Teva Pharmaceutical Industries Ltd (TEVA) 2008 Q3 法說會逐字稿

Greetings and welcome to the Teva Pharmaceuticals Industries Limited Third Quarter 2008 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.

If anyone should require Operator assistance during the conference please press star 0 on your telephone keypad.

As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Ms.

Elana Holzman.

Thank you, you may begin.

Thank you, good morning and good afternoon, everyone.

Welcome to Teva's Third Quarter 2008 earnings call.

We hope you've had a chance to review our Press Release which we issued earlier this morning.

A copy of the Press Release is available on our website at www.Tevapharm.Com.

Additionally, we are conducting a Live Webcast of this call that is also available on our website.

Today, we are joined by Shlomo Yanai, President and CEO; Eyal Desheh, Chief Financial Officer; Bill Marth, President and CEO of Teva North America; and Moshe Manor, Group Vice President and Global Innovative Resources.

Shlomo and Eyal will begin by providing an overview of our results.

We will then open the call for question and answer period.

Before turning the call over to Shlomo, I would like to remind everyone that Teva's results reported this quarter are adjusted to exclude certain items related to our ARS portfolio and acquisition related expenses.

Eyal will provide additional detail on this in his prepared comments.

I would also like to remind everyone the Safe Harbor language contained in today's press release also pertains to this conference call and webcast.

Shlomo?

Thank you, welcome everyone.

Good morning, America and thank you for joining us today as we review Teva's results for the third quarter of 2008.

I'm very pleased to report that Q3 was a very good quarter for Teva.

I believe that in many key ways, our performance and accomplishments this quarter exemplify the enduring strength of our business and bring Teva's uniqueness into very sharp focus.

In the midst of the ongoing turbulence in the market, we remain steadily on course with solid financial results and significant strategic achievements in Q3.

Teva's net sales in Q3 reached a record $2.8 billion, which represents 20% growth year-over-year.

The net income was $599 million, up 14% from Q3 '07, and this ultimately brought us to diluted EPS of $0.72.

In addition, and even more important these days, our cash flow from Operations was $710 million, more than double our cash flow in Q3 '07.

We experienced once again in Q3 the benefits of Teva's balanced business model, which was robust sales of our generic products, particularly in the US and our international markets, Copaxone's continued global leadership of the MS market, the rapid growth of Azilect and excellent sales of our ProAir inhalers, all combining to yield very good results.

It was an excellent quarter for Teva USA, where despite the loss of exclusivity of Risperidone, we enjoyed strong sales of our generics products.

Sales were driven by our launch of Lamotrigine, and continued strong sales of Bupropion and amlodipine/benazepril.

We had a record number of launches in Q3 which has brought our total through the end of this third quarter to 26 launches, driving our total prescriptions for the 12 month period to $467 million.

This is an increase of approximately 36 million prescriptions, nearly twice as many as our closest competitor compared to the same 12 month period a year ago.

Outside the US, in Europe, sales were up 10% over Q3 '07 with the strongest performance coming from France, Spain, and Poland.

Overall, however, we felt the impact of changing market conditions throughout Europe and particularly in the UK and Italy where we are seeing a more competitive pricing environment.

We expect our large number of planned launches next quarter to positively impact sales, and I would like to mention that despite the current challenges in Europe, we are very optimistic about the future of our European business, especially in times like this, when governments must find ways to cut spending and especially markets like those of Southern Europe, where generic penetration is low, we believe there will be many opportunities for growth in Europe.

This was an excellent quarter for our international business, which increased sales by 31% over Q3 '07, supported by especially strong results in Latin America, Russia, and Israel.

Turning to our global respiratory business, the most dramatic developments occurred in the US where the conversion from CFC to HFA-based inhalers continue to accelerate.

By the end of the third quarter, 80% of the market had switched with Teva's Pro-Air capturing 66% of the switchers.

ProAir continues to increase its leadership of the HFA market with 59% market share in Q3 growing into 61% by the end of October.

We are pleased that the long awaited conversion is finally nearing completion, making us very optimistic about ProAir's continued strong performance in the fourth quarter.

To remind all our listeners, by the end of the year, it will no longer be legal to sell CFC-based products in the US and 100% of the market will have converted to HFA.

Turning now to Teva's innovative business, it was a very good quarter for Copaxone, both in the US and globally.

Global in market sales of Copaxone grew to $562 million, representing 28% growth over the third quarter of 2007.

In the US, end market sales increased by 25% and outside the US, end market sales increased by 31%.

Copaxone remained the global leader among all treatments for multiple sclerosis for the first nine months of 2008 and we expect it to remain the leading therapy for MS and to continue to grow.

This was also an exciting quarter for Teva's second innovative product Azilect.

Sales of which rose 38% over Q3 '07.

As you will recall, Azilect met all three of the end points on the ADAGIO study which was designed to test Azilect's efficacy in slowing the progression of Parkinson's Disease, one of the most critical unmet needs in the treatment of Parkinson's patients.

In addition, earlier this week, we announced the results of the [Tyrome] study, which could lead to Azilect's label being modified and allowing it to be more broadly prescribed.

We are working intensively to prepare the submissions of the very promising results of the ADAGIO and [Tyrome] studies to the FDA and expect strong growth from Azilect in the coming quarters.

