Teva Pharmaceutical Industries Ltd (TEVA) 2014 Q2 法說會逐字稿

Welcome to the Teva second-quarter results conference call.

(Operator Instructions)

I'll advise you this conference is being recorded today on Thursday, 31 of July 2014.

I'd now like to turn the conference over to your speaker for today, Mr. Kevin Mannix.

Please go ahead, sir.

Thank you.

Good morning and good afternoon, everyone.

Thank you for joining us for this call to discuss Teva's second-quarter 2014 financial results.

I'm joined today by our President and CEO, Erez Vigodman; our Chief Financial Officer, Eyal Desheh; Dr. Michael Hayden, President of Global R&D and Chief Scientific Officer; Siggi Olafsson, President and Chief Executive Officer - Global Generic Medicines Group; Rich Egosi, Group Executive Vice President, Chief Legal Officer, and Company Secretary; Larry Downey, President - North American Specialty Medicines; and Jon Congleton, Senior Vice President and Head of Global CNS.

Eyal will start by providing a review of our financial results from the quarter, then Erez will spend some time discussing his perspectives on the business and outlook.

We will then open the call for questions.

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

Actual results could differ materially from those projected in the forward-looking statements.

Factors that could cause actual results to differ are 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, reserves and impairment, and related tax effects.

These are amounts that we cannot predict at this point.

We present these non-GAAP figures to show you how the Management team and our Board of Directors look at our financial data.

With that, I'll now turn the call over to Erez.

Erez, if you would, please?

This is Eyal Desheh, good morning and good afternoon, everyone.

I will start with a financial review, it will be followed by Erez with his view of our business and division.

So, I'm happy to provide the details on the business and financial results for the second quarter of 2014.

As always, we are presenting most of our results on a non-GAAP basis, while our GAAP results appear in our quarterly press release as well as in the 6-k which we will file later today.

I hope you can all view the slides, which is are accompanying this presentation.

As you can see from the results highlight, this was another good quarter, which followed a solid Q1.

We delivered 2% increase in revenues, we drove an 8% year-over-year improvement in our operating profit, 4% increase in net income, and 3% increase in earnings per share.

Cash flow generation for the quarter was also very strong.

As you know, we have two possible scenarios for profits and earnings per share this year, depending on the outcome of generic competition to Copaxone.

We are improving our guidance for both scenarios today.

For the non-generic Copaxone scenario, we see revenues at a range of $19.8 billion to $20.8 billion, and earnings per share at a range of $4.90 to $5.10.

This represented an improvement of $0.05 to the main point of our guidance.

For the generic Copaxone scenario we are updating the EPS model to $4.50 to $4.80, assuming a generic introduction in August this year.

Please note that this is a model only, and it does not represent any prediction for a near-term generic launch.

When we look at the year compared to our original plan, we anticipate an improvement in sale of Copaxone, which will be offset by higher R&D expenses, weakness in our API business, and some weakness in our business in Japan.

Our full non-GAAP P&L represents a small decline in gross margin, due to the mix of products sold.

Less Copaxone compared to Q2 last year, and more generic products.

A slight increase in R&D, and a reduction in SG&A.

We are seeing the benefits of our cost reduction program, which resulted in an improvement in operating margin from 25.6% to 27.1% this quarter.

As we have seen from the beginning of 2014, our effective tax rate is up from 13.7% last year to 18.6% as a result of the expiration last year of some of our tax incentives in Israel.

Our fully diluted share count, which impacts EPS, was up from 850 million shares to 857 million shares, as a result of higher share prices compared to last year, which caused many stock options to enter the money, and become part of the fully diluted count.

GAAP earnings per share was $0.87 per share, same as Q1 this year.

This was significantly higher than in Q2 last year, in which we reported a loss due to the one-time legal settlement expenses.

Please see the list of the non-GAAP adjustment, consisting mostly of the amortization expenses on the next slide.

Revenues.

The improvement in sales this quarter was driven by the growth of our global generic business, primarily in the US.

This increase resulted mainly from a full quarter of sales of Capecitabine, generic Xeloda, which was launched exclusively in March 2014, and the launch of Omega-3, generic Lovaza, for which we are first to market.

Our specialty business other than Copaxone delivered strong growth as well, with good performance of Azilect, Treanda and ProAir.

Sales of Copaxone were $131 million lower than last year and the entire variance came from the US market, while Copaxone sales in Europe demonstrated nice growth.

So let me review Copaxone.

As you can see on the next slide, Copaxone sales in the US, this is a US business only, Copaxone sales in the US this quarter were mostly impacted by inventory levels, while the sequential improvements in TRx, and we can see that on the right side of the slide, had a positive impact on demand, a decline in channel inventory, reduced US sales compared to last year and compared to the first quarter of this year.

In the next slide, you can see a demonstration and a bridge of what has happened compared to Q1 this year.

When we compare Q1 to Q2 this year, in Q1, we benefited from the build-up of 40-milligram inventory due to the launch, which did not repeat in Q2.

In addition, due to uncertainties regarding a possible launch of generic Copaxone in Q2, which as you know did not happen, we saw a decline in 20-milligram inventory, as our customers continued to sell and not refill their inventory.

The growth in generic sales made it 50% of our total sales, Copaxone, as you can see on the next slide accounted for 19% of total sales, and other specialties now selling more than Copaxone accounted for 21% of total sales.

When we look at the revenue break down by geography, the market mix remains stable, US accounting for about 50% of our total sales, Europe for 30%, and the rest of the world 20%.

Looking at what impacted profitability this quarter, the improvement of operating profit and profitability was driven by strong results of our global generic business, with profit improvement of 41% compared to last year.

Launch of generic Xeloda in March and generic Lovaza this quarter in the US market, together with improvements in profitability in Europe, led to the better results.

Copaxone profit contribution was down following the decline in sales, and our other specialty products, especially Azilect, Treanda, ProAir, showed good improvement contributing to $57 million to the improvement in operating profit.

So when we look at profitability by segment this quarter, profit contribution of the generic business increased from 24% last year to 32% of total this year.

