Teva Pharmaceutical Industries 20-F 2008
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the fiscal year ended December 31, 2007
For the transition period from to
Commission File number: 0-16174
Date of event requiring this shell company report:
TEVA PHARMACEUTICAL INDUSTRIES LIMITED
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Table of Contents
INTRODUCTION 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 are based on information provided by IMS Health Inc., a leading provider of market research to the pharmaceutical industry (IMS).
This annual report contains forward-looking statements, which express managements 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 5 of this report. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.
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, 2007 and at December 31, 2007 and 2006 are derived from Tevas 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, 2004 and at December 31, 2005, 2004 and 2003 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 most of Tevas other subsidiaries (principally operating in Western Europe, Central and Eastern Europe, Latin America and Canada) is the respective local currency.
Balance Sheet Data
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 Tevas earnings, financial condition, capital requirements and other factors. Tevas 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 Tevas 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 shareholders country of residence. In Tevas 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 2007 was 16.5%.
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 split effected in June 2004.
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 financial results depend, to a significant degree, upon our ability to successfully commercialize additional generic and innovative 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 approvals of those products. 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 competitors introduction of the equivalent product. For example, our 2007 operating results included major contributions from products sold with U.S. market exclusivity, such as pantoprazole. 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. Failure to continue to obtain such market exclusivities could have a material adverse effect on our sales and profitability.
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 relating to those products, based upon our belief that such patents are invalid or otherwise 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®, Lotrel® and Protonix®, 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 innovators 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 event of a finding of willful infringement, the damages may be up to three times the profits lost by the patent owner and not based on the profits we 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.
Although we currently have insurance coverage for certain of the specified types of damage described above, we may be subject to claims that are subject to our deductible, involve a co-insurance participation, 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.
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:
These strategies may increase the costs and risks associated with our efforts to introduce generic products and may delay or prevent such introduction altogether.
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.
Sales of our products may be adversely affected by the continuing 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 are 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.
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 during 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.
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.
We 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.
Regulations to permit the sale of biotechnology-based products as bioequivalent or biosimilar drugs, primarily in the U.S., may be delayed, or may otherwise jeopardize our investment in such products.
We have made, and expect to continue to make, significant investments in our ability to develop and produce biotechnology-based products, most recently including our acquisition for $400 million of CoGenesys Inc. Although some of these products may be sold as branded, innovative products, one of our key strategic goals in making these investments is to position Teva at the forefront of the development of bioequivalent or biosimilar generic versions of currently marketed biotechnology products. To date, in many markets, most notably the U.S., there does not yet exist a clear legislative or regulatory pathway for the registration and approval of such biogeneric products. Significant delays in the development of such pathways, or significant impediments that may be built into such pathways, could diminish the value of the investments that we have made, and will continue to make, in our biotechnology capabilities.
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 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.
Reforms 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 Deficit Reduction Act of 2005 mandated a new regulation, which became effective in part on October 1, 2007, establishing the method by which pharmaceutical manufacturers, including us, must calculate average manufacturer price. The Act strongly encouraged state Medicaid programs to utilize this average manufacturer price in the future as the benchmark for prescription drug reimbursement in place of the previous, widely used benchmark of average wholesale price. The Act also changed the method used to determine 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. This price limit may have the effect of reducing the reimbursement rates for certain medications that we currently sell. We are reviewing the potential impact of these provisions on our business and profitability and have not yet been able to draw conclusions, because the implementation of certain provisions of the final regulations promulgated under the Act has been stayed by litigation. We do not know how long the court-ordered stay will remain in effect or what the final outcome will be.
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.
Because we have substantial international operations, our sales and, to a lesser extent, our 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.
An increasing amount of intangible assets and goodwill on our books may lead to significant impairment charges in the future.
We regularly review our long-lived assets, including identifiable intangible assets and goodwill, for impairment. Goodwill, trade names and acquired product and marketing rights are subject to impairment review at least annually. Other long-lived assets are reviewed for impairment when there is an indication that an impairment may have occurred. The amount of goodwill and other intangible assets on our consolidated balance sheet has increased significantly in recent years, primarily as a result of our recent acquisitions. Impairment testing under U.S. GAAP may lead to further impairment charges in the future. Any significant impairment charges could have a material adverse effect on our results of operations. For a discussion of how we determine whether an impairment has occurred and what factors could result in an impairment, see Item 5. Operating and Financial Review and ProspectsCritical Accounting Policies and Item 18. Financial StatementsNote 1.
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 Parkinsons disease, as well as an expanding proprietary specialty pharmaceutical business, which consists primarily of respiratory products. Tevas active pharmaceutical ingredient (API) business sells to third-party manufacturers and provides significant vertical integration to Tevas own pharmaceutical production.
Tevas global operations are conducted in North America, Europe, Latin America, Asia and Israel. Teva has 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 2007, Teva generated approximately 58% of its sales in North America, 25% in Western Europe (including Hungary) and 17% in other regions (primarily Latin America, including Mexico, Israel and Central and Eastern Europe). For a breakdown of Tevas sales by business segment and by geographic market for the past three years, see Item 5: Operating and Financial Review and ProspectsResults of OperationsSalesGeneral.
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. The Companys website is www.tevapharm.com.
In 2007, Teva undertook a company-wide strategic review. The results of the strategic review highlighted key opportunities for growth and led Teva to set a goal of doubling the size of its business by 2012 and generating revenues of $20 billion and net income margins exceeding 20%.
The review was designed to clarify Tevas aspirations and targets, and to develop a strategy to achieve those targets over the next five years and beyond. In particular, Tevas growth strategy includes the following elements:
Generic pharmaceuticals are the chemical and therapeutic equivalents of brand-name drugs and are typically sold under their chemical names at prices substantially below those of the brand-name pharmaceuticals. Generics 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 pharmaceuticals 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 pharmaceuticals are benefiting from increasing awareness and acceptance on the part of consumers, physicians and pharmacists globally. 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 pharmaceuticals, which provide physicians and pharmacists with generic alternatives. In addition, various government agencies and many private managed care or insurance programs encourage the substitution of generics for brand-name pharmaceuticals as a cost-savings measure in the purchase of, or reimbursement for, prescription pharmaceuticals. Teva believes that these factors, together with an aging population and a corresponding increase in healthcare costs, as well as the large number of branded products losing patent protection over the coming years, should lead to continued global expansion of the generic pharmaceuticals market.
Through coordinated global research and development activities, Teva constantly seeks to expand its range of generic products. Tevas 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 an advantage over many of its competitors in its major markets as a result of capabilities that add value for its customers, including the following:
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.
Tevas principal U.S. subsidiary (Teva USA) is the leading generic drug company in the U.S. Teva USA markets over 300 generic products in more than 1,000 dosage strengths and packaging sizes. Teva USA also has the capability to formulate, fill, label and package finished dosage forms of injectable pharmaceutical products. 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 consolidation continues among purchasers, including large drugstore chains, wholesaling organizations, buying groups and managed care providers.
In 2007, Teva maintained its position as the U.S. generic market leader in total prescriptions and new prescriptions, with total prescriptions increasing from approximately 409 million in 2006 to approximately 437 million in 2007, representing 18% of total generic prescriptions. Tevas share of total pharmaceutical prescriptions was also the highest of any company, branded or generic, in the U.S. pharmaceutical industry. 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 products on a timely basis, its emphasis on regulatory compliance and high-volume cost-effective production, its increased capacity, its customer service and the breadth of its product line.
Several factors have affected the U.S. generics industry in recent years, 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.
Products. Teva USA manufactures and sells generic pharmaceutical products in a variety of dosage forms, including tablets, capsules, ointments, creams, liquids, injectables and inhalants. In 2007, Teva launched 25 generic versions of the following branded products in the U.S. (listed in order of launch):
Branded product 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.
The FDA requires companies to submit abbreviated new drug applications (ANDAs) for approval to manufacture and market generic forms of brand-name drugs.
In 2007, Teva USA received, in addition to 26 final generic drug approvals, 18 tentative approvals. 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 a 30-month regulatory stay lapses. The 18 tentative approvals received were for generic equivalents of the following products:
Tevas potential for revenue growth from generic products in the U.S. is closely related to its pipeline of pending ANDAs with the FDA, as well as tentative approvals already granted. As of February 7, 2008, Teva had 160 product registrations awaiting FDA approval (including some products through strategic partnerships), including 44 tentative approvals. Collectively, the brand-name versions of these 160 products had U.S. sales in 2007 exceeding $100 billion. Of these applications, 92 were Paragraph IV applications challenging patents of branded products. Teva believes it is the first to file with respect to 49 of these products, the branded versions of which had U.S. sales of more than $40 billion in 2007, and anticipates final approvals for most of these applications within the next three years.
In most instances, FDA approval is granted upon 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 to Teva associated with marketing exclusivity, Teva believes that its patent challenges improve healthcare by allowing consumers earlier access to more affordable, high quality medications.
Canada. Through Novopharm, its Canadian subsidiary, Teva manufactures and markets generic prescription pharmaceuticals in Canada. Novopharm is the second largest generic company in Canada and the tenth largest pharmaceutical company, based on IMS data, with a product portfolio that includes 181 generic products which are sold in approximately 700 dosage forms and packaging sizes. Novopharms product portfolio has the broadest market coverage based on generic dollar sales.
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 2007, Novopharm launched generic equivalents of the following 11 brand products: Altace®, DDAVP®, Flomax®, Navelbine®, Pariet®, Prinivil®, Rosephin (injectable)® , Vaseretic®, Vasotec®, Zestril® and Zyprexa®.
As of the end of 2007, Novopharm had applications for 62 products awaiting approval of the Therapeutic Products Directorate. Collectively, the branded versions of these products had Canadian sales in 2007 of approximately U.S. $3.8 billion.
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. Canada continues to see consolidation of independent retail pharmacies and increased expansion of retail chains. The top five retail chain customers in Canada represent approximately 50% of the dollar market. The business is conducted primarily through multi-year contracts with major group purchasing organizations or hospital buying groups.
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, through subsidiaries, entered into a marketing and product development agreement, which expires in 2011, that provided Teva with exclusive U.S. marketing rights for certain of Biovails pipeline of controlled-release generic versions of successful brands. The products currently marketed by Teva USA under this arrangement are generic versions of Trental®, Cardizem® CD, Adalat® CC, Procardia XL® and Voltaren® XR. Teva and Biovail have also entered into a long-term API supply agreement under which Biovail purchases raw material from Teva.
In 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 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 Tevas consolidated financial statements included in this report.
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 Impaxs ANDA for this product, and for Teva to sell the product within Anchens 180-day exclusivity period. In return, Anchen received from Teva certain
payments, both during and after the exclusivity period. Pursuant to Tevas 2001 agreement with Impax, Teva has U.S. marketing rights to Impaxs version of this product, and commenced sales in December 2006. In addition, Teva received a license to sell the generic version of Wellbutrin ER® tablets, 150 mg, in 2008. This license is exclusive for six months from launch and non-exclusive thereafter. Teva plans to commercialize this product by agreement with Anchen, which was awarded 180-day marketing exclusivity.
Until June 30, 2007, Teva participated in an exclusive U.S. distribution arrangement with Baxter Healthcare Corporation for propofol, the generic version of Diprivan®. Under the agreement, Teva produced the product and sold it to Baxter, which performed all marketing and distribution functions related to the product. Baxter paid Teva a manufacturing fee and an additional profit split based on gross margin. Effective June 30, 2007, distribution rights to propofol reverted to Teva. 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.
Recent Patent Litigation Settlements. From time to time Teva enters into agreements settling patent litigation with branded companies. Teva believes that these agreements benefit both U.S. consumers, by accelerating the introduction and increasing the availability of Tevas 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 significant settlements Teva reached during the last three years:
In 2005, Teva settled a patent litigation with GlaxoSmithKline relating to lamotrigine, the generic version of GlaxoSmithKlines Lamictal®. GlaxoSmithKline granted Teva an exclusive royalty-bearing license to distribute generic lamotrigine chewable tablets (5 mg and 25 mg) in the U.S. no later than June 2005. Teva was also granted the exclusive right to manufacture and sell a generic version of lamotrigine tablets (25mg, 100 mg, 150 mg, and 200 mg) in the U.S. with an expected launch date in mid-2008.
In 2006, Teva settled a patent dispute with the Purdue Frederick Company and certain of its affiliates pertaining to Tevas generic version of Purdues OxyContin® (oxycodone HCl extended-release) tablets. The settlement provided a full release of Teva and its distributors, purchasers and patients, and permitted Teva to continue to sell its oxycodone products. Teva continued to sell its generic version of OxyContin® until the end of January 2008.
In September 2007, Teva settled a patent dispute with GlaxoSmithKline that will enable Teva to enter the U.S. market in the first quarter of 2012 with generic versions of Avandia® (rosiglitazone maleate), Avandamet® (rosiglitazone maleate/metformin HCl) and Avandaryl® (rosiglitazone maleate/glimepiride) oral tablets.
In October 2007, Teva settled patent disputes with Astellas Pharma Inc. and King Pharmaceuticals, Inc. regarding Tevas submission of an ANDA for a generic version of Adenoscan® (adenosine injectable), a pharmacologic stress agent. Under the settlement agreement, Teva will be able to launch its generic version pursuant to a license in September 2012, or earlier under certain circumstances.
Marketing and Sales. The marketing of generic pharmaceutical products in the U.S. is conducted through Teva USA. During 2007, Tevas sales in the U.S. through different marketing channels were as follows:
Tevas U.S. sales organization consists of the Teva Generics group and the Teva Health Systems group, aligning the sales force with the customer base. 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. The Health Systems group handles unit dose products and finished-dosage injectable pharmaceutical products that are used primarily in institutional settings. It focuses 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.
In the U.S., Teva supports its wholesale selling effort with professional journal advertising and exhibitions at key medical and pharmaceutical conventions. From time to time, Teva bids for U.S. government-tendered contracts.
Teva is one of the leading generic pharmaceutical companies in Europe, with operations in 17 Western European countries including Hungary.
In Europe, the 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, while in other European countries, there is a market for branded generics only. Some countries, such as the U.K. and the Netherlandsso-called pure generic marketspermit substitution by pharmacists, while other countries permit pharmacists to dispense only the specific pharmaceutical product prescribed by doctors.
In 2007, in the U.K., the Netherlands and Germany, generic penetration reached 50% to 65% of total pharmaceutical sales, measured by volume. Such relatively high penetration rates are in contrast with other major European countries, such as France, Italy and Spain, where the market share of generics was less than 20%. Teva believes that these less developed generic markets will, over time, provide it with a significant opportunity for future growth in sales.
Governments see generics as an opportunity to lower healthcare costs. As a result, different reforms benefiting the generics market were introduced in 2007 in certain countries, such as reforms providing for incentives to physicians and patients who prefer generic pharmaceuticals over branded products (in the U.K., the Netherlands, Italy and Germany), eliminating disincentives for pharmacists to dispense generic products (in the U.K., France and Germany), and permitting prescriptions specifying the generic drug, rather than by brand name, thereby providing pharmacists the ability to dispense the generic product.
