Teva Pharmaceutical Industries Ltd (TEVA) 2009 Q4 法說會逐字稿

Greetings, and welcome to the Teva Pharmaceutical Industries, limited, fourth quarter 2009 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.

Please go ahead, ma'am.

Thank you, Diego.

Good morning and good afternoon, everyone.

Welcome to Teva's fourth quarter and full year 2009 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 Branded Products and Gerard Van Odijk, President and CEO of Teva Europe.

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

Please note that Shlomo will be referring in his prepared comments to non-GAAP gross margin, operating profit, net income, and EPS.

Eyal will provide additional detail on the items excluded from our non-GAAP 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 2009.

2009 was an excellent year for Teva, a year in which our Company grew significantly, increased profits, and quarter after quarter delivered value for all our stakeholders.

It was a year of record breaking sales across all our geographies and in all our major businesses, leading to record-breaking financial results across the board.

This was also a year of major strategic achievements for Teva, including the successful integration of Barr, a process which was completed less than a year after closing, and from which we expect to continue to derive significant synergies for many years to come.

I believe that especially, against the backdrop of the troubled world economy, volatile market conditions, and unfavorable foreign exchange effects, our results this year provide an especially strong demonstration of how Teva's agility and the strength of our balanced business model enable us to deliver continuous profitable growth, even as market conditions change.

I would also like to mention that in mid-January, Moody's upgraded Teva to a credit rating of A3, reflecting Teva's commitment to executing its growth strategy while maintaining a strong balance sheet.

Before I describe the year in greater detail, let me briefly review our results for the fourth quarter.

In a fitting end to the year, we had record-breaking results across every possible parameter in Q4.

Net sales reached $3.8 billion, with gross margins of 58.6%.

Our operating profit for the first time reached the $1 billion mark, with net profit of $847 million, and a very strong cash flow from operations of $957 million.

And all of this ultimately brought us to EPS of $0.94, another record high for Teva.

It is worth noting that these results were not driven by any one major launch in the US during the quarter, but rather, from contributions from across our Company.

We benefited from especially strong performance in Latin America, in Eastern Europe, as well as record global sales of ProAir, Qvar and Azilect.

In future quarters, the greatest contributions may come from a different mix of business, product and geographies.

Whatever the mix, the important things to keep in mind is once again, the value we derive from our balanced business model.

Let us turn now to the full year 2009.

A year in which, as I said earlier, we had record-breaking results across the board, including sales of $13.9 billion, which reflects 25% growth year-over-year, operating profit of $3.9 billion, up 35% over 2008, net income of $3 billion, up 22% over 2008, and record EPS of $3.37, up 11% over 2008.

We also had record cash flow from operations of $3.4 billion, and strong free cash flow of $2.18 billion.

Let me share with you some of the highlights of the year for each of our major businesses, beginning with our North American business which had an exceptional year, including record sales of $8.6 billion, up 34% over 2008.

$4.9 billion of these sales represent US generic sales, which grew 16% over 2008.

Viewing the year, we introduced 19 new generic products which collectively represent branded sales of $14 billion.

These launches included one significant new generic product, Adderall XR, and the rare introduction of another Pulmicort.

We were highly focused during the year on extracting the maximum value from all of our product launches, as well as on creating additional opportunities for the strength of our base business.

Our pipeline in the US grew to 260 product applications awaiting final FDA approval, including 89 first-to-files.

Collectively, the brand products covered by the entire pipeline had annual sales of over $113 billion.

We expect these products to materialize over the next three to five years.

In 2009, we expanded our leading market share in the US among all Pharmaceuticals companies, both generic and brand, to 16.3% of total prescriptions and 17% of new prescriptions.

Among generic companies, Teva leads with 22% of total prescriptions.

That number is greater than the next two competitors combined.

By any measure.

2009 was a very good year for our European business, where we had record sales of $3.3 billion, representing 22% growth year-over-year in local currencies and 10% growth in US dollars.

As you know, the effects of the financial crisis were especially apparent in Europe during this year.

With the market growing more slowly than expected.

Despite this, Teva maintained or improved our market position in every one of our major European markets.

Teva is a top three player in every major European market, except Germany.

We are the number one player in Italy, as well as in the fiercely competitive markets of UK and Netherlands where we extended our lead during the year.

And we have by far the broadest pipeline in Europe with 3100 marketing authorization applications in 30 European countries.

A key element of our integration of Barr during the year was the world integrate [Pleva].

By leveraging Teva's global and European platform and know-how we have turned Pleva's European business into a profitable entity which will make significant contributions to our business in the years to come.

2009 was an especially strong year for our international business.

For the first time, sales reached over $2 billion, up 32% over 2008 in local currencies and 20% in US dollars.

These results were driven by especially strong sales in Latin America, Russia, and other central eastern European countries and Israel.

I would like to turn now to the Teva's branded business, beginning with Copaxone, which had a truly outstanding year.

During 2009, Copaxone further solidified its position as the global leader among MS therapies.

Sales of Copaxone grew 25% over 2008 to reach a record-breaking $2.8 billion.

Throughout the year, Copaxone continued to demonstrate its unmatched safety and efficacy.

The FDA approved an expanded indication for Copaxone to include the treatment of patients who have experienced a first clinical episode and have MRI features consistent with MS.

In Europe, the UK issued a similar approval, which was adopted by 24 other European countries.

Teva remains strongly committed to the MS community and we are continuing to invest in a range of product enhancements, including new dosages, formulations and devices for Copaxone.

We are very pleased with the exciting results of our STRONG study which evaluated whether a new formulation would show improvement in the patient injection experience.

Based on the study's positive results, we plan to submit a file with the FDA by the end of this March.

In addition, last month we announced that we will be kicking off a new study called GALA which will evaluate the benefits of less frequent higher dosing of Copaxone.

The study will begin this April.

This was also an excellent year for Azilect, which had record end-market sales in 2009 of $243 million, up 39% over 2008.

The results of the ADAGIO study which was designed to test Azilect's efficacy in slowing the progression of Parkinson's disease were published in the New England Journal of Medicine.

In January, we had a productive meeting with the FDA and will file a supplemental New Drug Application based on the ADAGIO study results by the end of the first quarter of 2010.

