Teva Pharmaceutical Industries Ltd (TEVA) 2012 Q3 法說會逐字稿

Welcome to the third quarter 2012 Teva Pharmaceutical Industries Ltd earnings conference call.

My name is Larissa and I'll be your operator for today's call.

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

Later, we'll conduct a question-and-answer session.

Please note that this conference is being recorded.

I'd now like to turn the call over to Mr. Kevin Mannix.

Mr. Mannix, you may begin.

Thank you and good morning.

Good afternoon everyone.

I'm joined today by our President and CEO, Dr. Jeremy Levin, our CFO, Eyal Desheh, and additional members of the Teva executive team.

Jeremy will begin by providing an overview of the quarter's highlights followed by Eyal who will then provide additional details on our consolidated financial results.

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

Before we start I'd like to remind you that our discussions during this conference call will include forward-looking statements.

Actual results could differ materially from those projected in the forward-looking statements as a result of foreign currency translation effects, macroeconomic trends, interruptions in our supply chain, and other factors that could cause actual results to differ as discussed in Teva's report on Form 20-F and Form 6-K.

Also, we are presenting non-GAAP data which excludes the amortization of purchased intangible assets, costs related to certain regulatory actions, inventory step up, legal settlements, and reserves and impairment, and related tax effects.

With that I will now turn the call over to Jeremy.

Jeremy, if you would, please.

Thank you, Kevin.

Good morning everyone.

And thank you for joining the call today to discuss Teva's third quarter 2012 results.

Before I begin, I'd like to thank those of you who have joined us from New York and the East Coast, despite the tremendous problems I know some of you are experiencing.

We really appreciate your commitment and interest and hope that you and your families are safe.

During my remarks this morning, I will briefly discuss the quarterly results and then provide some content around the initial steps we are undertaking to reshape our Company.

As I promised shareholders on the May 24th call, as CEO of this Company I will ensure that we are managed and will continue to manage all of our businesses in a disciplined and focused manner.

This quarter's results and the way we are managing the business now reflects this approach.

I'll start with a few comments about the quarter.

Overall, we had a solid performance.

We ended the quarter with top line net revenue growth of 14%, compared to the third quarter of 2011.

And non-GAAP EPS coming in at $1.28 per share.

The quarter's GAAP results were primarily offset by a decision to account for a $670 million provision for a possible future loss and damage payment for the pantoprazole litigation.

In addition, we're recognizing an impairment charge of $481 million, with the majority of these charges reflecting pipeline products that the Company acquired through its acquisition of Cephalon.

Our year-to-date GAAP EPS decreased 25% compared to the same period in 2011.

This decrease was driven by the same reasons.

While these legacy events have an unfortunate impact on our current results, we remain on track to reach our financial goals for the year.

We now anticipate 2012 sales to be between $20.1 billion and $20.7 billion, and non-GAAP earnings per share of between $5.32 and $5.38.

Eyal will take you through the details of the financials later in the call.

I'll now take a few moments to discuss Copaxone and laquinimod.

Copaxone continues to lead the US in global relapsing remitting multiple sclerosis market in both sales and market share.

Copaxone remains above 40% of market share in the US and we anticipate it will maintain its global market leadership position due to its established and clinical experience in treating RRMS patients.

We continue to consider and develop ways to enhance patient experience with Copaxone through a very vigorous life cycle management program.

In that respect, we were particularly pleased to present the Phase III GALA study as late breaking research at the ECTRIMS Congress in October.

The results showed that three times weekly dosing of glatiramer acetate 40 milligrams per mill significantly reduced an annualized relapse rate in RRMS patients while maintaining a favorable safety and tolerability profile.

We are very pleased with the possibility of providing an alternative therapeutic option for patients with RRMS without compromising efficacy or safety.

We see real potential for laquinimod and are committed to its ongoing research and development.

Our efforts initially focused on oral laquinimod as a potential RRMS therapy.

In this area, after reaching agreement with the US Food and Drug Administration on a Special Protocol Assessment, we're in the process of initiating a third Phase III study of laquinimod called CONCERTO which will evaluate the impact of laquinimod on disability progression as a primary end point in patients with RRMS.

We submitted the Noventro file to the European Medicines Agency and are preparing to launch this product across Europe.

This will broaden our commitment to the MS community and patients around the world.

Further, we're encouraged by the Phase II A laquinimod data in patients with moderate to severe Crohn's disease versus placebo which was presented as an oral presentation at the 20th European Gastroenterology Week Conference in October.

The data is consistent with what we believe to be a safe and effective compound that has several important potential uses and provides us with a rational to further investigate the potential benefits of laquinimod in Crohn's disease.

Now turning to our generics business.

We successfully launched nine new products in the US market during the quarter, representing over $8 billion of brand value.

This brings the total number of new products launched in the US to date this year to 20 products, representing approximately $23 billion of brand value.

We are excited to have the opportunity to launch several additional products in the fourth quarter in what we expect to be one of the busiest years on record for our US generics business.

Regarding our European business, we increased sales of 1% in dollar terms and by 13% in local currency terms.

Additionally, we're taking a selective approach to the generic tender market, managing costs and are focused on sustainable business opportunity.

This is in line with our strategy for European generics business, to focus on profitability and sustainable, profitable growth.

We've been tightly managing our resources and commercial organizations across the region to increase our profitability while maintaining our leadership position.

I'd like to mention that in October we successfully resolved the warning letter that was received from the US FDA for the Irvine manufacturing facility in 2009.

A number of steps were taken to rectify the situation, including upgrades to the building and systems, as well as manufacturing and quality processes and practices.

At this facility, we continue to focus first and foremost on those life saving therapies on the drug shortage list and you'll be hearing more about our manufacturing efforts during our Investor Day.

PGT Healthcare, the joint venture between P&G and (inaudible) and Teva celebrates its one year anniversary on November 1. The JV is progressing as planned, leveraging the core technology and go-to-market strength of Teva and the consumer understanding and branding strength of P&G.

The combined strengths of Teva and P&G are enabling us to accelerate our rate of global expansion and category growth.

The OTC business is strategically important to us.

Given global trends and demographies, we think this is a growth engine for the Company now and into the future and we see the PGT joint venture as a key enabler.