The overall value of branded products expected to lose patent protection in the top eight European markets between 2008 and 2013 is estimated to be approximately $26 billion. However, the variations in regulatory regimes among different European countries often result in differences in patent expiration dates and, because of data exclusivity restrictions, differences in the timing of generic launches. Teva, currently the leading generic pharmaceutical company in the U.K., the Netherlands and Italy, sets as its primary strategic objective in Western Europe to maintain or acquire a leadership position in each country it operates. Teva has also established pan-European relationships with its customers. Teva expects to continue a strong program of registering a broad portfolio of generic products, to further expand its customer base to capitalize on pro-generic governmental reforms and, where appropriate, to seek strategic acquisitions.
In 2007, among the significant products sold by Teva in Europe were the generic versions of the following branded products: Prezal®, Losec®, Lipitor®, Zocor®, Zoloft®, Fosamax®, Taxotere®, Taxol®, Zofran®, Seroxat®, Neurontin®, Zithromax®, Augmentin®, Becotide®, Pulmicort®, Ventolin®, Dostinex®, Coversyl®, Norvasc® and Tritace®.
During 2007, Teva received 1,160 generic approvals, corresponding to 89 new compounds in 206 formulations. Each such approval is obtained per country. In addition, as of December 31, 2007, Teva had approximately 3,166 marketing authorization applications pending approval in 30 European countries (including countries in Central and Eastern Europe), corresponding to 154 compounds in 310 formulations. Teva believes that this pipeline of approvals and applications provides Teva with the opportunity to continue its expansion in Europe, including the introduction of new products to the European generic market, some of which Teva expects to launch in 2008.
Operations in Selected European Countries
United Kingdom. In 2007, Teva, with twice the sales of its closest generic competitor, expanded its generic market share in the U.K., which has become Tevas second largest market after the U.S. The U.K. pharmaceutical market is characterized by high generic penetration, reaching approximately 65% of the total market in volume terms. Tevas U.K. retail portfolio is broad, covering over 90%, by value, of what a pharmacist could dispense. Consequently, Teva offers the U.K. market more generic products than any other U.K. generics company and is also a major supplier to the National Health Service. Teva has excellent relations and a strong position with all major wholesalers and retail chains and also maintains the largest sales force in the industry focusing on independent retail pharmacies.
In 2007, Teva grew by both volume and sales in both the traditional solid dose generic market and the inhaler device respiratory market. Tevas respiratory business was strengthened further in 2007, with sales growth of 35% over 2006, due to its ability to compete in both the branded and generic sectors. Teva has benefited from the withdrawal of GlaxoSmithKlines CFC propelled inhalersBecotide®from the U.K. market in the third quarter of 2007 and expects to benefit from the controlled transition from CFC products to non-CFC beclometasone by being a last player in the CFC market and the main mover in the non-CFC market. In 2007, Tevas branded respiratory product, Qvar®, became the leading branded single inhaled corticosteroid for long-term control of chronic bronchial asthma. Growth was also generated by 37 new products introduced in 2007, including the generic versions of Dostinex®, Coversyl® and Eloxatin®. In order to meet the expected requirements of the U.K. market and to improve customer service, Teva is planning to relocate during 2008 to a new warehouse and logistics center, which has a capacity five times greater than its current capacity.
The Netherlands. Teva further strengthened its leading position and portfolio in the Dutch generic market in 2007. The Dutch market is mature with generic penetration of around 50% in volume, mainly driven by substitution at the pharmacy level. Teva has a strong generic retail portfolio, which covers over 90% of all generic retail products available in the market. In addition to this strong platform, Teva has launched in 2007 several new products, including the generic versions of Durogesic® and Resperidol®, among others. To further strengthen its retail position and over-the-counter (OTC) range, Teva also launched the Phitel® label of food supplement products.
Hungary. In Hungary, Teva is the fourth largest pharmaceutical company, the leading supplier to hospitals, the third largest supplier in the OTC market and the third largest wholesaler. A new healthcare reform program was initiated during 2007 to reduce overall healthcare costs. Teva was able to benefit from these reforms and to increase its market share (in value and in volume). Teva strengthened its position in both the cardiovascular and gastroenterologic areas with its leading molecules atorvastatin, simvastatin, amlodipin and lansoprasol.
In December 2007, Teva sold its plasma fractionation and production business in Hungary, which was acquired as part of the Novopharm acquisition in 2000, to the Italian company Kedrion SpA. The business produced and marketed the main plasma derivatives (Albumin, Factor VIII, Factor IX and IVIG). The business was sold after being identified as a non-core business for Teva as part of its strategic review.
France. Teva is the fourth largest company in the French generic market. During 2007, Teva launched a number of significant products, including the generic equivalents of Norvasc®, Lamisil® and Vantin®. In the respiratory field, Teva successfully launched its brand Ecobec® (beclomethasone diproprionate HFA). In addition to these launches, Teva strengthened its relationships with key customers. The combination of these factors has resulted in an increased market share for Teva products. Teva believes that it is well positioned to benefit from the introduction of reforms favoring generic products as discussed above, as well as the anticipated expansion of the current substitution list.
Italy. In 2007, the Italian government initiated efforts by implementing reforms, both at the national and provincial levels of government, aimed at reducing the prices of pharmaceutical products in general. As a result of these efforts, the Italian market experienced a transition from a branded generic market toward a more pure generic market. Under these market conditions, Teva
maintained its leading position in the retail generic market and a significant position in generic oncology products sold for hospital use. During 2007, Teva launched generic versions of Zocor®, Ciproxacin® and Diflucan®.
Germany. Germany constitutes the largest market for generic pharmaceuticals in Europe and is the second largest generic market in the world. As a result of recent legislative developments in Germany, the German generic pharmaceutical market is currently evolving into a tender-driven market in which health insurance organizations may enter into direct contractual discount agreements with pharmaceutical manufacturers. Pharmacists have the right to effect generic substitution to clients of such health insurance organizations by dispensing products that are the subject of such agreements (preferred products), except in cases where the doctor has specifically ruled out such substitution in his prescription.
As part of this trend and following its award of a tender issued in 2006, in 2007 Teva signed a contract for six molecules with the AOK, the largest German healthcare fund. Under this contract, Teva became one of three preferred suppliers of specific finished dosage products over a one-year period. Teva also participated in a tender held by the AOK in 2007 for the supply of molecules during 2008-2009, which resulted in signed agreements for three molecules entered into with the AOK. A fourth molecule awarded to Teva is currently the subject of litigation.
Despite Tevas successful bid for other molecules, the process by which AOK conducted its public tender was challenged in a German court proceeding (to which Teva was not a party) as not being in compliance with German and European procurement laws. In February 2008, the German court ruled that AOKs tender process did not meet applicable procedural requirements and that AOK could not tender for a pan-German countrywide contract, but would instead be required to offer separate tenders in each region. Although the outcome of these legal proceedings may signal a delay in the evolution of the German market for generic drugs, Teva expects that this market will present opportunities in the coming years, and that Teva, through its contracts with AOK or similar agreements with other state insurers, will be able to gain additional market share for its products in Germany. In addition to the tender market, Teva is active in the hospital field for oncology and nephrology products.
To date, Teva has had a relatively small participation in the German generic pharmaceutical market. However, in light of both the size of the German generic market and the changes which this market is currently undergoing, Teva believes that the German generic market provides it with a significant growth opportunity.
Spain. Teva has launched more than 60 products in Spain targeted both to hospitals and pharmacies since mid-2004, when its local activity was established. In the hospital market, Teva is the fourth largest generic company, and in the retail market, Teva entered the top 15 out of over 60 generic companies. The generic market continues to grow due to governmental regulatory changes that, among others, provide incentives to patients demanding generic products.
Other Western European Markets. Teva is also growing and establishing its business in other Western European markets, such as Sweden, Denmark, Belgium, Switzerland, Ireland, Portugal, Austria, Greece, Finland and Norway. Teva seeks to capitalize on its success in larger European markets through transferring its commercial assets and competence and utilizing its established global development and supply capabilities to expand into these new markets.
Tevas International Group is responsible for countries outside the U.S., Canada and Western Europe, excluding Hungary. The markets in the International Group present opportunities distinct from Tevas operations in North America and Europe in several respects. They are among the fastest growing pharmaceutical markets in the world, and include eight of the worlds top ten largest generic pharmaceutical markets (based on IMS data), such as China, India, Brazil, Mexico, Russia, Japan, Turkey and Korea. However, Teva has only a limited presence in these regions to date. The geographies where the International Group operates have a variety of characteristics, such as pure generic markets (where a pharmacist is permitted to make substitution for branded products) to branded generics (which offer the potential of higher margins but also higher marketing costs) and government-funded health plans. While each of these markets differs from the others, in general such markets limit the pharmacists ability to provide products other than those prescribed by doctors, and Teva does not anticipate that these market characteristics will change drastically in the near future. Among the advantages that Teva brings to these markets is its broad portfolio of globally manufactured finished products and other economies of scale. As a result of these factors and market conditions, Tevas operations in the International Group are expected to be of increasing importance in the coming years.
Tevas pharmaceutical sales in these regions reached $1.4 billion in 2007. Approximately 41% of these sales were generated in Latin America (including Mexico), 26% in Israel, 26% in Central and Eastern Europe (CEE) and 7% in other countries.
Teva sells a broad portfolio of innovative, branded generic, non-branded generic, respiratory and OTC pharmaceutical products in Latin America, which is a market of increasing importance for Teva. Teva has manufacturing operations in Mexico, Chile, Argentina, Peru and Venezuela, and distributes its products throughout most of Latin America. In most cases, these products are manufactured in Tevas facilities 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, certain governmental initiatives and statements continue to make it difficult to predict future economic and political conditions.
Total pharmaceutical retail sales in the region exceeded $33.8 billion in 2007 and, according to IMS forecasts, the Latin American pharmaceutical market is expected to grow at an average annual rate of approximately 10% through 2010.
Teva intends to expand its operations in Latin America, taking advantage of the expected increases in spending on healthcare (and on pharmaceuticals in particular) and growing populations, leveraging its manufacturing expertise, building on its existing brands and expanding the indications served.
Operations in Selected Latin American Countries
Below is a discussion of operations in Tevas main markets in the region, listed in the order of these markets contribution to Tevas sales. The three leading Teva markets in the region account for 60% of Tevas total sales in the region.
In Mexico, one of the largest pharmaceutical markets in Latin America in terms of revenue, Tevas operations include four pharmaceutical manufacturing sites. Sales are made primarily to the public sector (through government tenders and institutional sales), with private sales, including sales of innovative products (Copaxone®, as well as Azilect®) and OTC products, and exports to several other Latin American countries making up most of the balance of sales in Mexico.
In Venezuela, Teva is the leading company in terms of prescriptions, with a market share for 2007 of 4.6%. 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 is the largest pharmaceutical company. Teva distributes its products to retail and institutional (hospitals and clinics) customers, and exports to 13 other countries within the region. Branded generics account for approximately two-thirds of Tevas sales in dollar terms and the rest is pure generic.
In Argentina, Teva manufactures and sells approximately 170 branded generic and OTC products. As is largely the case in the rest of the region, the Argentinean pharmaceutical market is highly fragmented with no single company claiming undisputed market leadership. Teva is the third largest pharmaceutical company with a market share of approximately 4.4% as of mid-2007. Sales are made primarily to distributors and wholesalers, with the remainder directly to healthcare institutions.
In Peru, Teva operates the third largest pharmacy chain, as well as the sixth largest pharmaceutical company by revenues. The vast majority of Tevas sales in Peru are made to pharmacy chains, distributors and wholesalers. Approximately 20% of the pharmaceutical companys sales are to governmental customers.
In Brazil, which is a potentially large market for Tevas products, the generic market of $1.5 billion constitutes 11% of the generic market in the Latin America region, Teva is still at an early stage of its activities. A majority of Tevas sales is made to the public sector, with total sales in Brazil currently constituting only 3% of Tevas sales in the Latin America region. During 2007, Teva prepared product registrations for a generic oncology line and expects to begin sales of these products in 2008. Teva also has a distribution facility focused on Copaxone® sales.
Central and Eastern Europe (CEE)
The CEE region covers 23 countries diversified in terms of both their socio-economic and cultural backgrounds. Tevas main current CEE markets are Russia, Poland and the Czech Republic, which account for 75% of Tevas sales in the region. Tevas portfolio includes generic prescription medications as well as OTC products, vitamin supplements and medical devices. The regions pharmaceutical market is estimated at approximately $23 billion, with a forecasted average growth rate of approximately 15% a year through 2010. Currently, nine of the 23 countries included in Tevas CEE region have achieved EU membership status and another is scheduled to join by the end of the decade. The market is mostly branded generic and the level of generics, including branded, exceeds 50% of total pharmaceutical sales.
Tevas strategy is to become one of the top three pharmaceutical companies in this region, as well as to be a leading supplier in every category in which it operates, including generics, respiratory products, biogenerics and OTC products.
In Russia, Poland, the Czech Republic, Slovakia, Romania and Ukraine, Teva markets and sells mostly Copaxone® and branded non-proprietary pharmaceutical products. Teva is continuing its efforts to offer a substantially greater portion of its full product portfolio in this region in coming years.
In 2007, among the key products sold by Teva in the CEE were the generic versions of Novo-Passit® (guaifenesin), Beclazone® (beclomethasone) and Simgal® (simvastatin). During this year, Teva launched 72 new molecules in various CEE countries and received 456 generic approvals, corresponding to 66 new compounds in 71 formulations and 159 strengths. In addition, as of January 31, 2008, Teva had 1,197 marketing authorization applications pending approval, corresponding to 136 molecules in 156 forms and 320 strengths.
Effective April 1, 2008, the management and administration of the activities of CEE countries that became members of the European Union will be transferred to Tevas European division. The most important of these markets for Teva are the Czech Republic and Poland, which represented 56% of Tevas total sales in the CEE region. The remaining countries will continue to be managed by Tevas International Group.
Operations in Selected CEE Countries
In Russia, which is the largest market in the CEE region, Tevas sales grew over 30% during 2007, despite continuing government-imposed cost containment measures for products included in the reimbursement list, and the exclusion of some products from the reimbursement list. Sales in Russia represented 35% of Tevas sales in the CEE region during 2007, and consisted primarily of respiratory products, OTC products and Copaxone®, complemented by biogeneric products, as well as Alpha D3 (for bone metabolism). Copaxone® reached a market share of 40% of the Russian market for MS therapies.
In the Czech Republic, the retail market rebounded from the previous years decline and Tevas sales increased almost 60%, with Teva strengthening its position as the second largest generic company in the market. In 2007, Teva was the fastest growing company among the top ten pharmaceutical companies, registering a significant number of new products in the Czech Republic and reaching total sales of $67 million.
In Poland, Tevas second largest market in the CEE, during 2007 Teva registered a large number of products to strengthen its current portfolio and formed a stronger and more focused marketing force in its leading segments. In addition, Teva successfully entered the hospital market. In order to strengthen its supply chain capabilities and improve customer service in Poland, Teva established a new central distribution center in Kutno.
Other CEE highlights. Teva is taking steps to register its products in what have been, to date, 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 2007, Teva strengthened its operations in Slovakia, and changed its business model from indirect to direct presence in Romania and Bulgaria.
