May 10, 2006
Operator
Greetings ladies and gentlemen and welcome to the Teva Pharmaceutical Industries Q1 2006 results conference call. At this time all participants are in a listen-only mode.
A brief question and answer session will follow the full presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.
Kevin Mannick. Thank you, you may begin.
Kevin Mannick, Director Investor Relations. Thank you operator.
Good morning and good afternoon everyone. Welcome to Teva’s first quarter 2006 earnings conference call.
I hope you all had a chance to review our press release which we issued earlier this morning. A copy of the press release is available on our website at www.tevapharma.com.
Additionally, we are conducting a live webcast of this call which is also available on our website. today we are joined by Israel Mackoff, President and CEO, Dan Suskind, CFO, George Barrett, President and CEO, TEVA North America, Bill Marth, President & CEO, Teva USA, and Moshe Manor, Group Vice President, Global Innovative Resources.
Israel and Dan will begin by providing an overview of our results. We will then open up the call for a question and answer period.
I’d like to remind all of you that we will host a special quarterly luncheon today in New York. For those of you who haven’t received an invitation or have not RSVP’d yet, please call 215-591-3056.
if you are unable to join us, we are also conducting a live webcast of the event, which will also be available on our website. Before we proceed with the call I’d like to remind everyone that the safe harbor language contained in today’s press release also pertains to the this conference call and the webcast.
I would now like to turn the call over to Israel Mackoff, our President and CEO.
Israel Mackoff
Thank you Kevin and thank you everyone for joining us as we announce the results for the first quarter of 2006. this is the first time we are reporting both results for Teva and Ivax combined.
Please note though, that Ivax numbers are included for the last two months of the quarter only. As you might expect, this quarter’s financial results include a number of write-offs and charges related to the acquisition.
Dan is going to take you through these items steps by step. What I would like to do is underline our operational results independent of these items, which I believe (inaudible) our ongoing business.
Setting aside the R&D write off of approximately $1.25 billion and the inventory step up of nearly $64 million, the results of our operations on an adjusted basis would be as follows: We achieved sales of $1.672 billion, gross profit margins of 47.1%, operating profit of $369 million and net profit of $286 million. Sales for Teva, including Ivax, were strong in Latin America, Central and Eastern Europe and Israel and moderately strong in Europe and the US.
There were no significant new launches in the US or Europe for either Teva or Ivax in Q1. Our results in these markets were therefore similar to other periods in which we did not have major launches to compensate for natural price erosion, in general, and specifically on products launched in previous quarters.
In the US, Ivax lost the distribution rights for several authorized generics, as a result of the acquisition. As we anticipated, the loss of sales of these large volume products, when combined with the relatively small loss in net sales from the products we had to (inaudible) as a requirement of the acquisition, amounted to a decline in 2005 base sales, exceeding $200 million.
In spite of this, in Q1 our new prescription growth for the combined business, exceed 2005 Q1 by over 70 million prescriptions, more than tripling the growth of our nearest competitor. The effective of the lack of new launches on the bottom line results, however, was diminished to some extent by the contribution from all time high sales of Copaxone and of API – our active pharmaceutical ingredients business – and increased contribution from other variables.
Copaxone in-market sales reached $329 million in Q1. Level sales of Copaxone grew year over year by 29%, that’s more than double the rate of the market growth.
In dollar terms on a global basis, Copaxone has risen from the number three to the number two therapy, with an ever-narrowing gap between it and the number one therapy. I would like to draw your attention to one more crucial point.
Copaxone’s sales increase actually accounted for 47% of the global market sales increase and 65% of the US market sales increase, year over year. Of course we are very proud of Copaxone financial performance.
But what makes us even more proud are the results of a study published just two days ago. The study showed that 92% of patients who have been treated with Copaxone for 10 years are able to walk without aid.
Findings like this reinforce what we have long said, that no other therapy on the market can match Copaxone’s track record of long term efficacy and safety. The active pharmaceutical ingredient business or PAPI as we call it, also had an excellent first quarter in terms of both internal and third party sales.
Our internal sales reached a new height, which is the measure of an exceptionally high degree of our vertical integration. Some of these internal sales were made in anticipation of new product launches, one of which – (inaudible) was launched successfully in the US last month.
In our other geographies, including Israel, Canada, LatinAmerica, Central and Eastern Europe, results were very good and showed continued profitable growth. The contributions of all our business units have allowed us to thrive, even in a quarter without significant new product launches in our major markets, demonstrating once again the power of our balanced business model.
Since we announced the Ivax acquisition in July, 2005, we have mobilized all our expertise and a great deal of resources to design a smooth and successful integration. We have an excellent track record of integrating companies in together.
The scope of this integration is the largest we have undertaken so far. Today, a little over three months after we actually begun the integration, I am pleased to tell you that it is progressing well and very much according to our plan.
We have now successfully completed the integration of all of Ivax’s units into Teva’s organization and are focused on capturing and maximizing every source of value that this combination offers. On the pharmaceutical operations side, we have initiated a major and comprehensive rationalization plan.
