Teva Pharmaceutical Industries Ltd (TEVA) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Teva reports third-quarter 2014 results conference call.

(Operator Instructions)

I must advise you the conference is being recorded today on Thursday, the 30th of October 2014.

I would now like to hand the conference over to your speaker today, Mr. Kevin Mannix, Vice President, Head of Global Investor Relations.

Please go ahead.

Thank you, Tracy.

Good morning and good afternoon, everyone.

Thank you for joining our call to discuss Teva's third-quarter 2014 financial results.

I'm joined today by our President and CEO, Erez Vigodman; our Chief Financial Officer, Eyal Desheh; Siggi Olafsson, President and CEO of Global Generics Medicines Group; Dr. Rob Koremans, President and CEO, Global Specialty Medicines; Dr Michael Hayden, President of Global R&D and Chief Scientific Officer; Carlo de Notaristefani, President and CEO, Global Operations; David Stark, Senior VP and General Counsel, Global Specialty Medicines; and Mike Derkacz, Vice President and General Manager of CNS.

Erez will start by discussing highlights of the quarter as well as perspectives on the business and outlook.

Eyal will then provide additional details on our financial results.

We'll then open the call for a question-and-answer period, which will run until approximately 9 AM Eastern Time.

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, 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 will now turn the call over to Erez.

Erez, if you would please.

Thank you, Kevin.

Good morning and good afternoon.

I'm delighted to open the call today and to share with you the main highlights of the quarter and also the progress we have been making in all the components of our 2014 Must Wins.

Q3 was a solid quarter for Teva.

Significant improvement in all profit margins.

Generic profitability improved substantially.

A vast cash flow from operation and free cash flow.

Copaxone 40 milligram switch on track for year-end goal of 65%.

Strong focus on our pipeline.

Therapeutic area decision.

Solid uptake of certain important recent launches.

Good progress in clinical trials.

On track to deliver $650 million in net cost savings in 2014.

Resume and increase share repurchase program.

$3 billion in total available funds.

Net revenues were flat quarter over quarter, plus 2% in local currencies.

Operating income increased by 13% to $1.5 billion, a 29.7% operating margin.

Net income increased by 6% on the back of higher effective tax rate to $1.134 billion with 22.4% margin.

EPS increased by 4% to $1.32.

We generated $1.4 billion of cash flow from operating activities and $924 million of free cash flow.

Year to date, net revenues are up by 1%.

Operating income increased by 10%.

Net income increased by 6% to $3.226 billion.

Cash flow from operations increased by 39% to $3.375 billion.

And we have almost got free cash flow to $1.9 billion.

We solidified the foundation of Teva, streamlining the organization, creating a sound, stronger, more equipped competitive base for the near future.

We'll share with you today tangible outcomes through the five main pillars I specified shortly after taking charge.

Cementing our global leadership in generics, while improving profitability and driving organic growth.

Fully executing our cost reduction program.

Significantly improving our operational network to drive efficiency and optimize capacity.

Strong focus on cash and cash flow generation.

Quality as a competitive advantage.

We are on track to fully execute on our cost reduction program.

In 2013, which was the first year of the program, we generated $430 million of cost savings with $940 million of reinvestments.

Net cost savings were negative $510 million.

In 2014, we will generate $930 million of gross savings, offset by $280 million of reinvestment, generating $650 million of net savings.

In 2014 COGS has generated $450 million of cost savings, with $250 million of reinvestments.

R&D generating $1 million of cost savings, with $70 million of reinvestments.

And SG&A generating $380 million of cost savings, with $60 million of reinvestments.

We are on track to deliver the $800 million of net savings until the end of 2017.

It implies that from the beginning of 2014 until the end of 2017, Teva will extract $1.3 billion of net savings.

We continue to transform our operational network.

Optimizing network footprint continues as planned with six plants closed or divested.

Already nine plants are in process of being closed or divested, and we made progress on the review of additional five sites restructuring starts in 2015.

10 plants are included already in our operational excellence program, yielding significantly higher efficiency and reduced cost and CapEx.

The strong focus on procurement and supply chain optimization has been yielding the cost savings we have indicated before.

On product portfolio consolidation, we have released 3 billion oral solid dosage capacity to date, and will continue to drive up this number going forward.

We make good progress with our product robustness plan and we are on track on our inventory reduction target, from $5.2 billion of inventory by the end of Q3 2013 to $4.6 billion 12 months later.

Together with capital expenditures containment and improved margins, we are able to see a clear improvement trend of our cash flow from operations, yellow line, and free cash flow which is denoted by the green line.

Our strong focus on quality has yielded significant achievements in 2014 year to date.

35 regulatory agencies conducted 76 inspections in 52 Teva sites with no critical observations.

Zero sites to repeat regulatory inspection observations.

71%, 10 out of 14 of FDA inspections, concluded without any observations.

Substantial 25% reduction in recalls year over year, but we continue to focus on this area to further reduce the level.

We will be further solidifying quality as a core competitive competency of Teva.

I ask now Siggi Olafsson to share with you how we have been cementing our global leadership in generics.

Thank you, Erez, and good morning, everyone.

It was a very busy quarter for Global Generics.

First we initiated a review of all the markets we are operating in today to prioritize them where we want to play going forward, and how we want to play in different markets.

What are the key therapeutic areas and dosage forms we want to offer, and how we can differentiate from our competition.

We also continued ongoing effort on efficiency.

As I've mentioned before, Teva Generic's focus is on the bottom line and the growth of the bottom line.

We can improve the operating profit in three different ways: COGS, where it is already in progress through our savings program; efficiency in sales and marketing; and last but not least, the product mix, which includes new product launches.

We saw a significant improvement in third quarter, and we have a very aggressive target to improve further the profitability of the generic business over the next three years.

Global Generic Medicines has worked closely with R&D to direct the Generic R&D effort to match the strategy of the business.

The Generic organization was established in the quarter and key positions filled.

The goal is simple: to regain focus on Generic with global operating model.

Two key areas, global portfolio and commercial excellence.

Global portfolio focus is to align the product selection with the strategic objectives.

And the commercial excellence is centering on the current business opportunities and efficiency.