Other Countries in Tevas International Group
Israel. Teva is the largest non-governmental supplier of pharmaceuticals, healthcare products and services in Israel. Sales in Israel accounted for 4% of Tevas total sales in 2007. In this market, in addition to innovative pharmaceutical, generics and OTC products, Teva sells and distributes a wide range of healthcare products and services, including consumer healthcare products, hospital supplies, dialysis equipment and disposables, diagnostics and home care services. All sales of Tevas products in Israel are made through its distribution company, Salomon, Levin and Elstein Ltd., which sells directly to institutional customers, as well as to private pharmacies and chains. Tevas Israeli product portfolio also includes products sold under licensing arrangements.
IMS estimates that in 2007 the Israeli market for pharmaceuticals was approximately $900 million based on the manufacturers selling prices. This market consists of three sectors: healthcare institutions, private pharmacies/chains and government hospitals. As in several European markets, Tevas prices are significantly affected by pricing regulations and governmental policies.
Turkey. The Turkish pharmaceutical market is acknowledged as one of the fastest growing pharmaceutical markets worldwide. Currently the pharmaceutical market generates revenues of over $8 billion and is expected to grow beyond $10 billion within the next three years according to IMS. Teva intends to capitalize on this opportunity, and enhanced its presence in Turkey through the acquisition of Med-Ilac in 2007, which has been distributing Teva products in Turkey for many years. Med-Ilac markets and sells finished form pharmaceutical products throughout Turkey, and has its own infrastructure for registering products.
China. To date, Teva has only very limited operations in China. Tevas principal product sold in China during 2007 was Interferon Alpha 2B, used in the treatment of hepatitis and certain types of cancer, which is manufactured by Hualida, a local company controlled by Teva. Over the next few years, Teva plans to register and bring to market in China additional products from Tevas oncology portfolio.
Teva is committed to delivering a range of respiratory products for common usage at economical prices. Tevas global respiratory product strategy seeks to extract value out of both the branded and generic environments; it includes branded products that add value by using specific devices, while another part of the portfolio will be able to compete within the generic segment. In the short term, Teva believes it is well positioned to capture opportunities globally, utilizing its current portfolio of respiratory products. Over the longer 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, 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. This strategy is expected to result in device consistency, allowing physicians to choose which device matches a patients needs both in terms of ease of use and effectiveness of delivery of the prescribed molecule.
Over the past year, Teva has continued to build upon its substantial experience in the development, manufacture and marketing (mainly in the U.S. and Europe) of inhaled respiratory drugs, primarily for bronchial asthma and chronic obstructive pulmonary disease, delivered by metered-dose and dry powder inhalers. At the core of Tevas efforts to grow its respiratory franchise globally is a continued investment in manufacturing capacity both for press and breath metered-dose inhalers and Steri-Nebs ampoules for nebulization treatment, allowing Teva to play an important role in all major markets where it operates.
Teva recorded sales of respiratory products of approximately $740 million in 2007, reflecting a significant increase over the prior year.
All of Tevas asthma products sold in Europe (except for beclomethasone in the U.K.) 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. CFC propellants may not be sold in the U.S. after December 31, 2008. Since mid-2006, Teva has introduced inhaler products containing the ozone-friendly propellant hydrofluoroalkane (HFA). In the U.S., HFA propellant-based products currently constitute 60% of the propellant inhalers market, and Teva has captured approximately 60% of that opportunity. Teva has additional non-CFC products in development.
Tevas 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 for Teva. 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, the FDA issued an approvable letter that required Teva to propose a communication plan to teach pharmacists, physicians and patients how to use the BAI device and to perform a label comprehension and use study. The requirements of the approvable letter, which did not require further studies regarding safety and efficacy, are in keeping with the FDAs strict review of rescue medicines. Throughout 2007, Teva has worked closely with the FDA to design the studies and enroll appropriate categories of participants and expects to complete the work required by the FDA by mid-2008.
In January 2008, Teva entered into an agreement with UCB, a biopharmaceutical company with a 400-person U.S. sales force, to assist Teva in promoting Tevas respiratory products in the U.S. Together with Tevas existing sales personnel, the agreement with UCB will mean that over 600 sales representatives will focus on Tevas line of respiratory products in the U.S. The initial product to be jointly promoted is Tevas ProAir® HFA (albuterol sulfate) Inhalation Aerosol. Additionally, the agreement provides for future joint promotion opportunities of other products in development by Teva.
In Western Europe, Tevas principal markets for respiratory products are the U.K., the Netherlands and France. The main products in these countries include 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 2007, Qvar® was launched in Portugal and Switzerland and launches in additional countries are planned for 2008. A further global roll-out of Fluticasone nasal spray is expected. This product is successfully marketed in a number of Western and Eastern European countries.
In 2007, Teva was able to capture a substantial portion of the HFA-propelled inhaler market. As one of the final remaining sellers of CFC-propelled inhaler products in the U.K., it also benefited from the withdrawal of GlaxoSmithKlines CFC-propelled inhalers from the U.K. market in the third quarter of 2007. According to IMS Health, Tevas combined market share of HFA- and CFC-propelled beclomethazone reached 67% in 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.
Tevas proprietary research and development pipeline is currently focused primarily on three niche specialty areas: neurological disorders, autoimmune diseases and oncology. Products in these areas tend to require a smaller sales force, and therefore less of an initial marketing investment. Another element of Tevas approach to innovative product development is to leverage the advantages arising from Tevas status as the worlds leading generic company, such as its relationships with health insurers and the trade.
In building its pipeline, Teva focuses on products with meaningful differentiation from existing products in terms of clinical attributes and expected economic value and benefit to patients and health insurers. In addition, different new technologies are incorporated early in the development process to reduce the risk at more advanced stages of R&D (e.g., biomarkers).
Tevas Innovative Ventures unit focuses on early identification and evaluation of potential proprietary compounds, primarily in the above niche specialty areas. Teva invests in companies with promising products and technologies, under terms providing Teva, in most cases, with strategic rights and other options, thereby allowing Teva to simultaneously explore selected new products and technologies while limiting its financial exposure. 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 relationships 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, Tevas strategy is to explore corporate partnering options, where needed, through which it can share financial and other risks associated with each project. In 2008, Teva will initiate a more active global sourcing process for selected indications within the therapeutic areas of neurology, autoimmune diseases and oncology.
Copaxone®, Tevas largest product and its first major innovative drug, is a leading multiple sclerosis (MS) therapy. Copaxone®, indicated for reduction of the frequency of relapses in patients with relapsing-remitting multiple sclerosis (RRMS), is a 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 both interrelated and 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 include two two-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 15 years making it the longest continuous study ever of patients with relapsing-remitting multiple sclerosis. Results published after the first 10 years showed 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 in MS patients using unconventional MRI techniques that Copaxone® controls neurodegeneration and enhances repair. Copaxone® reduces the number of brain lesions that evolve into permanent black holes, slows 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.
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.
In 2007, results from three direct comparative studies of high dose interferon beta and Copaxone® sponsored by third parties were presented: the BECOME study involving 75 patients; the BEYOND study involving 2,200 patients (both sponsored by Bayer-Schering); and the REGARD study involving 764 patients (sponsored by Merck-Serono). The studies measured clinical parameters such as time to first or multiple relapses, progression on the EDSS scale and various MRI measures of disease activity. All three studies, which involved nearly 3,000 RRMS patients, were designed to demonstrate the superiority of interferon beta over Copaxone®, and all three failed to demonstrate such superiority.
Three further studies were presented in 2007 comparing the efficacy of interferons and Copaxone® in controlling neurodegeneration in the short term. All three studies showed that Copaxone® was significantly more beneficial.
Pre-planned interim analysis of the Teva-sponsored PreCISe trial in patients presenting a first clinical event and MRI features suggestive of MS, showed that treatment with Copaxone® reduced the risk of developing clinically definite MS by 45% versus a placebo, and prolonged the quartile time to disease conversion. Based on these results, Teva is preparing to apply for a new indication in the U.S. and Canada and file a request for marketing authorization of Copaxone® in Europe for the treatment of patients with a first clinical event suggestive of MS. Finally, data suggests that Copaxone® is beneficial not only for mild to moderate MS patients but also for aggressive recurrently relapsing patients. Several studies published in 2006 and 2007 showed that patients with rapidly deteriorating MS who received Copaxone® alone following short-term induction treatment with an immunosuppressant (mitoxantrone), or following six months of combination therapy with monthly intravenous steroids, had a pronounced and sustainable reduction in relapses and MRI-measured enhancing lesions of the brain.
A large Phase III study entitled FORTE is being conducted to explore the greater efficacy of a new higher dose of Copaxone®(40mg/day), following positive results obtained in the Phase II study. The Phase II study showed that patients treated with 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 treated with a 20 mg/day dose of Copaxone®, with a safety profile similar to Copaxone® 20 mg/day.
This Phase III study compares 40mg Copaxone® to 20mg Copaxone® for 12 months in 1,150 RRMS patients. Based on consultation with the FDA and the MHRA (U.K. Medicine and Healthcare Regulatory Agency), a submission for approval of the 40 mg dose, with the same labeling as that of the 20mg dose, may 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. This study is ongoing in 20 countries, and results are expected in the third quarter of 2008.
To date, Copaxone® has been approved for marketing in 51 countries worldwide, including the United States, Canada, Israel, 27 European Union countries, Switzerland, Australia, Russia, Turkey, 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. Teva is the licensee of pending patent applications directed to methods of treating MS by administering 40mg dosage forms of Copaxone®. If granted, the patents would expire in 2027.
In 2007, in-market global sales of Copaxone® reached a new record of $1,713 million, an increase of 19% over 2006. Copaxone® became the leading therapy for multiple sclerosis in the U.S., in dollar terms. U.S. Copaxone® sales continued to increase, reaching $1,094 million, an increase of 19% compared to 2006. U.S. sales represented 64% of total in-market sales in 2007. 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 10% and 7%, announced during 2007.
In-market sales outside the U.S., primarily in Europe, increased 24% to $619 million, driven by significant sales increases in Tevas principal European markets (the U.K., France and Germany, the largest MS market in Europe), as well as in Russia, Brazil and certain other Latin American countries. Since the exchange rate of most currencies appreciated against the U.S. dollar in 2007 (when annual average is compared to annual average), sales growth of Copaxone® outside the U.S. was also impacted by currency movements.
Copaxone® for the North American market is manufactured by Teva and supplied to Sanofi-Aventis, the distributor, at a transfer price. Teva actively markets and promotes the product in the U.S. 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®. Based on the current agreement with Sanofi-Aventis, Teva is expected to assume responsibility for the distribution of Copaxone® in the U.S. and Canada commencing April 1, 2008 and, as Teva cannot presently estimate the total amount to be paid to Sanofi-Aventis, it 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, it will also be responsible for certain marketing and administrative expenses, which will no longer be shared with Sanofi-Aventis. The resulting increase in expenses will substantially offset the increase in reported revenues, and therefore there will be minimal change to net income during this two-year period. Commencing April 2010, Teva will stop making this payment to Sanofi-Aventis and thereafter will record all in-market sales and profits of Copaxone® for the U.S. and Canada. Currently, Teva and Sanofi-Aventis are still negotiating the existing agreement to determine whether changes can be made that would be mutually beneficial.
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 U.K., 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 distributes it in Europe. Commencing in 2010, but mainly as of February 2012, Teva expects to gradually take over marketing 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 North America agreement described above, but with Teva making significantly lower payments to Sanofi-Aventis.
Multiple sclerosis remains an important focus of Tevas development efforts, as Teva continues to investigate potential improvement of Copaxone® and explore other molecules as future therapies for MS.
In June 2004, Teva acquired from Active Biotech 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). Laquinimod is a novel, orally bioavailable immunomodulatory compound. Teva has made an upfront payment to Active Biotech and will 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.
Two global Phase III studies, Allegro and Bravo, have been initiated in centers in the U.S., Europe, and other clinical centers worldwide. The recruitment of patients for the Allegro study has begun and the recruitment for the Bravo study is planned for the second quarter of 2008. These studies have been initiated following encouraging results of two Phase II studies and after discussions with the FDA and the European Medicines Agency:
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 multiple sclerosis. Under the agreement, which was entered into by Ivax prior to its acquisition by Teva, Teva is entitled to a royalty on sales of Mylinax® if it is commercialized. Cladribine cyclodextrin complex 10mg tablets and placebos are currently in Phase III trials which started in the first quarter of 2005.
Azilect® (rasagiline mesylate)
Azilect® (rasagiline tablets) is Tevas second significant innovative drug, indicated for the treatment of Parkinsons disease, both as initial monotherapy in the 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 Parkinsons 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 U.K. 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 Tevas alliance with Eisai, Azilect® is marketed in the U.S. solely by Teva, expanding its central nervous system franchise to include both Copaxone® and Azilect®. To date, Azilect® has been made available in 29 countries, including Canada, Spain, Italy, Sweden, Belgium, Greece, Turkey, the Netherlands and Mexico. Total sales of Azilect® worldwide during 2007 amounted to $120 million.
The development of Azilect® is part of a long-term strategic alliance with Lundbeck, which includes the global co-development and marketing of Azilect®, mainly in Europe, for the treatment of Parkinsons 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 Parkinsons disease at different stages of the disease. In two Phase III studies with Azilect® as adjunctive therapy to levodopa in more advanced patients, 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, showing a highly statistically significant effect on the progression of Parkinsonian symptoms and suggesting a possible effect on disease progression based on the 12-month results of the study. 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.
To date, no treatment has been proven to slow the progression of Parkinsons disease. The pharmacological strategy for the management of Parkinsons disease involves the use of drugs that act to increase the level of dopamine in the brain, to reduce the motor symptoms of the disease and to otherwise bring symptomatic relief to patients. However, mounting evidence suggests that early treatment administration strategy may also have the potential to impact disease progression. The rate of clinical progression is usually rapid in the early phase of Parkinsons disease and therefore, the early period after diagnosis is critical in determining the course of disease progression and stands out as a time of opportunity for interventions aiming to modify the course of the disease.
In November 2005, Teva initiated a large, randomized, double-blind and placebo-controlled Phase IIIb clinical study to determine whether treatment with once-daily Azilect® can modify the progression of Parkinsons disease, the most significant current need of patients affected by this illness. The ADAGIO study (Attenuation of Disease progression with Azilect® Once-daily) enrolled 1,176 patients recently diagnosed with Parkinsons disease in North America, Europe and additional countries, including Israel and Argentina. If the ADAGIO study confirms that Azilect® slows Parkinson disease progression, Azilect® could become the first drug to be marketed with a label claim relating to modifying the progression of the disease. 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, Crohns disease, lupus/lupus nephritis and oncology, including the following:
Autoimmune Diseases PipelineLupus
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 immuno modulation of the autoimmune processes in lupus. A Phase II study designed to assess the efficacy and safety of Edratide that was completed during 2007 did not meet its primary endpoint and the project was terminated at the end of 2007. The rights to the project were returned to the Weizman Institute.
