Teva Pharmaceutical Industries Ltd (TEVA) 2010 Q2 法說會逐字稿

Greetings and welcome to the Teva Pharmaceutical Industries Limited second quarter 2010 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, Elana Holzman, Senior Director of Investor Relations.

Thank you, Ms.

Holzman, you may begin.

Thank you, Diego.

Good morning and afternoon everyone.

Welcome to Teva's second quarter 2010 earnings conference 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; Dr.

Gerard Van Odijk, President and CEO of Teva Europe; and Dr.

Ben-Zion Weiner, Teva's Chief R&D Officer.

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 a 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 second quarter of 2010.

This was an outstanding quarter for Teva.

Indeed, it was our strongest quarter ever in terms of organic growth.

Net sales reached $3.8 billion, breaking all previous records in local currency terms, with record gross margins of 59%.

Quarterly operating profit reached a record $1.2 billion, a 22% increase over the second quarter of 2009.

Net income in the quarter reached $981 million, a 32% increase over Q2 '09.

And for the first time EPS crossed the $1 mark to reach $1.08.

Our free cash flow reached $700 million, an increase of 86% over Q2 '09.

Teva's better than anticipated results in the second quarter were driven by superb performances across our many geographies and lines of business including especially strong sales in North America.

It was a great quarter for Teva in North America with record-breaking results, record sales of generics and record number of new product launches.

Total sales in North America reached $2.5 billion, in Q2, up 17% over the second quarter of 2009.

We had sales of $1.5 billion in US generics, up 14% over the second quarter of 2009, and strong sales of our branded products.

It was also an exceptionally busy quarter, with nine new launches, representing a brand value of over $7.5 billion.

This intensive pace has continued into the beginning of Q3, with our launch of Venlafaxine ER, our generic version of Effexor XR.

Thanks to the efforts of our outstanding global team, within 24 hours of launching, over 25,000 pharmacies in the US were supplied with the product, ready to dispense to the patients.

This was also an excellent quarter for our European business, which, despite the challenging macro conditions in this region, reached sales of $811 million.

Up 10% over Q2 '09 in local currency terms.

Sales were up in all our major European markets.

And nearly all our other European markets as well.

Growth was especially impressive in France, Italy and in the new World Cup winner, Spain, where sales grew by well over 20%.

I believe that our performance in Europe this quarter demonstrates Teva's strong capabilities in managing a complex business environment.

The recent healthcare reforms in Europe do involve some pricing pressure in the short term.

But there is an outstanding opportunity over the longer term to increase generics penetration in these markets.

Pricing pressure is something we are accustomed to in the intensely competitive US market for a long time.

And it is a phenomenon that, as you know, Teva is adept at managing.

For all these reasons, we remain very optimistic about the future of our European business.

Let's turn now to our international business.

Where sales reached $522 million, up 6% in local currencies over Q2 '09.

Our strong performance in markets including Latin America and Israel, were offset by weaker results in Russia during this quarter.

Our results in Russia, one of the fastest growing markets where we continue to strengthen our market position, are simply a matter of the timing of tenders and the very large sales to governments which were especially strong in the first quarter of this year, as well as in the comparable second quarter of 2009.

Q2 was another outstanding quarter for our innovative business.

Global end market sales of Copaxone, the world's leading therapy for the treatment of multiple sclerosis, grew by 13% over the second quarter of 2009 to reach $770 million.

Copaxone sales in the US grew by 21%, and according to IMS data, Copaxone maintained its leading market position in the US with TRx of 40%.

We are continuously working to develop new ways of improving the experience of patients taking Copaxone.

In April the FDA indicated that a supplemental new drug application, sNDA, for our lower injection volume of Copaxone had been accepted and the action date is January 1, 2011.

And our GALA trial, which will examine a 40-milligram Glatiramer Acetate injection, dosed three times weekly, initiated patient recruitment during the second quarter of 2010.

We are confident that Copaxone sales leadership over the last 10 years will continue and that its unsurpassed long-term efficacy, safety and tolerability established over one million years of patient experience, will enable Copaxone to remain well positioned even as new oral therapies come to market.

Clearly, physicians and patients will have to carefully weigh the risk against the benefits for emerging oral therapies which are associated with serious safety concerns.

Market research indicates that most physicians and patients will not rapidly adopt newer therapies until the risk-benefit profiles are more thoroughly understood.

Research also reveals reluctance by physicians to switch therapy if a patient's disease is stable.

I would like to take a moment to address the market's reaction last Friday to the approval of the generic Lovenox and the apparent link that has been made to Copaxone.

Our team has thoroughly reviewed the FDA's response to the citizen petition questioning the approval criteria for a generic Lovenox.

We believe the Agency's response actually supports our position, and that in the case of Copaxone, and like some other complex molecules, there are no acceptable and reliable tests, either in humans or in animals, that can be relied upon, except for complete clinical tests which reflect the clinical outcomes in multiple sclerosis.

For this reason we believe that any company seeking to introduce a similar version of Copaxone will need to conduct a long placebo controlled clinical trial with measured clinical endpoints in a large patient population to establish safety and efficacy.

And last but not least, all this has been reflected in our long-term strategic outlook which we presented to you in January.

As we told you then, our risk adjusted outlook assumes that Copaxone will peak midway through the planning period and gradually decline into the $2 billion range, accounting for only 6% of Teva's sales by the end of 2015.

Just to remind you, we expect $31 billion in sales, of which $9 billion of sales will be branded sales by 2015.

I would now like to take a moment, to highlight for you, some of the major strategic achievements of the quarter.

As part of our ongoing efforts to continuously improve the level of service for Teva's customers, we opened two major new state of the art facilities during the quarter.