Lastly, based on the results of our Taiwanese study, the FDA in December approved newly revised prescribing information for Azilect, which reduced medication and food restrictions, thus, removing a significant barrier for some patients and physicians.

Turning now to our respiratory business, 2009 was a record-breaking year in which global sales of our inhalers grew 15% over 2008, to reach $898 million.

In the US, sales grew 40% to reach $568 million.

US revenues were driven by higher sales of ProAir, which maintained its market leadership in the HFA market and of Qvar, which captured the number two position in the ICS market.

2009 was also a year of major strategic achievements for Teva, and we took many steps during the year to ensure that we solidified even further our strong leading positions both in generics and in the pharma industry overall.

Let me share with you just a few of the highlights.

First and foremost, of course, was the successful completion of the Barr integration.

We now expect to realize over $500 million in synergies by this acquisition by 2012.

As you have already heard today, we have a very productive year when it comes to developing our innovative business, and in addition to growth through our own R&D, we recently announced that Teva is licensing a Phase III product from OncoGenex, for multiple oncology indications.

We regard biosimilars as one of our key growth drivers in the future and during 2009, we have made very good progress on our goal of becoming a leading player in this emerging field.

Earlier this month, the FDA accepted for filing Teva's first ever biologic license application for Neutroval, a G-CSF product.

This product has already been launched in several EU markets under the trade name TevaGrastim and will be launched in additional EU markets over time.

Our long acting G-CSF product, Neugranin, has successfully completed Phase II trials and will begin Phase III trials during the first half of 2010.

In addition to adding diversity and balance through our product mix, we are expanding our geographic footprint.

Especially in markets where with high potential for growth and profitability, such as Japan, the world's second largest Pharmaceutical market.

In late December, we announced the Teva-KOWA, our Japanese JV, was acquiring a majority interest in Taisho, an important step in realizing our strategic objective of becoming a leading player in the very important Japanese market.

Finally, as you know, during the year, we undertook a major review of our business and the industry, based on which we updated our long-term strategy.

At the heart of our strategy is value creation based on four factors.

Continuous growth, high profitability, financial strength, and hedging risk through our diverse mix of businesses, products and geographies.

I'm looking forward to continuing to share with you our progress towards realizing these strategic objectives in the quarters and years to come.

And now I would like to provide our current expectation for 2010.

For the full year, we expect net sales of around $16 billion.

It is important to bear in mind that in this uncertain economic and foreign exchange environment, exchange rate may have an impact on our revenues.

As for earnings per share, we expect non-GAAP EPS to be in the range of $4.40 to $4.60.

Before I turn the call over to Eyal, I would like to take a moment on behalf of the entire Teva family to wish Eli Hurvitz, the Chairman of Teva's Board of Directors a very swift recovery.

As we announced yesterday, Eli's taking a three weeks leave of absence in order to focus his full attention and energy on recuperating from treatment for recently diagnosed illness.

I'm happy to say that the treatment has been successful and we are all looking forward to Eli returning to work and most important, to excellent health very soon.

And now let's turn the call over to Eyal for a more detailed financial upstate.

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.

As you can see, the fourth quarter completed an excellent year for Teva, and we are reporting today a record quarter and year.

It is a long list of records here, so please bear with me.

Q4 was a record quarter in terms of sales, gross margin, and operating income, net income and of course earnings per share, all on a non-GAAP basis.

2009 was our best year ever as we delivered records in sales, GAAP and non-GAAP gross profit, non-GAAP gross margin, GAAP and non-GAAP operating income, and GAAP and non-GAAP net income, as well as non-GAAP earnings per share and operating cash flow.

We also had record sales across all three geographies, and across all our branded franchises, Copaxone, Azilect, respiratory products and women's health products.

Cash flow and free cash flow remained strong as well.

These results were driven by a good product mix, tight expense control, and successful integration of Barr.

In other words, all parts of the Teva machine worked together in perfect harmony.

Before we delve into the numbers, I would like to touch on two issues.

First, I would like to remind everyone that we are presenting GAAP and non-GAAP results.

In our non-GAAP presentation, we have excluded the following items this quarter.

Legal settlement of $379 million with $315 million relating both to settlement agreements and reserves in connection with drug pricing litigation, including a settlement we announced a couple of weeks ago, and the majority of the balance relating to settlement agreement with Novartis regarding Famciclovir.

Amortization of purchased intangible assets and inventory step-up totaling $139 million, of which $129 million are included in cost of goods sold, and the remaining $10 million in sales and marketing.

Impairment of assets of $71 million, and restructuring expenses of $25 million, mainly in connection with Barr-related integration and rationalization activities.

Purchased in process R&D of $23 million in connection with our investment in OncoGenex announced in December.

Other net financial income of $8 million, and in addition, the related tax benefits of $161 million.

You should note that the items excluded in arriving at our non-GAAP results for the fourth quarter of 2008 are not identical to those in the current quarter.

Also, the items excluded from our full year non-GAAP results are also not identical to those of the fourth quarter.

Please review our press release and related tables for complete information.

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

Foreign currencies continued to play a significant role in our results.

In the fourth quarter, foreign exchange trends were reversed, as the dollar weakened against most currencies, so in Q4 foreign currency differences contributed approximately $98 million, or 3% of total sales, as compared to Q4 2008.

The impact of sales resulted primarily from the decline in the value of the US dollar relative to certain other currencies, primarily the Euro, the Canadian dollar and the Hungarian forint, partially offset by the strengthening of the US dollar against the Russian ruble and the Argentinean peso.

For the full year 2009, exchange rates still had an adverse effect on sales of approximately $572 million.

For a full year sales were impacted mostly by strengthening of the US dollar against the British pound, the Hungarian forint, the Euro, the Russian ruble, the Polish zloty and the Israeli shekel.

However, it is important to note that on operating income, foreign exchange had a negligible effect, close to zero in Q4 and approximately $37 million adverse effect for the full year.

Teva's diverse geographical presence continued to provide us with a good natural hedge that mitigates such of the risks involved in currency fluctuation and minimizes the impact on our bottom line.