As we look toward the future, we have much to be excited about.

I would like to share with you some of the highlights of the excellent progress we have made recently towards realizing our long term strategic goals.

At the end of Q3, we announced a new strategic partnership with the core Company to create a leading generic pharmaceutical Company in Japan, enabling us to further expand our geographic reach and strengthen our global leadership.

As you know, Japan is the world's second largest pharmaceutical market and the Japanese Government has made a serious commitment to significantly increase the use of generics.

The goal is in fact to double the country's usage of generic product by 2012, and by the way, in my recent trip to Japan, has made me even more enthusiastic about the opportunity there for generics and especially for Teva.

I believe that Teva's knowledge and experience as the global generic leader coupled with our reputation for outstanding quality make our brand particularly attractive to the Japanese market.

The combination of Teva and [Toa], a Company whose deep understanding of the Japanese market will be a winning one.

We announced that we expect our new Company, Teva/[Toa], to begin operations in 2009 and by 2015 to reach sales of $1 billion.

I am very confident that we will reach our targets even earlier.

We also completed our acquisition of Bentley, in Spain, during the third quarter.

I am pleased to report that the integration of Bentley into Teva is going very smoothly and we are excited about opportunities for growth in this important market, and of course, we have been more than quickly in preparing for the Barr integration and to the extent permitted by law, working with our future colleagues at Barr to insure a smooth and successful integration.

We are extremely excited about the tremendous value that will be created by the combination.

This is a deal that will significantly enhance our market leadership in the US, strengthen our presence in key global markets and expand our product portfolio and pipeline.

In short, this is a deal that will enable us to separate ourselves even further from the pack while generating substantial cost synergies and revenue upside.

As we recently announced we have now secured sufficient funding commitments to complete the acquisition.

We are on track in our submissions to the regulatory authorities in the US, Europe, and in other countries and expect to receive the necessary approvals and close the deal by the end of this year.

As you can see, Q3 was an intensive, exciting and productive quarter for us, and before I turn the call over to Eyal, I would like to say a few words about the current global economic conditions as they relate to Teva.

Throughout Teva's history, we have always focused on maintaining our financial strength responsibly, avoiding the temptation to take unnecessary risks.

As a result, Teva today is in a very strong position financially, despite the turmoil in the global economy.

We are an equally strong position when it comes to the fundamentals of our business, thanks to our clearly defined strategy, in which generics remains at the core of our balanced business model.

I believe that the financial crisis will create an even more urgent need for high quality generics as governments, payers, and patients around the world face increased financial pressure.

As the rapidly changing global economy creates more opportunities for generics, Teva will be there, and will be uniquely well positioned to receive them and to continue to increase our market share.

Our strong position will not, however, make us complacent.

We are constantly monitoring the changes in the markets and assessing their potential impact on our business and I believe that our focus on agility is allowing us to respond quickly and well to events as they unfold.

All in all, as we look ahead to both the near and long term future, we feel very optimistic.

You will recall that last quarter, we provided guidance in the range of $2.69 to $2.75.

As Elana mentioned earlier, we have adjusted our results to exclude certain items.

Taking this adjustment into account, the guidance we provided last quarter would now translate to a range of $2.77 to $2.83 and Eyal will provide additional detail about these adjustments in just a moment.

Based on our strong performance during the first three quarters and our outlook for the fourth quarter of 2008, we are changing EPS guidance to a higher range of $2.79 to $2.85.

Thank you very much, and now I'll turn the call over to Eyal.

Eyal?

Thank you, Shlomo, and good day to everyone.

I hope you have had an opportunity to review the press release we issued earlier this morning.

This was another strong quarter for Teva, and I would like to review with you the results in detail.

As Shlomo mentioned, we had another quarter of record revenue with more than $2.8 billion, an increase of 20% or approximately $476 million compared to Q3 last year.

Before I delve into the numbers I would like to note briefly that we are once again presenting adjusted results for the quarter and the first nine months of 2008.

So Q3 2008, we excluded the following items from our GAAP results.

On the negative side, excluded $33 million of charges related to the acquisition of Bentley and $26 million related to the impairment of financial assets.

On the positive side, we excluded the $100 million received settlement payment in connection with our auction rate security portfolio.

Similarly, for the nine month period, we excluded acquisition related charges and charges related to impairment of our ARS portfolio which were not adjusted to Q1 and Q2.

As we told you before, we present adjusted figures to show you how we, as Management, and our Board, look at our financial results and we do so even when such adjustment results in more conservative figures than our GAAP results, which is the case this time.

GAAP net income was $637 million, an increase of 21% from last year, and GAAP earnings per share were $0.77, a 20% increase from last year.

Adjusted net income grew by 14% to $599 million, and adjusted EPS was up 13% to a second best $0.72.

For the first nine months of 2008, total sales grew by 21% to $8.24 billion, adjusted net income grew 26% to $1.74 billion and adjusted EPS was up 24% to $2.1 million.

Foreign exchange differences again played a major role this quarter impacting sales and operating profit as well as our balance sheet.

