Teva Pharmaceutical Industries Ltd (TEVA) 2008 Q4 法說會逐字稿

Greetings and welcome to the Teva Pharmaceutical Industries fourth quarter 2008 results conference call.

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

A question and answer session will follow the formal presentation.

(Operator Instructions) As a reminder this conference is being recorded.

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

Elana Holzman of Teva Pharmaceutical Industries.

Thank you, you may begin thank you.

Good morning and good afternoon, everyone.

Welcome to Teva's fourth quarter and full year 2008 earnings call.

We hope you have 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; Moshe Manor, Group Vice President, Global Innovative Resources; and Gerard Van Odijk, President and CEO of Teva Europe.

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

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

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

Shlomo?

Thank you, Elana.

Welcome everyone, and thank you for joining us today as we review Teva's results for the fourth quarter and full year 2008 and provide our outlook for 2009.

2008 was an extraordinary and exciting year for Teva.

It was a record breaking year across-the-board, for sales, adjusted net income and of course cash flow.

I believe that especially against the background of a troubled world economy, our results this year emphasize the fundamental strength and stability of Teva's balanced business.

Our balance of geographies and product lines provide us a natural hedge against risk and enable us to deliver continuous profitable growth.

Even under challenging market conditions.

Our strong results under these conditions also I believe highlight the many advantages that Teva enjoys as the global generic leader.

Our expertise leveraging economies of scale and our ability to provide a quick and agile response to changing market conditions.

Before I describe the year in greater detail, I would like to briefly review our results for the fourth quarter.

Teva's net sales in Q4 reached a record breaking of $2.8 billion with gross margin of 56%.

Our operating profit was $704 million with adjusted net profit of $634 million, and all of this ultimately brought us to the adjusted diluted EPS of $0.76.

All in all this was an excellent quarter which provided a strong end to the year.

Now, let us turn to the full year 2008, a year in which we had record sales of over $11 billion which reflects 18% gross year-over-year.

Record operational profit of $2.7 billion, record adjusted net income of $2.4 billion and record adjusted EPS of $2.86 exceeding our most recently updated EPS guidance of $2.79 to $2.85.

We also had record cash flow from operations of $3.2 billion and record free cash flow of $2.2 billion.

I would also like to mention that even after we spent approximately $3 billion of our own cash for the acquisition of Barr, we ended the year in a very strong cash position with over $2 billion of cash on hand ready to be deployed for good financial and growth purposes.

Our record breaking results in 2008 were driven by contributions from across our Company.

In the US we had a record number of target product launches in 2008 including those of Lamotrigine, (inaudible) and Risperidone.

These products like many of our launches last year were based on Teva's own API and were brought to market in a very timely way thanks to the nearly seamless coordination between API, legal, R&D, supply chain, operations, and many other divisions of our Company.

In 2008, we expanded our leading market share in the US among all pharmaceutical companies both generic and brand to 16.4% of total prescriptions.

In many generic companies, Teva leads with 24% of total prescriptions.

2008 was also a good year for our European business where sales grew by 13%, backed by strong euro throughout most of the year and Eyal will give more details on the precise effect of currencies.

As you know, 2008 was turbulent year in the European markets and we found in each of the countries that we operate in different challenges and opportunities.

In France, for example, we are outperforming the market and nicely increased our market share during 2008.

In Spain, one of our high priority countries, we launched 30 new products and significantly increased our market share through the successful integration of Bentley Pharmaceuticals.

We also saw some unfavorable effect of the changes in Europe, especially the nature of tenders in Germany and the Netherlands, but I am pleased to say that we were able to a large extent to overcome this harvest, winning 20% of the value of the AOK tender in Germany and in the Netherlands managing to increase our leading market share to 34%.

Our business in Europe is already substantial and our presence and leadership in this critical region continued to grow during 2008.

We launched over 125 new products in the top five European markets including 30 products in the UK, our leading European market.

We are also very excited about the way in which Barr or actually (inaudible - highly accented language) business will enable us to grow in Europe, especially in Poland and Germany.

In Poland, the combined Company will become the number three player in the generics market.

In Germany the combined portfolio of the two companies will allow us to become a top five player.

I would also just like to mention that as part of our long term strategy, we increased our R&D efforts in the EU in 2008 enabling us to more than double our number of submissions.

This will of course be a major growth engine for us in the years to come.

Overall, we remain very optimistic about the future of generics in Europe, a market with a population of nearly 0.5 billion with relatively low generics penetration and with government and other payers coming under increasing pressure to lower the cost of healthcare.

2008 was also an excellent year for our international business, where sales were up by 28% over 2007 driven by especially strong results in Latin America where sales were up 20% and in Russia where sales grew by 75%.

Turning now to our respiratory business, 2008 was a record year for sales of our inhalers.

As the US conversion from CFC to HFA-based inhalers accelerated and reached completion during Q4, ProAir ended the year with a market share of 59% of the total Albuterol market in the US.

2008 was an outstanding and exciting year for Teva's innovative business.

Let me begin with Copaxone.

In 2008, Copaxone became the world's number one therapy in terms of net sales for the treatment of MS and it remains the leader.

Copaxone enjoyed record breaking global end market sales of $2.3 billion with growth of 32%.

In the US in market sales increased by 26%.

Outside the US in market sales increased by an extraordinary 43%.

Copaxone also led the market in the US both new and total prescriptions.

In the US it grew by 10.5% year-over-year in terms of total prescriptions.

Copaxone continues to out pace the markets growth and we expect it to remain the leading therapy for MS and continue to grow.

And as we look toward the future of our MS franchise, I'm also very pleased to announce that the FDA has granted our request for fast track designation of oral Laquinimod for the treatment of MS which may mean that this products time to market may be significantly shortened.

This was also an excellent year for our second innovative product, Azilect.

Sales of which rose 46% during 2008.

The promising result of several studies of Azilect during the year have also made us very optimistic about Azilect's future.

As you will recall, the results of the ADAGIO impairment studies may lead to Azilect label being modified and allow it to be more broadly prescribed.