Looking at consolidated results for Q4, sales totaled $3.8 billion, an increase of 33% compared to Q4 of last year.

The Barr acquisition contributed to growth in sales in all Teva geographies, particularly in the US, Russia, Poland, Germany and Croatia.

For the full year, sales reached $13.9 billion, an increase of 25% compared to 2008.

Non-GAAP operating income reached record high, topping $1 billion, and up 41% compared to Q4 2008, and benefiting from strong gross margin and tight expense control.

For the full year, non-GAAP operating income was $3.9 billion, representing 35% gross compared to 2008.

Non-GAAP net income was strong at $847 million, up 28% compared to Q4 2008, despite the higher tax rate that resulted from the integration of the Barr business.

Non-GAAP net income for the full year was over $2 billion, up 22%.

Non-GAAP fully diluted earnings per share were $0.94, up 18% compared to Q4 2008.

Similar to the previous quarter, we had approximately 78 million more shares this quarter than in the fourth quarter of 2008, in our earnings per share calculation, due primarily to shares issued in connection with the Barr acquisition.

Two housekeeping points related to EPS calculation.

You will find share count details in the press release we issued today, and the add-back for the non-GAAP EPS calculation is $10 million for the quarter.

For the full year, non-GAAP diluted EPS was $3.37 per share, 11% up from 2008.

Now let's discuss profit margins and operating expenses.

Non-GAAP gross profit margin, which excludes amortization of intangible assets and inventory step-up, was 58.6% in the reported quarter, a record high compared to 57.4% in the comparable quarter of 2008.

The improvement in gross profit margin is attributable to higher contribution to sales from our branded and innovative franchises, higher contribution in the quarter from new product launch in the US, as well as improved gross margin of our US generic based business.

For the full year, non-GAAP gross profit margin was 58.4%.

A side note on the US based business, the improvement in the gross margin of the US based business is the result of internal action to improve our cost structure and product mix as well as leveraging market conditions that have led to supply opportunities.

Non-GAAP operating margin reached 27.6%, up from 26.2% in the comparable quarter last year, driven primarily from strong gross margin, lower G&A, and net R&D as a percentage of sales, primarily offset by higher royalty payments which are reflected in sales and marketing expenses.

For the full year, non-GAAP operating margin reached 27.7%, similar to the quarter.

Net R&D expenses reached $219 million or 5.8% of sales this quarter.

However, gross R&D before reimbursement from third parties for certain R&D (inaudible) expenses, primarily Teva joint venture with Lonza and purchased in process R&D was $276 million, or 7.3% of sales.

For the full year, net R&D expenses totaled $802 million, or 5.8% of sales.

R&D expenses in 2009 were lower than originally expected, primarily because Barr's pipeline also enabled us to keep R&D expenses lower than we had originally anticipated and planned.

I would like to provide some more details on total R&D spending done by the Teva Group.

When we add up all the R&D done by Teva that doesn't show up directly in our R&D income statement line items such as the Lonza JV, the Teva-KOWA JV, third party participation and innovative investments, total gross R&D for the year was $923 million, or 6.6% of sales.

In addition, we invested approximately $35 million in equity investments in 2009, primarily through Teva's innovative ventures, as part of our effort to expand our innovative pipeline.

As we discussed in our strategy update in early January, we view the breadth of our generic product portfolio as a core competitive advantage and we intend to continue investing in R&D in order to be first to market in every major opportunity and leverage our broad portfolio in the [United States] and elsewhere.

We also intend to expand our innovative and biologic R&D activity either in-house or through partnership, joint venture, as in the Lonza case, or licensing agreement as in the OncoGenex example.

Sales and marketing expenses, excluding amortization of intangible assets, totaled $742 million in the quarter, or 19.5% of sales, compared to 17.2% of sales in Q4 2008.

These higher sales and marketing expenses are the result of two main factors.

The contribution of Barr's business which is characterized by higher sales and marketing expenses and higher royalty payment in connection with Copaxone and other products, primarily the relaunch of Adenosine.

For the full year, sales and marketing expenses totaled $2.6 billion, or 19% of sales.

Total G&A expenses this quarter were $218 million or 5.7% of sales, compared with 6.4% of sales in Q4 last year.

For the full year, G&A expenses totaled $823 million, or 5.9% of sales.

We recorded $34 million of financial expenses on a non-GAAP basis in Q4.

This is $26 million on a GAAP basis.

Compared with $30 million of non-GAAP financial expenses in the comparable quarter in 2008.

A higher level of debt during the quarter compared to Q4 last year before the Barr acquisition were offset by lower interest rates.

Financial expenses were down $18 million from the third quarter of this year, as a result of a decrease in our debt over the first three quarters of 2009, and reduction in currency hedging cost.

The non-GAAP tax rate for the full year of 2009 was 16%, compared with the rate of 10% for 2008.

The increase in tax rate from 2008 to 2009 resulted primarily from the fact that Barr's effective tax rate is higher than Teva's.

The tax rate for 2009 GAAP results was 8%.

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

Cash generated from operations totaled $957 million.

Our free cash flow, excluding net capital expenditure of $179 million and cash dividend of $141 million amounted to $637 million.

The strong cash flow was driven primarily by strong collection during the quarter.

For the full year, cash flow from operations reached a record of $3.3 billion, strong collection throughout the year, more than offset significant Barr related integration and restructuring spending.

Free cash flow for the year totaled $2.2 billion.

On December 31st, our cash and marketable security was $2.5 billion, up $0.5 billion from September 30.

Our total outstanding loans, bonds and convertible debentures stood at $5.6 billion, down from $5.8 billion at the end of September.

From December 2008, our debt has gone down by $2.8 billion, resulting primarily from paying back the bridge financing incurred in connection with the Barr acquisition, and a conversion of convertible debt of almost $1 billion.

Our financial leverage as of December 31st, 2009 was 23%, similar to September 30, and down from 34% in December 2008 following the Barr acquisition.

Our strong balance sheet and business results has led Moody's to raise Teva's rating to A3.

The first ever A rating for a generic pharmaceutical company.

DSO, days sales outstanding amounted to 48 days this quarter, compared to 50 days in Q3 2009, and 51 days in Q4 last year.