While Copaxone contribution was down from 51%, it was more than half of our profit last year, to 42% this year.

Foreign exchange, the impact of foreign exchange rate was minimal this quarter, improving sales by $16 million and reducing our non-GAAP operating income by $16 million.

Cash flow generation in Q2 this year was strong, and demonstrated continuous improvements, quarter after quarter after quarter.

Cash flow from operations before legal settlement payment was $1.25 billion, an increase of 43% compared to Q2 of last year.

And finally, our financial ratios continued to improve.

Total debt was down to $11.2 billion.

Financial leverage declined to 32%, and debt to EBITDA ratio is now under 2, in fact, 1.89 times.

Our Board approved its quarterly dividend payment of NIS1.21 per share, or $0.35 per share in US dollars.

This is similar to last year.

So I'd like to summarize, thank you all very much for your attention, and I would now like to turn the call over to Erez discuss the business outlook and his vision.

Erez?

Thank you, Eyal.

Good morning, good afternoon.

We make progress on all our most wins for 2014, getting first our house in order, solidifying the foundation of Teva, maintaining our Copaxone franchise, implementing organic growth initiatives, and by the same time, exercising the efforts which are required for differentiating Teva, and for the introduction of new advantages to the industry.

We are committed and on track to deliver gross savings of $1 billion by the end of 2014, and $2 billion by the end of 2017, with our revised target of $800 million flowing to our bottom line by 2017.

The additional net savings emanates from being more efficient and effective in leveraging our sources and focusing effort and investments on TAs, R&D, sales, and marketing.

During the quarter, we have reconfigured our organizational structure.

This slide manifests the previous organizational structure with five business units, three core processes, and seven enabling processes.

This is the new organizational structure.

As of July 1, we are implementing our new lean, simplified, and more effective organizational structure, spear-headed by two fully integrated business units, the global specialty medicine group headed by Dr. Rob Koremans, and the global generic medicine group, headed by Siggi Olafsson.

The global integration of all our generic businesses under one roof, with clear direction, set of targets, priorities and under the right leadership will enable us to cement our global leadership position, and to unlock the significant value that stems from such a position.

Maintaining the Copaxone franchise.

Copaxone 40-milligram has exceeded our goals and expectations.

TRx volume rate at 51%, NRx volume rate at 52%.

Copaxone 40-milligram TRx share of the US MS market is 16.9%.

Copaxone family US TRx trend stabilizing post 40-milligram launch, Copaxone still outsells the number-two RRMS therapy 2 to 1 in the US.

One slide tells the entire story.

This is the competitive landscape without Copaxone and Tecfidera.

The very impressive uptake of Tecfidera since its launch in 2013 has made it the second leading therapy in the space.

Its emergence came at the expense of most of the other therapies, including Copaxone, that went down from 40% market share to 30% market share until the launch of 40 milligrams, which has gained in five months 16.9% market share, and has been stabilizing the entire Copaxone family around 33 plus market share at this stage.

I would like to ask Rich Egosi to provide us with a very short focused status on the legal front.

Thank you, and hello, everybody.

Just a brief update.

The Supreme Court here on our appeal has now been set for Wednesday, October 15, and we expect a decision later this Fall or early next year.

We are pleased that the Court agreed to hear our case, and we are confident in our position.

We believe the correct legal standard is deference to the District Court in claims construction cases, and I remind you that the Chief Justice specifically noted that we've shown a fair prospect of success on the merits.

In addition, our position has received significant support from third parties that have filed Amicus briefs to date with the court.

I'd also like to remind everyone that any Company that chooses to launch a purported generic of Copaxone at this point, assuming regulatory approval, with the Supreme Court decision still pending, would be doing so at risk and could potentially subject to treble damages in the billions of dollars.

I'm also pleased that the court in India has agreed to consider our request for a preliminary injunction of the Natco product, which would prevent export from India.

The hearing is scheduled for August 6 or 7, and we believe that the Natco Mylan process infringes our Indian patents, and we are pleased the court will finally hear our case on the merits.

Finally, I will mention that we are expecting a response from the FDA by the deadline of December 1 on our most recent Citizen's Petition, which include our gene expression data, and Michael will provide further comment on the importance of that data.

Thank you, Richard.

At the request of the FDA on July 2, we submitted another Citizen's Petition which contains significant new data that represents the analysis of the entire genome 45,000 genes, and looked at the expression relative to Copaxone and other purported generics in mouse, human and patient cells.

The analysis was undertaken using validated and very standard but stringent robust methodologies, with high numbers of replicates, conditions, and time points, and the end result was this, that the expression analysis revealed that none of the purported generics that we analyzed, including that from Natco in India, showed similarity to all aspects of the gene expression patent with Copaxone.

Furthermore, we were able to analyze one purported generic, Probioglat, which is on the market in Mexico, which also showed significant changes, including up regulation of genes that would increase inflammation, and down regulation of genes that would prevent inflammation.

This was supplemented by clinical data, that since the introduction of Probioglat in Mexico, has indicated a three times increase in adverse events following the administration of Probioglat, and a six times increase in relapse rate, compared to Copaxone.

So the importance of this data talks to the necessity, very clear biological understanding, pathways, markers, and in light of this, the FDA has welcomed this new discussion, and has actually put forward a new funding opportunity and new approach for people outside companies and academic groups to provide funding for the characterization and development of new models for characterization of complex molecules.

Thank you.

Thank you, Michael, thank you, Rich.

Driving organic growth, it is clear to us that we should start shifting the focus from conversion to switch, and from maintenance to organic growth.

This is why driving organic growth is an important focus earlier for us, going forward.

I would like to now to ask Siggi Olafsson to share with you the way he sees our opportunities in the generic space.

Thanks, Erez.

First of all, I'm really pleased to be on this call today.

I have to say for a brief moment, this fall I thought I would take a break from earnings calls this summer, but life wouldn't be the same without speaking to all of you, and have these calls.

Driving organic growth and improving our operation margin in the generic business are the key focus areas for me in next few years.