I'd now like to take a moment to discuss some important steps that have taken place over the last few months and which are part of the Company's overall strategy.

We've undertaken several steps to create a foundation for reshaping our Company.

This of course includes the ongoing process to build a world class management team.

We appointed Dr. Jonathan Isaacson to the newly created position of Chief Medical Officer, and Professor Itzhak Krinsky as Chairman of Teva Japan and Teva South Korea and Head of Business Development, Asia-Pacific.

In addition, in this reshaping process we identified key assets in the R&D program, and as part of our commitment to organic growth, we will increase our focus in areas such as CNS and respiratory.

We believe a focused pipeline is essential to our Company's future success and are committed to investing our resources in the right programs, in the right markets and at the right times.

In order to do this, we will manage our R&D cost and expenses in a disciplined manner, while using the talent within our organization to build a culture that is committed to delivering profitable growth.

Dr. Hayden, a world leading expert in Huntington's disease and his team identified and acquired Huntexil.

This drug candidate is being developed for the symptomatic treatment of Huntington's disease, success in this area will be highly beneficial to patients and provide expansion to our CNS portfolio.

The acquisition of Huntexil is one of examples of our strategy to build a robust pipeline through combining a vigorous approach to managing internal programs with a targeted selection and acquisition of external opportunities.

As part of our overall strategies to reshape Teva, we'll continue to leverage our product portfolio and R&D efforts while selling or out-licensing assets that no longer fit within the scope of our business.

The sale of Teva's Animal Health unit reflects our commitment to focus our business on our core strengths, while divesting non-core assets to fund future growth.

These types of transactions are a key part of our strategy to reshape the Company through organic as well as inorganic growth.

I will closely oversee our activities in this area and, therefore, I assigned the responsibility of corporate business development as part of the office of the CEO.

You'll hear more about our approach in this arena on Investor Day.

I'll now turn the call over to Eyal.

Thank you, Jeremy and good morning everyone.

We're pleased to share with you today our financial results for the third quarter of 2012.

As we continue to get ready to embark on a new and exciting strategy for our Company, we're reporting today another solid quarter for Teva.

Compared with Q3 2011, our net revenues grew by 14% or 19% in local currency and non-GAAP operating income and non-GAAP earnings per share grew by 6% and 2% respectively.

We also posted solid cash flow from operations and free cash flow.

Many of our businesses performed well in this quarter.

Our global branded business, which was the main driver of growth, grew by 38% as we benefited from contributions from strong sales of Copaxone this quarter at over $1 billion, and from the Cephalon products.

The US generic business continued its positive trend, increasing sales by 24%, compared to the third quarter of 2011, and benefiting from nine new launches in the quarter and a total of 20 launches so far this year.

Our businesses in Eastern Europe, Asia, and Latin America demonstrated organic and profitable growth.

We continue to strengthen and grow our OTC business together with our partner, Procter & Gamble.

We sold our Animal Health business with closing expected within a few months, and acquired a new branded asset for treatment of Huntington's disease.

In Europe, we posted a year over year growth of 1% or 13% in local currency terms, mainly driven by the inclusion of Cephalon that contributed to our branded business and the take-back of Copaxone distribution rights.

I would like to touch on two topics before I review the third quarter numbers in greater detail.

First, this quarter we made relatively high non-GAAP adjustments of $1.2 billion.

This primarily consisted of a provision for loss contingency of $670 million related to the pantoprazole patent infringement litigation.

The provision was triggered following a decision by federal circuit in an unrelated case which affected our estimate of the probable damages.

A trial on these damages is scheduled to begin in June 2013, after which both the initial liability ruling and any damages awarded will be eligible for appeal.

As we have long stated in our SEC filing, Teva has an insurance policy that specifically covers damages that may be awarded against us for patent infringement in this litigation, and we have every expectation that this policy will apply to this matter and provide partial coverage in case of damages.

In addition, based on Management decision and as a result of our ongoing portfolio review, we have impaired $481 million, mostly related to in process R&D.

The two following pipeline products constitute the majority of the impairment.

Obatoclax for the treatment of small cell lung cancer, and CEP-37247 anti-tumor necrosis factor for the treatment of sciatica.

We also adjusted the book value of our modafinil, Nuvigil, for the treatment of bipolar disorder to reflect the patent settlement with Mylan which will allow a generic entry in 2016.

On top of these items, we've excluded in our non-GAAP presentation of results the following; amortization of purchase intangible assets totaling $299 million, costs related to regulatory actions taking facilities of $25 million, acquisition restructuring and other expenses for a total benefit of $34 million and related tax benefits of $269 million.

Please review our press release and related tables for complete information including reconciliation with the GAAP figures.

As we have 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.

Second, exchange rate differences between this quarter and the third quarter of 2011 reduced our revenues by approximately $202 million, while having a minor positive impact on operating income.

The impact on revenue resulted primarily from the weakening of certain currencies primarily the Euro, the Hungarian forint, the Israeli shekel and Russian ruble relative to the US dollar.

Let me go over now to our consolidated results for the third quarter of 2012.

Net revenues for the quarter reached $5 billion, an increase of 14% compared to the third quarter of last year, or 19% in local currency terms.

Year over year, our sales grew organically by 1.3%.

If we eliminate the anticipated effect of Provigil going off patent, sales grew organically by 6%.

Sales of generic medicines in the third quarter of 2012 were approximately $2.5 billion, including API sales to third parties of $195 million, an increase of 1% in total in US dollar terms, when compared to the third quarter of 2011.

Our generic business in the US had a strong quarter with sales of $1.1 billion, an increase of 24% compared to the third quarter of 2011.

The US generic business benefited from 20 new product launches so far this year including 9 just this quarter alone.

In Europe, our generic business generated quarterly sales of $798 million, a decrease of 13% in dollar terms, but only 3% decrease in local currency terms, compared to the third quarter of 2011.

As mentioned on our previous quarterly call, to address the ongoing price and regulatory pressure in key markets in Europe, we are moving away from a pure growth focus to a profitable and sustainable growth model for generics in Europe.

As part of this model, we are being more selective in our go-to-market routes and have stopped utilizing certain discount and rebates which reduced profitability and avoid aggressively priced tenders, while still maintaining our leader position.