Our growth markets, which are the markets other than North America and Europe, are going through an in-depth strategy exercise to define its core markets, short- and long-term goals, and steps needed to reach them.

This was a very strong quarter for the Generic business.

Operating profit before G&A was up 40% year on year, and there was a strong profitability in most of our countries.

Sales and profit was negatively impacted with the FX changes, especially from Russia.

But also to highlight that the efficiency targets were delivered, especially in Europe, where the profitability of the European Generic business is significantly better than a year ago.

Our new launches are on track both in the US and the rest of the world.

In US, we have launched 14 products year to date, including 4 relaunches of injectables.

That's a very important milestone for us.

We are bringing more injectables and other hospital products to the market and see a significant growth in that part of the business in 2015 and onward.

But we have a very busy fourth quarter.

We still have seven US launches and multiple international launches before the end of the year.

We submitted Generic Byetta to the FDA recently.

That submission is a great example of the capabilities of Teva in developing complex generic product, including both peptide and device.

This was an integrated development effort across all functions of R&D, both specialty and generics.

It's been an exciting four months since I joined Teva.

Multiple opportunities have been identified and more opportunities will come from integrating our business further.

There is a close working relationship between the generic business and the specialty business.

Local country organizations are responsible for both specialty and generic sales.

And respiratory is just one example where we work closely together on the global strategy.

With that, I hand it back over to Erez.

Thank you Siggi.

Copaxone 40 milligram has gained already 10% market share in the MS space, and it accounts for 57.4% of the entire family based on mostly [CTIMS] data updated to October 2014.

Copaxone 40 milligram was launched also in Argentina and Israel, approved in Chile, pending in Russia, Brazil, and EMEA.

We thought it is also important to share with you relevant TRx data that demonstrates the durability of the Copaxone versus the other competition.

Copaxone total Rx in the quarter pre-Tecfidera launch was 172,000 scripts.

Copaxone total Rx in Q3 2014 was 171,780 scripts.

Copaxone total Rx in the three quarters following Tecfidera launch was 496,133 scripts.

Copaxone total Rx in the three quarters following 40 milligram launch was 187,227 scripts.

As you know, we appealed to the US Supreme Court in our Copaxone patent litigation.

Arguments were heard on October 15.

We raised a strong argument, which basically focused on the total standard of review to be applied in patent claim construction.

While it is not possible to predict how the Supreme Court will decide things, we are optimistic that the Supreme Court will rule in our favor and overturn the decision of the Federal Circuit.

If the Supreme Court rules in our favor, it will probably send the case back to the Federal Circuit to decide it again based on correct standards.

There is no set time for the Supreme Court decision, but we generally expect it to come late this year or Q1.

FDA decision on our most recent CP, citizen petition, expected by late November 2014.

I would like to ask now Mike Derkacz, Vice President and General Manager US Teva CNS, to share with us why we believe we are on track to achieve 65% conversion rate by year-end with our generic Copaxone.

Thank you, Erez.

It is my pleasure to report that the Copaxone 40 milligram conversion continues to progress as planned.

As of October 17, Copaxone 40 milligram is 57.4% of TRxs of the Copaxone franchise.

And even more importantly, 40 milligram new-to-brand prescriptions now account for 80% of the Copaxone franchise.

This is a very important leading indicator and a very reliable metric, as it truly represents new-to-brand patients.

Another important early indicator for us are enrollments of shared solutions.

I'm happy to report that 85% of shared solutions enrollments are at 40 milligram.

We continually monitor 40 milligram performance across various health plans across the country.

In one national health plan in particular, that provided Copaxone 40 milligram unrestricted day one of launch, now has a Copaxone market share TRxs of over 80%.

So this is what happens when you take a product with a clear patient benefit and put it in the hands of an exceptional team, in this case the Teva neuroscience sales and marketing team.

And couple that with a world-class patient support provided by shared solutions and our clinical nurse educators.

In fact, it is this team that gives us the utmost confidence that we will continue to execute according to plan, especially when you consider that as of October 1, Copaxone 40 milligram now has access to 94% of lives nationwide.

Now it's important to note that these prescriptions will not manifest for about two months in TRxs.

That's due to the fact that on average it takes about three weeks for patients to go through the benefits enrollment process.

In addition, 20 milligram patients will work down their existing inventory.

So thank you very much Erez, and it's back to you.

Thank you, Mike.

On the Q2 call, I shared with you how we plan to drive organic growth in our specialty franchise.

I mentioned how we'll defend potential LOEs, loss of exclusivities: the focus on successful execution of near-term launches, narrowing the focus on therapeutic areas, deliver on the promise in our pipeline, develop unique patient-centric strategies in our key TAs.

Today, we'd like to provide you with tangible outcomes from the measures we have been taking.

I would like first to ask Dr. Rob Koremans to discuss our 2014 launches performance.

Thank you, Erez.

I'm happy to report that it's not only Copaxone 40 that is really doing very well in terms of launches.

We are extremely pleased with all of our key launches that we've undertaken this year so far, with all of the key launches being significantly over plan.

I'm also here to share Adasuve, where we see less uptake as initially planned.

The lessons we've learned from that quite clearly show that for Adasuve we were too optimistic in the time needed for formularies to take this fantastic product on board.

We remain optimistic for the product and we continue to believe that this is a fantastic product for patients, and will give us up to $250 million of sales.

But clearly the performance so far has not been as good as we had planned.

This is not true for all of the other launches.

They are very much on track to deliver.

Plan B One, now the 75% market share in the emergency contraception in the US.

Granix with over 10% of the short-acting GCSF in the 12 months of launch.

Lonquex, which is in Germany now almost 12 months on the market, and has also achieved over 10% of the long-acting GCSF.

And our DuoResp Spiromax launch, which is now in seven countries early in launch performing extremely well, and also benchmarks with other launches in this therapeutical area.

So all in all, we are well on track to deliver, and this makes us very optimistic going forward.

Back to you, Erez.

Thank you, Rob.

On the promise to focus our therapeutic areas, our strategic review of therapeutic areas included an extensive evaluation of our current and future capabilities to address unmet patient needs.

The competitive landscape dynamics, barriers to entry and profitability with the purpose of crafting the winning strategy to a achieve global leadership in each goal TA.