Simultaneously, we are taking steps to close the existing supply gaps from some of the plants that we acquired. As part of this rationalization, we expect to close a number of global pharmaceutical plants over the next 2-3 years.
We recently announced the closure of four of these facilities, where a definitive decision has been taken. As part of this plan, we are consolidating the production of over 120 overlapping products globally in order to achieve further economies of scale.
The rationalization plan is comprehensive, including tactical investment plans. In Latin America, for example, each of the operating units has its own investment plan.
By drawing on our (inaudible) resources, we have been able to advise these plans in a way that offers the participants a plan that meets all of their needs at around 50% of the originally projected costs. Rationalization of Teva and Ivax’s operations should be viewed as an integral part of the rationalization of our entire supply chain.
This includes, for instance, the integration of our global sourcing. In this area, we expect to (inaudible) our scale to improve our economies, to increase the number of products which can be vertically integrated.
After all, there is no reason that the level of vertical integration of Ivax’s products should not be as high as it is with Teva’s, to create additional and significant (inaudible). On the generic R&D side, we have consolidated Teva and Ivax’s products.
This is enabling us to undertake more projects than before and with significant savings and efficiencies, including relocating products to our global generic R&D (inaudible). We are expanding our technological base and developing new (inaudible) to support our ever-growing global reach.
Similarly, we are integrating Teva and Ivax’s innovative R&D programs in selecting the best projects to establish an even greater pipeline. We are so pleased that many of Ivax’s top scientists have joined our organization and will be bringing their creativity and passion to the development of this important growth engine of innovative products.
As I said earlier, I’m very please that our integration plans are proceeding on course. This allows me to confirm today what I told you in July when we announced the acquisition, that we expected to become accredited during the first year of the acquisition.
In fact, we can now see that by the end of this year we will achieve $100 million of synergies and by the end of 2007, $200 million in synergies as opposed to $150 million I had indicated last July. And as time passes, we may do even better.
As we look ahead to the rest of the year, we expect 2006 to be a very good year for Teva. Teva plus Ivax, that is.
We anticipate that it will be so for each of our businesses, but especially for our US generic business, which is going to benefit from major launches including Provastopine, Cepradine and (inaudible). In Europe, we anticipate small product launches for RDO.
Nevertheless, we intend to increase the size of our lead in the UK and will enhance our leadership position in other markets there. In our other regions, that is Israel, Central and Eastern Europe and Latin America, we anticipate strong, profitable growth.
We also expect that it will be a good year for our innovative business. We believe it will be another record breaking year for Copaxone and we feel encouraged by our interaction with the FDA on Agilect and are hopeful for a 2006 launch in the US.
We also expect strong performances in our blended (inaudible) business of (inaudible) products. This leads me to our guidance for 2006.
I would like to note that this guidance includes sales of Simvastatin, without exclusivity. And we are, as you know, a major player in this product in this scenario.
As you know, we received a favorable decision on Simvastatin exclusivity, for those who don’t know, Simvastatin is a generic Zocor. We have received a favorable decision on Simvastatin exclusivity a few days ago.
We are of course very pleased with this ruling and are making the preparations for this important launch. But since this is a very important product and since the FDA has not yet responded to the quote, we believe it is prudent to provide you with separate guidance for the incremental contribution of the timely launch of Simvastatin with exclusivity.
For 2006, we project sales of $8.2-$8.5 billion, an adjusted net profit, net of one time write offs and acquisition related charges, of around $1.5 billion, which will translate into an adjusted EPS range of $1.82-$1.90, based on our current share count. Our conservative estimate of the incremental contribution of the exclusivity of Simvastatin to this guidance, is $250-$300 million in sales and approximately $0.20-$0.25 in EPS.
As we look ahead to 2007, 2008, it would be premature to give quantitative guidance, but I can give you a very clear qualitative guidance. We remain committed to continued strong, profitable growth and we expect to achieve it.
We believe that our various engines of growth will contribute throughout these three years period and that the relative contributions of the various businesses will fluctuate from one year to the next. In other words, we expect that the strongest engine of growth this year will be US generics, but that its contribution will be more moderate in 2007.
We expect that US Generics contribution will be stronger again in 2008. At the same time, we expect that our European, Latin American and respiratory business will have strong performances in 2007 and will thus play a larger role in our business.
And of course, we have both Copaxone, which we believe will continue to outpace the growth of the market, as well as our respiratory portfolio. And so, we are extremely pleased at the progress of the Ivax integration, pleased by the prospect of our business and grateful to our now expanded Teva family around the world, who are making all of this possible.
And now, I would like please to turn the call to Dan.
Dan Suesskind
Thank you very much Israel and good day to all of our friends in whatever time zone you are. I hope you have had a chance to review the figures we released this morning.
If you have, you will have seen that they are more complex than usual, due to the Ivax acquisition and the first time consolidation. This quarter, we have recorded acquisition related charges amounting to $1.29 billion after tax.
Excluding these charges, our adjusted net income reached $286 million, representing 17% on sales with EPS of $0.37. When we speak of adjusted results this quarter, we are reserving to do all the figures before the acquisition write offs.