We calculate the DSO as we always do after netting out from the receivable the sales reserve and allowances.

Inventory days were 182 days, down from 195 days in Q3, and down from 206 days in Q4 2008.

Net capital expenditures reached $179 million this quarter, similar to the CapEx levels in Q4 2008, and $195 million in the previous quarter.

Dividends.

Yesterday, Teva's Board approved an increase in our quarterly dividends from ILS0.6 per share to ILS0.7 per share.

As you know, our dividend is paid in shekels.

This is a 17% increase in our cash dividend, and completed more than 50% increase in dividend payment over the past two years.

Based on the rate of exchange on February 15 of the shekel to the US dollar, this translates into approximately $0.19 per share or a quarterly dividend amounting to approximately $165 million.

Before opening the call to questions, let me repeat our guidance for 2010 and provide a few more data points regarding 2010.

We expect sales of approximately $16 billion, as Shlomo indicated, this number is sensitive to foreign exchange volatility and could be impacted by future exchange rates.

We expect non-GAAP earnings per share to be between $4.40, and $4.60 for the year, with significant variance between the first quarter and the rest of the year, resulting from the timing of our key business drivers during the year.

New launches of Paragraph IV products in the US market, the elimination of Copaxone royalty payment to Sanofi-Aventis, as well as our regular seasonality.

Now let me provide some specific guidance as to expenses and margin.

Our non-GAAP gross profit margin is expected to average between 59 to 60%, with lower rates in Q1.

This number does not include amortization of approximately $470 million for the year.

Net R&D expenses with our joint venture and other investments, will be between 6 and 6.5% of net sales.

Sales and marketing expenses will be in the range of 16 to 18% for the year.

This number does not include amortization of approximately $40 million.

In Q1, sales and marketing will be considerably higher as a percentage of sales, since the take-back of royalties from Sanofi-Aventis does not begin before April 1st.

G&A as a percentage of sales for the year is expected to be between 5 and 5.5%.

Final expenses are expected to be between $150 million to $170 million.

Tax rate on our non-GAAP numbers is expected to be between 13 and 15%.

In 2010, we expect to record share in losses of associated companies of approximately $40 million, primarily in our JV with Lonza.

We believe that the fully diluted number of shares in 2010 should be approximately 925 million shares, and the add-back for earnings per share calculation will be $45 million for the year.

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

Thank you.

We will now be conducting the question-and-answer session.

(Operator Instructions).

Our first question comes from Randall Stanicky with Goldman Sachs.

Please state your question.

Hi.

Thanks for the questions.

Just one for you Eyal and one for Bill.

Eyal, could you give us a sense of how much cost savings you realized from Barr last year and how do we think about that for 2010 on your path.

It's $500 million in savings.

Secondly for Bill, could you just give us a sense of what's going on in women's health, how do we think about One-Step and the trajectory for that segment from here.

Thanks for the question.

First, on 2009, we estimate the savings of synergies measurement is not nuclear science.

We estimate the savings to be anywhere between $350 million and $400 million it will get to $500 million as Shlomo said.

It's factored into our numbers for 2010.

So it's already in there.

Okay.

Bill?

Hey, good morning, Randall.

Thanks for the question.

With respect to women's health I think your biggest question is about Plan B One Step.

We would have to say that was not the smoothest handoff that we would like.

It wasn't as smooth as we would like.

But what's important is we're committed to the franchise and our expectations are still very good for growth moving forward.

We're going to be putting a lot of emphasis behind Plan B One-Step and that will be very, very helpful.

Our thoughts about women's health is it continues to be a really good growth area for us and we're going to emphasize it a lot, especially in 2010.

Are there other products in that segment that we can think about adding growth in 2010?

From this quarter, does it grow sequentially?

Should we expect a ramp in One-Step?

How do we think about the level of growth going forward quarterly?

I think the level of growth on Plan B One-Step is really more back-end loaded for sure.

When you think about the efforts, the DTC and some of the other efforts we have put on that.

That's for sure.

The other -- we're also excited, when you look at all the promoted brands, they are all performing very well.

Okay.

Thanks, guys.

Thank you.

Our next question comes from Marc Goodman with UBS.

Please state your question.

Yes, hi.

Could Gerard maybe give us a flavor for what's happening in Europe, what's been changing, what kind of the prospects are for 2010 and -- ?

Yes.

My pleasure, Marc.

I think we -- and as Shlomo said, Europe had been a bit of a tough year in Europe in some places.

We've been hit by many aspects of the crisis.

We've seen sales picking up in the Southern European part in particular.

We see some stabilization in the central European places.

We've done very well through the year, despite all the difficulties in the economy in markets like in the northern part of Europe, UK, Netherlands and what have you.

So all in all, it seems as if the market is recovering from what was a very difficult year in 2009.

In which we did very well, as Shlomo explained, we did very well in every market relative to our competitors and we expect also to be able to try from that this year to come.

In particular, markets like Spain and France are doing very well.

We've launched a lot of products in the last 12 months which will bear a lot of fruit in the coming 12 months.

We've launched more than 200 products spread out for -- varying from almost 10 in Poland up to 30, 40 in markets like France, so we have a very good ability to grow our business on the back of that.

So will those markets -- I mean, will France be a growth market for the whole market in general or is it just you're growing because of all the new launches?

If you look at what France -- France has been going through a bad year in 2009 in terms of growth, in the low single digits.

We see Q4 picking up again and going up to the low single digits.

So that's a good sign, for instance.

So the market itself will grow.

And within that, we are doing better than the market.

Just give us the same sense on the UK as well?

The UK is low single digit growth.

We are slowing -- growing a bit faster than the market.

Thanks.

Our next question comes from Richard Silver with Barclays Capital.

Please state your question.

Good morning.

Just on the pharmaceutical sales by geography, excluding API, can you provide those numbers as you have in previous quarters?

Yes, we combined this quarter all our sales together.

But you could assume that the breakout of the API is similar to what we have provided in Q3.

Okay.

[You want to plug it in the] model, that's the information.

And then just on the gross margin, Eyal, you said 59 to 60 is the range for 2010.

Lower in the first quarter.

Would that be lower than 59 or the low end of 59 to 60?

No, it will be lower than 59.