In the Czech Republic we opened a new oral solid dose manufacturing plant, already approved by the FDA, where we will produce many of the large scale products for the US market.

The high quality and low cost production at this plant will enable us to further enhance our competitive position.

And in Hungary, where our main manufacturing site for the EU is based, we opened a massive packaging plant which will help us meet the growing needs of the many different markets we serve in Europe.

These last few months have been an exceptionally busy time for our European business, as we prepare for the closing and eventual integration of Ratiopharm into the Teva family.

As we get to know Ratiopharm even better, our excitement continues to grow about the combination of the two companies and the tremendous opportunities that lie ahead for our European business.

I am pleased to announce, that we now expect the closing to take place earlier than we initially anticipated, and that we should close during the current quarter.

We are extremely pleased with the results of the first half of this year which have yielded revenues of more than $7.4 billion and EPS of $1.99.

Based on our performance during the first half of the year, and our outlook for the third and fourth quarters, we now expect 2010 EPS in the range of $4.50 to $4.60.

Compared to the previous range of $4.40 to $4.60.

Thank you for your attention, and now, let us turn the call over to Eyal for a more detailed financial update.

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, we reported an outstanding second quarter with record sales in local currencies as well as record gross profit, operating profit, net income and earnings per share on a GAAP and non-GAAP basis.

Completing a very strong first half and heading to an excellent 2010.

We also reported cash flow from operations of almost $1 billion, and free cash flow of $700 million, both representing substantial growth compared to Q2 last year.

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

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.

Amortization of purchased intangible assets amounting to $130 million, of which $122 million are included in cost of goods sold.

And the remaining $8 million is sales and marketing expenses.

Finance expenses of $123 million which reflect $147 million in expenses resulting from hedging activities in connection with the acquisition of Ratiopharm, net of finance income of $24 million resulting from sales of securities.

Restructuring costs of $11 million resulting mostly from closing a manufacturing facility in Ireland.

$5 million purchased R&D process.

Impairment of assets of $3 million.

And these expenses were offset by income of $23 million in connection with legal settlements.

In addition, the related tax benefits of $65 million.

You should note that the items excluded in arriving to our non-GAAP results for the second quarter of 2009 are not identical to those in the current quarter.

Most notably, Q2 2009 included an inventory step-up in connection with the Barr acquisition and higher amortization of purchased intangible assets.

Please review our press release and related tables for the reconciliation of our GAAP numbers, and complete information.

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

And second, foreign currency continued to play a significant role in our results.

In the second quarter, foreign currency differences had a negative impact of approximately $52 million on sales, as compared to Q2, 2009.

The impact on sales resulted primarily from the decline in the value of certain currencies relative to the US dollar, primarily the euro, the British pound and the Hungarian forint, which was partially offset by a decline in the value of the US dollar relative to other currencies, primarily the Canadian dollar, the Israeli shekel, and the Russian ruble.

Nonetheless the impact on operating profit continued to be negligible, this time on a positive side, with a positive contribution of $8 million.

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

Before I review the P&L in more detail, one more comment on the impact of foreign -- that foreign exchange had on our balance sheet.

Namely on our equity.

The strength of the US dollar at June 30 versus March 31 primarily relative to the euro, the Hungarian forint, the Polish zloty, and the Czech koruna resulted in a negative impact of approximately $1 billion compared to the first quarter of 2010 due to translation differences of long term assets, mostly goodwill and other intangible assets, as well as cash balances held in euros.

However, in July, the weakening of the US dollar had already offset part of this negative impact of the exchange rate as of June 30.

Looking at our consolidated results for Q2, sales totaled $3.8 billion, an increase of 12% compared to Q2 last year.

This growth is all organic, as there was no acquisition during the past 12 months period.

North America, which grew 17%, delivered record generic product sales and strong profitability of the base business.

Europe grew 4% in US dollars and 10% in local currency terms.

Sales in international markets grew 1% in US dollars and 6% in local currencies term, and was influenced by the timing of Copaxone tenders in Russia.

Non-GAAP operating income reached $1.2 billion, up 22% compared to Q2 2009, benefiting from strong gross margin and tight expense control.

Non-GAAP net income reached $981 million, up 32% compared to Q2 2009.

Non-GAAP fully diluted earnings per share were $1.08, up 30% compared to Q2, 2009.

Two housekeeping points related to earnings per share calculation.

The weighted average share count for the fully diluted non-GAAP EPS was 921 million shares, and the addback for the non-GAAP EPS calculation was $11 million in the quarter.

Now, let's discuss profit margin and operating expenses.

Non-GAAP gross profit margin, which excludes amortization of purchased intangible assets was 59% in the reported quarter, compared to 58.5% in the second quarter last year.

Gross margin continued to benefit from contribution from new and recently launched generic products in the US, improved gross margin of the US generic base business and a contribution to sales of our innovative and branded franchises.

Non-GAAP operating margin reached 31.6%, up 2.7 percentage points from 28.9% in Q2 2009.

The increase resulted primarily from the termination of payments we made to Sanofi-Aventis over the past two years of 21%, of Copaxone in-market sales in the US and Canada which were recorded under sales and marketing.

Strong gross margin and lower G&A as a percentage of sales also contributed to the improvement in our operating margin.

Net R&D expenses reached $217 million, or 5.7% of sales, and was up 28% compared to Q2 2009.

Gross R&D before reimbursement from third parties for certain R&D expenses were $227 million, or 6% of sales, up 8% compared to gross R&D in Q2 2009.

The increase in R&D expenses relates mostly to our innovative and branded business, most notably women health products, the new low volume formulation of Copaxone for which filing was made with the US FDA and our BLA file for G-CSF.