We have submitted the results to the study to the FDA and expect to finalize the submission of the ADAGIO study in the first half of 2009.

To conclude my review of our performance during the year I would like to mention that we made a major effort during 2008 to increase efficiency, helping us to improve our performance when it comes to expenses, despite our increased R&D spend.

Our ability to respond quickly and with agility is a great advantage for us as we work to adapt ourselves to current market conditions and further report our competitiveness.

2008 was also a year for major strategic achievements for Teva and I would like to share with you just some highlights of the progress we have made recently towards realizing our long term strategic goals.

As I have said on numerous occasions, we believe biogenerics is both the next wave of technology and the next wave of generics, and we intend it to become a leading player in this.

Leadership in biogenerics is indeed one of the pillars of our long term strategic goals and we achieved a milestone in 2008 with the launch in Europe of our first biogenerics product, Tevagrastim.

We also made significant strides in building our biogenerics knowledge base, capabilities and infrastructure.

One of our important strategic acquisitions during the year was Cogenesis, a leader in cutting edge technologies in biotechnology.

And less than a month ago we took huge strategic steps to accelerate the pace of our biogenerics activity by entering into a joint venture with Lonza a Swiss Company that is best-in-class in the development and manufacturing of biologics.

We believe that Lonza's expertise combined with Teva's global experience and experience in bringing drugs to market puts us in the best position of any Company in the pharma industry to capture the opportunities and obtain the leading position in biogenerics.

This joint venture will provide us with outstanding infrastructure, infrastructure that would otherwise require great investment of both cash and time to build.

This JV will focus on the largest and most important biologics, products which represent most of the current biopharmaceutical market, of $30 billion.

We expect to begin to reap the fruits of the joint venture with Lonza in 2014.

We anticipate seeing the first fruits of our other investments in biogenerics at the beginning of 2013.

In 2008 we also made excellent progress on expanding our geographical footprint and accelerating our leadership in key markets.

As you will recall, we entered a strategic partnership with the core Company to create a leading generic pharmaceutical Company in Japan.

The Company has begun operations and we expect that it will reach sales of $1 billion by 2015.

We have been receiving extremely positive responses from both the government and the market to our new Japanese initiative and we are very excited about Teva's opportunities in this important market.

As I mentioned earlier, our acquisition with Bentley provides us with strong platform for establishing leadership in Spain, an important market with relatively low generic penetration.

And of course, the most important strategic development of this past year was the acquisition of Barr.

We are very pleased to have closed this deal at the end of 2008, as originally planned, despite the massive changes that occurred in the market between the time we signed the definitive agreement and the closing, and now I'm pleased to report that we are making excellent progress on the integration.

The more we learn about Barr's business, the more excited we are about the synergies and the strategic advantages that this combination will create.

As you will recall, when we announced the acquisition, we told you that we expected to see cost synergies at the end of the third year totaling $300 million.

We are now targeting over $400 million in the third year.

Furthermore, we now expect the acquisition to become accretive to get earnings in the third quarter of this year, three quarters after closing, rather than during the fourth quarter as we originally announced.

And now I would like to provide guidance for 2009.

We expect our sales in 2009 to be between $14.1 billion and $14.6 billion.

It is important to bear in mind that in this uncertain economic and foreign exchange environment, exchange rates have a strong impact on our revenues.

The numbers I just provided are of course based on current exchange rates.

Just for the sake of comparison, if we were to project our 2009 sales according to 2008 exchange rates, they would be in the range of $15.15 billion to $15.65 billion, and as for earnings per share, we expect EPS in the range of $2.85 to $3.05.

As you can see, we expect 2009 to be a great year.

I would like to mention that because we are speeding up our integration of Barr, we expect to see most of the integration expenses in the first and to a lesser extent, the second quarter, a period when we will of course not yet be realizing synergies from the acquisition.

In addition we expect this to be a back end loaded year in terms of product launches.

The combination of these two factors create a somewhat unbalanced year and we expect to see sequential improvement over the course of the year.

2009 is also building momentum for a great 2010.

We are not going to provide guidance for 2010 but our initial projection indicates that EPS will increase by 30 to 35% over our 2009 projected EPS.

And now, just one more note about the guidance.

In order to enhance investors overall understanding of the Company's past financial performance and prospect for the future, we have decided to make an additional adjustment to our non-GAAP earnings to reflect the exclusion of amortization of the intangible assets.

What is commonly referred to as cash EPS.

In a few moments, Eyal will give you a detailed explanation of the new non-GAAP presentation which we will be using going forward, and he will also provide you with the necessary details to reconcile between the two presentations.

And now I will 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 today.

This was another strong quarter for Teva ending an exceptional year.

I would like to take the next few minutes to review with you the results in detail.

Before I delve into the numbers, I would like to note briefly that we are once again presenting GAAP and non-GAAP results for the quarter and full year of 2008 in line with the format we used in the past.

For Q4 2008 we excluded the following items from our GAAP results--$992 million of in process R&D in connection with the acquisition of Barr, $272 million related to the impairment of financial assets primarily auction rate securities, $107 million related to the impairment of intangibles and other assets that were left primarily in connection with product rights acquired through our acquisition of C-Cor, and $17 million representing the net expense in connection with few legal settlements in the quarter, $75 million paid out and $58 million received.

In addition, the related tax effect of $66 million.

As indicated in the past, we'll present non-GAAP figures to show you how we as management and our Board look at our financial results.

As Shlomo mentioned we had another quarter of record revenue with more than $2.8 billion in sales, an increase of 11% compared to Q4 last year.

Excluding the items listed above, non-GAAP net income grew by 11% to $634 million in Q4 and non-GAAP earnings per share was up 10% to $0.76.

On a GAAP basis, and as a result of the above-mentioned items, we recorded a net quarterly loss of $688 million and a loss of $0.88 per share on a a per share basis.

For the full year of 2008, sales grew by 18% to $11.1 billion, non-GAAP net income grew 22% to $2.4 billion and non-GAAP earnings per share was up 20% to $2.86.