59 to 60 is the average for the year.

Right.

And as I said, particularly the first quarter, given the fact that no major powerful launch and the seasonality impact that we always see in a neutral Q -- first quarter.

The gross margin in the first quarter is expected to be lower than the yearly average and later quarters, especially Q3, with expected venlafaxine launch.

We'll see higher gross margins.

It's not going to be even throughout the year.

The range that I provided, is an average for the year.

One more on the gross margin.

You mentioned some reasons for the improvement in the US base business margin and you mentioned benefiting from supply disruption.

Is that something that we've seen the full benefit from in the fourth quarter or would you expect some additional benefit to be seen?

And then the second is in that 2010 plan, would you assume that that benefit is something that lasts throughout the year or would you expect as I assume the supply disruptions on the competitor side to change, that perhaps the benefit diminishes later in the year.

Bill, you want to take that one?

Sure, good morning, Rich.

Good morning, Bill.

The supply disruptions have -- there's a lot of lumpiness to them.

They haven't come in a smooth linear fashion.

So what we've noticed is that people are giving awards to us that are occurring over time.

So we've got some benefit in Q4.

We're going to get a little benefit in Q1.

You're going to see a lot more benefit in Q2, Q3, Q4.

It really builds towards the end of the year.

People are using up some their other supplies and have just decided that they're going to make a change.

We think it's for the better.

And that's something you already know is going to be in the cards for the second, third, fourth quarter of 2010?

Yes, these are commitments that have already been made.

And as far as the other reason for that base business improvement you mentioned some other I guess efficiencies.

Can you elaborate on what else that is that's contributed?

There have been another great -- there have been a number of really good initiatives and the Teva is always working on its API process to drive down its cost and its manufacturing to get in the right place with the lowest potential cost for us and so we've done a lot of that work.

We've done a little bit of pruning of the portfolio.

You might have noticed a little bit of share change this quarter.

That's because there were a couple of products that we just took out of the portfolio, because the margins were unacceptable and we turned that volume, used that API or that capacity, I should say, manufacturing capacity, for other more profitable products.

So I think movement around the portfolio has been very helpful.

Okay.

Thanks very much.

Thanks.

Our next question comes from Ken Cacciatore with Cowen and Company.

Please state your question.

Good morning.

Couple questions.

First, on Lovenox, can you give us a sense of any movement with the agency.

So an update there.

Also, although I'm sure you're not going to comment on anything surrounding ratiopharm for yourselves, could you give us a sense of why a Pfizer and taking that more broadly speaking, large pharma.

What you see as their actions on getting into the space in a broader way.

It looks like a ratiopharm is not really a platform, it's more of an add-on for a Company like yourself so what they may be thinking.

Finally, Eyal, some of the settlement costs this quarter were for Famvir.

I was wondering if you're planning on setting up a reserve for settlement losses.

You seem to be getting the benefit when you launch these products but keeping it off the P&L when you settle on them.

Although it was not a major cost to you how are you going to deal with that in the future so we can fully incorporate potential losses of these at risk launches?

Bill, do you want to take the first one, also the last one?

Shlomo will take the one on the ratiopharm.

Okay.

Go ahead, Bill.

Good morning, Ken.

The issue on Lovenox is obviously who knows when.

We've seen some really nice flow of information coming back and forth from the FDA.

We feel that this is a sign of more widely approval coming, but I can't ever tell exactly when.

You never know what will happen.

So I am more optimistic than I was a year ago because the data flow back and forth is very, very good but I can't really be more specific than that.

All I can say is that when that approval comes, we'll be ready.

The one on the settlement.

Oh, okay.

If you want me to roll right into the Famvir settlement, I think it's more important for Eyal to really discuss whether we want to set up a reserve.

But honestly, our issue is whenever we can take a liability like this off the books, this is the right thing to do and we've done this very effectively.

This was an excellent settlement that we're really excited about.

We're still -- we will still stay in the market and we think that makes a lot of sense.

This is the right kind of -- this is the right kind of settlement for both ourselves, for the brand Company, as well as the consumer in general.

One thing on the accounting treatment, you know, we can't reserve if we don't have high level of certainty on any kind of expense, even if we want to do that, the auditors will not allow us.

All our reserves are done when we reach a level of certainty, when we look at the pricing settlement.

We didn't settle all our pricing litigation, but we -- once a major litigation was settled we could take provision for the rest of what we believe is open.

Same approach on patent settlements.

Ken, as for the (inaudible) auction or bid, let me say the following.

First of all, as you may expect, I cannot say anything regarding any potential acquisition and I would prefer not to say anything regarding this one as well.

I can say only two things which I believe would help you a little bit to better understand the business environment or if you wish the background.

One, Europe is one of our key strategy targets for the next five years.

If you remember, the presentation that Gerard gave very well, thoroughly went on the key European markets and definitely part of them are very attractive for our future growth.

And as for the big pharma stepping into this generic potential arena, well, first of all, this is not new news.

I would like to pay your attention to the article in the New York times, if I will remember, that dealing with this phenomenon as a part of their probably let's call it remedies for their other issues or subjects.

But I don't want to speculate more on that point of time.

Thank you, guys.

Our next question comes from Ronny Gal with Bernstein Asset Management.

Please state your question.

Good morning and thank you for taking my questions.

First question is when I look at your numbers for 2010, you can go up pretty broad range of outcomes in EPS.

Depends on longevity of products like Prevacid, [Oxali], Lotrel, and Adderall XR.

It feels like you have been a little conservative here in where you decided to draw the outcome for the year.

Can you give us a little bit more color about what assumptions you made about longevity on those products?

I know you can't -- you won't discuss specific around products but overall essentially what was your philosophy in thinking about those products for this year?

Bill?

Yeah, I mean, Ronny, you've got to think about products like Adderall and Adderall is a product that there's been a lot of supply interruption or a lot of -- again, lumpiness around the API supply.

So although today we have a pretty good share on that product, I don't know -- we target more of about a 50 share but right now we're holding about a 60 share.

That's going to change.

(inaudible), we just got some competition coming in on (inaudible).

We see [Lonzo], although we took a lot of early share on Lonzo, and that's because we usually react and move very, very quickly.