As many of you have heard before, bottom line is the best measure of generic business performance, and we focus on profitable growth.

As an example, we are and will be more selective in participating in tenders in Europe and we will be more selective in what are the key markets we invest in, in the future.

We have a very strong pipeline, both in US and internationally to grow our business, pipeline challenge is a part of our business model and Teva is very good at it.

We can further use our scale and size.

Remember, Teva is top-three position in 21 of the 36 markets in Europe, and Teva is top-three in 30 out of the 62 markets we are operating in today.

We have the largest product offering of any generic Company, we are offering over 1,000 different products globally, and with that, we need to capture pricing opportunities around the world.

The right R&D pipeline is key to our growth going forward.

We select and prioritize the generic development pipelines through global portfolio Management, identifying the right opportunities for the right markets with the right returns for the business.

We have great opportunities in complex generics.

Remember, Teva already has a significant pipeline in complex ingestibles, multiplied release formulation and respiratory product, and there are many more opportunities we already have the expertise and the infrastructure to capture.

Biosimilars are key for portfolio in five-plus years, and we need to make the right investment.

Remember, estimated about 50 products will be valued at more than $500 million annually in the year 2018 and no Company can develop a full pipeline due to the cost of development.

That's why global portfolio selection is the key to our decision.

Teva has a significant growth potential in the emerging market.

We have the ideal business model, offering both specialty medicines and branded generics, having portfolio, pipeline and manufacturing infrastructure to serve these markets well.

I have to say I'm joining Teva at a really, really good time, based on the good results of the generic business showed in the second quarter and I'm excited to take the Company forward.

With that, I hand it back over to Erez.

Thank you, Siggi.

On the specialty front, we'll exercise all of the [OFOs] which are required in order to defend all potential LOEs going forward.

We will successfully execute all our near term launches, and just referring to 2014, beginning of 2015 only, we're talking about DuoResp, Spiromax, Adasuve, Zecuity, Lonquez, Copaxone 40-milligram, Granix, Vantrela, and Plan B One-Step.

These are specialty launches that are planned for 2014, beginning of 2015, all launches that were carried out already.

We will deliver on the promise in our pipeline with 15 products in Phase III through approval, with 9 products in Phase II, and with 18 NTEs approved for development.

We will complete until the end of the year and we will share it with you by year-end, or in the course of first quarter 2015, a comprehensive review of all our TAs, in the quest to take decisions on where to compete, and to craft our unique patient-centric strategy for each one of our future focus areas.

This process has already enabled us to identify more net savings going forward.

We are not yet in a position to share with you the final complete outcome of this process, but we have decided to share relevant insight that pertains to 2 TAs, in the way of manifestation of how we plan to grow organically and unlock value in our specialty business, and how we have been shaping our strategic direction as we move along.

Within our strategic CNS franchise, I would like to focus today on pain.

Our goal here is to become a global leader in pain by 2020.

To go from 4 products in 2014 to 10-plus products in 2020, to increase our annual net sales from $0.5 million in 2014 to more than $2 billion in 2020, to shift our geographic scope from US to global, and to become one of the three leading global players in this space.

We strongly believe that Teva is uniquely positioned to succeed in pain care.

Why pain care?

Number one reason for loss of health globally, strong projected global markets growth by 2020, significant unmet medical need, combination of reformulation and new mechanism of action and technology.

Why Teva?

Existing integrated capabilities and portfolio of assets, unique abuse deterrent technology and generics formulation expertise, and industry-leading patient services and specialty distribution channel.

How we will be doing it?

By combining generic and specialty capabilities with unique technological and formulation expertise, by innovative to create unique solutions, to address patient unmet needs in all pain segments, and by developing or acquire differentiated pain medicine, like Labrys, is a good manifestation of the notion.

We have already a strong patient-centric pipeline to support the goals, and going forward, we plan to launch at least one product on each and every year going forward.

The second TA under the spotlight today is our respiratory franchise.

Our vision here is to become one of the top three global players by providing unique fully-integrated products and solutions of superior quality and value that improve the everyday lives of patients.

Teva is currently the fifth largest respiratory player globally, with a broad-based R&D strategy in diseases, drug classes, devices and technology, one of the strongest pipelines in the industry.

We have been developing a fully integrated approach to address unmet patient needs for novel molecules to innovative devices and technologies, to generic products, and also to services.

We are in a process of developing products in all major categories and diseases, and this slide demonstrates basically the breadth of the pipeline and product portfolio that we will be creating going forward.

Our pipeline will enable us to grow organically, organically, from $1 billion in 2014 to $2.5 billion by 2019, and again, this slide provides you with relevant insights that pertains to the processes going forward.

This example creates also the context for the strategic direction discussion, which we will hold with you early next year.

Teva will transform its business model, transformation don't emerge fully formed.

We will start by unlocking the value from our two newly formed business units.

That's Horizon 1. So in Horizon 1, the notion is to unlock the value that we can generate in each one of our business units, the generic business units, and the specialty business units.

In Horizon 2, we will capture the synergies between the units, and in Horizon 3, we will create full long-term value from integration between the generics and specialty, focusing on relevant TAs that this strategy, pursuing beyond the peer solutions.

M&A will be used in order to support this direction.

We are actively assessing relevant opportunities in all forms.

Thank you.

Operator, we'll take questions now.

(Operator Instructions)

Your first question today comes from the line of David Maris from BMO Capital markets.

My question is for Siggi.

Siggi, obviously, most of the institutional investors know that your track record is fantastic.

I'm interested your perspective on what do you think as the new Head of Teva's most important business, that you need to do to get the edge back?

And what I mean by that is that a lot of investors think that Teva has lost a little bit of its edge or leadership in generics at the margin, and first, do you think that characterization is wrong, and what do you think you need to do to get that back?

And what do you need from the CEO in order to achieve that, if anything?

David, good to hear from you again.

First of all, Teva's a very exciting Company.

Teva basically throughout my career, been in the generic industry for about 20 years.

Teva has been the winner the whole time.