Laquinimod for Crohns Disease and Lupus Nephritis. Laquinimod is an oral new chemical entitya quinoline-3-carboxamide derivative. In addition to the efficacy that it has shown in Phase II clinical trials related to MS, laquinimod has demonstrated potent therapeutic efficacy in preclinical models of other autoimmune diseases such as rheumatoid arthritis, insulin-dependent diabetes mellitus, Guillain Barré Syndrome, lupus and Inflammatory Bowel Disease. The broad profile of efficacy in animal models of inflammatory diseases suggests that laquinimod affects a pivotal pathway of inflammation and autoimmunity. During 2008, Teva expects to initiate the clinical development of laquinimod for Crohns disease and lupus nephritis.
Rasagiline Mesylate for Alzheimers Disease. Rasagiline, the active ingredient in Azilect®, initially showed beneficial activity in experimental models relevant to Alzheimers disease. Furthermore, as rasagilines mechanism of action is different from that of all currently approved drugs for this indication, it was believed that it had the potential of being a good candidate for combined treatment with such approved drugs. A joint cooperation of Teva and Eisai regarding rasagaline was terminated in 2006. A Phase II study initiated in 2004 by Eisai and Teva has not reached its primary endpoint, and no further development is planned at this stage.
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 and has been found to be safe. In December 2006, Teva completed recruitment of 366 patients into a double-blind, placebo-controlled multicenter Phase II clinical study. This study will 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 endpoint will review the change in 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. The dosing of the last patient in the double-blind phase of the study was completed, with results expected during the second quarter of 2008.
Talampanel for ALS. Teva has 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. Based on talampanels anti-glutamate excitatory activity, Teva believes that talampanel can significantly delay the functional deterioration of ALS patients. Based on the scientific, mechanistic rationale and a positive signal 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 will commence during 2008.
Oncology and Emerging Therapeutics Pipeline
Talampanel for glioma. Talampanels ability to block AMPA receptors may act against malignant gliomas, both slowing their growth and reducing their ability to invade brain tissues. An ongoing Phase II study is currently being conducted by a consortium of nine clinical centers in the U.S. with 72 patients with newly diagnosed glioblastomas being treated with talampanel as an adjuvant therapy (in addition to their standard treatment) throughout their course of chemoradiotherapy. The Phase II study is scheduled to end by the third quarter of 2008. Should this Phase II study be successful, a Phase III study is planned for 2009.
Specialty Pharmaceutical Products
Teva is working to leverage its leadership in the global generics arena through expansion into the specialty pharmaceutical products business, presently focused on biogenerics, as well as hospitals and institutional franchises.
Biogenerics and Biopharmaceutical Operations
In light of the increased role of biopharmaceuticals in the overall pharmaceutical market, Teva has identified biopharmaceuticalsand primarily biogenericsas a key, long-term growth opportunity for the company. Teva expects that the biopharmaceutical market will represent a total of nearly 30% of the pharmaceutical market by 2015, up from only 15% in 2006, this increase reflecting an estimated compound annual growth rate of 12% for this period, as opposed to a compound annual growth rate of 1% for small molecule pharmaceuticals.
Tevas primary biopharmaceutical products are GCSF (granulocyte colony-stimulating factor) and interferon alpha 2b, which are currently sold in a limited number of markets, and hGH (human growth hormone), which is marketed in the U.S. pursuant to an agreement with Savient. Tevas finished dosage biopharmaceutical manufacturing facilities are located in Mexico, Hungary and China, and Teva expects to expand into additional facilities. Tevas bulk substance manufacturing facilities are located in Lithuania and China.
In February 2008, Teva substantially expanded the capabilities of its biogenerics business by acquiring CoGenesys, Inc., a privately held biopharmaceutical company with a broad-based biotechnology platform focused on the development of peptide- and protein-based medicines across broad therapeutic categories. Teva regards this acquisition as a strategic one, strengthening its capabilities in the important field of biogenerics and enabling it to benefit from the experience of CoGenesys biotechnology research team, its technologies and innovative pipeline.
In general, the biopharmaceutical portfolio under development for U.S. and European markets made significant progress with several projects entering preclinical and clinical study phases. Teva continued to invest in its biogeneric R&D and manufacturing capabilities in order to support both the marketing of the existing products and the development of additional products.
In 2007, collaborations with two Israeli companies, Protalix (with regard to the development of two proteins using Protalixs plant cell culture platform) and Procognia (covering two biopharmaceuticals), continued to progress.
2007 marked an important milestone for the biogenerics market in Europe, where, for the first time, guidelines were published that provide detailed data requirements for specific biopharmaceutical product registrations. Two recombinant human erythropoietin (Epo) products of other companies were approved for marketing.
In 2007, Teva submitted its first biosimilar file to the European Medicines Agency (EMEA), for its human granulocyte colony stimulating factor (G-CSF) product. A biosimilar is a medicine approved by regulatory authorities to be similar in terms of quality, safety and efficacy to a reference biological medicine to which it has been compared. On February 21, 2008, Teva received a positive opinion from the CHMP, the scientific committee of the EMEA, for this product. Tevas product is the first biosimilar G-CSF to receive a positive opinion in the European Union. The European Commission is now expected to grant marketing authorization for this product, which will be marketed in the EU by Teva under the brand name TevaGrastim®. Teva expects to begin marketing this product in certain European countries later in 2008.
In contrast to Europe, in the U.S. there is no legislative basis or regulatory pathway for biosimilar pharmaceutical products. In 2007, the legislative environment in the U.S. improved, as a Senate committee considered legislation to create a regulatory pathway for biogeneric products, but no final legislation was enacted. Teva played an active role in the development and introduction of proposed legislation and believes that a regulatory pathway will be created in the U.S. in the next several years. In his proposed 2008 budget, President Bush included an amount dedicated to enhance the approval process for biogeneric products, and Teva is hopeful that the legislative process will be re-started toward the end of 2008.
During 2007, Teva has decided not to continue development of a transdermal hGH project with Transpharma Medical Ltd. due to the fact that the Phase I clinical trial did not achieve the desired bioequivalence results.
Hospitals and Institutional Channels
In 2007, Teva continued its focus on sales of generic injectable products to hospitals and institutional channels, mostly in the U.S. and certain countries in Western and Eastern Europe and Latin America.
Teva, supported by its sterile manufacturing capabilities, offers a variety of product technologies, an efficient global supply system and a wide range of oncology products, with different therapeutic mechanisms in both injectables and solid form. Tevas portfolio, combining solids with injectables, differentiates it from companies offering solely an injectable product portfolio and provides its customers with an attractive commercial model, including customer support and service as well as supply deliveries.
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, provide it with the opportunity to expand its leadership position in injectable products, especially in the generic oncology market.
Tevas hospital business is supported also by a wide coverage of Tevas API injectable products and promising pipeline, especially in the oncology and immunosuppressive segments which enable differentiation from other players in the hospital market due to vertical integration, shared R&D timelines and development optimization.
Teva Innovative Ventures
Teva has invested and continues to invest directly and/or through investment companies, in early stage companies that Teva believes have interesting technologies or products. In some cases, in tandem with such investments, Teva will obtain strategic rights in a company or product. Examples of such rights received include 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 use of Tevas investment will be directed toward achieving certain development milestones based on an agreed budget and development plan. Initially, Teva will assist in the creation of a development plan. 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 Tevas pipeline.
StemEx®. In February 2005, Teva signed a joint venture agreement with Gamida Cell, to develop and commercialize StemEx®. Teva committed to invest $25 million in this joint venture. StemEx® is a novel cell therapy product containing expanded cord blood stem/progenitor cells for the treatment of hematological malignancies in patients who cannot find a matched donor. A Phase I/II study performed by Gamida Cell in 10 patients provided encouraging results on both the efficacy and 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, which was initiated in October 2007. This study, which will enroll 100 patients in 11 sites in the U.S., Europe and Israel, is scheduled to be completed in early 2010.
CT-011. Teva has invested $6 million in Curetech, which has developed CT-011, a humanized MAb that exerts anti-tumor activity against a wide range of solid tumors and lymphohematologic malignancies. CT-011 acts against PD-1 (Programmed Death-1), a surface receptor inducing apoptosis, allowing the extended survival and activity of tumor-reactive T cells and NK cells. Having successfully completed a Phase I study in hematological malignancy patients, Curetech is planning a Phase II study in lymphoma and a Phase I study in solid tumors. Both studies are expected to begin enrolling patients in the first half of 2008.
Debrase. Teva has invested $15 million in MediWound Ltd. and will jointly develop Debrase® with MediWound. Debrase® is an innovative botanical product developed by MediWound for the enzymatic removal of burn eschar (burn-injured tissue) of patients treated in burn units and hospitals. Currently, the product is in a Phase III clinical study in the EU and successfully completed a Phase II study in the U.S. Upon the successful completion of the Phase III study, a marketing authorization application is expected to be submitted to the EMEA by the end of 2008. A Phase III study in the U.S. is scheduled to start during 2009. During the clinical trials, Debrase® demonstrated the removal of approximately 90% of the burn-injured tissue, within four hours. Thus, Debrase® may present an alternative to surgery and/or lengthy non-surgical procedures which are commonly practiced today. Another benefit of Debrase® is its selective activity which removes only the dead burn eschar without harming the vital tissue. This enables treatment that would avoid the need for additional skin grafting surgery, while taking advantage of the potential for spontaneous healing of the burn wound (tissue-sparing effect).
Teva has also invested in companies such as Biomedical Investments, Clal Biotechnology and BiolineRx, which in turn invest in promising companies or technologies.
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 innovative 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.
Teva 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 certain European countries until 2010.
Azilect® is protected in the U.S. by several patents that will 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. Teva holds several European patents covering Azilect® that will expire between 2011 and 2014. Supplementary Protection Certificates have been granted in a number of European countries with respect to the patent expiring in 2014, thereby extending its term to 2019. Azilect® is also protected by data exclusivity protection in Western Europe until 2015.
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 finished dose pharmaceutical products, Teva manufactures and sells active pharmaceutical ingredients. Tevas API division provides the benefits of vertical integration and also operates a significant third party business. With a leading global market share in many chemicals used in generic pharmaceuticals, Tevas API division offers a high quality, long-term, reliable and cost-effective source of API.
The API division sells its products both to Tevas finished dose pharmaceutical businesses, on an arms-length basis, and to third parties in a competitive market for APIs mainly intended for generic products. Tevas API sales are affected by pharmaceutical trends and are directly related to the ability of its internal and external customers to launch new products and maintain market share.
Teva produces APIs worldwide through 18 production sites, some of which specialize in specific API categories or technologies, located in the U.S., Israel, Italy, Hungary, the Czech Republic, Mexico, Puerto Rico, India and China.
Teva offers over 250 different APIs, using a variety of production technologies: synthetic, semi-synthetic, fermentation process, peptide synthesis, plant extraction and production of highly potent compounds (compounds that have a therapeutic effect at very low dosages, typically at microgram levels). Teva is among the worlds principal suppliers of many of these chemicals. The API products are sold to formulators of pharmaceutical products mainly in the U.S. and Europe and also in Asia and Latin America, in each case subject to the local patent position. The portfolio of API products is a combination of high volume products and low volume, high value products.
In addition to the full range of more traditional APIs, Teva offers a broad portfolio of APIs for respiratory products, dermatological hormones, anti-inflammatories, oncolytics, immunosuppressants and muscle relaxants, as well as custom-manufactured APIs for a variety of proprietary drug manufacturers. Tevas expertise in the chemistry of steroids and high-potency production enables it to continue and enhance its leadership in the inhalation, injectables and dermatology fields.
API production requires a high level of technical and regulatory skill. Most of the products are produced in dedicated computer-controlled facilities, which promote the optimization of high quality production processes. In order for APIs to be approved for use, the facilities and production procedures must meet the standards set by the applicable regulatory authority. Tevas API plants meet such standards and are regularly inspected by the FDA (excluding the Chinese facility) and have additionally passed MHRA inspections, and inspections held by the Korean, Italian and Hungarian regulatory authorities. The Chinese facility does not manufacture for the U.S. market and was therefore not inspected by the FDA. However, production at this facility complies with all applicable regulatory requirements and Tevas internal quality assurance and control procedures.
Tevas API division maintains a portfolio of API intellectual property with over 3,600 registered and pending patents and a record of 90% of submitted patents being granted. The high standards that Teva applies to product and process patent clearance combined with its successful IP prosecution enable Teva to succeed in being first to market.
Marketing and Sales
In North America, the API division has marketed its products for over 25 years through Tevas well established subsidiary, Plantex USA. Most of Plantex USAs customers are generic manufacturers located in the U.S. and Canada. Additionally, Plantex USA has been able to make significant inroads into emerging drug-delivery segments and is venturing into selected custom synthesis projects for new drug applications.
In Europe, Tevas subsidiary Plantex Chemicals BV has been responsible for marketing to European customers for over 25 years. While the principal European customers are generic pharmaceutical companies, Teva also has important contracts with innovative pharmaceutical companies. Since 2006, Teva has also been an API supplier in the CEE region through its Czech subsidiary Galena, which focuses on Russia and Central and East European markets.
Tevas API division is extending its reach to markets with appropriate quality and patent protection regulation. Both Asia and Latin America have been identified as moving toward adoption of higher quality standards and enforcement of IP rights, presenting an opportunity for Teva to expand its API activities.
Through its IVX Animal Health subsidiary, Teva manufactures and markets proprietary, as well as generic, veterinary pharmaceutical products under IVX Animal Healths 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 Healths areas of focus include antimicrobials, antiparasitics, antipruritics and antiseborrheics, grooming aids, nutraceuticals and otics.
Tevas 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 Abics export marketing is conducted through agents and distributors, as well as through Tevas subsidiary companies. The company has successfully developed new and quality products for the prevention and treatment of diseases in poultry and large animals.
Teva is presently exploring strategic alternatives for its animal health business, including a possible divestiture. This decision follows the strategic review the Company conducted in 2007.
Research and Development
Tevas research and development efforts are involved in all of its major business activities. Tevas research and development expenses were $581 million, $495 million and $369 million in 2007, 2006 and 2005, respectively.
As a result of Tevas internal strategic review, Teva expects that its R&D expenses (primarily related to generic R&D) will increase significantly in 2008, continuing an acceleration of spending that began in late 2007. Such additional spending on R&D will target what Teva believes are increased future opportunities worldwide. Tevas new R&D expenditure target is 7.5% of sales, in comparison to 6% of sales, its previous target. This increased level of R&D spending as a percentage of sales is expected to be maintained over the next several years; however, it is expected that towards the end of Tevas current strategic review period (i.e., towards 2012), while R&D expenditures in dollar terms will continue to grow, such expenditures will decrease as a percentage of sales.
Tevas Global Generic R&D Division is in charge of developing products that are equivalent to branded pharmaceuticals. Its responsibilities include product formulation, chemical and physical (including shelf-life) testing, stability testing, bioequivalence (absorption and extent), blood level testing, clinical 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 tablets, capsules, liquids, ointments and creams to other dosage delivery systems and dosage types such as complex drug delivery systems, such as matrix systems, special coating systems for sustained release products, orally disintegrating systems, sterile systems such as vials, syringes and blow-fill-seal systems, drug device combinations and nasal delivery systems for generic drugs. The division operates from fifteen development centers located in the U.S., Israel, Canada, Hungary, Mexico, the Netherlands, India, the U.K., Chile, Argentina, Venezuela and Peru, providing Teva with the global resources necessary to take advantage of both human resources, including their unique expertise and costs, and a more favorable patent law approach towards generics in some of these countries.