You can view the reconciliation between the reported GAAP and net income and EPS to these adjusted numbers in appendix one of our press release, which is available on our website. The acquisition charges recorded in Q1 resulted mainly from the purchase price allocation (inaudible) related to the acquisition of Ivax and include $1.238 billion of in-process R&D and $54 million pre-tax or $45 million after tax of a step up in inventories that increases the quarterly cost of goods sold by this amount.
This step up of inventory represents about 2/3 of the total step up created through the acquisition of Ivax. The balance of $32 million was included in the cost of goods sold in Q2 and should be excluded from the analysis of most quarters.
In addition, we recorded additional charges of $3 million that relate to the restructuring of Teva’s operations (inaudible) the Ivax acquisition. As you know, restructuring costs, as long as they relate to Ivax operations are recorded under the purchase price allocation.
The restructuring costs that relate to Teva go into a separate line item in the GAAP P&L and are deducted in the adjusted accounts. We expect to have additional restructuring charges in the following quarters.
The reported GAAP accounts that result in a loss of $1,009,000,000 compared with adjusted net income of $286 million. We believe the adjusted results, which exclude acquisition related charges from the GAAP results, provide our best indication of Teva’s operations and trends.
Therefore, the following analysis will be based on adjusted results. i.e., the reported figures before the one-time charges.
I would like to make one additional point regarding the first time consolidation of Ivax. Ivax numbers are consolidated only as of February ’06, so we are effectively incorporating Ivax only for the last two months of the quarter.
The second large component of the purchase price allocation is the value of product life. (inaudible) valued at about $1.4 billion, and are amortized mainly over 17 years.
In Q1 $50 million of amortization is included in cost of goods sold; in Q2 the amortization will affect a full quarter level for $23-$25 million. This amortization will be part of our (inaudible) costs for the next 17 years or so and is not regarded as a one time expense.
With that I will put aside the GAAP figures and take you through the adjusted results, line by line beginning with sales. As I mentioned, sales reached $1.672 billion and increase of $368 million quarter over quarter.
The consolidation of Ivax contributed $329 million to this increase, while organic growth accounted for $39 million, net of another $39 million of a negative currency effect. Excluding the impact of the $39 million of negative currency impact, Teva’s organic growth would have amounted to $78 million or 6% from the comparable quarter.
While the fluctuations in exchange rates clearly effect the topline, the impact on our bottom line is mitigated through the natural hedging effect of having operations in the jurisdictions where the relatively strengthened or weakened currencies. This is part of our geographically balanced business model.
This natural hedging is supplemented by hedging instruments, the outcome of which is recorded in the (inaudible) expenses line item, which are calculated. 57% of this quarter’s consolidated sales were in North America.
26% in Europe and 17% internationally. Slightly less than 1/3 of what we classify under international was in Israel.
The other international sales benefited this quarter from Ivax’s substantial sales in these regions, mainly Latin America and central and Eastern Europe. In the US this quarter we sold 23 generic products that we have not sold in comparable quarters.
(inaudible), Azythromycin and Fexafenodene. In the first quarter of ’05, Teva sold Guarafentine, Oxycodone and Propofal.
All these were products where we were alone on the market, which resulted in tough comparisons for 2006. In addition, as part of the acquisition, Ivax lost the distribution rights of seven authorized generic products, which together with the small loss of net sales from products we had to divest, amounted to over $200 million of 2005 annual sales.
Total pharmaceutical sale in North America for the quarter include 2 months of Ivax, increased 17% to $861 million, compared to $730 million in the first quarter of last year. In Europe, we also lacked launches in this quarter.
Our overall European pharmaceutical sales including Ivax increased by about 17%, net of $29 million negative (inaudible) for $381 million. This quarter, again, Teva’s balanced business model has demonstrated its uniqueness and effectiveness.
While both the US generic and European markets were not at their best, both API and Copaxone experienced an excellent quarter. Globally market sales for Copaxone amount to $329 million.
This is a 29% increase. For the first time, we are the second most sold therapy globally.
US sales increased 36% to $221 million and non-US sales increased by 16% to $108 million. Non-US sales account now for 1/3 of total, global in-market sales.
As to our active pharmaceutical ingredients business, the API, sales to third parties amounted this quarter to $149 million, up 26%. In addition, the API business shoed $219 million worth of (inaudible) internally to Teva pharmaceutical operations, most of which was in anticipation of major launches expected in Q2 and Q3.
This is a good indicator for the future quarter. Inaudible) will realize the earnings of these internal sales once we launch these products and as the sales progress.
Our international business gained considerable momentum this quarter with the consolidation of Ivax, Latin America and central and eastern European pharmaceutical business. International sales altogether, excluding Israel, amounted this quarter to $201 million, compared to $268 million during all of fiscal ’05.
One step down in the P&L, projected gross profit, net of the earlier mentioned one-time inventory step up of $64 million in connection with the Ivax acquisition, amounts to $787 million. This is net an adjusted gross margin of 47.1% in the reported quarter, compared with 46.3% in the comparable quarter.
Both within the ordinary range of Teva of 45-48%. And on gross margin to R&D.