Teva was the Yankees, the Manchester United of the sports world.

They have the most first to file, and recently the focus shifted a little bit to the specialty business.

But the infrastructure and the knowledge, the enthusiasm, and the culture is in the Company.

I really was impressed when I joined the Company, what we want to do, and I'm working very closely with my colleagues to build up more of a first to file pipeline, we do launches at risk in the international markets better than anyone else.

We want to get the edge again on the US side.

We also, I think, what we want to do is to identify what are our key markets going forward.

We are operating today in between 60 and 70 markets around the world and some of our markets don't have the opportunity for growth, significant growth.

But in other markets, we grow significantly and I mentioned before we are top three in 30 markets out of the 62 and that really gives us an edge which I want to take more advantage on.

Working with Erez, he basically put on me to grow the business organically, also to look at the margin, how can we get to the same or similar margin as our competitors.

It's a little bit unfair comparison because our competitors in the industry, some of them count biosimilars as part of generics, others count respiratory as part of generics, and we count that within the specialty line.

But overall, I really feel with the right investment and the right focus, we have the infrastructure to be the winning team again.

Great, well thank you very much.

David, we see an economic and strategic -- significant economic and strategic value in global industry position in generics, so we'll do everything in our power in order to assume the basically global leadership position by a large margin and by the same time, we do everything which is fully in line with the way I have outlined the process is going forward, in terms of value creation from the generic business, as well as for the specialty business, before starting to capture synergies, and pursue more integration between the two.

Great, thank you.

Your next question comes from the line of Gregg Gilbert from Deutsche Bank.

Yes, thanks.

First for Erez, you suggested that you would announce which therapeutic areas are going to stay versus go, if I could say that late this year or early next year but are there other large initiatives or corporate actions you're considering that would also be announced along those lines?

And as part of that, Erez, I think investors assume that Teva would not consider redomiciling the Company for tax reasons, even if it could create significant shareholder value.

Do you agree with that?

And for Siggi, do you feel there are technical capabilities you need to bolster or add at Teva on the generic side?

Thank you.

I'm not sure that I understand the question.

The question wasn't on the basically on our tax level.

The first part of my question is do you plan to announce which therapeutic areas are core and non-core late this year and early next year, and as part of that analysis are there any other announcements about corporate structure or anything else?

That's the first part of the question.

The second part is, would Teva consider redomiciling for tax purposes?

I think investors assume you would not, but I would like some opinions from you on that subject.

Thank you.

Yes, thanks so yes, basically we will announce, and maybe Michael can shed more light on it, we'll announce the main focus area in terms of TAs going forward.

It is important because it is very strongly associated with the strategic direction of Teva going forward, which will be also shared with the Street early next year.

By the way, internally, we have exhausted the cores but we are learning now all of the relevant pieces, in order to be fully equipped before we share it to the market.

And also, the notion is that there is a lot of value that we can analog from solidifying the foundation in the generic business, in the specialty business, so there is no action there.

But the full conjunction of key elements that converge before the end of year or early next year, in terms of our strategic direction and one of them is TA focused, but there are others, in order to create a business model which is different from the one that you'll see today.

So that is the process and we'll share it with you early next year, TA discussion and decisions are important, but there are other elements which will become part of the equation.

On the tax question, I would like to refer it to Eyal.

Hi, Gregg.

Well we don't believe that Teva needs to redomicile in order to improve its tax structure or tax rate.

The tax rate in Israel, despite the fact that it has increased at the beginning of this year, our tax rate today is around 9% to 10% here in Israel, where most of our business is driven from, and it's still one of the best tax rates in the world today, so redomiciling or doing an inversion would not create the advantage that you see most US companies looking for today, not for Teva.

And Gregg on the technical capabilities in Teva, I have to say I'm pleased to see the technical capabilities that the R&D function has.

This has been the benefit of combining the specialty and generic R&D.

Where I want to see probably more investment is in the biosimilar area.

I think we have investment going on.

We have a great knowledge in-house, I think we need to decide what we want to do, especially for the third wave of products.

We have an active program, good going.

With regard to like past technology the Company really has built up a capability in R&D and I was very pleased to see that, and hopefully that will deliver opportunities going forward.

The only two therapeutic areas are dosage forms which we don't cover, which has a value in it, would be ophthalmology and dermatology.

These are therapeutic areas where we work with partners, instead of doing it in house.

I think looking at the portfolio going forward, and the return on the investment, that decision will be taken if we want to invest further in these therapeutic areas.

But overall, I think the technical capability within Teva is strong, based on the close cooperation between specialty and generic developments.

Thank you.

And your next question comes from the line of Ken Cacciatore from Cowen and Company.

Hi, thanks.

Just had a question on Copaxone.

Clearly, you all are doing a great job from a scientific perspective and a legal perspective, but I'm just wondering, as you stare at the conversion rates here, it looks like its flattened out, and the folks that are going to move to the three times weekly have done, and now we're at folks that probably are conformable with the daily.

So just wondering what level of urgency you have internally, understanding the good defenses, but why wouldn't you, or what would possibly move these patients that haven't moved, and why wouldn't you seek now to do a hard conversion to this, what is potentially a better medication, given the convenience benefits?

Thank you.

I'll address it and then I'll ask also Jon to shed more light on that.

Basically, on out switch it is a delicate dance and more patients [pay] the FDA, given also the uncertainty around the 2015 patent validity.

So with the revised conversion rate target of 65% by year-end, we continue to evaluate carefully when the magic moment is, and that's a process that we have been undergoing, and in the course of 2014, beginning of 2015.

Jon, you'd like to add something to that?

Yes, I'll just add a little bit.

Hi, Ken.

Erez having spoken very well to it, we're obviously very pleased with the conversion to date.

I know you've seen the recent numbers now approaching 51% of the Copaxone family being fulfilled by the 40-milligram.

Obviously, we're thrilled with how the patients and physicians have had a great experience with the 40-milligram.

The ability to take the best characterized market-leading asset like Copaxone and provide it in a three times a week, 60% less injections, 50% less adverse events, has been received extremely well by the market.