Generic revenues in our rest of the world market amounted to $620 million, a decrease of 11% or 8% in local currency terms compared to the third quarter of 2011, with strong performance in Israel, Russia and other Eastern Europe markets, which was negatively offset by a decrease in generic sales in Canada, where we had exceptionally high revenues in the third quarter of 2011 in the comparison.

Let's turn now to our branded business, where we had another good quarter across most product lines.

Total branded net sales in the third quarter were approximately $2 billion, an increase of 38% when compared to the third quarter of 2011.

Branded medicine revenues this quarter comprised 41% of our total revenues.

Branded medicine sales in the US were $1.5 billion, an increase of 35%, compared to the third quarter of 2011.

This was mostly the result of the inclusion of Cephalon as well as growth of Copaxone.

In Europe, our branded business had a strong quarter with sales of $376 million, an increase of 55% or 73% in local currency terms, compared to Q3 2011.

Driven by the successful completion of the take-back of Copaxone sales and marketing rights in Europe, and the inclusion of Cephalon and strong sales of its medicines.

In the rest of the world markets, branded sales were $177 million, an increase of 34% or 42% in local currency terms, driven primarily by unusually strong sales of Copaxone in Russia.

Finally, to our OTC business, which we are very excited about.

Net revenues in the quarter were $252 million, an increase of 38% or 46% in local currency terms, compared to $183 million in the third quarter of 2011.

Primarily due to sales of OTC products in the US to Procter & Gamble pursuant to a manufacturing agreement, which commenced in the fourth quarter of 2011, and growth in sales in Latin America, Europe, and in Russia.

Moving on to non-GAAP operating income for Q3, which totaled 28.2% of total sales or $1.4 billion.

This is up 6% compared to Q3 2011, reflecting mainly the inclusion of Cephalon and strong sales of our branded medicines.

Non-GAAP net income and fully diluted earnings per share for the quarter were $1.1 billion, and $1.28 for EPS, unchanged, and up 2% respectively compared to Q3 2011.

For the third quarter of 2012, the weighted average share count for the fully diluted earnings per share calculation was $869 million, shares on GAAP basis, and $870 million shares on non-GAAP basis.

Turning next to profit margin and a operating expenses.

Non-GAAP gross profit margin for the quarter was 58.6% in the third quarter, compared to 56.4% in Q3 2011.

This improvement is a result of the increased contribution from branded medicines primarily due to the integration of Cephalon and higher sales of Copaxone.

Net R&D non-GAAP expenses reached $319 million for the quarter or 6.4% of total sales.

This quarter compared to $227 million or 5.2% of total sales in the third quarter of 2011, mostly reflecting the inclusion of Copaxone.

R&D expenses to date are lighter than what we communicated to you as part of the 2012 guidance back in May, mainly due to ongoing review of our product pipeline and focusing, and subsequent delay in some development milestones.

However, we do expect these expenses to go up during the last quarter of 2012.

Selling and marketing expenses for the quarter totaled $903 million, on a non-GAAP basis, compared to $796 million in the third quarter of 2011.

The increase in dollar terms was primarily due to the inclusion of Cephalon as well as the take-back of distribution and marketing responsibilities for Copaxone in Europe.

This was partially offset by exchange rate differences and lower royalty payment on generic medicines in the US.

Total G&A expenses this quarter were $292 million, compared with $112 million in Q3 last year, primarily due to gains recorded in the third quarter of 2011 that offset our expenses in that quarter, as well as higher expenses in the current quarter due to the inclusion of Cephalon.

We recorded $73 million of financial expenses on non-GAAP basis in Q3 compared with $67 million of financial expenses in the comparable quarter in 2011.

The increase is mainly due to a higher interest expense resulting from the additional debt incurred to finance the acquisition of Cephalon and Taiyo.

This was partially offset by gains from exchange rate fluctuation and hedging activity during the quarter, compared with losses in these items in the third quarter of 2011.

The provision of non-GAAP tax for the third quarter of 2012 was approximately 16%, and amounted to $212 million on pretax non-GAAP income of $1.3 billion.

This compared to $119 million on pretax income of $1.2 billion in the third quarter of 2011.

We expect the tax provision to be lower next quarter and for the full year of 2012, we expect a slightly higher annual tax rate compared to 2011.

This is in line with our prior guidance.

Cash flow from operation, during the quarter was slightly higher than $1 billion, compared to $482 million in the third quarter of 2011, an increase of 117%.

Free cash flow, which excludes net capital expenditure and dividends, was $577 million compared to the notably low $2 million in the third quarter of 2011.

Cash and marketable securities on September 30, 2012 amounted to $2 billion.

Cash flow for the fourth quarter is expected to be stronger.

During the quarter, there were no shares repurchased.

Since the beginning of 2012 Teva repurchased 15.4 million shares for approximately $667 million, as part of the $3 billion share repurchase plan that was authorized in December 2011.

As we previously noted, we maintain our flexibility to commence, carry out or suspend the buyback program from time to time depending on a wide variety of factors and taking into account various corporate priorities.

On October 30, 2012, Teva's Board approved a quarterly dividend for the third quarter of ILS1 per share.

Based on the exchange rate on October 30, 2012 of the shekel to the US dollar, this translates into approximately $0.257 per share or a total amount of approximately $223 million.

Thank you all for your time and attention this morning.

I would now like to turn the call back to Jeremy for his closing remarks.

Jeremy?

Thank you, Eyal.

In closing, I'm confident we are creating the right strategy to deliver an even stronger overall business, coupled with greater innovation over the next several years as we build upon our key assets, recruit top talent, and identify value drivers that will reshape the Company's future.

It will take time for us to recognize the full value of some of our efforts.

Others are already showing positive impacts.

However, we are committed to aggressively drive changes to enhance Teva's ability to provide real solutions in the dynamic healthcare environment, build and create opportunities and deliver sustainable shareholder return.

I look forward to a more in-depth discussion around our strategy with all of you during our Investor Day scheduled for December 11 in New York.

At that time, we will discuss our strategy and share the details of our R&D programs, manufacturing capabilities, global brand and generic businesses, including insight into our commitment to sustain and grow our multiple sclerosis franchise, and where we see opportunities for both Copaxone and programs such as laquinimod.