Without excluding all of the charges I just described as well as some other charges we discussed in previous quarters such as the in process R&D relating to our Cogenesis acquisition, on a full year, GAAP net income was $635 million and full year GAAP earnings per share was $0.78.

Before going into some more detail, let me highlight two major elements affecting our results this quarter.

Foreign exchange differences and our US distribution of Copaxone.

Foreign exchange differences played a major role throughout the year in most of this quarter impacting sales and profits as well as our balance sheet.

Unlike the first three quarters of 2008, in Q4, foreign currency differences adversely affected sales by approximately 5% or $130 million as the dollar strengthened against most foreign currency primarily the British pound, the euro, the Hungarian forint, the Canadian dollar and Latin America currencies compared to the fourth quarter of 2007.

Foreign currency also had a $28 million adverse impact on operating income, primarily resulting from the strengthening of the US dollar relative to the British pound and the euro on one hand and strengthening of the Israeli sheqel relative to the dollar on the other hand.

For the full year foreign exchange differences compared to 2007 rates had a positive impact of $227 million on sales but a negative impact of $65 million on operating income.

As in the past three quarters, the change we made in the distribution of Copaxone in North America increased sales this quarter compared to Q4 last year by $181 million and was practically neutral to operating income.

Let me now review our many business units.

Pharmaceutical sales in North America, which include sales of generics, Copaxone, and Azilect and our respiratory products grew by 15% over the fourth quarter last year and for the full year grew by 19%.

The growth of Copaxone sales and the successful launch of Lamotrigine, Bupropion 150-milligram, Risperidone and (inaudible) as well as strong sales of pantoprazole and amolipine benazepril launched last year contributed to the 2008 results.

Pharmaceutical sales in Europe in dollar terms grew by 1% compared to Q4 2007 as these sales were the most negatively affected by the strengthening of the US dollars in recent months.

Net foreign exchange impact from pharmaceutical sales in Europe in the local currency grew by 14% this quarter.

For the full year, pharmaceutical sales in Europe increased by 13% reaching $2.8 billion.

In local currency, sales in Europe grew by 6% for the year.

International Pharmaceuticals sales grew by 13% over Q4 last year.

Our international sales continue to grow mainly due to the strong sales across our main geographies, Latin America, Israel and Russia.

In local currency, pharmaceutical sales in our international markets grew by 19%.

For the full year, international pharmaceutical sales increased by 28% compared with 2007 and in local currencies, sales were up by 23%.

Copaxone as Shlomo said had a record quarter and year.

Global in market sales totaled $595 million.

This is a 37% increase over the comparable quarter for the world's leading MS treatment.

For the full year of 2008, global in market sales of Copaxone increased by 32% to $2.3 billion with US in market sales increasing by 26% to reach $1.4 billion and non-US sales increasing by 43% to $884 million.

Two-thirds of the growth in the US Copaxone in market sales was driven by price increase while one-third of the growth was driven by volume increase.

In Europe and the international markets, most of the growth was driven by volume increase.

Azilect had both a good quarter and year in which it continued to gain market awareness and market penetration.

Although starting from a relatively small base, in market sales grew by 46% for the year and reached a level of $51 million in the fourth quarter and $175 million in 2008.

Our global branded respiratory business which is included in the North America, European and international sales figures had sales of $259 million in Q4, up 37%.

The main contribution came from the increase in the sales of ProAir in the US.

Annual respiratory sales reached $778 million in 2008 compared to $742 million in 2007.

These results do not include (inaudible) which is included in our generic business.

Gross profit margin was 56.1% in the reported quarter compared with 52.3% in the comparable quarter in 2007.

The improvement in gross profit margin is attributable to many parts of our business, higher Copaxone sales, partially resulting from the fact that we now record 100% of the Copaxone sales in North America, higher respiratory product sales, especially ProAir and a better generic product mix.

Gross profit margin for the full year of 2008 was 53.9%.

Net R&D expenses reached $215 million or 7.5% of sales up 28% compared to Q4 last year.

In 2008 we invested a total of $786 million in R&D which were 7.1% of sales.

This increased investment reflects our strategic goal to double R&D output.

Approximately 40% of R&D investment in 2008 were in generics and 40% in our beyond generic initiative innovative product, respiratory and biogenerics.

As you can see in the earnings release issued this morning, starting this quarter in order to improve data transparency we will break out our SG&A expenses into the two parts--sales and marketing and G&A.

Sales and marketing expenses totaled $498 million in the quarter or 17% of sales compared to 14% of sales in Q4 '07.

The higher sales and marketing 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 on the sale and Marketing total $178 million in the fourth quarter.

G&A expenses totaled $182 million or 6% of sales.

For the year, G&A expenses grew by 5% and were also 6% of sales as compared to 7% of sales in 2007.

This reduction of G&A as a percentage of sales is part of an expense control initiative that we took.

This has enabled us to increase R&D spending while maintaining our high operating margin.

We recorded $296 million of financial expense in our Q4 2008 GAAP results compared with only $3 million of financial expenses in the comparable quarter in 2007.

This amount includes a $247 million charge against us for the auction rate securities.

This charge was calculated based on our internally developed model as well as work done by an outside valuation expert.

The principal amount of our auction rate security bond portfolio is $450 million, including $13 million received through the acquisition of Barr, whereas the net amount at which we now carry this portfolio as of December 31, 2008, stands at $98 million.

Approximately half of this amount represents auction rate security based on municipal bonds and government guaranteed student loans.

The December 31, balance is after giving effect to a cumulative total of $343 million of P&L charge and a cumulative total of $9 million provided in our balance sheet under other comprehensive income.

Let me also remind you that last quarter, we recorded income of $100 million received from a financial institution in connection with our auction rate security portfolio.

We also recorded in this quarter a $25 million charge resulting from a decline in the market value of certain equity investments.

The tax rate for the full year of 2008 applicable to our non-GAAP results was 10% compared with a rate of 17% for 2007.