As we guided earlier in the year, for the full year we expect net R&D expenses to be between 6% to 6.5% of net sales.

Sales and marketing expenses, excluding amortization of purchased intangible assets, totaled $636 million in the second quarter.

Or 16.7% of sales compared to 18.9% of sales in Q2 2009.

As already mentioned, the decline resulted primarily from the termination of payment to Sanofi-Aventis which were recorded in sales and marketing expenses, partially offset by higher royalty payments in connection with new and recently launched generic products in the US market.

Total G&A expenses this quarter were $189 million, or 5% of sales, compared with 5.8% of sales in Q2 last year.

The synergies from the Barr acquisition continued to contribute to the decline in G&A expenses, and to many other expense line items in our P&L.

We recorded $25 million of net financial expenses on a non-GAAP basis in Q2, compared to $61 million of non-GAAP financial expenses in the comparable quarter of 2009.

The lower financial expense resulted primarily from lower level of average debt through most of the quarter compared to the second quarter of 2009, as well as lower interest rate and higher gains from hedging activity unrelated to Ratiopharm.

Excluded from our non-GAAP financial expenses in the quarter are $147 million incurred in connection with the hedging of the Ratiopharm acquisition and a gain of $24 million from the sales of securities.

Following the agreement to acquire Ratiopharm, and as we indicated last quarter, we created a hedging program designed to protect the dollar value of the acquisition.

After accounting for $147 million in hedging expenses, the net savings from the acquisition price is approximately $270 million in US dollar terms compared to the price on the day we announced the acquisition.

In the third quarter upon settling this hedging transaction, we reversed approximately $40 million of these costs, which are expected to be recorded as income in Q3, but consistent with our current presentation will again be excluded from our non-GAAP results.

The tax expense provided for the second quarter was $183 million on pretax non-GAAP income of $1.176 billion.

Our current estimate of non-GAAP annual tax rate for 2010 is 15%.

Compared to 16% for all of 2009.

The estimated tax rate for 2010 GAAP results is 12%.

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

Cash generated from operations this quarter totaled $954 million, up 45% compared to Q2 2009.

Our free cash flow excluding gross capital expenditure of $136 million, and cash dividend of $164 million, partially offset by proceeds from sale of certain assets of $46 million, amounted to $700 million even, or 86% higher than in Q2, 2009.

The improved cash flow was driven by strong collection and slight increase in working capital items this quarter.

As you all know, in anticipation of the closing of the Ratiopharm acquisition we issued $2.5 billion principal amount of senior notes and signed three credit agreements with banks for a total commitment of $1.5 billion.

On June 30 cash and marketable security totaled $5.2 billion, up approximately $2.2 billion from March 31, 2010.

Our total outstanding loans, bonds and convertible debentures stood at $7 billion, up from $5.4 billion as of the end of March.

Our cash position as of the end of Q2 reflects the use of some of the cash we raised to pay down approximately $800 million of the more expensive Barr bank debt.

Our convertible debentures were reduced by $70 million this quarter and we intend to pay down the balance of the Barr debt approximately $700 million by the end of this year.

As a result our financial leverage as of June 30, 2010, was 27%.

Similar to our leverage in Q2, but up from 22% in March 31.

DSO, days sales outstanding, amounted to 50 days this quarter compared to 53 days in Q1.

We calculated DSO after netting out from the receivables, our sales reserve and allowances.

Inventory days stood at 172 days, down from 183 days in the previous quarter.

Or down from 188 days in Q2, 2009.

Net capital expenditure reached $90 million this quarter, compared to $164 million in Q1 2010.

This quarter, net CapEx includes proceeds of $46 million from sales of certain assets.

And last, dividend.

Yesterday, Teva's board approved a quarterly dividend amounting to approximately $170 million.

On a per share basis, our dividend which is declared in Israeli shekels, is 0.7 shekels per share.

Based on yesterday's rate of exchange of the shekel to the US dollar this translates into approximately $0.181 per share.

Thank you all for your time and attention today.

Now we will be glad to take your questions.

(Operator Instructions).

Our first question comes from Randall Stanicky with Goldman Sachs.

Great, thanks for the questions.

Just first for Eyal, a clarification.

The updated guidance, that remains Teva standalone and does not yet reflect Ratiopharm, is that correct?

Yes, absolutely.

As the exact date of the closing is still not known, we did not account for Ratiopharm results in this guidance and this is apples to apples with what you know in 2010 in general.

We of course, will provide an update.

It will take us a little while to study the exact data of the company as right now our plans are based on due diligence information.

And it always takes a little bit of time.

We do expect this to have a positive impact on sales, of course.

As to our earnings per share, probably be $0.02 or $0.03 below, but not more than that in the first period.

And of course, it will have a contribution in 2011, as we mentioned, when we announced the deal.

Okay great.

Then for Gerard.

With respect to what you reported, the 10% constant currency growth in Europe, can you just give us a sense of how much of the known pricing cut's reflected in that second quarter reported number at this point?

Thank you, Randall, for the question.

I think it is a complex question you're asking there because it is almost different for each market to answer.

But I think I should start with saying, repeating what Shlomo said is that if you take it across the board, Teva has been able to demonstrate that our set-up in Europe makes us less vulnerable to some of the price dynamics in Europe.

We know how to handle the complexity and the challenges that are coming from the clear price pressure that we see in Europe.

I also think that we have learned, in tougher pricing environments like the US to handle this.

If you look at it, it will stay with us, price pressure, but it has been with us for a long time and it will stay with us.

We have seen prices going down in markets.

