20-F 1 d300203d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File number: 0-16174

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report:

TEVA PHARMACEUTICAL INDUSTRIES LIMITED

(Exact name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English)

ISRAEL

(Jurisdiction of incorporation or organization)

5 Basel Street

P.O. Box 3190

Petach Tikva 49131, Israel

(Address of principal executive offices)

Eyal Desheh

Chief Financial Officer

Teva Pharmaceutical Industries Limited

5 Basel Street

P.O. Box 3190

Petach Tikva 49131, Israel

Tel: 972-3-914-8171

Fax: 972-3-914-8678

(Name, telephone, e-mail and/or facsimile number and address of Company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Name of each exchange on which registered

American Depositary Shares, each representing one Ordinary Share   The Nasdaq Stock Market LLC

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

941,985,166 Ordinary Shares

699,092,829 American Depositary Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes   ¨    No  x

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x                    Accelerated filer  ¨                    Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

þ US GAAP

 

¨ International Financial Reporting Standards as issued by the International Accounting Standards Board

 

¨ Other

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

¨ Item 17

 

þ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

 

 


Table of Contents

INDEX

 

         

Page

Introduction and Use of Certain Terms

   1

Forward-Looking Statements

   1

Part I

  

Item 1:

      2

Item 2:

      2

Item 3:

  

Key Information

   2
  

Selected Financial Data

   2
  

Operating Data

   3
  

Balance Sheet Data

   3
  

Dividends

   4
  

Risk Factors

   5

Item 4:

  

Information on the Company

   17
  

Introduction

   17
  

Strategy

   18
  

Product Offerings

   19
  

Generic Products

   19
  

Branded Products

   20
  

Consumer Healthcare Joint Venture

   25
  

Other Revenues

   25
  

Teva’s Markets

   26
  

United States

   26
  

Europe

   28
  

Rest of the World Markets

   31
  

Operations and R&D

   35
  

Research and Development

   35
  

Operations

   41
  

Environment

   43
  

Organizational Structure

   43
  

Properties and Facilities

   44
  

Regulation

   46

Item 4A:

  

Unresolved Staff Comments

   51

Item 5:

  

Operating and Financial Review and Prospects

   52
  

Introduction

   52
  

Highlights

   52
  

Acquisitions and Other Transactions

   53
  

Results of Operations

   54
  

Revenues by Geographic Area

   54
  

Revenues by Product Line

  

61

  

Other Income Statement Line Items

   64
  

Supplemental Non-GAAP Income Data

   68
  

Impact of Currency Fluctuations and Inflation

   73
  

Critical Accounting Policies

   73
  

Recently Issued Accounting Pronouncements

   79
  

Liquidity and Capital Resources

   79
  

Trend Information

   82
  

Off-Balance Sheet Arrangements

   82
  

Aggregated Contractual Obligations

   82

 

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Page

Item 6:

  

Directors, Senior Management and Employees

   84
  

Directors and Senior Management

   84
  

Executive Officers

   84
  

Directors

   84
  

Compensation

   89
  

Board Practices

   90
  

Statutory Independent Directors/Financial Experts

   90
  

Committees of the Board

   91
  

Employees

   94
  

Share Ownership

   94

Item 7:

  

Major Shareholders and Related Party Transactions

   95

Item 8:

  

Financial Information

   96

Item 9:

  

The Offer and Listing

   97
  

ADSs

   97
  

Ordinary Shares

   97

Item 10:

  

Additional Information

   99
  

Memorandum and Articles of Association

   99
  

Israeli Taxation

   104
  

Documents on Display

   107

Item 11:

  

Quantitative and Qualitative Disclosures about Market Risk

   108
  

General

  

108

  

Exchange Rate Risk Management

  

109

  

Interest Rate Risk Management

  

111

Item 12D:

  

Description of Teva American Depositary Shares

  

113

Part II

     

Item 13:

  

Defaults, Dividend Arrearages and Delinquencies

   119

Item 14:

  

Material Modifications to Rights of Security Holders and Use of Proceeds

   119

Item 15:

  

Controls and Procedures

  

119

Item 16:

  

[Reserved]

  

120

Item 16A:

  

Audit Committee Financial Experts

  

120

Item 16B:

  

Code of Ethics

  

120

Item 16C:

  