Net R&D, after deduction of participations from our strategic partners and Israel’s chief scientist, increased by 17% to $103 million and represented over 6% of sales. SG&A, which reached $350 million this quarter, represented 18.9% of sales.
This is a substantially higher percentage of sales compared to Teva’s stand alone previous quarter, which averaged in fiscal ’05 15.2%. this increase is due to a large extent to the consolidation of Ivax with a significant branded business and operations in many branded generic markets, which requires substantially higher selling and marketing costs on the order of 23-25% of sales.
In addition, Teva’s innovative business also generated higher selling and marketing costs, supporting (inaudible) for Copaxone sales and a greater introduction of Agilect in non- US markets. Two other factors impacting the level of SG&A expenses this quarter.
One, the first time expensing of options a total of $30 million, most of it under SG&A and two, the sharing of profits with Barr on Fexofenadine, which is also recorded under SG&A. net of these factors, the SG&A rate of historic (inaudible) was still higher than the average of 2005 and you may consider this as an investment in creating a platform for the future growth of the company including expenses related to penetration into new markets.
The greater realization of synergies should reduce over time the rate of the SG&A line item. Operating profit, after adjusting for the $64 million of inventory step up amounted this quarter to $369 million, the second highest ever.
This represents 22% of sales. This quarter, net financial costs reached $14.3 million from (inaudible) in the comparable quarter.
This quarter’s expenses reflect only two months cost of the additional $2.9 billion of (inaudible) that we raised and the absence of the finance income on the $1.5 billion of Teva’s cash balances before the acquisition; both connected to the financing of the Ivax deal. In addition, financial costs this quarter were positively affected by income from hedging activities, which offset some of the negative currency impact on sales.
The normalized quarter increase (inaudible) $4.6 billion of long term debt amounts to approximately $35 billion, to be partially offset by the yield on our cash and (inaudible) cash balances which currently stand at about $1.5 billion. In addition, financial expenses in the future and future quarters will also include income or expenses as the case may be, (inaudible) from our hedging activities.
The provision for income tax amounts to 19% of adjusted pre-tax income. The increased rate reflects Ivax consolidation as most of Ivax income is generated in markets where tax rates are higher than the pre-acquisition average.
Going forward, we expect the tax rate to fluctuate around this level, reflecting movement in product and geographical mix. This rate of tax is our current best estimate for the annual rate.
All that leads us to adjusted net income of $286 million, up 10% from last year. Adjusted EPS, based on this adjusted income, to which about $5 million were added back related to the convert, nets out at $0.37 per share on a larger share base.
In a full quarter, the add back should be around $7.5 million. From here to cash flow.
The cash flow from operations amounted to $288 million. We invested in CapEx $72 million, slightly lower than our 2005 quarterly average.
Yesterday, we approved a first quarter dividend amounting to approximately $16 million. On a per share basis, our dividend based on the current rate of exchange of the sheckle to the dollar amounts to approximately $0.076.
Last, free cash flow this quarter amounted to $162 million. If we had to single out the most exceptional figure from our first quarter balance sheet, it would be our sales and equity, which reached $9.2 billion on March 31, 2006, an increase of 53% or $3.2 billion in just 3 months from December ’05.
This is a combination of the issuance of stock to Ivax shareholders, net of the (inaudible) loss, inclusive of the one-time write off and negative translation differences. In this quarter, we increased our working capital accounts receivable plus inventory minus accounts payable by $525 million to $1.9 billion.
Inventories increased in the quarter by $575 million, almost 90% reflect the first time consolidation of Ivax. The ratio of day sales outstanding in the inventory decrease went from 132 to 134 days.
Receivables rate increased from December ’05 by $387 million and (inaudible) by $735, both of which are due to the Ivax consolidation. As to days sales outstanding receivables, these decreased from 62 days in December to 60 days in March ’06.
We have calculated this after netting out the sales reserves and allowances, the so-called SR&A from the receivables. Although we record receivables on a gross basis and record the SR&A under current liabilities, we want to facilitate a more meaningful comparison with some of our (inaudible) these reserves and so we have used the net figure.
Both the SR&A at March 31st was $979 million compared to $733 million at year end. About 90% of which are from the US, up $140 million from December and reflecting almost entirely the consolidation of Ivax.
$4.6 billion or 81% of our total interest bearing debt at March 31st is long term. $2.6 billion in convert and $2 billion in straight fixed and floating interest debt.
As you will recall, we report we (inaudible) report $2.9 billion with two (inaudible) of convertible ventures with a blended (inaudible) of 1.1% as well as 2/3 of ten and thirty year bonds with an average cost of 5.9%. It was a very successful offering and reduced our liquid portfolio of mainly fixed income securities by $1.5 billion to finance part of the cash portion of Ivax’s acquisition.
For the convenience of our audience, I would like to mention three figures before we open up for Q&A so that we are all on the same page as long as it relates to our share count. As for the first quarter of ’06, our average share count for the purpose of calculated adjusted, fully-diluted EPS is 788.1 million shares.