Accordingly, the tax rate provided for the fourth quarter reflects just over 6% of non-GAAP pre-tax income.

As we've indicated earlier this year, the reduction in the effective rate from 17% in the prior year to 10% in 2008 mainly reflects product launches in the US during 2008 which to a large extent were developed and produced in Israel as opposed to a different mix in 2007.

The 2008 tax rate in our GAAP figures were 22% reflecting that $1.4 billion in process R&D expenses for the year which are not tax deductible.

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

We had a record quarter with cash generated from operation amounting to $969 million compared to $545 million in Q4 last year.

Our free cash flow after capital expenses of $179 million net and dividends of approximately $90 million amounted to $700 million, also a record.

Total SR&A at December 31, 2008, amounted to $2.7 billion an increase of almost $0.5 billion from September 2008.

Approximately $400 million of this increase is coming from Barr, about 96% of the total reserves are from the United States, up $146 million from September 2008.

Most notably due to the provision for chargebacks of new products.

Gross capital expenditures reach $181 million this quarter, essentially flat compared to $178 million in previous quarter.

CapEx in 2008 totaled $681 million mainly reflecting previously discussed planned capacity expansion to support our strategic growth plan.

Our financial leverage measured as debt to debt plus equity at December 31, 2008, increased to 34% from 24% following the additional debt incurred in connection with the Barr acquisition.

We expect the financial leverage to return to the pre-Barr acquisition level by the end of 2009.

Now about dividends.

Yesterday, Teva's Board approved a fourth quarter dividend amounting to approximately $127 million.

On a per share basis, our dividend which is declared in Israeli sheqel was increased by 33% from ILS0.45 to ILS0.63 fair share.

Based on the rate of the change on February 16, which was yesterday of the sheqel to the US dollar, this translates into approximately $0.15 per share per quarter.

As Shlomo indicated, we now expect to reach $400 million in cost synergies from the Barr acquisition by the end of 2011 up from $300 million we initially estimated.

In our presentation tomorrow, we'll provide additional color on the Barr synergies.

Before opening the call for questions I would like to provide additional detail on our guidance for 2009 and on how we intend to report our numbers going forward.

As all of you know, until and including today, Teva reported non-GAAP results by adjusting for certain items including acquisition related costs such as inventory step-up and in process R&D as well as the impairment of financial assets and legal settlements.

Many of you requested that we consider providing non-GAAP figures in which we also exclude amortization of our acquired intangible assets.

Given the fact that following the Barr acquisition, our amortization of acquired intangible assets had reached a material amount and the fact that these write ups will fluctuate from one quarter to another, we decided that we would accommodate your request and our non-GAAP disclosure going forward, we will exclude amortization of intangible assets from our quarterly and annual results.

In addition to the amortization of acquired intangible assets, and presenting its non-GAAP measures, Teva will continue to exclude the sale items already mentioned as we did in the past.

In order to provide you some clarity on reconciling our future non-GAAP data with our GAAP financials, and to allow you to see the impact of the exclusion in our guidance for 2009, let me highlight for you the items that we expect to exclude in 2009 in presenting our non-GAAP results.

Inventory step-up in the amount of approximately $270 million divided mostly over the first and the second quarter of 2009 and amortization of acquired intangible assets in the amount of approximately $470 million, possible restructuring expenses resulting from the Barr acquisition and the offsetting tax effect of approximately $250 million.

I would now like to reiterate our guidance for 2009.

Shlomo provided EPS guidance of $2.85 to $3.05.

These numbers compare with the way we've provided our guidance in the past and reported our results in 2008.

Commencing 2009 we will also exclude amortization which has been included in our cost of goods sold and sales and marketing expenses.

We therefore expense non-GAAP earnings per share to be in the range of $3.20 to $3.40 excluding these items.

After the call, we'll issue a detailed press release regarding our guidance.

2009 is expected to be back end loaded year with sequential improvement for one quarter to another, launch of new generic products and acceleration of cost synergies resulting from the Barr integration which are expected later in the year will influence the development of results.

Let me share with you a few more data points regarding 2009.

Our gross profit margin, and this is based on the presentation of our new guided format, the non-GAAP guidance format, our gross profit margin is expected to average between 55 to 58%.

This number did not include inventory step-up of approximately $270 million and amortization of approximately $350 million.

R&D expenses will be between 7 and 7.5% of net sales.

Sales and marketing will increase a percentage of sales compared to 2008 due to the fact that we will have four full quarters of payment to Sanofi in the US and in 2008, we only had three quarters, but keep in mind that starting April 2010, these payments will end altogether.

We expect sales and marketing to be between 16 and 18% of sales.

This number did not include amortization of approximately $120 million.

G&A as a percentage of sales for the year is expected to be just under 6% in 2009.

[Financial] expenses are expected to be between $200 million and $250 million.

Tax rate on our non-GAAP number is expected to be at the high teens, and we believe that a fully diluted number of shares in 2009 should be approximately 915 million shares.

We also have to add back about 50 million for earnings per share calculation resulting from the treatment of convertible debentures.

The increased interest expenses from convertible debentures is included in the final expenses which I mentioned before.

It is important to mention that these ranges are our current best estimates and actual results could vary based on business conditions, exchange rates, and other elements.

Just to be clear, in 2008, non-GAAP results, we issued today, and discussed on this call do not exclude amortization of intangible assets from our previous acquisition; however going forward, we will exclude amortization of intangible assets from all previous acquisitions from our results.

In order to facilitate a better comparison between our future and former presentation of non-GAAP results you will find on our website a reconciliation table covering quarterly and annual results from 2006 to 2008 showing how the exclusion of amortization of intangible assets will have affected our results for these periods.

Thank you all for your time and attention today and now, we'll be glad to take your questions.

Thank you.

(Operator Instructions) Our first question comes from Randall Stanicky with Goldman Sachs.

Please State your question.

Great.

Thanks guys for taking the questions.

Just a couple of brief ones.

