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Teva Pharmaceutical Industries 20-F 2007 Table of ContentsUNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 20-F
Or
For the fiscal year ended December 31, 2006 Or
For the transition period from to Or
Date of event requiring this shell company report: Commission File number: 0-16174
TEVA PHARMACEUTICAL INDUSTRIES LIMITED (Exact name of Registrant as specified in its charter)
5 Basel Street P.O. Box 3190 Petach Tikva 49131, Israel (Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨ If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 x If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
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Table of ContentsINTRODUCTION AND USE OF CERTAIN TERMS Unless otherwise indicated, all references to the “Company,” “we,” “our” and “Teva” refer to Teva Pharmaceutical Industries Limited and its subsidiaries. References to “U.S. dollars,” “U.S.$” and $ are to the lawful currency of the United States of America, and references to “NIS” are to New Israeli Shekels. Market share data is based on information provided by IMS Health Inc., a leading provider of market research to the pharmaceutical industry (“IMS”). All figures provided in this annual report reflect the consolidation of Ivax Corporation and Teva’s results commencing February 1, 2006. FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements, which express management’s current beliefs or expectations with regard to future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these statements relate to, among other things:
The forward-looking statements contained herein involve a number of known and unknown risks and uncertainties that could cause our future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements. You should understand that many important factors, in addition to those discussed or incorporated by reference in this report, could cause our results to differ materially from those expressed in the forward-looking statements. Potential factors that could affect our results include, in addition to others not described in this report, those described under “Item 3 – Key Information – Risk Factors.” These are factors that we think could cause our actual results to differ materially from expected results. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statements or other information contained in this report, whether as a result of new information, future events or otherwise. You are advised, however, to consult any additional disclosures we make in our reports on Form 6-K filed with the U.S. Securities and Exchange Commission (“SEC”). Please also see the cautionary discussion of risks and uncertainties under “Item 3: Key Information – Risk Factors” starting on page 4 of this report. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.
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Table of ContentsITEM 3: KEY INFORMATION SELECTED FINANCIAL DATA The Israeli Securities Law allows Israeli companies, such as Teva, whose securities are listed both on the Tel Aviv Stock Exchange and on certain stock exchanges in the United States (including NASDAQ), to report exclusively under the rules of the SEC and generally accepted accounting principles in the United States (“U.S. GAAP”). Except as otherwise indicated, all financial statements and other financial information included in this annual report are presented solely under U.S. GAAP. The following selected financial data for each of the years in the three-year period ended December 31, 2006 and at December 31, 2006 and 2005 are derived from Teva’s audited consolidated financial statements set forth elsewhere in this report, which have been prepared in accordance with U.S. GAAP. The selected financial data for each of the years in the two-year period ended December 31, 2003 and at December 31, 2004, 2003 and 2002 are derived from audited financial statements not appearing in this report, which have also been prepared in accordance with U.S. GAAP. The selected financial data should be read in conjunction with the financial statements, related notes and other financial information included in this report. The currency of the primary economic environment in which the operations of Teva and its subsidiaries in Israel and in the United States are conducted is the U.S. dollar. The functional currency of each of Teva’s other subsidiaries (principally operating in Western Europe, Central and Eastern Europe, Latin America and Canada) is the respective local currency. Operating Data
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Dividends Teva has paid dividends on a regular quarterly basis since 1986. Future dividend policy will be reviewed by the board of directors based upon conditions then existing, including Teva’s earnings, financial condition, capital requirements and other factors. Teva’s ability to pay cash dividends may be restricted by instruments governing its debt obligations. Dividends are declared and paid in New Israeli Shekels (“NIS”). Dividends are converted into U.S. dollars and paid by the depositary of Teva’s ADRs for the benefit of owners of ADRs, and are subject to exchange rate fluctuations between the NIS and the U.S. dollar between the declaration date and the date of actual payment. Dividends paid by an Israeli company to shareholders residing outside Israel are generally subject to withholding of Israeli income tax at a rate of up to 20%. Such tax rates apply unless a lower rate is provided in a treaty between Israel and the shareholder’s country of residence. In Teva’s case, the applicable withholding tax rate will depend on the particular Israeli production facilities that have generated the earnings that are the source of the specific dividend and, accordingly, the applicable rate may change from time to time. The rate of tax withheld on the dividend declared for the fourth quarter of 2006 was 16%. The following table sets forth the amounts of the dividends paid in respect of each period indicated prior to deductions for applicable Israeli withholding taxes (in cents per share). All figures have been adjusted to reflect the 2-for-1 stock splits effected in June 2004 and December 2002.
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Table of ContentsRISK FACTORS Our business faces significant risks. You should carefully consider all of the information set forth in this annual report and in our other filings with the SEC, including the following risk factors which we face and which are faced by our industry. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. This report also contains forward-looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-looking statements, as a result of certain factors including the risks described below and elsewhere in this report. See “Forward-Looking Statements” on page 1. Our success depends on our ability to successfully develop and commercialize additional pharmaceutical products. Our future results of operations depend, to a significant degree, upon our ability to successfully commercialize additional generic and innovative branded pharmaceutical products as well as active pharmaceutical ingredients. We must develop, test and manufacture generic products as well as prove that our generic products are the bio-equivalent of their branded counterparts. All of our products must meet and continue to comply with regulatory and safety standards and receive regulatory approvals; we may be forced to withdraw a product from the market if health or safety concerns arise with respect to such product. The development and commercialization process, particularly with respect to innovative products, is both time-consuming and costly and involves a high degree of business risk. Our products currently under development, if and when fully developed and tested, may not perform as we expect, necessary regulatory approvals may not be obtained in a timely manner, if at all, and we may not be able to successfully and profitably produce and market such products. Delays in any part of the process or our inability to obtain regulatory approval of our products could adversely affect our operating results by restricting or delaying our introduction of new products. Our ability to introduce and benefit from new products may depend upon our ability to successfully challenge patent rights held by branded companies or otherwise develop non-infringing products. The continuous introduction of new pharmaceutical products as well as active pharmaceutical ingredients is critical to our business. Our revenues and profits from generic pharmaceutical products generally decline as competitors introduce their own generic equivalents. Net selling prices of generic drugs typically decline, sometimes dramatically, especially as additional companies receive approvals and enter the market for a given product and competition intensifies. In particular, we are facing increasing competition from brand-name companies in addition to local and foreign generic companies. Our ability to sustain our sales and profitability on any product over time is dependent on both the number of new companies selling such product and the timing of their approvals. Our overall profitability depends on, among other things, our ability to continuously and timely introduce new products. Our revenues and profits are closely tied to our success in obtaining U.S. market exclusivity for generic versions of significant products. To the extent that we succeed in being the first to market a generic version of a significant product, and particularly if we obtain the 180-day period of market exclusivity for the U.S. market provided under the Hatch-Waxman Act, our sales, profits and profitability can be substantially increased in the period following the introduction of such product and prior to a competitor’s introduction of the equivalent product. For example, our 2006 operating results included major contributions from products sold with U.S. market exclusivity. Our ability to achieve sales growth and profitability is dependent on our success in challenging patents and/or developing non-infringing products and launching products with U.S. market exclusivity. In addition, the flow of potential new generic products with exclusivity and the size of the product opportunities vary significantly from year-to-year, or even from quarter-to-quarter. Our revenues and profits from generic pharmaceutical products may decline as a result of intense competition from brand-name companies that are under increased pressure to counter generic products. Our generic pharmaceutical products face intense competition from brand-name companies that have taken aggressive steps to thwart competition from generic companies. In particular, brand-name companies continue to sell or license their products directly or through licensing arrangements or strategic alliances with generic pharmaceutical companies (so-called “authorized generics”). No significant regulatory approvals are required for a brand-name company to sell directly or through a third party to the generic market, and brand-name companies do not face any other significant barriers to entry into such market. In addition, such companies continually seek to delay generic introductions and to decrease the impact of generic competition, using tactics which include:
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These strategies may increase the costs and risks associated with our efforts to introduce generic products and may delay or prevent such introduction altogether. Sales of our products may be adversely affected by the continuing and recent consolidation of our U.S. distribution network, seasonality, other pricing factors, financial constraints of pharmaceutical distributors and the concentration of our customer base. A significant proportion of our sales is made to relatively few U.S. retail drug chains, wholesalers, managed care purchasing organizations, mail order distributors and hospitals. These customers, which represent an essential part of the distribution chain of pharmaceutical products, are continuing to undergo significant consolidation. This consolidation may provide our customers with additional purchasing leverage and consequently increase the pricing pressures that we face. Additionally, the emergence of large buying groups representing independent retail pharmacies and the prevalence and influence of managed care organizations and similar institutions enable those groups to extract price discounts on our products. Our net sales and quarterly growth comparisons may be affected by fluctuations in the buying patterns of retail chains, major distributors and other trade buyers. These fluctuations may result from seasonality, pricing, wholesaler buying decisions or other factors. In addition, many of the major pharmaceutical distributors have experienced downturns and financial constraints, which may impact both our sales and the collectibility of our receivables and result in even greater consolidation among our customers. These developments may have a material adverse effect on our business, financial condition and results of operations. Changes in the regulatory environment may prevent us from utilizing the exclusivity periods that are important to the success of our generic products. The Medicare Prescription Drug Act provides that the 180-day market exclusivity period provided under the Hatch-Waxman Act is only triggered by commercial marketing of the product. However, the Medicare Act also contains forfeiture provisions which would deprive the first “Paragraph IV” filer (as described under “Regulation” in Item 4 below) of exclusivity if certain conditions are met. Accordingly, we may face the risk of forfeiture and therefore may not be able to exploit a given exclusivity period for specific products. If we elect to sell a generic product prior to the final resolution of outstanding patent litigation, we could be subject to liability for damages. At times, we or our partners seek approval to market generic products before the expiration of patents for those products, based upon our belief that such patents are invalid, unenforceable, or would not be infringed by our products. As a result, we are involved in patent litigation, the outcome of which, in certain cases, could materially adversely affect our business. Based upon a complex analysis of a variety of legal and commercial factors, we may elect to sell a generic product even though litigation is still pending – whether before any court decision is rendered or while an appeal of a lower court decision is pending. For example, we launched, and continue to sell, generic versions of Allegra®, Neurontin® and Wellbutrin XL® despite the fact that litigation with the companies that sell these branded products is still pending. To the extent we elect to proceed in this manner, and the final court decision is adverse to us, we could be required to cease selling the infringing products, causing us to lose future sales revenue from such products and to face substantial liability for patent infringement, in the form of either payment for the innovator’s lost profits or a royalty on our sales of the infringing products. These damages may be significant, and could materially adversely affect our business. In the case of willful infringement, the damages may be up to three times the profits lost by the patent owner and not based on the profits
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Table of Contentswe earned. Because of the discount pricing typically involved with generic pharmaceutical products, patented brand products generally realize a significantly higher profit margin than generic pharmaceutical products. Because of the nature of these claims, we are generally not permitted under U.S. GAAP to establish reserves in our accounts for such contingencies. Although we currently have insurance coverage for certain of the specified types of damage described above, subject to certain terms and conditions, we may be subject to claims that are subject to our deductible, exceed our policy limits or relate to damages that are not covered by our policy. In addition, there is a very limited market for such insurance coverage, which is becoming increasingly less cost-effective or economically viable, and as a result, we may not be able to obtain the type and amount of coverage we desire or to maintain our current coverage. Research and development efforts invested in our innovative pipeline may not achieve expected results. We invest increasingly greater resources to develop our innovative pipeline, both through our own efforts and through collaborations with third parties, which results in higher risks. The time from discovery to a possible commercial launch of an innovative product is substantial and involves multiple stages in which the product may be abandoned as a result of such factors as serious developmental problems, the inability to achieve our clinical goals, the inability to obtain necessary regulatory approvals in a timely manner, if at all, and the inability to produce and market such innovative products successfully and profitably. In addition, we face the risk that some of the third parties we collaborate with may fail to perform their obligations. Accordingly, our investment in research and development of innovative products can involve significant costs with no assurances of future revenues or profits. Our sales of innovative products, especially Copaxone®, could be adversely affected by competition. Our innovative products face or may face intense competition from competitors’ products, which may adversely affect our sales and profitability. Copaxone® is our leading innovative product, from which we derive substantial revenues and profits. To date, we and our marketing partners have been successful in our efforts to establish Copaxone® as a leading therapy for multiple sclerosis and have increased our global market share among the currently available major therapies for multiple sclerosis. However, Copaxone® faces intense competition from existing products, such as Avonex®, Betaseron®, Rebif® and Tysabri®. We may also face competition from additional products in development, including an orally administered treatment for multiple sclerosis. In addition, the exclusivity protections afforded us in the United States through orphan drug status for Copaxone® expired on December 20, 2003. If our patents on Copaxone® are successfully challenged, we may also face generic competition for this product. Momenta Pharmaceuticals, Inc., for example, has announced that it has commenced, in cooperation with Novartis, developing a generic equivalent of Copaxone®. We are subject to government regulation that increases our costs and could prevent us from marketing or selling our products. We are subject to extensive pharmaceutical industry regulations in countries where we operate. We cannot predict the extent to which we may be affected by legislative and other regulatory developments concerning our products. We are dependent on obtaining timely approvals before marketing most of our products. In the United States, any manufacturer failing to comply with FDA or other applicable regulatory agency requirements may be unable to obtain approvals for the introduction of new products and, even after approval, initial product shipments may be delayed. The FDA also has the authority to revoke drug approvals previously granted and remove from the market previously approved drug products containing ingredients no longer approved by the FDA. Our major facilities, both within and outside the United States, and our products are periodically inspected by the FDA, which has extensive enforcement powers over the activities of pharmaceutical manufacturers, including the power to seize, force to recall and prohibit the sale or import of non-complying products, and to halt operations of and criminally prosecute non-complying manufacturers. In addition, we are subject in the U.S. to other regulations, including those related to quotas for controlled substances, which may from time to time limit our ability to meet demand for products containing such substances. In the European Union (“EU”) and Israel, the manufacture and sale of pharmaceutical products is regulated in a manner substantially similar to that in the United States. Legal requirements generally prohibit the handling, manufacture, marketing and importation of any pharmaceutical product unless it is properly registered in accordance with applicable law. The registration file relating to any particular product must contain medical data related to product efficacy and safety, including results of clinical testing and references to medical publications, as well as detailed information regarding production methods and quality control. Health ministries are authorized to cancel the registration of a product if it is found to be harmful or ineffective or manufactured and marketed other than in accordance with registration conditions. Data exclusivity provisions exist in many countries where we operate, although their application is not uniform. In general, these exclusivity provisions prevent the approval by, and/or submission of generic drug applications to, the health authorities for a fixed period of time following the first approval of a novel brand-name product in that country or other recognized countries. As these exclusivity provisions operate independently of patent exclusivity, they may prevent the approval and/or submission of generic drug applications for some products even after patent protection has expired.
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Table of ContentsWe are subject to legislation in Israel, primarily relating to patents and data exclusivity provisions. Modifications of this legislation or court decisions regarding this legislation may adversely affect us and may prevent us from exporting Israeli-manufactured products in a timely fashion. Additionally, the existence of third-party patents in Israel, with the attendant risk of litigation, may cause us to move production outside of Israel or otherwise adversely affect our ability to export certain products from Israel. Exports from Europe may similarly be affected by legislation relating to patents and data exclusivity provisions and also by the risk of patent litigation. The manufacture of our products is highly complex, and sometimes single-sourced, and a supply interruption or delay could adversely affect our business, financial condition or results of operations. The products we market, distribute and sell are either manufactured at our own manufacturing facilities or, in certain cases, through supply agreements with third parties. Many of our products are the result of complex manufacturing processes, and are sometimes dependent on highly specialized raw materials. In addition, for certain of our products, and certain key raw materials, we have only a single source of supply. As a result, we can provide no assurances that supply sources will not be interrupted from time to time. For these same reasons, the volume of production of any product cannot be rapidly altered. As a result, if we fail to accurately predict market demand for any of our products, we may not be able to produce enough of the product to meet that demand, which could affect our business, financial condition or results of operations. We may not be able to successfully identify, consummate and integrate future acquisitions. In the past, we have grown, in part, through a number of significant acquisitions, including our acquisitions of Ivax Corporation in January 2006 and Sicor Inc. in January 2004. We continue to be engaged in various stages of evaluating or pursuing potential acquisitions and may in the future acquire other pharmaceutical and active pharmaceutical ingredients businesses and seek to integrate them into our own operations. Future acquisitions involve known and unknown risks that could adversely affect our future revenues and operating results. For example:
We may be susceptible to product liability claims that are not covered by insurance, including potential claims relating to products that we previously sold or currently sell and that are not covered by insurance. Our business inherently exposes us to claims relating to the use of our products. We sell, and will continue to sell, pharmaceutical products for which product liability insurance coverage is not available to us, and, accordingly, we may be subject to claims that are not covered by insurance as well as claims that exceed our policy limits. Additional products for which we currently have coverage may be excluded in the future. Because of the nature of these claims, we are generally not permitted under U.S. GAAP to establish reserves in our accounts for such contingencies. In addition, product liability coverage for pharmaceutical companies is becoming more expensive and increasingly difficult to obtain and, as a result, we may not be able to obtain the type and amount of coverage we desire or to maintain our current coverage.
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Table of ContentsReforms in the healthcare industry and the uncertainty associated with pharmaceutical pricing, reimbursement and related matters could adversely affect the marketing, pricing and demand for our products. Increasing expenditures for healthcare have been the subject of considerable public attention almost everywhere we conduct business. Both private and governmental entities are seeking ways to reduce or contain healthcare costs. In many countries where we currently operate, pharmaceutical prices are subject to regulation. In the United States, numerous proposals that would effect changes in the U.S. healthcare system have been introduced in Congress (as well as in some state legislatures), including expanded Medicare coverage for drugs, which became effective in January 2006. Similar measures are being taken or introduced throughout Western Europe, Israel, Russia and certain countries in Central and Eastern Europe. These changes may cause delays in market entry or adversely affect pricing and profitability. We cannot predict which measures may be adopted or their impact on the marketing, pricing and demand for our products. In the United States, the recently enacted Deficit Reduction Act established a new standard, the average manufacturer price, as the benchmark for prescription drug reimbursement in the Medicaid program, eliminating the previously used average wholesale price standard. The Act also changed the federal upper limit on payment for generic drugs. Payments to pharmacies for Medicaid-covered outpatient prescription drugs are set by the states. Federal reimbursements to states for the federal share of those payments are subject to this federal ceiling, which, effective January 1, 2007, was 250% of the average manufacturer price for generic drugs. We are reviewing the potential impact of these provisions on our business and profitability and have not yet been able to draw conclusions. This price limit may have the effect of reducing the reimbursement rates for certain medications that we currently sell. The success of our innovative products depends on the effectiveness of our patents, confidentiality agreements and other measures to protect our intellectual property rights. The success of our innovative products depends, in part, on our ability to obtain patents and to defend our intellectual property rights. If we fail to protect our intellectual property adequately, competitors may manufacture and market products identical or similar to ours. We have been issued numerous patents covering our innovative products, and have filed, and expect to continue to file, patent applications seeking to protect newly developed technologies and products in various countries, including the United States. Any existing or future patents issued to or licensed by us may not provide us with any competitive advantages for our products or may be challenged or circumvented by competitors. In addition, such patent rights may not prevent our competitors from developing, using or commercializing products that are similar or functionally equivalent to our products, especially Copaxone®, our leading innovative product. We also rely on trade secrets, unpatented proprietary know-how, trademarks, data exclusivity and continuing technological innovation that we seek to protect, in part by confidentiality agreements with licensees, suppliers, employees and consultants. If these agreements are breached, it is possible that we will not have adequate remedies. Disputes may arise concerning the ownership of intellectual property or the applicability of confidentiality agreements. Furthermore, our trade secrets and proprietary technology may otherwise become known or be independently developed by our competitors or we may not be able to maintain the confidentiality of information relating to such products. We have significant operations in countries that may be adversely affected by acts of terrorism, political or economical instability or major hostilities. We are a global pharmaceutical company with worldwide operations. Over 80% of our sales are in North America and Western Europe. However, we expect to derive an increasing portion of our sales and future growth from other regions such as Latin America and Central and Eastern Europe, which may be more susceptible to political or economic instability. Significant portions of our operations are conducted outside the markets in which our products are sold, and accordingly we often import a substantial number of products into such markets. We may, therefore, be denied access to our customers or suppliers or denied the ability to ship products from any of our sites as a result of a closing of the borders of the countries in which we sell our products, or in which our operations are located, due to economic, legislative, political and military conditions, including hostilities and acts of terror, in such countries. Our executive offices and a substantial percentage of our manufacturing capabilities are located in Israel. Our Israeli operations are dependent upon materials imported from outside Israel. We also export significant amounts of products from Israel. Accordingly, our operations could be materially and adversely affected by acts of terrorism or if major hostilities should occur in the Middle East or trade between Israel and its present trading partners should be curtailed, including as a result of acts of terrorism in the United States or elsewhere.
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Table of ContentsBecause we have substantial international operations, our sales and profits may be adversely affected by currency fluctuations and restrictions as well as credit risks. Over 40% of our revenues is from sales outside of the United States. As a result we are subject to significant foreign currency risk, including foreign currency payment restrictions in certain countries. An increasing amount of our sales, particularly in Latin America and Central and Eastern European countries, is recorded in local currencies, which exposes us to the direct risk of local currency devaluations or fluctuations. We may also be exposed to credit risks in some of these less developed markets. Our failure to comply with applicable environmental laws and regulations worldwide could adversely impact our business and results of operations. We are subject to laws and regulations concerning the environment, safety matters, regulation of chemicals and product safety in the countries where we manufacture and sell our products or otherwise operate our business. These requirements include regulation of the handling, manufacture, transportation, use and disposal of materials, including the discharge of pollutants into the environment. In the normal course of our business, we are exposed to risks relating to possible releases of hazardous substances into the environment, which could cause environmental or property damage or personal injuries, and which could require remediation of contaminated soil and groundwater. Under certain laws, we may be required to remediate contamination at certain of our properties regardless of whether the contamination was caused by us or by previous occupants of the property. In recent years, the operations of all companies have become subject to increasingly stringent legislation and regulation related to occupational safety and health, product registration and environmental protection. Such legislation and regulations are complex and constantly changing, and we cannot assure you that future changes in laws or regulations would not require us to install additional controls for certain of our emission sources, to undertake changes in our manufacturing processes or to remediate soil or groundwater contamination at facilities where such clean-up is not currently required.
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Table of ContentsITEM 4: INFORMATION ON THE COMPANY Introduction Teva Pharmaceutical Industries Limited is a global pharmaceutical company that develops, produces and markets generic drugs covering all major treatment categories. It is the leading generic drug company in the world as well as in the United States in terms of total and new prescriptions. Teva also has a significant and growing innovative pharmaceutical business, whose principal products are Copaxone® for multiple sclerosis and Azilect® for Parkinson’s disease, as well as a rapidly expanding proprietary specialty business, which consists primarily of respiratory products. Teva’s active pharmaceutical ingredient (“API”) business sells to third-party manufacturers and provides significant vertical integration to Teva’s own pharmaceutical production. Teva also has an animal health business, with principal operations in the U.S., covering both the companion animal and economic animal markets. Teva’s global operations are conducted throughout North America, Europe, Latin America, Asia and Israel. Teva has direct operations in more than 50 countries, as well as 36 pharmaceutical manufacturing sites in 16 countries, 17 generic R&D centers operating mostly within certain manufacturing sites and 18 API manufacturing sites around the world. During 2006, Teva generated approximately 60% of its sales in North America, 24% in Western Europe (including Hungary) and 16% in other regions (primarily Latin America, including Mexico, Israel and Central and Eastern Europe). For a breakdown of Teva’s sales by business segment and by geographic market for the past three years, see “Item 5: Operating and Financial Review and Prospects—Results of Operations—Sales—General.” Teva believes that its balanced business model, combining generic, branded generic, innovative and specialty pharmaceutical products, and API, coupled with its geographic diversity, is a key strategic asset. This business model was further strengthened through the acquisition of Ivax Corporation in 2006, which provided Teva with broader geographic reach and significant increases in sales of branded products and operations in branded generic markets. Teva was incorporated in Israel on February 13, 1944, and is the successor to a number of Israeli corporations, the oldest of which was established in 1901. Its executive offices are located at 5 Basel Street, P.O. Box 3190, Petach Tikva 49131 Israel, telephone number 972-3-926-7267. Generic Products Generic drugs are the chemical and therapeutic equivalents of brand-name drugs and are typically sold under their generic chemical names at prices substantially below those of their brand-name equivalents. These drugs are required to meet similar governmental regulations as their brand-name equivalents and must receive regulatory approval prior to their sale in any given country. Generic drugs may be manufactured and marketed only if relevant patents on their brand-name equivalents (and any additional government-mandated market exclusivity periods) have expired, been challenged and invalidated, or otherwise legally circumvented. Generic drugs are benefiting from increasing awareness and acceptance on the part of consumers, physicians and pharmacists that generic drugs are the equivalents of brand-name drugs. Factors contributing to this increased awareness are the passage of legislation permitting or encouraging substitution and the publication by regulatory authorities of lists of equivalent drugs, which provide physicians and pharmacists with generic drug alternatives. In addition, various government agencies and many private managed care or insurance programs encourage the substitution of generic drugs for brand-name pharmaceuticals as a cost-savings measure in the purchase of, or reimbursement for, prescription drugs. Teva believes that these factors, together with demographic trends, including an aging population and a corresponding increase in healthcare costs, as well as the large volume of branded products losing patent protection over the coming years, should lead to continued expansion of the generic pharmaceuticals market. Through coordinated global research and development activities, Teva constantly seeks to expand its range of generic products. Teva’s generic product development strategy is two-fold: to introduce its generic products upon the patent expiration date of the equivalent brand-name pharmaceutical and to achieve market introduction at the earliest possible date, which may involve attempting to invalidate or otherwise validly circumvent existing patents. Teva actively reviews pharmaceutical patents and seeks opportunities to challenge those patents that it believes are either invalid or would not be infringed by a generic version. In furtherance of this strategy, Teva also seeks to enter into alliances to acquire rights to products it does not have or to otherwise share development costs or litigation risks, or to resolve patent barriers to entry. Teva believes that its generic business provides it with a competitive advantage over many of its competitors in its major markets as a result of capabilities that add value for its customers and enhance its business, including the following:
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These capabilities enable Teva to respond, on a global scale, to a wide range of requirements (both therapeutic and economic) of patients, customers and healthcare providers. North America Teva Pharmaceuticals USA Inc. (“Teva USA”), Teva’s principal U.S. subsidiary, is the leading generic drug company in the United States. Teva USA markets approximately 315 generic products in approximately 1,079 dosage strengths and packaging sizes in the U.S. Teva USA has the capability to formulate, fill, label and package finished dosage forms of injectable pharmaceutical products, which are principally sold in the U.S. Teva believes that the breadth of its product offerings has been and will continue to be of strategic significance as the generics industry continues to grow and as it experiences the effects of consolidation among purchasers, including large drugstore chains, wholesaling organizations, buying groups and managed care providers. In 2006, Teva enhanced its position as the U.S. generic market leader in total prescriptions and new prescriptions, with total prescriptions increasing from approximately 358 million in 2005 to approximately 416 million in 2006, representing 18.4% of total generic prescriptions. Teva expects that its leadership position will continue to increase as a result of its ability to continually introduce new generic equivalents for brand-name drug products on a timely basis, its emphasis on regulatory compliance and high volume cost-effective production, its customer service and the breadth of its product line. Teva’s share of total pharmaceutical prescriptions was the highest of any company in the U.S. pharmaceutical industry. Several factors have affected the U.S. generics industry recently, including consolidation at all levels, the introduction of a Medicare prescription drug program, and the efforts of brand companies to fight generic competition. Industry consolidation, which has taken place among pharmacy chains, wholesalers, benefit managers and generic producers themselves, has generally resulted in fewer, but larger, players throughout the supply chain, from manufacturers to middlemen to customers. Through Novopharm Limited, Teva manufactures and markets generic prescription drugs in Canada. Novopharm is the second largest generic drug company in Canada with a product portfolio covering approximately 84% of the Canadian generic market’s sales requirements. Novopharm’s portfolio includes 170 generic products, which are sold in over 700 dosage forms and packaging sizes. Products. Teva USA manufactures and sells all types of generic pharmaceutical products in a variety of dosage forms, including tablets, capsules, ointments, creams, liquids, injectables and, through the acquisition of Ivax, inhalants. The four most significant products that Teva sold during 2006 under exclusivity in the U.S. were the generic versions of: Zocor® (simvastatin), the largest generic launch in history to date, Zoloft® (sertraline), Wellbutrin XL® (bupropion) and Pravachol® (pravastatin). In addition, during 2006, Teva sold generic versions of the following branded products in the U.S. (listed in the order of launch): DDAVP® (desmopressin acetate), Clozaril® (clozapine), Desferal® (deferoxamine mesylate), Zonegran® (zonisamide), Novantrone® (mitoxantrone), MiraLax™ (polyethylene glycol), Proscar® (finasteride), Mobic® (meloxicam), Effexor® (venlafaxine), Cipro® (ciprofloxacin), Depo-Medrol® (methylprednisolone acetate), Ditropan XL® (oxybutynin), and Zofran® (ondansetron). The FDA requires companies to submit abbreviated new drug applications (“ANDAs”) for approval to manufacture and market generic forms of brand-name drugs. In 2006, Teva USA received 28 final generic drug approvals and 15 tentative approvals. The 15 tentative approvals received were for generic equivalents of the following products: Depakote®, Actos®, AdenoScan®, Aciphex®, Zofran® (tablets and OD tablets), Sarafem®, Protonix®, Cozaar®, Hyzaar®, Lotrel®, Risperdal®, Avelox®, Focalin™ and Wellbutrin XL® (150 mg.). A “tentative approval” letter indicates that the FDA has substantially completed its review of an application and final approval is expected once the relevant patent expires, a court decision is reached or the 30-month stay lapses. Teva’s potential for revenue growth from generic products in the United States is closely related to its pipeline of pending ANDAs with the FDA, as well as tentative approvals already granted. As of February 14, 2007, Teva had 162 product registrations awaiting FDA approval (including some products through strategic partnerships), including 42 tentative approvals. Collectively, the brand-name versions of these 162 products had U.S. sales in 2006 exceeding $92 billion. Of these applications, 78 were “Paragraph IV” applications challenging patents of branded products. Teva believes it is the first to file on 45 of these applications, the branded versions of which had U.S. sales of more than $37 billion in 2006. Branded
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Table of Contentsproduct market size is a commonly used measurement of the relative significance of a potential generic product. Generic equivalents of any given product are typically sold at prices below (and in those instances where there are multiple generic producers of the same product, substantially below) the branded price. In most instances, FDA approval is granted on the expiration of the underlying patents. However, companies are rewarded with a 180 day period of marketing exclusivity, as provided by law, for successfully challenging or circumventing these patents. As part of its strategy, Teva actively reviews pharmaceutical patents and seeks opportunities to challenge patents that it believes are either invalid or are not infringed by its generic version. In addition to the financial benefits of marketing exclusivity, Teva believes that these activities improve health care by allowing consumers quicker access to more affordable, high quality medications. In Canada, the Therapeutic Products Directorate of Health Canada requires companies to make an Abbreviated New Drug Submission in order to receive approval to manufacture and market generic pharmaceuticals. During 2006, Novopharm launched 15 generic equivalents of the following brand products: Amaryl®, Casodex®, Effexor XR® (its largest launch in history), Fludara®, Imitrex DF®, Lipidil Supra®, Mirapex®, Novatrone®, Remeron RD®, Risperidal®, Serc®, Tiazac®, Zofran®, Zofran Injectable® and Zovirax®. As of the end of 2006, Novopharm had applications for 55 products awaiting approval of the Therapeutic Products Directorate. Collectively, the brand-name versions of these products had Canadian sales in 2006 of approximately U.S. $2.8 billion. Collaborations. As part of its strategy to reach the market with generic versions as early as possible, Teva seeks to enter into alliances with partners to acquire rights to products it does not have and/or to otherwise share development costs or litigation risks or resolve patent barriers to entry. In 1997, Teva and Biovail Corporation International, through subsidiaries, entered into a ten-year marketing and product development agreement that provided Teva with exclusive U.S. marketing rights for certain of Biovail’s pipeline of controlled-release generic versions of successful brands. Biovail was responsible for the regulatory filing and approval process as well as for manufacturing the products. The products currently marketed by Teva USA under this arrangement are generic versions of Trental®, Cardizem®CD, Adalat®CC, Procardia XL® and Voltaren®XR. This 1997 agreement with Biovail was extended in 2004 by an additional four-year period. Under the 2004 amendment, Biovail also transferred all development and intellectual property rights for two additional extended-release generic products, which Teva has the right to develop and manufacture. In consideration for these agreements, Teva made certain payments to Biovail and committed to certain milestone payments. As part of the 2004 amendment, the gross margin percentage shared with Biovail was modestly increased for the remaining extended term. Teva and Biovail have also entered into a long-term API supply agreement under which Biovail increased its purchases of raw material from Teva. In June 2001, Teva entered into a strategic alliance agreement for twelve controlled-release generic pharmaceutical products with Impax Laboratories, Inc. The agreement grants Teva exclusive U.S. marketing rights and an option to acquire exclusive marketing rights in the rest of North America, Latin America, the EU and Israel. Teva subsequently exercised its option with respect to the marketing rights of certain products in Canada. The products subject to the agreement include the following products as to which Impax had pending ANDAs at the FDA and for which it has now received final or tentative approval: generic versions of Claritin® D12, Claritin® D24, Claritin® Reditabs, Wellbutrin® SR tablets, Zyban® tablets, Prilosec® capsules, Ditropan® XL and Allegra® D12H. During 2004, generic versions of Wellbutrin® SR tablets, Zyban® tablets and Prilosec® capsules were launched, and a generic version of Ditropan® XL was launched in 2006. Impax issued shares, valued at $31 million at the time of issue, to Teva under this agreement and in repayment of loans from Teva under a separate marketing rights transfer agreement. In 2006, Teva entered into an agreement with Impax and Anchen Pharmaceuticals, Inc. for the marketing of the generic version of Wellbutrin XL® (bupropion) tablets, 300 mg, the branded product marketed by GlaxoSmithKline. In accordance with the agreement, Anchen took the regulatory steps necessary to permit Impax to obtain final FDA approval of Impax’s ANDA for this product, and for Teva to sell the product within Anchen’s 180-day exclusivity period. In return, Anchen will receive certain payments, both during and after the exclusivity period. Pursuant to Teva’s 2001 agreement with Impax, Teva has U.S. marketing rights to Impax’s version of this product, and commenced sales in December 2006. Teva participates in an exclusive U.S. distribution arrangement with Baxter Healthcare Corporation for propofol, the generic version of Diprivan®. Under the agreement, Teva produces the product and sells it to Baxter, which then performs all marketing and distribution functions related to the product. Baxter pays Teva a manufacturing fee and an additional profit split based on gross margin. In early 2007, the parties amended their distribution agreement to provide that distribution rights to propofol will revert to Teva on June 30, 2007. In exchange for facilitating the assignment of customer contracts from Baxter to Teva, Baxter will continue to receive a decreasing royalty on certain sales of propofol by Teva through 2010.