As you would expect at this point in the launch, about 22 weeks post launch, the rate of conversion is slowing but it continues to grow.

As Erez said, we're targeting roughly 65% by the end of this year.

Right now, just because of the disruption it would represent for patients, the hard switch is not something that we're looking to do immediately, but there will come a point in time where there will be enough of a conversion over that we'll certainly entertain that, just from a logistic and simplicity standpoint.

Thank you.

Your next question comes from the line of Douglas Tsao from Barclays.

Thanks, good morning.

Perhaps Siggi, I just wanted to hear your perspectives in terms of how you see Teva positioned today, given the consolidation we've seen, in terms of your key customers in the generic segment on the purchaser side, all through M&A as well as alliances.

And the differences from some of your prior companies as well, in terms of how the Company might be positioned to capitalize on that opportunity, as well as some of the risks?

Doug, yes.

I think Teva is in a different position.

What I mean by that is, overall, we are such a large supplier and the large customers are looking for strategic partners, and Teva is a really strategic partner.

We touch them at all of their point of location.

Overall if you think about it, we supply the market close to 70 billion tablets annually.

These are significant numbers, and with the pipeline we have in place, we have managed, and we will manage going forward, with these strong customers to build a strategic partnership which in the end will be a win-win.

The difficulties in the markets are companies that only are local in one market or have a limited exposure in the international markets.

Teva clearly, with being top three in 21 markets in Europe, we are really top three in all of the markets where Alliance Boots are operating more or less, and also the same as [Alessio] so we can manage the customer relationship to the best of our ability with the product offering.

Also, over the last two years, the service level of Teva has increased significantly.

We are coming with new products in the market, so I feel that we are in the ideal position to build a win-win relationship with these customers, and I'm positive on this, how this has moved forward over the last two years, because the market needs strong customers, and strong companies to serve it.

Okay, great and then just one follow-up on Copaxone, perhaps I think Jon can chime in here.

I know that you have seen since the launch, some improvement in terms of the managed care coverage for the 40-milligram formulation.

Just curious in terms of an update in terms of where you are, and how you can see that playing out in the course of the year.

Do you see some further gains?

Thank you.

Yes, Doug, actually, I've got Larry Downey here who heads up our North American specialty business.

I'll let him address that.

We have made great progress early on with payers in terms of our access in managed markets, and we're now in our second round of discussions with those payers that have not put 40 on the formulary, and I think that's going to be a real key for us going forward in terms of our continued growth and conversion.

And if we're successful in these discussions I think the fact that a generic has not come on the market for the 20-milligram, that's going to put pressure on these payers to come to the 40-milligram, put it on their formularies.

And is it your experience that given the passage of time, that they are increasingly accepting that they are going to have to ultimately put this on?

Yes, that's our position.

Okay, great, thank you.

Your next question comes from the line of Liav Abraham from Citigroup.

Good morning.

A couple of questions.

Firstly, Erez, you mentioned a Copaxone conversion target, an updated target of 65%.

Can you provide some additional commentary on how you plan to get there?

Currently you're around 50%.

What mechanisms are in place to accelerate the switch outside of a hard switch?

Is it data from the recent Citizen's Petition?

Is it reimbursement tactics?

If you can provide some additional color there.

The second question is on cost savings.

You indicated increased net cost savings.

I was wondering whether you are still evaluating incremental gross cost savings over and above those that have already been identified.

The last time you addressed the Street, you mentioned that you're evaluating incremental rationalization of Teva's supply network, and the potential shutdown of manufacturing plants.

Where are you in this process and when can we expect an update?

And then thirdly, for Siggi, I'd be interested your thoughts on Teva's positioning in the biosimilar space?

And your strategy for augmenting your presence there, particularly inorganically.

Thanks very much.

Hi, Liav.

First on the gross cost savings, I will provide more insights before year-end.

We are still evaluating all of the operational aspects and dimensions, and then we will provide more insights by year-end.

On Copaxone with 1.2 to 1.6 conversion run rate today, we basically have been exercising all commercial efforts, looking at basically commercial opportunity, and at the same time, of course sharing with payers and physicians, all of the relevant insight from our GLACIER study.

So we believe that with all these elements, we will be able to hit the target by the 31st of December 2014, and we will also do everything in our power in order to deliver more than that.

That's basically at this stage, that's the most realistic assumption, and it's based on all of these biomeasures.

And Liav, maybe if I take the biosimilar question, I think overall, through the acquisitions Teva did in the past, we are participating in Wave 1. We have a Company knowledge of the biosimilar development, we have a team in Germany, we have a team in Israel that really knows this space quite well, but there has been limited focus.

We don't have a large pipeline to any means, but we have products, obviously Wave 1 products we already have, Wave 2 we have been very selective what products we are developing, and then obviously we need to look at the third wave of biologic products that are out there.

I think in terms of inorganic growth, we are open to all kinds of relationships.

It could be a joint venture, it could be a co-development venture, it could be an acquisition.

I think what Teva offers is a very strong scientific base, both based on the biosimilars and biologics knowledge we have in the similar space, but also in terms of the specialty development and all of the expertise that has been built within the Company around the Copaxone franchise and other things like that.

So I think we want to invest wisely.

This is something important to us, especially for the long term growth of the Company.

I have been quoted previously to say I wouldn't like to be a General Manager in the Year 2020 for any generic Company if there would be no biosimilars available in my pipeline, so we need to get this right.

We are working very diligently, but we are open to all kinds of business models to make this a reality.

Thank you.

Liav?

The 1.2 to 1.6 conversion run rate that I mentioned before tends to basically our weekly run rate, so that's clear.

Yes.

Okay.

Your next question comes from Sumant Kulkami from Merrill Lynch.

Thanks for taking my question.

The first one is a clarification on Copaxone.

The 65% switch rate target by year-end, is that the same for the exclusive Copaxone scenario and the generic Copaxone scenario?

And we've seen a lot of talk on established product divisions being either divested or potentially divested by major pharma companies.