We think our share's going to come down on that.

So I think we've got a pretty good handle on where this goes and I think our track record stands as being very appropriate at predicting this.

You don't think you've been necessarily being conservative on those?

No.

Okay.

Second, I think in the press conference in Israel this morning you mentioned a target of about $800 million to $900 million for biosimilar revenue by 2015.

One, if you can confirm that.

And second, what would that entail in terms of building a sales and marketing infrastructure, primarily in Europe, where a lot of those folks have at least half of their sales?

Ronny, if your first question was regarding the biosimilars by 2015, I can confirm it.

This is what we anticipate now.

Let's call it the first wave in the time frame of our next five years strategy plans.

And we said it.

(multiple speakers) Yes, but that is why we can confirm it now.

So I have no problem to tell -- to say it again for you, Ronny.

And what was the second part of your question, please?

Yes, actually what will that entail in terms of investment in sales and marketing sales force primarily in Europe where a lot of the early entrants will take place?

Would you like to refer to that Gerard from your perspective?

Yes, I will.

First of all, we see different models in different European markets currently enrolling, if you look at the [demographic] roll-outs across Europe.

You may remember, Ronny, that we spoke about the launch in Europe on TevaGrastim as a small product that's not going to move the dial.

But it's allowing us to understand much better what are the dynamics in the marketplace looking like if you look at the selling process of a product in the bio-G area.

We see markets where it's a very concentrated hospital driven business where we have limited resources to invest.

In other places you really have to go to out-clinics to generate prescription and we see all the variations in between.

I think currently it's very difficult to predict precisely how that is going to be developing and we have an existing sales force across Europe that's dealing with that.

It's the right size and depending on the timing of the launches that will come through we will adjust that based upon the learnings that we're going through now.

Thank you.

Our next question comes from Gregg Gilbert with Banc of America Corporation.

Please state your question.

Thank you.

I have a couple questions on the good Copaxone news.

Bill, what type of filing will be required to get that product to market and what's the FDA review time?

And if that product's approved, should we view your strategy as a quick replacement strategy or a gradual switch strategy?

Moshe, do you want to take that or do you want me to move?

You can start.

Okay.

Gregg, the (inaudible) we're very excited about those results and that will be going in in the first quarter.

And as far as the review time on that, we're hopeful that that would be an expedited review, but it's more likely within a year.

And I think over time that one would expect that the low volume would replace the 1 ml because it's going to be a real -- it's really important for the patient.

The pain, the injection experience is better, any time you can inject less it's a good thing.

So do you care to summarize any of the findings of the study or do we have to wait for a publication there?

I think you're going to have to wait on that.

But again, we would -- I would just state that we were very pleased with the results that we saw.

Okay.

Just to add one sentence.

I think we're going to publish the results so can't get into the details but I think the fact that we have a positive outcome if we look at the 0.5 versus the 1 ml I think we all realize it's important definitely for an injectable product and specifically for Copaxone as a daily injectable product.

I think for the patient it would be great news.

Would it be simple for an existing patient to move to the new formulation?

I don't think we want to disclose any strategies at this point of time.

At the moment, we are concentrating on filing the data, submitting the data and we will be ready to provide more data later on, once we are ready and we make our choices there.

Okay.

Then one other question on respiratory.

Are there any new respiratory opportunities in your 2010 guidance or is that really a longer term opportunity?

I realize the existing products are growing but do you have anything new dialed in for 2010.

Gregg, this is Bill Marth.

No.

Right now 2010 is the existing products.

We are holding over a 50 share on ProAir, we're running between 52 and 53, and I would remind people that we've always guided that 50 share for us would be a really good thing and we've held that and that's been very good.

Where we're most excited though is Qvar.

We've had really good results with Qvar in the ICS space and that's growing.

No new opportunities in 2010.

Thanks.

Our next question comes from John Newman with Oppenheimer.

Please state your question.

Hi, guys.

Thanks for taking the question.

Just wondered if you could give us some color on what we should expect this year in terms of M&A?

Should we expect that you focus more on the X-US opportunities?

Let me give you time, and I apologize for not being prompt or specific here, in a kind more of a general answer.

First of all, yes, acquisition is part of our growth path and we said it in the investors meeting that we held last month when we presented the five-year strategy plan.

Basically, what we are looking of acquisitions that are fitting to our strategy plan.

Either market share in the generic arena or more specific molecules or technologies that help us to grow and sustain our interesting branded franchise.

As for example the licensing of the Phase III OncoGenex product that I just mentioned in my part in the presentation.

And if you go back and read our strategy, you can easily find where we are going to concentrate our targeting efforts for acquisition for the next year.

Then to complete the answer, I would like to remind you the three (inaudible) areas that we are using in acquisitions.

One I already said which is it should fit our strategy and the second one of course, the economics, and last but not least, it should be accretive in the first year after the acquisition.

Okay.

Great.

Thank you.

Our next question comes from Sebastien Berthon with BNP Paribas.

Please state your question.

Yes, hello, gentlemen.

Two quick questions, one on Copaxone outside of the US and Europe, you had some delayed tender effects in Q4.

Is it a catch up from a strong Q3 or should we see you catch up more in Q1 of next year.

Secondly, could you provide us with your biosimilar sales in 2009, little bit of color behind the breakdown behind that?

Also could you tell us what could be the design of the Phase III trial for (inaudible) please?

This is Moshe.

I think as far as Copaxone and outside of the US, we see a very good and solid growth.

Some markets, the question of timing of the tender, really affects the sales in this quarter.

But overall I think in Europe, we see strong double-digit growth about 15% in 2010 and 2009 and we see really increase in our share, market share in most of the markets in Europe.

So all in all, I think the (inaudible) from the timing, all in all we are in a positive trend in Europe and in the international market.

Those markets that we are not affected by -- I would say by tenders, we see a growth both in Latin and other markets (inaudible).

Thank you.

Our next question comes from David Amsellem with Piper Jaffray.

Please state your question.

Hi.

Thanks.

Just quick question on the Qvar intranasal formulation.

Any update on when you think you would be in a position to file on that?

Qvar, can you repeat your question, please.

Sure.