The goal TAs on which Teva will focus are CNS, including MS, neurodegenerative diseases and pain, and respiratory, including asthma and COPD.

We are committed to being a world leader in CNS and respiratory, both areas underpinned by significant and growing unmet patient needs.

We strongly believe that the conjunction of our existing portfolio, integrated global R&D, buy plan assets, patient intervention infrastructure and capability, sales force platforms and innovation capabilities, positions us to deliver true value for patients and payers, and to generate significant financial value for our shareholders.

[In a moment] as an oncology, where we have a significant commercial presence and capabilities, we'll focus on market-ready or close-to-market assets to maximize sustainable profitability.

And we will actively value the opportunities for commercial activity and collaborations.

Innovation around existing molecules will focus on core TAs, and we'll continue into other TAs as well, where we can bring substantial value to patients and payers, targeting the unique space in the industry at the intersection of novel products and off-patent products.

In this process, we've also identified five planned projects for discontinuation, divestment, or partnerships.

I would like to ask Dr Michael Hayden to share with you relevant details pertaining to assets designated for discontinuation, divestment, or partnerships.

And also to share with you how we plan to deliver on the promise in our pipeline.

Thank you, Erez.

Good morning to everybody.

As Erez has explained, we have numerous assets that are exciting but not core relative to our focused therapeutic areas.

These include assets in oncology, gastroenterology, and immunology.

In terms of our early-stage oncology programs, including two in clinical development, these provide significant and first- or best-in-class opportunities and have unique utility against multiple cancer types.

In addition, in our assets in gastroenterology and immunology, we have two assets, including a first-in-its-class.

And these assets also provide potential for significant improvement to current therapies in areas of significant unmet need.

In addition, we are looking for structured financing and alternate funding for late-stage assets where there are three programs that are not in our core therapeutic areas.

These also offer significant commercial potential.

In all of these programs, we've had a process now that has been evolved in talking to the community, the community of investors, both the biotech and the pharma community.

There's been a tremendous response and tremendous interest in numerous of these assets.

We would expect, over the coming months, to be able to report on progress with regard to divestment of some of these assets, and also opportunities for partnering, structured approaches to partnering, that allow for further development of some of our late-stage assets.

Now as a result of this focus, we've been able to, on next slide, our focused pipeline.

You can see here with green being CNS and pain, yellow in respi, you can see that the vast majority of our portfolio and our pipeline is now focused to build strength and great promise in those three areas, the CNS and pain, and respi.

You can see also from this particular slide that our focus is not only on innovation using existing molecules, such as the exciting abuse-deterrent ER hydrocodone, that essentially will be in registration by the end of this year.

But also, innovation against novel targets such as NAV1.7 where we have a program in osteoarthritis, as well as programs that would start in neuropathic pain.

In our respi portfolio, we are expecting to have significant launches also in this area.

And we again have a platform of different inhalers that have really -- including the Spiromax now approved in Europe, the breath activator, the inhaler, and the meter dosing inhaler, which offer opportunities to improve compliance and adherence for patients in our respi business.

I would also draw attention to the abuse-deterrents in terms of ER hydrocodone, which we are now submitting this year.

This again, gives validation to our novel abuse-deterrence technology, which has allowed further development not only of extended release hydrocodone, but other products in earlier development using the same technology, but that are focused more on immediate release products.

In addition, you can see here that Copaxone is submitted for registration in numerous other parts of the world, including Europe, Russia, Australia, South Africa, and has now also been approved in Israel and Chile.

As we look at the next slide, what you can see that 2015 is a very important year in terms of our specialty pipeline.

And that this is a year that some of the focus, and strategic approaches that we've taken, will bear fruit.

We're looking at four target approvals including an sNDA for QNASL for pediatric use.

As mentioned, the extended release for abuse-deterrent hydrocodone, and an NDA also for ProAir for asthma.

We're also looking for some important submissions.

Our novel drug and biologic against IL-5 for asthma reslizumab is targeted for submission next year.

As well as numerous other respi products, Qvar BAI, fluticasone propionate and fluticasone salmeterol for asthma and COPD.

This will also be an important year for some results that are important clinically.

We expect the results of our phase 2 study for the product licensing from Labrys for both chronic and episodic migraine.

We are expecting the results of the TV-45070, which is the product being NAV1.7 for osteoarthritis.

In addition, we expect to see some results for pridopidine for Huntington's Disease, a model neurodegenerative disorder, and also our results in pediatrics for growth hormone deficiency.

So 2015 will be a pivotal year for our specialty milestone.

Back to you, Erez.

Thank you, Michael.

With a unique patient-centric integrated strategy, we believe we can turn our respiratory and CNS pain core therapeutic areas into a $2.5 billion and $2 billion franchises, respectively by 2019 on a combined franchise of $1.2 billion today.

Full winning strategy to deliver substantial growth is also developed for the other core therapeutic areas in MS, neurodegeneration and migraine.

Our 2014 overall performance, including strong cash flow from operations and free cash flow as it is manifested by this slide, 31% leverage by end of September 2014 and 1.76 debt to EBITDA ratio, together with the progress in our transformation process, created trigger for us to resume and increase our share buyback program, so that $3 billion are now available for repurchase.

In parallel, we continue to pursue and assess BD opportunities in all sizes, subject to assessment criteria that we've already shared with you.

Over time, Teva will move from unlocking value by solidifying the foundation in our generic business and in our specialty business, to generate value from capturing the synergies between the two, and pursuing more and more integration in a way which will enable us to target a unique space in our industry.

I would like now to ask Eyal Desheh to review the for the financial reports with more granularity.

Thank you, Erez.

Good morning and good afternoon, everyone.

I'm happy to provided some details of the business and financial results for the third quarter of 2014.

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

As you have seen and heard from Erez, from Siggi, Mike, Rob and Michael, this was a very good quarter.

At the end of June this year, we divested two OTC plants which contributed about $250 million in annual sales with no profit, and we no longer carry these sales.

Excluding the divestment of these OTC plants and negative foreign exchange impact, we delivered 2% revenue growth in real terms.