Would that be something that Teva is interested, or is your scale, does your scale make that unnecessary?

Basically the 65% conversion rate by year-end is applied on both analyses.

And maybe if I take the established product, I think, there's a selected opportunistic, we would, for example, overall, if it would be established products only in Europe or only in the US, I think that wouldn't appeal to us as much, because of our relative strength, but overall, I think this is not a bad business.

This is a slow, declining business.

We have to keep that in mind, so it needs to be managed in the right way.

But it's the opportunity, especially in the branded generic market, where we have a sales force in place, this would be something we would look at for sure, but overall, in the non-branded generic market, it's not the most appealing thing to look at this point in time.

Thanks.

The next question comes from the line of Jami Rubin from Goldman Sachs.

Thank you.

First, I just want to say that I'm hoping that you, Erez, and the members of the management team and Teva employees are safe and your loved ones are safe, and hoping that the conflict ends quickly.

But Erez, just have a couple of questions for you.

On the issue of cost savings, and I know that you will provide more granularity on that later in the year, but you did say that you expect an additional $300 million net to the bottom line.

I think it was $500 million, now you expect 800 million.

Can you just, where is that coming from?

Is that R&D expenses that you are going to cut now, or just give us a sense from where that's coming from?

And just generally on the $2 billion cost cutting program, is that $2 billion being applied evenly across the organization?

Are you targeting lower growth areas, are you targeting lower performance employees?

Just generally speaking how are you going about this?

And then secondly, on the issue of corporate governance, which is obviously of great concern to investors, we've seen some improvement, which is great, the Board size reduced from 15 to 13.

Just wondering what other corporate governance changes are being contemplated, and related to Dr. Frost's retirement from the Board by the end of the year, what candidates are you considering for his replacement?

Are you looking externally as well as internally?

And just asking the question because press reports are saying that the current Vice Chairman, Amir Elstein has been selected for that role.

Thanks very much.

Thanks, Jami, basically for your opening notes, and we appreciate it.

Just on governance, I'm not in a position to nominate the Chairman, it's the role of the Board, but maybe just after the General Assembly yesterday, there is a message that I would like to spell out, and although the Board prevailed in the proxy fight, the message the Board has received from shareholders is clear, which means that the Board is committed to continue and accelerate its efforts to address matters that are important to our shareholders and to improve corporate governance, and you'll see before the next General Assembly other measures that the Board will be accommodating.

That's on governance.

On cost savings, a vast majority of cost savings portend to our generic business, a vast majority.

On the $300 million additional net savings, I mentioned this, but maybe to put it another way.

As it pertains to the strategic direction process that we have been entertaining, and it is clear to us that we shall put much more focus on less TAs, in a way that will enable us to generate a strategy that will differentiate Teva, on the one hand, and by the same time, will enable us to exhaust the capabilities we have in the generic space, in the specialty space, in the way that treats future TAs.

And that process has enabled us to come to conclusions that we are able to leverage much better resources that are directed towards R&D, sales and marketing and there are a few other forms and that's the formal trigger for the additional $300 million net savings.

Operator, next question?

Your next question comes from Michael Faerm from Wells Fargo.

Thanks for taking the question.

Could you provide any color on how you think about capital allocation broadly, and what I mean by that is, how you think about the relative place in your strategy of M&A, share repurchase, potential dividend increases, and so on?

Thank you.

Eyal will start.

I'll then add a number of a few more insights.

Okay, Michael, thank you for the question.

When we look at capital allocation, first of all the good news we are beginning to generate more cash, which we have, as you have seen recently, used to reduce our debt level, make room for additional borrowing, if need be.

We have solidified our dividend policy, we're looking at it.

Our Board is looking at a dividend policy.

Every quarter at the end of last year we increased dividend faster than the growth in net income, and in fact we have been doing this for the past few years, so we believe that Teva is currently has a solid dividend policy, which will continue to be evaluated, also at the second half of this year.

We have right now suspended our buyback program, the stock price has appreciated nicely.

Erez talked in his opening comments about the role of M&A.

We do believe that substantial value can be created in Business Development activities, whether this is by acquiring the next big blockbuster, or a footprint in markets, or expanding our generic business.

So we'll probably look at these possibilities as well, together with the current dividend policy.

And just to really maybe underscore the notion that pertains to M&A, we are basically actively assessing today relevant opportunities in all the dimension and forms that we have shared with you.

On portfolio and pipeline assets, and again, the Labrys acquisition manifests a good technology, the way we look at potential, relevant, interesting attractive pipeline analysis for us.

Technologies here also, there are a number of potential candidates that we have been assessing, microdoses that was conducted is another manifestation of the notion in the way it reinforces the strategic direction that I've started to outline with you.

We need to take the time in order to exhaust the discussion with you, but that's just the manifestation of the notion, how we are creating the full constellation between generic products, novel products, devices, services, with technologies that might be acquired.

Microdose is an example and we have been looking actively on a number of other targets.

A geographic expansion basically, something that is a priority for us.

There are measures of uncertainty, we should be careful, but we look at opportunities also.

And we are, as we said it in the past, we might engage in a larger acquisition, as well.

Thank you.

Your next question comes from the line of Randall Stanicky from RBC Capital Markets.

I just have two follow-ups to that last comment.

Erez, would you be open to pipeline deals if they weren't necessarily immediately accretive?

Because I know one of the hurdle rates you've thrown out there is that M&A that you would pursue would be accretive to non-GAAP earnings.

So is that an option for you?

And then I have one quick follow-up.

Labrys, I think, addresses the question, the answer is yes.

And Labrys is a demonstration of it.

Okay, good and then maybe for Eyal, as you look at acquisition targets, how can we think about the tax rate of some of those targets?

Most of your peers are now foreign companies, or domiciled overseas, with low tax footprints.

As you pursue M&A and particularly large scale M&A, is there an opportunity for you to reduce the tax rate of some of those targets, based on either your Israel footprint or your broader tax structure?

Thanks.