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Table of ContentsIn June 2005, Teva entered into a strategic alliance arrangement with Barr Pharmaceuticals, Inc. for the marketing rights in the U.S. for the generic version of Allegra® (fexofenadine) tablets. Under the agreement, Barr enabled Teva to launch its own product, with the parties sharing profits. The percentage of profit share to Barr is dependent on multiple factors, including the number of competitors and resolution of related patent litigation with Sanofi-Aventis. The parties have agreed to share the patent litigation risks on a proportionate basis to that of the profit split arrangement. The generic version of Allegra® was launched in September 2005. This product is the subject of a patent litigation more fully described under “Contingent Liabilities” included in Note 8 to Teva’s consolidated financial statements included in this report. Recent Patent Litigation Settlements. In 2006, Teva entered into agreements settling patent litigation with certain branded companies. Teva believes that these agreements benefit both U.S. consumers, by increasing the availability of Teva’s lower cost generic products, and Teva, by removing uncertainty regarding possible litigation risks. Teva will continue to evaluate any potential future settlements on a case-by-case basis. Below are examples of settlements Teva reached during 2006: In October 2006, Teva settled a patent dispute with the Purdue Frederick Company and certain of its affiliates pertaining to Teva’s generic version of Purdue’s OxyContin® (oxycodone HCl extended-release) tablets. The settlement provided a full release of Teva and its distributors, purchasers and patients, and permits Teva to continue to sell its oxycodone products until the occurrence of certain contingencies, which have not yet occurred. Teva anticipates continuing to sell its generic version of OxyContin® at least through the end of 2007. In November 2006, Teva settled patent disputes with Pfizer Inc. regarding idarubicin, azithromycin and epirubicin. The agreement resolved and dismissed all outstanding patent litigation filed by a subsidiary of Pfizer against Sicor over Sicor’s sales of generic idarubicin, and all patent litigation brought by Pfizer over Teva’s sale of generic azithromycin. The parties granted each other full releases, and Teva continues to market its generic versions of idarubicin and azithromycin. Under the settlement, which includes certain rights for Teva to sell its generic version of epirubicin prior to the expiration, in August 2007, of Pfizer’s patent, Teva paid $62 million to Pfizer. Marketing and Sales. The marketing of generic pharmaceutical products in the U.S. is conducted through Teva USA. During 2006, 49% of Teva’s sales in the U.S. were made to drug store chains, 32% to drug wholesalers, 11% to mail order pharmacies, 6% to generic distributors, hospitals and affiliated organizations and 2% to others, including governmental institutions and managed care institutions. These percentages reflect a greater proportion of sales through wholesalers than in prior years, which is primarily the result of the several significant product launches in 2006. As part of the integration of Ivax, Teva’s U.S. sales organization was reorganized in 2006 into two groups: the Teva Generics group and the Teva Health Systems group, to align the sales force with the customer base. The new Health Systems group, which handles unit dose products and finished-dosage injectable pharmaceutical products that are primarily used in institutional settings, was created to focus on the injectable pharmaceutical market and key institutional accounts, including hospitals and clinics for critical care, government systems, hospital group purchasing organizations, managed care groups and other large healthcare purchasing organizations that Ivax had served to a greater extent than Teva had previously, and emphasizes Teva’s commitment to serving that market segment. The Teva Generics sales force calls on purchasing agents for chain drug stores, drug wholesalers, health maintenance organizations, mail order pharmacies, pharmacy buying groups and nursing homes. In the U.S., Teva also contacts its retail customers and supports its wholesale selling effort with telemarketing as well as professional journal advertising and exhibitions at key medical and pharmaceutical conventions. From time to time, Teva bids for U.S. government-tendered contracts. In Canada, Novopharm has a sales force that markets generic products to wholesalers and retail chains reaching approximately 7,500 pharmacies. Novopharm also has a hospital sales division, which offers 50 injectable products and covers approximately 900 hospitals throughout Canada. The business is conducted primarily through multi-year contracts with major group purchasing organizations, or buying groups to which many hospitals belong. Novopharm is the second largest generic manufacturer in Canada. Europe Teva is a leading generic pharmaceutical company in Europe, Teva’s second largest market after the United States, with operations in 17 Western European countries, including Hungary. The European generics market varies considerably from country to country in terms of market penetration and other characteristics. In certain European countries, there is a market for both branded generic products and drugs sold under their generic chemical names; in other European countries,
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Table of Contentsthere is a market for branded generics only. Some countries, such as the United Kingdom and The Netherlands, permit substitution by pharmacists, so-called “pure generics,” while other countries, such as Germany, Hungary and Italy, restrict the pharmacist to providing only the pharmaceutical product prescribed by doctors. In the United Kingdom, The Netherlands, Germany and Hungary, generic penetration reached 35% to 50% of total pharmaceutical sales, measured by volume; in other major European countries, such as France, Italy and Spain, the market share of generics for 2006 was less than 25%. Generics are becoming an increasingly important source of pharmaceutical products in the European Union as governments seek to lower healthcare costs. The overall value of branded products expected to lose patent protection in the top eight European markets between 2007 and 2013 is estimated to be approximately $31 billion. However, there are varying regulatory regimes among the different countries within Europe, which often result in patents expiring on different dates within European markets or which result in differences in timing of the launch of generic products due to data exclusivity restrictions. Teva’s primary strategic objective in Western Europe is to maintain or acquire a leadership position in different countries while growing faster than the market. Teva expects to continue a strong program of registering a broad portfolio of generic products, to expand in the Western European markets where Teva does not have a leading position, to capitalize on pro-generic governmental reforms and, where appropriate, to seek strategic acquisitions. In 2006, among the significant products sold by Teva in Europe were the generic versions of Zocor®, Prezal®, Zoloft®, Taxol®, Zofran®, Imigran®, Selektine®, Zithromax®, Lamictal®, Zoton®, Seroxat/Deroxat®, Staril/Fosinopril® and Fosamax Once Weekly®. During 2006, Teva received 300 generic approvals, corresponding to 27 new compounds in 36 formulations. In addition, in Europe, as of December 31, 2006, Teva had approximately 1,800 marketing authorization applications pending approval corresponding to 140 compounds in 295 formulations. Teva believes that this pipeline of approvals and applications provides Teva with the opportunity to continue its expansion, including the introduction of new products to the European generic market, some of which Teva expects to launch in 2007. Teva’s European business benefited from Ivax’s substantial presence in the United Kingdom and France and from Ivax’s presence in Germany and the Nordic countries. The acquisition of Ivax also facilitated Teva’s entrance into the respiratory business in Europe. Teva is currently the leading generic pharmaceutical company in the United Kingdom, The Netherlands and Italy. Operations in Selected European Countries United Kingdom. In 2006, Teva further strengthened its leadership position in the United Kingdom generic market with sales substantially ahead of its nearest competitor, due to the acquisition of Ivax as well as organic growth, including the launch of over 20 new products, such as the generic versions of Flomax®, Ikorel® and Imigran®, among others. In 2006, Teva became the eighth largest pharmaceutical company in the United Kingdom in terms of sales, the first time a generic company has been one of the ten largest pharmaceutical companies in the United Kingdom, and the top supplier by volume to the National Health Service. In addition to increasing Teva’s share in the generic market, the integration of Ivax has also led to other benefits such as a leading position in the branded respiratory market, expansion of the hospital product portfolio and sales and cost synergies. The Netherlands. Teva maintained its leading position in the Dutch generic market in 2006 and slightly increased its market share through the launch of new generic products. During 2006, Teva launched the generic versions of Flixonase®, Imigran®, Zofran® and Zithromax®, among others. In addition, during 2006, Teva integrated Ivax’s marketing and sales activities in The Netherlands and launched branded products, such as Almogran®, Orfiril® (neurology segment), Qvar®, Ipraxa®, Ipramol®, Airomir™ and Autohaler™ (asthma/COPD segment). Hungary. In Hungary, Teva is the fifth largest pharmaceutical company, the largest supplier to hospitals, the third largest supplier in the over-the-counter pharmaceutical market and the third largest wholesaler. During 2006, Teva substantially increased sales of the generic versions of Lipitor® and Fosamax®, successfully launched the generic version of Lanson® and increased sales of Alpha D3® (Teva’s bone metabolism product). France. While market conditions in France remained challenging in 2006, Teva’s French subsidiary, which is the fourth largest company in the French generic market, launched a number of significant products, including the generic equivalents of Taxol® (a product acquired as part of the Ivax acquisition), Vastin®/Elisor®, Triatec® and Zithromax®. At the end of 2005, the French government introduced new measures to determine prices of generic and innovative products, which are intended to increase generic substitution. As a result of the integration of Ivax, Teva also entered into the branded respiratory market in France.
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Table of ContentsItaly. Since the end of 2004, following its launch of the generic version of Neurontin®, as well as the acquisition of Dorom S.r.l, Teva has maintained a leading position in the retail generic market in Italy in addition to its well-established position in generic oncology products sold for use in hospitals. In 2006, Teva launched generic versions of Augmentin®, Claforan®, Lansox®, Omnic®, Taxol®, Fosamax® and Flixonase®. Market conditions in Italy have been affected by the Italian government’s efforts to reduce the prices of pharmaceutical products. As a result of such efforts, the Italian market was characterized in 2006 by substantial price reductions of original brands, which negatively affected generic sales. Germany. Teva maintains a limited presence in the German market, active mainly in the niche therapeutic areas of urology, oncology, nephrology and respiratory, as well as osteoporosis. The German pharmaceutical market is undergoing significant reforms, such as legislation reducing list prices, banning free products and canceling required patient co-payments for products whose selling prices are at least 30% less than the reference price for comparable products. Spain. Teva commenced its operations in Spain in mid-2004 and, although it is still in the early stages of development in this market, has launched more than 35 products targeted both to hospitals and pharmacies. Teva expects that new legislation approved in July 2006, as well as other governmental measures, such as reference prices for more than 40 brand products covering 18% of the total market and recommendations for the use of generic products, may have a positive effect on the Spanish generic market. Other Western European Markets. Teva also operates on a smaller scale in other Western European markets, such as Sweden, Finland, Denmark, Norway, Belgium, Switzerland, Ireland, Portugal, Austria and Greece. As part of its business strategy, Teva seeks to capitalize on its success in larger European markets by expanding into Europe’s relatively smaller markets. International Teva’s International Division is responsible for countries outside of the U.S., Canada and Western Europe. Teva’s pharmaceutical sales in these regions reached $1,212 million in 2006. Teva generated approximately 7% of its sales in Latin America (including Mexico), 4% in Israel, 3% in Central and Eastern Europe (CEE) and 1% in other countries. Latin America Latin America is a market of increasing importance for Teva, as it continues to build on past activities in the region and the businesses acquired as part of the Sicor and Ivax acquisitions. Teva sells a broad portfolio of innovative, branded generic, non-branded generic and over-the-counter pharmaceutical products in Latin America. Mexico, Chile, Brazil, Argentina and Venezuela are the largest markets in the region, with substantial local manufacturing and, due to the historical absence of effective patent protections for innovative drugs, a history of reliance on generic and branded generic products. In Brazil, Mexico and Chile, the current economic and political landscape is relatively stable and free market oriented, while in Venezuela, recent governmental initiatives and statements have made it difficult to predict future economic and political conditions. Total pharmaceutical retail sales in the region exceeded $25 billion in 2006, and according to IMS forecasts, the Latin American pharmaceutical market is expected to grow at an annual rate of 8-11% through 2010. In 2005, pure generic penetration in the region was estimated at approximately 16% in units and 7% in revenues. Teva intends to continue to build a franchise in Latin America, taking advantage of the expected increases in spending on healthcare (and on pharmaceuticals in particular) and growing populations in Latin America, leveraging its manufacturing expertise, building on the already existing brands it has in Latin America and on expanding the indications served. Teva has recently expanded its operations in Brazil, where it focuses on Copaxone® sales as well as oncology products. Teva has manufacturing operations in Mexico, Chile, Argentina, Peru and Venezuela and distributes its products throughout most of Latin America. Operations in Selected Latin American Countries In Mexico, one of the largest pharmaceutical markets in Latin America in terms of revenue, Teva’s operations include four pharmaceutical manufacturing sites. Sales are made primarily to the public sector (through government tenders and institutional sales), while private sales, including sales of innovative products and over-the-counter products, and exports to several other Latin American countries make up most of the balance of sales in Mexico.
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Table of ContentsIn Argentina, Teva manufactures and sells approximately 170 branded generic and over-the-counter products. Teva is the third largest pharmaceutical company with a market share of approximately 4.5% as of mid-2006. Sales are made primarily to distributors and wholesalers, with the remainder directly to healthcare institutions. In Venezuela, Teva’s subsidiary is the leading company in terms of prescriptions. Its primary business consists of branded generics, which are sold to distributors and wholesalers, with a small portion of sales being made directly to pharmacies, institutions and governmental customers. In Chile, Teva’s subsidiary is the largest pharmaceutical company. Teva distributes its products to retail and institutional (hospitals and clinics) customers, and exports to thirteen other countries within the region. Branded generics account for approximately two-thirds of Teva’s sales in dollar terms. In Peru, Teva’s operations include the third largest pharmacy chain in the country, as well as the sixth-largest pharmaceutical company in Peru by revenues, with the vast majority of its sales being made to pharmacy chains, distributors and wholesalers. Approximately one-fifth of the pharmaceutical company sales are in the form of government tenders. Central and Eastern Europe (CEE) The CEE region covers 23 countries diversified both in terms of their socio-economic and cultural backgrounds. Teva’s current main CEE markets are Russia, Poland and the Czech Republic, which account for approximately 75% of Teva’s sales in the region. The Ivax acquisition significantly expanded Teva’s CEE operations and provided Teva with a broader portfolio of generic prescription medications as well as over-the-counter drugs, vitamin supplements and medical devices. The region’s pharmaceutical market is estimated at approximately $21 billion, with a forecasted growth rate of approximately 10% a year until the end of the decade. Currently, seven of the 23 countries included in Teva’s CEE region have achieved EU membership status, two of which joined in January 2007, and three more are scheduled to join by the end of the decade. Teva’s strategy in this region is to become one of the top five regional pharmaceutical companies, as well as to be a leading supplier in every category in which it operates, including generics, respiratory products, biogenerics and over-the-counter products. Sales in the region are made through subsidiaries, local representative offices and distributors in the different markets. In Russia, Poland, the Czech Republic, Slovakia, Romania, Bulgaria and Ukraine, Teva markets and sells mostly branded non-proprietary pharmaceutical products. Teva expects to offer a substantially greater portion of its full product portfolio in this region in coming years. In 2006, among the key products sold by Teva in the CEE were the generic versions of Novo-Passit®, Beclazone®, Simgal®, Sanorin®, Stoptussin®, Stopangin®, Alendronate® and Equoral®. In 2006, Teva received 261 generic approvals, corresponding to 64 new compounds in 72 formulations and 136 strengths. In addition, in the CEE, as of February 1, 2007, Teva had 430 marketing authorizations applications pending approval, corresponding to 65 molecules in 66 forms and 140 strengths. In 2006, Teva reorganized its operations and its business models in the significant countries of its CEE region to maximize synergies, reduce dependency on third parties and begin registration of a broad portfolio of products in order to respond more effectively to customer needs. In addition, Teva has shifted much of the focus from specific product branding to a Teva branding approach to maximize the benefit of marketing the global Teva brand. Operations in Selected CEE Countries In Russia, Teva’s sales grew over 25% during 2006, despite significant government imposed cost containment measures for products included in the reimbursement list, which resulted in a considerable price declines across the generic market. In the Czech Republic, the retail market experienced a decline in value terms due to governmental cost containment policies, as well as low growth in the hospital market due to a change in the reimbursement system for certain hospital products. While this resulted in a decline in sales, Teva was able to outperform the market in the second half of the year and strengthen its position as one of the top three generic companies in the market. In 2006, Teva began to register a significant number of new products in the Czech Republic. In Poland during 2006, Teva rationalized its generic product portfolio and registered a large number of products to strengthen its current portfolio.
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Table of ContentsOther CEE highlights. Teva is taking steps to register its products in what have, to date, been markets of lesser focus and is actively exploring the expansion of its sales and marketing organization to markets where it currently does not have a significant local presence. In 2006, Teva has strengthened its operations in Slovakia and has also established local operations in Romania, Bulgaria and Ukraine. Israel Teva is the largest non-governmental supplier of healthcare products and services in Israel. Sales in Israel accounted for 4% of Teva’s total sales in 2006. In this market, Teva is involved in the marketing, promotion, selling and distribution of a wide range of healthcare products and services. These include innovative pharmaceutical products, generics, over-the-counter and consumer healthcare products, hospital supplies, dialysis equipment and disposables, diagnostics and home care services. In 2006, Teva became increasingly active in supplying healthcare services for the geriatric market. In Israel, Teva has aligned its products and services with the needs of its main customers, namely healthcare funds, hospitals, private pharmacies and pharmacy chains. It has built its Israeli product portfolio through licensing arrangements, as well as through its own product development. Teva intends to introduce new products into the Israeli market and toward that goal it maintains ongoing contact with other pharmaceutical, biotechnology, hospital supply and healthcare companies around the world. Teva estimated that in 2006 the Israeli market for pharmaceuticals was approximately $800 million based on the manufacturers’ selling price. This market is comprised of three sectors, namely healthcare funds, private pharmacies/chains and government hospitals. All sales of Teva’s products in Israel are made through its distribution company, Salomon, Levin and Elstein Ltd., which sells directly to institutional customers, as well as to the private pharmacies and chains. Several issues affected Teva’s product pricing in Israel during 2006. The Health Ministry has been under significant pressure to lower prices for pharmaceuticals, and has continued its policy of measures restricting expenditures for pharmaceutical products by the government-sponsored healthcare funds. Teva’s prices were also affected by pricing regulations that mandate that the retail prices of pharmaceuticals in Israel may not exceed the average of prices in four EU markets (the United Kingdom, Germany, France and Belgium) (the so-called “Dutch Model”). Effective as of January 15, 2007, the model was amended to include three additional EU markets (Spain, Portugal and Hungary, or Poland if the product does not exist in any of these additional markets) where prices of pharmaceutical products are notably low, which will result in lower reference prices. In addition, the Israeli healthcare funds continue to parallel import, primarily to put pressure on Israeli producers to lower prices. In addition, Israeli regulations that came into effect in May 2005 allow for sales of some over-the-counter products for the first time in retail locations in addition to pharmacies. However, penetration in the retail over-the-counter market has been slow, as retail stores and the general public are not yet acquainted with this offering and opportunity. Moreover, the annual update of the National List of Reimbursed Drugs in 2006 included, for the first time since its establishment, new pharmaceutical products and new services to treat chronic illnesses, whereas in previous years only life-saving products were given priority for inclusion in the list. Other Countries China. In China, Teva is engaged in initial efforts to capture a larger share of this important and fast growing market. Teva’s current presence in China is based on assets acquired as part of the Sicor and Ivax acquisitions. In 2006, Teva increased its holdings in Tianjin Hualida Biotechnology Company Ltd. from 45% to 60%. Hualida’s main product is Interferon Alpha 2B, used in the treatment of hepatitis and certain types of cancer and which is marketed in China. Over the next few years, Hualida plans to register and bring to market additional products from Teva’s oncology portfolio. As part of the acquisition of Ivax, Teva acquired additional assets in China, including a 50% interest in Sino-American Kunming Baker Norton Pharmaceutical Co., Ltd., which produces and markets amoxicillin and cephaclor in China, as well as Teva’s Alpha D3® and other imported products. Specialty Pharmaceutical Products Teva leverages its leadership in the global generics arena through expansion into the specialty pharmaceutical products business, presently focused on respiratory, bio-generics and biopharmaceutical products, as well as hospitals and institutional franchises. Respiratory Products Through the Ivax acquisition, Teva gained substantial access to expertise in the development, manufacture and marketing (mainly in the United States and Europe) of inhaled respiratory drugs, primarily for bronchial asthma and chronic
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Table of Contentsobstructive pulmonary disease, delivered by metered-dose and dry powder inhalers. The respiratory franchise recorded annual sales of approximately $500 million in 2006, reflecting a significant increase from the sales recorded during 2005. At the core of this respiratory franchise are several patented delivery systems, including Easi-Breathe®, an advanced breath-activated inhaler (BAI), Spiromax™/Airmax™, a multi-dose dry powder inhaler and Cyclohaler®, a single dose dry powder device. In addition, Teva markets several press and breathe metered dose inhalers as well as Steri-Nebs™ ampoules. This franchise is expected to benefit from Teva’s global reach and efficient supply chain, coupled with growing recognition for Teva’s branded proprietary delivery systems. Teva’s respiratory strategy is targeted to extract value out of both the branded and generics environments. In the short term, Teva believes it is positioned to capture the opportunity identified in the global respiratory market, utilizing its current respiratory portfolio. In the medium to long-term, Teva expects to utilize its research and development capabilities, both internal and through alliances, to develop additional products based on its proprietary delivery systems. Teva’s principal branded respiratory products in the U.S. include ProAir® (albuterol HFA), a short-acting beta agonist for treatment of bronchial spasms linked to asthma or chronic obstructive pulmonary disease, and exercise-induced bronchospasm, and QVAR® (beclomethasone diproprionate HFA), an inhaled corticosteroid for long-term control of chronic bronchial asthma, which is manufactured by 3M Corporation pursuant to an agreement with Ivax. These products are marketed directly to physicians, pharmacies, hospitals, managed healthcare organizations and government agencies. Teva is also seeking approval for ProAir™ HFA Breath Actuated Inhalation Aerosol, based on the Easi-Breathe® technology. In December 2006, Teva received an approvable letter from the FDA. The FDA takes a rigorous approach on all novel, inhaled delivery systems and has asked Teva to complete a label comprehension study as well as in-vitro studies to help assure that patients accurately use the product in accordance with labeled instructions. Teva is working to finalize these studies and believes that it will be in a position to launch this product in late 2007 or early 2008. In Western Europe, Teva’s respiratory franchise is well developed in the United Kingdom, The Netherlands and France, mainly through the sale of salbutamol, beclomethasone in metered dose inhalers, QVAR® and Airomir® in metered dose inhalers and in Autohaler™, as well as through QVAR, beclomethasone and salbutamol in Easi-Breathe®, the Cyclohaler® franchise, Budesonide in Spiromax™/Airmax™ and several products in Steri-Nebs™. Teva believes that there are opportunities for further development of its Easi-Breathe®, Spiromax™/Airmax™, Cyclohaler® and Steri-Nebs™ sales in this region. In addition, the sales of intranasal fluticasone in Teva’s nasal spray has already contributed substantially to the sales in The Netherlands and it awaits final approvals in most Western European countries. Its introduction in such markets is expected during 2007. In the CEE, the emphasis is on Spiromax™/Airmax™ (currently with budesonide), as a superior alternative to the current multi-dose dry powder inhalers. The introduction of fluticasone nasal spray and Steri-Nebs™ is also planned across the region in 2007. All of Teva’s asthma products sold in Europe (except for beclomethasone in the United Kingdom) and in the U.S. are free of chlorofluorocarbon (CFC) propellants, which are being phased out worldwide under the Montreal Protocol, a 1987 international treaty to eliminate the production and use of ozone-depleting chemicals, and may not be sold in the U.S. after December 31, 2008 under a recent FDA ruling. Instead, Teva’s current inhaler products contain the ozone-friendly propellant hydrofluoroalkane (HFA). Teva has succeeded in capturing a strong position in the albuterol HFA market in the U.S., exceeding 60% market share since September 2006, as the market has largely moved away from CFC-containing products well ahead of the legal deadline. Teva has additional products that are free of chlorofluorocarbon propellants under different stages of development. Teva believes that the recent announcement regarding the withdrawal of important beclomethasone products containing CFCs from the United Kingdom market before September 2007 presents a major opportunity to grow its respiratory franchise in Western Europe. Biogenerics and Biopharmaceutical Operations During 2006, Teva marketed a portfolio of biopharmaceutical products including interferon alpha 2b, granulocyte colony-stimulating factor and pursuant to an agreement with Savient, human growth hormone (“hGH”). Teva’s finished dosage biopharmaceutical manufacturing facilities are located in Mexico, Hungary and China (through Tianjin Hualida Biotechnology Company Ltd., of which Teva increased its holdings from 45% to 60% during 2006). Teva expects to expand its finished dosage biopharmaceutical manufacturing into additional facilities. Teva’s bulk substance manufacturing facilities are located in Lithuania and China. Teva has sold hGH as a branded product in the U.S. since 2005, pursuant to an agreement originally entered into with Savient. Teva plans to introduce additional biopharmaceutical products as generics into the U.S. marketplace, but
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Table of Contentscurrently a definitive regulatory pathway, similar to that under the Hatch-Waxman Act, does not exist for these products. Teva continues to work with the FDA and other organizations in order to create a favorable legislative and regulatory environment for these products. With regard to the EU, in 2006 product specific guidelines were issued providing a more detailed interpretation on the data requirements for specific biopharmaceutical product registrations. Teva anticipates that this legal pathway and abbreviated application requirements will enable distribution in the EU of affordable biotechnology-derived products with demonstrated safety and efficacy comparable to the brand-name products. Research and development of biopharmaceutical products is performed by a few dedicated research and development groups based in Israel (specializing in mammalian cell culture products), and in Lithuania and China (specializing in microbial expression systems). In 2006, Teva entered into two agreements related to the development of biopharmaceutical products:
During 2006, work on the transdermal hGH Teva/Transpharma joint project continued. Transdermal hGH is based on a proprietary transdermal technology licensed by Teva from Transpharma Medical Ltd. under a 2004 agreement. This product is intended to provide both children and adults with an alternative to the currently injected therapy. Hospitals and Institutional Channels In 2006, Teva increased its focus on the hospitals and institutional channels, mostly in the U.S. and certain countries in Western Europe and specifically on its generic oncology products. Teva, through the acquisitions of Sicor and Ivax, and supported by its efficient global supply system, offers a wide range of oncology products, in both injectables and solid form, with different therapeutic mechanisms. Teva believes it is well-positioned to take advantage of the growth expected in this global market. Future patent expirations and growth in the oncology market present promising opportunities in the generic oncology market. Teva believes that leveraging its strong generic research and development capabilities and a promising pipeline, together with a strong global reach in the hospital and institutional markets, provides it with the opportunity to expand its leadership position in the generic oncology market. Proprietary Products Teva’s dual strategy in proprietary products is to leverage its access to Israeli-based academic research and start-up companies as well as to explore specific opportunities outside of Israel in order to develop innovative compounds for use in selected therapeutic markets. Teva’s proprietary research and development pipeline is currently focused mainly in three specialty areas: neurological disorders, autoimmune diseases and oncology. In conducting its research and development, Teva seeks to manage its resources conservatively and to limit its risk exposure. At the drug discovery phase, Teva leverages, among other things, its relationship with the Israeli academic community and start-up companies to gain early access to potential projects. Once these projects progress into the more costly clinical study phase, Teva’s strategy is to explore corporate partnering options, where needed, through which it can share financial and other risks associated with each project.