At the same time, we saw operating income increase by 13% year-over-year, or 15% in real terms.

Excellent margins, cost reduction and strong cash flow are the financial highlights for this quarter.

Foreign exchange fluctuation has, again, a small negative impact on our results.

As you can see, it reduced revenues by $57 million from Q3 last year, or about 1% and operating income was reduced by $26 million.

The two currencies with the most significant impact on the profit was the Russian ruble and the Israeli shekel.

We are running an ongoing currency hedging program which partially mitigates foreign exchange impact.

Looking at the year-to-date results, we can see that Q3 was not a one-off good quarter.

We've consistently delivered improved results from the beginning of the year, highlighted by 39% increase in cash flow from operations.

As you know, we have two possible scenarios for profits and EPS in our guidance this year.

Depending on the outcome of generic competition to Copaxone, we are raising today our guidance.

We see revenues for the exclusive Copaxone scenario, which is presented here, at the range of $20 billion to $20.3 billion, and earnings per share at the range of $5 to $5.10.

These numbers include the forecast of about $1 billion in Copaxone sales for the fourth quarter.

We've also increased our forecast flow from operations for this year to $4.5 billion in total.

Introduction of an AB-rated generic competition to Copaxone before the end of this year could reduce operating income by $40 million to $50 million per month.

And depending on a possible entrant.

When we compared 2013 to 2014 as we are seeing the results for the year, we see consistent improvement in operating profit, but with higher tax rates and more shares influencing our EPS.

In Q4 last year, the tax rate was especially low at 7%, which is not going to repeat this year and influences the forecast.

Cost reductions.

You've seen this slide already in Erez's presentation.

A few more details.

Our cost reduction and efficiency program is one of the most important goals for Teva management team.

As we told you in the past, not all our cost reductions will hit the bottom line as we continue to invest out of these savings.

But we estimate that our net year-over-year cost reduction for 2014 could be as high as $600 million.

This is higher than what we had in our original guidance when we started the year, as we are seeing the results in all our line items, as you can see on this slide.

The Q3 results represent significant improvement in gross margin, as we already noted, resulting from cost reduction and mix of product sales.

While R&D was modestly up, SG&A was down year-over-year, representing cost savings and focused activities.

Tax rate was up to 21% this quarter, due to the mix of profits' origins and the countries where they are being generated.

And financing expenses increased slightly due to foreign exchange fluctuation.

All in all, a 4% year-over-year increase in earnings per share, which was better than market expectations.

When we look at the GAAP results, our GAAP P&L also shows meaningful improvement with earnings per share up 21% year over year.

In the non-GAAP reconciliation items, as we do every quarter, we had a number of non-GAAP adjustments, mostly routine.

The most significant one is $122 million of income, rather than another expense from our paragraph 4 insurance policy, as we began to settle our claim with the insurance companies, and collect from them.

We expect the total insurance reimbursement will exceed the $300 million, as we already informed earlier.

When we look at revenues, and we see the bridge, what went up and what went down, basically revenues were flat year over year.

When we compare Q3 2013 and the results of this quarter, the results of this quarter do not include the sale of the divested OTC plant, which I mentioned earlier, which was divested at the end of June.

As noted, the deed sale did not have any impact on profit.

While having no impact on profit, this plant generated annual sales of approximately $250 million.

It was about $64 million in the parallel quarter and it's not included in our year-end sales.

Copaxone sales.

We delivered a very good quarter in Copaxone sales.

Results show an improvement in the US, resulting from some inventory buildup following a weak Q2, as we all remember.

And the impact of the tender in Russia, which was delivered in Q3.

While we look at revenue breakdown by the different business segments, what you see, revenues split -- there was an improvement in almost every line item here.

Other than generics, which was mostly impacted by foreign exchange.

And in real terms, had a very small decline year over year.

The geographical split, we can see a 9% improvement coming from emerging markets, and not any material changes in the other geographies.

Profitability, which is our measure for segment operating income without G&A allocation, improved through all segments.

Mostly for the generic segment, with 40% improvement year over year, as you have heard from Siggi.

The improvement is due to better gross margins, lower sales and marketing expenses and Copaxone revenue, which grew year over year.

Moving to some more details, as you can see on the next slide.

We can see a very healthy quarterly trends in margin improvement for specialty and for generic.

And a more detailed slide on the generic improvement can be seen on the next slide.

We can see the gross profit margin over the full year improved from 39.5% to 44.3%.

Total profitability operating profit from 15.9% to almost 23%, an improvement of 7 full points.

Cash flow trends.

Cash flow continued to improve, creating additional financial resources, with $1.4 billion in cash flow from operations, and over $900 million in free cash flow delivered this quarter alone.

We expect cash flow from operations to be at the level of $4.5 billion for the entire year, and free cash flow will be close to $3 billion for 2014.

You've seen this slide before.

Just as a recap, with our financial strength and liquidity, all credit metrics continue to improve.

Total debt is down to $10.6 billion and debt to EBITDA ratio is down to 1.76%.

The strong balance sheet combined with improved cash flow generation creates additional liquidity capacity for Teva.

And the last slide, our dividend history and story.

Our Board approved a quarterly dividend payment of NIS1.21 per share or $0.32 per share, similar to last quarter.

So thank you all very much for listening to our presentation.

We will now open the call for questions.

Operator, please go ahead.

(Operator Instructions)

[Yuma Rafak], ISI Group.

Thank you very much.

I had two questions actually, both R&D specific perhaps.

First, Michael, I noticed there's -- have you guys examined Copaxone above 40 milligram doses?

And perhaps potential for less frequent dose administrations?

It's unclear to what extent it's been studied at that dose level.

And number two, I think there's a lot of activity in MS on the next-gen fumarate side.

You guys clearly have the strongest capabilities, both on the formulation and legal.

So, Michael, when I look at that slide on R&D, I'm curious, is there any internal fumarate program you guys are looking into as well?

Thank you.

Thank you for that question.

On the 40 milligram, and higher dose than 40 milligram, of course as part of our lifecycle management, we are interested in different approaches to further extend the life of the safe and highly effective drug.

And of coarse as part of the lifecycle management, we're also doing additional work to define sub-populations within MS who might have a particular favorable response to Copaxone.