First of all I think we got the question earlier, and I said that just to take care of tax rate in our effective tax rate right now, just under 20%, and our Israeli tax rate is between 9% to 10%, just for that, we would not pursue a transaction that is a motivation for many companies in our industry today.

This is not a motivation of Teva; however, as we did in the past, we will try to make any deal that we look at the most tax efficient as possible, in terms of where the assets are held, where the transaction is conducted.

But to be frank, the major driver is how we can create maximum value from a deal and not what is the tax structure of the deal.

Eyal, understood.

My question is more specific to if we're acquiring a US Company with a 30%-plus tax rate, do you have an opportunity to take that tax rate down based on your current structure over time?

In other words, is there an opportunity based on either your current footprint or tax planning strategies, that can make you more competitive on a relative basis?

Thanks.

Yes, the answer to that of course is yes, but it takes time and as you move the IP and the intellectual property assets, which is where most of the tax should be accumulated to a lower tax rate jurisdiction, and Teva has a number of them in our universe, including Israel, including Europe, and other places.

But as usual these things take time, if you do it all once right on start, it usually drives a huge tax event, and it's so specific, deal by deal, Company by Company, that I can only read very high level in general.

But the answer is that generally yes, but it takes time.

Understood, thank you.

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

Yes, thanks for the question.

Three quick ones.

First, for Siggi, can you talk a little bit, in about your brief tenure in the Teva generics business, talk a little bit about the role of pricing that you saw globally and in the US, and your view on sustainability of that?

Secondly, can you talk about whether there are any markets that you might look to exit, particularly in Western Europe, that's been obviously a strategy in your former company, as you look to improve profitability.

And then finally for Erez, since about 64% of profitability is still coming from MS and other specialty, should we be expecting capital allocation for M&A to be more protecting that branded business, and why wouldn't we want to strengthen that branded footprint, particularly with Copaxone competition in Europe and other geographies, going forward?

Thanks.

David, yes first of all on pricing, I think as I mentioned in my introduction, pricing is very important today maybe five, six, seven years ago, there was never a pricing crisis, especially in the US, in the industry, and I think the Company, due to the consolidation and due to the environment, Company take pricing actions whenever they can.

The same applies a little bit outside now.

We have taken the decision that in some of our markets, we look at the portfolio and we take a pricing decision, and see if we stay for this molecule or not.

So I think the size of Teva helps us, and this is very important part of the commercial execution going forward, to keep this in mind.

There has to be a balance in the whole thing, but we being the largest Company, being probably [14 post] of the overall generic business, this is a very important tool today to maximize the value of the business.

And on top of that obviously, we need to have the same service level, good quality, the right pipeline to be able to take these actions.

But clearly, it's important and Teva is probably in better position than any other Company to explore this possibility.

The market exit, I think in my previous Company, I think that the reason was that exit was, the market was a weakness in the market.

The Company wasn't big enough to operate profitably in the markets chosen.

On the other hand, for Teva, I think Teva is top three in all those markets that my previous company exited previously, so I see that now that my theory to be profitable and have a good business you have to be in top three in those markets is coming through, based on what I see within Teva.

So overall, western European markets are in strong position, we grow the markets for bottom line.

It's difficult in many of these markets to grow the top line, but bottom line growth is our focus.

I mentioned the tenders in Germany, huge impact on top line, but sometimes when you walk out of these you can grow the bottom line.

With regards to other markets, I mentioned previously we want to have key focus on markets.

It doesn't mean that I will have an open-ended commitment to all of the markets around the world and we wouldn't consider moving away from a single market or two, but overall, there's no change in the strategy in Western Europe.

I think we have a very good business, and our strength, the size and scale in these markets helps us enormously to have a profitable business.

And on my end, with the right opportunity, we might pursue a blended business or assets acquisition, that's one.

Number two, I think we need to work out the process with the Street in order to -- I would say, to unlock the value that we see in our pipeline today, and to get here recognition, which we deserve.

Yes, we have shared a number of -- we still have a number of gaps where we want to basically to look for potential acquisitions, but we believe that the opportunities that we have already, and the value that is embedded in our specialty pipeline is something that shall be much better recognized.

And just in this respect, it's maybe the right context to I have shared with you today two TAs, so it's not of course the complete picture.

The complete picture will be shared with you early next year, when we will discuss the strategic direction going forward with you.

But you know just look at the 2 TAs that I've shared with you, and that's, I believe a good manifestation of the notion.

And number three, in everything that we will be doing going forward, the foremost driver is to create and unlock value for our shareholders.

Michael?

I'd just add, just to give you a flavor of the strength of the pipeline, in the first seven months of this year, we've had six approvals, five submissions, and the approvals have been for some very important products, including Copaxone of course, 40 milligrams three times a week.

But in Europe, the DuoResp/Spiromax that essentially was approved or received marketing authorization received in April.

And then in terms of our submissions, again when you look at Albuterol, which is using the same technology now called Respiflex in the United States, where this is going to be very significant, NDA submitted in May, accepted for filing for treatment of asthma and exercise-induced bronchospasm.

So tremendous strength in both the CNS and respiratory franchises, in the way that Erez has outlined.

And then of course some of the really exciting data in terms of clinical results, our ER Hydrocodone Phase III results looks very good, we're on track to file this year, this will be first demonstration of our abuse deterrents in terms of Hydrocodone and there will be many more products to follow using this technology.

Your next question comes from David Risinger from Morgan Stanley.

Yes, thanks very much.

Well first of all, I wanted to just thank you for the detailed slides and more perspectives on your longer term vision.

I have a number of questions.

I wanted to start with cost cutting, so with respect to the cost cutting, the $2 billion gross remains unchanged, the net cost cutting has been stepped up from $500 million to $800 million on more efficient reinvestment.

But I'm just curious that given that the cost cutting guidance is through 2017, whether those cost cutting plans already reflect cost cuts associated with potential competition to ProAir, Nuvigil, and Treanda going generic, or whether those cost cuts would be on top of the $800 million.

The second question is with respect to the $210 million reduction in Copaxone in the quarter, I was hoping that you could characterize that a little bit further.

