining and growing our royalty revenue base from sales of Testim; second, continuing to develop Nasulin to achieve the maximum value we can derive from partnering; third, expanding and developing our internal pipeline of products beyond Testim and Nasulin; and fourth, out-licensing our CPE-215 technology to potential partners who have products that can benefit from it.

Looking first at revenue, sales of Testim continue to grow in the first quarter. A testosterone gel marketed by our licensing partner, Auxilium, Testim increased its share of the U.S. testosterone gel market to 22% at the end of March 2008, from 19% a year earlier. Total prescriptions for Testim grew more than twice as fast as the market over the same one-year period. As a result, our Testim royalty stream for the first quarter of 2008 increased 50% from the first quarter last year to $3.3 million and our total drug delivery revenues grew 68% to $3.5 million.

As we reported on our March call, the U.S. PTO has granted Bentley a new U.S. patent for Testim that protects our intellectual property until the year 2025, or 20 years from the filing date of April 2003 plus an additional two-year extension.

Auxilium reported on April 30 that they now believe that there is no ANDA for generics to Testim filed prior to the issuance of the patent, because three months have passed since it was listed in the FDA's Orange Book. Both we and Auxilium would have expected an ANDA filer to have acted by now to preserve its first-to-file exclusivity. We have also received our European patent for Testim and foreign filing issuance in six other countries. This expanded patent protection reinforces our confidence in the outlook for Testim.

Now let's turn to the second critical value driver in drug delivery, which is Nasulin, our intranasal insulin candidate. We believe that Nasulin has the potential to significantly improve therapeutic outcomes for diabetes patients around the world.

Our clinical results indicate that Nasulin is fundamentally different from the pulmonary insulin products developed, and recently withdrawn by Pfizer, Novo Nordisk, and Eli Lilly. Instead of delivering insulin to the lung, Nasulin delivers insulin to the nasal membranes. We believe this overcomes a significant disadvantage of pulmonary insulin delivery, the concern for long-term pulmonary lung function effects and a resulting requirement for patient lung function testing in the clinic.

Another clear advantage of Nasulin is that it is a less complex product to manufacture than inhaled insulin. Nasulin is not a dry powder that requires a complicated manufacturing process and device for administration into the lung. Instead, it is a stable liquid emulsion that can be delivered nasally using a convenient, low-cost, and commercially available small spray bottle.

Most important, we believe that Nasulin can demonstrate a product profile that is different and potentially superior to any other insulin product. A time-action profile that closely mimics that of insulin naturally secreted by the pancreas. In our recent clinical trials, Nasulin has not only shown a rapid delivery to the bloodstream, faster than injected and inhaled insulin, but more importantly, a shorter duration of action.

Because this is a unique time-action profile closely mirrors the action of natural insulin, it offers two potential advantages. First, it's rapid appearance in the bloodstream may signal the body to shut down excessive hepatic glucose production after a meal, reducing the level of insulin required. And second, it could reduce the risk of hypoglycemia caused by insulin persisting in the bloodstream long after it is needed.

As a consequence, we believe that Nasulin can provide better glycemic control and reduce patients' fear of serious hypoglycemia effects. In combination, these two characteristics could significantly improve patient outcomes. Our clinical development path for Nasulin is to move toward Phase III trials aimed at confirming this important clinical profile. Our goal is to conclude our current Phase II studies with an end-of-Phase II meeting with the FDA in the second half of 2009. At that meeting we plan to discuss the roadmap we have created that could be used to conduct Phase III studies and move to final product approval.

As you know, we've been working to attract a licensing partner for Nasulin. We have shared this clinical roadmap during our discussions with a variety of parties. At the same time, we continue to build value in areas that potential licensing partners would consider important.

Chief among these initiatives is an ongoing series of negotiations with contract manufacturing organizations. Our objective in these discussions is to secure the capacity to meet all of our Nasulin manufacturing needs for the remainder of the clinical development process and for the first few years of commercial marketing without building a manufacturing plant ourselves.

Let's now turn to our third and fourth drug delivery value drivers. Number three, is to develop a pipeline of products that we can either license or eventually take to market in order to create a sustainable business model. We continue to assess a number of serious clinical needs and candidate molecules either developed in-house or acquired with an objective of moving at least one of them into clinical development.

The fourth strategic value driver is to partner our CPE-215 platform technology, leveraging the platform's unusual ability to permeate biological membranes and rapidly enter the bloodstream. We believe that CPE-215 can be applied to a wide range of clinical molecules, and we have discussed making the platform available with a number of biotechnology companies.

In summary, while the proposed spinoff and merger makes this a transformational moment in Bentley's corporate history, our two underlying businesses continue to make excellent progress. We expect a date for the special annual meeting of the stockholders related to the merger to be set in the near future. And we look forward to seeing you at this meeting.

Now I would like to turn the call back over to our CFO, Richard Lindsay, for discussions of first-quarter finances.