At the end of the first quarter, our share count for calculating fully diluted earnings per share is approximately 832 million shares and for calculating our market cap it is approximately 762 million shares. And if this is not enough, don’t get confused by the 722 million shares you find at the bottom of our quarterly GAAP account and our press release.
This figure does not include the diluting effect of our convert and options, as they are not dilutive when you show a loss. If you forget, those recorded (inaudible) loss and this share count.
And now we will be very glad to take your questions. Thank you very much.
Operator
Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session.
If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate you’re slotted in the question cue.
You may press star 2 if you would like to remove your question from the cue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
One moment please while we poll for questions. The first question is from Dimi Tomsulis, with UBS.
Dimi Tomsulis. Good morning, just a few questions.
Israel, you made some comments about your ’07 growth really looking toward more of the international whether the European or Latin American type markets; can you give us a little more color on that? Is it generic?
Is it brands? Can you give us a little bit of strategy around the respiratory brands and how you intend to promote those?
And then two questions maybe for George. George, any color or expectation around when you might hear from the FDA with respect to Vilcor and can you comment at all on the Privostatin pricing environment?
Israel Mackoff. Thank you very much for your question.
What I said is the relative contribution of the other territories which include Europe and Latin America and other territories will be relatively higher in 2007. But we are still going to have growth both in the US and in Europe.
The markets there are branded generic markets, mostly branded generic markets. We are in many of these markets we are now in a leadership position.
That means one of the three leading companies in most of these markets. We are now supporting these markets with our global capabilities, that means in operations, in generic R&D and increasing their competitive power.
In addition, you have to remember that these two areas are one of the toughest growing pharmaceutical markets in the world. So, we are very pleased with what we see there.
We are very pleased with the rate of growth that we have in these countries. And, this is one element.
The other one is the respiratory products…we have a very interesting product line which we think can be used better and we can really leverage it in many more markets and really develop a very important business, based on the current products and other products which we are going to add to this line. And I hope this answers your question.
Dimi Tomsulis. Actually, if I could just ask a little bit for more color with respect to some of the international markets.
They’ve been growing at well north of 20% for several years, including Europe. is that sustainable over the next number of years?
Do you think that’s going to continue to be the case? Israel Mackoff.
This is a very good question because everybody asks us in the last five years if we can continue to grow at the rate of 20% because every time that we become a larger company, the base looks unattainable. The truth of the matter is that the larger we became the faster we grew.
And if you want to know, I can assure you that in 2007 and 2008, our numbers will be, will reflect the 20% growth - or double the sales – compared to before. This is what we say.
I will say that I don’t want to commit whether we become a $10 billion company that we can continue to grow at 20% per annum. I don’t want to commit it right now.
But I can tell you that we are going to grow faster than the market growth of our industry, which is again a double digit number. George Barrett.
Dimi, it’s George. I’ll give you a quick answer to the two questions you asked as it relates to the updated plans from Privostatin.
We don’t know and we don’t know really a sense of timing; we can only assume that they’re well aware of the date involved. So that’s as much as we have there.
As it relates to Privostatin and the market. We generally expect a band.
It’s within the band we projected; perhaps slightly low of midpoint in that band, but largely within expectation. Dimi Tomsulis.
Okay. Thanks George.
Operator
The next question is from Elliott Wilbur with CIBC World Markets. Elliott Wilbur.
Thanks, good morning to everyone. My first question has to do with respect to the Ivax topline contribution in the first quarter.
I understand the impact from the disposition of the authorized generics was probably larger than most of us had originally anticipated. Again, maybe you could remind us of what the full year ’05 sales for Ivax were.
But even considering that, it looks like the contribution was lighter than most people had modeled. I was just wondering if you guys could make some commentary on the relative level of wholesaler inventory, with respect to the acquired Ivax business vs.
what you guys are normally accustomed to having in the channel; and if there’s any significant differences there. And I have a follow up question as well.
Israel Mackoff. I would say that first we have to remember that the numbers are global numbers; it’s not just US numbers.
And believe you me that you don’t know the wholesalers inventory in countries in South America or in countries outside of the US; we don’t get these numbers. I would say that in the US, both in the US and in Europe, the situation of Ivax was very similar to our situation.
Both of us did not have any significant launch. When I say that we didn’t have any significant launch, we haven’t had any launch during this quarter of new products.
And, therefore, I guess that the (inaudible) of the Ivax generics and the Teva generics in these two regions reflect the normal sales expansion on the one hand and the normal price erosion on the other hand. Elliott Wilbur.
Okay. Thank you.
Then I wanted to ask a question with respect o Copaxone as well. Can you at least give us some color or some idea of what you’re expecting in ’06 relative to ’05, given the possible re-entry of Tysabri?
Maybe sort of a baseline number? Are you at least expecting positive volume growth in the US?
And maybe given that you had a 9% price increase in the beginning of the year, should we at least expect that US sales should exceed that 9% rate of price growth. George Barrett.
Elliott, it’s George. Good morning.
We continue to see growth for Copaxone in 2006, both in price, as you mentioned, and in volume. You are well aware that the FDA is evaluating the terms and conditions of the Tysabri return.