Eyal just to clarify, does the 3.20 to 3.40 range, does that exclude all of Teva's amortization or just specific parts of it?

Yes, that includes amortization, including the ones that relates to acquisition made in the past.

You will see we're providing all of the detail for comparison on our website a little later after the end of the call.

We had about $140 million of amortization in 2008 from prior acquisitions and Barr of course is adding a significant number but that includes everything.

Sorry,excludes everything.

Great and then going forward when you update guidance that's the number we should look for to be updated is that correct?

Yes, absolutely.

Okay, great.

And then last question, in terms of the specific line items of guidance that you gave for 2009, I guess I didn't hear if you gave R&D but the question is should we expect any meaningful quarterly variation around those ranges, is there anything we should be thinking about?

Yes, of course.

This is not rocket science, and the business is going to vary from one quarter to another.

Both level of expenses and the level of revenues as we said the year is going to improve from one quarter to another both in terms of margins and in terms of results.

The margins that I gave you are average for the year but are going to vary.

And did you give the R&D?

The R&D ranges between 7 to 7.5% of sales.

Perfect, thank you.

You're welcome.

Our next question comes from [Greg Gilbert] with Banc of America/Merrill Lynch.

Thank you, first the US question for Bill.

Whether or not you're building it in your model can you discuss the potential for the pricing environment to improve in '09 versus '08 versus the typical shrinkage rate on the base business you've been seeing and perhaps comment on some of those factors?

And then I have one for Gerard if he's on the call.

Thanks for the question, Greg.

Right now, we have seen pricing remain stable for I feel like I've been saying this for a long time and I guess I have for the last two years, we haven't really changed our model at all.

I don't anticipate that at this time, and we think that taking cautious approach is the right thing to do.

In terms of Europe can you talk about growth on constant currency excluding Bentley and then Gerard perhaps you can talk about what you see as an exciting growth opportunity in Europe in '09, perhaps the most exciting versus the biggest challenge that you see in the European climate in '09?

Thanks.

Gerard?

Yes, sorry, Shlomo.

Gerard, can you take this one?

Yes, I will.

Thank you, Greg.

First of all I think it's a very mixed picture across Europe.

If you take UK, UK still has the underlying growth coming back, if you remember '08 was the year in which the government took out 400 million sterling out of the system which was seeking, all companies were seeking compensation for that and we did very well in those circumstances and I believe better than many if not all of our competitors, so that is not going to happen in '08 -- in '09 again so it means that relative '09 will do better versus '08.

The second good news I think should be coming from Germany if the UK will play out as we are currently expecting it to play out in terms of its tender we should be able to reap the benefits of our well performance offering in that tender, in combination of course with the fact that we should see from bringing together the Pliva AWD business together bringing them together with the Teva business in Germany.

Thirdly, France is looking very hopeful.

We've been extremely successful the last year in terms of our competitiveness.

We've turned around that business to be one of the most, let's say, competitive elements of our franchise in Europe and we are doing very well.

We catched up from (inaudible).

We're number three in the market.

So I'm sure they will not sit on it so it will continue to be a very tough market but we are doing very well and we are beating the marketplace there.

Spain with Bentley, we have almost 10% market share now.

We have the answer to all of the different dynamics in the different parts of the Spanish market.

We expect the Spanish market to continue to grow in the next few years in the low double digit or mid double digits so between 10 and 15 and maybe a little bit above that depending on who you ask.

It's a little bit higher or a little bit lower but that's very attractive and I think with our portfolio of products, launches and also with our commercial offerings that are adjusted to the part of the country that you're in in Spain, we believe we have exactly the right answer to the opportunities in Spain, and then finally the one that is a bit uncertain is Italy.

Italy is a marketplace in which we did well this year although it's a very tough environment, we've seen a low penetration of generics, we've seen very competitive atmosphere at the retail level.

I believe Teva within the circumstances did very well.

We used our strong position in the marketplace with our partners, with our portfolio, but it hasn't been moving as much as we would have hoped for and I think that's true for the whole generics market.

I think the government is not clear in its policy to its generics and that means that the market is not growing as much as it could be so that's the marketplace that I don't expect much growth from this year.

The other four I explained.

Another interesting one I think we should mention here is Poland, with the acquisition of the Pliva business in Poland, Teva as Shlomo already said is the number three in the generics market and number six in the total Polish market whereas we have got a wonderful breadth and depth of portfolio of products, we've got a very strong commercial set up there and line up with people on the ground as well as in the marketing groups.

We have got OTC business there, we have the anti-infectives, we have a very I would say nice range of assets that should allow us to make that business thrive and I think given the pressure in the economy that it will be a trend to its generics in general and that part of the world and if we played it right we should be able to benefit from that.

You have to answer the question about the contribution of Bentley, from the 14% growth in the quarter in the European currency, Bentley contributed approximately 3%.

Thanks for the clarification.

Our next question comes from Ronny Gal with Bernstein.

Please state your question.

Good morning, a couple of them.

First regarding R&D percentage I think you mentioned it will stay somewhere between 7 to 7.5% of revenue and I was kind of wondering if you think it will remain that way or are we looking to raise it over time?

I'm kind of thinking with the percentage of revenue currently generating from innovative businesses you should considerably move more towards a branded business like investment in R&D.

And then I've got a follow-on for Bill.

Ronny, it's Shlomo, let me first answer you on where are we heading with the R&D expenses.

As you may recall, we when we launched the 2020 strategy, we said that for a couple of years, we are going to increase the R&D expenses in order to enhance our product portfolio and to capture the advantages that we found in that area so it's not going to stay there.

I mean this is a level of expenditure, not be there forever.

It's part of the 2X initiative and let's call it actually for the coming year and maybe for another year and then I can say that you probably will see us getting back to the 6.8, 7% level.

I'm actually asking why is it not going the other way, Shlomo?

I was wondering why it's not going more towards 10%.

If you're going to be a Company which is almost derived half of its profit from innovative products, shouldn't you be spending more on branded R&D or maybe this simply does not include acquisition that you intend to make?