But it has been over compensated by volume growth, and very clear that it has to do with our portfolio, which is quite well spread between OTC, with hospitals, with retail, with many other products.

And also our geographies.

We're not over-weighted in one place or the other.

We have a very nice, well spread portfolio with products and geographies.

On top of that, of course, we have our launches that give us the tools to respond to all of these challenges.

On top of that, we believe that the environment is helping us.

There is volume growth in many, many places, which is very strong.

And that is why I believe that it is for that that we can explain that our growth in this quarter was as good as it was.

I am sure it will require every quarter a lot of hard work from us and very specific tailor-made answer to the different challenges and opportunities we see in the different geographies in Europe but it is very clear we're up to it.

I am happy to give you a few examples but perhaps we can talk about that later in light of another question.

Are there a couple of main regions or major countries that you can highlight or point to that the pricing cuts have been fully reflected, the known pricing cuts at this point?

Well, in some places it's started and in some places it's not started.

I'll take the much spoken about example in Spain, for instance, in retail where we all know about the announced 35% price decrease on the gross prices, but also with limitation on discounts in the trade as part of that whole package.

As Shlomo reported, or I think Eyal it was, we had excellent growth.

We have been growing nearly 20% in our retail in Spain in the period that all of these measures were kicking in Spain.

So, it has been absorbed.

And despite that, we have been able to grow our business very strongly in a place like Spain.

In other places like in Italy, it will take a bit more time.

It has just been announced, the 12.5% again on gross price.

In Germany, you see that some of these tenders are currently kicking in and where some companies have been gaining tenders last year and they see now some of the results in that, we know we have won some tenders in the first half of this year which will be kicking in terms of market share and volume growth next year, in the rest of this year of next year and therefore the price impact will be related to that.

It is a very diverse picture across Europe.

If I talk about Germany, I talk about the tender business but as you know a large chunk of the German market is not exposed to tenders.

So it is a segment in Germany that is under price pressure.

There are other segments that are feeling the pressure of price, but as I said, that is the sort of price pressure that we see coming in every year.

Okay.

And France is reflected?

And France, in France we know that the government is going after some extra savings.

They haven't yet specifically announced, although the indication is they are going to go for a few specific therapeutic areas, and that hasn't yet kicked in and we expect a specific price decrease on some specific therapeutic areas, like they did last year.

Okay great.

Thanks very much for the color.

Our next question is from Rich Silver with Barclays Capital.

Please state your question.

The respiratory business in the quarter seemed stronger than we would have expected.

Can you provide a little bit more detail on what is happening both in the US and overseas and what we can expect going forward?

And I have a second question.

Okay, so Bill, will you take the US please and then Moshe will follow by the international data -- or countries of the international part.

Sure.

Good morning, Rich, and thanks for the question.

With respect to respiratory, obviously, as you've seen, ProAir has been holding around 50%.

So that's been very well.

Then we have got some seasonally adjusted advantage because this is a particularly good season for us.

And really, the strength of Qvar has been really exceptional.

It's almost 20% of that category now, and so it has done very, very well and continues to grow.

So I would say the ProAir really holds steady, and moves with the market, with the season, and Qvar is really showing just great strength for us.

So, with the seasonal strength that you cited, does that mean that in the coming quarter, we should not expect the same level of sales that we saw in this quarter?

Well, it is hard to say what's going to happen in Q3.

It all depends on the weather and the season.

So right now the quarter seems to be pretty good.

But we will see how it ends up.

We wish for Teva there was only one season in a year.

Okay.

And then on the gross margin, the guidance that maybe Eyal had commented but I didn't hear, that the range had been 59% to 60%.

Is that still the case for the full year guidance?

Yes.

I believe so, Rich.

I think that 59% as we reported this quarter, underscores the second half of the year with Venlafaxine coming in.

You could see some improvement there, and I think what we have guided at the beginning of the year is pretty valid.

Okay.

And then lastly, I know you haven't provided 2011 guidance yet, but specific to Venlafaxine, are you assuming additional competition in January?

I think it is too early to answer this question unless, Bill, you would like to add something here.

Well, I would just add that it is too early to answer that question.

So I concur.

Just wait, Rich, we will get there.

Our next question comes from Chris Schott with JPMorgan Chase & Co.

Please state your question.

Great.

Thanks.

The first question was just a follow up on Europe.

I think you have averaged about 5% constant currency growth for the first half of this year.

When we consider the mix of further price cuts, as well as potential new launches and volume growth, is that 5% type of growth rate we are seeing so far this year a decent proxy of what you are anticipating for the second half?

And I just have a quick follow up after that.

Gerard?

I think the second half of last year was a very good second half.

And although we are anticipating continued price pressure as we spoke about earlier, I would assume that we would be able to stay in the same sort of growth range as we have been doing so far.

Then my -- first, the updated guidance, can you just talk a little bit about the earnings progression as we think about 3Q and 4Q given the generic effects or launch this quarter, and number of potential opportunities if you think about 4Q?

Should we be thinking about 3Q and 4Q as roughly equal quarters, or are you anticipating one is going to be meaningfully above the other?

Thanks.

We have very little choice but to return to our old type of describing our market as a market with many moving parts.

That is throughout the second half.

Generally, we could see the rest of the earnings per share for the second half split more or less even between the quarters but could definitely, we could definitely see a couple of cents moving from one quarter to another, depending on timing of launches, demand in the market, how it is allocated over the period.

And of course this does not include the Ratiopharm impact.

So I would calculate this more or less even, plus or minus $0.02 it could move.

Thank you.

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

Please state your question.

Thanks.

I was wondering if you all could give us a little bit of sense of what the Lovenox citizen's petition taught you about your own Lovenox filing?