And you probably also know that in Europe that evaluation has also been done. They have different views of the world, the Europeans and the US, on this.
We’re modeling that in the back half we’d see a return. We thought it was cautious to do that based on the deliberations at the committee here.
But we continue to see growth for 2006 and we believe that if there is a return, that the impact on us would be limited. Israel Mackoff.
Elliot, just to come back to your question on Ivax total sales. In ’05 they were about $2.25 billion, obviously that’s before…towards the end of the year the rights on those generics were taken away from them.
So it almost shows a full year of operation. George Barrett.
Elliott, again, I just want to make sure you’re clear. We believe they will outgrow the market, again, in 2006.
On Copaxone. Elliott Wilbur.
Is that specifically in the US or are you referring to global? Israel Mackoff.
US and global.
Elliott Wilbur.
Okay. Thank you.
Operator
Our next question comes from Andrew Foreman with W.R. Hambrandt.
Andrew Foreman. Good morning.
On the $200 million in synergies, our rough estimate suggests that (inaudible) operating margin and 25% operating margins. First question, is that the case?
two, drilling down on the Latin America integration, can you go over synergies and the duplication and what savings you can get? Give us some sense of the (inaudible)?
We’re trying to understand what is the growth time? Give us a sense of the competitive landscape, Israel, vis-à-vis the US, in terms of the number of competitors, what the pricing dynamics are, etc.
are prices eroding, as they are in the Us, or are they more stable? Thank you.
George Barrett. There are a couple of questions in there and one was Latin America.
Can we just go backward? Can you restate the US part one more time?
Andrew Foreman. Well, I think there’s some confusion about international generics and the US.
And I’m trying to understand from your perspective, having acquired Ivax, what have you learned about the competitive landscape in terms of pricing? How many competitors do you see and what are the synergies in terms of savings in Latin America and the context of the $200 million?
The big picture question for Dan is, is a 25% operating margin the effective goal for 2007? Israel Mackoff.
I would say that the competitive landscape is different in all the branded generic markets. What you see in the US is of course you have the upside of being the first to launch a product and then you have sometimes a very steep price erosion until the price is stable.
In the (inaudible) markets, this is different and you don’t…the launch is normally, once you launch you don’t get all the major sales in the first month. It takes time to reach the peak sales.
Again, the price is stable and the quantity, the volume could continue to grow. We have now many more markets like this.
We have a balance, as you see, just another element to better balance our business model, which is all in the balance. Now if you talk about synergies, we have major synergies in Latin America in countries like Mexico, where we have combined the two organizations.
And the two organizations, each of tem was less than $100 million in scope, is going to be very close to $160-$170 million dollars next year. In a country like Mexico what you get really is economies of scale in operation and of course, the other advantages which you get are being a leader in the market.
In the other countries, I just think that we have rationalized all the investment plans in terms of CapEx, it just means that we are also rationalizing the production; we are going to give support to additional product lines and give these companies – which most of them are leaders in their countries – give them additional products and enable them to use the platform that they have already built to leverage the platform that they have already built. This is true, by the way, also for countries in East and Central Europe.
There you can see, as we did, that Russia is very similar to Mexico. We combined two companies below $100 million each to become a major player of approximately $150-$150 million.
So, we’re benefiting from this (inaudible). Now the gross profit in this market is higher than in other markets; but remember that the SG&A is also higher, because we are promoting the products and therefore you have to really look at the operating profit and the operating profit is in line with our operating profit of the company.
So we’re going to get the synergies both in operations and we’re going to build synergies in R&D. remember that now, instead of having each company looking after their own R&D, we are going to leverage for them a very sophisticated R&D operation that we have to provide them with additional products.
It takes time, but this is where we are heading. Relating to your question about the $200 million of synergies and a goal of 25% on operating, as you know we have already been at the level of 25% operating, Ivax in ’05 had substantially lower rate of operating profit and the synergies obviously have to increase greatly our operating; but I can’t confirm at this stage that in ’07 we will be already at 25%.
It’s a long way. Andrew Foreman.
Thank you.
Israel Mackoff.
And I would appreciate if in the future everyone will refrain to one question, please.
Operator
The next question comes from Richard Silver with Lehman Brothers. Richard Silver.
Can you elaborate a little bit on the Zocor exclusivity assumption that $250-$300 million revenue estimate? Is that probability weighted at all?
It wouldn’t make sense that it would be because that, obviously, is the amount that you would assume if you have it. But can you give us some sense of what kind of assumptions you’re making on that number?
And then just also related to Zocor, do you expect the FDA to comment on exclusivity before final approval or will you just expect the FDA to confirm the final approval and then you know whether you’ll have exclusivity?
George Barrett.
Rich, it’s George. Let me let Bill Marth speak a little bit about the statin and then I’ll jump in on your second question.
William Marth.
Hey Rich, I just wanted to mention that, first of all, it’s a cautious assumption, number one. And the second part of that is to make sure you understand that it was incremental, when Israel mentioned the $250-$300 to what was in the base.
We had always assumed we would be a pretty good player in Zimstaten. As it relates to the FDA commenting, it’s not clear.