No.

It's about first of all that the majority of our business is generics but in the innovative arena, we may increase some expenditures depending on the level of the success of our R&D there, but as we see it now, and definitely if we will have to increase that means we are in good shape because it means we are having some successful achievements, then we will sustain this level of expenditure.

Ronny, if I could add something, you could very easily calculate it.

I'm sure you've done it already that we plan to spend more than $1 billion in R&D next year or this yes, or this year, I should say, 2009, and the mix probably I mentioned before, was 60% generics and 40% all the rest, we will probably see more going into the beyond generic arena as part of this $1 billion, so the mix is also going to change internally and this is with Barr, and there's plenty of synergies over there.

Well, and the only other thing I would say is again that level of the spending will depend on the opportunity as we've said and a lot of that depends on biologics as well.

So we will be funding that.

Makes sense.

Bill, a couple of quick ones for you.

If you can quickly reflect the Imitrex situation and if you care to make a comment about the issue of the 30 month stay for the recently listed antibiotics?

I know what you're thinking on this matter.

First with respect to Summatriptin, Summatriptin as you know we launched last week, we were first to file I believe on two patents and Riambaxi was first to file.

One, already in the market.

We launched with a full complement of all strengths, we launched with all strengths, Riambaxi launched with a single strength, the 100-milligram so we're shipping our product, we're gaining share, we feel good, right now we're targeting roughly a 40%, we should transition up to about a 40% share and we'll see where it takes us from there.

The second piece, the 30 month stay on the antibiotics?

Yes.

What is the question?

The question is if you can just give us what your are telling us about whether those products are eligible for a 30 month stay?

Or will you be able to come in earlier than that?

I think it's still unclear at this point in time.

And one last question, it's a request or if you wouldn't mind guys, putting online the Barr numbers for fourth quarter just to ease our ability to transition the numbers forward.

The Barr numbers?

Yes.

I will take it up.

I don't think we're going to put it online.

Barr doesn't exist anymore as a public Company and I can tell you the numbers are more or less in line with the forecast but I think the details we (inaudible).

Okay, thank you.

Thank you.

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

Please state your question.

Good morning.

Thanks, guys.

The question Shlomo if you could repeat what your 2010 growth assumption was and I believe that was off of a GAAP figure, the 2.85 to 3.05, if you could let us know if that also was applicable to the cash figure?

And following on that, can you talk to us about the amortization levels in 2010?

Should we assume that they are relatively constant or did they go down in 2010?

And then I have a question for Bill as well.

Well, first of all, I gave the numbers, of course based on the old methodology that you used but the percentages are the same percentages so if you wish to do it the old way or the new way you should just add 30 to 35% to our 2009 expected results.

Okay, so roughly a 3.70 to 4.10 without holding you to numbers, are we working the math pretty much right on a GAAP basis?

If you are doing the math the right way, you'll be there probably.

Okay, thanks, and Bill, just on the US line, without getting into our specific numbers versus yours it looked like it was a little weaker than we would have thought.

Was the full (inaudible) booked?

And before you answer that I also want to get this into Eyal, if you just take the Teva standalone numbers for 2008 and add roughly a flat Barr in 2008 you get to the low end of that $14.1 billion guidance.

Are you modeling this conservative or is the currency really just a pretty significant hit?

Thank you.

Okay you want to take the first?

I could tell you first, I think you heard Shlomo, one of the major impact is foreign currency.

We have to remember what happened between the 2008 average foreign exchange rate and the one that we expect today and our plan, we're not trying to speculate where foreign currencies are headed.

We're taking the current rates, $1.28 per euro, for example, compared to almost 1.5 in 2008.

That has an impact on the top line but as you've seen that the bottom line is not suffering from that impact.

If foreign currencies changed their direction they will be very happy to take the addition to the sales but this is the major impact and 2008 foreign exchange rates, our sales forecast would exceed $15 billion, I think 15.1 to 15.6.

So it's all about foreign exchange rates.

Ken, this is Bill Marth.

With respect to your question on Q4 2008 versus Q4 2007, I would make sure you point out before we talk specifically about Pulmicort that you remember Q4 2007 included oxycodone, Welbutrin, and lest you forget, there was that launch of Panto that we spent so much time on so when you look at the two quarters I think actually the fourth quarter of 2008 was very very good.

That notwithstanding I believe the majority of Pulmicort was recognized but I would also remind you that on Pulmicort price don't be too aggressive because when we launched Pulmicort, of course we did not know that we would be exclusive in that market and we had Parr chasing us and in fact they actually did have some product in the channel.

Ken, it's Shlomo.

Let me just add one more comment on the foreign exchange impact on Teva, as we are going into probably a very volatile unknown foreign exchange trend.

Generally speaking, the foreign exchange would impact more of the top line rather than the bottom line because the market is what it is.

Having said that, when it's come to the bottom line part of the P&L, then it's both, our efforts to manage it and to a certain degree to compensate for having our business, our balance business model and then of course by other managerial actions that we are taking in order to go with the current situation so even though if you can see kind of the fluctuating top line, we believe that we will be able to observe part of it and to manage the bottom line.

Our next question comes from Chris Schott with JPMorgan.

Great, thank you.

On the M&A front, you obviously just completed a deal that involved adding additional leverage.

Can you comment on you interest in continued M&A especially with generic assets potentially available and updates in your current M&A priorities?

And then I have a couple quick questions for Bill from there.

M&A by definition is part of Teva's strategy but right now we are focusing on digesting Barr.

We believe that this is the major effort for Teva for 2009.

Having said that of course we are (inaudible) all opportunities and as we said, we probably are the most equipped Company to capture opportunities if we come to the conclusion that this is the right opportunity and the right time.

Great, thanks and then just a couple quick questions.

The HFA Albuterol market with ProAir just the expectations of this market heading into 2009 now that we're past the conversion phase and how do we think about pricing that environment and then finally, quickly Lotrel, does your guidance assume additional generic competitors there in 2009?