In addition, you will also have the opportunity to meet a selection of executives from around the Company who together with others provide the core of a world leading management team.

In closing then, I'd like to thank you for joining us today and would like to open the call up for questions.

Thank you.

We'll now begin the question-and-answer session.

(Operator Instructions)

David Buck, Buckingham Research.

Yes, thanks for taking the question.

Just a couple of quick ones maybe for Jeremy.

Can you talk about what the benefit was in the quarter going forward from some of the actions taken in the US in terms of inventory reductions in both the brand and generic businesses.

You talked a little bit about profitability focus in Europe.

Can you talk about what's changed in the US in terms of the businesses?

And then just a quick one for Bill if he's on, just on generic pricing trends in the US.

Thanks.

Good morning, David.

I think it's probably easier for Bill and Alan who are both in, both on and can give you good color on both questions so why don't I hand it over to them.

Hey, David.

Good morning.

With respect to the inventory, the DSA continues to have positive impact for us in the long run.

There was initial charge which cost us something in the first and second quarter, but really paying a lot of benefit right now.

With respect to the price increase we took in Copaxone, because of the DSA agreements, we were able to immediately recognize those changes.

So that's a real positive for us on the inventory.

Most of our inventory on the branded side has been brought down to under 20 days.

And we think that's a very manageable place to keep it, and that of course, allows us on these price increase opportunities to get as much benefit as possible.

With respect to the pricing on generics, we continue to see that mid single digit price erosion that's has been really historic now for the last couple of years.

Great.

If I could just sneak one in maybe on Copaxone or the MS category.

What's the view for the ability for the category to sustain price increases as we look at new entrants next year?

Well, David, that's a great question and really with respect to Copaxone and our pricing, we've never been a price leader.

That's not been our strategy.

We've always kept ourselves in the game.

We are over 40% share.

The standard of care, if you will, in this business and we think it's appropriate for us to be priced at the higher end of the group, but certainly not the highest price strategy or the highest priced product.

That's always been our pricing strategy.

Where it's going to go with new entrants in, that's going to be very interesting for us to see and we'll just have to wait.

Douglas Tsao, Barclays.

Good morning.

Just a quick follow-up question on laquinimod.

You indicated that you have an FTA from the FDA regarding getting the disability indication.

So would you be able to submit for disability with just the additional Phase III, the CONCERTO data, in addition, combined with the trials that you've already completed?

Thanks, Doug.

Why don't we ask Michael who's on the line to answer that.

Yes, thank you.

Well, at the present time we're about to start CONCERTO.

We certainly have a special agreement with the FDA in this regard with this particular study.

It's a two year study.

We're very excited about laquinimod because it has its effect not only on relapse remission, but importantly, on what matters profoundly to patients, which is progression of disability and also maintenance of brain volumes.

The only product that has this particular quality to reverse the deterioration in brain volume in MS. The exact regulatory strategy is, while we have permission, we really haven't decided exactly what route to follow.

This will depend on the results that we have.

But we have numerous options open to us.

We're very excited about laquinimod.

Offers a unique opportunity to have impact on those issues that are very worrying to patients, which is progression of disability and actually loss of brain volume.

Very unique in its mechanism, and so we're continuing with CONCERTO and also looking at other opportunities for laquinimod in this space.

Okay.

Great.

And then just one other question in terms of Europe, you indicated that you are perhaps scaling back the strategy in terms of perhaps being a little bit more selective in terms of the markets and products that you compete to maximize profitability rather than focus on just simply revenue.

Just curious in terms of the competitive landscape if you see that occurring with some of your competitors as well in terms of perhaps trying to sense sort of the more rational behavior or more rational competitive landscape today.

Let's ask -- we've got Rob here.

Let him ask -- why don't you have a quick run on this one?

Thanks for the question, Douglas.

First of all, we are clear market leader in Europe, so we have a position where we do not necessarily need to compete for every little bit of market share gain and we can be much more selective in our growth approach going forward.

So we focus strongly on profitable growth and we've stepped away from some of the very aggressive tenders or in some cases discounts.

As to many of our competitors, they are not market leader, right, we are, so I don't think they can quite follow that strategy.

But I would definitely hope that also they find a more rational approach in some of the tender pricing.

Okay.

Great.

Thank you very much.

Gregg Gilbert, Bank of America.

Thanks, good morning.

A couple.

In light of the new oral composition in the MS space can you comment on the potential for the space to move towards combination therapy over time, or do you think that will be price competitive or are there other technical hurdles as compared to other therapeutic areas.

And then, Jeremy, anything other than Animal Health that you think might not be core to Teva.

You seem willing to talk about Irvine and Animal Health today, but can you talk about whether anything else is under your scrutiny as to whether it's core or non-core.

And lastly, Jeremy, more conceptually on your expense base as you take a hard look at everything, COGS, R&D, SG&A, do you want investors to expect the potential for a large amount of savings to fall to the bottom line over time, or should the thought be more about reallocation or reinvestment of such savings into more productive areas, just a more conceptual crack at that.

Thanks.

Hi, Gregg.

Three big questions.

Let me just try and break them down.

First of all, I'd like if we can, have a quick discussion on the combo strategy and then we'll come to your question of core assets that we would consider disposing of and lastly the cost structure of the Company.

I'll talk a little bit about the last two and then maybe Eyal will talk a little bit about that.

Just let me just say, Copaxone and the experience that Teva's had over the years has been spectacular in both understanding the disease and also having contact with patients.

And so we really have a very deep understanding indeed.

We've got over 1.3 million patient years of safety record of dealing with these patients, and we understand a lot about the disease, and as we look at it, it becomes more and more clear that the future holds a different set of paradigms for how the patients will need to be treated.

This is not unusual in disease areas that are evolving.

Certainly single dose of a single drug which is tremendously good like Copaxone can lead the way in understanding what might come in the future.

With regard to the future, let me ask Michael to give a sense of how we look at the orals and how they fit into that kind of a concept.

Thank you, Jeremy.

Thank you, Gregg.

Very important question and of course just to amplify what Jeremy said, when you look at other chronic diseases, combination therapy is very usual, not that usual in MS. As we evaluate potential combinations we're interested in complementarity.