It's the internasal formulation of Qvar, when you think you may be in a position to file on that.

We are planning to file it in 2011.

You're referring to the Qvar nasal.

Yes.

Secondly on the ADAGIO results for Azilect, can you give us a sense of which patient subgroups you expect to see greater usage with the inclusion of that data in the label and are you going to be asking for an expedited review as well?

I think the ADAGIO study was around the -- based on early patient and that's what we see the major benefit, definitely on early diagnosed patients, but we're seeing the physicians will start much earlier the treatment and in this segment we believe that we can increase significantly the share of Azilect and we see more and more physicians that are starting with Azilect versus other therapies or the traditional.

We believe that we see a good effect based on the data that we have from our adjunct study on Azilect in more advanced patients and we believe that based on the result and based on the I would say health effect on the ADAGIO, we see more and more patients are getting Azilect as an adjunct therapy or the first adjunctive therapy to levodopa.

As far as the second question, since we have already discussed the Azilect data and as Shlomo mentioned we met with the FDA, so we believe that the FDA will have all the information needed in order to look at the data and to come back with their response or their reaction to our file.

Okay.

Thank you.

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

Please state your question.

First question for Eyal.

On sales and marketing trends, expense trends in the quarter, I know you talked about this a little bit in your prepared commentary, but if you just look at 4Q, saw an uptick to around 19.5%, kind of the highest run rate for the year and I'm curious what may be underlying that sequential increase and anything you could provide that might help us thing about what could be some of the swing factors in terms of thinking about your 2010 guidance which I think implies roughly a 200 basis point swing between the high and low end of guidance.

I think I said that in my part, but there were two major factors as compared to last year, the growth in Copaxone which is driving royalties of Sanofi-Aventis.

Most of them are going to be eliminated in Q2 2010 which is a major factor as to how to look at it going forward and the other one is the relaunch of [odezenide], which according to our agreement drives royalties and we had a nice launch in Q4 and the level of royalties are reflected in our sales and marketing expenses as a percentage of sales.

As I said, in 2010 in my guidance, we believe that the average for the year will be between 16 to 18%.

Majority of that results from the fact that we will no longer pay 25% of our sales in the US as royalty to Sanofi starting in the second quarter.

You can make a calculation.

It's a pretty big number.

On some of of our other products, there will be less royalty.

It's mostly about royalty component, the run rate of our regular sales and marketing expenses, the sales and marketing activities is going to be more or less in line with sales, maybe a little less than sales growth because we've got to become more effective.

If I could ask additional question about 2011 as well.

I know someone attempted this at your strategy review and you guys didn't really provide any color on EPS guidance for 2011, but I guess sort of thinking with kind of the big run-up in 2010, given the Copaxone royalty elimination, I guess there's increasing concern that you're facing a relatively flattish year in 2011.

I guess wondering at this point if you could just provide some color commentary as to whether or not that's actually going to be a growth year for you.

I think Bill will be happy to answer that.

Yes, Elliott, thanks for the question.

I think that really when you look at it, the answer is pretty simple.

We are going to grow in 2011 over 2010.

What people seem to miss is that -- and IMS alone, you've got about $64 million, $65 billion of innovator value coming off patent between that period of 2010, 2011, 2012 and our own data shows that we have targets, around 100 targets, worth about $70 billion within that same range.

So there's plenty of opportunity and the names you know, right.

There's [Ecordistatin], [Fenofibrin], Yaz, some people forget about Olanzapine, that will come in the same period.

There's just a litany of products that are available.

And then one piece I would add to that too is remember what Shlomo had said in the beginning.

We are growing on our balanced business model, both geographically and by business segment.

If I could sneak in one more question here since we have Moshe on the line, you guys kind of underplayed the branded pipeline a bit at the strategy review day.

Just wondering if there were any -- a such couple of particular events you would.

I think the activities that we presented on the different segments, starting with MS and definitely we see the potential with the, we believe this is a product that we can actually bring good value to patients based on as we see the competitive landscape and based on the I would say efficacy and the safety, ratio, good ratio for that.

We are now going full steam ahead with our neurology product, with the ALS programs.

So everything is going actually according to plan and I think that we don't have any additional news at this point in time.

As Shlomo mentioned the licensing with OncoGenex, that's what we are planning to continue to do that and to bring more product and to develop that other product all the way to the market and I think that the activity in is going as planned as part as we mentioned from, which is interesting, big potential for us and we are making progress in all of our antibodies products that we are developing.

So all in all I think we have in good shape to realize the numbers that we presented in our strategic strategy day.

Let me add by saying -- this is Shlomo here -- that I can assure you that 2011 would be another year of growth for Teva, as we first of all committed our self to growth in the last time that we mentioned our five-year strategy.

So 2011 is not an exception there.

And in more specific terms, besides what Bill already mentioned which is things that you can already based on the pipeline or pipeline projections or anticipation, we are working always on additional business initiatives and some other business ideas that in the size, diversity and our business expansion, geographical expansion, you may expect that from now to 2011, you are going to see more ideas other than what you can see just on looking into our future pipeline.

Thank you.

Thank you.

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

Please state your question.

Yes, hi, it's Jim Dawson for David Buck.

Where do you stand on generic ODT and generic Chemidar as far as approval timing?

David, couple things on the -- with respect to the Chemidar, we expect that approval any time but there is continued court proceedings going on on right now that they've appealed to the -- we expect appeal to the federal circuit so that's going to delay us a little bit there.

Lonza ODT is also in the queue we think for approval relatively soon.

Okay.

Thanks.

What about organic growth in Europe, X acquisition or X Barr and what is your forecast for the whole year for 2010 and also just pricing outlook currently in 2010 for Europe and Asia?

Gerard, would you like to take the European part?

Yes, I will.

As you know, David, we do not give very specific information on that level.

But I can give you a few perspectives on it anyway.

I think if you look at what we've done in the markets where we were not accretive, we have shown some good performance through last year.

And we don't expect that to change in the coming year.

There's one market I mentioned I think in the previous quarter which has been a bit difficult this year, which was the Italian market but that was across the the board.

Despite that, we managed to keep our number one position there.

We grew our business in Hungary to a number one position organically.