Compared to Q3 2007, about $92 million were due in sales, were due to foreign exchange differences as sales benefited from a weaker US dollar relative to most currency primarily the Euro, the Israeli shekel, and the Hungarian florin.

And at the same time, foreign currency had an $18 million adverse impact on operating income, primarily resulting from the relative strength of the Israeli sheckel, compared to most currency in the weakness of the British Pound.

Moving forward from here, changes in the rate of the US dollar against other currency compared to the Q3 level could have an impact on sales and on operating profit in both directions.

As in the previous quarter, taking over the distribution activities of Copaxone from Sanofi Aventis in North America also positively affected revenues contributing about $166 million to sales growth.

The remaining $218 million in sales growth were attributable to organic growth.

Pharmaceutical sales in North America grew to $1.6 billion or 22% over the third quarter last year.

Generic sales in the US topped $1 billion this quarter, up 12% compared to the comparable quarter last year.

Pharmaceutical sales in Europe, which includes the sales since August of the recently acquired businesses of Bentley in Spain grew 10% to $865 million and represented 25 % of total pharmaceutical sales.

European generics in dollar terms grew approximately 8% while the local currency sales were flat compared to Q3 last year.

International pharmaceutical sales totaled $395 million, growing 32% over Q3 last year.

This growth rate is higher than the group average mainly due to strong sales across Latin America as well as in Russia and Israel.

Copaxone has another excellent quarter, Global Market sales totaled $562 million, matching last quarter's record sales.

This is a 28% increase over the comparable quarter for the world's leading MS treatment.

Our global respiratory business, which is included in the North America, European and international sales figure had sales of $177 million, essentially flat compared to Q3 2007, but up 5% compared to Q2 2008 as sales of HFA products in the US began to accelerate.

Now let me review the rest of our adjusted P&L results.

Gross profit margins on an adjusted basis which exclude the $5 million of inventory step up recorded in connection with the Bentley acquisition was 52.7% in the reported quarter compared to 52.8% in the comparable quarter of 2007.

The positive contribution Copaxone had on gross margin was offset by two main factors: First, the adverse effect of currency, primarily the decline of the British pound compared to the US dollar, which hurt our results in the UK as well as the strengthening of the Israeli shekel against all currencies and second, our product mix.

Net R&D expenses increased quarter-over-quarter by 38% to $194 million or 6.8% of total sales.

As previously indicated, this increased investment is a direct reflection of the increased effort particularly in the generic and biogeneric R&D and is consistent with our strategic goal to double R&D output by 2012.

SG&A which reached $648 million in the quarter, represented 23% of sales compared with 19% in Q3 2007.

The higher SG&A is in line with our plan and resulted primarily from the termination of our distribution agreement with Sanofi Aventis regarding Copaxone in North America, as of March 31, 2008.

The net impact of the termination of the distribution agreement of SG&A totaled $171 million in the third quarter.

Operating profit this quarter amounted to $655 million compared to operating profit of $651 million in Q3 2007.

As a percentage of sales, operating profit was 23.1%, 4.4% lower than the comparable quarter in fiscal 2007.

Similar to the trend we witnessed in the previous quarter, 1.6% of the difference was attributable to the termination of our distribution agreement with Sanofi Aventis in North America, 1.4% to foreign exchange impact and 1.3% to higher R & D spending and product mix.

We recorded $63 million of financial income in our Q3 2008 GAAP results compared with $3 million of financial expenses in the comparable quarter of 2007.

This amount included $19 million charge against our portfolio of auction rate securities.

As in the past two quarters this charge was calculated based on an internally developed model which evaluated every single security in the portfolio.

The principal amount of our ARS portfolio is $440 million, whereas the net amount of this portfolio as of September 30, 2008, stands at $261 million.

The September 30 balance is after giving effect to a cumulative total $96 million of P&L charges and a cumulative total of $83 million provided in our balance sheet under other comprehensive income.

We also recorded this quarter a $7 million charge resulting from a failure of a certain financial institution.

These charges were offset this quarter by $100 million cash payment received as settlement from an institution which acted as a broker in our auction rate security portfolio.

This quarter, we updated our estimated annual tax rate for the whole year of 2008 to 11% of adjusted pretax income.

Therefore, our provision for income tax for the third quarter is $47 million or 7% of adjusted pretax income.

The reduction in effective rate from 17% in 2007 to 11% expected in 2008 reflect mainly product launches as well as expected launches in the US generic market during 2008 which to a large extent was developed and produced in Israel.

However, as we previously indicated, we are not in a position at this point to assure you that this rate is final for the year or sustainable for the future.

Now, let's have a look at our cash flow.

We had another strong quarter in cash generated from operating, amounting to $710 million, more than double compared to Q3 last year.

Our free cash flow, after capital expenditure of $170 million net and dividends of approximately $97 million amounted to $443 million, almost three times Q3 last year's number.

Free cash flow was used primarily to pay for Bentley acquisition and to reduce debt obligation by approximately $90 million.

DSO, Day Sales Outstanding amounted to 55 days this quarter, down from 61 days in Q3 2007.

We've calculated DSO as we always do, after netting out from the receivables the sales reserves and allowances, so-called SRNA.

Inventory days were 195 days, up from 192 days in June.

We increased inventory levels earlier this year in order to improve service levels to our customers.