Tevas Global Innovative R&D Division operates in Israel, the U.S., Canada, Hungary and several Western European countries. The division, together with Teva Innovative Ventures, conducts all activities relating to the clinical testing and regulatory approval of Tevas growing portfolio of proprietary products, up to market entry and throughout the life cycle of each molecule. In addition, the division supports Tevas efforts to source, on a global scale, both pre-clinical and early clinical products, specifically in the areas of neurodegeneration/neuroprotection, autoimmunity and oncology, to create and maintain a leadership position for Copaxone® in multiple sclerosis and to establish a franchise in Parkinsons disease through Azilect®.
In addition to 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 plus 1.5%-2% interest). In recent years, however, such grants have become insignificant in the overall funding of Tevas innovative R&D efforts.
Tevas Global API R&D focuses 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 Tevas proprietary drugs. Its facilities include a large center in Israel (API processes and peptides), a large center in Hungary (fermentation and semi-synthetic products), a facility in India and additional sites in Italy, Mexico and the Czech Republic (development of high potent API). The API R&D division seeks methods to continuously reduce API production costs, enabling Teva 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.
Tevas Biopharmaceutical R&D. Teva also has R&D operations in Lithuania, China, Mexico and Israel that are specifically dedicated to the development of biopharmaceutical products. This divisions expertise covers recombinant protein expression and production, including genetic engineering, recombinant bacterial fermentation, mammalian tissue culture, protein purification and the development of analytical methods and formulation. Through its recent acquisition of CoGenesys, based in Rockville, Maryland, Teva has added a world-class biotechnology research team, advanced technological platforms and an innovative pipeline addressing a broad spectrum of therapeutic categories.
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 Tevas 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 has resulted in customers gaining more purchasing power. Consequently, 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, Tevas 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 expiration 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 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 Tevas 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 Tevas local operations in all of the markets. Tevas 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 Tevas 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, where Teva is the leading pharmaceutical company by volume and has twice the sales of its closest generic competitor, is one of the largest markets for generic pharmaceuticals 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 decreased due to consolidation.
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. Tevas 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. Tevas 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 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.
In 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. 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.
In Poland, where Teva is currently the ninth-largest pharmaceutical company, 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, which is dominated by several very strong local and regional competitors across the CEE, continues to be challenging, with over 240 manufacturers.
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 2007, results from three company-sponsored, direct comparative studies between high dose interferon beta and Copaxone® were presented: the BECOME study involving 75 patients; the BEYOND study involving 2200 patients (both sponsored by Bayer-Schering); and the REGARD study involving 764 patients (sponsored by Merck-Serono). The studies measured clinical parameters such as time to first or multiple relapses, progression on the EDSS scale and various MRI measures of disease activity. All three studies, which involved nearly 3000 RRMS patients, were designed to demonstrate the superiority of interferon beta over Copaxone® but failed to show any difference in efficacy in the short term.
Azilect® is a new treatment for early and moderate to advanced stages of Parkinsons 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 class, Mirapex®/Sifrol® (pramipexole) and Requip ® (ropinirole), which are the leading products in this class, indicated for all stages of the disease. These products are expected to face their first generic competition in some markets in 2008, and are about to launch new once-daily slow-release formulations to replace the immediate release product currently used. An additional competitor in this class is Neupro®, a recently launched dopamine agonist with a new once-daily patch delivery system. In the moderate to advanced stage of the disease, in addition to the dopamine agonists, Azilect® also competes 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 that apply to approved suppliers of API. Tevas API division is a leader in terms of both sales and breadth of API offerings. 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.
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 Tevas products. Tevas 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.
FDA 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 three 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 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 first commercial marketing of the drug by the first applicant. 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 to ANDAs where the first Paragraph IV certification was 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 beneficiarys 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, Tevas 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.
The 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 FDAs current Good Manufacturing Practices (cGMP) standards or risk sanctions such as the suspension of manufacturing or the seizure of drug products and the FDAs 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 and 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 enacted and are expected to continue to enact measures, such as the Medicare Act, enacted in December 2003, which expanded the scope of Medicare coverage for drugs beginning in January 2006. These measures are aimed at reducing the costs to government third party insurers, such as Medicare and Medicaid, that dispense drugs to the public. Teva cannot predict the nature of future such measures or their impact on its sales or profitability.
In the United States, the Deficit Reduction Act of 2005 mandated a new regulation, which became effective in part on October 1, 2007, establishing the method by which pharmaceutical manufacturers, including Teva, must calculate average manufacturer price. The Act strongly encouraged state Medicaid programs to utilize this average manufacturer price in the future as the benchmark for prescription drug reimbursement in place of the previous, widely used benchmark of average wholesale price. The Act also changed the method used to determine 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. This price limit may have the effect of reducing the reimbursement rates for certain medications that we currently sell. We are reviewing the potential impact of these provisions on our business and profitability and have not yet been able to draw conclusions, because the implementation of certain provisions of the final regulations promulgated under the Act has been stayed by litigation. We do not know how long the court-ordered stay will remain in effect or what the final outcome will be.
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 USAs quarterly Medicaid drug rebate obligations.
Tevas 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 an abbreviated regulatory pathway, such as the Hatch-Waxman Act, does not exist for these products. In 2007, the legislative environment in the U.S. improved, as a Senate committee considered legislation to create a regulatory pathway for biogeneric products, but no final legislation was enacted. Teva played an active role in the development and introduction of proposed legislation and believes that a regulatory pathway will be created in the U.S. in the next several years. In his proposed 2008 budget, President Bush included an amount dedicated to enhance the approval process for biogeneric products, and Teva is hopeful that the legislative process will be re-started toward the end of 2008.
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 companys favor.
A number of amendments to the Patented Medicines (Notice of Compliance) Regulations and the Food and Drugs Regulations came into force in October 2006. The Canadian federal governments 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.
The 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 Provinces of Ontario and Quebec have adopted amendments to their pricing and reimbursement regimes. 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. Most local pharmaceutical industry companies in the region engage in 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, Brazil and Chile and may provide an avenue for Tevas Latin American operations to capitalize on products sold by Teva in other markets.
Israel. Israel 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 and 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, pre-clinical (toxicological and pharmacological) tests and 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.
During the course of 2007, Teva continued to register its products in the European Union. Teva used 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. Teva is also committed to using the centralized procedure to register its generic equivalent version of reference products that originally used this procedure. On October 2007, the committee for medicinal products for human use (CHMP) adopted a positive opinion (subject to ratification by the European Commission) recommending the granting of a European-wide marketing authorization for olanzapine.
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 U.K., 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 the 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. The 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 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 regulations imposed 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.
Miscellaneous 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.
Teva now operates 34 finished dosage pharmaceutical plants in North America, Latin America, Europe, Israel and China. The plants manufacture solid dosage forms, injectables, liquids, semi-solids and inhalers. During 2007, Tevas plants produced approximately 41 billion tablets and capsules and over 500 million sterile units, compared with 37 billion tablets and capsules and 450 million sterile units in 2006.
Tevas 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 Tevas pharmaceutical production.
Tevas plants in the U.S. and Canada, the Kfar Saba and Jerusalem sites in Israel, the Haarlem site in the Netherlands, the Runcorn site in the U.K., the Waterford site in Ireland, the Opava site in the Czech Republic and the Godollo site in Hungary are FDA-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, requires sustained efforts and expenditures, and 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.
Tevas API division is the principal raw materials supplier for Tevas pharmaceutical businesses. The remaining raw materials are purchased from suppliers located mainly in Europe, Asia and the U.S. Most of Tevas purchases from external U.S.-based suppliers of API 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.
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, Teva 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.
Teva has a global dedicated environmental and safety group which oversees Tevas global efforts in this respect. Tevas initiatives in 2007 included the following:
In addition, on an annual basis, Teva sets forth objectives focusing on the decrease of energy consumption and water usage as well as improvement of waste disposal and treatment. These objectives are set forth in annual environmental work plans prepared for each Teva site.
Tevas 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 34 pharmaceutical manufacturing sites in 17 countries and R&D centers in 15 countries. The following sets forth, as of December 31, 2007, Tevas principal operating subsidiaries in terms of pharmaceutical or API sales.
In North America- United States: Teva Pharmaceuticals USA, Inc., Tevas principal subsidiary in the U.S., and the following subsidiariesDoral Manufacturing, Inc., Goldline Laboratories, Inc., IVAX Corporation, Ivax Diagnostics Inc. (72% owned), IVAX Pharmaceuticals New York LLC, IVAX Pharmaceuticals NV Inc., IVX Animal Health, Inc., Plantex U.S.A., Inc., Teva Parenteral Medicines, Inc., Teva Neuroscience, Inc. and Teva Specialty Pharmaceuticals, LLC; Canada: Novopharm Limited;
In Europe- Czech Republic: Ivax Pharmaceuticals s.r.o.; France: Teva Classics S.A.S.; Germany: Teva Deutschland GmbH; 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 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.; Poland: Kutno S.A.; 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 Tevas principal facilities in various regions of the world and their size in square feet as of December 31, 2007:
Teva leases certain of its facilities. In Israel, the site of Tevas principal executive offices and corporate headquarters in Petach Tikva is leased until December 2012.
In North America, Teva USAs 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. Teva Parenteral Medicines Inc., a subsidiary of Teva USA, purchased four facilities in Irvine, CA, which are used for manufacturing, a distribution center and laboratories, consisting of 115,000 square feet. With these purchases, Teva Parenteral Medicine, Inc. owns five facilities. It also has lease agreements for five additional facilities which are used for administrative offices, laboratories and warehouses, which leases expire at various times between 2009 and 2017.
Teva USA sold its facility, consisting of 270,000 square feet, situated in Miami, FL and leased back a warehouse facility at the same site. Novopharms headquarters building in Toronto, Ontario and a Novopharm manufacturing facility in Stouffville, Ontario were purchased in 2007. Teva owns and leases various other facilities worldwide.
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 U.S., 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 Parkinsons disease, as well as an expanding proprietary specialty pharmaceutical business, which consists primarily of respiratory products. Tevas API business both sells to third-party manufacturers and provides significant vertical integration to Tevas own pharmaceutical production.
The generic drug industry as a whole, and therefore Tevas own operations, are affected by demographic trends, including an aging population and a corresponding increase in healthcare costs, governmental budget constraints and spending decisions of healthcare organizations. In each of Tevas markets around the globe, governments as well as private employers are working to control growing healthcare costs, and there is an increasing recognition of the importance of generics in providing access to affordable pharmaceuticals. In addition, the generic industry, particularly in the U.S., 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.
In 2007, Tevas net sales grew to $9.4 billion, an increase of approximately one billion dollars, or 12% over net sales in 2006. Tevas success in terms of sales growth in 2007 can be attributed to strong performance in most of its business units, including higher generic sales in the U.S., despite relatively few major product launches in the U.S. The decline in the value of the dollar relative to the currencies of the other countries in which Teva has sales contributed approximately 3% to the sales, with insignificant impact on net income.
Net income in 2007 was $1,952 million, as compared to $546 million in 2006. The 2006 net income figure, however, reflects, among other things, the impact of $1,321 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 in early 2006, charges relating to a litigation settlement with Pfizer, and product impairment charges. On the other hand, the provision for income taxes in 2006 decreased following a release of $120 million in tax reserves during the fourth quarter of 2006.
Among the significant highlights of 2007 were:
Results of Operations
The following table sets forth, for the periods indicated, certain financial data derived from Tevas 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.
Consolidated sales by geographic areas and business segments were as follows:
Sales by Geographical Areas
Sales by Business Segments
While Teva recorded a substantial increase in sales between 2006 as compared to 2005, resulting from the Ivax acquisition, the increase in sales from 2007 over 2006 was attributed almost entirely to organic growth, since Ivax was consolidated as of February 1, 2006. This internal growth was driven principally by a strong performance in most of Tevas business units and to a lesser extent by higher than expected appreciation of most currencies relative to the U.S. dollar.
In 2007, pharmaceutical sales in North America amounted to $5,162 million, an increase of 8% over 2006. The increase in sales was achieved despite fewer major generic product launches with exclusivity in the U.S., as compared to recent years, and was attributable to:
These factors were partially offset by price erosion in 2007, which affected not only the major products introduced in 2006 under exclusivity but also base generic products.
In 2007, Teva dispensed in the U.S. approximately 454 million prescriptions, of which 437 million were generic prescriptions, an increase of 5% as compared to 2006 and 153 million prescriptions ahead of Tevas nearest generic competitor and 156 million prescriptions ahead of any other pharmaceutical company. According to IMS data, in 2007, Teva had 12% of all prescriptions and 18% of all generic prescriptions in the U.S.
Following the launch of Tevas generic version of Wyeths Protonix® in December 2007, Teva entered into a standstill agreement with Wyeth, in which Teva agreed to cease sales of its generic version of Protonix®. The standstill was terminated on January 30, 2008 upon Wyeths launch of an authorized generic version. Five weeks after the launch of the product, Teva captured 65% of the market. Less than half of the products unit sales were recorded in 2007, and the remainder are to be recorded in 2008. Teva announced in February 2008 that it does not presently intend to re-launch this product.
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 7, 2008, included 160 ANDAs, including 44 tentative approvals and 92 Paragraph IV applications, which challenge the brand products patents. Total 2007 annual sales of the related brand products targeted by this generic pipeline, including tentatively approved products, exceeded $100 billion. Teva believes it is the first to file on 49 of these applications, relating to brand products whose aggregate 2007 annual U.S. sales exceeded $40 billion. Despite fewer major opportunities in 2007, as compared to the unusual concentration of very large launches in 2006, Teva nevertheless launched a substantial number of new products and expects an accelerated pace of significant product launches in the coming years. In February 2008, Teva launched the generic version of Fosamax® (alendronate sodium) after receiving final approval from the FDA.
In Canada, as of December 31, 2007, 82 products submitted to the Canadian Therapeutic Products Directorate were awaiting approval. Collectively, the brand name versions of these products had annual Canadian sales in 2007 of approximately U.S. $3.95 billion.
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:
While most of the generic products launched or sold in 2006 were from Tevas 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 Tevas 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 Tevas generic version of Purdues 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.
Pharmaceutical sales in 2007 in 17 Western European countries (including Hungary) amounted to $2,245 million, an increase of 21% compared to 2006, reflecting growth in nearly all of Tevas markets, with the main contributors to this increase being the retail and respiratory business in the U.K. and the generic business in France, as well as increased sales of Copaxone® and Azilect®. In 2007, among the significant products sold by Teva in Europe were the generic versions of Prezal®, Losec®, Lipitor®, Zocor®, Zoloft®, Fosamax®, Taxotere®, Taxol®, Zofran®, Seroxat®, Neurontin®, Zithromax®, Augmentin®, Becotide®, Pulmicort®, Ventolin®, Dostinex®, Coversyl®, Norvasc® and Tritace®. During 2007, Teva received 1,160 generic approvals in different European countries, corresponding to 89 different compounds in 206 formulations.