The first thing that patients want is ways to have impact on the disease, the progression, the disability, as well as the relapse rate and so we're very interested in drugs that are complementary in actions, different in their effects, and in particular, these are drugs that patients are going to be on for a long time.

Copaxone is one drug with this incredible safety record, more than 20 years' experience, great efficacy.

Laquinimod is another drug that acts in a different way, acts on a totally different pathway, and actually has major effect on progression and brain volume.

So we're of course very interested to look at combinations, not only in terms of subcutaneous combinations with Copaxone, but also looking at oral combinations with laquinimod and as such, we're looking -- the most important thing is safe combinations, we need.

We want to look at drugs in particular that have long safety records.

Of course, we're considering newer orals such as the S1P1 inhibitors, the NRF2 activators, but each of them has particular liabilities and we're going to assess each of them as potential combinations with oral laquinimod.

And then of course, because of mechanism of action, complementarity, great safety record, we're excited about the combination of Copaxone with laquinimod in novel formulations.

Let me walk on just a little couple things, as Michael has said, for us, the critical fact here is safety, and as we look at the combination with other orals, we really must look at the side effects of some of these orals, some of them which are already in the market, others of which are being developed and our intent here is to understand deeply some of the trends that we're seeing in safety profiles coming out on publications.

And it's important to us because we think we can drive the area of MS to a whole new level as we start to examine this type of approach.

Let me just talk quickly about the two other points you raised.

One was have we looked at assets that aren't core.

Yes, we have.

We continue to do that.

We will definitely be bringing over the next period of time a hard look at some of these assets that simply don't fit with us or would be better suited with others.

In part, the way we look at this is to consider what are the things that are best partnered with third parties, what are the things that we simply believe that should be sold up and monetized, and lastly, we're looking at also those that we think that should be stopped.

So there's a whole sequence of events there.

And I'll turn over briefly to Eyal.

Your last question related to the cost structure and savings in this.

One of the first things I did when we got here was to ask Eyal with his team to lead a really solid review of not just our cost structure, but really the basic framework of the Company and we're able to unpack a lot of information out of that, leading me to believe that over time there's a tremendous amount of efficiency and capability that we can build into the Company as we reshape it.

So Eyal, perhaps you'd make a comment on that.

Thanks.

A few things.

Jeremy, you mentioned, over the past few months we've taken a very, very deep look at the way we spend money and drew many conclusions and built a plan, a long-term plan to reshape Teva and do a big effort on how we optimize our expenses.

We'll discuss that in our Analyst Day, December 11th.

I don't want to preempt.

However, you asked about reallocation of cost saving and what do we plan to do with that.

We're a pharmaceutical Company.

We want to free up resources and spend more money on R&D if we can in the future, and of course, this is part of our plans of cost saving and being more efficient.

Corey Davis, Jefferies.

Thanks very much.

Two questions.

First with the charge that you took to the R&D that included that bipolar indication of Nuvigil, does that mean that you're no longer going to pursue that indication, that you won't file it with the FDA?

And second question, with your new market strategy over in Europe to focus on the more profitable growth, does that mean that you're going to have to go through more periods of revenue declines to improve the profitability on that revenue until it hits some sort of new steady state equilibrium.

Let's walk back on that and perhaps what we can do is, why don't you deal with Europe first and we'll talk about the pipeline subsequently.

Okay.

Happy to do so.

Good morning, Corey.

Frankly, for the European business going -- Europe is in what has been for the last years, very much in the control of government issued reforms, resulting in some price cuts, increased penetration of generics.

And there's not so much that we as a Company can do about it.

What we can do is the approach that we take to that market.

So we have focused more on sustainable profitability, not going after every last bit of market share, but still we want to maintain our leading market position, right.

On top, we have really also adapted our organization and our teams where we've already reduced about 2% of our commercial workforce this year in Europe and going forward we're doing a bit more of that with alignment and without impacting the commercial power.

It's very difficult to predict what the European markets are going to do, but there's good opportunities, for instance, in Italy where there's new legislation that will give an increased penetration.

Recently we've seen very good increase in penetration of generics in France as well.

So frankly, I do not expect that the revenue's going to go much below what we have now.

I really see midterms even very good opportunities, because Europe still is a continent with 500 million fairly wealthy people that expect and demand good healthcare services, and generics are the solution for this, and we are best placed to deliver that.

We really have a fantastic position in that.

But the very short term is going to be difficult to predict and we have adapted our approach both in profitability and organization and that's what we have decided to do.

And then going back to the Nuvigil question, Michael, will you handle that please.

Yes, of course.

Thank you, Jeremy.

Thanks, Corey.

Important question.

We do have, as you well know, positive results from the first of three Phase III studies with Nuvigil.

Our second study is going to read out at the -- towards the end of this year and certainly if positive, we do plan to file an sNDA for this indication.

This is important.

This will really provide another option for patients with a very serious disorder, bipolar depression, and so we're moving ahead with Nuvigil, and are encouraged by the first study, and look forward to seeing the results of the second.

Okay.

Thanks very much.

Shivani Mohapatra, RBC Capital.

Hi.

Thanks for taking the question.

I've got a couple, both for Jeremy.

So first, Jeremy, I know you're not giving us 2013 guidance, but when we look at our model, we see that you have a number of large first to file opportunities in 2012 and you don't have those in 2013.

So can you talk conceptually on how you see revenue and earnings growth next year?

And if it's not possible to grow on an organic basis, what you can do in terms of capital allocation, et cetera.

And then second, just a quick one on return on capital and return on investment.

You've talked about this before.

But I was wondering if you could just talk about what you think a good hurdle rate is for you when you are looking at where to invest.

Thank you.

Shivani, good morning to you, and thanks for the question.

Couple questions there, both of which I'd like to have the opportunity to answer in depth.

First of all, when we give guidance and secondly at the Investor Day.

So if you don't mind, I'm going to leave those for the day that we have coming up.

We're still in the process of completing our work plan and we will provide formal guidance no later than December 11th.

Okay.

Does that mean you could give us guidance before December 11th?

I'll just repeat, we'll not guide until December 11th.

Okay.

Thanks.

Tim Chiang, CRT Capital.

Hi.

Thanks.