Is there anything you saw in that that now you can go back and address, or are you in interactions with the Agency?

And as well, Shlomo, your commentary about some of the teachings in the Lovenox citizen's petition, vis-a-vis Copaxone, how do you think the FDA is going to address some of these potential deficiencies?

Do you think they will have to solicit expert commentary or open up to the public to help address maybe the mechanisms and assays that should be utilized on Copaxone?

Thank you.

Okay.

So Bill, you take this one and then Benzi we will follow to complete the answer to this question.

Good morning, Ken, and thanks for the question.

With respect to our Lovenox file, we are continuing to dialogue with the Agency.

I would say to you that we feel that we are on track, we are progressing ahead.

We did file slightly later, about a month later than Momenta on the response to the immunogenicity which is very likely why we haven't received our notification yet.

But as we review the five criteria, we find that our product falls clearly within the range that we believe is approvable.

Now, of course, we have to let the FDA, they're going to have to give us their opinion, as well.

But the fact of the matter is, as we read through this, we think we hit all the criteria very, very well and it is just a timing issue.

Benzi, would you like to add on?

Yes.

Relevance to the correlation between Lovenox and Copaxone, I don't think there's a direct correlation between approval of Lovenox and future generic approval of Copaxone.

The FDA had issued five criteria by which Lovenox has to follow and then get approval.

Three of those have to do with the actual material, physical chemical aspects for the fragments, et cetera.

I won't go into details on this you won't need.

And the two criteria that have to do with biological assays and tests and human exposure.

And I think Copaxone is very different from Lovenox in the first part, in the three criteria that have to do with the actual product and primarily with the two biological ones.

The first three with Lovenox is the parent compound is obviously heparin, known chemical and known product for 90 years.

The structure is known, activity is known.

And Copaxone is obviously a very different molecule based on random polymerization, a four amino acid structure, is not very clear.

There's no specific epitope through which the activity can be explained.

And I won't go into details about the series of polypeptides and the number of repeating units in the Lovenox.

What is very important to note here is that Lovenox, the assays through which FDA approved Lovenox, is based on very simple, straightforward, acceptable tasks that everybody can do, which are directly related to the target organ which is the blood.

Copaxone target organ is the brain.

There's no direct correlation between the mechanism of action of Copaxone which has to do with influencing immune cells and the target activity in the brain.

So, in my mind, and other people mind, there's no direct substitution to a proper clinical trial conducted on MS patients with clinical end points.

In my mind there's no good way to demonstrate safety and efficacy unless such a clinical trial is being performed.

No PK, no PD, and no biological assays can substitute this notion.

Great.

Very helpful.

Bill, just to finalize, can you talk about the Irvine facility, any update there?

The Irvine facility, we continue to work with the Agency.

We have released 12 products to date in cooperation with the FDA, and we are continuing to work with them on a daily basis to bring that facility up.

I would remind that any of the big launches that people are concerned about, enoxaparin, is not tied to the Irvine facility.

Or gemcitabine, for that matter, is also a product that can be manufactured elsewhere (multiple speakers) we have our final approval.

Thanks.

Our next question comes from Ronny Gal with Sanford Bernstein.

Please state your question.

Good morning and thank you for taking my question.

A couple of them, one around the filing of the low volume Copaxone.

Do you happen to have any update of whether the product will be titled for three year exclusivity?

And second, a little bit of -- if you can give us a little bit about how you are thinking about the risk that you currently have with Protonix and the chances of exclusivity on Aricept.

Bill, can you take the second one and then you will take -- you, Moshe, the first one?

Okay, Moshe, do you want to go first?

Yes.

Well, on one, as you probably know, we have submitted the file of the 0.5 ml, and the file was accepted by the FDA with the action date that was mentioned in the January 1st, 2011.

Of course I think it is too early to comment on the question that you asked about exclusivity.

We definitely -- we have a good data there that show that the 0.5 ml is associated with less local site reaction and pain, local pain and that's something that we are going to discuss with the FDA, and with relation to the potential pre exclusivity, to the low volume product.

But you would not know the answer to that until January 1st?

Or would you know the answer before that?

I don't think that we will know the answer.

I don't believe that we will know the answer before January 1st to this question.

Unless the FDA will give us the answer earlier.

Bill, can you answer the second one on the Protonix?

Yes, let's talk about the last two questions, Ronny, the Protonix and the donepezil.

On Protonix, we go back to that and say I think it is a little early to talk about damages on Protonix because we still believe we have a very long way to go here.

Although, obviously we don't agree with the judge and at the appropriate time we will appeal that decision.

We still have two defenses that remain alive out there, the patent misuse and the unclean hands.

So we will still pursue those with full vigor and we will be looking for discovery in those particular areas.

So I think we're a long way away from that on Protonix.

On the donepezil, I can recount to you where we are at.

You know we have actually two files but our first file, we have a final approval on that file.

We believe we are first to file on the compound patent.

We believe we are entitled to exclusivity.

We maintain that position.

Of course, Ranbaxy challenges that, but we beg to defer -- to differ to that view.

And so we are just proceeding.

So what decision needs to take place?

Is that in that FDA hands?

Is it in courts?

Where does that stand and what is the timeline to approving this -- to resolving that question?

Well, we don't know what's going to happen at this point in time.

Obviously we think the decision will be in the hands of the FDA.

There's no issue with the court, so --

Thank you.

Our next question comes from David Amsellem with Piper Jaffray.

Please state your question.

Thanks.

Just a couple.

First on Copaxone, do you think you're getting to a point, in the US at least, where you won't be able to be as aggressive in raising prices?