We have precedent where they have commented as to whether or not they will or will not appeal. I’m not sure that necessarily obligates them to do so again.
So, at this point we’re just doing what you’re doing, staying tuned, preparing. But we cannot be assured that they will in fact make a public comment on this.
Richard Silver.
And I assume that you’re not having dialog with them? It’s just sitting and waiting for them?
William Marth.
Yeah. We’re waiting.
Richard Silver.
Okay. And just Bill, I’m sorry but when you say cautious, if you get the exclusivity, what’s part of the cautiousness there?
Just pricing?
William Marth.
There’s a lot of dynamics there that we can’t really speak to at this point, Rich. Growth would be one of them.
So we need to, again, we remain very cautious at this point in time.
Operator
Our next question comes from David Woodburne with Prudential Equity Group.
David Woodburne.
I think this is a relatively quick one. I know you’re not giving guidance for quarterly earnings throughout the year, but with two very large drugs going generic in the last two weeks and (inaudible) in there as well, should we think of Q3 and Q4 as being significantly larger than Q2?
Or, how much can you shift in the last 2 weeks of June? And would Q2 actually be one of the bigger quarters of the year?
Israel Mackoff.
One of the (inaudible) is not going to be in Q2 because we are closing the quarter before the end of June, a few days before the end of June. So it’s going to be a Q3 launch and if we launch Simatapin in the last days of June just before the close of the month, then of course it’s going to effect Q2 and make Q2 a very good quarter.
Otherwise, the Q2 and Q4 will be very, very good quarters and Q2, if we look at any of these two launches, will be just a normal quarter with very few launches. George Barrett.
Just again to remind you this is totally timing sensitive. Because really you’re talking about a 3-4 day swing at the end of Q2.
So, one or two days differential could mean the difference between it essentially shifting between Q2 and Q3. We’ll just have to see how the timing plays out and Israel, I think, captured most of it.
Operator
The next question comes from Randall Fenicki with Goldman Sachs.
Randall Fenicki.
Thanks for the question. Just on the synergy target.
Can you just clarify is the $100 million in synergy, is that a full year or is that annualized by Q4? And has that forecast changed at all and maybe more broadly, now that you’ve had some time with Ivax, how has your view of the synergy opportunities changed from time when you initially announced the deal to where we are today?
Thanks.
Israel Mackoff.
First of all, the $100 million is full year. And of course when you make your forecast before you acquire a company, you have to take the reservation to make a responsible estimate.
The more we learned, the (inaudible) and of course we will learn even further during the next months and we see more opportunities and the forecast of the synergies and of course a larger part will come in 2007 because it takes time to realize the synergies. The run rate, at the end of this year, will be higher than $100 million.
Randall Fenicki.
Great. So it feels like you could have upside to the current targets right now as you move through the year?
Israel Mackoff.
Maybe. Look, in all our forecasts we will have an upside.
I heard before the question about Simvastatin. We don’t even want to talk about the upside in Simvastatin because it’s huge.
We don’t discuss it. There will be upsides but we are trying to give you what we call a realistic estimate, which are risk adjusted in every respect.
Sometimes the adjustment is off and sometimes we have upside and that’s it.
Operator
Our next question comes from David Marrish with Banc of America Securities.
David Marrish.
You mention the results don’t include any launches in the quarter, but we also had a few pretty big things that weren’t in the year ago quarter like Allegra and Zithromax and Oxycontin, so can you provide the sales of maybe Allegra and Zithromax. Then separate from that, it appears that you backed out API and Copaxone and Ivax, or actually just Ivax and Copaxone and that Teva generics aren’t growing.
Is that the case? And what’s happening with the operating margins for that business?
Probably the biggest question is, what’s going on in the generics business?
George Barrett.
David, hi it’s George. The US generics business is actually doing very well, as was mentioned by Dan and Israel, where the comp, depending on launches and elimination of exclusivities and therefore the associated reduction in price…but our prescription growth looks good, our margins look good, we are certainly seeing, as we always remind you, very competitive characteristics in the market.
That has not changed. It remains a robustly competitive market but we really feel good about where our US generics business is and we’re going to have these episodic periods where one quarter against another we’re going to look less exciting, because of the changes in exclusivity.
But when you look at the underlying characteristics, prescription growth, positioning with key customers, generally the margin of the bulk of our products, we feel good about the business.
David Marrish.
Nothing didn’t feel good. George, what’s the organic growth?
Israel talked about doubling sales over four or five years. First, does that include acquisitions?
And secondly, over that period of time, excluding some of the boldness of the exclusivity, what’s the organic growth rate, normalized, for the generics business?
Israel Mackoff.
David, I don’t understand what is zero percent. If this was normalized growth then Teva would have been about a $200 million business in US generics.
This is was probably the sales of 10 years ago. We have continued to grow by new launches and it’s moderated by the launches.
So if you take a quarter without new launches, what you have is only erosion. If you say you have zero sales of new launches, then only erosion and expansion of sales of the current products to new customers.