The total SRNA at September 30, 2008, amounted to $2.2 billion, an increase of $133 million from June 2008.

About 93% of the total reserves are from the United States, up $169 million from June 2008, most notably due to provision for chargebacks, for new products.

Gross Capital Expenditures reached $178 million this quarter essentially flat compared to $180 million in Q2 this year.

We expect CapEx to exceed $700 million for the full year, mainly reflecting previously discussed planned capacity expansion to support our strategic growth plans.

As to our debt, $3.9 billion or 83% of our total interest bearing debt at September 30 is long term debt, of which $1.9 billion is in our convertible debentures and $2 billion is in straight fixed or floating interest.

Our leverage measures debt to debt plus equity at September 30, 2008, stood at 24% unchanged from the end of June.

Shareholders equity as of September 30, 2008, reached $14.8 billion.

Shareholders equity is up $1.1 billion from the end of 2007 but down a net $232 million from June 30.

Shareholders equity was adversely affected by $866 million, quarterly decrease in our global net assets due to exchange rate differences, primarily the strengthening of the US dollar towards the end of the quarter compared to most currencies which took place at the end of September.

As a result of Teva acquisition of IVEX [we will have] significant intangible assets and goodwill in currencies other than the US dollar.

It should be noted that in the past two years Teva recorded positive currency translation differences which increases shareholders equity level by about $2 billion and the current decrease reflects the reverse in non-US dollar currency movement against the US dollar.

In the nine month period, the decline in shareholders equity due to currencies is much smaller, $132 million.

I would like to remind you that when calculating our sales, the exchange rate used is a quarterly average, but on shareholders equity, the relevant exchange rate is that recorded at the end of the quarter.

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

For the third quarter 2008, our average share count for the purpose of calculating fully diluted earnings per share, was 837 million shares.

The share count at the end of the quarter for the purpose of calculating further diluted EPS going forward is 838 million shares while the share count was calculating our market cap, it is approximately 784 million shares.

Dividends.

Yesterday Teva's Board approved a third quarter dividend amounting to approximately $97 million.

On a per share basis, our dividend which is declared in the Israeli shekels remains 0.45 shekels.

Base on the rate of exchange of November 5, 2008 of the shekel to the US dollar, this translates into approximately $0.12 per share.

Before we open the call for questions, I would like to repeat guidance which Shlomo shared with you on this call.

Last quarter, we provided guidance in the range of $2.69 to $2.75 As I mentioned before, we've adjusted our results to exclude certain items.

Most importantly, these adjustments exclude the impact of auction rate securities all together and result in an increase of our base guidance by $0.08 in order to make it apples-to-apples.

Taking this adjustment into account, the guidance we provided last quarter would now translate to a range of $2.77 to $2.83.

Now, based on our strong performance during the first three quarters and our outlook for the Fourth Quarter of 2008 we would like to update the earnings per share guidance for the year to a higher range of $2.79 to $2.85.

Thank you, all for your time and attention today and now, I'd like to open the call for questions and have your questions.

Thank you.

Thank you, sir.

(OPERATOR INSTRUCTIONS).

Our first question today comes from the line of Ronny Gal with Sanford Bernstein.

Good morning.

First, just a quick clarification on the EPS guidance.

The raising the guidance to 2.79 to $2.85 includes or excludes those $0.08 you've been excluding this quarter, that is is the raise $0.10 versus the pro forma numbers or $0.02 versus your pro forma numbers?

Hi, Ronny.

We are, as you saw in our report, our adjusted non-GAAP for the three quarters is $2.10, and it excludes the $100 million which we received as compensation as it excludes all of the auction rate security write-offs for the year for Q1 and the $26 million that were also recorded in Q3, and this considers what you call the pro forma basis for our guidance which we believe is apples-to-apples with the guidance that we have provided so far.

In order to make the adjustment accurate for the guiding basis, we took the write-off of the auction rate security in Q1 and Q2, which represents approximately $0.08 per share and increased the guidance by that amount to create a new base.

From that point on, we increased it by $0.02 as we look at the Fourth Quarter and That's what we believe the results will be.

I hope that clarifies it.

Thank you.

A second question regarding a gross margin for the quarter, I understand the impact of currency but the issue of product mix you mentioned is a bit puzzling.

You sold $22.5 more million of branded products this quarter than the sequential quarter, the Second Quarter of this year and you've launched Lamictal which is obviously a high gross margin product.

How does product mix then work against you this quarter?

Hi, it's Shlomo.

First of all as you know the margins are highly sensitive to the product we are selling, so if there's no big launches, that would definitely (inaudible), this quarter does not have a big one like we usually have so that's one part of my answer, and I will not take it by a quarterly base, or if you take it on a yearly base, that's the average by the longest time.

Bill, would you like to add to that?

Bill?

No.

I think that, no, I think that's correct.

In all, Ronny, we did have a great launch of [Lamictal], we're very happy about that.

We didn't get revenues from Risperidone, so that plays into it as well as we lost the exclusivity there and there was of course certainly some charges when that happened and price fell.

Great.

I'll get back in the queue.

Thanks.

Thanks, Ronny.

Thank you.

Our next question comes from the line of Ken Cacciatore with Cowen & Co.