And just talk about what you think the long-term outlook on price increases are for Copaxone and how you are thinking about that, at least in the US?

Bill, would you like to take this one?

Yes, thanks for the question, David.

You bring up an excellent question about Copaxone and the pricing.

We did take another price increase this quarter.

And as we move forward, we begin to wonder about where those price increases will lead us to.

But frankly you have seen the competition raise their price, as well.

So price in this particular area seems to go up.

I would tend to agree with you that I would not be as aggressive in the future on my pricing.

But we will have to see.

My concern has always been Teva is, generally speaking, not a price leader.

We are a price follower.

What I can't tolerate is a situation where what I believe is the standard of care in this particular therapy and the leading product in the US and global markets to be disadvantaged on price.

So we will continue to watch that as we move forward and just follow the market.

Okay.

Then just the second question is about competition from the orals and specifically Gilenia.

What's your market research telling you regarding the willingness of doctors to potentially use Gilenia in the earlier stage patients?

Do you expect that Gilenia will largely -- at least initially will see usage in treatment failures and potentially switches from Tysabri?

Just I guess talk about what your research has been telling you there.

Well, based on our research and discussion, extensive discussion actually, with opinion leader, we believe the orals and specifically Gilenia will enjoy slower, really slow uptake.

The reason I believe is the -- is first of all, the physician -- sorry -- patient, most of the patients on Copaxone are stable, which they're doing well and we don't see the rationale to switching patients that are doing well to a product that is really relatively new with unknown long-term safety concerns.

And actually, if you talk about safety we have to look at the -- and on the safety as an issue that already well published and more that I think we have to pay attention to the potential long-term safety.

And based on the experiences that we all have in the market, and physicians and patients, with Tysabri, we know there is a question of issues of safety in the short term and the emergence of safety issues on the long term.

So therefore I believe that physicians will, and definitely patients will follow, will prescribe the orals mainly in the third line therapy and, in some cases, in the second line therapy after a patient will fail -- have failed on one or two therapies.

I think it is fair to say that the oral might have the chance or the opportunity to expand the market as those patients that are really not -- or really currently not treated, (inaudible), or even former patients, that's an opportunity that the oral can offer to the market that will not come on the expense on the existing product, and definitely not the expense of Copaxone.

So therefore, if you look at the oral and we look at Copaxone, Copaxone can deliver, we are confident Copaxone will maintain its leadership and actually we will grow Copaxone sales in 2011.

That's helpful.

Thank you.

Our next question comes from Gilbert Gregg (sic) with Bank of America.

Please state your question.

Thanks.

Good morning.

I think this one is for Bill on the 0.5 ml filing.

Regardless of whether you will get exclusivity or not, do you expect the product to have its own Orange Book entry?

And separately, is there any intellectual property pending that is specific to that formulation?

Gregg, good morning.

Should I call you Gregg or Gilbert?

Your call.

I was kidding.

But in any case, it is impossible for us to say at this point in time really whether we will get the exclusivity on the sNDA, on the low volume.

I would like to believe that we should get that.

But the fact of the matter is right now we will have to wait to see what the FDA's opinion is on this.

Okay.

So whether or not it has its own Orange Book listing and exclusivity are tied to each other?

You don't know based on the type of application whether you would get an Orange Book listing that's separate or not?

I just want to make sure I am clear on this.

It all depends on the label.

So at this point in time we are just not sure.

Okay.

Fair enough.

And then the other bigger picture North America question I have for you, Bill, is your latest thinking on the implementation or AMP, and the implications for your business and the industry.

Last time we checked in with you I think it was still unclear too what the final deadlines would be and what the effects might be.

Well, we know that the effect actually, the Bill was signed on March 23rd, and then it actually goes into effect at the first of next year.

And it will go back and reference pricing from the fourth quarter of 2010.

That's our estimates right now.

The actual, what the effect of AMP will be in the US is really a very interesting question.

We just don't have a good sense for that.

One has to speculate that if you're talking about AMP being a weighted average of pricing that's sold using a particular formulation, with some exclusions and exclusions, essentially those largest purchasers that are not mail order, being the large chains in the US, are likely to be those individuals that drive the AMP.

So those largest chains, prices will be largely what makes up the weighted average AMP because if you aggregate maybe a CVS and a Walgreens and a Wal-Mart and a Rite Aid together, you have got to have what's largely the retail market in the US.

So, if you think about that, you have to wonder about the new dynamics and why do these large chains want to drive down price where they did prior.

Prior they always wanted to get advantage over the other chain.

Now, if you drive down price at one particular location, whether it be in whatever city you are located, whichever chain drives down price, there's effect against everyone.

So you don't get to capture that benefit.

So it is really a perverse incentive.

This was something that when this whole theory of AMP was talked about in Washington, we fought against it because we didn't think it was proper, the proper incentive.

But we will see what happens.

It is very much an open question, and anyone's guess is probably valid at this point.

Thanks, Bill.

Lastly on biosimilars, has there been any color to offer on regulatory or legal issues with your GCSF filing?

And are you doing anything with EPO in the US?

Well, our file so far on the GCSF is progressing.

I don't think we will have anything to add on EPO just yet but we may have something to talk about a little later, but nothing to talk about right now.

We are proceeding down the path as a BLA at this point in time.

And not with the ABLA route.

Again, why would you take the ABLA route, which is very uncertain as to how to go down that path now.

And if you look at some of the legal characteristics of how this Bill will work, why would I reveal my whole process to the innovator so that they can decide what to sue me on.

It just doesn't make a whole lot of sense for us, it is just much simpler for us to go down the path of a BLA.

Thanks a lot.

Our next question comes from David Buck with Buckingham Research.