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Table of ContentsMultiple Sclerosis Copaxone® Copaxone®, Teva’s largest product and its first major innovative drug, is a leading multiple sclerosis (“MS”) therapy. Copaxone®, which is indicated for the reduction of relapse rate in patients with relapsing-remitting MS, is a new class of modifying therapy with a dual mode of action that offers MS patients a different treatment concept. Multiple sclerosis is a chronic disease of the central nervous system characterized by both inflammation and neurodegeneration, which are interrelated but are also independent of each other. In the majority of patients, the disease is of the relapsing-remitting form, which is manifested by acute attacks (relapses) followed by recovery (remission). This recovery may be incomplete at times, resulting in a disability progression which is measured by the Expanded Disability Status Scale (EDSS). The science behind Copaxone® has been developed over many years, and three clinical trials (prospective, randomized and controlled) have established its efficacy and safety. The three studies included two 2-year studies conducted in the U.S., which demonstrated Copaxone®’s efficacy in reducing relapses. The third study, conducted in Europe and Canada, also established Copaxone®’s efficacy in reducing inflammation as measured by the number of brain lesions, as detected through magnetic resonance imaging (“MRI”). In addition, one of the two-year studies was extended as an open-label trial to 12 years with a commitment to extend to 15 years — making it the longest continuous study ever of patients with relapsing-remitting multiple sclerosis. Results published so far from this follow-up study have shown that in patients who continue to inject Copaxone® for an average of 10 years, the number of attacks was reduced to an average of one attack every five years, and nine out of ten patients continue to be able to walk unaided. In addition, no additional safety concerns other than those reported in the pivotal studies were detected in these long-term treated patients. Significant efforts have been made to investigate Copaxone®’s mode of action. The current understanding suggests that it has a dual mechanism of action both outside and within the central nervous system (where MS is active) to regulate inflammation at the site of brain lesions. In addition, it has been demonstrated in animal models as well as unconventional MRI techniques that Copaxone® controls neurodegeneration and enhances myelin repair. Copaxone® reduces the number of brain lesions that evolve into permanent black holes, slows reduction of brain shrinkage and increases the production of factors that enhance neuronal repair. Recently, it has been demonstrated that Copaxone® slows the reduction in the concentration of the metabolite NAA (N-acetyl aspartate), a marker that is highly correlated with progression of disability in MS. Data presented at the 22nd Congress of the European Committee for Treatment and Research in Multiple Sclerosis (ECTRIMS 2006) in Madrid, Spain in September 2006, demonstrated that this positive effect on axonal injury and recovery was maintained for up to four years in patients treated with Copaxone®. Recent data suggests that Copaxone® is not only beneficial for mild to moderate MS patients but also to aggressive recurrently relapsing patients. A new study presented at ECTRIMS 2006 showed that patients with very active MS, who received Copaxone ® alone following short-term induction treatment with an immunosuppressant (mitoxantrone), experienced an 89% greater reduction compared to those receiving Copaxone® alone, using MRI-measured enhancing lesions of the brain. This initial benefit achieved early on in the study was maintained over the entire 15-month study period. In addition, no adverse events outside of those associated with either treatment when used as monotherapy were observed. Another study that examined the effect of treatment with Copaxone® alone following six months combination therapy with IV steroids demonstrated pronounced, early and sustained effects on disease activity. To further explore the efficacy of a new higher dose of Copaxone®, at 40mg/day, a large Phase III study entitled FORTE has been initiated to confirm the positive results from a recently completed Phase II study. The Phase II study, which compared the new higher dose of 40 mg/day dose of Copaxone® to the currently approved Copaxone® 20 mg/day in 90 relapsing MS patients, showed that patients who took the higher dose of Copaxone® had a 38% greater reduction in the mean cumulative number of brain lesions as measured by MRI compared with those taking the Copaxone® 20 mg/day dose. In addition, compared to the annual relapse rate prior to entry, patients who took Copaxone® 40 mg/day experienced a 77% reduction in mean on-trial relapse rate, whereas patients taking Copaxone® 20 mg/day experienced a 62% reduction. Copaxone® 40 mg/day was well-tolerated with a safety profile similar to Copaxone® 20 mg/day. Based on consultation with the FDA and the Canadian Medicines and Healthcare Products Regulatory Agency, approval of the 40 mg dose, with the same labeling as that of the 20mg dose, will be based on this one-year Phase III study, with an additional one-year open-label extension where all patients will be treated with the higher dose. To date, Copaxone® has been approved for marketing in 48 countries worldwide, including the United States, Canada, Israel, 22 European Union countries, Switzerland, Australia, Russia, Mexico, Brazil and Argentina. Copaxone® was first launched in Israel in December 1996, followed by the launch in the United States in March 1997 and European Union approval in 2001 through the European mutual recognition procedures.
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Table of ContentsIn 2006, in-market global sales of Copaxone® reached a new record of $1,414 million, an increase of 20% over 2005. Copaxone® continues to be one of the leading therapies for MS in the U.S., in terms of both new and total prescriptions. U.S. Copaxone® sales continued to increase, reaching sales of $916 million, an increase of 17% compared to 2005. U.S. sales represent 65% of total in-market sales in 2006. Sales also increased in Canada. The growth of in-market sales of Copaxone® in the United States also reflected the impact of two price increases of 9% and 4%, announced in 2006. Beginning in January 2007, IMS introduced a change in its prescription sampling methodology. Based upon this new methodology, in January 2007 in the U.S., Copaxone® had 31.2% of new prescriptions and 29.9% of total prescriptions, compared with a market share computed in accordance with the IMS’ prior methodology, as of December 2006, of 36.5% of new prescriptions and 35.3% of total prescriptions. In-market sales of Copaxone® outside the United States, primarily in Europe, increased 26% to $498 million, driven by significant sales increases in Teva’s principal European markets (the United Kingdom, France and Germany, the largest MS market in Europe), as well as Russia, Mexico and certain other Latin American countries. Since the exchange rate of European currencies remained at almost the same level as against the U.S. dollar in 2006 (when annual average compared to annual average), sales growth of Copaxone® in Europe was not impacted by currency movements. In North America, Copaxone® is marketed by Teva and is distributed by Sanofi-Aventis. Teva manufactures the product and supplies it to Sanofi-Aventis at a transfer price. Teva actively markets and promotes the product in the United States and Canada, respectively, through a wide range of activities, including doctor detailing, educational seminars, websites and patient support programs, such as Shared Solutions® and MS Watch®. Teva will assume responsibility for the distribution of Copaxone® in the U.S. and Canada commencing April 1, 2008 and will thus record the full in-market sales of Copaxone®, net of a payment to Sanofi-Aventis of 25% of the in-market sales for a period of two years. Although Teva will record higher revenues as a result of this change, Aventis will no longer share certain marketing expenses. The resulting increase in SG&A will substantially offset the increase in reported revenues, and therefore this termination provision will result in a minimal change to net income during this two year period. Thereafter, commencing April 2010, Teva will stop making this payment to Sanofi-Aventis and thus record all in-market sales and profits of Copaxone® for the U.S. and Canada. Teva and Sanofi-Aventis have an additional collaborative agreement for the marketing of Copaxone® in Europe and other markets. Under the terms of this agreement, Copaxone® is co-promoted with Sanofi-Aventis in Germany, the United Kingdom, France, Spain, The Netherlands and Belgium and is marketed solely by Sanofi-Aventis in the rest of the European markets, Australia and New Zealand. The product is manufactured by Teva, and Sanofi-Aventis purchases it from Teva and sells and distributes it in Europe. Commencing February 2012, Teva expects to take over distribution responsibilities for Copaxone® in territories covered under this additional agreement, at which time Sanofi-Aventis will be entitled to pre-agreed residual payments for a period of two years, following a pattern similar to that under the agreement described above, but with Teva making significantly lower payments to Sanofi-Aventis. Multiple sclerosis remains an important focus of Teva’s development efforts, as Teva continues to investigate potential improvement of Copaxone® and explore other molecules as future therapies for MS. Oral Copaxone® for MS In March 2006, Teva and Lundbeck A/S decided not to continue the development of a simple oral formulation of glatiramer acetate (the active ingredient of Copaxone®). Several attempts to achieve a clinically significant effect using an enteric-coated formulation of glatiramer acetate have failed. New and potentially improved formulations are in pre-clinical development. TV 5010 for MS The efficacy and safety of once-weekly subcutaneous injections of TV-5010, a high molecular-weight copolymer comprised of the same four amino acids present in glatiramer acetate, was examined in two Phase II trials. This project was terminated at the end of 2006. Laquinimod In June 2004, Teva signed an agreement with Active Biotech, a Sweden-based, publicly traded biotechnology company, to develop and commercialize laquinimod, a novel, orally bioavailable immunomodulatory compound. A Phase II study performed by Active Biotech showed that laquinimod, at a dosage of 0.3 mg daily, is well-tolerated and effective in suppressing development of active MRI lesions in patients with relapsing MS. Treatment over six months with 0.3 mg of laquinimod daily resulted in a 44% decrease in MRI disease activity. Patients with disease activity at the start of the study showed a decrease of more than 50%. The study also confirmed laquinimod’s acceptable safety profile.
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Table of ContentsAn additional Phase IIb trial completed in 2006 confirmed the efficacy and favorable safety profile of laquinimod and showed significant reduction in the rate of inflammatory disease activity and a considerable reduction in the number of clinical relapses compared to placebo at a daily dose of 0.6 mg. The majority of the patients who participated in the study are currently continuing treatment with laquinimod in an ongoing extension study. Teva is in discussions with regulatory authorities in order to accelerate the clinical program into Phase III. In 2005, Teva submitted an investigational new drug application to the FDA to initiate a clinical trial in the U.S. with laquinimod to assess drug-drug interaction. Teva is currently working with the FDA to resolve various issues raised in connection with this application. Under the terms of the agreement, Teva acquired the exclusive rights to develop, register, manufacture and commercialize laquinimod worldwide, with the exception of the Nordic and Baltic countries, where Active Biotech will retain all commercial rights. Teva has made an upfront payment to Active Biotech and has agreed to conduct and fund the further clinical development of laquinimod. The agreement between the two companies also calls for Teva to make payments to Active Biotech upon the achievement of various sales targets and other milestones, with maximum payments of $92 million. Active Biotech will also receive tiered double-digit royalties on sales of the product. Cladribine (Mylinax®) Through its acquisition of Ivax, Teva is a party to an agreement with Serono S.A. for the development of a proprietary oral formulation of cladribine (Mylinax®) as a treatment for MS. Under the agreement, Teva is entitled to a royalty on sales of Mylinax® if it is commercialized. Previous clinical trials had demonstrated the positive effect of injected cladribine in patients with MS as well as a reduction in new lesion development in the brain as seen on MRI scans. In 2005, Serono initiated a 1,200 patient two-year double-blind placebo-controlled study in patients with relapsing forms of MS. Parkinson’s Disease Azilect® (rasagiline mesylate) Azilect® (rasagiline tablets) is Teva’s second significant innovative drug, indicated for the treatment of Parkinson’s disease, both as initial monotherapy in early stage of the disease and as an adjunct to levodopa in moderate to advanced stages of the disease. Azilect® is a potent, second-generation, irreversible monoamine oxidase type B (MAO-B) inhibitor with neuroprotective activities demonstrated in various in vitro and in vivo studies. Its beneficial clinical effect, seen in the entire spectrum of the disease, combined with its once-daily dosing, lack of need for titration and high tolerability, allows Azilect® to address significant unmet needs in the treatment of Parkinson’s disease. Although many therapies are available, there is still a high level of dissatisfaction with many of these treatments, both in terms of their efficacy and tolerability. An estimated four million patients are affected by this chronic disease worldwide, which typically occurs at a late age, affecting approximately 1% of the population over the age of 65. Teva launched Azilect® in its first market, Israel, in March 2005, followed by a rolling launch in various European countries, including the United Kingdom in June 2005 and Germany in July 2005. During July 2006, Azilect® became available in the U.S. As announced in July 2006 and in accordance with the termination of Teva’s alliance with Eisai Co., Ltd., Azilect® is marketed in the U.S. solely by Teva, expanding its central nervous system franchise to include both Copaxone® and Azilect®. In September 2006, Azilect® was approved in Canada. To date, Azilect® has been made available in 24 countries, including Spain, Sweden, Belgium, Greece, The Netherlands and Romania. Total sales of Azilect® worldwide during 2006 amounted to $44 million. The development of Azilect® is part of a long-term strategic alliance with Lundbeck A/S, which includes the global co-development and marketing of Azilect®, mainly in Europe, for the treatment of Parkinson’s disease. Under this agreement, Lundbeck and Teva jointly market the product in certain key European countries. Lundbeck will exclusively market Azilect® in the remaining European countries and certain other overseas markets. Azilect® has demonstrated efficacy and safety in three pivotal studies that included over 1,500 patients with Parkinson’s disease at different stages of the disease. In two Phase III studies with Azilect® as adjunctive therapy to levodopa in more advanced patients—the LARGO study conducted in Europe, Israel and Argentina and the PRESTO study in North America—Azilect® demonstrated beneficial effects in the two categories defined as the goals for adjunctive therapy in this disease: symptomatic control of Parkinsonian symptoms and treatment of levodopa-induced motor complications. In the TEMPO Phase III study, conducted in North America in early stage patients, Azilect® demonstrated efficacy and safety as monotherapy treatment. This clinical trial, which used an innovative delayed-start design, showed a highly
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Table of Contentsstatistically significant effect on the primary endpoint—progression of Parkinsonian symptoms. Moreover, the 12-month results of this study, which were published in the April 2004 issue of Archives of Neurology, suggest a possible effect on disease progression. In an open extension of the TEMPO trial, approximately half of the patients who were still in the study after two years (121 out of 266) were adequately maintained on monotherapy with Azilect® (without additional dopaminergic treatment). In this same open extension, the results of six and one-half years follow-up of patients treated with Azilect® show that the benefit of early treatment is maintained over time. In November 2005, Teva initiated a randomized, double-blind and placebo-controlled Phase IIIb clinical study to determine whether treatment with once-daily Azilect® can modify the progression of Parkinson’s disease, the most significant current need of this illness. The ADAGIO study (Attenuation of Disease progression with Azilect® Once-daily) enrolled over 1,100 patients recently diagnosed with Parkinson’s disease in North America, Europe and additional countries, including Israel and Argentina. This study, which has a delayed-start design, similar to that of the TEMPO 12-month trial, is aimed at reproducing and confirming the earlier findings of the TEMPO 12-month trial. Enrollment of patients in this study was completed during the fourth quarter of 2006, sooner than expected, and the results of the study are expected in mid-2008. Other Innovative Projects Teva has other innovative projects in various development stages (including both clinical and pre-clinical) in the areas of psoriasis, asthma, amyotrophic lateral sclerosis, oncology and lupus. Some of these projects were initially licensed and developed by Ivax and were integrated into the Teva innovative pipeline during 2006. These innovative projects include the following: Autoimmune Diseases Pipeline - Lupus Systemic lupus erythematosus (SLE) is characterized as a chronic, diffuse autoimmune disorder, with rheumatological and dermatological damage to various tissues and organs. The organ-threatening form of SLE presents involvement of the heart, lungs, liver and kidneys. There is significant unmet medical need in lupus as all current treatments offer only symptomatic improvement with no impact on the disease pathology. No new drugs have been approved by the FDA for the treatment of this disease in more than 40 years. Edratide Acetate (TV-4710) is a synthetic peptide based on the complementary-determining region 1 (CDR1) of the 16/6Id human anti-DNA antibody. This may enable specific modulation of the autoimmune processes in lupus. In experimental animal models, edratide demonstrated improvement in lupus disease manifestation to include renal involvement. Phase I studies were seen as safe and well-tolerated. A Phase II trial in SLE patients is currently on-going in 12 countries in North America, Latin America, the European Union and Israel. The trial is designed to evaluate the safety and efficacy of edratide administered subcutaneously, once weekly, over six months of treatment. Recruitment into this trial has been completed, with results expected during 2007. The development of edratide is based on original research performed by scientists at the Weizmann Institute of Science. Teva has acquired the exclusive worldwide license for all intellectual property related to edratide and related peptides. Neurology Pipeline Rasagiline Mesylate for Alzheimer’s Disease. Rasagiline has shown beneficial activity in experimental models relevant to Alzheimer’s disease. Furthermore, as rasagiline’s mechanism of action is different from that of all currently approved drugs for this indication, it has the potential of being a good candidate for combined treatment with such approved drugs. An early Phase II study of rasagiline in mild-to-moderate Alzheimer’s disease patients has been completed with encouraging results, supporting the safety of rasagiline mesylate in this patient population. The joint cooperation of Teva with Eisai Co. Ltd and Eisai Inc. was terminated during 2006. However, the global Phase II study, in which rasagiline is used as an adjunctive treatment in Alzheimer’s patients treated with Aricept®, initiated in 2004 by Eisai and Teva under this agreement is on-going. Results are expected to be available during 2007. Ladostigil tartrate ( TV-3326) is a novel compound developed for the treatment of Alzheimer’s disease and other forms of dementia. Phase IIa testing was terminated at the beginning of 2007. Glatiramer acetate (GA) for Amyotrophic Lateral Sclerosis (ALS). The active ingredient of Copaxone® in a 40 mg/day dosage form is being developed for the treatment of ALS. The safety and tolerability of Copaxone® administered either daily or every alternate week has been examined in a Phase I/II study in ALS patients. During December 2006, Teva completed recruitment of 300 patients into a double-blind, placebo-controlled multicenter Phase II clinical study. This study
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Table of Contentswill evaluate the safety, tolerability and efficacy of GA administered subcutaneously, once daily at a dose of 40 mg/day over one year of treatment. The primary end point will review the change of deterioration of the ALS functional scale. ALS is a motor neuron disease, characterized by degeneration and loss of upper and lower motor neurons. Median survival time is 3-5 years with death most often due to respiratory failure. Talampanel for ALS. Through the acquisition of Ivax, Teva has acquired exclusive worldwide rights to develop and market talampanel for the treatment of neurological disorders. Talampanel is an orally active antagonist of the alpha-amino-3-hydroxy-5-methyl-4-isoxazolepropionate (AMPA) neuronal excitatory glutamate receptor. Following inconclusive Phase II studies in epilepsy and based on positive trends from a small Phase II study in ALS, Teva is proceeding with the development of talampanel for the latter indication, and a new Phase II study to be initiated in late 2007 or early 2008 is being planned. Oncology Pipeline Talampanel has shown anti-tumor activity against malignant gliomas both in slowing their growth and reducing their ability to invade surrounding brain tissues. A Phase II study is currently on-going in the U.S. Assuming a successful completion of the Phase II study, a Phase III is planned for 2008. StemEx®. In February 2005, Teva signed a joint venture agreement with Gamida Cell, an Israeli-based, private biotechnology company, to develop and commercialize StemEx®. StemEx® is a novel cellular therapeutic, derived from cord blood, for the treatment of hematological malignancies. A Phase I/II study performed by Gamida Cell Ltd. in 10 patients provided encouraging results on both the efficacy and the safety of the product. In 2006, the Gamida Cell-Teva joint venture obtained a special protocol assessment from the FDA for the clinical protocol of a Phase III, pivotal study for StemEx®, which is expected to commence in the first quarter of 2007 and initially utilize 11 sites in the U.S., the EU and Israel. The study will enroll 100 patients and is scheduled to be completed early in 2009. New Ventures In addition to the direct sourcing of projects from the Israeli academic community, as Teva has traditionally done, Teva has also made equity investments and entered into agreements with various start-up and early-stage ventures, primarily with the goal of leveraging Israeli expertise and scientific initiatives. Teva believes that these new ventures create more product/technology sourcing opportunities for Teva. Teva’s direct investments include investments in Gamida-Cell Ltd., CureTech Ltd. and TransPharma Medical Ltd. In 2006, following the successful conclusion of a Phase I/II trial, Teva entered into a joint venture with Gamida-Cell to commercialize Gamida-Cell’s flagship product, StemEx®, for the treatment of hematological diseases. Teva committed to invest $25 million in this joint venture. Curetech’s successful Phase I/II trial in patients with hematological malignancies led to Teva’s investment of $6 million in Curetech to, among other things, fund a Phase II study of Curetech’s lead monoclonal antibody. The joint venture with TransPharma includes transdermal hGH which is based on a proprietary transdermal technology licensed by Teva from TransPharma Medical Ltd. under a 2004 agreement. This product is intended to provide both children and adults with an alternative to the current therapy by injection. Teva has also invested in such companies such as Biomedical Investments (1997) Ltd., Clal Biotechnology Industries Ltd. and BiolineRx Ltd., which in turn invest in promising companies or technologies. Typically, Teva will invest, directly and/or indirectly, in such a company and obtain an option for a strategic right in a company or a product. Examples of such rights received include, among others: an option to buy the entire company under certain circumstances at pre-negotiated prices/terms and/or an option to license a product or create a joint venture with the company on a particular product based on pre-negotiated terms. Typically, the company will use Teva’s investment proceeds towards achieving certain development milestones based on an agreed budget and development plan. Teva assists in the development plan at this stage. Once a development milestone is achieved, Teva will determine whether to exercise its option. If it does, Teva will become much more actively involved in the company and its development, and the product will enter Teva’s pipeline. Intellectual Property and Other Protections Teva relies on a combination of intellectual property protections and exclusivity periods provided under applicable regulations to protect its innovative products. Teva seeks to obtain, where possible, product, process and use patents on its
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Table of Contentsinnovative products. Teva also relies on trade secrets, unpatented proprietary know-how and confidentiality agreements, as well as FDA data exclusivity rules, trademarks and copyright protection, for its innovative products. Similar laws and regulations in the European Union provide for six to ten years of data exclusivity. Newer EU legislation provides for a uniform period of European Union data exclusivity for newly registered products for a period of ten years which, under certain circumstances, can be extended to 11 years. The market exclusivity protections afforded Copaxone® in the U.S. due to its status as an “orphan drug” expired on December 20, 2003. Teva also has patents relating to Copaxone® with terms expiring in 2014 in the U.S. and in 2015 in most of the rest of the world. Copaxone® is also protected by data exclusivity protections in most European countries, which remain in effect for a period of six or ten years from the 2001 market authorization date. Azilect® is protected in the U.S. by several patents which expire between 2012 and 2016. A request for a patent term extension has been made in connection with one of these patents. In addition, Azilect® is entitled to New Chemical Entity exclusivity for a period of five years from its 2006 approval date. In the European Union, Teva holds several patents covering Azilect® which will expire between 2011 and 2014. Supplementary Protection Certificates (“SPCs”) have been granted in a number of EU countries with respect to the 2014 patent, thereby extending its term to 2019. Azilect® is also protected by data exclusivity protection in Western Europe for a period of ten years from its 2005 marketing authorization date. Teva also relies on patent protection and trade secret protection to protect generic processes, products and formulations for its API and final dosage forms. Active Pharmaceutical Ingredients (“API”) In addition to its production and sale of pharmaceutical products, Teva manufactures and sells active pharmaceutical ingredients. Teva’s API division has a large and growing third-party business, and also provides Teva with the benefits of vertical integration. With a leading global market share in the production of many major chemicals for generic pharmaceuticals, Teva’s API division facilitates Teva’s entry into new drug markets and offers a high quality, reliable long-lasting and cost-effective source of API. Teva offers approximately 250 different APIs, using synthetic, semi-synthetic, fermentation and high-potent technologies (compounds that have a therapeutic effect at very low dosages, typically at microgram levels), for use in pharmaceuticals. Teva believes it is among the world’s principal suppliers of many of these chemicals. The products are sold, subject to the patent position, to formulators of pharmaceutical products mainly in the U. S. and Europe, but also in Asia and Latin America. The API division’s portfolio of products is a combination of high volume products as well as low volume, high value products. Teva’s acquisition of Sicor complemented Teva’s existing API capabilities with a broad portfolio of APIs for respiratory products, dermatological hormones, anti-inflammatories, oncolytics, immunosuppressants, muscle relaxants and custom-manufactured APIs for a variety of proprietary drug manufacturers. The consolidation with Teva opened traditional Teva markets to Sicor’s API products and also gave Teva access to new customers, mainly in the inhalation, injectibles and dermatology fields. The acquisition of Ivax has provided Teva’s API division with an additional 30 APIs and access to new technologies, mainly plant extraction technology. Through Ivax, Teva’s API division obtained access to new markets such as CEE and Latin America. In addition, the acquisition enhances and strengthens vertical integration activities with Teva’s pharmaceutical units. Teva’s existing API sales to Ivax shifted from third-party sales to intercompany sales, while Ivax’s own third-party API sales were included in Teva’s third-party API sales. The API business sells products to Teva’s finished pharmaceutical product businesses and to third parties in a competitive market for APIs mainly intended for generic products. Sales to Teva’s finished pharmaceutical product businesses are on an arm’s-length basis, fulfilling Teva’s generic and proprietary manufacturing needs. Teva’s API sales are affected by pharmaceutical trends and are directly related to the ability of its API customers, both Teva itself and third-party customers, to launch new products and maintain market share. The production of APIs requires a high level of technical and regulatory skills. In order for APIs to be approved for use in the United States, the facilities and production procedures utilized at such facilities must meet FDA standards. Teva’s API plants (other than China and India, which have recently been inspected by the FDA) meet such standards and are regularly inspected by the FDA. Many of the products are produced in dedicated computer-controlled automated facilities, facilitating optimization of the production processes and high quality. Teva’s API division has developed and acquired an expertise in specialized technologies, such as fermentation processes, high potency and the production of peptide API. This expertise enabled the API division to support successful
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Table of Contentslaunches of pravastatin and simvastatin in the United States in 2006 and also enabled Teva to establish a leading position in the sale of fermentation products such as lovastatin, simvastatin, pravastatin and tobramycin. Sicor’s API expertise in the chemistry of steroids and high-potency production enabled Teva’s API division to continue and enhance its leadership in the inhalation, injectibles and dermatology fields. In addition, through the establishment of joint ventures, Teva has taken steps towards supplying various peptides such as desmopressin, calcitonin, octreotide and others to its customers. During 2006, API sales to Teva’s various pharmaceutical units were approximately 56% of the division’s total sales as compared with 51% during 2005. Teva believes that its ability to produce these APIs is a strategic advantage for its production of finished pharmaceuticals. Marketing and Sales In North America, the API division has marketed its products for over 25 years through Teva’s subsidiary Plantex USA. Most of Plantex USA’s customers are generic dosage form manufacturers located in the U.S. and Canada. Additionally, Plantex USA has been able to make significant inroads into the emerging drug delivery segments and is venturing into selected custom synthesis projects for new drug applications. The direct contact with customers enables the API division to establish long-term relationships. In Europe, Teva’s subsidiary Plantex Chemicals BV has been responsible for marketing to European customers for over 25 years. While the API division’s principal customers in Europe are generic pharmaceutical companies, Teva also has important contracts with innovative pharmaceutical companies. In Asia, Latin America, Australia and New Zealand, Teva sells APIs through either local subsidiaries or local distributors. In 2006, Teva’s API division began to expand in other international markets. Teva established a subsidiary in Japan, which has its own sales force and regulatory personnel, which has begun to demonstrate Teva’s commitment to strengthen its API activities in this important market. In Asia and Latin America, Teva has identified a trend toward adopting higher quality standards and enforcement of intellectual property rights, which should represent an opportunity for Teva’s API division to expand its activities in these markets. Production Teva produces APIs worldwide through 18 production sites located in the U.S., Israel, Italy, Hungary, the Czech Republic, Mexico, Puerto Rico, India and China. The plants manufacture APIs through synthetic, semi-synthetic, fermentation processes, peptide synthesis, high potency, plants extraction, process control, a variety of milling equipment and Teva’s expertise in the field of physical properties, enabling tailoring of the products’ physical characteristics to customer needs. Animal Health Through its IVX Animal Health subsidiary, Teva manufactures and markets proprietary, as well as generic, veterinary pharmaceutical products under IVX Animal Health’s own brand and for sale under private labels. IVX Animal Health serves all major companion and economic animal segments with both prescription and over-the-counter products, and is considered the leading supplier of generic pharmaceuticals for economic animals in the United States. IVX Animal Health also provides an existing and extensive base of marketing, sales and technical support for its products. IVX Animal Health’s areas of focus include antimicrobials, antiparasitics, antipruritics and antiseborrheics, grooming aids, nutraceuticals and otics. Teva’s animal health operations are also conducted through its Israeli subsidiary, Abic Ltd., which researches, develops, manufactures and markets veterinary products, both in Israel, where the company has a significant market share, and internationally, particularly in Southeast Asia, Africa, Latin America and Eastern Europe. Some of Abic’s export marketing is conducted through agents and distributors, as well as through Teva’s subsidiary companies. The company has successfully developed new and quality products for the prevention and treatment of diseases in poultry and large animals. Research and Development Teva’s research and development efforts are involved in all of its major business activities. Teva’s research and development expenses were $495 million, $369 million and $338 million in 2006, 2005 and 2004, respectively. The Global Generic R&D Division is in charge of developing brand equivalent products which includes product formulation, bioequivalence testing, registration and approval of a growing list of generic drugs for all of the markets where Teva operates. It continues to expand and enhance its capabilities beyond the traditional generic tablets, capsules and liquids, into various other dosage delivery systems and dosage types such as complex drug delivery systems, sterile systems, drug device combinations, and nasal and respiratory delivery systems such as dry powder and metered dose inhalers for generic
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Table of Contentsdrugs. The division operates from sixteen development centers located in the U.S., Israel, Canada, Hungary and Mexico, The Netherlands, India, United Kingdom, Ireland, Chile, Argentina, Venezuela and Peru, providing Teva with the global resources necessary to take advantage of both human resources and the prevailing patent law situation. The Global Innovative R&D Division employs researchers in Israel, the U.S., Canada, Hungary and several Western European countries. The division conducts all activities required for the identification of lead compounds as well as all pre-clinical development, clinical testing and regulatory submissions for Teva’s growing pipeline of proprietary products, including the clinical and regulatory development of respiratory products following the Ivax acquisition. The division is deeply involved in supporting Teva’s effort to achieve and maintain a leading position in the treatment of multiple sclerosis and to establish a franchise in Parkinson’s disease. Teva collaborates intensively with Israel’s major universities, medical institutions and research institutes in order to leverage the extensive, first-class research activities conducted in Israel and to source projects, specifically in the areas of neurodegeneration/neuroprotection, autoimmunity and oncology. In addition to the funding received through collaborations with third parties such as Lundbeck, Sanofi-Aventis and Eisai, Teva avails itself of government funding for research conducted in Israel. The Israeli government offers grants, which are repayable as royalties from the sale of products resulting from funded research, with the aggregate amount of such royalties limited to the amount of the original grant (with the addition of LIBOR interest). In recent years, however, such grants have become insignificant in the overall funding of Teva’s innovative R&D efforts. The royalties are at rates between 2% and 3.5% (depending on the number of years elapsed since the commencement of the royalty payments) of sales relating to a product or a development resulting from the funded research. The amount of the contingent liability in respect of royalties to the Israeli government at December 31, 2006 is insignificant. The Global API R&D Division. Researchers from the API division focus on the development of processes for the manufacturing of API, including intermediates, chemical and biological (fermentation), which are of interest to the generic drug industry, as well as for Teva’s proprietary drugs. This group’s facilities include a large center in Israel (API processes and peptides), a large center in Hungary (fermentation and downstream processing), a facility in India and additional sites in Italy, Mexico and the U.S., as well as two sites added as part of the Ivax acquisition in Puerto Rico and the Czech Republic (extraction technology). The process research groups seek ways to continuously improve processes to reduce API production costs, enabling Teva’s API division to remain a supplier of key API products in an environment of price erosion after other competitors cease to be able to produce these products economically. The Biopharmaceutical R&D Division. Teva has R&D operations specifically dedicated to the development of biopharmaceutical products located in Lithuania, China, Mexico and Israel. These groups’ expertise covers aspects related to recombinant protein expression and production, including genetic engineering, recombinant bacterial fermentation, mammalian tissue culture, protein purification and the development of analytical methods and formulation. Competition In the U.S., Teva is subject to intense competition in the generic drug market from other local and foreign generic drug manufacturers, brand-name pharmaceutical companies (through authorized generics), manufacturers of branded drug products that make efforts to continue to produce those products after patent expirations and manufacturers of therapeutically similar drugs. Teva believes that its primary competitive advantages are its ability to continually introduce new generic equivalents for brand-name drug products on a timely basis, its emphasis on regulatory compliance and high-volume cost-effective production, its customer service and the breadth of its product line. A significant amount of Teva’s U.S. generic sales is made to a relatively small number of retail drug chains and drug wholesalers. These customers have undergone and continue to undergo significant consolidation, which resulted in customers gaining more purchasing power. As a result, there is heightened competition among generic drug producers for the business in this smaller and more selective customer base. On the other hand, this trend provides a competitive advantage to large suppliers such as Teva that are capable of providing sufficient quantities of a product, as well as a broad product line, on a national basis while maintaining a high level of customer service. Price competition from additional generic versions of the same product may result in significant reductions in sales and margins over time. To compete on the basis of price and remain profitable, a generic drug manufacturer must manufacture its products in a cost-efficient manner. In addition, Teva’s competitors may develop their products more rapidly or complete the regulatory approval process sooner, and therefore market their products earlier. New drugs and future developments in improved and/or advanced drug delivery technologies or other therapeutic techniques may provide therapeutic or cost advantages to competing products. Many brand-name competitors try to prevent, discourage or delay the use of generic equivalents through several tactics, including legislative initiatives (e.g., pediatric exclusivity), changing dosage form or dosing regimen just prior to the
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Table of Contentsexpiration of an original patent, regulatory processes, filing new patents, patent extensions, litigation, including citizens’ petitions, negative public relations campaigns and, most recently, creating alliances with managed care companies and insurers to reduce the prices and economic incentives to purchase generic pharmaceuticals. In addition, the brand-name companies sometimes launch, either through an affiliate or through licensing arrangements with another company, an authorized generic concurrent with the first generic launch, so that the patent challenger no longer has the full exclusivity granted by the Hatch-Waxman Act. In Canada, the competitive landscape continues to intensify with the increasing presence of foreign competitors. Five major generic drug manufacturers, three of which, including Teva’s subsidiary Novopharm, are subsidiaries or divisions of global manufacturers, satisfy approximately 80% of the Canadian demand for generic pharmaceuticals. The customer base for Novopharm continues to change as the number of independent community pharmacies decreases at the expense of chain drug and banner-aligned store groups, which work closely with selected suppliers for specific products. This trend is expected to continue, resulting in increased competition for generic drug manufacturers at the chain and banner buying offices. These larger customers look to generic suppliers to timely launch cost-effective generic products, maintain high levels of product availability and provide increased levels of overall customer value and service. In Latin America, the pharmaceutical markets in the various countries are generally fragmented, with no single company enjoying overwhelming market dominance. Local generic companies as well as multinational brand companies compete with Teva’s local operations in all of the markets. Teva’s strengths in the region include its comprehensive range of products, which cover a wide range of therapeutic categories, strong sales forces and the opportunity to leverage Teva’s global product portfolio. In Western Europe, Teva competes with other generic companies (several major multinational generic drug companies and various local generic drug companies) and branded drug companies that continue to sell or license branded pharmaceutical products after patent expirations. As in the U.S., the generic market in Western Europe is very competitive, with the main competitive factors being price, time to market, reputation, customer service and breadth of product line. The United Kingdom is one of the larger generic markets in Western Europe and is also one of the most competitive due to its very low barriers to entry. Significant vertical integration exists between wholesalers and retailers, ensuring low prices as long as there are several suppliers. The number of major players in the United Kingdom pharmaceutical market has shrunk. Teva is the leading company in the market. In The Netherlands there is a developed “pure generics” market that operates in a manner similar to the United Kingdom. As in the United Kingdom, many pharmacies are grouped into chains that are owned by major wholesalers. In France there has been substantial growth in the use of generics. France has some of the lowest pharmaceutical prices in the region largely due to aggressive pharmacist buying groups. In Hungary, Teva competes with local Hungarian manufacturers and faces increasing competition from multinational pharmaceutical companies. Teva continues to strengthen its position and presence in Hungary, while creating a more diversified product and service portfolio, including wholesaling services. In Israel, Teva is the largest supplier of pharmaceuticals, with a market share (including distribution on behalf of third parties) of approximately one-quarter of the total pharmaceutical market. Teva’s position in the market is based on its ability to market pharmaceutical products, hospital supplies and healthcare services to the medical community, its product range at competitive prices, its in-house distribution abilities and a variety of value-added services. Teva has the broadest portfolio of products in the Israeli pharmaceutical market, including generic, over-the-counter, branded drugs, hospital supplies and healthcare services. Teva’s products compete with those of other local manufacturers, as well as with imported products. Generic competition has increased in recent years in Israel, and this trend is expected to continue, with additional pressure on prices coming from the healthcare funds and other institutional buyers. Regulations that came into effect in May 2005 allow for sales of some over-the-counter products for the first time in retail locations in addition to pharmacies. However, penetration into the retail over-the-counter market is slow, as retail stores and the general public are not yet acquainted with this offering and opportunity. In addition, the introduction of private labels into the retail market has increased competition in the total over-the-counter market, a trend that is expected to increase in the future. In Russia, Teva faces strong competition in the generic market, particularly in the branded generic drug market. This competition derives principally from international generic firms as well as from the many local low cost pharmaceutical manufacturers. Nonetheless, Russia represents substantial long-term potential for industry growth due to the size of the population, growing purchasing power and a currently low pharmaceutical usage rate. Teva believes that, through its local subsidiary, it is positioned to leverage this rapidly growing market with its leading product portfolio, emphasis on regulatory compliance, high volume cost-effective production and customer service.