Thanks, John. Consolidated revenues for the first quarter '08 increased 27% to $40 million from $31.4 million reported in the first quarter of '07. Expressed in constant currency, revenues were approximately 13% greater than in the comparable quarter of 2007.

The increase in revenues was driven primarily by growth in the generics segment and, specifically, revenue growth outside of Spain. Consolidated gross profit for the first quarter '08 was $20.1 million, a 30% increase from $15.5 million reported in the first quarter of '07.

Consolidated gross margins were 50% and 49% for the quarters ended March 31, 2008 and 2007, respectively. 72% of the increase in gross profit was due to the generics segment with the remaining 28% resulting from the increased drug delivery royalties. Adjusting for the favorable affect of foreign currency, drug delivery royalties contributed the majority of the increase in gross profit for the first quarter.

Consolidated operating expense for the first quarter '08 was $17.2 million compared with $11.3 million reported in the same quarter of '07. The $5.9 million increase included strategic consulting expenses incurred in connection with the pending spinoff of the drug delivery business and sale transactions of $3.8 million.

Increased sales and marketing expenses of $1.3 million, G&A increases of $0.7 million and R&D increases of $0.1 million. Both operating segments contributed to the total increase in operating expense. The operating expense increase also includes an unfavorable currency effect of $1.3 million.

Consolidated operating income for the first quarter '08 was $2.9 million compared with $4.2 million reported in the same quarter of '07. The $1.3 million decrease in operating income resulted from the $4.6 million increase in gross profit, offset by the $5.9 million increase in operating expense previously discussed. The operating income increase also includes a favorable currency effect of $0.8 million.

Consolidated net income for the first quarter was $1.1 million or $0.05 per diluted share, compared with $2.4 million or $0.10 per diluted share a year ago. The $1.3 million decrease in net income primarily resulted from the $1.3 million decrease in operating income previously discussed.

As we have discussed in previous calls, pretax losses generated by the drug delivery segment are subject to a valuation allowance and, as a result, are not offsetting pretax income generated by the specialty generics business for the purpose of determining provision for income taxes. This has the effect of increasing the consolidated effective tax rate for GAAP reporting purposes for the Company.

Favorable fluctuations in foreign currency provided a benefit of $0.6 million, or $0.02 per diluted share in the first quarter of 2008. Cash, cash equivalents, and marketable securities were $34.4 million at March 31, 2008, and $34.7 million at December 31, 2007. During the first quarter 2008, we invested $1.6 million in fixed asset additions and $0.7 million in drug licenses. This compares to additions of $2 million in fixed assets and $0.5 million in drug licenses during the first quarter of '07.

Turning to segment information, specialty generics revenues of $36.6 million were up 25%, and 9% in constant currency, for the quarter driven primarily by expansion in European markets beyond Spain.

Reduced selling prices on the Company's Spanish pharmaceutical products, following the implementation of price reductions by the Spanish government on March 1, 2007, continue to affect revenues. This impact was partially offset by rising generics revenues outside of Spain, which as a percentage of total generics revenue, increased to 32% for the first quarter 2008 from 26% reported in the first quarter 2007.

Specialty generics gross profit of $16.6 million was up 25% for the quarter as growth in revenue outside of Spain, plus favorable foreign exchange rates, offset the mandated reductions and reimbursement rates in Spain. Gross margins of the specialty generics business were 45% and 46% for the quarters ended March 31, 2008, and 2007, respectively.

Specialty generics operating expense for the first quarter 2008 was $11.4 million, compared with $7.5 million reported in the same quarter 2007. A $3.9 million increase included separation costs of $2 million, increased sales and marketing expenses of $1.3 million, G&A increases of $0.4 million, R&D increases of $0.2 million. The operating expense increase also included an unfavorable currency effect of $1.3 million.

Specialty generics operating income for the first quarter '08 was $5.2 million, compared with $5.8 million recorded in the same quarter of '07. The $0.6 million reduction in operating income resulted from the $3.3 million increase in gross profit, offset by the $3.9 million increase in operating expenses previously discussed. The operating income reduction also includes a favorable currency effect of $0.8 million.

Specialty generics net income for the first quarter was $3.2 million, or $0.13 per share, compared with $3.8 million, or $0.17 per share, a year ago. The $0.6 million reduction in net income resulted from the $0.6 million decrease in operating income. Favorable fluctuations in foreign currency provided a benefit of $0.6 million, or $0.02 per share, in the first quarter of '08.

Specialty generics EBITDA for the quarter was $6.8 million, down 6%, from $7.3 million recorded in the first quarter of '07. Drug delivery revenues were up $1.3 million, or 60%, versus the first quarter of '07 on increased royalties related to Testim sales. Drug delivery operating expense for the first quarter '08 was $5.7 million, compared with $3.8 million reported in the same quarter of '07.

The $1.9 million increase in strategic consulting expenses incurred in connection with the planned spinoff of the drug delivery business of $1.8 million. G&A increases of $0.2 million, partially offset by R&D decreases of $0.1 million. Fluctuations in G&A and R&D expenses were due to changes in headcount and in the timing of clinical trial activity.