Because not every patient, just as with every drug, responds equally to this.

That work is ongoing and proving to be very exciting in terms of the opportunity to stratify patients to improve the outcome for giving patients the right drug who will respond.

And so as part of lifecycle management, we are looking at different approaches to Copaxone.

These include all kinds of approaches, which I can't really go into here.

But obviously this is different formulations, different approaches, that really can further extend the lifecycle of this particularly important product.

Tracy next question?

(Operator Instructions)

Ken Cacciatore, Cowen & Co.

Hi, thanks.

First question is, as you see the consolidation of the customer base on the generic side, I was wondering you all could provide your perspective in consolidation on the generic side.

And maybe discuss if there's any FTC restrictions, why there couldn't be further consolidation of the major players.

And then second question is, on slide 29 you give stringent assessment criteria in terms of things that you would want to buy.

And you list EPS accretion ahead of generate long-term value to Teva shareholders.

So it doesn't make a ton of sense to me, given that there's a lot of late-stage de-risked assets out there that, on the branded side, that could really leverage your commercial footprint if you're willing to be patient.

It wouldn't be accretive in the near term, but could be very value creating.

So if you can discuss exactly how stringent that assessment criteria is.

Does it have to hit all four before you would make an acquisition?

Thank you.

Hey, Ken, it's Siggi.

I will take the consolidation.

I think as you rightly said, there's been a significant consolidation both globally but especially in the US, over 60% of the generic business, I think overall, is with the top three customers.

I think it's difficult for us to say if there's any FTC impact on the consolidation going forward.

But we know that as of today it's 60% of the businesses are with these three customers.

I think in that situation, it's good to be strong and a large Company.

We have the largest offering of any generic Company in the US.

We also have the largest offering in Europe where they have a global presence.

So I think we don't see that as a negative to have a strong global customers to work with.

We work extremely well with all three of the big customers.

We can offer them, I think, a portfolio that nobody else can.

But a question about further consolidation, I think it would be a guess on my behalf to take that any further.

And Kevin, on my end, with the right opportunity on the specialty side, we might use more longer-term approach in basically looking at the values measures that we have specified.

And if I could add that a good example is Labrys, where this was a program that's of course not immediately accretive to EPS, but is a strong and solid strategic feature to have in terms of pain and migraine, and has the potential, again, for a very novel target to generate very significant long-term value.

So it depends on the opportunity.

Each of these criteria are important, but each asset or each business relationship, may have different features that are stronger than others.

Thank you, next question.

Ken, the answer is clear on the second one?

Gregg Gilbert, Deutsche Bank.

Yes, thanks.

Kind of a follow-up on that, Erez.

Teva is making clearly good progress on solidifying the foundation.

Should investors expect Teva to be active on the acquisition front in the near term?

And what are your key acquisition priorities at this point?

And my second question is for Siggi.

You mentioned injectables as a key growth area.

Are you satisfied with Teva's capabilities and portfolio in injectables in the hospital channel more broadly?

Or do think you need to supplement that externally?

Thanks.

So Gregg, maybe I'll take that question first.

I think first of all, the good thing about Teva, obviously there was an upset in Teva business a few years back, when we had the qualification in the Irvine plant.

Clearly that has been addressed very significantly.

We identified that site on the slide previously as being under divestiture at the moment.

But we also have a very strong international site for the injectable business.

I think overall we need to supplement; we are looking for further opportunity in injectables.

But also keep in mind as we are, I said it on the last call and I'll say it again.

I feel Teva is the world leader on complex injectable development on the long acting injectables.

So I'm pleased when those come to market.

There's still a little bit of gaps in the portfolio we are looking for, but overall I'm pleased with where we are to date.

And on my end, we have been assessing actively potential opportunities in the market.

We look for technologies; Michael gave us with just one illustration of the notion.

We look for attractive pipeline assets and Labrys, although there is another illustration of what we might look at.

We might pursue generic businesses in the emerging markets and in complex generic arena if we find the right one.

And we might also look at potential attractive specialty assets in the United States or in Europe.

We don't rule out that the possibility of also a transformation transaction if the right one manifests itself.

Thank you.

Liav Abraham, Citi.

Good morning.

First question for Erez.

You mentioned, I think on the last call, that you were conducting a full review of the Company's cost base.

I was wondering if this has been completed and whether you can provide at least some additional initial thoughts following this review.

And the second question for Michael.

Two parts.

On Copaxone firstly, I understand that some form of generic Copaxone was approved in Argentina a couple months ago.

Was wondering if you have gotten a hold of this and conducted any tests versus the brand of Copaxone, and anything you can share with us.

And also on your progress for genetic biomarker test for Copaxone high responders, where this stands and potential timing for this coming to the market.

Thank you.

Michael, please start.

Yes, thank you, Liav, good morning.

With regard to the [paluminol], or the Synthon product in Argentina, just to say that we have obtained that particular product and have done detailed analysis.

This will be part of -- as you know we have an open citizens petition and the FDA has chosen the citizens petition and advised us this is the appropriate place for a discussion of the different attributes of Copaxone and purported generics.

And we will plan to submit additional data before the end of November on the results of those particular studies.

So that's just a heads up on that, this will be coming in the very near future.

With regard to the genetic biomarkers, we are continuing genetic validation studies.

And have now completed the validation studies in our cohorts that we had announced from our own studies.

These have continued to provide strong support for the ability to identify a sub-population of patients.

Could be between 40% to 60% of patients who actually can be predicted to have an outstanding response to Copaxone.

We are continuing this work by using also outside cohorts, and we wait to see development of the large derived test.

It was in one of milestones for 2016 and this has all been unrolled.

Of course this is an ongoing process of getting additional information from other cohorts to further validate the highly predictive findings that we have thus far.

Yes, maybe, Liav, just one comment on my end that pertains to your second question.

We shall refrain until we submit our response to the -- to refrain from providing more details on the analysis that we have conducted on Synthon in Argentina.

The Street will be able to basically understand what is our view and what are the findings in the analysis that was conducted in the course of November after we submit our response.

And on your first question, we are providing here for the first time, much more granularity that relates to our cost reduction program.