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Table of ContentsIn the Czech Republic, Teva competes with other generic companies (several major generic drug companies across the CEE and various local generic drug companies) and branded drug companies that continue to sell or license branded pharmaceutical products after patent expirations. Moreover, Teva faces other competitive elements such as strengthened branded companies, which at present are influential with the regulatory authorities, and an unfavorable reimbursement system as a result of the current political uncertainty. As in Russia, the generic market is very competitive, with the main competitive factors being price, time to market, reputation, customer service and breadth of product line. By focusing on these factors, Teva has achieved a strong position in the market and is currently ranked among the top three generic players. In Poland, the pharmaceutical industry has experienced significant structural change in recent years. Most of the state-owned companies have been privatized, and foreign firms account for a high proportion of sales. The competitive landscape continues to be challenging with over 240 manufacturers but is dominated by several very strong local and regional competitors across the CEE. Teva has begun launching its product portfolio in the local market and increasing its sales from its domestic subsidiary. Copaxone® is a non-interferon therapy available for the treatment of relapsing remitting multiple sclerosis. Its primary competition is with three formulations of beta-interferons, Avonex®, Betaseron® and Rebif®. A fifth therapy, Tysabri®, was re-introduced in the U.S. in June 2006 with a “black box” label, which includes the most critical information about Tysabri®, such as indications and warnings, and with an indication for patients who have had an inadequate response to, or are unable to tolerate, alternate multiple sclerosis therapies. In July 2006, Tysabri® was launched in the EU with a restricted indication for patients who have failed beta interferons or for highly active patients. Teva continues to believe that Copaxone® is a superior product with long-term benefits, being the only product for which efficacy and safety have been demonstrated for over 10 years in a continuous prospectively planned study. In 2003, Schering AG initiated a trial (BEYOND) that compares the efficacy of the current dose Betaseron® with a higher dose Betaseron® and the current dose of Copaxone®. Serono has also announced the initiation of a head-to-head comparison between Rebif® and Copaxone® (REGARD). Both studies are ongoing. Results of the REGARD trial are expected in the first quarter of 2007. A smaller trial, BECOME, which compared Betaseron® and Copaxone® on MRI disease activity as measured by gadolinium-enhancement, was presented at the last meeting of the European Committee for the Treatment of MS (ECTRIMS) in September 2006 in Madrid and did not demonstrate superiority of Betaseron® over Copaxone® in reducing MRI activity. In 2004, Teva initiated a comparative trial (ACHIEVE) in which patients who are on a high dose of interferon and who experienced at least one relapse in the year prior to study entry are randomly switched to Copaxone® or remain on the high dose interferon for the duration of the trial. The trial is being conducted in North America, with results expected in 2009. Azilect® is a new treatment for early and moderate to advanced stages of Parkinson’s disease. It uniquely combines a convenient once-daily, no titration dosing and favorable side effect profile, in contrast with its main competitors. Competitors include the newer non-ergot dopamine agonists Mirapex®/Sifrol® and Requip®, which are the leading products in this class, indicated for all stages of the disease, as well as with Neupro®, a recently launched dopamine agonist with a new patch delivery system. In the moderate to advanced stage of the disease, in addition to the dopamine agonists, Azilect® is also competing with Comtan®, a COM-T inhibitor. In the sale of active pharmaceutical ingredients, Teva competes in all of its markets with specialty chemical producers, mainly located in Europe (particularly in Italy and Spain), in India and elsewhere in Asia. Teva competes based on price, quality, timely delivery and its ability to meet the stringent FDA requirements for approved suppliers of API. Teva’s API division is a leader, in both terms of sales and breadth of offerings of API. Teva believes that its extensive portfolio, combined with the creation of intellectual property rights and its financial resources, make its API division a leader in the industry. Regulation United States. All pharmaceutical manufacturers selling products in the United States are subject to extensive regulation by the U.S. federal government, principally by the FDA and the Drug Enforcement Administration, and, to a lesser extent, by state and local governments. The federal Food, Drug, and Cosmetic Act, the Controlled Substances Act and other federal statutes and regulations govern or influence the development, manufacture, testing, safety, efficacy, labeling, approval, storage, distribution, recordkeeping, advertising, promotion and sale of Teva’s products. Teva’s major facilities and products are periodically inspected by the FDA, which has extensive enforcement powers over the activities of pharmaceutical manufacturers. Non-compliance with applicable requirements may result in fines; criminal penalties; civil injunction against shipment of products; recall and seizure of products; total or partial suspension of production, sale or import of products; refusal of the government to enter into supply contracts or to approve new drug applications; and criminal prosecution. The FDA also has the authority to deny or revoke approvals of drug active ingredients and dosage forms and the power to halt the operations of non-complying manufacturers. Any failure by Teva to comply with applicable FDA policies and regulations could have a material adverse effect on its operations.
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Table of ContentsFDA approval is required before any “new drug” (including generic versions of previously approved drugs) may be marketed, including new strengths, dosage forms and formulations of previously approved drugs. Applications for FDA approval must contain information relating to bioequivalence (for generics), safety, toxicity and efficacy (for new drugs), product formulation, raw material suppliers, stability, manufacturing processes, packaging, labeling and quality control. FDA procedures require that commercial manufacturing equipment be used to produce test batches for FDA approval. The FDA also requires validation of manufacturing processes before a company may market new products. The FDA conducts pre-approval and post-approval reviews and plant inspections to implement these requirements. Generally the generic drug development and the ANDA review process can take two to five years. The Hatch-Waxman Act established the procedures for obtaining FDA approval for generic forms of brand-name drugs. This Act also provides market exclusivity provisions that can delay the submission and/or the approval of ANDAs. One such provision allows a five-year market exclusivity period for new drug applications (“NDAs”) involving new chemical entities and a three-year market exclusivity period for NDAs (including different dosage forms) containing new clinical trial data essential to the approval of the application. The Orphan Drug Act of 1983 grants seven years of exclusive marketing rights to a specific drug for a specific orphan indication. The term “orphan drug” refers to a product that treats a rare disease affecting fewer than 200,000 Americans. Market exclusivity provisions are distinct from patent protections and apply equally to patented and non-patented drug products. Another provision of the Hatch-Waxman Act extends certain patents for up to five years as compensation for the reduction of effective life of the patent which resulted from time spent in clinical trials and time spent by the FDA reviewing a drug application. Patent term extension and non-patent market exclusivity may delay the submission and approval of generic drug applications. Under the terms of the Hatch-Waxman Act, a generic applicant must make certain certifications with respect to the patent status of the drug for which it is seeking approval. In the event that such applicant plans to challenge the validity or enforceability of an existing listed patent or asserts that the proposed product does not infringe an existing listed patent, it files a so-called “Paragraph IV” certification. As originally legislated, the Hatch-Waxman Act provides for a potential 180-day period of generic exclusivity for the first company to submit an ANDA with a Paragraph IV certification. This filing triggers a regulatory process in which the FDA is required to delay the final approval of subsequently filed ANDAs containing Paragraph IV certifications 180 days after the earlier of the first commercial marketing of the drug by the first applicant or a final court decision in the generic company’s favor regarding the patent that was the subject of the Paragraph IV certification. Submission of an ANDA with a Paragraph IV certification can result in protracted and expensive patent litigation. When this occurs, the FDA generally may not approve the ANDA until the earlier of thirty months or a court decision finding the patent invalid, not infringed or unenforceable. The Medicare Prescription Drug, Improvement and Modernization Act (the “Medicare Act”) of 2003 modified certain provisions of the Hatch-Waxman Act. Under the Medicare Act, final ANDA approval for a product subject to Paragraph IV patent litigation may be obtained upon the earlier of a favorable district court decision or 30 months from notification to the patent holder of the Paragraph IV filing. Exclusivity rights may be forfeited pursuant to the Medicare Act if the product is not marketed within 75 days of the final court decision and under other specified circumstances. However, some of these changes apply only to ANDAs containing a Paragraph IV certification that were filed after enactment of the Medicare Act; previously filed ANDAs generally continue to be governed by the previous law. The Medicare Act further expanded the scope of Medicare coverage for participants by creating what is known as the Medicare Part D prescription drug benefit. The Part D prescription drug benefit became available to Medicare beneficiaries on January 1, 2006. Medicare prescription drug coverage under Part D is insurance that covers the Medicare beneficiary’s cost (subject to certain statutory purchasing thresholds, co-payments, insurance premiums, and deductibles) of prescription drugs at participating pharmacies. Medicare prescription drug coverage under the Part D benefit is available to all Medicare beneficiaries regardless of income and resources or health status. As a result, Teva’s products are, as of January 1, 2006, available for government-subsidized purchase by a larger market of Americans participating in government-sponsored third-party payor insurance programs. In addition, the structure of reimbursement under Medicare Part D includes a gap or “doughnut hole” in coverage, after the initial coverage limit is reached and before the catastrophic coverage benefit begins. To date, many benefit plans have utilized generic products to mitigate the impact of this gap. The Best Pharmaceuticals for Children Act, signed into law in 2002, continues the so-called “pediatric exclusivity” program begun in the FDA Modernization Act of 1997. This pediatric exclusivity program provides a six-month extension both to listed patents and to regulatory exclusivities for all formulations of an active ingredient, if the sponsor performs and submits adequate pediatric studies on any one single dosage form. The effect of this program has been to delay the launch of numerous generic products by an additional six months.
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Table of ContentsThe Generic Drug Enforcement Act of 1992 established penalties for wrongdoing in connection with the development or submission of an ANDA by authorizing the FDA to permanently or temporarily debar such companies or individuals from submitting or assisting in the submission of an ANDA, and to temporarily deny approval and suspend applications to market generic drugs. The FDA may suspend the distribution of all drugs approved or developed in connection with wrongful conduct and also has authority to withdraw approval of an ANDA under certain circumstances. The FDA may also significantly delay the approval of a pending NDA or ANDA under its “Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities Policy.” Manufacturers of generic drugs must also comply with the FDA’s current Good Manufacturing Practices (“cGMP”) standards or risk sanctions such as the suspension of manufacturing or the seizure of drug products and the FDA’s refusal to approve additional ANDAs. Products manufactured outside the United States and marketed in the United States are subject to all of the above regulations, as well as to FDA and U.S. customs regulations at the port of entry. Products marketed outside the United States that are manufactured in the United States are additionally subject to various export statutes and regulations, as well as regulation by the country in which the products are to be sold. The Center for Medicare & Medicaid Services is responsible for enforcing legal requirements governing rebate agreements between the federal government and pharmaceutical manufacturers. Drug manufacturers’ agreements with the Center provide that the drug manufacturer will remit to each state Medicaid agency, on a quarterly basis, the following rebates: for generic drugs marketed under ANDAs covered by a state Medicaid program, manufacturers are required to rebate 11% of the average manufacturer price (net of cash discounts and certain other reductions); for products marketed under NDAs, manufacturers are required to rebate the greater of 15.1% of the average manufacturer price (net of cash discounts and certain other reductions) or the difference between such average manufacturer price and the best price during a specified period. An additional rebate for products marketed under NDAs is payable if the average manufacturer price increases at a rate higher than inflation. Teva USA has such a rebate agreement in effect with the federal government. Federal and/or state governments have and are expected to continue to enact measures aimed at reducing the cost of drugs to the public, including the enactment, in December 2003, of the Medicare Act that expands the scope of Medicare coverage for drugs in 2006 and beyond. Teva cannot predict the nature of such measures or their impact on its profitability. Various state Medicaid programs have in recent years adopted supplemental drug rebate programs that are intended to provide the individual states with additional manufacturer rebates that cover patient populations that are not otherwise included in the traditional Medicaid drug benefit coverage. These supplemental rebate programs are generally designed to mimic the federal drug rebate program in terms of how the manufacturer rebates are calculated, e.g., as a percentage of average manufacturer price. While some of these supplemental rebate programs are significant in size, they are dwarfed, even in the aggregate, by comparison to Teva USA’s quarterly Medicaid drug rebate obligations. Teva’s products also include biotechnology-derived products that are comparable to brand-name drugs. Of this portfolio, only one, Tevtropin®, is sold in the U.S., while others are distributed outside of the U.S. Teva plans to introduce additional products into the U.S. marketplace, but currently a definitive regulatory pathway, such as the Hatch-Waxman Act, does not exist for these products. Canada. The Canadian federal government, under the Food and Drugs Act and the Controlled Drug and Substances Act, regulates the therapeutic products that may be sold in Canada and the applicable level of control. The Therapeutic Products Directorate is the national authority that evaluates and monitors the safety, effectiveness and quality of drugs, medical devices and other therapeutic products. Issuance of a Notice of Compliance for generic drug products is also subject to the Patented Medicines (Notice of Compliance) Regulations under the Patent Act. The Therapeutic Products Directorate will not issue a Notice of Compliance if there are any patents relevant to the drug product listed in the Patent Register maintained by Health Canada. Generic pharmaceutical manufacturers can either wait for the patents to expire or serve a notice of allegation upon the brand company. Service of a notice of allegation often results in patent litigation with the brand company, in which case a Notice of Compliance will not be issued until the earlier of the expiration of a 24-month stay or resolution of the litigation in the generic company’s favor. A number of amendments to the Patented Medicines (Notice of Compliance) Regulations and the Food and Drugs Regulations came into force on October 5, 2006. The Canadian federal government’s stated intention was to balance the interests of brand and generic companies by eliminating certain anticompetitive loopholes, known as “evergreening,” in the Patented Medicines (Notice of Compliance) Regulations in exchange for up to eight and one-half years of data exclusivity on new chemical entities under the Food and Drugs Regulations. The Canadian generic industry trade association is opposing the application of these regulations in the courts.
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Table of ContentsThe changes to the Patented Medicines (Notice of Compliance) Regulations resulted in the Patent Register being effectively frozen as of the filing of a generic regulatory submission under the Food and Drugs Act. A generic company is therefore not required to address any patent listed by a brand company on the Patent Register in respect of that drug product after the date of filing of its submission. These changes will reduce the number of 24-month stays available to brand companies to a single stay in most cases, and may therefore accelerate the introduction of certain generic products. However, under certain other changes to the regulations, generic companies are prohibited from filing a generic submission using a new chemical entity as the Canadian reference or comparator product for six years following the receipt by a brand company of a Notice of Compliance for such new chemical entity. These changes may delay introduction of certain generic products. Provincial governments control expenditures on therapeutic products by establishing interchangeability formularies and benefit lists and only reimbursing products that are listed in the formulary and benefits lists. Provincial Ministries of Health, through their own review processes, determine the eligibility of the products for interchangeability by evaluating the drug quality, bioequivalence data, drug therapeutics, drug utilization and pharmacoeconomic issues. The Province of Ontario adopted a number of amendments to its pricing and reimbursement regime on October 1, 2006. These amendments generally reduce the price of generic drug products and permit generic drugs to be designated as interchangeable with not only the “same” but with “similar” brand drug products. Similar changes to pricing regimes are being considered by other provincial governments. In addition, the Canadian federal government and several provincial governments are studying possible improvements of their publicly funded Medicare system. Many of these governments acknowledge the need to limit extended brand patent monopolies and to speed the approval process for generic drugs. Branded pharmaceutical companies continue to lobby against expedited approvals of generic drugs, which would enhance generic drug sales at the expense of branded products. Latin America. The extension of patent protection to pharmaceutical products is a relatively new concept throughout much of Latin America, and most local pharmaceutical industry companies in the region involve the production of either copied versions of drugs still under patent in their countries of origin, or true off-patent drugs sold under a local brand-name, without bioequivalence testing in either case. Historically, registration has been the only regulatory prerequisite for new products, and if the regulatory agency fails to prove that a product may be harmful during the registration period, the product becomes registered and therefore eligible to be manufactured and sold. Pathways to true bioequivalent generics have generally not been adopted in Latin America, although procedures for introducing such generics exist in Mexico and Chile and may provide an avenue for Teva’s Latin American operations to capitalize on products sold by Teva in other markets. Israel. Israel, like other countries with advanced pharmaceutical industries, requires pharmaceutical companies to conform to international developments and standards. To this end and in order to meet the three basic criteria for drug registration (quality, safety and efficacy), regulatory requirements are constantly changing in accordance with scientific advances as well as social and ethical values. Legal requirements prohibit the manufacture, importation and marketing of any medicinal product, unless it is duly approved in accordance with these requirements. As a result of the 1998 amendments to the patent law, the term of certain pharmaceutical patents may be extended under certain conditions for up to five years. In 2005, the Israeli Knesset (Parliament) enacted new legislation, which ensures that the patent term extension in Israel will terminate upon the earliest of the parallel patent term extension expiration dates in the U.S., Europe and several other countries. Also, in 2005, the Knesset ratified legislation which provides for data exclusivity provisions, which may prevent the marketing of a generic product for a period of five and a half years measured from the first registration of the innovative drug product in any one of a number of specified Western countries. Regulations which came into effect in May 2005 allow for sales of some over-the-counter products for the first time in retail locations in addition to pharmacies. Israeli pricing regulations mandate that the retail prices of pharmaceuticals in Israel may not exceed the average of prices in four European markets (the United Kingdom, Germany, France and Belgium) (the so-called “Dutch Model”). Effective as of January 15, 2007, the model was amended to include three additional EU markets (Spain, Portugal and Hungary, or Poland if the product does not exists in any of the first three additional countries) where prices of pharmaceutical products are notably low, which will consequently reduce the reference prices. European Union. The medicines legislation of the European Union requires that medicinal products, including generic versions of previously approved products, new strengths, dosage forms and formulations of previously approved products, shall have a marketing authorization before they are placed on the market in the European Union. Authorizations are granted after the assessment of quality, safety and efficacy by the respective health authorities. In order to obtain an authorization to place a medicinal product on the market, an application must be made to the competent authority of the member state concerned. Besides various formal requirements, the application must contain the results of pharmaceutical (physico-chemical, biological or microbiological) tests, of pre-clinical (toxicological and pharmacological) tests as well as of clinical trials. All of these tests must have been conducted in accordance with relevant European regulations and must allow the reviewer to evaluate the quality, safety and efficacy of the medicinal product.
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Table of ContentsDuring the course of 2006, Teva continued to register its products in the European Union. Using both the mutual recognition procedure (submission in one member state and after approval by the authorities of the so-called reference member state, applications can be submitted in the other chosen member states) and the newer decentralized procedure (that allows simultaneous submission of the application to the chosen member states) established by the European Union in the new legislation effective November 2005, in an attempt to simplify and harmonize registration. Due to historical court interpretations of “essential similarity” that have now been included in the new legislation, it has become possible to register generic drugs containing different salts of the active ingredient. Teva continues to invest in its registration activities in the majority of countries in the European Union, including Hungary, the United Kingdom, France, Germany, The Netherlands, Italy, the Czech Republic and Poland. In 2005, a legal pathway was established to allow approval of Similar Biological Medicinal Products (“Biosimilars”) using abbreviated marketing applications. Appropriate tests for demonstration of safety and efficacy include preclinical or clinical testing or both. The reference product for this testing is the brand-name drug and the scientific principles of comparability are followed. In 2006, product specific guidelines were issued providing a more detailed interpretation of the data requirements for specific products and further guidance is being developed by the respective authorities in conjunction with the pharmaceutical industry. Teva anticipates that this legal pathway and abbreviated application requirements will enable distribution in the European Union of affordable biotechnology-derived products with demonstrated safety and efficacy comparable to the brand-name product. In order to control expenditures on pharmaceuticals, most member states of the European Union regulate the pricing of such products and in some cases limit the range of different forms of a drug available for prescription by national health services. These controls can result in considerable price differences among member states. The duration of certain pharmaceutical patents may be extended in the European Union by up to five years in order to extend effective patent life to fifteen years. Some older French and Italian patents were extended up to eight and eighteen years, respectively. Additionally, exclusivity provisions in the European Union may prevent companies from applying for a generic product for either six or ten years (the period is selected by each country) from the date of the first market authorization of the original product in the European Union. New legislation, applicable to all members of the European Union and effective as of November 2005, changes and harmonizes the exclusivity period for new products submitted after the effective date. The period before a generic application can be made will be eight years (from either six or ten years before) and allows the generic product to be marketed only after ten years from the first marketing authorization of the original product in the European Union, with the possibility of extending the exclusivity by one additional year under certain circumstances. Given that new products submitted after November 2005 will take at a minimum approximately one year to be assessed and approved, the new data exclusivity provisions of ‘8+2+1’ years will affect only generic submissions from around the end of 2014 onwards. The new legislation also allows for research and development work during the patent term for the purpose of developing and submitting registration dossiers. Economic reforms to the Hungarian pharmaceutical industry were introduced in January 2007. The new regulations will impose increased financial burdens on pharmaceutical manufacturers and wholesalers, including, for example, the obligation of marketing authorization holders to pay a fixed percentage (12%) of the total annual state subsidy (based on turnover) paid for their subsidized pharmaceuticals, as well as a provision stating that the National Health Insurance Fund and the marketing authorization holders are to share any costs which exceed the preliminary subsidy estimate in the National Health Insurance Fund budget. CEE. (For countries that are members of the EU –See “Regulation- European Union”) Russia. The Service for Healthcare and Social Development (Roszdravnadzor) regulates the prices of pharmaceuticals at a national level and determines eligibility for reimbursement. There are several difficulties with this reimbursement scheme, such as frequent changes in rules and extremely bureaucratic and time consuming procedures for registering drugs and obtaining other licenses. Key concerns remain over regional variations in retail and wholesale price controls, the lack of patent safeguards, a large counterfeit sector, and the poor legal enforcement of existing regulations. Russia has officially incorporated many relevant EU directives regarding pharmaceutical registration into national law. However, the registration process is still cumbersome. The federal-level Scientific Centre handles the final registration dossier and makes recommendations for the approval of products. Delays between submission and marketing approval reportedly average 10 to 12 months, although approval times vary widely; new indications and renewals take around one year to obtain.