Hi, thanks, guys.

I guess on the Lamictal question, Bill, was there anything going on with GSK during the launch that maybe clipped the pricing?

I understand there was no authorized but maybe you could give us a little bit of color on how that launch proceeded, and then wondering on Pulmicort if you could give us an update on where the Citizen's Petition stands and if there's been any interaction with the agency and finally last question for Eyal, on currency you downplayed it to a certain extent.

Looking forward you'll have about 4 billion in revenues we would gather combined with Barr out of Europe so if you could just talk a little bit more detail on how the currency may impact what is becoming an increasingly large line for you all.

Thanks guys.

Good morning, Ken.

With respect to Lamotrigine, we have come to be accustomed to the fact that innovators will always try do creative things to the markets whether they can launch an AG or whatever else they can do, or try to launch their product and use a DAW code in order to use that as a generic, but GSK did try to do something like that in the market.

It was largely unsuccessful and really didn't impact price all that much.

Remember, Lamotrigine is our own API.

It's a relatively high margin product so I think there was no real issue there.

Should we be assuming that Q4 has got lower Lamictal, you booked more here than Q4 or is that a bad assumption?

Again, you're going to be phasing out of your exclusivity, so one would think as we get towards the end of any exclusivity, we're a little bit more careful about how much product we put into the pipeline so we do not get hit with adjustments that we don't want to have.

All right, regarding currencies, we're not down playing this at all.

Teva traditionally has a very balanced business model on many aspects that includes currencies.

Now, currencies today, predictability has become a little more complex than in the past but it was never easy to predict.

You can't take anything like this lightly.

We believe that our business model is pretty much immune.

What we've seen over the past two quarters is our revenue going up and operating profit going down as a result of changes in currency.

This is rare, but we haven't seen much of that in the past.

Harder to predict in the future but I think the impact of currency on our profit which is the important part is fairly minimal and will continue to be that in the future.

Great, thanks, Bill.

Just to finish up on the Pulmicort, any interaction there?

Bill?

Bill?

I think we lost Bill on the line.

So maybe we'll try to call him again and we'll answer you later.

Right.

Thanks, Shlomo.

Thank you.

Ladies and gentlemen, our next question comes from the line of Randall Stanicky with Goldman Sachs.

Please proceed with your question.

Great.

Thanks very much.

Guys just to avoid any confusion out there can you just give us the implied Q4 EPS range?

Can you repeat your question, please?

Sure.

Just so there's no confusion out there given the adjustments can you just give us the implied Q4 EPS range?

Yes, $2.79 to $2.85 on an adjusted basis.

Right for the full year?

For the year, yes.

For the basis, to remind you the first three quarters was $2.10.

Okay, so effectively we take that number and that gives us (multiple speakers).

Yeah, you reduce 2.10 and you got the rate for the quarter.

Very helpful and then the second question, the tax rate continues to go down, 11% now is the current full year view, and you talked about the reason for that going down being some generic launches that appear to have happened.

Are there any launches factored in that haven't happened that are part of the reduction there in the full year tax rate?

Well, in our business and business models, there are always things that happen and always things that don't happen but the average is the average.

A lot of our generic products in the US and in Europe and the international are based on the Israeli API and manufacturing, we have preferred tax environment in here and a lot of the profits goes back to where the IP and where the production is originated.

As I said on my part before, we can't guarantee this going forward.

It depends on the product mix.

The product mix if things happen and things don't happen.

It's a little difficult to predict.

It's not going to jump much higher in Q4.

It will probably remain in this area or maybe a little higher, but very, very hard to be precise here.

You have to be careful.

But, Eyal, as we think about modeling the Company going forward there's been a wide range in a tax rate from the current 11% to what's been a high teens number.

How should we think for the next year or two on a Teva standalone basis about that tax rate?

I suggest that you stay with the way we've guided last time and we'll provide an update when we give our forecast and numbers for 2009 when we report the Fourth Quarter in the middle of February.

So low teens at least over the near term?

Midteens.

Okay, great.

Thank you.

Eyal, I just wanted to finish up the last answer for Ken on the Pulmicort?

Well go ahead, Bill.

Just a quick comment there, Ken.

With the Pulmicort, as you know we had our summary judgment was denied back in September.

We're still blocked by Citizen's Petition, and we still believe it's a very resolvable matter and we're very hopeful that the agency agrees with us and we'll do that promptly but that's where we sit at the moment.

Thanks, Bill.

Next question?

Thank you, ladies and gentlemen, our next question comes from the line of Gregg Gilbert with Merrill Lynch.

Please proceed with your question.

Thank you.

Good morning, good afternoon.

First a quick one for Bill.

Did you ship any generic Protonix in the third quarter as you did in the second?

No.

Still waiting on that appellate decision as well?

[Who could know?].

A bigger picture question then for Shlomo and Eyal.

In light of the consolidation of Barr next year the borrowing costs you're thinking about now and potentially some currency effects is the $3 or more in EPS for 09 still on the table?

Short answer yes and more longer answer, I would say that based on the current visibility into our business, we'll remain comfortable with our previously provided expectation, so that's based of course on the standalone Teva and after we will get more visibility on Barr, definitely we will come in mid February when we will discuss the next year guidance with more clarity and more precise on that, precise numbers.