Please state your question.

Yes.

Thanks.

Just a couple of quick ones.

First, for Eyal, can you give a sense of Ratiopharm, how you think they have been reacting in terms of performance to the European price cut environment, and what the run rate of sales would be from Ratiopharm in 2010?

Secondly, for Moshe, can you talk a little bit about, you mentioned clinical trials as your view that you think it is the gold standard for a bioequivalent form of Copaxone.

How do you expect at this point to get your message across to the FDA?

Obviously the citizen petition route has been tried.

What's the next step we should be expecting in dialogue with the Agency?

And finally can you just talk about what the status is of Laquinimod, and what the filing target date would be for that.

Regarding Ratiopharm, I think this is way too early for us to provide an educated answer.

We will open the boxes once we complete the acquisition.

We will learn and we'll come back to you guys well informed and educated.

I don't anticipate any material changes.

It seems that that business has been running well, but, numbers will be provided on a timely basis.

It is a private company, as you know, much less information than when you acquire a publicly traded company.

Still view it in the period before closing as a potential competitor.

So the level of detailed information provided to us was naturally limited and we will study and report.

But as I said, we don't anticipate surprises, and things have been dealing -- from all we know they have been dealing well with the environment, in Germany and rest of Europe where they are selling.

David, as far as Copaxone, based on what we just heard from Benzi, and our understanding of Copaxone and the (inaudible), we believe that we will continue our interactions, and we plan to do it with the FDA.

And actually demonstrate to them and convince -- we believe that we convince the FDA that in the case of Copaxone, it is unavoidable that any generic competitor will need to embark on clinical study and even on the preclinical activities, as well.

As far as Laquinimod, as we reported, we have completed the -- of course the recruitment and the first study.

We will see the results of the first study in the first quarter of 2011 and followed by the result of the second study by the mid of 2011.

And followed by the result of the second study by the mid of 2011, and if everything goes as we plan, we immediately plan to submit the file as we have a fast track in the US, we are planning to launch the product by mid 2012.

Just one follow up.

Would you anticipate any type of public forum such as an advisory committee, on Copaxone on the issues that you raised?

That could be one of the scenarios that can take place.

I think that the dialogue with the FDA is ongoing and we believe that based on the recent publication on the Copaxone and the mood effects, that this is the case that the FDA will require clinical studies from any follow on Copaxone.

Thank you.

Our next question comes from John Boris with Citi.

Please state your question.

Thanks for taking the question.

The first couple are for Eyal, and then I have a couple of follow ups for Bill.

First, on cost of goods, can you just help us understand what the impact of foreign exchange was on COGS within the quarter?

And then you do provide us with your API sales.

Can you provide us with your global generic and branded sales within the quarter?

First of all, on COGS, there was major improvement in COGS that we have seen.

Mostly a matter of product mix, that we have seen.

What was the second question?

You give us API, can you possible provide percent generic and percent branded sales?

The breakout, I don't have under my hand regarding API sales.

We had a very strong and good quarter on the sales of API, actually, with growth of about 23% year over year.

And, as you know, we stopped publishing this individually as a business unit around $163 million for the quarter, and 23% growth.

Okay.

For Bill, can you just comment on whether you have launch quantities available on Lovenox and your capability of being able to supply the market.

Some initial checks would seem to indicate that Momenta, Sandoz might be somewhat capacity constrained.

And then second question just has to do with the Office of Generic Drugs.

Seems as though between some patch formulation getting approved, some high profile sustained relief preparations, and then the Lovenox approval, are we seeing a pick up at OGD or is this just an anomaly?

Thanks for the question, John.

As far as launch quantities with respect to enoxaparin, the answer is yes.

We are in good shape.

We will need approval and of course we commented on that earlier.

The second question, your second question was about the OGD and its activity now and the leadership there.

I think on that particular question, I do see them getting bolder and making some very interesting calls.

And I think this is really a step in the right direction.

There's interim leadership right now in the department, and we take our hats off to them for approving enoxaparin and proving that they can stand some tough tests.

So we think that that's really a positive thing at this point in time.

Thank you.

The next question is from Marc Goodman with UBS.

Please state your question.

First, you keep talking about the US based business being strong.

Can you just give us an indication of is this stronger than last quarter?

Is last quarter stronger than fourth quarter?

Is this getting better or is this just continues to be stable?

Maybe you can put some color around that.

And then, also, Canada, obviously we have seen what Canada is going to do to pricing.

Give us a flavor for how that's going to impact your business, the business you are about to get from Ratiopharm?

Should we be assuming that the Canadian sales are going to be down in 2011 versus 2010?

Bill?

Yes, Marc.

A couple of points here.

The base business is strong.

We have done a lot of things to improve our base over the last couple of years, whether it is pruning where we have taken out some of the less profitable products and sell more of the profitable products.

We have seen more impact around price increases.

Just lots and lots of different things.

Some of the products that have launched have launched a little better pricing than it had historically.

Some of this can be retraced to the quality concerns.

Lots of proactive things going on in our base business.

So I think that by and large our base business has been strong for the last few quarters, and continues to be strong.

There's not much more to say about it than that.

When you say is that changing from quarter to quarter, remember, the way we track our base business, it's products that have been in the market for two years.

So every quarter and old launch product becomes a base product, and of course that changes your numbers somewhat.

But it has been a very strong business.

As far as Canada goes, the Canadian business we continue to believe is going to be strong.

Obviously the effect in the various provinces of the change, especially with respect to Ontario, that's going to have an effect.

The idea though is, the big change is what happens with the chain or the pharmacy itself.