Jeremy, I wanted to ask you a little bit about how you sort of view the pharmaceutical industry globally going forward, heading into 2013.

I mean, you've traditionally come from a branded background and certainly Teva's the largest generic drug Company in the world.

Maybe just a really high level question, do you expect to see more consolidation coming from Teva in 2013?

Well, broad question.

So more consolidation meaning larger M&A, just let me clarify that question.

Yes, absolutely, more M&A, you know, certainly with the debt markets being so accessible by pharmaceutical companies, would it make sense for Teva to increase its leverage?

Good point.

Look, I think first of all, going into 2013 we're going to take a very disciplined approach to M&A and considering anything that we would buy.

I think from my perspective, yes, we will certainly look at small assets.

I'm not anticipating any major -- we're not anticipating leveraging up to secure large acquisitions at all.

At this stage, though, if you look at the industry as a whole you are correct with the cost of capital being quite as low, that is a lot of people are thinking hard about what they can do.

And interestingly enough, at the same time, we're also getting a lot of the pharmaceutical companies who have finally recognized that they need to be out of some of the marketplaces, are willing to divest assets that are not a clear fit with their branded.

So it's going both ways.

I'm seeing a lot of very interesting opportunities which are crossing our desks in emerging markets and also in Europe as well.

So we're going to look at them all but there's nothing -- there's no indication and you shouldn't take any indication that we're embarking on a process to leverage ourself up to secure large acquisition.

Okay.

Jeremy, maybe one follow-up on laquinimod.

I know that you had indicated you're doing a third trial.

I think the market has always been a bit concerned about the efficacy with laquinimod.

Do you think that the market is correct in its judgment or do you think that the market has sort of missed the opportunity already that laquinimod might provide longer term?

You know, Tim, I've got great respect for the market.

You guys do a lot of research going around the industry and talking to different people.

However, we had a chance to really dig into the science and understanding of laquinimod and so let me just say that we are confident that what we're seeing certainly as we look deeply into the science and I'm reiterating the science, I'm not talking about necessarily the clinical results in the past, I'm talking about the science and the clinical data that he we have at our fingertips, we're very confident about this molecule, having great potential.

Now, we're going to explore that fully, in the past that hasn't been fully explored.

Let me ask Michael to step in on this.

It's important to remember what Michael had mentioned previously, and that is the potential not only for being a single agent, but also for being a backbone to combination therapies.

It's very important to understand what the kind of characteristics of a molecule would have to be to make it that.

Michael, why don't you comment on the factors we know them a little bit about laquinimod.

Yes, thank you Jeremy.

Laquinimod is actually a highly efficacious agent.

When you looked at the -- this was reported at ECTRIMS, the meta analysis of the data showed highly significant improvements in disability and in progression, but also relapse rate, as well as improvement in quality of life and also brain volume.

So on all the parameters and end points that matter to the physicians and patients from relapse rate, disability, progression, which is a major issue for patients, brain volume loss, and importantly, quality of life, laquinimod had spectacular results.

All of this in the face of an outstanding safety record, easily tolerated, no gastrointestinal side effects, no issues that really are raising any concern, a unique novel mechanism of action.

So we're excited.

We're going to explore this fully.

One of the Phase III studies was not adequately powered.

The first study was.

The second study not.

If you did the meta analysis, profoundly significant results across the issues that matter to patients and doctors.

So with an outstanding safety record and tolerability.

Not just serious side effects but for patients, an outstanding tolerability.

No serious side effects.

Jami Rubin, Goldman Sachs.

Hi, this is Ariel Herman in for Jami.

So our question, we just noticed that you guys didn't do buybacks this quarter.

We were just hoping to get an idea of the Board's appetite for increasing buybacks and/or the dividend.

I'm sorry, I didn't catch the name.

Could you repeat that again.

Sorry, it's Ariel Herman.

Hi Ariel.

First of all, listen, I'm going to give you an overview philosophy of the Company and then I'll ask Eyal to comment briefly on the buyback.

First of all, Teva's approach to capital allocation is and will be extremely disciplined and we are balancing the needs of our shareholders with those of business development and capital requirements internally.

But we, all investors should feel extremely comfortable that we are conscious of the needs of the different stakeholders and we will be extremely focused on total shareholder return in that focus.

With regard to -- and very disciplined.

Very disciplined.

Let me just ask then for Eyal to speak specifically and briefly to our share buyback program.

Yes, just to remind, we have a $3 billion plan that was approved by our Board last December.

We so far this year used close to $700 million of this three year program.

We look at buyback every quarter and make a decision where and when to enter the market, considering the corporate priority.

We paid down almost $0.5 billion in debt this quarter.

We'll keep evaluating the program as we go along.

Thank you.

David Amsellem, Piper Jaffray.

Hi, this is Trevor Davis on for David Amsellem.

I appreciate you taking the questions.

So just a few quick ones on the brand business.

First, what kind of life cycle management work are you doing on Treanda, given that the orphan status expiry is coming up in 2015.

And then just two quick ones on the pipeline.

On the tamper resistant ER Hydrocodone product, given the Phase III setback that you disclosed in the past, are you still pursuing development of this product or is this something that is not going to be a priority for you going forward?

And just lastly, on the MS franchise, are you looking at other development opportunities outside of laquinimod and Copaxone in line extensions, and is this a priority in terms of your business development.

Thanks.

Terrific.

I'm sorry, again, our speaker's not playing up, I missed your name.

Can you repeat it again.

Sure, it's Trevor Davis.

Okay.

Again, very blurred.

My apologies.

Maybe it's just the ear.

Quite a number of questions there.

Let me first of all walk through the Treanda, and I think Treanda followed by -- Michael, why don't you handle these questions because they're all pretty much pipeline related, and then coming back to the business development, just I'll make one comment, absolutely.

We are looking at multiple different opportunities in MS. It is a major strategic focus for us and this is an area which we look at as wanting to offer patients every possible benefit.

But we also look at MS in the context of an overall neurodegenerative approach and I'll let Michael now speak briefly to the next -- to the two other questions that you had.

Thank you, Jeremy.

So we're committed of course to the life cycle management of Treanda.

As part of that, we're committed to bringing the indication for the -- front line indication for NHL to the US market.