You see clear association between gross savings and net savings and how the savings relate to the relevant P&L items.

Basically, what you can learn from the numbers that were provided, is that from the beginning of 2014 until the end of 2017, Teva is committed to generate $1.3 billion of net savings.

And from now on, by the way, we'll put all the focus on net savings only, which is the relevant number.

This is what really matters for you.

So from the beginning of 2014, on the back of negative net savings in 2013 of $500 million, in order to generate the $800 million, we need to deliver and we are committed to it, $1.3 billion of net savings.

Now you will be able to basically monitor and track how the progress, which means that Teva is committed to delivering a number which was not discussed until now with the Street.

Over time we'll continue the assessment and evaluation in order to try to extract more potential savings as we go along.

That's great, Erez, thank you.

Chris Schott, JPMorgan.

Great, thanks very much.

Just two questions here.

First on transformational acquisitions.

A question for Erez, do believe Teva is ready for such a transaction if it were available?

You're obviously making very good progress on solidifying your foundation.

But it seems like you've got a number of significant initiatives on your core business that you're in the midst of.

I guess my question is, if a transaction were available, is this the right time for that?

My second question was on the Board decision to resume and increase the buyback.

Could you give us come more color of what drove that decision?

Thanks very much.

Okay.

So on the first one, Chris, the progress that we have been witnessing on a day-by-day basis with the transformation of the Company.

In other forms, according to 2014 that we all shared with the Street, I feel more and more comfortable with the level of readiness for acquisitions in general.

And all the time I believe also for a transformation transaction.

Basically everything we do creates a platform that is much more solid, much more equipped to deliver growth in the future, based on organic growth than on inorganic growth.

And that's the main purpose of the sequence of measures that were specified and were shared with you.

On the other front, I think I said it.

I just maybe need to reiterate the notion that on the back of the performance in 2014, the rate of progress in the transformation process, and all the measures that are conducted.

And there's very strong cash flow that we have been generating.

We felt that that's the right time to resume the buyback program without deviating from the quest to pursue also acquisitions.

David Maris, BMO Capital Markets.

Hi, a couple questions.

First on the facility installation (technical difficulty) at least stepping down by the end of the year.

If you could update us on how the search is going and whether or not the Board's leading for an internal candidate, an external candidate.

What that might mean for the rate of progress that you're making with the margin improvement story and the new rollouts.

That being, an external candidate may need more time to get up to speed versus an internal candidate.

Separately, building on the buyback question, is there anything to read into the increase of the buyback now, given you have a long list of acquisition candidates.

Is it more a reflection of how expensive yields are out there?

Or that you're really not looking, you may be ready for a transformational acquisition, but it's really not high-priority.

Or is it that you're looking into 2015 and you think the shares are excessively inexpensive?

Because with a lot of acquisitions on your list, it would seem just keeping more cash would be something that you'd consider.

Thank you.

On the second one, I'll start and maybe I'll ask Eyal enforce it.

But that's, David, about the right balance between, I'd say different dimensions in it.

And we need to find the right balance.

I need to be tuned to also, I would say, needs and desires of our shareholders.

It's also important for us, we believe, at this level, to spell out a strong message that is around the faith we have in the future of Teva and basically the share price that is prevailing today.

And by the same time, it doesn't mean that we'll not be pursuing acquisitions.

That's something that was basically conveyed more than once during the call, and I am just underscoring it now again.

It's about the balance.

It's about the balance between different dimensions in the capital allocation strategy of the Company.

Eyal, you'd like to add something?

You said most of it.

Strong cash flow.

Strong balance sheet.

Significantly improved liquidity position and the ability to load more debt on the balance sheet if we need it.

We are going into the market as we wrote promptly, with no further delay we believe that this is the right time to do it and the stock price represented.

We can always stop if an interesting acquisition comes along, which is way above the $3 billion that we have in the current plans.

And we will continue to execute it day in and day out.

And on your first question, David, the Board is committed to improve the governance and to conduct all the measures that were communicated, and just about time.

You'll see important measures before year-end, you'll see other measures in the course of 2015 in the quest to transform also the governance.

Okay.

Shibani Malhotra, Sterne Agee.

Hi, guys, thanks for taking the question.

I've got a couple, the first is for Siggi.

Having been at Teva for a few months right now, can you talk about the cost-cutting initiatives?

Where do you see room for further streamlining?

And where do you see opportunities for divestitures?

Or areas in generics in particular that you would like to invest in versus your previous experience?

and then the second is around the hydrocodone ER product.

Can you talk about how this product will be differentiated in the market?

And then how you're thinking about the opportunity in IR that you talked about going forward as well.

Thank you.

Hi, Shibani, let me take the cost.

I think overall there's been enormous progress in Teva.

If you see at the end of fourth quarter 2013, the profitability was 19.2%.

We're just over 22% now.

I have communicated that I want to improve this even further.

I think we should be on par with our significant competition out there.

So I think by the end of 2017 we should have improved from the beginning of this year or end of last year.

We should have improved to the profitability of the generic business by about 600 basis points.

So we should be about between 25% and 26% profitability.

Where that comes from, part of it will come from cost of goods sold.

We clearly have a strong initiative there.

We have a contract supply chain.

We are working hand-in-hand with the operation of supply chain to simplify our operation to lower our cost of goods.

We also are looking for a different product mix.

The introduction of complex generics, they have a higher margin in the market.

There's less competition.

I mentioned a new product that we are submitting.

There's much more in the pipeline of these products.

But also if we look at the cost, sales and marketing and G&A, we are always looking for opportunities in that.

This is our efficiency program.

Where can we get the best return on our investment?

And what I initiated, as I mentioned, was a review of all the markets.

Teva today is in 60 markets.

We are top three Company in close to 30 out of the 60 markets.

We are reviewing each of these markets on prioritizing them, where we want to invest, what markets we need to turn around, and where we might want to look for alternative scenarios.

And that doesn't have to be a divestiture of the market, that could be a different business model.

That could be a specialty model going forward.

This work is ongoing.

I hope to share some of this with investors soonish.

The team is working hard.

But I think we have a good understanding how we can move and improve the profitability of the generic business going forward.