Chris, thanks, thanks for the question.

The HFA market as we said, got about a 59% share right now.

We're not necessarily projecting that we're going to continue to hold that amount of share through the totality of 2009.

It's still a great product and its converting.

Almost all CFC is gone.

There's still a few traces out there but by and large, it should be gone, so we see that that's going to smooth out.

We did take a price increase as you remember in November, and now we have seen the competition has taken another price increase, so we'll just keep an eye on it.

Right now we feel comfortable where it is but obviously it's a completely branded market in our eyes and we'll be subject to price increases from time to time.

The next question was on Lotrel, and right now you know that there are several players that may enter the 30 month date, somewhere around the March/April time frame and one has to anticipate that there is potential for competition but then of course, Sandisk may bring some action.

We'll have to wait and see.

Thank you.

Thank you.

Ladies and Gentlemen, due to time considerations, please limit yourself to one question and one follow-up.

Our next question comes from David Buck with Buckingham Research Associates.

Please State your question.

Yes, thanks.

Two quick questions.

First on the international and particularly the Russian market can you talk about the outlook you're expecting in 2009 given the currency volatility we've seen and what efforts you're making to protect that business, and for Bill, a couple of quick US questions.

First, do you expect to have a cell-manufactured generic Adderall XR in April and any update on Pentoprasol litigation?

Hi, this is Shlomo.

Hi, Shlomo.

As per your question about Russia, and I would with your permission extend my answer not only for Russia but for all those countries that are facing a volatile economy situation, we enhanced our cash management policy and actions in this kind of country.

So if you take Russia, all of the whole issue of hedging, price increase, increase in collection, credit policies in this kind of methods that we are using in this uncertain and volatile environment is part of our managerial effort and we believe that Russia is a major and important country.

We've overcome these turbulent times but in the meantime we will do both, we will try to increase our market share and of course protect our revenues and profits.

Do you think it can actually be a driver of growth again in 2009 or do you think it goes the other way?

I believe that we will increase our market share in Russia.

I would like to remind you that part of the Pliva acquisition is a substantial business in Russia.

It puts us among the first 10 companies in Russia and we would like to build our future base there as we see Russia is one of the future growth engines for the geography part of Teva.

Okay.

David?

With respect to Adderall XR, what I can tell you is we'll be launching the product in April of 2009 and whether it would be our product or not, it would depend on whether you get an approval.

But that notwithstanding we will be launching the product in April of 2009.

But you haven't heard anything on the citizen petition either way?

No.

We haven't heard anything on the citizen petition.

So and then the second part on Pentoprasol, we're pretty much where we were at the last time that you and I spoke, we're still waiting for the June 3, decision and there's been no movement there and we don't anticipate a trial until either late 2009 or significantly into 2010.

Okay, great.

Our next question comes from Rich Silver with Barclays Capital.

Please state your question.

Yes, just on the cost synergies, the $400 million in the third year.

Is that the run rate by the end?

And a second question is the break down of the synergies, any further detail on that?

Yes, hi, Rich.

It's Eyal.

Regarding 400, we upped the number from an initial preliminary estimates of 300 and this is by the end of 2011, of course it has to build up the price on the cost of sales and production streamlining of production facilities, that takes the longest and so we do see some expenses leaving the system a little earlier and the numbers to be bigger than what we initially thought.

It clearly is going to improve as we go along.

With regards to some more details I think I mentioned this in my part before, everybody on the line is invited of course to join us tomorrow in New York and we'll provide some more detail as to in what area this is happening.

Just one more which is on foreign exchange just so I better understand.

You'd talked about 2010 and the assumptions but for 2009, is the assumption constant currency or are you actually forecasting some change versus where we finished '08?

Not sure I followed the question.

Is the forecast based on constant currency?

Yes.

The answer is yes.

The answer is yes.

The forecast, the 2010 forecast?

No.

2009.

2009 forecast is based on the current currency, current exchange rate, and some more conservative assumptions and part of the riskier countries we mentioned, Russia, places where we could expect the currency to deteriorate a little further, we're a little extra careful but by and large, it's based on current currency.

Thank you.

Thank you.

Our next question comes from Corey Davis with Natixis.

Please state your question.

Thanks very much.

I appreciate your clarification on the growth rate for 2010, but I guess that begs the question, for a Company your size that's a pretty incredible growth rate on the bottom line so where is the majority of that coming from?

Is it mostly cost synergies or is there a big component of revenue growth that you anticipate in 2010 as well?

Okay, it's Eyal.

Without going into detail we're focusing on '09, but we thought we felt comfortable with 2010, we thought we ought to give it.

It's based on basically three major factors.

One, remember our agreement to compare royalties to Sanofi Aventis on Copaxone and on March 31, 2010, and from April 1, we're no longer paying that.

That's one component.

The other one is that we anticipate 2010 to be a pretty rich year and preparing for a new generic product launch in the US but also outside of the US and in 2010, cost synergies on the Barr acquisition are expected of course to be higher than they are in 2009.

Okay and then quickly on Lonza, the joint venture that you've set up could you elaborate a little bit more in the details?

Is it a true 50/50 economic split costs and revenues or profits and down the line, what percent of your biogeneric, biosimilar products will you have to split with Lonza versus 100% economics to Teva?

Okay, first of all, the Lonza is a 50/50 joint venture.

We share the investment and we share of course the revenues and the profits.

We see it as a very excited joint venture, as I said in my previous biogenerics future part in the conference, I believe this is a very compelling joint venture and we are targeting the majority of the big product in the industry of the time frame of 2014, 2016.

The potential value of this product in blended sales right now is about $30 billion and this is actually where we are, have in this accompanying JV.

Okay, thanks very much.

Our next question comes from Michael Tong with Wachovia Capital Markets.

Thanks for taking the questions.

The first one I have is with respect to quarterly progressions that you've talked about for '09, in terms of being back end loaded.

If we backed out the inventory step up that's going to hit you heavy in Q1 and Q2, are there going to be improvements in the rest of the business in the back half of the year to account for that or it's just the removal of the inventory step ups?