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Table of ContentsMiscellaneous Regulatory Matters Teva is subject to various national, regional and local laws of general applicability, such as laws regulating working conditions. In addition, Teva is subject to various national, regional and local environmental protection laws and regulations, including those governing the discharge of material into the environment . As discussed above, data exclusivity provisions exist in many countries worldwide and may be introduced in additional countries in the future, although their application is not uniform. In general, these exclusivity provisions prevent the approval and/or submission of generic drug applications to the health authorities for a fixed period of time following the first approval of the brand-name product in that country. As these exclusivity provisions operate independently of patent exclusivity, they may prevent the submission of generic drug applications for some products even after the patent protection has expired. Pharmaceutical Production Teva now operates 36 finished dosage pharmaceutical plants in North America, Latin America, Europe, Israel and China, following the integration of Ivax and after closing five plants. The plants manufacture solid dosage forms, injectables, liquids, semi-solids and inhalers. During 2006, Teva’s plants produced approximately 37 billion tablets and capsules and over 450 million sterile units, compared with 22 billion tablets and capsules and 200 million sterile units in 2005. In 2006, Teva started to operate its new state-of-the-art facility in Jerusalem for solid dosage forms. In early 2007, this new high-volume production plant was approved by the FDA for the production of products destined for the U.S. and has now begun producing products for the U.S. market. Teva’s two main manufacturing technologies, solid dosage forms and sterile, are available in North America, Latin America, Europe and Israel. The main manufacturing site for respiratory inhaler products is located in Ireland. The manufacturing sites located in Kfar Saba and Jerusalem represent in the aggregate a significant percentage of Teva’s pharmaceutical production. As part of Teva’s strategy to create manufacturing “Centers of Expertise”, Teva continued its rationalization of manufacturing infrastructure during 2006 and closed five manufacturing facilities in North America (including the Cidra facility in Puerto Rico). Teva’s ability to rapidly rationalize its manufacturing infrastructure and to generate significant synergies is made possible by its ability to transfer product manufacturing efficiently between sites. Teva’s plants in the United States, Canada, the Kfar Saba and Jerusalem sites in Israel, the Haarlem site in The Netherlands, the Runcorn site in the United Kingdom, the Waterford site in Ireland and the Opava site in the Czech Republic are FDA- inspected or approved. Achieving and maintaining quality standards in compliance with the current Good Manufacturing Practices (cGMP) regulations, as established by the FDA and other regulatory agencies worldwide, require sustained efforts and expenditures. Teva has spent significant funds and dedicated substantial resources for this purpose. Raw Materials for Pharmaceutical Production Teva takes a global approach to managing commercial relations with its main suppliers. Strategic decisions are made on a global basis, while day-to-day operations are run locally. Most packaging materials are purchased locally. Teva’s API division is the principal raw materials supplier for Teva’s pharmaceutical businesses. The remaining raw materials are purchased from suppliers located mainly in Europe, Asia and the U.S. The acquisition of Ivax has expanded both Teva’s vertical integration, where significant opportunities still exist, and Teva’s commercial relations with third party API producers. Most of Teva’s purchases from U.S.-based suppliers are controlled substances. Teva has implemented a supplier audit program to ensure that its suppliers meet its standards. Teva USA utilizes controlled substances in certain of its products and therefore must meet the requirements of the Controlled Substances Act and the related regulations administered by the Drug Enforcement Administration. These regulations include quotas on procurement of controlled substances and stringent requirements for manufacturing controls and security to prevent pilferage of or unauthorized access to the drugs in each stage of the production and distribution process. Quotas for controlled substances may from time to time limit the ability of Teva USA to meet demand for these products in the short run. Environmental As part of its overall corporate responsibility, Teva prides itself on its commitment to environmental, health and safety matters in all aspects of its business. As a vertically integrated pharmaceutical company with worldwide operations,
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Table of ContentsTeva believes that its adherence to applicable laws and regulations, together with proactive management beyond mere compliance, enhances its manufacturing competitive advantage, minimizes business and operational risks and helps Teva to avoid adverse environmental effects in the communities where it operates. Teva believes that it is in substantial compliance with all applicable environmental, health and safety requirements. Organizational Structure Teva’s worldwide operations are conducted through a network of subsidiaries primarily located in North America, Europe, Latin America and Asia. Teva has direct operations in more than 50 countries, as well as 36 pharmaceutical manufacturing sites in 16 countries and R&D centers in 17 countries. The following sets forth, as of December 31, 2006, Teva’s principal operating subsidiaries in terms of pharmaceutical or API sales. In North America- Canada: Novopharm Limited; United States: Goldline Laboratories, Inc., Teva Specialty Pharmaceuticals, LLC, Doral Manufacturing, Inc., IVAX Corporation, IVAX Pharmaceuticals Caribe, Inc., IVAX Pharmaceuticals New York LLC, IVAX Pharmaceuticals NV Inc., IVX Animal Health, Inc., Plantex U.S.A., Inc., Sicor Pharmaceuticals, Inc. and Teva Pharmaceuticals USA, Inc. In Europe- Czech Republic: Ivax Pharmaceuticals s.r.o.; France: Teva Classics S.A.; Hungary: Teva Pharmaceutical Works Private Limited Company (formerly known as Biogal Pharmaceutical Works Ltd.) (99.4% held by Teva); Italy: Sicor Societa Italiana Corticosteroidi S.r.l., Teva Pharma Italia S.r.l.; Ireland: IVAX Pharmaceuticals Ireland (a branch of IVAX International B.V.); The Netherlands: Pharmachemie Holding B.V., Plantex Chemicals B.V., Teva Pharmaceuticals Europe B.V.; United Kingdom: Norton Healthcare Limited, Teva U.K. Limited (formerly known as Approved Prescription Services Limited). In Israel- Assia Chemical Industries Ltd. and Salomon, Levin and Elstein Ltd. In Latin America- Mexico: Lemery S.A. de C.V.; Chile: Laboratorio Chile S.A.; Venezuela: Laboratorios Elmor, S.A. In addition to the subsidiaries listed above, Teva operates businesses in various strategic and important locations, including China, India and other emerging and smaller markets. Properties and Facilities Listed below are Teva’s principal facilities in various regions of the world and their size in terms of square feet as of December 31, 2006:
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Teva leases certain of its facilities. In Israel, the corporate headquarters in Petach Tikva is leased until December 2007, with an option to renew annually until December 2012. In North America, Teva USA’s principal leased properties are its facilities in North Wales, Pennsylvania, the initial term of which expires in 2011, and a new warehouse in New Britain, Pennsylvania, the initial term of which expires in 2013. Sicor leases nine facilities in Irvine, California, seven of which are used for warehouse, packaging, research and office purposes (whose leases expire at various times between 2007 and 2016), and the remaining two of which are used for manufacturing. Sicor has contracted to purchase the latter two buildings, and expects to complete the purchases in March 2007 and early 2008, respectively. Novopharm’s headquarters building in Toronto, Ontario and a Novopharm manufacturing facility in Stouffville, Ontario are presently leased by Teva but are due to be sold as further described in Item 7 of this report. In addition, Teva owns or leases various other facilities worldwide. ITEM 4A: UNRESOLVED STAFF COMMENTS None.
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Table of ContentsITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS Introduction Teva is a global pharmaceutical company that develops, produces and markets generic drugs covering all major treatment categories. It is the leading generic drug company in the world as well as in the United States in terms of total and new prescriptions. Teva also has a significant and growing innovative pharmaceutical business, whose principal products are Copaxone® for multiple sclerosis and Azilect® for Parkinson’s disease, as well as a rapidly expanding proprietary specialty pharmaceutical business, which consists primarily of respiratory products. Teva’s API business both sells to third-party manufacturers and provides significant vertical integration to Teva’s own pharmaceutical production. Teva also has an animal health business, with principal operations in the U.S., covering both the companion animal and economic animal markets. The generic drug industry as a whole, and therefore Teva’s own operations, are affected by demographic trends, including an aging population and a corresponding increase in healthcare costs, budgetary constraints of governments and healthcare organizations. In each of the markets in which Teva operates, governments as well as private employers are working to control growing healthcare costs, and there is a steadily growing recognition of the importance of generics in providing access to affordable pharmaceuticals. In addition, the generic industry is significantly affected by consolidation among managed care providers, large pharmacy chains, wholesaling organizations and other buyer groups. Generic companies also face intense competition from brand-name pharmaceutical companies seeking to counter generic products. Teva believes that its broad pipeline and balanced business model, combining generic as well as branded generic, innovative and respiratory pharmaceutical products, and API, coupled with its geographic diversity, are key strategic assets in addressing these trends. Highlights In 2006, Teva’s net sales grew to $8,408 million, an increase of 60% over 2005 net sales. The principal drivers for the growth in sales were the acquisition of Ivax and several major launches of generic products in the United States with exclusivity. Net income in 2006, on a U.S. GAAP basis, was $546 million, as compared to $1,072 million in 2005. The 2006 figure, however, reflects, among other things, the impact of $1,391 million in charges in 2006 for a number of items including: a write-off of in-process research and development, primarily related to the Ivax acquisition, charges relating to a litigation settlement with Pfizer, and product impairment charges. Among the significant highlights of 2006 were:
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Ivax Acquisition In early 2006, Teva acquired Ivax, a multinational generic pharmaceutical company with operations mainly in the United States, Central and Eastern Europe and Latin America. For accounting purposes, the transaction was valued at approximately $7.9 billion in cash and stock. Ivax’s results were consolidated with those of Teva commencing February 1, 2006. This acquisition, Teva’s largest to date, enhanced Teva’s business model by strengthening Teva’s leadership position in the United States, expanding its strong presence in Western Europe and significantly enhancing Teva’s reach in Latin America, Russia and Central and Eastern European countries, with substantial increases in sales of branded products and operations in branded generic markets. The acquisition further provided Teva with an opportunity to expand its vertical integration in both existing and new regions. Ivax brought Teva new capabilities in the respiratory business, including proprietary technologies. Ivax also added to Teva’s existing small veterinary pharmaceutical business through the Ivax animal health pharmaceutical business. The acquisition strengthens Teva’s ability to respond, on a global scale, to a wider range of requirements of patients, customers and healthcare providers, both therapeutically and economically. As a result of the acquisition, Teva now has direct operations in more than 50 markets. Pursuant to a consent order, Teva and Ivax terminated or assigned to third parties various authorized generic distribution agreements to which Ivax was a party, which represented approximately $200 million in Ivax aggregate sales during 2005. In addition, certain overlapping generic products representing approximately $15 million in aggregate annual sales were divested. While the inclusion of Ivax sales increased Teva’s sales in all of Teva’s main geographies, the impact on the relative weight of the geographies is modest, with some increased weight for International at the expense of Western Europe. Teva’s existing API sales to Ivax shifted from third-party sales to intercompany sales, while Ivax’s own third-party API sales are now included in Teva’s third-party API sales. For the purpose of financing the cash portion of the acquisition, Teva used approximately $1.7 billion of its own cash together with $2.8 billion of short-term borrowings under bridge financing facilities. These bridge loans were then replaced within several days with the proceeds of publicly issued debt securities, totaling $2.9 billion comprised of a mixture of convertible senior debentures and long-term straight debt instruments, as follows:
During 2006, Ivax business units were operationally integrated to various degrees with those of other Teva units. The Ivax units whose financial processes were not fully integrated as of year end represented approximately 18% of Teva’s consolidated total assets and approximately 22% of Teva’s consolidated net sales, as of, and for the year ended, December 31, 2006.
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Table of ContentsResults of Operations The following table sets forth, for the periods indicated, certain financial data derived from Teva’s U.S. GAAP financial statements presented as percentages of net sales and the increase/decrease by item as a percentage of the amount for the previous year.
Sales—General Consolidated sales by geographic areas and business segments were as follows: Sales by Geographical Areas
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Table of ContentsSales by Business Segments
Teva’s overall sales growth for 2006 was driven principally by the effects of the Ivax acquisition, which impacted mainly the pharmaceutical segment, as well as organic growth in the U.S. resulting from new product launches with exclusivity. Pharmaceutical Sales North America In 2006, pharmaceutical sales in North America amounted to $4,759 million, representing an increase of 68% over 2005. The increase in sales was attributable to:
These factors were partially offset by price erosion of several major products that were introduced in 2005, combined with erosion of the base business of generic products in 2006. In 2006, Teva dispensed in the U.S. approximately 420 million prescriptions, of which 416 million were generic prescriptions, an increase of 16% as compared to 2005 and 164 million prescriptions ahead of Teva’s nearest generic competitor and 112 million prescriptions ahead of any other pharmaceutical company. While most of the generic products launched or sold in 2006 were derived from Teva’s R&D pipeline, certain products were the result of agreements with partners where Teva acquired rights to products it did not have, in furtherance of Teva’s strategy to reach the market with generic versions as early as possible. In addition, in 2006 Teva entered into agreements settling patent litigation with certain branded companies. These included a settlement agreement with Purdue pertaining to Teva’s generic version of Purdue’s OxyContin® (oxycodone HCl extended-release) tablets, a settlement agreement with Pfizer regarding idarubicin, azithromycin and epirubicin, and an agreement with Impax and Anchen Pharmaceuticals, Inc. for the marketing of the generic version of Wellbutrin XL® (bupropion hydrochloride extended-release) tablets, 300 mg, the branded product marketed by GlaxoSmithKline. Teva expects that its revenue stream in North America will continue to be fueled by its strong U.S. generic pipeline, which, as of February 1, 2007, included 162 ANDAs, including 42 tentative approvals and 78 “Paragraph IV” applications, which challenge the brand products’ patents. Total 2006 annual sales of the related brand products targeted by this generic pipeline, including the tentatively approved products, exceeded $92 billion. Teva believes it is the first to file on 45 of these
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Table of Contentsapplications, relating to brand products whose aggregate 2006 annual U.S. sales exceeded $37 billion. The launches with exclusivity in 2006 provided an unusual concentration of very large opportunities. Although Teva anticipates a substantial number of new product launches in 2007, primarily in the latter half of the year, none is likely to have the impact of the major launches of 2006. For 2008, Teva anticipates that its new product launches will once again be likely to include some substantial launches. In Canada, as of December 31, 2006, 55 products submitted to the Canadian Therapeutic Products Directorate were awaiting approval. Collectively, the brand name versions of these products had annual Canadian sales in 2006 of approximately U.S. $2.8 billion. Certain legislative changes affecting the pricing and reimbursement regime were adopted in the Province of Ontario during late 2006. These amendments generally reduce the price of generic drug products and permit generic drugs to be designated as interchangeable with not only the “same” but with “similar” brand drug products. In 2005, pharmaceutical sales in North America amounted to $2,837 million, representing an increase of 3% over 2004. The increase in sales was attributable to a number of new generic product launches in the U.S. (including two major launches, the generic versions of Allegra® (fexofenadine) and Zithromax® (azithromycin)), continued growth in sales of Copaxone® and continued substantial growth in Canada as a result of 13 new product launches and the revaluation of the Canadian dollar against the U.S. dollar. On the other hand, price erosion of several major products launched in 2004 (such as oxycodone 80mg, gabapentin and carboplatin) where Teva experienced limited competition, combined with a higher rate of erosion of the base business of generic products in 2005, more than offset the contribution of the new product sales in 2005. Europe Pharmaceutical sales in 2006 in seventeen Western European countries, including Hungary, amounted to $1,850 million, an increase of 34% compared to 2005. In 2006, among the significant products sold by Teva in Europe were the generic versions of Zocor®, Prezal®, Zoloft®, Taxol®, Zofran®, Imigran®, Selektine®, Zithromax®, Lamictal®, Zoton®, Seroxat/Deroxat®, Staril/Fosinopril® and Fosamax Once Weekly®. During 2006, Teva received 300 generic approvals in different European countries, corresponding to 27 different compounds in 36 formulations. Other than the consolidation of Ivax sales, which primarily increased sales in the United Kingdom, France, Germany and the Nordic countries, and which facilitated Teva’s entrance into the respiratory product business in Europe, new product launches, higher sales of third-party products in Hungary, and the continued penetration of Copaxone® and Azilect® contributed to the year-over-year sales growth. The European generics market varies considerably from country to country in terms of market penetration and other characteristics. In certain European countries, there is a market for both branded generic products and drugs sold under their generic chemical names; in other European countries, there is a market for branded generics only. Some countries, such as the United Kingdom and the Netherlands, permit substitution by pharmacists (so-called “pure generics”), while other countries, such as Germany, Hungary and Italy, permit pharmacists to provide only the drug prescribed by doctors. In 2006, while Teva faced challenging market conditions in certain of its principal European markets, including the United Kingdom and Italy, it benefited from opportunities in other countries such as France. Most of the European currencies remained stable against the U.S. dollar in 2006 (on an annual average compared to annual average basis). Accordingly, currency fluctuations relative to the U.S. dollar had an insignificant positive impact on European sales in 2006. The overall value of branded products expected to lose patent protection in the top eight European markets between 2007 and 2013 is estimated to be approximately $31 billion. However, there are varying regulatory regimes among the different countries within Europe, which often result in patents expiring on different dates within European markets or which result in differences in timing of the launch of generic products due to data exclusivity restrictions. In Europe, as of December 31, 2006, Teva had approximately 1,800 marketing authorization applications pending approval corresponding to 140 compounds in 295 formulations, with over 260 additional compounds approved for development. Teva believes that this pipeline of approvals and applications, which includes important products, some of which Teva expects to launch in 2007 in various European countries, will provide an opportunity to generate significant growth in the next several years. Teva has significantly increased its registration efforts in a number of European countries, including: Hungary, the United Kingdom, France, Germany and the Netherlands. Over the course of 2006, Teva continued to register its products in Europe, using both the mutual recognition procedure and a newer decentralized procedure established by the European Union in an attempt to simplify and harmonize registration. The new decentralized procedure allows simultaneous submission of an application to several member states.
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Table of ContentsDue to historical court interpretations of “essential similarity” that have now been included in the decentralized procedure, it has become possible to register generic drugs containing different salts of the active ingredient. A significant number of legislative changes in Europe aimed at reducing healthcare costs were introduced during 2005 and 2006:
Pharmaceutical sales in Europe in 2005 amounted to $1,378 million, an increase of 25% compared to 2004, primarily due to new launches of generic products, including many of the same key products in a variety of countries within Europe. International Teva’s International cluster includes Israel and all other countries outside of the U.S., Canada and Western Europe. Teva’s pharmaceutical sales in those regions reached an aggregate of $1,212 million in 2006, an increase of 137% as compared to $511 million in 2005. Teva generated approximately 7% of its pharmaceutical sales in Latin America (including Mexico), 4% in Israel, 3% in Central and Eastern Europe (CEE), and 1% in other countries. Teva’s International pharmaceutical sales benefited in 2006 from the addition of territories gained through the Ivax acquisition, primarily certain countries in Latin America and Central and Eastern Europe, where Teva formerly had a small presence, as well as the expansion of sales in existing markets. The principal countries contributing to our Latin American pharmaceutical sales were Mexico, Chile, Venezuela, Peru and Argentina and the principal countries contributing to our Central and Eastern Europe pharmaceutical sales, were Russia, Poland and the Czech Republic. In most of these markets, our products are marketed and sold as “branded generics.” Sales of branded generic products involve considerably higher marketing expenditures than do non-branded generic products such as those we sell in the United States and certain Western European countries. Pharmaceutical sales in Israel, which amounted to $335 million in 2006, increased by 10% compared to 2005, reflecting primarily new distribution contracts entered into in 2006. Teva intends to continue to build a franchise in Latin America, taking advantage of the expected increases in spending on healthcare (and on pharmaceuticals in particular) and growing populations in Latin America, leveraging its manufacturing expertise to the extent possible, building on the already-strong brands it has in Latin America and expanding the indications served. Teva has recently expanded its operations in Brazil, where it focuses on Copaxone® sales as well as oncology products. The Ivax acquisition significantly expanded Teva’s operations in the CEE and provided Teva with a broader portfolio of generic prescription drugs, as well as over-the-counter drugs, vitamin supplements and medical devices. Teva’s strategy is to become one of the top five pharmaceutical companies in the region, as well as to be a leading supplier in generics, respiratory products, biogenerics and over-the-counter products. In 2006, among the significant products sold by Teva in the CEE were the generic versions of Novo-Passit®, Beclazone®, Simgal®, Sanorin®, Stoptussin®, Stopangin®, Alendronate® and Equoral®. In 2006, Teva received 261 generic approvals, corresponding to 64 new compounds in 72 formulations. In addition, in the CEE, as of February 1, 2007, Teva had 430 marketing authorization applications pending approval, corresponding to 65 molecules in 66 formulations and 140 strengths.
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Table of ContentsAnimal Health Teva manufactures and markets proprietary and generic veterinary pharmaceutical products principally in the U.S., as well as in Israel. Teva also markets animal health pharmaceutical products in other regions, particularly in Southeast Asia, Africa, Latin America and Eastern Europe. Sales in 2006 increased over 2005, reflecting the inclusion of sales from IVX Animal Health and, to a marginal degree, an increase in sales at Teva’s historical veterinary business. In 2006, the U.S. animal health business faced a number of challenges, including delays in new product launches due to regulatory backlogs, supply constraints and pricing pressures. Innovative Products Teva’s innovative products include Copaxone® for the treatment of relapsing remitting multiple sclerosis and Azilect® for the treatment of Parkinson’s disease. Teva continues to seek additional innovative products through its R&D efforts (as further described in Item 4 of this report) and focuses on the following therapeutic areas: neurological disorders, autoimmune diseases and oncology. Copaxone®. In-market global sales of Copaxone® in 2006 reached a new record of $1,414 million, an increase of 20% over 2005. Copaxone® continues to be one of the leading therapies for MS in the U.S., both in terms of new and total prescriptions. U.S. Copaxone® sales continued to increase, reaching $916 million, an increase of 17% compared to 2005. U.S. sales represented 65% of total in-market sales in 2006. Sales also increased in Canada. In-market sales outside the United States, primarily in Europe, increased 26% to $498 million, driven by significant sales increases in our principal European markets (the United Kingdom, France and Germany, the largest MS market in Europe), as well as Russia, Mexico and certain other Latin American countries. The growth of in-market sales of Copaxone® in the United States also reflected the impact of two price increases of 9% and 4%, announced in 2006. Copaxone® is sold through Sanofi-Aventis and its subsidiaries in most markets, and Teva records as revenue only a portion of the in-market sales of Copaxone® sold by these entities. In the United States, Copaxone® is marketed by Teva Neuroscience, Inc. Since the exchange rate of European currencies remained at almost the same level as against the U.S. dollar in 2006 (when annual average compared to annual average), sales growth of Copaxone® in Europe was not impacted by currency movements. Beginning in January 2007, IMS introduced a change in its prescription sampling methodology. Based upon this new methodology, in January 2007 in the U.S., Copaxone® had 31.2% of new prescriptions and 29.9% of total prescriptions, compared with a market share computed in accordance with the IMS’ prior methodology, as of December 2006, of 36.5% of new prescriptions and 35.3% of total prescriptions. Teva will assume responsibility for distribution of Copaxone® in the U.S. and Canada commencing April 1, 2008 and in Europe and certain other markets in 2012. Teva will thus record the full in-market sales of Copaxone®, net of a payment to Sanofi-Aventis (equal to 25% of the in-market sales of Copaxone® with respect to the U.S. and Canada agreement) for a period of two years in each case. Although Teva will record higher revenues as a result of this change, Aventis will no longer share certain marketing expenses. The resulting increase in SG&A will substantially offset the increase in reported revenues, and therefore this termination provision will result in a minimal change to net income during this two year period. Thereafter, commencing April 2010, Teva will stop making this payment to Sanofi-Aventis and thus record all in-market sales and profits of Copaxone® for the U.S. and Canada. Following the termination of the European agreement in 2012, a similar pattern will come into play for Europe and the other markets covered by the agreement, but with Teva making significantly lower payments to Sanofi-Aventis. To date, Copaxone® has been approved for marketing in 48 countries worldwide, including the United States, Canada, Israel, 22 European Union countries, Switzerland, Australia, Russia, Mexico, Brazil and Argentina. In 2005, in-market global sales of Copaxone® amounted to $1,176 million, an increase of 26% over the previous year. U.S. sales in 2005 accounted for 66% of global sales of Copaxone®. The growth of in-market sales of Copaxone® in the United States in 2005 also reflected the impact of a price increase of 9.4% announced in May 2005. Sales growth of Copaxone® in 2005 in Europe was not impacted by currency movements. A large Phase III study, FORTE, has been initiated to confirm positive results from a recent Phase II study that compared a 40 mg/day dose of Copaxone® in 90 relapsing MS patients to the currently approved 20 mg/day dose. Patients who took the higher dose of Copaxone® experienced a greater reduction in the mean cumulative number of brain lesions accompanied with greater reduction in annual relapse rate. Based on consultation with the FDA and the Medicines and
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Table of ContentsHealthcare Products Regulatory Agency, approval of the 40 mg dose, with the same labeling as that of the 20mg dose, would be based on the new one year Phase III study, with an additional one year open-label extension where all patients will be treated with the higher dose. Azilect®. During July 2006, Azilect® (rasagiline tablets), Teva’s once-daily oral treatment for Parkinson’s disease and its second innovative drug, became available in the U.S. as part of a gradual global roll-out of this new product, expanding the Teva central nervous system franchise. Total in-market sales of Azilect® worldwide in 2006 amounted to $44 million. Teva is making significant progress with the ADAGIO trial, a large Phase III clinical trial designed to establish Azilect®’s potential effects on modifying the progression of Parkinson’s disease. Enrollment of patients into this study was completed during the fourth quarter of 2006, sooner than had been expected. Specialty Products Since the Ivax acquisition, Teva has significantly expanded its presence in the specialty pharmaceutical products business, presently focusing on respiratory, bio-generics and biopharmaceutical products, as well as hospitals and institutional channels. Respiratory. Teva’s respiratory product line, which was acquired as part of the Ivax acquisition, contributed significantly to revenues in 2006. During 2006, Teva created a global respiratory franchise. Respiratory sales increased significantly from the sales recorded during 2005 to approximately $500 million in 2006, driven by increases in sales of ProAir™ (albuterol HFA) and QVAR in the U.S. and sales of QVAR in Europe. Teva has succeeded in capturing a strong position in the U.S. albuterol HFA market, with greater than a 60% market share since September 2006, according to IMS data. In Western Europe, Teva progressed in the commercialization of Fluticasone Nasal Spray and in the commercialization of budesonide Spiromax®, a multi-dose dry powder inhaler. In Central and Eastern European countries, Teva is continuing to develop its respiratory commercial activities and is registering several products using its devices. In Latin America, Teva is building the necessary infrastructure to enable further growth of the franchise. All of Teva’s asthma products sold in Europe (except for beclomethasone in the United Kingdom) and in the U.S. are free of CFC propellants, which are being phased out worldwide under the Montreal Protocol, a 1987 international treaty to eliminate the production and use of ozone-depleting chemicals, and which may not be sold in the U.S. after December 31, 2008 under a recent FDA ruling. Instead, Teva’s current inhaler products contain the ozone-friendly propellant hydrofluoroalkane (HFA). The phasing out process in anticipation of implementation of the Montreal Protocol is already affecting the market. Teva is seeking approval for ProAir™ HFA Breath Actuated Inhalation Aerosol, based on the Easi-Breathe® technology in the U.S. In December 2006, Teva received an approvable letter from the FDA. The FDA takes a rigorous approach on all novel, inhaled delivery systems and has asked Teva to complete a label comprehension study as well as in-vitro studies to help assure that patients accurately use the product in accordance with labeled instructions. Teva is working to finalize these studies. Teva’s respiratory product line is expected to benefit in the future from the shift to non-CFC based inhaler products as well as by new product launches. Hospitals and Institutional Channels. Teva, supported by its global supply system, offers a wide range of oncology products, as well as other products for the hospital channel, in both injectables and solid form. Biogenerics and Biopharmaceuticals. During 2006, Teva marketed a portfolio of biopharmaceutical products including interferon alpha 2b, granulocyte colony-stimulating factor and human growth hormone. Teva has in its pipeline additional biopharmaceutical products which it intends to launch in the coming years into the U.S., EU and International markets. Active Pharmaceutical Ingredient (API) Sales Overall sales of active pharmaceutical ingredients in 2006 amounted to $1,327 million, an increase of $260 million, or 24% over 2005. Of this amount, API sales to third parties in 2006 amounted to $587 million, an increase of 12% compared to 2005, which resulted primarily from increased sales to branded product manufacturers, market share gains in certain generic products and the inclusion of Ivax’s third-party sales. Intercompany API sales during 2006 amounted to $740 million, an increase of 36%, primarily as a result of the launches in the U.S. of azithromycin in late 2005 and of simvastatin, sertraline and pravastatin in 2006, substantially all of which were vertically integrated products, as well as the inclusion of sales to Ivax, which were previously considered third-party sales. The high proportion of intercompany sales reflects the strategic
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Table of Contentsimportance of vertical integration and is one of the reasons for Teva’s higher gross margins in 2006. Teva’s portfolio of API products increased to approximately 250 as a result of the Ivax acquisition. The business environment remained very competitive in 2006, with the main factors being increased competition from Indian and Chinese API manufacturers and ongoing consolidation of customers and competitors. Teva believes that its extensive API product portfolio, which is one of the broadest available in the industry, combined with its creation of intellectual property rights and its financial resources, make its API division a leader in the industry. Sales of active pharmaceutical ingredients to third parties in 2005 amounted to $524 million, an increase of 5% over 2004. At the same time, intercompany sales of active pharmaceutical ingredients increased 24% and amounted to $543 million. Other Income Statement Line Items Gross Profit Gross profit margins reached 50.7% in 2006 compared with 47.2% in 2005 and 46.7% in 2004, reflecting a change in the product mix in which Teva recorded substantially higher sales of new U.S. generic products launched with exclusivity and Copaxone®, the inclusion of certain high-margin Ivax businesses (such as respiratory products and branded generics in Latin America and Central and Eastern Europe) and the increasing benefits of Teva’s vertically integrated API division. These positive trends were somewhat offset by the effect of an inventory step-up recorded in 2006 in connection with the Ivax acquisition, the amortization of acquired Ivax product rights and lower margins on Teva’s base business. We believe that the gross margins of our operations in the near term will return to Teva’s indicated range of 47% to 50%, as a result of changes in new product opportunities and the geographic spread of our sales. In 2005, fexofenadine, which was launched with Barr, had a positive impact on gross margins, since the profit split with Barr was recorded under SG&A. Several of the products launched in 2004 also involved collaborations with partners but on a royalty basis, which impacts gross margins. As required under U.S. GAAP, Ivax and Sicor’s acquired inventories were stepped up to their fair market value at the date of acquisition in 2006 and 2004 by $95 million and $14 million, respectively. As a result, the sales of these inventories negatively impacted Teva’s gross profit margins in those years. Research and Development (R&D) Expenses Research and development expenses (net of the effect of third-party participations and net of the $1,295 million of in-process R&D) increased from $369 million in 2005 to $495 million in 2006, an increase of 34%. As a percentage of sales, these expenses represented 6% in 2006 as compared to 7% in 2005. Generic R&D expenses in 2006 accounted for 52% of gross R&D expenses, an increase of approximately 24% compared to 2005, due to increased R&D activity for the U.S. and Europe and litigation costs involved in patent challenge litigation, and the inclusion of Ivax generic R&D expenditures. Innovative R&D expenses amounted to approximately 28% of gross R&D expenses for 2006, an increase of 62% compared to 2005, mainly attributed to higher expenditures relating to MS, primarily the FORTE study, and to Parkinson’s disease, primarily the ADAGIO study, as well as other pipeline projects, including certain Ivax innovative R&D projects. The balance was dedicated to the development of other products, principally new products for the API division. Gross research and development expenses and net research and development expenses as a percentage of sales remained practically the same in 2005 relative to 2004. In 2006, Teva submitted a total of 116 generic files worldwide, including 39 ANDAs to the FDA, 25 abbreviated new drug submissions in Canada and files for 28 new molecules in various Western European markets, as well as 24 submissions in other regions. As is discussed above, Teva is making significant progress with the ADAGIO trial, a Phase III clinical trial designed to establish Azilect’s® potential effects on modifying the progression of Parkinson’s disease. Following the signing of an agreement in 2004 with Active Biotech, a Sweden-based, publicly traded biotechnology company, to develop and commercialize laquinimod as an oral treatment for multiple sclerosis, Teva initiated a double-blind, placebo-controlled multicenter Phase IIb clinical study in several European countries, in which the effects of laquinimod are being tested. In September 2006, Teva reported that the trial confirmed efficacy and a favorable safety profile of the oral drug and showed significant reduction in the rate of inflammatory disease activity. Teva is in discussions with regulatory authorities in order to accelerate the clinical program for this product into Phase III. The first Phase III study of laquinimod is scheduled to begin in 2007.