2007 highlights in the major European countries included:
During 2007, the European currencies were revalued against the U.S. dollar (on an annual average compared to annual average basis). Accordingly, these currency fluctuations relative to the U.S. dollar increased sales by 11% in 2007.
The overall sale of branded products expected to lose patent protection in the top eight European markets between 2008 and 2013 is estimated to be approximately $26 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 in differences in timing of the launch of generic products due to data exclusivity restrictions.
In Europe, as of December 31, 2007, Teva had over 3,100 marketing authorization applications pending approval corresponding to 154 compounds in 310 formulations. Teva believes that this pipeline of approvals and applications, which includes important products, some of which Teva expects to launch in 2008 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 U.K., France, Germany and the Netherlands.
Over the course of 2007, Teva continued to register its products in Europe, using both the mutual recognition procedure and the newer decentralized procedure established by the European Union in an attempt to simplify and harmonize registration. The decentralized procedure allows simultaneous submission of an application to several member states. Due 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.
Additional reforms benefiting the generics market were introduced in 2007 in certain European countries, such as reforms providing for incentives to physicians and patients who prefer generic pharmaceuticals over branded products, removal of disincentives for pharmacists to dispense generic products, and permitting prescriptions specifying the generic drug, rather than by brand name, thereby providing pharmacists the ability to dispense the generic product.
Pharmaceutical sales in Europe in 2006 amounted to $1,850 million, an increase of 34% compared to 2005. Other than the consolidation of Ivax sales, which primarily increased sales in the U.K., France, Germany and the Nordic countries, and which facilitated Tevas 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. In 2006, while Teva faced challenging market conditions in certain of its principal European markets, including the U.K. and Italy, it benefited from opportunities in other countries such as France.
Tevas International group includes Israel and all other countries outside of the U.S., Canada and Western Europe, which includes Hungary. Tevas pharmaceutical sales in those regions reached an aggregate of $1,440 million in 2007, an increase of 19% as compared to 2006. Approximately 41% of Tevas International pharmaceutical sales were generated in Latin America, 26% in Israel, 26% in the CEE and 7% in other countries.
The principal countries contributing to Tevas Latin American pharmaceutical sales were Mexico, Chile, Venezuela, Peru and Argentina. The principal countries contributing to pharmaceutical sales in the CEE region were Russia, Poland and the Czech Republic. In most of these markets, Tevas products are marketed and sold as branded generics. Sales of branded generic products usually generate higher gross margins but also involve considerably higher marketing expenditures than do non-branded generic products (such as those sold in the United States and certain Western European countries).
In Latin America, sales grew by 12% in comparison with 2006 sales, representing increased sales both in U.S. dollar terms and in local currency terms, in all the countries, especially in Venezuela, Peru and Argentina, except for Mexico, where our business suffered from temporary problems primarily related to the integration of Ivaxs business.
In the CEE region, Tevas sales grew by 34% during 2007 to $362 million, reflecting increased sales in all of Tevas main markets in the region. In Russia, despite continuing government-imposed cost containment measures for products included in the reimbursement list, and the exclusion of some products from the reimbursement list, sales increased due primarily to higher sales of respiratory products, OTC products and Copaxone®, which reached a 40% market share of the Russian MS market. Sales in the Czech retail market generally rebounded from the previous years decline and Tevas sales increased almost 60%, strengthening its position as second largest generic company in the country. In Poland, Teva strengthened its portfolio by registering during 2007 the new products finasteride, carboplatin and oxaliplatine and successfully penetrated the hospital market.
Among the key products sold by Teva in the CEE during 2007 were the generic versions of Novo-Passit® (guaifenesin), Beclazone® (beclomethasone) and Simgal® (simvastatin). During this year, Teva launched 72 new molecules in various countries and received 309 generic approvals, corresponding to 56 new compounds in 60 formulations and 135 strengths. In addition, as of December 31, 2007, Teva had 877 marketing authorization applications pending approval, corresponding to 114 molecules in 135 forms and 277 strengths.
In 2007, Teva enhanced its presence in Turkey through the acquisition of Med-Ilac, which has been distributing Teva products in Turkey for many years. Teva intends to use Med-Ilac as a basis for further strengthening its presence in the Turkish market, which is acknowledged as one of the fastest growing pharmaceutical markets in both the branded and generic markets.
Pharmaceutical sales in Tevas International group during 2006 amounted to $1,212 million, an increase of 137% compared to 2005. This increase in sales reflects primarily the consolidation of Ivax sales in the CEE, Latin America and other regions as of February 1, 2006, and the accessibility to new markets that Teva obtained with the acquisition of Ivax.
Teva manufactures and markets proprietary and generic veterinary pharmaceutical products primarily 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 2007 reached $173 million, a slight increase of $2 million over sales during 2006. This increase in sales reflected increased sales of veterinary products in markets outside the U.S., which offset a reduction in U.S. sales.
Teva is presently exploring strategic alternatives for its animal health business, including a possible divestiture. This decision follows the strategic review Teva conducted in 2007.
Tevas innovative products include Copaxone® for the treatment of relapsing remitting multiple sclerosis and Azilect® for the treatment of Parkinsons disease. Teva continues to invest in the development of 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 2007 reached a new record of $1,713 million, an increase of 21% over 2006. Copaxone® became the leading therapy for multiple sclerosis in the U.S., in dollar terms. U.S. Copaxone® sales continued to increase, reaching $1,094 million, an increase of 19% compared to 2006. U.S. sales represented 64% of total in-market sales in 2007. In-market sales outside the U.S., primarily in Europe, increased 24% to $619 million, driven by significant sales increases in Tevas principal European markets (the U.K., France and Germany, the largest MS market in Europe), as well as Russia, Brazil and certain other Latin American countries. The growth of in-market sales of Copaxone® in the U.S. also reflected the impact of two price increases of 10% and 7% during 2007. Copaxone® is sold through Sanofi-Aventis and its subsidiaries in most markets, and Teva records as revenue only a portion (slightly above 50%) of the in-market sales of Copaxone® sold by these entities. In the U.S., Copaxone® is marketed by Teva Neuroscience, Inc. Since the exchange rate of most currencies appreciated against the U.S. dollar in 2007 on an annual average basis comparison, sales growth of Copaxone® outside the U.S. was also impacted by currency movements.
Pursuant to the agreement with Sanofi-Aventis, 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. As Teva cannot presently estimate the total amount to be paid to Sanofi-Aventis, it will 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, compared with slightly above 50% of in-market sales we currently record. Although Teva will record higher revenues as a result of this change, according to the existing agreement, Sanofi-Aventis will no longer share certain marketing and administrative 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 in April 2010, Teva will stop making this payment to Sanofi-Aventis and will thus record all in-market sales and profits of Copaxone® for the U.S. and Canada. Following the termination of the European agreement, which is to take effect in most countries 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. Currently, Teva and Sanofi-Aventis are still negotiating the existing agreement to determine whether changes can be made that would be mutually beneficial.
To date, Copaxone® has been approved for marketing in 51 countries worldwide, including the U.S., Canada, Israel, 27 European Union countries, Switzerland, Australia, Russia, Turkey, Mexico, Brazil and Argentina.
In 2006, in-market global sales of Copaxone® amounted to $1,414 million, an increase of 20% over the previous year. U.S. sales in 2006 accounted for 65% of global sales of Copaxone® . The growth of in-market sales of Copaxone® in the U.S. in 2006 also reflected the impact of two price increases of 9% and 4%. Sales growth of Copaxone® in 2006 in Europe was not impacted by currency movements.
To further explore the efficacy of a new higher dose of Copaxone®(40mg/day), a large Phase III study entitled FORTE has been initiated to confirm the positive results obtained in the Phase II study. This Phase III study compares 40mg Copaxone® to 20mg Copaxone® for 12 months in 1,150 multiple sclerosis patients. Based on consultation with the FDA and the MHRA (the UK Medicine and Healthcare 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. This study is ongoing in 20 countries, and results are expected in the third quarter of 2008.
Azilect®. Total in-market sales of Azilect® worldwide amounted to $120 million in 2007, compared with global sales of $44 million in 2006. Sales in the U.S. increased to $52 million, in comparison with sales of $17 million in 2006 (which reflect six months sales as the product was launched in the U.S. in July 2006). European sales increased to $66 million, led by increased sales in Spain and in Italy. To date, Azilect® has been made available in 29 countries.
In 2007, Teva continued strengthening its specialty pharmaceuticals business, presently focusing on respiratory, biogeneric and biopharmaceutical products, as well as specialty products for hospitals and other institutional channels.
Respiratory Products. Tevas global respiratory product portfolio recorded a significant increase in sales in 2007, reaching approximately $740 million, a 49% increase over 2006. These sales were driven by greater sales of ProAir (albuterol HFA) and Qvar® in the U.S. and sales of Qvar® in Europe (mainly in the U.K. and in France). In the U.S., HFA propellant-based products currently constitute about 60% of the propellant inhalers market, and Teva has captured approximately 60% of that opportunity.
Most of Tevas respiratory products are manufactured in Ireland, in a manufacturing facility acquired by Teva as part of the Ivax transaction which was substantially expanded since then.
All of Tevas 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, Tevas current inhaler products contain the ozone-friendly propellant hydrofluoroalkane (HFA). The phase-out process in anticipation of implementation of the Montreal Protocol is already affecting the market.
In January 2008, Teva entered into an agreement with UCB, a biopharmaceutical company with a strong presence in the U.S., to co-promote Tevas respiratory products in the U.S. This agreement will provide Teva with access to a larger sales force, increasing the sales force from about 200 representatives to over 600 and consequently enabling Teva to capture a greater part of the HFA inhalers market. The consideration to be paid to UCB under this agreement is to be performance-based. The initial product to be jointly promoted is Tevas ProAir® HFA (albuterol sulfate) Inhalation Aerosol. Additionally, the agreement provides for future joint promotion of other products currently in development by Teva.
Teva is seeking approval for ProAir® HFA Breath Actuated Inhalation (BAI) Aerosol, based on the Easi-Breathe® technology, in the U.S. In December 2006, the FDA issued an approvable letter that required Teva to propose a communication plan to teach pharmacists, physicians and patients how to use the BAI device and to perform a label comprehension and use study. The requirements of the approvable letter, which did not require further studies regarding safety and efficacy, are in keeping with the FDAs strict review of rescue medicines. Throughout 2007, Teva has worked closely with the FDA to design the studies and enroll appropriate categories of participants and expects to complete the work required by the FDA by mid-2008.
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, including injectables, solid form and inhaled delivery systems.
Biogenerics and Biopharmaceuticals. During 2007, sales of biogeneric pharmaceuticals reached $50 million, as compared with $30 million in 2006. Most of these products are sold in the less regulated markets, while hGH is also sold in the U.S. Teva has in its pipeline additional biopharmaceutical products which it intends to launch in the coming years into the U.S., European and international markets.
In 2007, Teva submitted its first biosimilar file to the European Medicines Agency (EMEA), for its human granulocyte colony stimulating factor (G-CSF) product. A biosimilar is a medicine approved by regulatory authorities to be similar in terms of quality, safety and efficacy to a reference biological medicine to which it has been compared. On February 21, 2008, Teva received a positive opinion from the CHMP, the scientific committee of the EMEA, for this product. Tevas product is the first biosimilar G-CSF to receive a positive opinion in the EU. The European Commission is now expected to grant marketing authorization for this product, which will be marketed in the EU by Teva under the brand name TevaGrastim®. Teva expects to begin marketing this product in certain European countries later in 2008.
In general, the biopharmaceutical portfolio under development for U.S. and European markets made significant progress with several projects entering preclinical and clinical study phases. Teva continued to invest in its biogeneric R&D and manufacturing capabilities, in order to support both the marketing of the existing products and the development of additional products.
It is expected that the biopharmaceutical market will achieve a total of nearly 30% of the pharmaceutical market by 2015, up from only 15% in 2006, this increase reflecting an estimated compound annual growth rate of 12% for this period, as opposed to a compound annual growth rate of 1% for small molecule pharmaceuticals (based on multiple sources).
In February 2008, Teva substantially expanded its biogenerics capabilities by acquiring CoGenesys, Inc., a privately held biopharmaceutical company with a broad-based biotechnology platform focused on the development of peptide- and protein-based medicines across broad therapeutic categories.
Active Pharmaceutical Ingredient (API) Sales
Overall sales of active pharmaceutical ingredients in 2007 amounted to $1,460 million, an increase of $133 million, or 10% over 2006. Of this amount, API sales to third parties in 2007 amounted to $561 million, a decrease of 4% compared to 2006. Intercompany API sales during 2007 amounted to $899 million, an increase of 21%, primarily as a result of the launch in the U.S. of pantoprazole in late 2007. In general, the increase in internal sales coupled with the decrease in sales to third parties reflects a shift in opportunities of Tevas pharmaceutical businesses and those of third parties. The high proportion of intercompany sales reflects the strategic importance of vertical integration and is one of the reasons for Tevas high gross margins. The business environment remained very competitive in 2007, 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, 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 2006 amounted to $587 million, an increase of 12% over 2005. At the same time, intercompany sales of active pharmaceutical ingredients increased 36% and amounted to $740 million.
Gross profit margins reached 51.8% in 2007, compared with 50.7% in 2006 and 47.2% in 2005. These higher margins in 2007 reflect a favorable product mix, including the sale of products under exclusivity in the U.S. which are vertically integrated, increased sales of branded products and sales in branded markets and sales of products under settlement agreements where the profit split is being recorded under SG&A and therefore favorably affect the gross margin. Without the effect of an inventory step-up recorded in 2006 in connection with the Ivax acquisition, the gross margin for 2006 would have been 51.8%, similar to that of 2007. Teva believes that the normative gross margins of its operations in 2008 and onwards will be in the range of 49%52% of sales, as a result of changes in new product opportunities and the geographic spread of our sales.
In 2006, gross profit margins increased to 50.7%, in comparison to margins of 47.2% in 2005. This increase reflected 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 Tevas vertically integrated API division.
Research and Development (R&D) Expenses
Research and development expenses increased from $495 million in 2006 to $581 million in 2007, an increase of 17%. As a percentage of sales, these expenses represented 6.2% in 2007, compared with 5.9% in 2006.
Generic R&D expenses in 2007 accounted for approximately half of the R&D expenses, due to increased R&D activity for the U.S. and Europe and litigation costs involved in patent challenge litigation. In 2007, Teva submitted a total of 126 generic files worldwide, including 35 ANDAs to the FDA, 25 abbreviated new drug submissions in Canada and applications for approval of 23 new products in Western Europe (which, along with applications for approval of 50 additional products previously introduced to the Western European market, were submitted under approximately 2000 marketing authorization applications), as well as 43 submissions in other regions. Innovative R&D expenses amounted to approximately 28% of R&D expenses for 2007, mainly attributed to higher expenditures relating to MS, primarily the FORTE study, and to Parkinsons disease, primarily the ADAGIO study, as well as other pipeline projects. The balance was dedicated to the development of other products, principally new products for the API division.