Well first, I'll take the beginning and Bill can add to that.

First of all, this is based on backing out inventory step-over, backing out amortization so it's net of one of the reasons why we're doing this, not to confuse everybody, this is net of that.

This is basically there are more generic launches in the second half of the year and in Q2 than in Q1 and of course the expenses, the expense synergy with Barr will start to be meaningful only in the second half of the year, take time to reduce cost, take time to reduce the number of people and we do this as you have seen already in a good fashion and so for the second half of the year it's going to benefit both from stronger business and new launches and lower expense run rates.

Bill, you want to add anything?

Yes, Michael, just to add some color to what Eyal said, he's absolutely right.

We have more launches on the back end.

In 2008 we launched 28 products with approximately $12.5 billion of innovator value, in 2009 we anticipate the launching of a similar number but the market value is about $19.5 billion but however if you look at the total potential launches that you have in 2009, you have as many as 38 with a total value of $32 billion or almost 30% of our entire pipeline becomes available to us so there is a huge potential for the back half of 2009, and you know, as we've spoken so many times before we risk adjust for this model but that gives you some clarity of what we are looking at our risk adjusted model.

Great.

The second one is actually for Shlomo.

About a year ago when you talk about your five year strategy I recall that in your view the growth in the European business is going to be higher than in the US or North America.

Given that you have Barr now, given what you saw in 2008, is that something that you're still seeing now or should we see a more balanced growth going forward?

I believe that if you net out the foreign exchange, that the projection is still intact and still valid and I believe the potential for going generics in Europe is there, actually the higher the pressure of the payers on reducing the healthcare cost, you'll see more a friendly environment for generics and all in all, with the case-by-case that is reflecting the European region, my projection or perspective for the long run is still there.

Thanks very much.

Thank you.

Our next question comes from Caius Christoe from Morgan Stanley.

Good morning, thanks for answering the questions.

Firstly a macro question.

Given the tough global economic environment, the government has become increasingly interested in pro generic measures and do you see governments in France and Japan pursuing more aggressive initiatives in 2009 and 2010 to increase generic penetration?

And then secondly, Bill, how do you see the Fentanyl patch market playing out given the safety concerns of [Resliaub] patches, has the FDA communicated at all if they are ultimately willing to remove the Resilaub patch from the market?

Let me first take the first part of your question.

I do believe that from the strategic point of view the current world crisis is favoring generics.

Again, the pressure on governments that are struggling with budgets and cost reductions in many areas, one of the most compelling ideas there is to go more for generics.

Generics is actually about having the same quality for less price, so what I'm saying is that either it would take a little bit of time here and there and you can see some differences between the reaction of governments, I do believe that all in all, the current crisis will accelerate the generic penetration and just let me give you a simple number regarding the US generics.

Every percentage point in the US market for generics is less $7 billion for the patients there, so you can see how big the potential is to balance budget and to reduce the cost of healthcare in our current world.

Bill?

Yes, good morning Caius, and thanks for the question.

With respect to Fentanyl, I think if you've been following the prescription gain, people have been asking us, where this share was and you see quite a bit of gain in the last few weeks and in fact every week of the last four weeks, you seen at least a thousand prescription growth so it's coming along quite well.

We've gained the share we thought we were going to gain and we're doing very well.

That said, I have not heard that the FDA is necessarily going to be taking reservoir patches off.

Although, I've got to say that there's a certain amount of customer fatigue around the constant recall.

Okay, do you think the FDA is actually looking into having two stable matrix supplies in the market before considering such actions?

You'd have to ask them that.

I'm sure they have been on the receiving end on many complaints, and I'm sure there's some concern there.

How far they are going to go exactly with that I can't tell you.

Okay, thanks, Bill.

Thanks.

Our next question comes from Elliot Wilbur with Needham & Company.

Please state your question.

Thank you.

Just a couple of follow-up questions on the amortization expense for Eyal.

Specifically what effective tax rate should we be thinking about in terms of looking at the after-tax impact of the amortization because using your high teens rate we seem to come up with a higher number than what you're adding back.

Yes, I think I gave it in the set of, the long set of data points that I gave you includes that as well, but the tax effect on the inventory step up and the amortization is $250 million and you calculate it it's about 33%.

Okay.

So we took a conservative measure as to where the geographies, where these things are happening.

And they aren't happening in Israel.

Right.

And then I wanted to ask you a follow-up question as well and make sure I'm perfectly clear on this point, but with respect to the implied rate of growth in 2010, the 30, 35% off of the GAAP numbers in '09, in the merger document, there was a fairly significant step down in the Barr related amortization in 2010 roughly $200 million, so I guess in thinking about applying that same rate of growth to the new cash EPS basis, it just didn't seem like that would be appropriate to do sort of given that big step down in amortization which works in your favor on GAAP EPS basis but works against you on a cash EPS basis, I just want to make sure that that is in fact--?

We try to make your life simple here.

This growth rate is based on the non-GAAP or what you call a cash EPS basis.

It's not on the GAAP.

It doesn't take into account the fluctuation in amortization at all so it's purely business backing out the amortization and the inventory step up.

Okay, is it still -- should we still be thinking about that large step down in amortization expense in 2010 as was outlined in the merger document then?

Yes, but the growth is not resulting from that.

It's eliminating the amortization altogether.

The amortization in 2010, this is on the GAAP part, the amortization in 2010 will be lower than it was in 2009 and as we've said in the preliminary report on the filing, we now have the detailed schedule and yes, it is stepping down, not dramatically, it's not going to be half but it's going to go down.

All right, thank you.

Thank you.

Ladies and gentlemen, I would now like to turn the floor back over to Teva's President and CEO, Shlomo Yanai, for closing comments.

Thank you all very much for joining us today.

We hope to see you all in New York tomorrow where we will give more color on the results, the exciting biogenerics area, the Barr integration and provide more on the 2009 outlook.

Thank you very much.

Thank you.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you all for your participation.