Okay, and then a bigger picture question about Europe as well, Shlomo.

Can you give us a sense of the growth rate that the European generic and branded generic businesses had, if you take out acquisitions and currency, it looks like it was down on that basis.

Can you confirm that is correct and secondly what's it going to take to make that region overall, again generic and branded generic a growth driver for Teva other than longer term government initiatives to increase generic utilization?

Can that be a growth driver excluding acquisitions in the near to midterm for Teva?

Okay so first of all, if you take the quarterly results in the European region for Teva, actually the gross way to reflect, if you take out the currencies, that's basically neutralize the 9% growth, which is currency effect, the impact on our sales there.

As for the more longer range than one quarter, as I said in my previous comments, I see Europe as a very strategic important region for Teva growth in the future, especially in those countries where the imitation of generics or the level of generics penetration is very low, and I can point out the Southern countries in Europe but also some center in Eastern European countries as well, where the potential for growth is high in one hand, and the governments need for reducing the healthcare budget burden on the other hand will both present us with a great potential to grow our business so all in all, I believe that Europe will contribute a substantial part to our future growth and as per acquisition, I have to balance what we all know that we acquired Bentley in Spain but I would like to remind that we have sold also some of our small European business as part of our focusing our business there.

We sold our blood business in Hungary and we sold some minor businesses in other countries as well, so all in all, the impact of the acquisition is not part of the, it's actually neutral here.

Thank you.

Ladies and gentlemen, our next question comes from the line Rich Silver with Barclays Capital.

Please proceed with your question.

Yes, can you talk a little bit more about SG&A and R&D trends?

I know you mentioned the year-over-year and what accounted for the difference but what we should be looking for as a reasonable run rate either as a percentage of revenues or an absolute dollars or growth rate because at least relative to our estimate, it looked like the quarter was light on both line items.

Thanks.

Rich, hi, Shlomo.

Before I turn to Eyal to give you more details, let me first give you where are we heading.

As you know, part of our long term strategic goal we are doubling the product portfolio of Teva by increasing our R&D and that would increase our expenses on R&D as we see it as an investment, not as an expense.

In the coming year or two to the level of seven is kind of a number.

It could fluctuate a little bit but this is part of what we purposely and intentionally are doing in order to increase or double down on our product portfolio.

As for G&A, G&A went down and we will continue to do whatever is needed to be a more efficient Company and the S&M is very depends on the business segments due to the differences between blended and generics, there was a huge different S&M expenses here and I'll turn to Eyal to give a little bit more on that.

Yeah, hi, Rich.

Let me give you some break down.

First of all, last year in Q3 last year, G&A was 6.5% of our total sales and sales and marketing was 12.8%.

In Q3 this year, G&A was 5.5% as we are becoming more efficient and basically growing sales without increasing G&A or maybe even a little down but Sales and Marketing was 17.3% and mostly, as a result of the agreement with Sanofi Aventis.

That is the entire shift from last year, so we are becoming more efficient on G&A.

We are not growing Sales and Marketing more than sales but we're not forgetting for one second that this is the fuel that is driving sales in many, many areas, so there is I believe very efficient and effective management of this line item.

I believe that we'll continue to see a little bit of improvement on the G&A margin, on the Sales and Marketing we probably could expect to keep more or less the same proportion.

Rich?

Thank you, ladies and gentlemen, our next question comes from the line of Marc Goodman with Credit Suisse.

As a reminder ladies and gentlemen, please limit yourself to one question.

Yes, hi.

The question has to do with Europe.

Can you talk a little bit about some of the countries you mentioned, France and Poland did well.

Why was that?

Was that market growth or were you guys taking market share or both?

Can you talk about some of the countries that are weak and one of the concerns that I guess I have is when we get into a tough economy and you've got governments in Europe paying for pharmaceuticals, this is more in the branded generics markets that they will decide to take price cuts or anything to hurt the pharma industry, similar to like maybe what Hungary did a few years ago.

Can you talk about your expectations for any major changes in '09 for some of the important countries in Europe that might affect you?

Thanks.

Well first of all as you well know, Europe is not homogeneous region and every country is a different story, but there are some common denominators that we can speak about and one of those I mentioned before, there is a price pressure or pricing pressure in some countries due to the government intervention in that regard.

For example, in the UK, as it has been done years ago in Hungary that you mentioned.

There are also tender in some countries that are also pushing the price down, but I would like to remind all of us that this pressure is on all players in the market and as far as we can see, we have the advantage of our scale and our know how of how to operate in different business models so what I'm saying is the pressure and the results of our competitors is weaker than ours.

We believe that we have as I mentioned the know how based on what we can learn in different business models and different countries and implement them in the countries that we're operating now, and we see relatively good results in countries where we already manage the business situation and I mentioned before, France for example.

In France, even though the market is a tough one, we are doing okay.

We are growing the business, the same goes for Spain even though that this is based on the current acquisition of Bentley, but all in all, we see they are very good results as well which is more than just the acquisition and Poland has been mentioned also is also a good result so what I'm saying is that I'm optimistic about the future of the European business for Teva.