We grew our position in Germany to a number four position from number five organically.

We grew our business in the Netherlands organically.

We grew our business in France organically and in Spain.

I think if I summit up, these were markets where we were not acquisitive last year or if you take Germany we were acquisitive, on top of that acquisition, we generated some good underlying growth.

So the launches I mentioned before and our ability to wire our business well into the needs our major customers and our specific customer needs in countries have been bringing us the ability to grow faster than the markets on top of what we've done in terms of acquisitions.

Okay.

How about just on pricing, could you just talk about that in Europe and Asia?

On Asia, I cannot comment but I can comment on Europe that the pricing compared to I think the second half versus the first half is, again, that it's widespread across Europe.

What's happening, we've seen reasonable stable price setting in the central Europe markets.

We've seen in segments of the German business, meaning the bit of the German business that was tender driven, we've seen price competition like we've seen in UK and in Netherlands.

In France and Italy we've seen strong much on prices but not as bad as expected in the second half at least.

So it is moving and it goes up and down.

So we've also been able to in some places get some prices slightly improved or to stabilize that.

The nice bit about price push is that in many markets we also saw some good volume growth compensating for that.

So I think all in all, it's a good blend.

Let me add on on the part of your question.

As you well know, we have for the time being at least a relatively very minor business in Asia.

With a few very limited volume of sales in China and Japan which as I mentioned in my presentation we are growing the business there faster by -- I believe that the acquisition of would definitely -- which boost our business and our sales in Japan, starting 2010.

In other parts, it's still on the back burner for the time being, as I said.

But this is one of the long-term projects for Teva, once we will solidify our business in this part of the world.

By the way, interestingly to add, that talking about pricing or price pressure in part of the world that we all come used to, in the end of 2009 we see at least in one part of the world, which is Latin America, certain countries, price increase, whether it's going to be spur all our other regions in the world, this is still to be seen.

Interesting to mention, talking about the pricing issue.

Our next question comes from Tim Chiang with CRT Capital.

Please state your question.

Hi.

Thanks.

I wanted to get some more detail on the GALA trial, how is that going to be different than the SONG study you recently completed?

And -- I'll just stop right there.

Well, I think the GALA study is very different from the SONG study.

The GALA study is looking at Copaxone on the higher dose of Copaxone, less frequent dosing and will be looking at the result of this new dose regimen on Copaxone and while as you know the SONG is about the regimen going from 1 ml to 0.5 ml.

We are very pleased with the fact that we have completed all our preparation and we are going to embark on the study shortly and we believe that we can execute it in a fast manner, actually.

How long will the GALA trial be?

Without going into the detail, I believe that based on our experience and execution, I believe that we can bring the product to the market by I would say 2013.

Eyal, you mentioned 6 to 6.5% of R&D spending on total sales going for 2010.

How much of that is -- do you expect to be going to the biologics?

Looks like you will try to ramp up this whole Lonza JV.

I sort of want to get your thoughts on how much that's going to cost for you in the next couple years.

Most of the biologic is not in that number because it's done basically in the joint venture with Lonza, which we call TL Biopharmaceutical and it's not in there.

That's why I differentiated in my talking points between the net R&D which this is the number, 6 or 6.5 and the gross R&D which you could add about $100 million to that so, to the total number, R&D which is done outside of the Teva reported P&L in the joint venture.

All in all, for biologics, it's under $100 million for the next year.

Okay.

Great.

Thanks, Eyal.

You're welcome.

Our next question comes from John Boris with Citigroup.

Please state your question.

Thanks for taking the questions.

Just a question on Apotex.

I think if you look at their product line from the two facilities in Canada they line up pretty well with yours.

What are your assumptions about Apotex supply.

Any kind of price firming and how long do you expect them to be out of the market?

Bill, would you like to take it?

Sure.

Good morning, John.

Good morning.

Just it's really tough for us to comment on a competitor like that.

I mean, I don't know what they're dealing with with the agency.

We hope that they'll get through this fine and they'll get back into their position.

I think where most people are concerned is that if comes back online, does everybody go and do a student body right and switch their product back to Apotex from Teva or Myland or whomever and that's really not the case.

Our customers have been very, very loyal.

They understand that we came to them when they were in need and filled the gap and so that's -- we feel very positive that that's not going to happen.

My guess is that when comes back in, it will be a slow start for them.

Okay.

And then a follow-up on Prevacid.

Obviously the agency hasn't approved the additional generics.

What might be holding up the agency and what's your assumption around Prevacid.

On Lonzo ODT, we think we're, again, in the final -- in final preparation for that approval.

That should come in the relatively near term and then we do have a period of exclusivity for that.

How about on the conventional formulation for that.

Obviously there's others that haven't been approved.

If you go back to our earlier comments on this, a year ago, it's not an easy process and we know what we went through getting our approval and right now there's three competitors out there and the market's dividing up very well.

We've got a little bit more than 50% of the market today.

We expect to hold maybe a bit under that 50% but, again, it's not an easy process.

I don't see a lot of people getting into the market immediately.

However, you know, I don't know where all the files sit at the agency.

I can't really tell.

Then just one last follow-up question for Eyal.

Thanks for the color on 2010 but can you just provide some commentary on what your foreign exchange assumption is for 2010?

Thanks.

Well, we don't really have too many assumptions.

Our base model assumes that the exchange rate will be in the vicinity of where they are today.

Of course we know this is not going to be the case.

As I said earlier and we've been discussing this for a long time, the impact on sales could jump right up or down.

The impact on profit is minimal because of the balance between the different geographies and the different currencies.

Thanks.

The last question coming from?

Thank you.

Final question comes from Dave Windley with Jefferies & Company.

Please state your question.

Thanks for sneaking me in under the wire.

Dave?

(Operator Instructions)?

Hello?

Okay, then, I think we're ready to conclude.

You want to conclude?

Yes, sure.

Thank you all very much for joining us today.

As you have heard, 2009 was another excellent year for Teva and we are very excited about what lies ahead for us in 2010.

And of course and beyond.

Thank you again and have a good day.

Thank you.

Ladies and gentlemen, this concludes today's teleconference.

You may disconnect your lines at this time.

Thank you all for your participation.