We recently heard that progression-free survival data from the BRIGHT study will be required to support a front line approval and we're currently examining all options to obtain this requested data.

This drug is, again, very useful.

It's been outstanding in terms of its effects of efficacy, and we're committed to finding a way to get this approved for front line NHL.

On the other areas, in terms of our pipeline and expansion, what's surprising and interesting about drugs like laquinimod is that they act on various inflammatory pathways that are actually important in other disorders of the nervous system, such as Alzheimer's, ALS, Huntington's, Parkinson's.

And so we're busy of course both exploring some preclinical data, proof of concept, proof of principle, and we'll be exploring laquinimod in other areas and more of that to come on the Investor Day.

Sounds great.

Thank you.

Ken Cacciatore, Cowen and Company.

Hi, thanks, guys.

Just following up on your discussion on laquinimod, in the Crohn's trial, was wondering if you could discuss the inverse dose response that we saw and also maybe discuss--and I know this may be preempting December 11th but maybe discuss the next moves here.

Do you need to do another dose ranging or do you think this is ready to move into a pivotal trial.

And then second question would be, you did highlight CNS and respiratory key franchises.

Wondering if oncology and women's health are considerations for divestiture or are they still core to Teva going forward?

Thank you.

Good morning to you.

Good questions, again.

Michael, would you handle both questions, please.

I think you've got them.

It's not so much a preempt.

We'll be able to go in depth in some of these things during the Investor Day and it's good that we get a chance to talk about some of them now as well.

So thank you, Jeremy, and thank you for the opportunity to comment on the Crohn's data.

I would say it's very important not to over-read the Crohn's data.

This was a Phase II A study in a small number of patients.

So that's very important.

If you look at the number of patients treated it was in the order of 30.

Interestingly, the laquinimod 0.5 and also 1 milligram showed effects, 0.5, the major effect, 1 milligram, slightly less robust.

And in higher doses, 1.5 and 2, there had been some dropout of patients, so the numbers were really significantly decreased from a number already that was small, as would be expected for a Phase II A trial.

So we're encouraged by the data.

There are many potential reasons for why there might have been an inverse dose relationship.

One of them might have been just the power to detect.

It is important that one of the biochemical indices for effect which is faecal calprotectin was reduced in all of them.

The clinical effects were only seen in the lower dose.

This encourages us to do much more rigorous now Phase II studies, focusing on dose relationship.

We will sort this out.

We're encouraged.

This was an effect that occurred within a week against all outcome measures, which is quite remarkable, and I think important not to over-read the data, but it provides sufficient proof of concept for further exploration in detailed studies to follow.

Michael, would you -- I don't -- in case anybody thinks, we weren't trying to avoid the question on tetra hydrocodone.

Would you quickly comment on that.

Yes.

We missed our end point in the last study.

We've revised this and continuing with the TD hydrocodone study, and we're expecting, this is a study that has some slight changes in design, and we're expecting to be successful in the next Phase III.

We still see a tremendous opportunity, both in the opioid market for pain, and of course, non-opioid as well, which is part of our R&D perspective, and we're continuing with the TD hydrocodone trial in an effort to reach -- we're confident we can reach the appropriate end points.

Florent Cespedes, Exane BNP.

Good afternoon, gentlemen.

Thank you very much for taking my questions.

Two quick ones.

Could we have more color on the competitive environment on the respiratory and on the women's health products?

How do you see their performance going forward?

And second question on OTC, we start to see an acceleration of the OTC business.

Should we continue to see this going forward?

And could we have more color on the drivers?

Thank you.

Really as far as I can see three questions here, OTC, women's health and respiratory.

Let me go in inverse, I'll -- Florent, I'm going to ask Rob to comment on OTC, and then we'll go to -- and perhaps on respiratory as well.

I'll answer on the women's health.

With regard -- just a comment on the OTC.

I want to say that this is a -- we're very, very pleased with our -- as I mentioned, we're very pleased with our alliance.

This is something that we think that P&G have been great partners to work with.

We're learning a lot from each other.

The partnership is evolving and it continues to evolve.

We've been very successful and particularly pleased by some of the results that we're seeing, early results with Vicks.

But I think let me have Rob who is now -- we have a core set of senior people watching over this, the PG&T alliance, and so Rob whose got hands on experience with this can give you some color on it.

With pleasure, Jeremy and Florent.

We have launched Vicks already previous quarter in Poland and Russia and continue to see really fantastic success there.

So far, we're extremely happy.

In Poland, for instance, Vicks is on its way to become the best OTC launch in the last 10 years.

It's really doing extremely well, both in sales into pharmacies but also in the last weeks in sell-out to real patients.

And for instance, in Germany, we are really outperforming with our OTC franchise, the overall market, the overall market is in a slight decline.

We're increasing.

I'm confident that going forward we'll see more increase in OTC.

So I think on the respiratory side, do you want to make any comments, Rob or Bill?

I pass it to Bill.

Bill?

Sure.

Thanks for the question, Florent.

With respect to respiratory, we're doing very well.

I'm very excited with the progression for ProAir in the SABA space.

We're at 51.7% share.

Our numbers, our revenues for the quarter both for ProAir and Qvar were impacted by some late charges due to healthcare reform that came in from California and a couple of other states.

But absent that, both franchises actually in a weak respiratory season are progressing very nicely.

TRX data as I said for ProAir is 51.7%.

And our TRX share is up to 26.2% in Qvar in the ICS category so we're doing real well, and in fact, our growth is up about 25% in Qvar against Q3 of 2011.

So really progressing very well in respiratory, so we really like this space.

Thanks, Bill.

Michael, will you just quickly comment on the pipeline and in addition to that, briefly on women's health.

I think we're running a little short on time.

Thank you, Jeremy.

Just to make it short, there's been some significant progress in our pipeline in respiratory, in particular in the BF Spiromax, where we've now shown bioequivalents for both the mid and high strength products.

These are products that are combined products, corticosteroid and beta two agonists for treatment of asthma and COPD.

This is a big breakthrough for us.

The Spiromax is a great platform and this is going to be an effective asthma medication in a novel and easy to use inhaler and we're looking to file this in Europe early 2013.

On the women's health, of course Teva's place in contraception is profound.