As a result of Tevas internal strategic review, Teva expects that its R&D expenses (primarily related to generic R&D) will increase significantly in 2008, continuing an acceleration of spending that began in late 2007. Such additional spending on R&D will target what Teva believes are increased future opportunities worldwide. Tevas new R&D expenditure target is 7.5% of sales, in comparison to 6% of sales, its previous target. This increased level of R&D spending as a percentage of sales is expected to be maintained over the next several years; however, it is expected that towards the end of Tevas current strategic review period (i.e., towards 2012), while R&D expenditures in dollar terms will continue to grow, such expenditures will decrease as a percentage of sales.
Research and development expenses (net of the effect of third-party participations and net of the write-off of $1,295 million of in-process R&D) increased in 2006 to $495 million from $369 million in 2005, an increase of 34%. In-process research and development (IPR&D) write-offs in 2006 were primarily attributable to the Ivax acquisition.
As discussed in Item 4 above, Teva is making significant progress with the ADAGIO trial, a Phase III clinical trial designed to establish Azilects® potential effects on modifying the progression of Parkinsons disease. The results of the study are expected in mid-2008.
Teva has initiated two Phase III studies, Allegro and Bravo, with respect to laquinimod, an oral treatment for multiple sclerosis which Teva acquired from Active Biotech. The recruitment of patients for the Allegro study has begun and the recruitment for the Bravo study is planned to start in the second quarter of 2008. These studies have been initiated following encouraging results of two Phase II studies and after discussions with the FDA and the EMEA, as discussed above.
In 2007, Teva also continued to invest in the clinical development of a number of earlier stage innovative products, including treatments for ALS, lupus and various types of cancers, as well as funding other innovative product opportunities, derived primarily from Israeli research, through a variety of direct investment and joint venture arrangements.
Selling, General and Administrative Expenses (SG&A)
SG&A expenses in 2007 amounted to $1,901 million, an increase of 21% over 2006. As a percentage of sales, SG&A expenses increased to 20.2% for 2007 from 18.7% for 2006. This higher level reflects increased profit sharing with third parties, a higher proportion of sales of branded products and operations in branded generic markets, as well as higher selling and marketing costs supporting growing Copaxone® sales and the gradual introduction of Azilect®. Teva believes that SG&A expenditures as a percentage of sales should generally decline as sales continue to increase, although increased sales of branded products and in branded markets could impact this trend.
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 2007 and in 2006 amounted to approximately $67 million and $48 million, most of which is included in the SG&A line item.
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 to 18.7% for 2006 from 15.2% for 2005. 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.
In 2007, Teva financial expenses amounted to $42 million, compared with expenses of $95 million during 2006. The decrease in financial expenses is primarily attributable to increased cash balances in 2007 which generated higher earned interest as well as the impact of favorable currency movements.
In 2006, Teva recorded financial expenses of $95 million, compared with financial expenses of $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.
Going forward, Teva expects a normal interest expense level per quarter of about $45 million, the majority of which is service of Tevas $5.3 billion of short and long-term debt. Net of income on Tevas invested cash, Tevas normative quarterly level of interest charges is expected to be $10 million.
The provision for taxes as a percentage of pre-tax income amounted to 17% in 2007, compared with 22% in 2006 and 18% in 2005. The decrease in the effective tax rate in 2007 was due to significantly lower net income in 2006, resulting mainly from: 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 with tax authorities and the expiration of the tax statute of limitations in various jurisdictions.
The statutory Israeli corporate tax rate was 29% in 2007 compared to 31% in 2006 and 34% in 2005. It is scheduled to further decrease to 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter. However, this is expected to have a relatively small impact, as Tevas effective consolidated tax rates have historically been considerably lower, since a major portion of Tevas income in Israel is derived from approved enterprises (as more fully described in Item 10: Additional InformationIsraeli Taxation below) which have not been reduced, and from certain operations outside of Israel (where Teva has enjoyed lower tax rates), which represent an increasingly larger portion of Tevas consolidated taxable income.
Most of Tevas 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 Additional InformationIsraeli Taxation.
The most recent example of such an approved enterprise is Tevas 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 is now being expanded 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 in 2007 was producing products mainly for the U.S.
In the future, 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 2007 amounted to $1,952 million, an increase of 258% over 2006. The significantly lower net income in 2006 was 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 Ivaxs inventory at its acquisition date. Diluted earnings per share reached $2.38 in 2007, an increase of 245% over diluted earnings per share in 2006. Net income totaled $546 million in 2006, as compared with $1,072 million in 2005, and diluted earnings per share amounted to $0.69 and $1.59 in 2006 and 2005, respectively.
During early 2007, Teva spent $152 million to repurchase approximately 4 million of its shares at an average price of $34.73 per share, pursuant to an authorization in November 2006 by its board of directors to repurchase up to $600 million of Teva securities. At year end, Teva still had authorization to repurchase $211 million of Teva securities. During 2006, Teva spent $234 million to repurchase approximately seven million of its shares at an average price of $31.8 per share.
The share count used for the fully diluted calculation for 2007, 2006 and 2005 amounted to 830 million, 805 million and 681 million shares, respectively. The significantly higher level of outstanding shares for 2006 compared with 2005 results primarily from the issuance of shares in connection with the Ivax acquisition.
During 2007, the remainder of the $450 million of 0.375% Convertible Senior Debentures due 2022 ($63 million) were converted following the conversion of approximately $182 million of these debentures during 2006.
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.
Supplemental 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 readers understanding of the trends in the Companys underlying business:
In 2007: Management considers that there were no items appropriate for adjustment in 2007.
The data so presented after these exclusions are the results used by management and Tevas board of directors to evaluate the operational performance of the Company, to compare against the Companys 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 managements 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 Companys 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 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-recurring impact on the income statement or which, in the judgment of Tevas 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 performance 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 Tevas operations on a global basis; material tax 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 Companys 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 Companys 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.
The below table provides a reconciliation of our U.S. GAAP reported results and these supplemental as adjusted data:
Changes in Senior Management
The following management changes occurred during 2007:
Impact of Currency Fluctuations and Inflation
Because Tevas 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 (primarily the Euro, pound sterling, Hungarian forint, NIS, Canadian dollar, Russian ruble and Czech Republic koruna) affect Tevas results. During 2007, the movements of the main European currencies relevant to Teva, relative to the U.S. dollar, have been more significant than in previous years. The Hungarian forint revalued against the dollar by 13%, the Euro, the pound sterling and the NIS all revalued against the U.S. dollar by 9%, the Canadian dollar revalued against the U.S. dollar by 5%, the Russian ruble revalued against the U.S. dollar by 6% and the Czech koruna revalued against the U.S. dollar by 10% (when average compared to average).
While the appreciation of non-U.S. currencies contributed approximately 3% to the overall sales during 2007 in comparison with 2006 sales, Teva also recorded increased expenses due to these currency fluctuations and, as a result overall, changes in the exchange rates had a negligible effect on Tevas operating profit and net income.
Critical Accounting Policies
The preparation of Tevas 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 Tevas business activities, certain Teva accounting policies that are more important to the portrayal of its financial condition and results of operations and that require managements 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 Tevas consolidated financial statements included in this annual report for a summary of all of Tevas 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 Tevas financial statements.
Provisions for chargebacks, returns, rebates, other promotional items and price protection provisions are included in Sales reserves and allowances under the heading of current liabilities in Tevas balance sheets included in the accompanying financial statements. Prompt pay discount provisions are netted against Accounts receivable. 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 may 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 customers contract price.
Provisions for chargebacks are the largest component of Tevas 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 and 2007 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, they 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 and Other Governmental Rebates. Pharmaceutical manufacturers whose products are covered by the Medicaid program are required to rebate to each state a percentage of their average manufacturers 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, 2007 and 2006 were as set forth in the below table. Such sales reserves and allowances to U.S. customers comprised over 90% of Tevas total sales reserves and allowances as of December 31, 2007, with the balance primarily in Canada and the U.K.
Reserves for the year ended December 31, 2007 increased by approximately $162 million. The chargeback reserve for the year ended December 31, 2007 decreased by approximately $60 million over the December 31, 2006 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, 2007 increased by approximately $10 million over the reserve as of December 31, 2006 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, 2007 or 2006.
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.
The provision for income tax is calculated based on Tevas 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 Tevas compliance with the terms and conditions set out in these laws.
FIN 48 requires that tax benefits recognized in the financial statements must be at least more likely than not of being sustained based on technical merits. The amount of benefits recorded for these positions is measured as the largest benefit more likely than not to be sustained. Significant judgment is required in making these determinations.
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 Tevas 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.
Since Teva does not expect non-Israeli subsidiaries to distribute taxable dividends in the foreseeable future, it does not provide for related taxes.
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 are stated at the lower of cost or market. Cost is determined as follows: raw and packaging materials and purchased productsmainly on a moving average basis; finished products and products in process; raw material and packaging componentmainly on a moving average basis; labor and overheadon an average basis over the production period.
Tevas 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. Tevas 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
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. Tevas 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 of 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 units 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 consist mainly of debt securities classified as available-for-sale and are recorded at fair value. The fair value of such securities is based on current market value. When securities do not have an active market, as in the case of auction rate securities since mid-2007, the fair value is determined using a valuation model. This model is based on reference to other instruments with similar characteristics, or a discounted cash flow analysis, or other pricing models making use of market inputs and relying as little as possible on entity-specific inputs. Changes in fair value, net of taxes, are reflected in other comprehensive income. Unrealized losses considered to be temporary are reflected in other comprehensive income; unrealized losses that are considered to be other-than-temporary are charged to income as an impairment charge.
Due to the continuing changes and the uncertainty in the credit markets, it is possible that the valuation of auction rate securities will further fluctuate in the near term. Also, as market conditions change, the Company may determine that unrealized losses, which are currently considered temporary in nature, may become other than temporary, resulting in an impairment charge.
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.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued FAS 157, Fair Value Measurements. This standard establishes a framework for measuring fair value and expands related disclosure requirements; however, it does not require any new fair value measurement. FAS 157 is effective for fiscal years beginning after November 15, 2007 and should be applied prospectively (with a limited form of retrospective application). On February 12, 2008, the FASB issued FSP FAS 157-2, which delays the effective date of FAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements. As applicable to Teva, FAS 157, except as it relates to non-financial assets and liabilities as noted in proposed FSP FAS 157-b, will be effective as of the year beginning January 1, 2008. The Company does not expect the partial adoption of this statement to have a material effect on its consolidated financial statements.
In February 2007, the FASB issued FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. This standard permits entities to choose to measure various financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected would be reported in earnings. As applicable to Teva, this statement will be effective as of the year beginning January 1, 2008. The Company does not expect the adoption of this statement to have a material effect on its consolidated financial statements.
In June 2007, the FASB ratified Emerging Issues Task Force Issue 07-3, Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities (EITF 07-03). EITF 07-3 provides guidance on the capitalization of non-refundable advance payments for goods and services to be used in future research and development activities, until such goods have been delivered or the related services have been performed. As applicable to Teva, this pronouncement will be effective as of the year beginning January 1, 2008. The Company does not expect the adoption of this pronouncement to have a material effect on its consolidated financial statements.
In December 2007, the FASB issued FAS No. 141 (revised 2007) (FAS 141R), Business Combinations. FAS 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. Key changes include: acquired in-process research and development will no longer be expensed on acquisition, but capitalized and amortized over its useful life; fair value will be based on market participant assumptions; acquisition costs will generally be expensed as incurred; and restructuring costs will generally be expensed in periods after the acquisition date. Early adoption is not permitted. As applicable to Teva, this statement will be effective as of the year beginning January 1, 2009. Teva believes that the adoption of FAS 141R could have an impact on its consolidated financial statements; however, the impact would depend on the nature, terms and magnitude of acquisitions we consummate in the future.
In December 2007, the FASB issued FAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of Accounting Research Bulletin No. 51 (FAS No. 160). FAS No. 160 establishes accounting and reporting standards for non-controlling interests in a subsidiary and deconsolidation of a subsidiary. Early adoption is not permitted. As applicable to Teva, these statements will be effective as of the year beginning January 1, 2009. Teva is currently evaluating the potential impact, if any, the adoption of FAS No. 160 would have on its consolidated financial statements.
In December 2007, the SEC issued Staff Accounting Bulletin No. 110 (SAB 110) relating to the use of a simplified method in developing an estimate of the expected term of plain vanilla share options. SAB 107 previously allowed the use of the simplified method until December 31, 2007. SAB 110 allows, under certain circumstances, to continue to accept the use of the simplified method beyond December 31, 2007. The Company believes that the adoption of SAB 110 will not have a material impact on its consolidated financial statements.
Liquidity and Capital Resources
On December 31, 2007, Tevas working capital was $4.5 billion, compared to $3.6 billion at December 31, 2006. The revaluation of the non-U.S. dollar currencies relative to the U.S. dollar increased the various working capital items. Overall, the strengthened currencies increased working capital by $241 million. Cash, cash equivalents and short- and long-term investments grew by $919 million, reflecting the net cash generated during the year. Accounts receivables increased by $624 million, representing mainly the higher sales in 2007, as well as the pantoprazole launch towards the end of the year. Inventories increased by $561 million, in large part due to an effort to increase service levels. Total current liabilities increased by $1.3 billion, reflecting an increase in the current portion of long-term debt and short-term credit of $1.1 billion and an increase in accounts payable and accruals of $200 million.
Shareholders equity on December 31, 2007 reached $13.7 billion, up by $2.6 billion from December 31, 2006. Nearly one-third of the increase in shareholders equity in the year reflects a positive foreign currency effect. The remainder of the increase is mainly attributable to the net income generated during 2007 net of dividends paid, Teva shares repurchased and the write-off in connection with the adjustment to the value of the auction rate securities held by Teva.
As of December 31, 2007, $651 million of cash balances were held in highly rated auction rate securities, primarily rated AAA. These securities are long-term securities with maturities ranging from 10 to 40 years and were designed to offer liquidity through an auction, generally every 28 days. The recent uncertainties in the credit markets have resulted in unsuccessful auctions for $387 million of the auction rate securities that Teva holds. Consequently, the interest on these auction rate securities was increased as per the conditions, and the securities were reclassified as long-term securities. As the trade was not resumed since mid-2007, Teva assessed their fair market value as of December 31, 2007. Based on a valuation model which Teva developed, and was benchmarked against other independent indications, Teva reduced the fair value of these securities, on a temporary basis, by $50 million (net), which was thus recorded under other comprehensive income. Subsequent to year-end, Teva decreased its investments in auction rate securities, resulting in a total balance as of February 21, 2008 of $444 million in principal amount.
During 2007, days sales in inventory, which began the year at approximately 145 days, increased to 176 days at the end of 2007. The primary reason for the increase is higher inventories of finished goods was Tevas effort to improve customer service. The days sales outstanding (DSO) reached 63 days in December 2007 compared with 58 days as of December 31, 2006, primarily due to the pantoprazole sales during December 2007. The DSO calculation is made on a net basis after netting out provisions for accrued rebates and returns, from account receivables in the amount of $1.73 billion for December 2007 and $1.56 billion for December 2006. A net DSO calculation is presented in order to facilitate a more meaningful comparison with similar calculations by Tevas peers. The account payables days decreased from 45 days to 44 days.