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Table of ContentsTeva submitted an investigational new drug application to the FDA in 2005 to initiate a clinical trial in the U.S. with laquinimod to assess drug-drug interaction. Teva is currently working with the FDA to resolve various issues raised in connection with this application. In 2006, Teva also continued to invest in the clinical development of a number of earlier stage innovative products, including treatments for ALS, lupus and various cancers, as well as funding other innovative product opportunities, derived primarily from Israeli research, through a variety of direct investment and joint venture arrangements. In 2005, Teva increased its research efforts to enhance the development of its generic pipeline. During the course of the year, Teva submitted an additional 38 ANDAs to the FDA and 29 abbreviated new drug submissions in Canada. Selling, General and Administrative Expenses (SG&A) SG&A expenses in 2006 amounted to $1,572 million, an increase of 97% over 2005, and as a percentage of sales, SG&A expenses increased from 15.2% for 2005 to 18.7% for 2006. This higher level reflects primarily the inclusion of Ivax with its higher SG&A expense levels, mainly due to its higher proportion of sales of branded products and its operations in branded generic markets, as well as higher selling and marketing costs supporting growing Copaxone® sales and the gradual introduction of Azilect® and increased profit sharing with third parties. Teva believes that SG&A expenditures as a percentage of sales should generally decline as sales continue to increase, although the launch of Azilect®, additional profit-sharing agreements and increased support for Copaxone® could impact this trend going forward. In 2006, for the first time, Teva started to expense employees’ stock options applying the provisions of FAS 123R. The annual pre-tax charge in 2006 amounted to approximately $48 million, most of which fell under the SG&A line item. SG&A expenses in 2005 amounted to $799 million, an increase of 15% over 2004, and as a percentage of sales, SG&A expenses increased to 15.2% for 2005 from 14.5% for 2004. These higher SG&A expenses were primarily the result of the profit-sharing agreement with Barr Pharmaceuticals related to the launch of fexofenadine in 2005 described above. In-Process Research and Development (IPR&D) IPR&D write-offs in 2006 were primarily attributable to the Ivax acquisition. IPR&D write-offs in 2004 were primarily attributable to the Sicor acquisition. Litigation Settlement, Impairment and Restructuring Expenses A litigation settlement charge of $50 million in 2006 reflects the litigation expense portion of a settlement with Pfizer Inc. relating to azithromycin, idarubicin and epirubicin, out of a total settlement cost of $62 million. Teva believes that these litigation settlements benefit both U.S. consumers, by increasing the availability of Teva’s lower cost generic products, and Teva, by removing uncertainty regarding possible litigation risks. Impairment expenses in 2006 amounted to $36 million and $30 million in 2004 mainly related to impairment of product rights for Purinethol®. Restructuring charges in 2006 related to integration activities arising from the Ivax acquisition, but affecting Teva operations. Financial Expenses (Income) In 2006, Teva financial expenses amounted to $95 million, compared with $4 million during 2005. The increase in financial expenses is primarily attributable to the Ivax acquisition financing. The annual interest payments and amortization of issuance expenses on the $2.9 billion raised in connection with the acquisition amounted to approximately $110 million. In 2005, Teva recorded financial expenses of $4 million, compared with financial income of $26 million during 2004. During 2005, higher yields on Teva’s increased cash and investment balances were more than offset by the negative effect of currency erosions and hedging activities. In addition, Teva saved both interest and the amortization of issuance expenses associated with certain debentures that were converted during 2004 and 2005. In general, income or expenses from hedging activities are partially offset in other line items which enjoy or suffer from the impact of currency movements on the underlying asset. The impact on the financial income/expense line item is, however, noticeable, as this line item is of relatively small magnitude compared to sales, cost of goods and other income statement line items.
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Table of ContentsTaxes Provisions for taxes as a percentage of pre-tax income amounted to 22.0% in 2006, compared with 18.0% in 2005 and 44.3% in 2004. The rate of tax fluctuates with the source of taxable income. The increase in the effective tax rate in 2006 is mainly due to the in-process research and development write-off related to the Ivax acquisition, which is not tax-deductible, partially offset by a release of $120 million related to prior years’ tax provisions. The release of provisions is due to closure of tax settlements and the expiration of tax statute of limitations in various jurisdictions. The statutory Israeli corporate tax rate was 31% in 2006 compared to 34% in 2005 and 35% in 2004. It is scheduled to further decrease to 29% in 2007, 27% in 2008, 26% in 2009 and 25% from 2010 and onwards. However, this is expected to have a relatively small impact as, historically, Teva’s effective consolidated tax rates have been considerably lower, since a major portion of Teva’s income in Israel is derived from “approved enterprises” (as more fully described in “Item 10—Israeli Taxation” below) and from certain operations outside of Israel, which represent an increasingly larger portion of Teva’s consolidated taxable income, where Teva has enjoyed lower tax rates. The lower tax rate in 2006 and 2005 reflects profits derived from lower tax rate sources, including profits from products introduced into the U.S. market that originated from an Israeli source, such as Copaxone® and certain API sales. Most of Teva’s investments in Israel were granted approved enterprise status, which confers certain tax benefits. These benefits include a long-term tax exemption for undistributed income generated by such projects, and lower rates of tax on dividends distributed from other projects, the source of which is approved enterprise income, for the periods set forth in the law, as described in “Item 10—Israeli Taxation.” The most recent example of such an approved enterprise is Teva’s new state-of-the-art pharmaceutical production facility in Jerusalem, which benefits from a ten-year tax exemption for undistributed income generated at such facility starting in 2007. This new facility has the capacity, when fully operational, to produce up to eight billion tablets annually and has the potential for expansion to twelve billion tablets. In early 2007, this new high-volume production plant was approved by the FDA for the production of products destined to the U.S. and has now begun producing products for the U.S. market. Going forward, the effective tax rate is expected to fluctuate as a result of various factors, including statute of limitations, settlements and the constant changes in the products and geographical mix of our sales, as well as the effect of any mergers and acquisitions. Net Income and Earnings Per Share Net income in 2006 amounted to $546 million, a decrease of 49% over 2005, mainly due to the Ivax purchase accounting write-offs, including $1,277 million related to a write-off of in-process R&D and $95 million in a step-up of Ivax’s inventory at its acquisition date. Diluted earnings per share reached $0.69 in 2006, a decrease of 57% over diluted earnings per share in 2005. Net income totaled $1,072 million in 2005, as compared with $332 million in 2004, and diluted earnings per share amounted to $1.59 and $0.50 in 2005 and 2004, respectively. The main factor for the lower 2004 results is the purchase accounting write-offs relating to the 2004 Sicor acquisition. During 2006, Teva spent $234 million to repurchase 7.3 million of its shares at an average price of $31.80 per share and $4 million of its 1.75% convertible debentures due 2026, pursuant to an authorization in November 2006 by its board of directors to repurchase Teva securities in an amount valued at up to $600 million. During 2005, Teva spent $379 million to repurchase 12.7 million of its shares at an average price of $29.91 per share, pursuant to an authorization by its board of directors to repurchase Teva securities in an amount valued at up to $300 million, which was increased to $600 million in December 2004, as well as pursuant to a previous $50 million repurchase authorization. During 2004, Teva spent $188 million to repurchase 6.9 million of its shares and $25 million of convertible debentures due 2024 under this plan. The share count used for the fully diluted calculation for 2006, 2005 and 2004 amounted to 805 million, 681 million and 688 million shares, respectively. The significantly higher level of outstanding shares for 2006 results from the issuance of shares in connection with the Ivax acquisition as well as exercised employee options less shares repurchased under Teva’s share repurchase program. This purchase of securities had only a marginal effect on the 2006 share count since the program was initiated in November 2006 (decreasing total outstanding shares on a fully diluted basis by 0.6 million shares). The slight decrease in share count from 2004 to 2005 represents the repurchase program that took place in late 2004 and early 2005.
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Table of ContentsDuring 2006, $182 million of the $450 million of 0.375% Convertible Senior Debentures due 2022 were converted following the conversion of approximately $200 million of these debentures during 2005, particularly in the fourth quarter. In August 2004, as a result of a call for their redemption, $360 million of 0.75% Convertible Senior Debentures due 2021 were converted into approximately 17 million shares. In connection with the acquisition of Ivax, approximately 123 million additional Teva shares were issued in January 2006. In addition, Teva used $1.7 billion of its existing cash resources, together with a total of $2.9 billion in proceeds from bridging facilities, to pay the cash portion of the purchase price for the acquisition of Ivax. These bridging facilities were promptly refinanced as further described below. As part of the acquisition, substantially all of Ivax’s employee stock options became fully vested in accordance with the terms of the applicable option plans and, in accordance with the merger agreement with Ivax, became exercisable for an aggregate of approximately 16 million Teva shares. The bridge loans for the Ivax acquisition were promptly refinanced through public offerings of debt securities of two Teva finance subsidiaries, who issued an aggregate of $1 billion principal amount of 6.15% Senior Notes due 2036, $500 million principal amount of 5.55% Senior Notes due 2016, $817.5 million principal amount of 1.75% Convertible Senior Debentures due 2026 and $575 million principal amount of 0.25% Convertible Senior Debentures due 2026. Holders of the 0.25% Convertible Senior Debentures due 2026 have the right to cause Teva to repurchase their debentures for 100% of the principal amount, plus accrued interest, in cash on February 1, 2008; holders of the 1.75% Convertible Senior Debentures due 2026 have a similar repurchase right on February 1, 2011. The 0.25% Convertible Senior Debentures due 2026 include a net share settlement feature according to which principal will be paid in cash and, in the case of conversion, only the residual conversion value above the principal will be paid in Teva shares. Therefore, these convertible debentures will become dilutive only if the stock price exceeds the conversion price of $47.16 per share. The $817.5 million of 1.75% Convertible Senior Debentures due 2026 are convertible into approximately 16 million Teva shares.
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Table of ContentsSupplemental As Adjusted Income Data The table on the following page presents supplemental data, in U.S. dollar terms, as a percentage of sales and the increase/decrease by item as a percentage of the amount for the comparable period, after taking into account the following items, the exclusion of which management believes facilitates the reader’s understanding of the trends in the Company’s underlying business: In 2006:
In 2004:
The data so presented — after these exclusions — are the results used by management and Teva’s board of directors to evaluate the operational performance of the Company, to compare against the Company’s work plans and budgets, and ultimately to evaluate the performance of management. For example, the Company annually prepares detailed “work plans” for the next three succeeding fiscal years. These are the work plans used to manage the business and are the plans against which management’s performance is measured. All of such plans are prepared on a basis comparable to the presentation below, in that none of the plans takes into account those elements that are factored out in the “as adjusted” presentations. In addition, at quarterly meetings of the Board at which management provides financial updates to the Board on the Company’s performance, presentations are made comparing the current fiscal quarterly results against: (a) the comparable quarter of the prior year, (b) the immediately preceding fiscal quarter and (c) the work plan. Such presentations are based upon the “as adjusted” approach reflected in the table below. Moreover, while there are certainly always qualitative factors and elements of judgment involved in the granting of annual cash bonuses, the principal quantitative element in the determination of such bonuses are performance targets tied to the work plan, and thus tied to the same “as adjusted” presentation as is set forth below. In arriving at its “as adjusted” presentation, Teva has in the past factored out items, and would expect in the future to continue to factor out items, that either have a non-recurrent impact on the income statement or which, in the judgment of Teva’s management, are items that, either as a result of their nature or size, Teva would not expect to occur as part of its normal business on a regular basis, and that, were they not singled out, could potentially cause investors to extrapolate future
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Table of Contentsperformance from an improper base. While not all inclusive, examples of these items include: purchase accounting adjustments related to acquisitions, including adjustments for write-offs of in-process R&D, and inventory “step-ups” following acquisitions; restructuring charges related to efforts to rationalize and integrate Teva’s operations on a global basis; material litigation awards or settlements — both in terms of amounts paid or amounts received; impairment charges related to intangible assets such as intellectual property, product rights or goodwill; and the income tax effects of the foregoing types of items when they occur. As adjusted data are non-GAAP financial measures and should not be considered replacements for GAAP results. Teva provides such non-GAAP data on an adjusted basis because management believes that such data provide useful information to investors. However, investors are cautioned that, unlike financial measures prepared in accordance with GAAP, non-GAAP measures may not be comparable with the calculation of similar measures for other companies. These non-GAAP financial measures are presented solely to permit investors to more fully understand how management assesses the performance of the Company. The limitations of using these non-GAAP financial measures as performance measures are that they provide a view of the Company’s results of operations without including all events during a period, such as the effects of acquisition, merger-related, restructuring and other charges, and may not provide a comparable view of the Company’s performance to other companies in the pharmaceutical industry. Investors should consider non-GAAP financial measures in addition to, and not as replacements for, or superior to, measures of financial performance prepared in accordance with GAAP. Supplemental as adjusted income data:
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Table of ContentsThe below table provides a reconciliation of our U.S. GAAP reported results and these supplemental as adjusted data:
Impact of Currency Fluctuations and Inflation Because Teva’s results are reported in U.S. Dollars, changes in the rate of exchange between the U.S. Dollar and the local currencies in the markets in which Teva operates—mainly the NIS, Euro, Canadian Dollar, Pound Sterling, Hungarian Forint, Swiss Franc, the Russian Ruble and the Czech Republic Koruna-affect Teva’s results. During 2006, the movements of the main European currencies relevant to Teva, relative to the U.S. Dollar, have been less significant than in previous years. The Hungarian Forint devalued against the dollar by 5%, the Canadian dollar revalued against the dollar by 7% and the Euro, Pound Sterling as well as the NIS remained all relatively stable (when average compared to average). Critical Accounting Policies The preparation of Teva’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in certain circumstances that affect the amounts reported in the accompanying consolidated financial statements and related footnotes. Actual results may differ from these estimates. To facilitate the understanding of Teva’s business activities, certain Teva accounting policies that are more important to the portrayal of its financial condition and results of operations and that require management’s subjective judgments are described below. Teva bases its judgments on its experience and various assumptions that it believes to be reasonable under the circumstances. Please refer to Note 1 to Teva’s consolidated financial statements included in this annual report for a summary of all of Teva’s significant accounting policies. Revenue Recognition and Sales Reserves and Allowances Revenue is recognized generally when title and risk of loss for the products is transferred to the customer. Provisions for sales reserves and allowances are established concurrently with the recognition of revenue. Accordingly, and in compliance with EITF 01-9, reported net sales is presented net of those deductions. These provisions primarily relate to sales of pharmaceutical products in the North American marketplace, principally the United States. The following briefly describes the nature of each deduction and how provisions are estimated in Teva’s financial statements. Provisions for chargebacks, returns, rebates, other promotional items and price protection provisions are included in “Accounts payable and accruals” under the heading of current liabilities in Teva’s balance sheets included in the accompanying financial statements. Prompt pay discount provisions are netted against “Accounts receivable—trade.” Teva adjusts these provisions in the event that it appears that the actual amounts may differ from the estimated provisions. Chargebacks. Teva has arrangements with various third parties, such as managed care organizations and drug store chains, establishing prices for certain of its products. While these arrangements are made between Teva and the customers, the customers independently select a wholesaler from which they purchase the products. Alternatively, certain wholesalers
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Table of Contentsmay enter into agreements with the customers, with the concurrence of Teva, that establish the pricing for certain products which the wholesalers provide. Under either arrangement, Teva will issue a credit (referred to as a “chargeback”) to the wholesaler for the difference between the invoice price to the wholesaler and the customer’s contract price. Provisions for chargebacks are the largest component of Teva’s revenue recognition process, involving estimates of contract prices across in excess of 1,000 products and multiple contracts with multiple wholesalers. The provision for chargebacks varies in relation to changes in product mix, pricing and the level of inventory at the wholesalers and therefore will not necessarily fluctuate in proportion with an increase or decrease in sales. Provisions for estimating chargebacks are calculated using historical chargeback experience, or expected chargeback levels for new products. Chargeback provisions are compared to externally obtained distribution channel reports for reasonableness. Teva regularly monitors the provision for chargebacks and makes adjustments when it believes actual chargebacks may differ from estimated provisions. In addition, Teva considers current and expected price competition when evaluating the provision for chargebacks. Returns. Under certain conditions, the customer is able to return its purchases to Teva. Teva records a reserve for estimated sales returns in accordance with the provision of FAS 48, “Revenue Recognition When Right of Return Exists.” The returns provision is estimated by applying a historical return rate to the amounts of revenue estimated to be subject to returns. Revenue subject to returns is estimated based on the lag time from time of sale to date of return. The estimated lag time is developed by analyzing historical experience. Lag times during 2006 were generally between 22-25 months from the date of sale. Additionally, Teva considers specific factors such as levels of inventory in the distribution channel, product dating and expiration, size and maturity of launch, entrance of new competitors, changes in formularies or packaging and any changes to customer terms for determining the overall expected levels of returns. Shelf Stock Adjustments. The custom in the pharmaceutical industry is generally to grant customers a shelf stock adjustment based on the customers’ existing inventory contemporaneously with decreases in the market price of the related product. The most significant of these relate to products for which an exclusive or semi-exclusive period exists. Provisions for price reductions depend on future events, including price competition, new competitive launches and the level of customer inventories at the time of the price decline. Teva regularly monitors the competitive factors that influence the pricing of its products and customer inventory levels and adjusts these estimates where appropriate. Customer Volume Rebates. Rebates are primarily related to volume incentives and are offered to key customers to promote loyalty. These rebate programs provide that, upon the attainment of pre-established volumes or the attainment of revenue milestones for a specified period, the customer receives a rebate. Since rebates are contractually agreed upon, rebates are estimated based on the specific terms in each agreement. Externally obtained inventory levels are evaluated in relation to estimates made for rebates payable to indirect customers. Medicaid Rebates. Pharmaceutical manufacturers whose products are covered by the Medicaid program are required to rebate to each state a percentage of their average manufacturer’s price for the products dispensed. Many states have also implemented supplemental rebate programs that obligate manufacturers to pay rebates in excess of those required under federal law. Teva estimates these rebates based on historical trends of rebates paid as well as changes in wholesaler inventory levels and increases or decreases in sales. Other Promotional Arrangements. Other promotional or incentive arrangements are periodically offered to customers specifically related to the launch of products or other targeted promotions. Provisions are made or expenses recorded in the period for which the customer earns the incentive in accordance with the contractual terms. Prompt Pay Discounts. Prompt pay discounts are offered to most customers to encourage timely payment. Discounts are estimated at the time of invoice based on historical discounts in relation to sales. Prompt pay discounts are almost always utilized by customers. As a result, the actual discounts do not vary significantly from the estimated amount. Sales reserves and allowances for third-party sales of pharmaceutical products to U.S. customers at December 31, 2006 and 2005 were as set forth in the below table. Such sales reserves and allowances to U.S. customers comprised over 90% of Teva’s total sales reserves and allowances as of December 31, 2006, with the balance primarily in Canada and the U.K.
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Reserves for the year ended December 31, 2006 increased by approximately $806 million. The increase was primarily a result of the acquisition of Ivax and significant new launches in 2006. The chargeback reserve for the year ended December 31, 2006 increased by approximately $440 million over the December 31, 2005 reserve. Since chargeback reserves are calculated on a product and customer basis, changes may not appear to be directly reflective of the overall change in net sales due to a change in any one variable. Returns reserves as of December 31, 2006 increased by approximately $77 million over the reserve as of December 31, 2005 primarily due to an increase in the estimated lag period between period of sale and actual return. Reserves for returns are estimated by analyzing past returns rates, taking into consideration current product sales levels and customer mix. The primary contributor to the increase in Other Sales Reserves and Allowances was an increase in price protection related to the significant launches with exclusivity, the acquisition of Ivax and a proportionate increase due to the increase in sales. Rebates as a percentage of gross sales did not vary significantly for the years ended December 31, 2006 or 2005. Actual inventory on hand with our customers may be higher or lower due to differences between actual and projected demand. Teva monitors inventory levels to minimize risk of excess quantities. As is customary in the industry, Teva may provide additional incentives to wholesalers for the purchase of certain inventory items or in relation to wholesale trade shows. Revenue is recognized for sales associated with the incentives and launches, in accordance with the criteria in Staff Accounting Bulletin (“SAB”) 104: primarily whether the product ownership was transferred to the customer and whether provisions for sales deductions, such as chargebacks, returns, rebates, promotional and other incentives and price adjustments, can be reasonably estimated. Income Taxes The provision for income tax is calculated based on Teva’s assumptions as to its entitlement to various benefits under the applicable tax laws in the jurisdictions in which it operates. The entitlement to such benefits depends upon Teva’s compliance with the terms and conditions set out in these laws. Deferred taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and tax bases of assets and liabilities under the applicable tax laws. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Taxes, which would apply in the event of disposal of investments in subsidiaries, have not been taken into account in computing deferred taxes, as it is Teva’s intention to hold these investments, rather than realize them. Teva intends to permanently reinvest the amounts of tax exempt income in Israel and does not intend to declare dividend distributions from such income. Therefore, no deferred taxes have been provided in respect of such tax exempt income.
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Table of ContentsSince Teva does not expect non-Israeli subsidiaries to distribute dividends in the foreseeable future, it does not provide for related taxes. Contingencies Teva is from time to time subject to claims arising in the ordinary course of its business, including patent, product liability and other litigation. In determining whether liabilities should be recorded for pending litigation claims, Teva assesses the allegations made and the likelihood that it will successfully defend itself. When Teva believes that it is probable that it will not prevail in a particular matter, it then estimates the amount of the liability based in part on advice of legal counsel. Inventories Inventories are stated at the lower of cost or market. Cost is determined as follows: raw and packaging materials and purchased products—mainly on a “moving average” basis; finished products and products in process; raw material and packaging component—mainly on a “moving average” basis; labor and overhead—on an average basis over the production period. Teva’s inventories generally have a limited shelf life and are subject to impairment as they approach their expiration dates. Teva regularly evaluates the carrying value of its inventories and when, in its opinion, factors indicate that impairment has occurred, it establishes a reserve against the inventories’ carrying value. Teva’s determination that a valuation reserve might be required, in addition to the quantification of such reserve, requires it to utilize significant judgment. Although Teva makes every effort to ensure the accuracy of forecasts of future product demand, any significant unanticipated decreases in demand could have a material impact on the carrying value of its inventories and reported operating results. To date, inventory adjustments have not been material. Valuation of Intangible Assets, Marketable Securities and Long-Lived Assets Intangible assets Goodwill reflects the excess of the purchase price of subsidiaries acquired over the fair value of net assets acquired. Pursuant to FAS 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized but rather is tested annually for impairment. Intangible assets consist mainly of marketing and other rights relating to products in respect of which an approval for marketing was provided by the FDA or an equivalent agency. Intangible assets are amortized mainly using the straight-line method over their estimated period of useful life. In conjunction with acquisitions of businesses or product rights, Teva allocates the purchase price based upon the relative fair values of the assets acquired and liabilities assumed. In certain circumstances, fair value may be assigned to purchased in-process technology and expensed immediately. Teva regularly assesses whether indefinite life intangibles and goodwill have been impaired and will adjust the carrying values of these assets whenever events or changes in circumstances indicate that some or all of the carrying value of the assets may not be recoverable. Its judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operating performances of its businesses and products. Future events could cause Teva to conclude that impairment indicators exist and that the carrying values of its intangible assets or goodwill are impaired. Any resulting impairment loss could have a material adverse impact on its financial position and results of operations. No impairment losses relating to goodwill and indefinite life intangible assets have been recorded to date. Teva evaluates the recoverability and measures the possible impairment of its goodwill under FAS 142. The impairment test is a two-step process that begins with the estimation of the fair value of the reporting unit. The first step screens for potential impairment, and the second step measures the amount of the impairment, if any. Teva’s estimate of fair value considers publicly available information regarding the market capitalization of the company, as well as (1) publicly available information regarding comparable publicly traded companies in the pharmaceutical industry, (2) the financial projections and future prospects of its business, including its growth opportunities and likely operational improvements, and (3) comparable sales prices, if available. As part of the first step to assess potential impairment, Teva compares, on an operating unit level, its estimate of fair value for such operating unit to the book value of the operating unit. If the book value of any of the operating units is greater than the estimate of its fair value, Teva would then proceed to the second step to measure the impairment, if any. The second step measures the amount of impairment by comparing the implied fair value of goodwill with its carrying value. The implied fair value is determined by allocating the fair value of the operating unit to all of the assets and liabilities of that unit as if the operating unit had been acquired in a business combination and the fair value
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Table of Contentsof the reporting unit was the purchase price paid to acquire the operating unit. The excess of the fair value of the operating unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying amount of the operating unit’s goodwill is greater than its implied fair value, an impairment loss will be recognized in the amount of the excess. Teva has selected December 31 as the date on which it performs its annual impairment test for goodwill and other indefinite life intangible assets. Marketable securities: Marketable securities primarily consist of equity investments and debt securities classified as available-for-sale securities which are carried at market value, with unrealized gains and losses, net of taxes, reported as a separate component of accumulated other comprehensive income (loss). If it is determined, based on valuations, that a decline in the fair value of any of the investments is other than temporary, an impairment loss is recorded and included in the consolidated statements of income as financial expenses. Interest, premium and discount amortization and dividends on securities are also included in the statement of income as part of financial income (expense), net. Long-lived assets: Teva tests long-lived assets, including definite life intangible assets, for impairment in the event an indication of impairment exists. If the sum of expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount of such assets, an impairment would be recognized and the assets would be written down to their estimated fair values, based on expected future discounted cash flows. Recent Accounting Pronouncements In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FAS 109.” This financial interpretation clarifies the accounting for uncertainty in income taxes and prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on various related matters such as derecognition, interest and penalties and disclosure. As applicable to Teva, the interpretation prescribed by FIN 48 will be effective commencing January 1, 2007. Teva is currently evaluating the impact that the adoption of FIN 48 would have on its consolidated financial statements. In September 2006, the FASB issued FAS 157, “Fair Value Measurements”. This financial accounting standard establishes a framework for measuring fair value and expands related disclosure requirements. As applicable to Teva, this statement will be effective as of the year beginning January 1, 2008. Teva is currently evaluating the impact that the adoption of FAS 157 would have on its consolidated financial statements. In September 2006, the FASB issued FAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FAS 87, 88, 106 and 132(R)”. This financial accounting standard requires an employer to recognize the over-funded or under-funded status of a defined benefit pension and other postretirement plan as an asset or liability in its balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. Teva had adopted this statement prospectively from December 31, 2006. The effect on adoption was to increase the employee-related obligations by $28 million and decrease accumulated other comprehensive income by $26 million. Liquidity and Capital Resources On December 31, 2006, Teva’s working capital was $3.6 billion, compared to $3.25 billion at December 31, 2005. Cash, cash equivalents and short- and long-term investments increased by $69 million, reflecting the cash generated during the year as well as the liquidation of certain long-term investments in anticipation of the acquisition of Ivax, offset by the cash used for the acquisition of Ivax. Accounts receivables increased by $1.15 billion, representing mainly the inclusion of the Ivax business into Teva’s business. Inventories increased by $765 million, in large part due to the Ivax acquisition. Total current liabilities increased by $1.81 billion, reflecting an increase in short-term credit of $367 million and an increase in accounts payable and accruals of $1.44 billion. During 2006, days sales in inventory, which began the year at approximately 142 days, increased to 145 days at the end of 2006. The “days sales outstanding” (“DSO”) decreased to 58 days in December 2006 compared with 62 days as of
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Table of ContentsDecember 31, 2005. The DSO calculation is made on a net basis after netting out provisions for “sales reserves and allowances,” presented in Teva’s consolidated balance sheet in “Accounts payable and accruals,” from account receivables in the amount of $1.56 billion for December 2006 and $733 million for December 2005. A net DSO calculation is presented in order to facilitate a more meaningful comparison with similar calculations by Teva’s peers. The account payables days increased from 41 days to 45 days. Cash generated by operations for 2006 amounted to $2.06 billion, as compared with $1.37 billion in 2005. Investment in fixed assets in 2006 amounted to $390 million, an increase of 26%, compared to $310 million in the previous year. Depreciation in 2006 and 2005 represented 58% and 51% of the total investment in fixed assets respectively. Among the more significant capital expenditures during 2006 were further investments in Teva’s new state-of-the-art pharmaceutical facility in Jerusalem, Teva’s expansion of its state-of-the-art API facility in southern Israel and its API plant in Hungary and the deployment of modernized information systems, including Teva North America’s new enterprise resource planning system. During 2006, Teva paid $230 million in dividends on its shares, compared to $162 million in 2005. Free cash flow (cash flow from operations net of capital investments and dividends paid) amounted to $1,463 million in 2006, compared to $901 million in 2005. During 2006, the Company spent $234 million to repurchase approximately 7.3 million Teva shares. In 2005, Teva spent $379 million to repurchase 12.7 million shares. In addition to Teva’s financing obligations as reflected by short-term debt and long-term loans, debentures and convertible debentures, its major contractual obligations and commercial commitments include leases, royalty payments and participation in joint ventures associated with research and development activities. Teva is committed to pay royalties to owners of know-how, partners in alliances and other certain arrangements and to parties that financed research and development, at rates ranging mainly from 0.5% to 10% of sales of certain products, as defined in the agreements. In some cases, the royalty period is not defined; in other cases, royalties will be paid over various periods, not exceeding 20 years, commencing on the date of the first royalty payment. Teva has also undertaken to pay royalties to the Government of Israel, at the rates of 2.0% to 3.5% of sales relating to certain products the development of which was funded by the Office of the Chief Scientist. The royalties due to the Government are linked to the amount of participation, in dollar terms (in respect of research grants commencing 1999—with the addition of dollar LIBOR interest). At the time the grants were received, successful development of the related projects was not assured. In the case of failure of a project that was partly financed as above, Teva is not obligated to pay any such royalties. The maximum amount of the contingent liability in respect to royalties to the Government as of December 31, 2006 amounts to $30 million. Teva has agreed to invest in certain venture capital funds in Israel and to participate in the funding of research and development conducted by other companies. As of December 31, 2006, Teva’s remaining commitment is $25 million, a major portion of which are milestone payments. In connection with certain development, supply and marketing, and research and collaboration or services agreements, Teva is required to indemnify, in unspecified amounts, the parties to such agreements against third-party claims relating to (1) infringement or violation of intellectual property or other rights of such third party; or (2) damages to users of the related products. As of December 31, 2006, Teva is not aware of any material pending infringement action that may result in the counterparties to these agreements claiming such indemnification. Certain of Teva’s loan agreements and debentures contain restrictive covenants, mainly the requirement to maintain certain financial ratios. Teva currently meets all applicable financial ratios. Teva’s principal sources of short-term liquidity are its existing cash and investments in liquid securities, as well as internally generated funds, which Teva believes are sufficient to meet its operating needs and anticipated capital expenditures over the near term. Teva’s existing cash is generally invested in liquid securities that bear fixed and floating interest rates. Teva continues to review additional opportunities to acquire companies in the pharmaceutical and API industries and to acquire complementary technologies or product rights. To the extent that any such acquisitions involve cash payments, rather than the issuance of shares, they may require Teva to draw upon credit lines available to Teva from financial institutions, or may involve raising additional funds from debt or equity markets.