Drug delivery net loss for the first quarter 2008 was $2.1 million, or $0.09 per diluted share, compared with $1.5 million, or $0.07 per diluted share, reported in the same quarter of 2007. The $0.6 million change in net loss resulted from the $1.3 million increase in revenue, offset by the $1.9 million increase in operating expenses previously discussed.

Now this concludes our prepared remarks, and we would now begin the Q&A session. I would like to remind you that Bentley is in the process of completing the merger and in registration for the spinoff, so our ability to provide information about these transactions during this call is very limited.

If your questions pertain to the spinoff or merger, we encourage you to consult the CPEX Form 10 and Bentley's preliminary proxy statement, both of which are available on the SEC website.

Operator, you can now open the call for questions.

(OPERATOR INSTRUCTIONS) Randall Stanicky, Goldman Sachs.

Thanks a lot for the question. And again congratulations on getting the deal with Teva in place.

I just have one question. John, I was hoping maybe you could just expand a little bit more on your outlook for Nasulin. You provided a lot of detail there, and as you talk to partners, potential partners, around that product can you maybe give us a sense of how some of those discussions are going as that product continues to move along?

And then, secondly, you had referred on the call and your prepared remarks to your CPE-215 technology and also, obviously, leveraging that. Can you maybe expand a little bit more in terms of some of the opportunities to do that going forward?

Yes, Randall, first let me just talk -- in previous conference calls we've talked about being in discussions on Nasulin with other companies that are interested in that. I mentioned in my remarks that one of the things that we're focusing on is the pathway for Phase III clinicals and then going forward on that.

These discussions, as I mentioned in our remarks, have been discussed with potential partners and clearly they're looking, as we are, to the outcomes of the clinical process that we have ongoing. And as they go forward, those discussions continue to go.

With respect to CPE-215, we are excited about that platform. And the fact that it does have the ability to move these molecules through biological membranes, we are constantly getting either people talking to us about it or in discussions with people on how we can affect their molecule. But beyond that, I would rather -- I don't think that I can go into much discussion on it.

Maybe just let me follow-up, and again, I want to be sensitive to what you can and cannot talk about. I think clearly people understand, at this point, the value of the generics piece of the business given the contract in place. So clearly, the incremental value is sort of the rest of the business.

So just in terms of -- I guess some of the other things that you have going on, Testim is fairly obvious and with the reissue there a little bit more visible. In terms of what you can do with the CPE technology, are you thinking more early stage, or are there opportunities to do some collaborations, just generally with partners that are more later stage focused?

I think we -- Randall, the answer is both. And you do have to appreciate, and if I seem tentative or cautious on what I say, you have to be -- understand that we filed our Form 10, and we just do not want to discuss anything that is not in the Form 10.

I understand. Let me leave it there. And again, congratulations, guys, and we will talk soon.

Kenneth Smith, Lenox Equity Research.

On the trials that you are doing, will continue to do, for Nasulin, you said you won't really be done with all this and ready to go to the FDA until the second half of '09. But as you go through these various trials, I assume there are several of them to make up the whole package. Will you reveal the results of those as they come out?

The answer is, as those results come out we will reveal them as we go forward, and you'll get a better sense of where we're at and what we are accomplishing.

Okay.

And if they're not, there's no reason to keep them confidential.

Okay, can you give a ballpark estimate when the first part of those trials will be done?

Ken, one of the things -- and honestly, with these I don't want to give a ballpark on that. Only because as they go you may give some idea where it's at, and for some reason it may change. It actually may be sooner or later.

Ken, this is Rich. I just want to add a little something to what John talked about. John mentioned that we're in the process of filing an amended 10, and one of the items in that amended 10 is, we do give some description on our Nasulin trial progress. So what I would encourage you to do is to look at that once it becomes available.

Okay, let me ask you about the royalty number. It was up 50%, I think you said. And I think Auxilium said that prescriptions written were up 31% in the quarter. Can you kind of reconcile that? And secondly, you have another source of revenue in there. I know it's small, but is there something new going on in your revenue stream that we haven't heard about before?

Yes, I think I am going to avoid the reconciliation of Auxilium. I think that there's a number of items in that calculation. There's different royalty rates depending on where those products are written and the royalties are written off of, revenue versus scripts. And as far as the other revenue, that relates to a small amount of collaboration revenue with a third party. That is a very early stage research process.

Okay.

And, Ken, it goes to what Randall asked. Randall asked questions about CPE platform and all that, and are there other people. And we're constantly looking at other things.

Okay, but my question on the royalties. Can you at least say has there been a material change in the royalty rate over all that you're receiving on the Testim product?

No, the royalties are locked in by contract and they only vary by geography.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) There are no further questions.

Thank you, Natasha. And I'd like to thank everyone for joining us this morning. Rich, I would like to thank you for your outstanding job that you always do. And again, this concludes our call, and we will look forward to talking to you on our next conference call.

Thank you. This concludes today's conference call. You may now disconnect.