And Shibani, if I could just add to that then provide some transparency on our abuse-deterrent ER hydrocodone.

As part of the efficiency measures within Teva, we are also looking at improving our efficiency in our R&D organization.

And of course that includes our generic R&D.

And that also includes prioritization of sites, including making sure we have critical mass and economies of scale to truly yield additional benefits in sites.

All of the efficiency measures also looking at various sites in our generic R&D organization.

Now with regard to the abuse-deterrent ER Hydrocodone, we have performed and had positive results from numerous abuse-deterrent studies, including the oral [cross] human abuse liability study.

And also as we reported in a recent press release, from a nasal human abuse liability study.

Now these are both category 3 studies, which would support an FDA abuse-deterrence claim of tier 3. That is, the product would be expected to result in a meaningful reduction in abuse.

And this would be the highest that you could expect at this stage, with a tier 4 claim only when the products truly demonstrate in the market reduced abuse in the community.

So of course we are pleased.

Our abuse-deterrent technology appears validated.

And we are most interested to also apply this for other products, recognizing that the real epidemic of abuse in the United States.

But now extensively more in other parts of the world, the major abuse is occurring with immediate release products, with maybe 80% of all the abuse in those immediate release opioids.

Now we're directing this very novel technology to development of products that would provide added advantage in safety and improve value to patients and the communities in which they live, using this technology.

Great, thank you.

Michael, maybe to add to that, this is Rob.

Shibani, maybe to add on that is also our ER hydrocodone abuse-deterrent formulation is not only the only one to have positive clinical trials.

But it's going to be twice-daily form, which is exactly what our paying customers would ask for in managing this complex pain disease.

So our product is really very, very different from that of our competitors.

Thanks.

Ronny Gal, Sanford Bernstein.

Good morning and congratulations on a very nice quarter.

A couple of questions, the first one is about Europe.

You got a couple of really nice launches in Europe around DuoResp and you list a follow-on product.

Can you describe them a little bit more in details?

And for some reason when we look at the revenue line for Europe generics it seems flat.

So can you describe the trends a little bit?

What is going down that makes the overall line not going up?

And second, Erez, you discussed in the past, keeping the earning lines flat through 2015 and 2016.

Now that you got a pretty nice couple of quarters behind you and the numbers begin to look a little bit better, any more thoughts?

We think about this as the floor and with some buybacks and nice product trends, we could potentially see better numbers.

You're not committing yourself to long-term guidance here, but just in terms of how do you think about it?

I'll start with the second one, Ronny.

We provide more visibility into 2015, at least 2015, during our guidance call in December.

If I talk about the generic revenue in Europe, I think overall you can see that the generic revenue in Europe is flat to a little bit declining.

But overall the reason we are doing that is we are focusing on the bottom line.

We are participating in fewer tenders in Germany, and we are running the business for a bottom line.

We have new launches, we have a good business, but overall there's a slight decline, even though the profitability in Europe is significantly up over last year.

Maybe, Rob, you talk about the DuoResp and [ulesta].

With pleasure.

So the DuoResp Spiromax is now recently launched.

It's in seven countries.

It's the first of launches with our fantastic device that will allow really much better delivery of products to patients and in their lungs, a very intuitive device.

It's in seven countries in the market.

And this is a product that we expect slow penetration, but ultimately it's going to reach $450 million to -$500 million in sales, which is a very important launch.

And it's tracking well ahead of plan.

Lonquex, our long-acting GCSF is competing, as you said, with Amgen's.

We're doing really well.

It's now in 20 countries in the market.

Its tracking nicely over plan.

And again, this is a product also with quite significant potential in sales.

What you see and that makes me really proud, and I'm glad for the question, very confident going forward.

It's good to see that we're not only successful with our launches in the US, but also doing really well now ex US, like in Europe.

Going forward, launches are going to be imposed and we are really nicely on track with those two products ex US as well.

The best part is brings up the question of mix versus unit cost.

You've been discussing moving facilities to lower-cost locations, but you also have a little bit of a mix affecting your tail right now, from both Europe and the United States.

You've got those of launches in the second quarter.

So when we think about your cost structure, and I think most people talk about cost per thousand pills, can you just give us a feel?

You look at this number internally, I'm sure.

How will your cost per thousand decreasing over time?

I think it already decreased from, let's call it, the beginning of this year.

How much?

If you look at 2015, what are we looking at here?

That is, what is the effects of the cost versus mix effect in your business?

Carlo, maybe you take it over.

Yes, thank you, Erez, and thank you, Ron, for the question.

We track our cost per thousand tablets like every one does.

We are starting here, in fact, of the migration of our product.

But most importantly, the effect we're seeing is from the effect of our procurement initiatives, which are bringing meaningful reduction in our cost of goods.

We are targeting the 2% to 3% reduction in actual cost of our material.

We are seeing that falling through the bottom line.

And the other aspect is having an impact is our operational excellence program.

The typical lean-seek activity on our strategic sites, where we are concentrating our powers.

So we have a plan to reduce our solid cost of goods of about 10% over the next three years in conversion costs.

That's complemented by the procurement impact on the materials.

Okay.

Thank you.

Ronny, I believe that during 2015, maybe before the end of the year, we'll be able to share and to provide you with more granularity in terms of competitiveness of our different facilities versus the competition.

And also there is an intention which is not yet manifested, and wasn't presented to you until now, to invest in direct sources to establish operations also in local countries, some of which is not yet in the equation.

But we started to move and I believe that during 2015 we'll be able to share with you our progress also on this one.

Douglas Tsao, Barclays.

Two questions.

First, perhaps Michael Hayden, provide an update on the NTE program.

It hasn't been talked about in terms of update in terms of the renewed R&D focus.

And then my second question is for Eyal.

If you could provide us with a bridge in terms of the revenue guidance adjustment that we saw with a slight takedown in terms of the top end.

I think much of that is FX, but curious (technical difficulty) what other factors that might be involved there.

Thank you.

Thank you so question on the NTE program or the way we like to refer to it now, is the innovation using the existing molecules.

This still remains a very important source of new products for our pipeline.

We have now 18 products approved for development.

These include, obviously using innovations for example, using our abuse-deterrent technology, the opportunity to do formulations that combine drugs.