It says on the slide, channel inventory and launch quantities.

I didn't understand the launch quantities.

Also, there was no generic in May, and so I would have thought that the wholesalers would have restocked in June, but obviously that didn't happen.

So should we expect the $210 million number to basically come into the third quarter instead?

Assuming that there are no generics in the third quarter.

And then finally, have you filed with the FDA to stop manufacturing of the once-daily Copaxone, and if not, when you do later this year, should we just assume that standard six-month clock?

Thank you.

David, this is Eyal.

Let me try to take the first two.

First of all on cost cutting, Erez explained before, and I'll try to reiterate.

Our plans for the gross cost cutting cost reduction right now remains unchanged until 2017, which is about $2 billion.

This is happening mostly in our manufacturing network, in procurement, but also in increasing efficiency throughout our activities in G&A, and sales and marketing, and also to a lesser extent, more efficiency in R&D.

So that's where the plan is coming from.

When we look at our long range plan and what are the resources that we will need to grow the business, we're taking another look, and we now believe that we will need to reinvest less, meaning if we plan to reinvest $1.5 billion of debt before, I'm looking now at $1.2 billion of reinvestment in R&D and sales and marketing, in order to continue and leverage capabilities and grow the business.

This has nothing to do with the loss of exclusivities that are coming mostly end of 2015, 2016 and 2017, which you mentioned are other plans of course, to try to minimize the impact of LOEs versus the legal side, and the science side.

But this is unrelated to our cost reduction plan, which is in place, and we are executing.

The net impact, which was mentioned, relates to how we see our plan going forward.

Regarding Copaxone and the inventory in the channel.

So the slide that I showed is just comparing Q1 and Q2, in order to try to understand this year, in order to try to understand the run rate.

So what you see in that slide, the first thing is that there was an increase in demand, and basically, which was resulted in an increase of close to $60 million, and you can see this also on the slide that preceded it, with the growth in TRxs that was translated into demand increase for the product.

For the entire family of products, both 20 and 40.

Now in anticipation to a generic introduction in May, we've seen the 20-milligram channel inventory reduce, people continue to sell out of inventory, and then buy from the Company, in order to fill those vacancies, not knowing when generic is going to come.

The result is that today, our wholesalers are operating on very low level of inventory in terms of days, lower than what we have traditionally seen, and we will see next quarter what is the dynamic of inventory going to look like, again, depending on how they see the expectation for the generic launch.

But it was a big impact resulting from that, as people, so to speak, did not want to get stuck with inventory, if there is a generic in the market.

When we compare to Q1, we also had in Q1 which naturally was a quarter of launch of the 40-milligram, so people build up inventory, a reasonable level which are going to stay, so we believe that the inventory level in Q3 are going to normalize, going back to the same days inventory level that we've seen in the past.

It might take another quarter because of the uncertainties in the market and the switch rates between 20-40.

All this is having an impact on the moving parts.

I really hope that this explains, but by and large, if I look at the big piece, yes in terms of inventory level, when we compare the Q1 and Q2, there's a $200 million switch that had an impact, a direct impact on sales.

This -- most of it is one-time, so we expect to see higher sales in the next quarter.

Thank you.

And the third one, our assumption is that pulling off 20-milligram is subject to six months notice, and we have not yet filed with the FDA to stop the 20-milligram manufacturing.

Your next question comes from Elliott Wilbur from Needham & Company.

Thanks, good morning, just a quick question for Siggi, and I apologize if this has been asked already, but on the recent approval of Enoxaparin, can you just give a sense of when you'll be in a position to launch that product, and whether or not you think it will be a meaningful contributor for Teva's generic business?

Obviously the innovator has done a very good job of retaining share in the institutional marketplace and I'm wondering if you think there's an opportunity to crack that, or you're going to be more focused on retail, just what you think the potential benefit can be.

And then just going back to another question on the switch dynamics between the 20 and 40-milligram Copaxone formulation, given the relatively high refill rate.

I'm assuming at this point most patients have already cycled through, and if they were on the 20 have been prescribed 20 again.

I'm just wondering if it's possible, or if you've been able to obtain granularity on why that may in fact be occurring, is it just physicians just not writing it for whatever reason, or is it more tied to formulary restriction?

thanks.

Okay, I think first of all, it's on Enoxaparin, it's still an opportunity.

This was a hard nut to crack for the FDA, and for Teva to get approval on this product.

It's been a long time coming.

We are excited about this.

We are currently building up enough inventory to launch the product.

We expect to launch it in the second half, so it will have some effect.

I think not material to the results, but we feel good about it.

I think we will not limit ourselves to the institutional or retail.

We will take the opportunity as they come.

We are a strong supplier to the market and we feel good that we can get our fair market share for this product.

The prices are clearly lower than they were two years ago, when Teva originally wanted to launch the product, but still, this is a very valuable product that, in fact, there's only three/four players in the market, and we feel we have a good chance to take a fair market share.

But overall it will not impact the overall results of fourth quarter or third quarter.

Jon?

Yes, Elliott to your question, if I understood it right, your question is for patients who are on the 20-milligram and still on the 20, why is that, is it access, is it preference?

And it's really a little bit of both.

We've seen great response to the 40-milligram, as I mentioned before, so the refill rate on that is exceptionally high, very pleased with that.

Patients are enjoying the reduction of the injection site reactions.

Some of this is market cycling.

We know some patients are a little bit slower to adopt.

There's a real attachment to the Copaxone daily, in that patients want to eventually get comfortable with that.

They talk to their physicians, they talk to other patients that have made that change.

And there is some access element to this as well, as Larry Downey had spoke to, we are continuing to dialogue with payers, and because of the dynamics going on in the marketplace and the uncertainty around a follow-on Copaxone, we're going to continue to work.

And believe that we can create some additional access, so those patients who may have been blocked to the 40 will have access to it.

Okay, I'd like to thank you all for attending our conference call today and I look forward to touching base with you.

Thank you, bye-bye.

Ladies and gentlemen, that does conclude today's conference.

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You may now all disconnect.

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