And remember we are expanding the sales we are serving more customers, we’re increasing the volume. We have increased sales of TRX, we sold in the first quarter two or three times higher than our next competitor.
So, the erosion is part of our life. Now the erosion of products which are going out of exclusivity is a very, very substantial in the first few weeks or first few days after exclusivity is going to expire and you know it.
George Barrett.
Dave, again I just want to remind you that when you ask about the underlying business, Israel is right. The underlying business contains and is critical to our business model a flow of new products.
It would be like saying let’s see what General Motors’ business is like if you just take out the car part.
David Marrish.
If you take out the acquisition part, what is the sales growth expectation with acquisition?
George Barrett.
We’re growing organically as a generics business in the US and we would have done so without and acquisition. 2006 was going to look like a wonderful year under any circumstances and it will look particularly wonderful this year with the addition of Ivax.
Israel Mackoff.
David, I would like to say something about acquisition. In the last 10 years, Teva acquired one company on the average every year.
And this is part of our business. We are living in an industry which is going through consolidation and we are leaders in this consolidation.
And, if you look at the result of these acquisitions, our compounded growth in the last 10 years on the topline was 23%. And our compounded growth on the bottom line in the last 10 years was 29%.
That means that not only did we make an acquisition every year and each acquisition is a burden on your financials, always an immediate burden on your financials, we were able to generate and to grow the profit line past the topline. So acquisition is part of our business model.
David Marrish.
Thank you.
Operator
Our next question comes from Michael Tong with Wachovia Securities.
Michael Tong.
Hi, good morning. Just following along the lines of cost synergy, do you have right now enough visibility to tell us where the cost synergy is coming from?
Have you allocated a cost of goods, R&D and SG&A?
Israel Mackoff.
Actually it’s divided under all these three items. We expect that if you look at let’s say the end of 2007, you will see that approximately, you will see that the larger part of the synergies are coming through the cost of goods, this means efficiencies in sourcing, etc.
and you will see that the order of magnitude of savings both in R&D and SG&A are very comparable.
Michael Tong.
Thank you.
Israel Mackoff.
We’ll take two more questions.
Operator
The next question comes Rich Watson with William Blair and Company.
Rich Watson.
Good morning, thanks. Real quick, can Dan just confirm the full year tax rate for us and also, now that you’re a few months into the Ivax acquisition, just kind of thinking back over Teva’s history, it seems like your acquisitions have fallen into broadly one of two buckets.
Broken companies that you maybe pay less than a premium price for and then fix and extract synergies and all that sort of thing, vis-à-vis premium prices paid for premium organizations such as Seecor. Where does Ivax, three months into the acquisition, fall on that continuum?
Thanks.
Dan Seusskind.
I would say that Ivax falls in the category of all our other acquisitions. I can tell you that for each acquisition, we paid a premium.
If it was a broken company, we paid the premium of a broken company. You always when you buy, pay a premium.
We said always that we will allow dilution only for the first year; and this is a rule of ours that we don’t buy companies that cannot get the acquisition results in the second year. Ivax falls in the better category, which gives us actually (inaudible) during the first year.
Rich Watson.
Thank you.
Operator
Our final question comes from Robert Vante with (inaudible).
Robert Vante.
Hi it’s Robert Vante. Question 1a, could you give us a sense please on Latin America and just what sort of growth we can be looking for in a couple of years as you feed Teva’s products through Latin America.
And question 1b, as I look at your 20F from last year and your currency hedging book, roughly half of your hedges outstanding are Hungarian forint. Now Hungarian forint weakened significantly against other currencies at the end of the first quarter and I would have thought, given that you have a lot of costs in Hungarian forint that you would have incurred a hedging loss.
And I was wondering…you mentioned before that you had a hedging gain in the quarter.
Israel Mackoff.
Ultimately, our hedging is not only confined to forint, Robert. We are not discussing now the growth rate in each of the countries.
We don’t give the growth rate in the US or the growth rate in Europe. We are talking about the company as a whole and we don’t break it into regions and hedgings, etiher.
We are doing hedgings partially against the euro, partially against the forint. We also do hedgings on the (inaudible).
Altogether, actually it worked out that we made quite a nice gain during Q1. it also depends when you do what.
If (inaudible) what that will be. And also, the question is how do you hedge?
If you hedge in the right direction. So even if the forint is devalued, maybe the values that you are maintaining make money.
Also in which way you went. If you do options or if you do cylinders.
So, it’s very, I appreciate that from the outside it is very difficult to calculate for us what the hedging result was, even retrospectively.
Robert Vante.
Okay. Thank you very much.
Operator
Thank you. I would like to turn the floor back over to management for closing comments.
Kevin Mannick.
Thanks a lot operator. We’d like to thank everyone for joining us today.
As always, we’ll be happy to take additional question offline if you have any. We also hope you’ll join us in person at our luncheon today or listen into the webcast.
Operator, if you could please provide the replay information, I’d greatly appreciate it. Thank you.
Operator
A replay of this conference will be available until May 17th, 2006. to access the replay dial 877-660-6853.
for international dialers, please dial 201-612-7415. use account number 3055 and conference id number 201219.
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