Governments will push toward generics.

We know how to operate in this environment, and this is why I'm optimistic.

Thank you.

Ladies and gentlemen, as a reminder, please limit yourself to one question.

Our next question comes from the line of David Buck with Buckingham Research.

Please proceed with your question.

Yes, thanks for taking the questions.

First one for Bill, can you give your latest thoughts on the opportunities for generic Evista and generic Lovenox, and for Shlomo, can you talk a little bit about the strength ex- US for Copaxone and what you think might be a sustainable growth rate there.

What lead to the strength, if you could give maybe how much was currency and what do you think is the sustainable growth rate there.

Thanks.

Good morning, David.

How are you?

Good morning.

Well, thanks.

A couple of things.

With respect to Raloxifene, that right now the trial date on that 30 month actually has been extended and that's been extended to March, and so we're dealing with that issue right now.

So that's where we sit with Raloxifene.

The second one was Lovenox, and with respect to Lovenox, the (inaudible) was denied on September 25, the mandate issued on October 2, so that's clear.

The CP is still sitting there, and I believe Momenta has said on their call they believe they will get approval.

We feel that we're similarly situated.

We have responded all of the FDA's questions so we just need to sit back and wait and see if we get another round of questions or we get an approval.

Okay, thanks.

As for Copaxone, I have the confidence on growing the Copaxone mainly because Copaxone has the advantage of being a very safe product and in multiple sclerosis where we have so many (inaudible) other problems that you have to take care of definitely this is a big advantage, and this is why I believe that we were going to see growing sales of Copaxone and I have some good reason to believe so because if we measure the growth rate of prescriptions in the United States, the number one is Copaxone.

And to give you a little bit more on that, I will ask Moshe Manor who is the head of the global Innovative Business of Teva to give a little bit more on that.

Thank you, Shlomo.

We see an interesting growth in Copaxone in the last I would say five consecutive quarters that about 30%.

It goes actually across-the-board and in many markets we are improving Copaxone position as we are moving in for example, if we take Germany to the second position in the market, in France the second position as well and we believe the accumulation of the data that over the last year with all of the result of Copaxone, the precise data on the early MS and all of the head-to-head data, this will continue to fuel Copaxone growth and we need to remember that in most of the growth is unit growth.

So we are growing in volume and in patients and we based on what we have in all of the data that we have and the improving perception of Copaxone, and both on the frequency and the unmatched safety, we continue to fuel Copaxone growth actually across-the-board in all of the major European markets so we're very optimistic about the growth going forward as well.

Thank you.

Ladies and gentlemen, as a reminder please limit yourself to one question.

Our next question comes from the line of Adam Greene with the Stanford Group.

Please proceed with your question.

Thank you.

A question for Bill.

Could you talk about the impact of the implementation of USP 467 over the summer.

Has it delayed any meaningful products for you, what's the status of it now and should we expect issues or delays in approvals going forward after that?

Adam, I'm sorry.

You were really faint there.

I didn't get that.

The impact of USP 467, the testing of residual solvents, has that had any meaningful impact on you and what should we expect that going forward?

Do you expect it to delay any product approvals?

No, at of this time it hasn't had any meaningful effect on us at all and I think, I don't see it being an issue moving forward although one never knows.

Okay, thank you.

Thank you.

Our next question comes from the line of Tim Chiang with FTN Midwest.

As a reminder, ladies and gentlemen, please limit yourself to one question.

Thanks.

Bill, I had a question for you.

You know, the FDA recently made a ruling on Merck's Cosopt and that sort of nullified a small generic company's exclusivity.

Does that have an impact on your own Cozaar, Hyzaar filing, another Merck drug?

Yeah, I mean, I don't know that we necessarily agreed with that decision and we did weigh in on that, so I don't know if it's going to have an implication on us or not.

We'll get, we'll deal with it as we get to that point but we feel that the case law is pretty clear at this point in time.

Is there any way that you could appeal that decision?

No.

My sense, I'm not a lawyer, we don't have standing necessarily in that particular case.

We did file an amicus brief and that's about the extent to what we can do.

Okay, great.

Thanks.

Thank you.

Ladies and gentlemen, please limit yourself to one question.

Our next question comes from the line of Elliot Wilbur with Needham.

Thank you.

Just a couple of questions, I guess for Eyal on operating cash flow in the quarter.

Number one can you tell us whether or not Copaxone had a positive or negative impact on the op income line this period and then just maybe provide us with a little bit of color behind the strength and operating cash flow, just looking at the preliminary balance sheet, it certainly doesn't look like working capital moved in your favor and it's obviously a very strong number year-over-year.

Regarding Copaxone, I assume you're referring to the change that we had with our agreement with Sanofi Aventis.

It was neutral or maybe it was a few million dollars lower than before, before the change.

We're very similar to the last quarter and we had $166 million increase in revenue about $170 million increase in expenses, so you can do the math of the outcome and we believe (inaudible) this will go away in a couple of quarters, that difference.

On operating cash flow, throughout the year, this is not a one quarter Q3 event.

Q2 was even stronger and we expect Q4 back on the collection of the sale that we had, so we made in the third quarter to deliver another strong quarter in operating cash flow.