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Table of ContentsIn November 2005, Teva fully drew down its $350 million multicurrency term loan facility, which was established in September 2005 with a syndicate of banks. This loan, which bears a floating interest rate, is divided into a 3-year tranche and a 5-year tranche of $175 million each. The syndicate participants comprise 21 banks based in Israel, Europe, the United States and China, each of which committed to lending between $10 million and $25 million. The funds were used to finance working capital needs of several European subsidiaries of Teva. In connection with the acquisition of Ivax, approximately 123 million additional Teva ADRs were issued in January 2006. In addition, Teva used $1.7 billion of its existing cash resources, together with a total of $2.8 billion in proceeds from bridging facilities, to pay the cash portion of the purchase price for the acquisition of Ivax. These bridge loans were promptly refinanced through public offerings of debt securities of two Teva finance subsidiaries, who issued an aggregate of $1 billion principal amount of 6.15% Senior Notes due 2036, $500 million principal amount of 5.55% Senior Notes due 2016, $817.5 million principal amount of 1.75% Convertible Senior Debentures due 2026 and $575 million principal amount of 0.25% Convertible Senior Debentures due 2026. Holders of the 0.25% Convertible Senior Debentures due 2026 have the right to cause Teva to repurchase their debentures for 100% of the principal amount, plus accrued interest, in cash on February 1, 2008; holders of the 1.75% Convertible Senior Debentures due 2026 have a similar repurchase right on February 1, 2011. The 0.25% Convertible Senior Debentures due 2026 include a net share settlement feature according to which principal will be paid in cash and, in the case of conversion, only the residual conversion value above the principal will be paid in Teva’s shares. Therefore, these convertible debentures will become dilutive only if the stock price exceeds the conversion price of approximately $47.16 per share. The $817.5 million of 1.75% Convertible Senior Debentures due 2026 are convertible into approximately 16 million Teva shares. In addition, in connection with the Ivax acquisition, Teva guaranteed the $231.1 million principal amount outstanding of Ivax’s 4.5% Convertible Senior Subordinated Notes due 2008, which, as a result of the acquisition, are now convertible into an aggregate of approximately $93.8 million in cash and 3.1 million Teva ADRs. Trend Information Please see “Item 5. Operating and Financial Review and Prospects” and “Item 4. Information on the Company” for trend information. Off-Balance Sheet Arrangements Teva does not have any material off-balance sheet arrangements, as defined in Item 5.E of the instructions to Form 20-F. Aggregate Contractual Obligations The following table summarizes Teva’s contractual obligations and commitments as of December 31, 2006:
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Table of ContentsITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES Directors and Senior Management The following table sets forth information as to the executive officers and directors of Teva as of January 10, 2007: Executive Officers
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Table of ContentsDirectors
Executive Officers Israel Makov has been the President and Chief Executive Officer of Teva since April 2002. Previously he served as Teva’s Chief Operating Officer from January 1, 2001, Executive Vice President from 1999 and Vice President for Business Development from 1995 – 1999. Prior to joining Teva, Mr. Makov was Chief Executive Officer of Gottex from 1993 – 1995, Chief Executive Officer of Yachin Hakal Ltd. from 1991 – 1993 and Chairman of Axiom Ltd. from 1987 – 1991. Mr. Makov has also been a director of Bank Hapoalim Ltd. from October 2002 until February 2006, a director of Ramot at Tel Aviv University Ltd. from 2001 until January 2006, and one of the founders and a director of the INNI—Israel National Nanotechnology Initiative since 2003. He received his B.Sc. in agriculture from the Hebrew University in 1963 and his M.Sc. in economics from the Hebrew University in 1965. Shlomo Yanai has recently joined Teva and will assume the office of President and Chief Executive Officer on March 1, 2007. Prior to joining Teva, Mr. Yanai served as President and Chief Executive Officer of Makhteshim-Agan Industries Ltd. since May 2003. Before joining Makhteshim-Agan, Mr. Yanai served for 32 years with the Israel Defense Forces (the “IDF”), where he achieved the rank of Major General, the highest rank below Chief of Staff, and successively held two of the most senior positions within the IDF: Commanding Officer of the Southern Command and then Head of the Division of Strategic Planning of the IDF. Mr. Yanai was the head of the Israeli security delegation to the peace talks at Camp David, Shepherdstown and Wye River. Mr. Yanai is a board member of Bank Leumi Le-Israel Ltd. and Lycord Natural Products Industries (a wholly owned subsidiary of Makhteshim-Agan). He is a member of the International Advisory Board of the M.B.A. program of Ben-Gurion University, and an honorary member of the Board of the University’s Institute for Policy and Strategy of the Interdisciplinary Center. Mr. Yanai has received numerous awards, among them the Israel Defense Forces Distinguished Service Medal in 1973, the Max Perlman Award for Excellence in Global Business Management in 2005 and the Dun & Bradstreet Leadership Excellence Award in 2006. Mr. Yanai received a B.A. in political science and economics from Tel Aviv University, an M.P.A. in national resources management from George Washington University, and is a graduate of the Advanced Management Program of the Harvard Business School. George S. Barrett has served as Group Vice President—North America and President and Chief Executive Officer of Teva North America since January 2005. In January 2006, Mr. Barrett joined the Office of the CEO. Mr. Barrett previously served as President and Chief Executive Officer of Teva USA from 1999 to 2004. Prior to his joining Teva in 1999, Mr. Barrett served as CEO of Diad Research, a technology start-up. From 1990-1997, Mr. Barrett was with Alpharma Inc., most recently serving as President of the U.S. Pharmaceutical Group. From 1981 to 1991, Mr. Barrett held various positions within NMC Laboratories, serving as President from 1988 through its acquisition by Alpharma. Mr. Barrett was a Chairman for the Generic Pharmaceutical Association (GPhA) and is also a Director of The American Foundation for Pharmaceutical Education (AFPE). Mr. Barrett received his Bachelor’s Degree from Brown University in 1977 and his M.B.A. from New York University in 1988.
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Table of ContentsAmir Elstein has served as Teva’s Group Vice President—Global Specialty Pharmaceutical Products since January 2006. In January 2006, Mr. Elstein joined the Office of the CEO and assumed responsibility for overseeing the generics global supply chain. Mr. Elstein served as Teva’s Group Vice President—Biogenerics from January 2005 to January 2006 and as a director of Teva from 1995 to 2004. He was the General Manager of Intel Electronics Ltd., Jerusalem from 1998 to 2004. He received his B.Sc. in physics and mathematics from the Hebrew University in 1980 and his M.Sc. in the Solid State Physics Department of Applied Physics from the Hebrew University in 1982. In 1992, he received his diploma of Senior Business Management from the Hebrew University. Chaim Hurvitz has served as Group Vice President International since April 2002. He served as President and CEO of Teva Pharmaceuticals Europe between 2001-2002 and as Vice President—Israeli Pharmaceutical Sales from May 1999 until April 2002. He served as President and CEO of Teva Pharmaceuticals Europe, B.V. and Vice President—European Pharmaceutical Sales from 1995 to 1999. From 1993 to 1995, he served as the General Manager of Teva’s European Office in The Netherlands and from 1991 to 1992 as the head of the pharmaceutical and OTC departments of Abic Ltd., a Teva subsidiary. He received his B.A. in political science and economics from Tel Aviv University in 1985. Dr. Itzhak Krinsky joined Teva as Corporate Vice President for Business Development in May 2005. Prior to joining Teva, Dr. Krinsky was a managing director with The Silverfern Group, Inc. from January 2003 until February 2005 and until joining Teva, he was also a managing director with Trenwith Securities, LLC, both investment banking boutiques in New York City. From July 2001 until December 2002, Dr. Krinsky was a managing director of I. Krinsky, Financial & Investment Consulting in New York City and from January 1998 until May 2001 a senior strategist with the Investment Banking Research and Strategy Group of Bankers Trust (the predecessor of Deutsche Bank Securities) and later a managing director in the Acquisition and Corporate Advisory Group of Deutsche Bank Securities in New York City. Dr. Krinsky’s academic career includes a position as Professor of Finance & Business Economics, Michael G. DeGroote School of Business, McMaster University, Ontario, Canada and as a visiting professor in the Institute for International Studies and Training of Japan, Kamiide, Japan, Nankai University, Tianjin, The Peoples Republic of China and the Leonard N. Stern School of Business at New York University, as well as extensive publications in leading academic journals. Dr. Krinsky serves as Chairman of the Board of Ivax Diagnostics, Inc., a public company that is 72% owned by Teva, and is a member of the board of Can-fite Biopharma Ltd. He served as a board member of Advanced Vision Technology (A.V.T.) Ltd. from 2005 to 2007. He received his B.A and M.A. in economics from Tel Aviv University in 1976 and 1978, respectively, and his Ph.D. in economics from McMaster University in 1983. Moshe Manor has been Group Vice President—Global Innovative Resources since January 2006. Mr. Manor served as Vice President—Global Products Division from 2002 until January 2006. Previously, he served as Vice President of Strategic Product Planning from 2000 to 2002 and as Vice President Israel Pharmaceutical Sales from 1995 to 2000. He served as the General Manager of Teva-labeled products in Israel from 1993 to 1994 and as the Marketing Director of the Israeli Pharmaceutical Division from 1989 to 1993. He received his B.A. in economics from the Hebrew University in 1982 and his M.B.A. from Tel Aviv University in 1985. Dr. Gerard W.M. Van Odijk joined Teva as Group Vice President—Europe and President and CEO of Teva Pharmaceutical Europe B.V. in January 2006. Over the previous 18 years, he held a variety of senior positions in Europe at Glaxo, GlaxoWellcome and GlaxoSmithKline and served in commercial and General Management positions in France, the United Kingdom and The Netherlands. Prior to joining Teva, Dr. Van Odijk was Senior Vice President and Area Director of GlaxoSmithKline Northern Europe. He received his M.D. from the State University of Utrecht in 1987. Eli Shohet has been with Teva since 1986. Since January 2006, Mr. Shohet has served as Vice President of the Central and Eastern Europe Region (CEE), which is part of the International Cluster. In addition, Mr. Shohet has joined the Office of the CEO, assuming the role of Chief Integration Officer (Ivax). From 1999 until 2006, he served as Vice President of Business Development. He previously served as Chief Economist and assistant to Teva’s CEO from 1989 to 1993, president of Plantex USA from 1993 to 1996 and director of Business Development for Teva’s API division from 1996 to 1999. He received his B.A. in economics from Bar-Ilan University in 1986. Bruria Sofrin joined Teva in August 2004 as Corporate Vice President—Human Resources. Prior to joining Teva, Ms. Sofrin held senior positions as Director of Human Resources at Hewlett-Packard in Europe and in Israel. Prior to joining Hewlett-Packard in 1984, Ms. Sofrin served as Director of Human Resources at National Semiconductor in Israel for three years. Ms. Sofrin received her B.A. in psychology and studied for an M.A. in social and industrial psychology at Bar Ilan University. Dan S. Suesskind has been with Teva since 1976 and has been Chief Financial Officer since 1978. From 1970 until 1976, he was a consultant and securities analyst with International Consultants Ltd. He served as a director of Teva until 2001. Mr. Suesskind was a director of Lanoptics Ltd. until 1998, a director of ESC Medical Systems Ltd. until 1999 and a director of First International Bank until 2003. He is currently a member of the Board of Migdal Insurance Company Ltd.,
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Table of ContentsNess Technologies Inc. and Syneron Medical Ltd., and a member of the Investment Advisory Committee of the Jerusalem Foundation and the Board of Trustees of the Hebrew University. Mr. Suesskind is one of the founders and a member of the steering committee of the Israeli Forum of Chief Financial Officers. He received his B.A. in economics and political science from the Hebrew University in 1965 and an M.B.A. from the University of Massachusetts in 1969. Dr. Ben-Zion Weiner has been with Teva since 1975. In January 2006, Dr. Weiner joined the Office of the CEO and assumed the role of Chief R&D Officer. Dr. Weiner served as Group Vice President—Global Products from April 2002 until January 2006. Previously, he served as Vice President—Research and Development from 1986 to 2002. Dr. Weiner serves as a director of XTL Biopharmaceuticals Ltd. In 1975, he received a Ph.D. in chemistry from the Hebrew University, where he also earned B.Sc. and M.Sc. degrees. He conducted his post-doctorate research at Schering-Plough Corporation in the United States. He was granted the Rothschild Prize for Innovation/Export two times, in 1989 for the development of Alpha D3 for dialysis and osteoporosis patients and in 1999 for the development of Copaxone® for multiple sclerosis. Jacob Winter has been with Teva since 1986 and has served as Group Vice President—Global Generic Resources since January 2006. From March 1999 until January 2006, he served as Vice President—Global Pharmaceutical Operations. Previously, he served as Vice President/Manager of the Israeli Pharmaceutical Operations Division from 1991 through 1998. He served as the Manager of Teva’s Jerusalem pharmaceutical plants from 1986 through 1991. He received his B.Sc. in industrial engineering and management from Tel Aviv University in 1976. Aharon (Arik) Yaari has served as Group Vice President—Global API division since January 2006. Mr. Yaari served as Vice President—Global API Division from 2002 until January 2006. Mr. Yaari joined Teva in 1981 and among his various assignments at Teva he served as Vice President—Marketing and Sales of Teva API Division from 1999 to 2002 and President of Plantex USA from 1996 to 1999. He received (Cum Laude) his B.A. and M.A. in economics from the Hebrew University in 1981 and 1988, respectively. Yehuda Arad has served as Teva’s Vice President—Safety and Environment since January 2003. Before joining Teva, Mr. Arad was Senior Vice President of Rotem Amfert Negev Ltd. from January 2001 through December 2002 and Technical Vice President—Dead Sea Bromine Group from January 1995 through December 2001. He received his B.Sc. in mechanical engineering from Polytechnic Institute of New York in 1979 and his M.B.A. from Ben Gurion University in 1998. Dr. Shmuel (Muli) Ben-Zvi has been Teva’s Vice President—Planning, Economics & IT since October 2004. Prior to joining Teva, Dr. Ben-Zvi served as the Financial Advisor to the Chief of Staff of the IDF and as the Head of the Budget Department of the Israel Ministry of Defense from 2000 until 2004, and prior to 2000 held several senior positions in the Budget Department of the Ministry of Defense. In 1986, Dr. Ben-Zvi received a Ph.D in economics from Tel Aviv University, where he also received his M.A degree in 1982 and B.A. degree in 1981. Dr. Ben-Zvi did post-doctorate work at the Massachusetts Institute of Technology. Doron Blachar has been Teva’s Vice President—Finance since February 2005. Mr. Blachar previously held several senior financial positions at Amdocs Limited from 1998 to 2005, the last as Vice President Finance. He was responsible for the Amdocs financial organization and was involved in Amdocs’ convertible debt offering, merger and acquisition activities and various other financial operations. Mr. Blachar is a Certified Public Accountant (Isr). He received his B.A. in accounting and economics in 1992 and his M.B.A. in 1996 from Tel Aviv University. Rodney Kasan has been with Teva since 1980. He has served as Vice President and Chief Technology Officer since 1999. Prior to that he served as Vice President—Global Product Development—Generic Pharmaceuticals. He served as Head of Pharmaceutical Research and Development until 1995 and subsequently as Director of Pharmaceutical Research and Development for the Operations Division. He received his degree in pharmacy from the College for Advanced Technical Education (now part of Pretoria University), Pretoria, South Africa in 1966. William S. Marth serves as President and Chief Executive Officer of Teva USA, a position he has held since January 2005. He previously served as Executive Vice President of Teva USA from January 2002 to January 2005. From July 1999 to January 2002, he served as Vice President of Sales and Marketing for Teva USA. Prior to joining Teva USA, he served in various positions with the Apothecon division of Bristol-Myers Squibb. Mr. Marth received his B.Sc. in pharmacy from the University of Illinois in 1977 and his M.B.A. in 1989 from the Keller Graduate School of Management in Chicago, Illinois. Mr. Marth serves on various boards and committees, including the executive committee of the Generic Pharmaceutical Association. Michael Netz has been with Teva since 1989 and has been Vice President—Global Innovative Products Division since January 2006. Prior to that, he served as Vice President—Israel Pharmaceutical Sales from 2002 until January 2006, as General Manager of the Teva-Abic Pharma Israeli Division from 1998 to 2002 and Branded Generic Business Unit Manager in Israel from 1993 to 1998. He received his B.A. in economics and business administration in 1989 and his M.B.A. in marketing and international management in 1993 from Tel Aviv University.
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Table of ContentsDr. Shosh Neumann has been with Teva since March 1988. Dr. Neumann has served as Vice President—Product Portfolio Management since January 2006. Previously, she was executive director of Israel Generic Research and Development from July 2000 to January 2006, served in various management positions in Quality Assurance from 1995 to 2000 and as manager in Research and Development from 1988 to 1995. Dr. Neumann received her Ph.D. in chemistry from the Hebrew University in 1985, where she also earned her B.Sc. degree in 1978 and M.Sc. degree in 1981. Christopher Pelloni has been with Teva since November 1997. He is currently Vice President of Global Generic Research and Development (GR&D). Previously, he was Vice President of GR&D for Teva USA from June 2000 to May 2002 and Senior Director of Pharmaceutical GR&D from November 1997 to June 2000. Prior to that, he served in various management positions with Geneva Pharmaceuticals Inc. during 28 years of service. He received a B.S. in business administration in 1986 and an M.B.A. in 1989 from Regis College (now Regis University) in Denver, Colorado. Dr. Irit Pinchasi has been with Teva since 1986, serving in different positions within the Global Innovative Research and Development Division, and has served as Vice President for the Global Innovative R&D Division since May 2002. Dr. Pinchasi received her Ph.D. in neurobiochemistry from Tel Aviv University in 1984, where she also earned her B.Sc. degree in 1974 and M.Sc. degree in 1976. She did her post-doctorate research at the Weizmann Institute of Science, Rehovot, Israel. Dr. David Reisman has been with Teva since 1980. Since 1999, he has served as Vice President—Israel Pharmaceutical Operations. From 1996 to 1999, he served as quality assurance director of the API Division. He received his Ph.D. in chemistry from Bar Ilan University in 1985. Dr. Aharon Schwartz has been with Teva since 1975 and has served as Vice President—Strategic Business Planning and New Ventures since April 2002. He previously served as Vice President—Global Products Division since 1999 and Vice President of the Copaxone® Division from 1995 – 1999. From 1993 to 1995, he served as Vice President Business Development/Export Division and served as head of the Pharmaceutical Division from 1989 to 1993. He received his Ph.D. in chemistry from the Weizmann Institute in 1975. Judith Vardi has been with Teva since 1985. Ms. Vardi has served as Vice President—Israel Pharmaceutical Sales since January 2006. She served as the General Manager for the Prescription Medicines and Health Fund Division in Teva Israel from November 2002 to 2005. From 1994 to 2002, Ms. Vardi held various positions within the Global Products Division, and from 1990 to 1994, she served as the General Manager of Farmaquim Ltd., a subsidiary of Teva in Latin America. She received her B.A. in statistics and M.B.A. from Tel Aviv University in 1983 and 1987, respectively. Ron Grupel has been the Internal Auditor of Teva since 1993. He received his B.A. in economics and accounting in 1975 and his M.B.A. in 1979 from Tel Aviv University. Uzi Karniel has served as the General Counsel of Teva since 1971 and as Teva’s Corporate Secretary since 1978. He received his L.L.B. from the Hebrew University in 1969. He is a member of the Executive Committee of the Israeli Association of Publicly Traded Companies. Directors Eli Hurvitz has served as Chairman of the Board of Teva since April 2002. Previously, he served as Teva’s President and Chief Executive Officer for over 25 years and recently completed over forty years of employment at Teva. He serves as Chairman of the Board of The Israel Democracy Institute (IDI), Chairman of the Board of Neuro Survival Technologies Ltd. (a private company), Chairman of the Board of Pontifax Management (G.P) Ltd., Chairman of the Board of Orthodontix, Inc. and Protalix Ltd. and also a director of Vishay Intertechnology Inc. He served as Chairman of the Israel Export Institute from 1974 through 1977 and as the President of the Israel Manufacturers Association from 1981 through 1986. He served as Chairman of the Board of Bank Leumi Le-Israel Ltd. (1986 – 1987). He was a director of Koor Industries Ltd. from 1997 through 2004 and a member of the Belfer Center for Science and International Affairs at John F. Kennedy School of Government at Harvard University from 2002 through 2005. He received his B.A. in economics and business administration from the Hebrew University in 1957. Eli Hurvitz has been determined by the Board to be a financial and accounting expert under Israeli law. Dr. Phillip Frost has served as Vice Chairman of the Board of Teva since the completion of the Ivax acquisition in January 2006 and as Chief Executive Officer of Ivax from 1987 until 2006. He also served as Chairman of the Board of Ivax from 1987 until January 2006 and as President of Ivax from 1991 until 1995. Dr. Frost is a director of Northrop Grumman Corporation, Continucare Corporation, Cellular Technical Services Company, Inc., Orthodontix, Inc. and Ladenburg Thalmann Financial Services Inc. He is a life member, and former Chairman, of the Board of Trustees of the University of Miami, co-Vice Chairman of the Board of Governors of the American Stock Exchange, a member of the Board of Trustees of The Scripps Research Institute and a member of the Board of Regents of the Smithsonian Institution. Dr. Frost received a B.A. in French literature from the University of Pennsylvania in 1957 and an M.D. from the Albert Einstein College of Medicine in 1961.
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Table of ContentsRoger Abravanel joined Teva’s Board in January 2007, following a distinguished career in business consulting at McKinsey & Company. Mr. Abravanel joined McKinsey in 1972 and served as a Principal since 1979, a Director since 1984 and held many leadership positions in industry practice groups including the specialty chemicals/pharmaceuticals practice. He retired from McKinsey in June 2006. Mr. Abravanel currently serves as an advisor to several public and private Italian institutions, including the Association of Business Leaders and the Italian government. Mr. Abravanel has served as a member of the Supervisory Board of Teva Pharmaceuticals Europe B.V., a subsidiary of Teva, since June 2006 and serves as a member of the Board of Directors of Luxottica Group S.p.A., Valentino Fashion Group S.p.A., Hugo Boss AG, Marazzi Group S.p.A., Banca Nazionale del Lavoro, a subsidiary of BNP Paribas, and the Italian Institute of Technology. Mr. Abravanel graduated with a bachelor’s degree in chemical engineering at the Politecnic University in Milan in 1968 and received an M.B.A. from INSEAD in 1972. Ruth Cheshin is the President of the Jerusalem Foundation, a multi-national organization which raises funds around the world for the creation of social, educational, cultural and coexistence projects for all the citizens of Jerusalem. Ms. Cheshin is also an active member of many of the city’s most important boards. Abraham E. Cohen served as Senior Vice President of Merck & Co. and from 1977 to 1988 as President of the Merck Sharp & Dohme International Division. Since his retirement in January 1992, Mr. Cohen has been active as an international business consultant. He is presently a director of Akzo Novel NV., Chugai Pharmaceutical Co. U.S.A., Neurobiological Technologies, Inc. and Vasomedical, Inc. Leslie Dan is the Chairman of Novopharm, which he founded and managed until its acquisition by Teva in 2000. Mr. Dan serves on several hospital boards in Canada and is a director of Draxis Pharmaceutical Company and Chairman of Viventia Biotech. He is a pharmacist with over 50 years of business experience in the pharmaceutical industry. Mr. Dan received three honorary doctorates and numerous other awards for his charitable contributions, including the Canadian Medicine Aid Program (CanMAP) that he founded, which provides medical aid to developing nations. He holds an M.B.A. from the University of Toronto. Prof. Meir Heth has served on Teva’s Board since 1977 and as Chairman of the Board from 1994 to 2002. During his service at Teva, Prof. Heth served as Chairman of the Executive Committee for an extended period. Prof. Heth has served as Chairman of the Board of Bank Leumi Le-Israel Ltd. and as Chairman of Bank Leumi Trust Company of New York from 1987 to 1988. From 1978 to 1986, Prof. Heth was Chairman of the Tel Aviv Stock Exchange. Prof. Heth served at The Bank of Israel beginning in 1962 in various positions, including Senior Economist from 1962 to 1968, Supervisor of Banks from 1969 to 1975 and Senior Advisor to the Governor from 1975 to 1977. Prof. Heth is a Professor at the Law School of the College of Management and serves as a director of Nilit Ltd. Between 1995 and 2007 he served as Chairman of Psagot Ofek Investment House Ltd. Prof. Heth was designated as the financial expert on Teva’s audit committee, for the purposes of SEC regulations, and was determined by the Board to be a financial and accounting expert under Israeli law. Prof. Moshe Many, M.D., Ph.D. has served as president of the Ashkelon Academic College since January 2002. He previously served as the President of the Tisom International School of Management. He is a former President of the Tel Aviv University, the former Medical Director of the Ramat Marpeh Hospital and the former Deputy Chairman of Maccabi Healthcare Fund. He has been a Department Head at Tel Hashomer Hospital since 1976. He has served as a director at Elbit Medical Imaging Ltd. since 1997 and at Israel Laser Industries Ltd. from 1994 to 1998. He received his M.D. degree from Geneva University in 1952 and his Ph.D. in surgery from Tufts University in 1969. Dr. Leora (Rubin) Meridor has been a director of Teva since December 2002. Dr. Meridor is a business and financial consultant. She served as the Chairman of the Board of Bezeq International Ltd. and Walla Communications Ltd. from 2001 to 2005. She served as Chairman of the Board of Hapoalim Capital Markets from 2001 to 2004. From 1996 to 2000, Dr. Meridor served as Senior Vice President and Head of the Credit and Risk Management Division of the First International Bank of Israel. Between 1983 and 1996, Dr. Meridor held various positions in the Bank of Israel, the last of which was Head of the Research Department. Dr. Meridor has held various teaching positions with the Hebrew University and holds a bachelor’s degree in mathematics and physics, a master’s degree in mathematics and a Ph.D. in economics from the Hebrew University. She serves on several boards of directors (Alrov (Israel) Ltd., NICE Systems Ltd., Gilat Satellite Networks Ltd., Isrotel Ltd., GEJ Yizum Ltd. and Weizmann Institute of Science) and qualifies as a statutory independent director under Israeli law. Dr. Meridor was determined by the Board to be a financial and accounting expert under Israeli law. Dr. Max Reis is Chairman of Degem Systems Ltd. and serves on the boards of Oridion Medical Ltd., Yachin Hakal Ltd. and Gaon Holdings. From 1971 until 1986, he was Chairman or Managing Director of half a dozen companies in the Israel Chemicals Group. From 1986 until 1990, he served as President of the Technion Israel Institute of Technology. From 1992
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Table of Contentsuntil 1999, he was Chairman of the Audit Committee of the board of directors of the Union Bank of Israel. Dr. Reis has a Ph.D. in chemical engineering from the Imperial College, London and attended the Advanced Management Program of the Harvard Business School. Prof. Michael Sela is the Institute Professor of Immunology at the Weizmann Institute of Science, where he was the President from 1975 to 1985 and served as a Deputy Chairman of the Board of Governors from 1985 to 2004. He received his Ph.D. degree in biochemistry from the Hebrew University in 1954. He is the recipient of nine honorary doctoral degrees from institutions in the U.S., France, Mexico and Israel. He is a member of 15 Academies of Science in various countries, including the U.S. National Academy of Sciences. Dov Shafir, Colonel (retired) of the Israel Defense Forces, served as chairman of the Executive Committee of Teva’s Board of Directors from 1992 until 2002 and presently serves as a director of Ofer Technologies Ltd. and “Am-Shav”- Initiative and Technological Applications Ltd. Prof. Gabriela Shalev was a member of the Faculty of Law of the Hebrew University from 1964 until 2002, and served as Professor of Contract Law from 1986 to 2002. Having retired from the Hebrew University in 2002, she is currently President and Rector of Ono Academic College. Over the years she has been a visiting professor in many law schools in Europe and the U.S. Prof. Shalev was a member of the board of directors and chairperson of the audit committee of Bank Hapoalim Ltd. from 1990 until 1996. From 1995 until 2005, she was a member of the board of directors and chairperson of the audit committee of the Israel Electric Company. Currently she is also a director of Delek Group Ltd. and Osem Investments Ltd., as well as a member of various committees serving non-profit organizations. Prof. Shalev qualifies as a statutory independent director under Israeli law and was determined by the Board to have professional competence under Israeli law. David Shamir has served as the General Manager of Texas Instruments Israel Ltd. since 2001. From 1986 to 2001, he served in several R&D and management positions in Motorola Semiconductor Israel Ltd. He received his B.Sc. in computer engineering from the Technion, Israel Institute of Technology in 1986. Harold Snyder, now retired, was Senior Vice President of Teva USA and the former President of Biocraft Laboratories, Inc. Mr. Snyder founded Biocraft Laboratories in 1964. He had previously served as President of Stoneham Laboratories Inc. He received his B.S. in Science from New York University in 1948 and his M.A. in natural science from Columbia University in 1950. Compensation The aggregate direct compensation paid or accrued on behalf of all directors and executive officers as a group during 2006 was $16,424,158. This amount includes fees of $1,229,000 for non-employee directors and amounts set aside or accrued to provide pension, retirement or similar benefits of $176,413. This amount does not include $28,031,290 from the exercise of previously granted stock options. In addition, directors are reimbursed for expenses incurred as part of their service as directors. An increase in directors’ remuneration was approved at the annual shareholders meeting held on May 4, 2006. In addition, the remuneration of the Company’s statutory independent directors was recently increased, with their current remuneration equal to the remuneration of the other directors who are not chairpersons of any committee, excluding the chairman and the vice chairman. The compensation amount includes the remuneration for Mr. Eli Hurvitz, Chairman of the Board, and Dr. Phillip Frost, Vice Chairman of the Board, as approved by Teva shareholders at the special meeting held on October 5, 2006, and effective as of July 3, 2006. Accordingly, in 2006, Mr. Hurvitz and Dr. Frost received a pro-rated share of $300,000 and $275,000 per annum plus VAT, respectively. None of the non-employee directors have agreements with Teva that provide for benefits upon termination of service. Teva has adopted a number of stock option or stock incentive programs covering either ordinary shares or ADRs. Following the approval of Teva’s 2005 Omnibus Long-Term Share Incentive Plan by Teva’s shareholders in July 2005, the compensation committee authorized, in December 2005, the granting of options to purchase an aggregate of 1,014,799 ordinary shares or ADRs to Teva’s executive officers, at an average exercise price of $42.64 per share or ADR and an average expiration date in 2012, as well as 260,067 restricted share unit awards. In addition, the compensation committee authorized, in November and December 2006, the granting of options to purchase an aggregate of 4,066,463 ordinary shares or ADRs to Teva’s executive officers, at an average price of $32.57 per share or ADR and an average expiration date in 2013, as well as 441,333 restricted share unit awards. As of December 31, 2006, options for an aggregate of approximately 42.7 million shares, with an average exercise price of $23.56 per share, were outstanding under Teva’s stock option and incentive programs, with options for an aggregate of approximately 35.6 million shares available for future grant. For further information regarding outstanding Teva options, see Note 9 to the Notes to Consolidated Financial Statements.