Cash generated by operations for 2007 amounted to $1.79 billion, as compared with $2.06 billion in 2006, representing increased working capital in 2007 as discussed above. Investment in fixed assets in 2007 amounted to $542 million, an increase of 39%, compared to $390 million in the previous year. Depreciation in 2007 and 2006 represented 50% and 58% of the total investment in fixed assets, respectively.
Among the more significant capital expenditures during 2007 were further investments in Tevas new state-of-the-art pharmaceutical facility in Jerusalem, Tevas 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 the continued roll-out of the new enterprise resource planning (ERP) system in Israel and worldwide. In general, these investments are intended to enable Teva to face future challenges and capture future opportunities.
During 2007, Teva paid $299 million in dividends on its shares, compared to $229 million in 2006.
Teva announced a dividend for the fourth quarter of 2007 of NIS 0.45 (12.4 cents as per the rate of exchange on February 11, 2008) per share, representing an increase from NIS 0.40 (9.7 cents), which is the average of the dividends declared for each of the first three quarters of 2007. Actual payment of dividends for the fourth quarter of 2007, which is expected to take place on March 6, 2008, will be made with respect to ADRs on the basis of the USD NIS exchange rate as of March 3, 2008.
Free cash flow (cash flow from operations net of capital investments and dividends paid) amounted to $1,013 million in 2007, compared to $1,463 million in 2006. This decrease is due to the lower cash flow from operations and increased capital expenditures.
During 2007, the Company spent $152 million to repurchase approximately 4 million Teva shares. In 2006, Teva spent $234 million to repurchase approximately 7 million shares.
In addition to its financing obligations as reflected by short-term debt and long-term senior notes and loans, debentures and convertible debentures, Tevas 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 certain other 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 1999with 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, 2007 amounted to approximately $27 million.
Teva has agreed to invest in certain venture capital funds and investment companies in Israel and to participate in the funding of research and development conducted by other companies. As of December 31, 2007, Tevas remaining commitment, excluding commitments subject to milestone payments, was $18 million.
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, 2007, Teva is not aware of any material pending infringement action that may result in the counterparties to these agreements claiming such indemnification.
Certain of Tevas loan agreements and debentures contain restrictive covenants, mainly the requirement to maintain certain financial ratios. Teva currently meets all applicable financial ratios.
Tevas 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. Tevas 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.
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 $2.8 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, which 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 had the right to cause Teva to repurchase their debentures for 100% of the principal amount, plus accrued interest, in cash on February 1, 2008. While the first put date for these 0.25% debenture holders elapsed with only a minimal portion being converted, the next put date in which they can redeem is February 1, 2011. 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 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 Ivaxs 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 shares.
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 Tevas contractual obligations and commitments as of December 31, 2007:
Teva adopted FIN 48, Accounting for Uncertainty in Income Taxes as of January 1, 2007. The total amount of gross unrecognized tax benefits for uncertain tax positions, including positions impacting only the timing of tax benefits, was $338 million at December 31, 2007. Payment of these obligations would result from settlements with taxing authorities. Due to the difficulty in determining the timing of settlements, FIN 48 obligations are not included in the above table. We do not expect a significant tax payment related to these obligations within the next year.
Directors and Senior Management
The following tables set forth information as to the executive officers and directors of Teva as of February 15, 2008:
Shlomo Yanai has been the President and Chief Executive Officer of Teva since March 2007. Prior to joining Teva, Mr. Yanai served as President and Chief Executive Officer of Makhteshim-Agan Industries Ltd. from 2003 until 2006. Before joining Makhteshim-Agan, Mr. Yanai served in the Israel Defense Forces (the IDF) for 32 years, 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 Head of the Division of Strategic Planning. 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 Lycord Natural Products Industries (a wholly owned subsidiary of Makhteshim-Agan). He was also a board member of Bank Leumi Le-Israel Ltd. from 2004 until 2007. Mr. Yanai 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 Herzliya Interdisciplinary Centers Institute for Policy and Strategy. 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 and 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.
Amir Elstein has served as Tevas Executive Vice President, Global Pharmaceutical Resources, at the Office of the CEO since March 2007. He joined the Office of the CEO on January 2006, and assumed responsibility for overseeing the generics global supply chain, as well as serving as Tevas Group Vice President Global Specialty Pharmaceutical Products. He served as Tevas Group Vice PresidentBiogenerics from January 2005 to January 2006 and was a director of Teva from 1995 to 2004. Mr. Elstein 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.
Isaac (Ika) Abravanel joined Teva in September 2007 as Corporate Vice PresidentHuman Resources. From 2005 to 2007, he served as Deputy CEO of Bezeq Israel Telecommunications Co. Ltd., responsible for operations, the business sector, the private sector, and human resources, and from 2001 to 2005, was the Senior VP of Operations & Customer Service at Pelephone Communications Ltd. From 1998 to 2000, he held the position of Executive Director of Israels Association of Chambers of Commerce. Mr. Abravanel retired from the Israel Defence Forces in 1998 after serving as head of the Planning Division of the Human Resources Branch of the IDF. Mr. Abravanel holds a B.A. and M.A. in political science from Haifa University.
Chaim Hurvitz has served as Group Vice PresidentInternational since April 2002. He served as President and CEO of Teva Pharmaceuticals Europe from 2001 to 2002 and as Vice PresidentIsraeli Pharmaceutical Sales from May 1999 until April 2002. He served as President and CEO of Teva Pharmaceuticals Europe, B.V. from 1995 to 1999. From 1993 to 1995, he served as the General Manager of Tevas 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 and later a managing director in the Acquisition and Corporate Advisory Group of Deutsche Bank Securities in New York City. Dr. Krinskys academic career includes a position as Professor of Finance & Business Economics, Michael G. DeGroote School of Business, McMaster University, Ontario, Canada, 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 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 served as Group Vice PresidentGlobal Innovative Resources since January 2006. Mr. Manor served as Vice PresidentGlobal 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.
William S. Marth has served as President and Chief Executive Officer of Teva North America since January 21, 2008 and as President and Chief Executive Officer of Teva USA 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. On February 2008, Mr. Marth was elected Chairman of the Generic Pharmaceutical Association. 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.
Dr. Gerard W.M. Van Odijk joined Teva as Group Vice PresidentEurope 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 Group. From 1999 until 2006, he served as Vice President of Business Development. He previously served as Chief Economist and assistant to Tevas CEO from 1989 to 1993, president of Plantex USA from 1993 to 1996 and director of Business Development for Tevas API division from 1996 to 1999. He received his B.A. in economics from Bar-Ilan University in 1986.
Dan S. Suesskind has been with Teva since 1976 and has been Chief Financial Officer since 1977. 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 of Israel Ltd. until 2003. He is currently a member of the Board of Migdal Insurance Company Ltd., Ness 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. Mr. Suesskind is scheduled to retire as Chief Financial Officer in mid-2008.
Dr. Ben-Zion Weiner has been with Teva since 1975. In January 2006, Dr. Weiner assumed the role of Chief R&D Officer. Dr. Weiner served as Vice PresidentGlobal Products from April 2002 until January 2006. Previously, he served as Vice PresidentResearch and Development from 1986 to 2002. Dr. Weiner has served as a director of XTL Biopharmaceuticals Ltd. since 2005. In 1975, he received a Ph.D. in chemistry from the Hebrew University, where he also received 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 twice, 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 PresidentGlobal Generic Resources since January 2006. From March 1999 until January 2006, he served as Vice PresidentGlobal 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 Tevas 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 PresidentGlobal API division since January 2006. Mr. Yaari served as Vice PresidentGlobal API Division from 2002 until January 2006. Mr. Yaari joined Teva in 1981 and among his various assignments at Teva he served as Vice PresidentMarketing 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.
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 Tevas Corporate Secretary since 1978. He received his LL.B from the Hebrew University in 1969. He is a member of the Executive Committee of the Israeli Association of Publicly Traded Companies.
Announced Incoming Officer
Eyal Desheh is expected to become Tevas Chief Financial Officer in mid-2008. Mr. Desheh currently serves as the Executive Vice President and Chief Financial Officer of Check Point Software Technologies Ltd. Prior to joining Check Point in May 2000, Desheh served as Chief Financial Officer of Scitex Corporation Ltd. Before joining Scitex, he served in numerous finance management and business development roles, including, from 1989 to 1995, as Tevas Deputy CFO. Mr. Desheh holds a bachelors degree in Economics and an MBA in Finance, both from the Hebrew University.
Eli Hurvitz has served as Chairman of the Board of Teva since April 2002. Previously, he served as Tevas 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. and Protalix Biotherapeutics Inc. and as 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 from 1986 to 1987 and was a member of the Advisory Committee of the Bank of Israel from 1991 to 1995. 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. In 2002, Mr. Hurvitz received the Israel Prize for Lifetime Achievement for a Unique Contribution to the Society and to The State of Israel, bestowed by The Ministry of Education of Israel. He received his B.A. in economics and business administration from the Hebrew University in 1957. Mr. 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 acquisition of Ivax Corporation in January 2006 and as Chairman of the Board and Chief Executive Officer of Ivax from 1987 until 2006. He was also President of Ivax from 1991 until 1995. Dr. Frost presently serves as the Chairman of the Board and CEO of Opko Health, Inc., a specialty pharmaceutical company, and as Chairman of the Board for Ladenburg Thalmann Financial Services. Dr. Frost is a director of Northrop Grumman Corporation, Continucare Corporation Inc. and Modigene Inc. Within the past five years, Dr. Frost has also served as a director of Protalix BioTherapeutics, Inc. (formerly Orthondontix), Castle Brands, Inc. and Cellular Technical Services, and as Chairman for Ivax Diagnostics, Inc. and Whitman Education Group, 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.
Roger Abravanel joined Tevas 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 private equity funds in Israel and Italy, and including the Association of Business Leaders. 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., 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 bachelors 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 citys most important boards.
Abraham E. Cohen served as Senior Vice President of Merck & Co. from 1982 to 1992 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 served as a director of Akzo Nobel NV until 2007. He is presently a director of Chugai Pharmaceutical Co. U.S.A., Neurobiological Technologies, Inc. and Vasomedical, Inc.
Prof. Meir Heth has served on Tevas 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 has been designated as the financial expert on Tevas 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. Heth is also the Chairman of the executive sessions of the Board.
Prof. Roger D. Kornberg is the Winzer Professor in Medicine in the Department of Structural Biology at Stanford University, where he has been a professor since 1978. Prior to joining Stanford, he served as a professor at Harvard Medical School. Prof. Kornberg received a B.A. degree from Harvard in 1967 and a Ph.D. degree in chemistry from Stanford in 1972. He has received many awards, including the Welch Prize (2001), the highest award in chemistry in the United States, the Leopold Mayer Prize (2002), the highest award in biomedical sciences of the French Academy of Sciences, and the Nobel Prize in Chemistry (2006). He is a recipient of honorary degrees from universities in Europe and Israel, including the Hebrew University, where he is a visiting professor. He is a member of the U.S. National Academy of Sciences and an honorary member of other academies and professional societies in the United States, Europe and Japan.
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 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 is currently a director of Rosetta Genomics Ltd. and served as a director of Zim Integrated Shipping Services Ltd. until 2007. Prof. Many 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 Chair of the Board of Bezeq International Ltd. and Walla Communications Ltd from 2001 to 2005. She served as Chair 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 bachelors degree in mathematics and physics, a masters degree in mathematics and a Ph.D. in economics from the Hebrew University. She served as director of NICE Systems Ltd. from 2002 until 2007 and of Isrotel Ltd. from 2001 until 2007. She presently serves on the boards of directors of Alrov (Israel) Ltd., Delta Galil Ltd., Gilat Satellite Networks Ltd., GEJ Yizum Ltd., Osem Investment Ltd., Weizmann Institute of Science and Betzalel Academy of Art. Dr. Meridor qualifies as a statutory independent director under Israeli law and was determined by the Board to be a financial and accounting expert under Israeli law.
Dan Propper is the Chairman of the Board of Osem Investments Ltd., a leading Israeli manufacturer of food products. Mr. Propper served as the Chief Executive Officer of Osem for 25 years until April 2006. In addition to his role at Osem, from 1993 until 1999, Mr. Propper served as President of the Manufacturers Association of Israel, an independent umbrella organization representing industrial enterprises in Israel, and as Chairman of the Federation of Economic Organizations in Israel. Mr. Propper has received awards for his contributions to the Israeli industry and economy, including an honorary Doctorate from the Technion-Israel Institute of Technology in 1999. Mr. Propper serves as a member of the boards of Check Point Software Technologies Ltd., First International Bank of Israel, Delta Galil Industries Ltd. and a number of private companies. Mr. Propper is also a member of the board of trustees of the Technion and Ben-Gurion University and a member of the executive committees of the Weizmann Institute of Science and Tel Aviv University. Mr. Propper earned a B.S. summa cum laude in Chemical Engineering and Food Technology from the Technion.
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 until 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 Tevas Board of Directors from 1992 until 2002. He served as a director of Am-Shav- Initiative and Technological Applications Ltd. from 2004 until 2006. Mr. Shafir serves as a director of Ofer Technologies 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, and from 2001 until 2007 she was a member of the board of directors of Osem Investments Ltd. Currently, she is also a director of Delek Group 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 previously served as Senior Vice President of Teva USA (Tevas principal U.S. subsidiary) and as President of Biocraft Laboratories, Inc. (Teva USAs predecessor company), retiring from these positions in 1999. 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.
The aggregate direct compensation paid or accrued on behalf of all directors and executive officers (including the former President and CEO and the former President and CEO of Teva North America) as a group during 2007 was $14.2 million. This amount includes fees of $1.9 million for non-employee directors and amounts set aside or accrued to provide pension, retirement or similar benefits of $0.6 million. This amount does not include $16.0 million from the exercise of previously granted stock options. In addition, directors are reimbursed for expenses incurred as part of their service as directors.
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 Tevas 2005 Omnibus Long-Term Share Incentive Plan by Tevas 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 Tevas 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 Tevas 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. In addition, the compensation committee authorized, in January and December 2007, the granting of options to purchase an aggregate of 784,002 ordinary shares to Tevas executive officers, at an average price of $35.20 per share or ADR and an average expiration date in 2014, as well as 17,187 restricted share unit awards.
As of December 31, 2007, options for an aggregate of approximately 35.4 million shares, with an average exercise price of $27.57 per share, and approximately 1.6 million restricted stock units (RSUs), with a weighted average grant date fair value of $36.64, were outstanding under Tevas stock option and incentive programs. For further information regarding Teva options and RSUs, see Note 9 to the Notes to Consolidated Financial Statements.
Tevas board of directors is comprised of 16 persons, of whom 13 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. In accordance with Nasdaq regulations, we do not consider the following directors to be independent: Eli Hurvitz, Dr. Phillip Frost and Prof. Michael Sela.
All directors are entitled to review and retain copies of Tevas documentation and examine Tevas 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).
Annual Meetings. Teva encourages serving directors to attend annual shareholders meetings. A majority of the serving directors attended the 2007 annual meeting.
Board Practices and Procedures. Tevas Board members are generally elected for terms of three years. Teva believes that this system of multi-year terms allows Tevas 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 lectures, 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. Information regarding the number of meetings of the Board and Board committees and attendance rates is presented in the table below.
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 2007. 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-employee directors that 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 companys 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.
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 Tevas 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.