And still we're making great progress.

We're seeing tremendous synergy between -- this was built on our, of course, large generic portfolio.

But there's been tremendous synergy and creativity coming out of the interaction between the specialty, the medical perspective, the clinical perspective and our group in the generic space.

In addition to that, as we think about innovation using the existing molecules, it's not just about the pill.

But it's also about novel modes of delivering, novel modes of enhancing patient compliance.

It's using different approaches to digital health that will help in this approach.

So it's been well of many new ideas.

And this will be the first year that we actually have an NTE already approved.

And what we're excited about, and it's living up to its potential, as announced about a year ago, we are now seeing programs actually enter into clinical development.

And again, this will be an accelerated development, fulfilling the promise of accelerated ramp, getting to the market from the time we start of less than six years.

And the cost of development, again, will be significantly less than other products because it's built on portfolio know how, a tremendous knowledge in the product.

Often the API is in place and we're able to look at novel approaches to improve.

And this is mostly in our core areas, but we are of course also looking at significant opportunities outside core areas, where there is a tremendous patient need.

And Teva has the ability to service that need.

And in terms of the 18 programs you mentioned, Michael, will those largely be ones that were discussed last year?

There are new ones of course, and we haven't -- but we will be planning a time to share this with the market so that people can gain confidence about, not only the announcement of a proof of development, but real milestones in the clinical development pathway on the road to approval.

We look forward to sharing more transparency on details about that program in the upcoming year.

Okay, great, thanks.

And, Eyal, if you could provide some details on terms of the guidance.

Yes, sure.

When we're looking at Q4, you can extract it from the annual guidance, we're looking at over $5 billion in top line.

When compared to Q4 last year, which was very, very strong on sales, we're probably see Copaxone at about $140 million.

Less than last year, this is all compared to Q4 last year.

FX impact could be as high as $100 million.

The sales of our OTC plants included about $60 million in the sales of Q4 last year.

This is the majority of the difference in top line.

All of this will now have an income on operating profit.

Our operating profit is expected to be higher than in Q4 last year.

As I mentioned earlier, we are going to have higher taxes.

We paid 7% effective tax rate in Q4 last year, and this quarter is going to be anywhere between 19 % to 20%.

So in line with what we've guided for 2014.

Those are the big pieces.

Cost reduction, improved efficiency, good mix in sales, improvement in generics that we've seen throughout the year.

But at the top line foreign exchange impact, the sales of the OTC.

And Copaxone could be lower than what we had in Q4 last year, which was one of our biggest quarters ever.

So maybe I would like you to maybe to reinforce the message on the bottom line.

Among tax expenses, number of shares and final expenses we have $0.20 to $0.25.

Higher in Q4 2014 versus 2013 just on the back of these three components.

Before the impact of $100 million net revenues, less in Copaxone Q4 2014 versus Q3 2013.

So if you take all these components, you understand basically also the bridge of the EPS between the quarter.

$0.20 to $0.25 final expenses, number of shares and tax expenses, $0.20 to $0.25 before $100 million net revenues that determinated for Copaxone, okay?

So you can understand that basically what we plan to generate in terms of at least operating profit Q4 2014.

Yes.

Which means that the rest of the business, the generic business both US, Europe, the rest of the world, and all the other specialty business that we are running globally, is going to show improved results and compensate for the mostly non-operating profit items that are having a negative impact.

Okay, great.

Thank you very much.

[Mark Toplin], UBS.

Morning.

Siggi, could you talk about generics a little bit in the US?

Xeloda, Lovaza, Baraclude, obviously.

Those were the big drivers.

If you can talk about how much revenue did you get from them?

Then the rest of the base and one of those price increases in some of your base business.

And whether that impacted some of it.

You talked a little bit about Europe, but can you talk about the rest of the world a little bit with generics.

Some of the important regions for you and the growth drivers there?

And then one question in the branded portfolio.

There's a drug called Albutropin, which is obviously a growth hormone.

There's many growth hormones on the market, co I'm curious what the hook is for this product.

Thanks.

Hey, Mark.

Let me talk a little bit about the US business.

I think overall we have a good revenue off the new launches this year.

[Capasida] being the generic Lovaza omega 3 ANDA Entecavir.

Entecavir was a new launch for us in the quarter.

I think all these three products have been very significant contributors through the year.

I think in fourth quarter, the big launch in fourth quarter, I mentioned seven launches, but I there's an expectation of the launch of celecoxib sometime in December.

I think it's December 10.

I think the pricing, I've said it before, there's never a price increase on the base business as a whole.

Like any other business, if there's a pricing opportunity that comes in the market, we look for that.

But the base business itself has been eroding overall because of the consolidation of the customers.

When there is an opportunity, when there is a shortage in the market, we obviously look for pricing like any other business.

But overall, as I've said many times before, the base business itself is slowly eroding the overall of the base business.

If we look at the rest of the world, we have very significant generic business in Russia.

It's a good business.

We are improving the pipeline in Russia, we are building it up.

Obviously we also have a good Russian business due to the Copaxone tender that Eyal mentioned in his presentation.

We see that business growing going forward.

We see a double-digit growth in the business even though the market is growing high single-digits.

Obviously the FX has impacted us.

The effect of the ruble has affected us in third quarter and we expect to see that in fourth quarter.

For the rest of the world, Latin America is still a significant contributor.

We're a strong player in Chile, in Peru.

We have a growing business in Argentina.

We have a relatively small business in Brazil, which we want to grow further.

And the same applies to Mexico.

So these are the key growth markets that we want to focus on.

There's multiple opportunities.

We have a significant portfolio that we haven't introduced in these markets and really see a good opportunity.

I expect the growth markets to be the fastest-growing region off the tail of it that's going forward with the exercise we're doing today.

I'll just comment on the Albutropin product.

That's the product in development in our pipeline.

Of course it's the 100 milligram once-weekly liquid formulation with a unique and comparative -- (technical difficulty) Can you hear me?

(technical difficulty) I'm sorry, we'll be with you shortly.

Okay, Tracy.

Thank you all very much for attending our call today and look forward to touching base with you in the near future.

Thank you.

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