We're looking at all kinds of novel ways to improve contraception, both devices as well as approaches.

But we're going beyond that, looking at women's health in areas of unmet need beyond contraception and these include things like endometriosis, fibrosis, these are important for the future.

And then of course with women predominant in the aging population looking to identify particular needs for women across the spectrum of the life of women, and focusing in some significant opportunities at different stages of the life of women in multiple geographies.

Thank you very much.

Randall Stanicky, Canaccord Genuity.

Great, thanks guys.

Two very quick ones, one for Bill and then one probably for Jeremy.

First, Bill, can you maybe just help us understand the US generics business and really more from a run rate perspective.

You had a great first half, some of those products are obviously seeing competition.

How do we think about the base business there?

What are the big potential launches in '13 that can add a little to growth or clip what could be a tough comp?

Randall, thanks for the question.

You know, you heard the earlier data, right, that we launched nine products in the quarter with $8 billion of innovative value bringing us to roughly 20 products for the year worth about $23 billion in innovator value.

We have potential for as many as 10 more launches in the fourth quarter.

And so when you look at that, the potential for 30 launches in a year, that's a big year, probably -- and I was trying to think through as I looked at my records before the call, I don't remember a year that we've launched 30 products in a long, long time.

So when you really think about the comparable, I think you've got it right.

2013 is a very strong year for launches, lots of them, some of them weren't as large as others, but great dollars coming in in 2012.

You don't have that same impact in 2013.

When you look at 2013, do we have launches?

Yes, we do.

We have a number of them, and we can think of products such as [tizolamide] and a couple of others.

And niacin that came in through the Barr acquisition, but absent that, nothing like we saw in 2012.

You do have an issue there that you really need to think broadly about.

When you think about the base business, we think the base business still remains very, very strong.

It is a very commoditized market.

You've got to be set up to handle that.

But for the long run, generics with the advent of ACA are just going to continue to grow in the US, and you just have to be positioned to be able to handle that.

Is this a $4 billion or $4.5 billion sort of -- I know before a year ago you gave us sort of the plus or minus outlook on the business.

Is there a similar number that you can look to now, given the current conditions?

I think we've talked about this before.

This was -- it's a $4 billion-ish business.

It goes up and down based on exclusivities.

And so I think that's really the way you've got to think about this.

There's that base that we just talked about that's strong, growing with ACA.

I think that's important.

But it's -- think of your base as around a $4 billion business, up and down.

Okay.

And that's helpful.

And then Jeremy, just a question, maybe a two-parter for you.

Maybe I missed it.

Did you provide us the time line for when we're going to get 2013 guidance?

And then just specifically, there's been a lot of discussion around this, but is the Board actively considering boosting the dividend as one of the options that we could get on December 11th?

Thanks.

I think I made it pretty clear, we will provide formal guidance no later than December 11 this year.

And with regards to the Board's deliberations, I'm not prepared to go into it.

As I said to you, we have a very conscious approach to capital allocation and a very, very disciplined approach in addition to which we're conscious of the need to support shareholders in this process as well as build the Company.

Okay.

Great.

Thanks, guys.

Ronny Gal, Sanford and Bernstein.

Good morning, good afternoon, thank you very much for taking the questions.

I've got two.

First, the rest of the world number, looked a little bit weaker if you just think about emerging markets.

Would you be able to break out for us a little bit the growth in Eastern Europe and Lat Am versus the more established markets?

Second on the respiratory, it's a two-part.

First, it's good to hear about the Spiromax getting to bioequivalents and being able to submit in Europe.

Do you think you'll be in time for the expiry of the molecule patent in the United States?

That is, mid-2015.

And second, we've seen the mepolizumab study design for their Phase III, the subcutaneous multi-injection.

Would you be able to make reslizumab competitive against that product?

Why don't we start with Eyal.

Emerging markets, our emerging markets are part of the rest of the world category, but the rest of the world includes very mature markets like Israel, like Canada and emerging markets like Latin America, Eastern Europe, and what is emerging market for us is Japan.

This quarter kind of balance each other, especially Canada had a very, very strong quarter last year, in the comparison and basically we are running on the same rate for the past three quarters, so this is not new, and has an impact on the entire group, including some foreign exchange impacts as well, but that was it.

The emerging market products have done well there.

On the patent expiry, perhaps Rich or Michael you'd like to have an answer on that.

Rich, do you want to comment?

Could you repeat the question, please.

The question was do you expect to be in the US market with in mid-2015 when the compound patents expire for Advair?

I think the issue there, Ronnie, this is Bill Marth, is that the data that was generated for Europe is for Europe, and that data is not for the US.

I think our position in respiratory in the US has been very clear for a long time, that the rules that allow us to get into the European market for generics with respect to respiratory are not the same as they are in the US.

We still believe very strongly that you're going to need clinical studies, and until l Michael or the FDA tell me differently we're going to be approaching it that way.

I'm aware of that.

The device patent expires in 2016 but if you want to choose to go the 505(b)(2) way, you have an option of coming in middle 2015 with a composition of meta expire on the compounds.

In the past you've kind of suggested that you will be able to come to the market with that formulation at that point, and then you weren't quite sure, and I'm kind of trying to get there, catch up, whether based on your recent results that expectation has changed?

I'd just comment on that.

We're very pleased with this bioequivalents result.

We're continuing in Europe and I'd say our US strategy is still being decided on and formulated.

Let me just also comment on reslizumab, Ronny, that you asked about.

Of course, the data from -- recent data validates this as a target I05 antagonist.

We've of course in the middle of Phase III studies with our intravenous program, but we see the major application in the subQ.

And we're pursuing reslizumab I'd say with great progress and intensity, both for IV, and in particular for subQ applications, and you'll hear more about that at the Investor Day.

Thank you very much.

Thank you.

Dr. Levin, do you have any final remarks?

Thank you very much.

I do appreciate everybody joining us this morning and for those elsewhere this afternoon.

Again, for those of you in the East Coast, our thoughts are with you.

I know it's really rough and I know it was particularly tough for some of you to get on this call, so my thanks to you.

For the rest, we look forward to speaking with you later in the year, and certainly look forward to seeing those of you who can come and join us on December 11th.

Thank you, ladies and gentlemen.

This concludes today's conference.

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