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Table of ContentsBoard Practices Teva’s board of directors is comprised of 15 persons, of whom 11 have been determined to be independent within the meaning of applicable Nasdaq regulations. The Board includes two independent directors mandated under Israeli law and subject to additional criteria to help ensure their independence. See “—Statutory Independent Directors/Financial Experts” below. The terms of the directors are set forth in the table above. All directors are entitled to review and retain copies of Teva’s documentation and examine Teva’s assets, as required to perform their duties as directors and to receive assistance, in special cases, from outside experts at the expense of Teva (subject to approval by the Board or by court). Board Practices and Procedures. Teva’s Board members are generally elected for terms of three years. Teva believes that this system of multi-year terms allows Teva’s directors to acquire and provide Teva with the benefit of a high level of expertise with respect to its complex business. Teva also provides an orientation and continuing education program for board members which includes the provision of materials, meetings with key management and visits to company facilities. Board Meetings. Meetings of the board of directors are generally held every 4-6 weeks throughout the year, with additional special meetings scheduled when required. The Board held 19 meetings in 2006, five of which took place in Teva’s various European facilities. The average attendance rate at board meetings held during 2006 was 84%. Executive Sessions of the Board. The independent members of the Board met in executive session (without management or non-independent directors’ participation) one time during 2006. They will continue to meet in executive session on a regular basis. Prof. Meir Heth serves as Chairman of the executive sessions of the Board. Director Service Contracts. Teva does not have any contracts with any of its non-executive directors that would provide for benefits upon termination of employment. Home Country Practice. Except as described below, Teva is in compliance with corporate governance standards as currently applicable to Teva under Israeli, U.S., SEC and Nasdaq laws and regulations. Nasdaq Rule 4350(f) requires that an issuer listed on the Nasdaq National Market have a quorum requirement for shareholders meetings of at least one-third of the outstanding shares of the company’s common voting stock. However, our articles of association, consistent with the Israeli Companies Law and Israeli practice, provide that the quorum requirements for a meeting are the presence of a minimum of two shareholders, present in person or by proxy or by their authorized persons, and who jointly hold twenty five percent or more of the paid up share capital of the Company. As further described below, Teva has adopted an audit committee charter formalizing its procedures and duties and also has adopted a nominating procedure, each pursuant to applicable laws and regulations. Communications with the Board. Shareholders or other interested parties can contact any director or committee of the Board by writing to them care of Teva Pharmaceutical Industries Limited, 5 Basel Street, Petach Tikva, Israel, Attn: Corporate Secretary or Internal Auditor. Comments or complaints relating to Teva’s accounting, internal controls or auditing matters will also be referred to members of the audit committee as well as other appropriate bodies of the Company. The Board has adopted a global “whistleblower” policy, which provides employees and others with an anonymous means of communicating with the audit committee. Statutory Independent Directors/Financial Experts Under Israeli law, publicly held Israeli companies such as Teva are required to appoint two statutory independent directors, who must also serve on the audit committee. All other Board committees must include at least one such statutory independent director. Such statutory independent directors are appointed at the general meetings by the holders of a majority of Teva’s ordinary shares and must meet certain non-affiliation criteria—all as provided under Israeli law. A statutory independent director is appointed for an initial term of three consecutive years, and may be reappointed for additional three-year terms, subject to certain conditions (including approval by Teva shareholders at a general meeting) as provided under Israeli regulations. Regulations promulgated under Israeli law set the minimum and maximum compensation that may be paid to statutory independent directors. Dr. Leora Meridor and Prof. Gabriela Shalev currently serve in this capacity. Israeli law further requires that at least one statutory independent director has financial and accounting expertise, and that the other statutory independent director has professional competence, as determined by the company’s board of directors. Under relevant regulations, a director having financial and accounting expertise is a person who, due to his or her education, experience and talents, is highly skilled in respect of, and understands, business and accounting matters and financial reports, in a manner that enables him or her to have an in-depth understanding of the company’s financial information and to stimulate discussion in respect of the manner in which the financial data is presented. Under the regulations, a director having professional competence is a person who has an academic degree in either economics, business
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Table of Contentsadministration, accounting, law or public administration or an academic degree in an area relevant to the company’s business, or has at least five years experience in a senior position in the business management of a corporation with a substantial scope of business, in a senior position in the public service or in the field of the company’s business. Dr. Leora Meridor was determined by the board of directors to be a financial and accounting expert under Israeli law, and Prof. Gabriela Shalev was determined by the Board to have professional competence. The board of directors has also adopted a policy to require at least two directors who are financial experts in accordance with Israeli law, in addition to the one statutory independent director required under Israeli law, to qualify as a financial expert in accordance with Israeli law. Accordingly, Prof. Meir Heth and Eli Hurvitz were determined by the board of directors to be financial and accounting experts. Committees of the Board Teva’s Articles of Association provide that the board of directors may delegate its powers to one or more committees of the Board as it deems appropriate to the extent such delegation is permitted under the Israeli Companies Law. Each committee must include at least one independent director. The Board has appointed audit, compensation, nominating, finance, science and technology and community affairs committees. Audit Committee The Israeli Companies Law mandates the appointment of an audit committee comprised of at least three directors. The audit committee must include both statutory independent directors and may not include certain members of the Board. Under the Israeli Companies Law, the audit committee is responsible for overseeing the business management practices of the Company in consultation with the Company’s internal auditor and independent auditors, making recommendations to the Board to improve such practices and approving transactions with affiliates, as described below under “Item 10: Additional Information—Memorandum and Articles of Association—Directors’ Powers.” In accordance with the Sarbanes-Oxley Act and Nasdaq requirements, Teva’s audit committee is directly responsible for the appointment, compensation and oversight of Teva’s independent auditors. In addition, the audit committee is responsible for assisting the Board in monitoring Teva’s financial statements, the effectiveness of its internal controls and its compliance with legal and regulatory requirements. Teva’s audit committee charter sets forth the scope of the committee’s responsibilities, including: its structure, processes and membership requirements; the committee’s purpose; and its specific responsibilities and authority with respect to registered public accounting firms, complaints relating to accounting, internal accounting controls or auditing matters, authority to engage advisors, and funding as determined by the audit committee. The current members of Teva’s audit committee are Dov Shafir (Chairman), Prof. Gabriela Shalev, Dr. Leora Meridor, Dr. Max Reis, Prof. Moshe Many and Prof. Meir Heth, all of whom have been determined to be independent as defined by the applicable Nasdaq rules and those of the SEC. During 2006, the audit committee held 14 meetings. The average attendance rate of members of the audit committee at meetings held during 2006 was 95%. The Board has determined that Prof. Meir Heth is an “audit committee financial expert” as defined by applicable SEC regulations. See “Item 16A: Audit Committee Financial Expert” below. Compensation Committee The compensation committee is responsible for determining or making proposals to the Board with respect to the terms of employment and the compensation of Teva’s executive and other officers. In addition, the compensation committee has certain responsibilities in connection with the granting of stock options and other equity awards to Teva’s officers, directors and employees under its stock incentive plan. The current members of Teva’s compensation committee are Prof. Moshe Many (Chairman), Prof. Meir Heth, Harold Snyder, Dov Shafir, Abraham E. Cohen and Prof. Gabriela Shalev or, in her absence, Dr. Leora Meridor, all of whom have been determined to be independent as defined by the applicable Nasdaq rules and those of the SEC. During 2006, the compensation committee held 20 meetings. The average attendance rate of members of the compensation committee at meetings held during 2006 was 84%. Nominating Committee The role of the nominating committee is to recommend, to the Company’s board of directors, the slate of director nominees for election to the board of directors and to identify and recommend candidates, subject to the approval of the board of directors, to fill vacancies occurring between annual shareholder meetings. Before recommending an incumbent, replacement or additional director, the committee reviews his or her qualifications, including capability, availability to serve, conflicts of interest and other relevant factors. Members of the nominating committee are Prof. Meir Heth (Chairman), Dov Shafir, Abraham E. Cohen and Dr. Leora Meridor or, in her absence, Prof. Gabriela Shalev. The committee held three meetings in 2006. The average attendance rate of members of the nominating committee at meetings held during 2006 was 87%.
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Table of ContentsFinance Committee The finance committee is responsible for overseeing Teva’s financial strategies and policies, risk management and financial controls and reporting, as well as a variety of other financial-related matters. The current members of the committee are Eli Hurvitz (Chairman), Dr. Phillip Frost, Dr. Leora Meridor, Prof. Gabriela Shalev, Roger Abravanel and Prof. Meir Heth. The committee held four meetings in 2006. The average attendance rate of members of the finance committee at meetings held during 2006 was 86%. Science and Technology Committee The science and technology committee is primarily engaged in the review and analysis of the annual budgets and plans of the innovative and generic R&D divisions, the review of new technologies and major projects, and the review of Teva’s relationship with the scientific community. The current members of the committee are Dr. Phillip Frost (Chairman), Prof. Moshe Many, Eli Hurvitz, Prof. Gabriela Shalev or, in her absence, Dr. Leora Meridor, Prof. Michael Sela, Dr. Max Reis, Dov Shafir, Abraham E. Cohen and Harold Snyder. The committee held two meetings in 2006, one of which took place at Teva’s innovative research and development laboratories in Netanya, Israel. The average attendance rate of members of the science and technology committee at meetings held during 2006 was 93%. Community Affairs Committee The community affairs committee is primarily engaged in the review and oversight of Teva’s involvement in the community, public policy issues affecting Teva and the Company’s relationships with medical, educational and cultural institutions, including charitable donations. The current members of the committee are Eli Hurvitz (Chairman), Dr. Phillip Frost, Ruth Cheshin, Prof. Gabriela Shalev, Prof. Meir Heth, Dov Shafir, Leslie Dan and Prof. Michael Sela. The committee held two meetings in 2006. The average attendance rate of members of the community affairs committee at meetings held during 2006 was 71%. Employees As of December 31, 2006, Teva employed approximately 26,700 full-time-equivalent employees. Teva considers its labor relations with its employees around the world to be good.
Grouped by function, approximately 53% of Teva’s employees work in pharmaceutical production, 27% in sales and marketing, 9% in research and development and 12% in the general and administrative function. Share Ownership As of December 31, 2006, all the directors and executive officers as a group beneficially held 60,234,769 ordinary shares (representing approximately 7.6% of Teva’s outstanding shares as of such date). This figure includes 21,382,410 shares beneficially owned by Dr. Phillip Frost, representing approximately 2.7% of Teva’s outstanding shares, 10,360,818 shares beneficially owned by Eli Hurvitz, representing approximately 1.3% of Teva’s outstanding shares, and 9,566,421 shares beneficially owned by Harold Snyder, representing approximately 1.2% of Teva’s outstanding shares. Such persons are the only directors or officers who hold 1% or more of Teva’s outstanding shares as of December 31, 2006.
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Table of ContentsITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS According to a Schedule 13G filed on February 5, 2007, Franklin Resources, Inc. beneficially owns 72,892,202 Teva shares (substantially all relating to Teva’s convertible debentures), which as of such date represented approximately 8.5% of Teva’s outstanding shares. To the best knowledge of Teva, as of February 15, 2007, no other shareholder beneficially owns 5% or more of Teva’s ordinary shares. All holders of Teva ordinary shares have one vote per share. In May 2006, Novopharm entered into an agreement with a corporation controlled by members of the family of Leslie Dan, a Teva director and Chairman of Novopharm, with respect to a facility located at 30 Novopharm Court, Toronto, Canada. Novopharm had been leasing the property on a month to month basis for CAD $7.50 per square foot, for an aggregate annual rent of CAD $1,560,000. Under the new agreement, the lease will be extended to December 17, 2010 on the same economic terms. In February 2007, Teva entered into an agreement to purchase the facility described above and an additional leased facility in Stouffville, Ontario related to Novopharm’s operations for CAD $41.5 million. The sellers of both facilities are companies controlled by members of the Dan family. The sales are expected to close in May 2007. In September 2006, Teva sold the former headquarters of Ivax, consisting of approximately 150,000 sq. ft. of office space, land and the adjacent parking facility, together with certain related equipment and service contracts, to an affiliate of Dr. Phillip Frost, Teva’s Vice Chairman of the Board, for a cash purchase price of $18 million, which was determined by Teva to reflect the fair market price for such property based on advice from an independent appraisal. Ivax, in turn, leased back approximately 84,000 square feet of the facility for an annual rent of approximately $1.7 million (including operational and service costs) for a one-year term, renewable by Teva for an additional one year term upon 120 days notice. Such amount was determined by Teva not to exceed the fair market rent for the property following a review of commercial rental market for such space. In September 2006, Teva and Protalix Ltd. signed a collaboration and licensing agreement for the development of two proteins, using Protalix’s plant cell culture platform. Under the agreement, the two companies will collaborate on research and development of the proteins utilizing Protalix’s expression system. Protalix will grant Teva an exclusive license to commercialize the developed products in return for royalty and milestone payments to be made to Protalix upon the achievement of certain pre-defined goals. Protalix will retain certain exclusive manufacturing rights. Eli Hurvitz, Teva’s Chairman of the Board, is Chairman of the Board of Protalix, and Dr. Phillip Frost, Vice Chairman of the Board, is a director of Protalix. Mr. Hurvitz and Dr. Frost each own certain equity interests in Protalix. Teva and Jexys Medical Research Services & Development Co. Ltd entered into an agreement for the development of up to five prototype molecules, using Jexys’ platform technology. As part of the agreement, Jexys granted Teva an option to receive an exclusive, worldwide royalty-bearing license for the commercialization of products in exchange for certain milestone payments and royalties. Harold Snyder, a director of Teva, is a shareholder of Jexys, and Arik Yaari, president of Teva’s API division, is a director and shareholder of Jexys. Recently, Teva and Se-cure Pharmaceuticals Ltd. entered into a Marketing, Selling and Distribution Agreement for Femarelle, a food supplement. Pursuant to the Agreement, Teva has the exclusive right to market, sell and distribute Femarelle in Israel. Dr. Ben-Zion Weiner, Teva’s Chief R&D Officer, holds a right to receive 4% of the issued and outstanding share capital of Se-cure and is also a member of its scientific advisory board. All related party transactions described above have been reviewed and approved by Teva’s audit committee and board of directors. As of December 31, 2006, there were approximately 3,120 record holders of ADRs, whose holdings represented approximately 75% of the total outstanding ordinary shares, substantially all of which record holders were in the United States.
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Table of Contents8.A Consolidated Statements and Other Financial Information 8.A.1 See Item 18. 8.A.2 See Item 18. 8.A.3 See Report of Independent Registered Public Accounting Firm, page F-2. 8.A.4 We have complied with this requirement. 8.A.5 Not applicable. 8.A.6 Not applicable. 8.A.7 Legal Proceedings Teva is subject to various litigation and other legal proceedings. For a discussion of these matters, see “Contingent Liabilities” included in Note 8 to Teva’s consolidated financial statements included in this report. In addition, during 2006, Teva settled various litigations, as described under “Item 4—Information on the Company—Pharmaceutical Products—Generic Products – North America—Recent Patent Litigation Settlements.” 8.A.8 Dividend Policy See “Item 3: Key Information—Selected Financial Data—Dividends.” 8.B Significant Changes See Note 2 to Teva’s consolidated financial statements included in this report regarding the Ivax acquisition and Notes 6 and 7 to such financial statements regarding the issuance of senior notes and convertible senior debentures.
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Table of ContentsITEM 9: THE OFFER AND LISTING ADRs Teva’s ADRs have been traded in the United States since 1982 and were admitted to trading on the Nasdaq National Market in October 1987. The ADRs are quoted under the symbol “TEVA.” The Bank of New York serves as depositary for the ADRs. In November 2002, Teva was added to the NASDAQ 100 Index. As of December 31, 2006, Teva had 593,800,333 ADRs outstanding. Each ADR represents one ordinary share; accordingly, the number of the outstanding ADRs are included in the number of outstanding ordinary shares. In each of December 2002 and June 2004, Teva effected a 2-for-1 stock split. Each holder of an ordinary share, or an ADR, as the case may be, was issued another share. All figures in this annual report have been adjusted to reflect the stock splits. The following table sets forth information regarding the high and low prices of the ADR on Nasdaq for the periods specified in U.S. dollars.
On February 16, 2007, the last reported sale price for the ADRs on Nasdaq was $37.71. The American Stock Exchange, the Chicago Options Exchange and the Pacific Stock Exchange quote options on Teva’s ADRs under the symbol “TEVA.” Teva’s ADRs are also traded on SEAQ International in London and on the exchanges in Frankfurt and Berlin.
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Table of ContentsOrdinary Shares Teva’s ordinary shares have been listed on the Tel Aviv Stock Exchange since 1951. As of December 31, 2006, Teva had 793,272,230 ordinary shares ADRs outstanding, including those ordinary shares underlying the outstanding ADRs. The table below sets forth in U.S. dollars the high and low last reported sale prices of the ordinary shares on the Tel Aviv Stock Exchange during the periods as reported by such Exchange (restated to reflect the stock splits). The translation into U.S. dollars is based on the daily representative rate of exchange published by the Bank of Israel then in effect.
On February 19, 2007, the last reported sale price of the ordinary shares on the Tel Aviv Stock Exchange was $37.60.
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Table of ContentsITEM 10: ADDITIONAL INFORMATION Memorandum and Articles of Association Register Teva’s registration number at the Israeli registrar of companies is 52-001395-4. Directors’ Powers The Israeli Companies Law, 1999 (the “Companies Law”) requires approval by both the audit committee and the board of directors of, among other things, the following actions or transactions, all subject to the requirement that such transactions are not adverse to the interests of the company:
Under the Companies Law, certain other transactions (listed in Section 270 of the Companies Law) that require approval by the board of directors and the audit committee may also require shareholder approval (including, in certain cases, a specified percentage of disinterested shareholders). Approvals of the terms of service of directors, including the grant of exemption, insurance, an undertaking to indemnify or indemnification under a permit to indemnify as well as the company’s contracts with its directors on conditions of employment in other assignments, require approval by the audit committee, the board of directors and the shareholders. A director with an interest in any of the above transactions may not be present and may not vote at the board of directors and audit committee’s meetings at which such transaction is approved (except under certain circumstances detailed in Section 278(b) of the Companies Law). In cases in which the approval of the audit committee is required, the audit committee may only approve such transactions if two statutory independent directors are members of the committee and at least one of them is present at the meeting at which the transaction is approved. The Companies Law requires that an office holder promptly disclose any “personal interest” that he may have and every substantive fact or document in connection with any existing or proposed transaction by the company and codifies the duty of care and fiduciary duties that an office holder owes to the company. Neither Teva’s Memorandum or Articles of Association, nor the laws of the State of Israel, mandate retirement or non-retirement of directors at a certain age, or share ownership for a director’s qualification. The board of directors of Teva has adopted a policy that at least two directors of the Company be required to qualify as financial experts in accordance with Israeli law, in addition to the one statutory independent director required to qualify as a financial expert in accordance with Israeli law. CEO and Center of Management Under Teva’s Articles of Association, Teva’s chief executive officer as well as the majority of the Board are required to be residents of Israel, unless Teva’s center of management shall have been transferred to another country in accordance with the Articles of Association. The Articles of Association require that Teva’s center of management be in Israel, unless the board of directors otherwise resolves, with a supermajority of three quarters of the participating votes. Description of Teva Ordinary Shares The par value of Teva’s ordinary shares is NIS 0.10 per share, and all issued and outstanding ordinary shares are fully paid and non-assessable. Holders of paid-up ordinary shares are entitled to participate equally in the payment of dividends and other distributions and, in the event of liquidation, in all distributions after the discharge of liabilities to creditors. Teva’s board of directors may declare interim dividends and propose the final dividend with respect to any fiscal year out of profits available for dividends after statutory appropriation to capital reserves. Declaration of a final dividend (not exceeding the amount proposed by the Board) requires shareholder approval through the adoption of an ordinary resolution. Dividends are declared in NIS. All ordinary shares represented by the ADRs will be issued in registered form only. Ordinary shares do not entitle their holders to preemptive rights.
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Table of ContentsVoting is on the basis of one vote per share. An ordinary resolution (for example, resolutions for the approval of final dividends and the appointment of auditors) requires the affirmative vote of a majority of the shares voting in person or by proxy. Certain resolutions (for example, resolutions amending many of the provisions of the Articles of Association) require the affirmative vote of at least 75% of the shares voting in person or by proxy, and certain amendments of the Articles of Association require the affirmative vote of at least 85% of the shares voting in person or by proxy, unless a lower percentage shall have been established by the board of directors, and approved by three-quarters of those directors voting, at a meeting of the board of directors which shall have taken place prior to that general meeting. Meetings of Shareholders Under the Companies Law and Teva’s Articles of Association, Teva is required to hold an annual meeting every year no later than fifteen months after the previous annual meeting. In addition, Teva is required to hold a special meeting:
If the board of directors receives a demand to convene a special meeting, it must publicly announce the scheduling of the meeting within 21 days after the demand was delivered. The meeting must then be held no later than 35 days after the notice was made public. The agenda at an annual meeting is determined by the board of directors. The agenda must also include proposals for which the convening of a special meeting was demanded, as well as any proposal requested by one or more shareholders who hold no less than 1% of the voting rights, as long as the proposal is one suitable for discussion at an annual meeting. A notice of an annual meeting must be made public and delivered to every shareholder registered in the shareholders’ register at least 30 days before the meeting is convened. The shareholders entitled to participate and vote at the meeting are the shareholders as of the record date set in the decision to convene the meeting, provided that the record date is not more than 40 days, and not less than 28 days, before the date of the meeting, provided that notice of the general meeting was published prior to the record date. Israeli regulations further require public companies to send voting cards, proxy notes and position papers to their shareholders. Under the Companies Law, a shareholder who intends to vote at a meeting must demonstrate that he owns shares in accordance with certain regulations. Under these regulations, a shareholder whose shares are registered with a member of the Tel Aviv Stock Exchange must provide Teva with an authorization from such member regarding his ownership as of the record date. Right of Non-Israeli Shareholders to Vote Neither the Memorandum of Association, the Articles of Association, nor the laws of the State of Israel restrict in any way the ownership or voting of Teva’s ordinary shares by nonresidents or persons who are not citizens of Israel, except with respect to citizens or residents of countries that are in a state of war with Israel. Change of Control Subject to certain exceptions, the Companies Law provides that a merger requires approval both by the board of directors and by the shareholders of each of the merging companies. In approving a merger, the board of directors must determine that there is no reasonable expectation that, as a result of the merger, the merged company will not be able to meet its obligations to its creditors. Creditors may seek a court order to enjoin or delay the merger if there is an expectation that the merged company will not be able to meet its obligations to its creditors. A court may also issue other instructions for the protection of the creditors’ rights in connection with a merger. Under the Companies Law, an acquisition of shares in a public company must be made by means of a purchase offer to all stockholders if, as a result of the acquisition, the purchaser would become a 25% or more stockholder of the company. This rule does not apply if there is already another 25% or more stockholder of the company, nor does it apply to a purchase of shares by way of a “private offering” in certain circumstances provided under the Companies Law.
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Table of ContentsForeign Exchange Regulations Nonresidents of Israel who purchase ADRs with U.S. dollars or other non-Israeli currency will be able to receive dividends, if any, and any amounts payable upon the dissolution, liquidation or winding up of the affairs of Teva, at the rate of exchange prevailing at the time of conversion. Dividends to non-Israeli residents are subject to withholding. See “— Israel Taxation—Withholding Taxes on Dividends Distributed by Teva to Non-Israeli Residents” below. U.S. Federal Income Tax Considerations The following is a summary of material U.S. federal income tax consequences to U.S. Holders of ADRs who hold such securities as capital assets. For purposes of this summary, a “U.S. Holder” means a beneficial owner of an ADR that is for U.S. federal income tax purposes:
If an entity that is classified as a partnership for U.S. federal tax purposes holds ADRs, the U.S. federal income tax treatment of its partners will generally depend upon the status of the partners and the activities of the partnership. Entities that are classified as partnerships for U.S. federal tax purposes and persons holding ADRs through such entities should consult their own tax advisors. This summary is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), existing final, temporary and proposed regulations thereunder, judicial decisions and published positions of the Internal Revenue Service, and the treaty between the United States and Israel relating to income taxes, all as of the date of this annual report and all of which are subject to change (including changes in interpretation), possibly with retroactive effect. It is also based in part on representations by the depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms. This summary does not purport to be a complete analysis of all potential tax consequences of owning ADRs. In particular, this discussion does not take into account the specific circumstances of any particular investor (such as tax-exempt entities, certain insurance companies, broker-dealers, investors subject to the alternative minimum tax, investors that actually or constructively own 10% or more of Teva’s voting securities, investors that hold ordinary shares or ADRs as part of a straddle or hedging or conversion transaction, traders in securities that elect to mark to market, banks or other financial institutions, partnerships or other entities classified as partnerships for U.S. federal income tax purposes or investors whose functional currency is not the U.S. dollar), some of which may be subject to special rules. Investors are advised to consult their tax advisors with respect to the tax consequences of the ownership of ADRs, including the consequences under applicable state and local law and federal estate tax law, and the application of foreign laws or the effect of nonresident status on U.S. taxation. U.S. Holders of ADRs will be treated as owners of the ordinary shares underlying their ADRs. Accordingly, deposits and withdrawals of ordinary shares in exchange for ADRs will not be taxable events for U.S. federal income tax purposes. The U.S. Treasury has expressed concerns that parties to whom ADRs are released may be taking actions that are inconsistent with the claiming of foreign tax credits for U.S. Holders of ADRs. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate U.S. Holders. Accordingly, the analysis of the availability of foreign tax credits and the reduced tax rate for dividends received by certain non-corporate U.S. Holders, described below, could be affected by actions taken by parties to whom the ADRs are released. Taxation of Distributions The amount of any distribution paid to a U.S. Holder, including any Israeli taxes withheld from the amount of such distribution, will be subject to U.S. federal income taxation as ordinary income from sources outside the United States to the extent paid out of current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. Subject to applicable limitations, dividends paid to non-corporate U.S. Holders with respect to taxable years beginning on or before December 31, 2010 are generally subject to tax at a maximum rate of 15%. The amount of any distribution of property other than cash will be the property’s fair market value on the date of the distribution. To the extent that an amount received by a
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Table of ContentsU.S. Holder exceeds that U.S. Holder’s allocable share of current and accumulated earnings and profits, such excess will be applied first to reduce that U.S. Holder’s tax basis in the shares and then, to the extent the distribution exceeds that U.S. Holder’s tax basis, will be treated as capital gain. Any dividend received will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations. Dividends paid in NIS will be included in a U.S. Holder’s income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of the U.S. Holder’s (or, in the case of ADRs, the depositary’s receipt of the dividend), regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. Holder should generally not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. Holder may have foreign currency gain or loss, which will be treated as income from sources within the United States, if he or she does not convert the amount of such dividend into U.S. dollars on the date of receipt. The amount of any distribution of property other than cash will be the property’s fair market value on the date of the distribution. Subject to applicable limitations that may vary depending on a U.S. Holder’s circumstances, Israeli taxes withheld from dividends on Teva ADRs at the rate provided by the U.S.-Israel tax treaty will be creditable against a U.S. Holder’s U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. The rules governing foreign tax credits are complex, and, therefore, you should consult your own tax advisor regarding the availability of foreign tax credits in your particular circumstances. Instead of claiming a credit, a U.S. Holder may elect to deduct such otherwise creditable Israeli taxes in computing taxable income, subject to generally applicable limitations. Taxation of the Disposition of ADRs Upon the sale or exchange of ADRs, a U.S. Holder will generally recognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized and the U.S. Holder’s tax basis determined in U.S. dollars in the ADRs. The gain or loss will generally be gain or loss from sources within the United States for foreign tax credit limitation purposes. In general, the capital gain of a non-corporate U.S. Holder is subject to tax at ordinary rates for ADRs held for one year or less and at the long-term capital gains rate (currently 15%) for ADRs held for more than one year. A U.S. Holder’s ability to deduct capital losses is subject to limitations. The surrender of ADRs in exchange for ordinary shares, or vice versa, will not be a taxable event for U.S. federal income tax purposes, and U.S. Holders will not recognize any gain or loss upon such an exchange. U.S. Information Reporting and Backup Withholding A U.S. Holder generally will be subject to information reporting with respe | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||