In that particular system, where they are lowering the reference price, it is not indifferent, by the way, to what is happening in other markets, whether you see the US change in AMP or you see the change in Spain.

It is really the government trying to take something out of the channel.

And what they're doing is lowering price and then you're limiting your back end to the pharmacies themselves.

So net-net for us, it's not as huge of a change as one might expect.

We certainly believe we will get some pressure from the chains in orders to get more on the back end.

But at this point in time we don't see a huge change.

It may actually be a net positive for the business, as it becomes more difficult for some of the smaller companies to manage.

So we should be assuming Canadian sales in 2011 will be up from 2010?

Obviously with the addition of Ratiopharm.

And again, I can't really comment on that until I actually get my hands on the Ratio business, and I am able to look at it.

Just on your own base business in Canada you would expect it to be up next year?

Our business has been growing and will continue to grow.

Let me take this opportunity to follow on because I see that the pricing pressure is a kind of common denominator question, all over the globe.

I think that the results in Europe, 10% growth is actually the best answer to prove the statement that Teva knows how to operate in a price pressure environment.

This is not just a statement for stating the obvious from our point of view.

It's just to say that we know how to leverage our market leadership, how to leverage our skills, and how to leverage our largest ever portfolio and our different lines of business.

And if you add to that the deep understanding and the know how in different models of businesses, countries and healthcare system, that actually give you the answer of how we are managing to continue a profitable journey in a pressurized environment exactly as we did it for many years in the United States.

So, we believe that this is one of our unique advantages that make us different from part of our peers, that we know how to operate and how to make money, and even how, of course, to grow the business under this different business or market environment.

Thank you.

Your next question comes from Corey Davis with Jefferies & Company.

Please state your question.

Let me just follow on, then, to that last comment you just made.

So, if you're continuing to grow in the face of pricing pressure, I guess the only way to do that would be to gain share.

So, A, do you agree with that?

And, B, since you are the first of the big public companies to report, when the others report, are we going to see perhaps less robust results?

I am not asking you to comment specifically on their results but if you are gaining share in volume terms you have to be gaining it from other players.

So is that the right way to think of how you're being so successful in Europe in the face of such pricing pressure?

First of all, as a general statement, I would agree with you, that market leadership is about getting market share.

We said it many times in the past, that our strategy is to gain more market share.

There's only one caveat to your way of posing the question.

I do believe that in certain markets, definitely Europe is a good geography for that, that we can also see larger pie.

So actually see more market, or potential market, as the European markets, at least some of them, the level of the generic penetration is relatively low compared to a market like US or let's call it generic developed countries in Europe.

So there's still more room to grow generics and therefore we are so optimistic on the business in Europe, not only by taking market share for our competitors but also by growing the overall market for generics in Europe and some other countries in the world, as well.

For Eyal, did I hear you say that the goal is to take your tax rate down to 12% in 2012?

No, no, no.

I don't recall saying anything of that kind.

I must have misheard.

In my opening comments I said that our GAAP tax rate for this year is estimated at 12%, at 15% on a non-GAAP basis, and we don't see this declining in 2012.

Okay.

Got that.

And for Bill, I think I got the message, but I sensed fairly extreme optimism on your own generic Lovenox.

Can you elaborate even more on your interactions with the FDA discussions?

Is it really nothing more than checking all of the boxes that they put out in their response to the CP, and just finishing up their review of your immunogenicity data you mentioned?

Corey, it is hard for me to say much more.

We have dialogue with the Agency.

We believe we have, first of all, we have looked at the citizens' petition.

We believe we meet all the criteria on the citizens; petition.

Our dialogue with the Agency says that our review is going nicely, and we are just waiting for an answer.

So, we feel we are in a good position but again it is up to the FDA to decide, not me.

Right.

And last one, Eyal, can you just run down the list of countries in Europe or broadly when the royalty rates flip from the rough 50% on Copaxone down to the 6% as we go through 2012?

Let me take this off line.

We want to be precise, we should have the list in front of us.

Let's take this off line.

Fair enough.

Thanks.

Just one more, just before the next question, just one more follow on the Copaxone, as it is becomes the major subject in this conference call.

To add on comments to add to what we all answered in this respect.

One is just to remind you that about a third of our Copaxone sales is in non US markets, which the whole discussion that we are involved in is less relevant for this $1 billion growing business.

The second comment is regarding the oral therapies.

As a kind of fruitful thought I would like to take the case study for you and you can look at it what respective, which reminds me to be the next oral therapies and you see the current market share and developing the last six years, it can give you a good hunch on where we see this oral is going to be in the coming years.

Thank you.

Our final question comes from [Mylan Paratay] with Credit Agricole.

Please state your question.

It is David Maris.

On Copaxone, can you just update us again on the timing of the trial and the decision and walk us through your timing assumptions?

You mentioned it earlier?

Which trial?

The Copaxone trial.

Are you referring to GALA trial?

No, no, the legal trial.

I will take that one.

Right now, David, as you know, we are waiting for our claims construction.

There's no trial date set.

And whether the claims construction, whether the Mylan Natco data gets rolled into that claim construction, it is very difficult to say at this point in time.

Judge Jones is a fairly busy judge, and so we will have to wait and see.

We just don't know the timing of the claims construction.

Once we get that, of course, then we can get on to scheduling and trial and so on and so forth.

Bill, based on your best guesstimate, would you assume it starts in the fall or early winter?

Gets resolved sometime mid year next year?

No, no.

I think that's very optimistic, I would say much farther out than that.

Great.

Thank you very much.

Thank you all very much for joining us today.

As you have heard, we had a great quarter, and we are very enthusiastic about the rest of 2010.

So, thank you again and you have a good day.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you all for your participation.