This is coming right out of the business, and you can look at our cash flow statement, I think it's pretty straightforward and detailed enough to understand, we are generating a lot of cash flow from the business, the working capital doesn't change by much and it's mostly coming out of profits.

And you also saw what we did with it.

We acquired two companies so far this year.

We paid down our debt from the beginning of the year by approximately $0.5 billion and we are paying dividend and we're investing in capital expenditures and we're still growing our total cash which of course most of it is going to be used to (inaudible).

Thank you.

Once again please limit yourself to one question.

Our next question comes from the line of Ricky Goldwasser with UBS, please proceed with your question.

Hi.

This is actually Annabel Samimy with Ricky Goldwasser.

Could you please tell us, give us some color around the generic pricing for the base business?

Has there been any pressure there and also can you quantify the Risperdal impact on the quarter and what was the timing of the shelf stock adjustments that had to be taken?

Bill, will you take it?

Good morning.

Your first question was about the base business and the pricing and boy I hate to be really boring on this, but I've got to be.

We haven't really seen a change and I think we've said this so many quarters in a row that we're down somewhere in the last 24 months, it hasn't been a real change on the base business.

We don't see that.

So that's where we're sitting so far on that.

Your second question on Risperdal had to do about the price adjustments?

Just the impact on the quarter and what kind of shelf stock adjustments had to be taken.

Yeah, it was very unfortunate that we lost Risperdal at that point in time and we still think we're right but that's the way the courts are, and in any case we had to take the adjustment and we did so.

It was not insignificant to the quarter but it was an adjustment that's out there.

We're still holding our share and doing very well in the market.

Okay, thank you.

Thank you, as a reminder please limit yourself to one question.

Our next question comes from the line of Corey Davis with Natexis.

Thanks very much.

Just more general question as to how you'd characterize the FDA's efficiency in approving your ANDA and you got lots of companies saying that it's dramatically slowing down, so A) would you agree and B) if so, is it a function of an increased number of applications or a lack of resources or both and do you see that improving any time soon?

Bill.

Yes, Corey, good morning.

With respect to the FDA, we hear a lot about that right now and I take my hat off to the FDA, they are doing the best they can with the resources they have and I hope the new administration is going to help to fund them a lot better.

There certainly are a lot of files at the agency.

I don't see it though particularly affecting us in a meaningful way.

I think they're very good at prioritizing and getting first to market products there and Teva is all about first to market products, so we get a lot of those.

I think the (17 filing on a 10 law) might have some issues and they certainly know how to prioritize so I think they've done a great job there but I would say I'd love to see them getting more resources.

Do you see the industry ever funding those resources for the generic division the way the brand companies do through PDUFA?

Well, yeah, in fact I'm here at the GPAJ CEO Summit today and I would speak for both as the present CEO of Teva North America and also as the Chairman of the Association that we are always willing to engage in dialogue with the agency with respect to user fees, and we've done that before.

Our only issue about user fees is getting a level set with what the brand industry got with PDUFA meaning we need performance metrics.

We need milestones.

We need to get something for what we pay, we just don't want to necessarily just pay without metrics.

Okay, great.

PDUFA worked pretty well up until this year.

Yeah.

Hopefully the generic side of things will go that way.

Thanks, Bill.

Thanks, Corey.

Thank you.

Please limit yourself to one question.

Our next question comes from the line of Rich Silver with Barclays.

Please proceed with your question.

Yeah, just two quick ones.

The $0.02 raise for the year, can you give us a better sense qualitatively what drives that increased guidance and the second question is similar to SG&A, Eyal, the R&D number in the quarter, as I said was low.

You did just say 7 to 7.5% of revenue is sort of the target.

Previously I think you said 7.5, so there is a big difference on your revenue base, so how should we look at the R&D spending going forward?

Rich, let me apologize, if I will answer your first question in a general mode, due to the nature of how you answer those kind of questions.

It's based on our confidence on our business and our business in these days when we see strong sales in the United States, we see international strong sales, we see Copaxone and Azilect strong sales, we see what I just described in the respiratory inhalers, HFA in the United States, the conversion toward the end of the year, so all in all, we believe that we have the momentum and we believe that was behind our decision in this regard.

We believe that the current situation in the marketplace is in a way a favoring Company which is stronger financial strength with the business which I could describe balance on what we call the balance business model of Teva and of course with our advantages of having a culture of a quick response to changes in the market which definitely is not something that everybody can do, so we think that in the current competitive environment, we have all the strengths to do better and this is actually what is behind our decisions and the numbers that we have provided in this conference call.

On the R&D, the target was 7.5 percent of sales for year-end.

We'll see if we get it.

I think the main issues at our R&D resources and expenses and headcount are growing all the time.

We're investing a significant amount of resources in three major areas of our R&D, the generics, the innovative, and the biogeneric R&D.

Our numbers are growing but this is not science.

This is R&D, so we'll continue to increase it in line with our strategy.

Thank you.

Thank you, ladies and gentlemen.

At this time we have no further questions.

I'd like to turn the floor back to Mr.

Yanai.

Thank you.

We are looking forward to a great Q4.

In the meantime I am now going to phone into listen to Barr's earnings call which is beginning shortly and I invite you all to join me there.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.