Principal Accountant Fees and Services

  

120

  

Policy on Pre-Approval of Audit and Non-Audit Services of Independent Auditors

  

120

  

Principal Accountant Fees and Services

  

120

Item 16D:

  

Exemptions from the Listing Standards for Audit Committees

  

121

Item 16E:

  

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

  

121

Item 16F:

  

Change in Registrant’s Certifying Accountant

  

122

Item 16G:

  

Corporate Governance

  

122

Part III

     

Item 17:

  

Financial Statements

   123

Item 18:

  

Financial Statements

  

123

Item 19:

  

Exhibits

  

124

Consolidated Financial Statements

   F-1

Financial Statement Schedule

  

S-1

 

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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, and references to “revenues” refer to “net revenues”. References to “U.S. dollars,” “U.S.$” and “$” are to the lawful currency of the United States of America, and references to “NIS” are to New Israeli shekels. Market share data is based on information provided by IMS Health Inc., a provider of market research to the pharmaceutical industry (“IMS”), unless otherwise stated.

FORWARD-LOOKING STATEMENTS

This annual report contains forward-looking statements, which express management’s current beliefs or expectations with regard to future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. Such statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these statements relate to, among other things:

 

   

our business strategy;

 

   

the development and launch of our products, including product approvals and results of clinical trials;

 

   

projected markets and market size;

 

   

anticipated results of litigation;

 

   

our projected revenues, market share, expenses, net income margins and capital expenditures; and

 

   

our liquidity.

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.

 

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PART I

 

ITEM 1: NOT APPLICABLE

 

ITEM 2: NOT APPLICABLE

 

ITEM 3: KEY INFORMATION

SELECTED FINANCIAL DATA

The Israeli Securities Law allows Israeli companies, such as Teva, whose securities are listed both on the Tel Aviv Stock Exchange and on certain stock exchanges in the U.S. (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 operating data for each of the years in the three-year period ended December 31, 2011 and selected balance sheet data at December 31, 2011 and 2010 are derived from our audited consolidated financial statements set forth elsewhere in this report, which have been prepared in accordance with U.S. GAAP. The selected operating data for each of the years in the two-year period ended December 31, 2008 and selected balance sheet data at December 31, 2009, 2008 and 2007 are derived from our 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 our operations in Israel and the United States are conducted is the U.S. dollar. The functional currency of most of our other subsidiaries and associated companies in most cases is their local currency.

 

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Operating Data

 

     For the year ended December 31,  
     2011      2010      2009     2008     2007  
     U.S. dollars in millions (except per share amounts)
 

Net revenues

     18,312         16,121         13,899        11,085        9,408   

Cost of sales

     8,797         7,056         6,532        5,117        4,531   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     9,515         9,065         7,367        5,968        4,877   

Research and development expenses—net

     1,080         933         802        786        581   

Selling and marketing expenses

     3,478         2,968         2,676        1,842        1,264   

General and administrative expenses

     932         865         823        669        637   

Legal settlements, acquisition, restructuring and other expenses and impairment

     901         410         638        124        —     

Purchase of research and development in process

     15         18         23        1,402        —     
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     3,109         3,871         2,405        1,145        2,395   

Financial expenses—net

     153         225         202        345        91   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Income before income taxes

     2,956         3,646         2,203        800        2,304   

Provision for income taxes

     127         283         166        184        386   

Share in losses of associated companies—net

     61         24         33        1        3   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     2,768         3,339         2,004        615        1,915   

Net income attributable to non-controlling interests

     9         8         4        6        1   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Net income attributable to Teva

     2,759         3,331         2,000        609        1,914   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Earnings per share attributable to Teva:

            

Basic ($)

     3.10         3.72         2.29        0.78        2.49   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Diluted ($)

     3.09         3.67         2.23        0.75        2.36   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Weighted average number of shares (in millions):

            

Basic

     890         896         872        780        768   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Diluted

     893         921         896        820        830   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance Sheet Data

 

     As at December 31,  
     2011      2010      2009      2008      2007  
     (U.S. dollars in millions)  

Financial assets (cash, cash equivalents and marketable securities)

     1,748         1,549         2,465         2,065         2,875   

Working capital (operating assets and liabilities)

     3,766         3,835         3,592         3,944         3,454   

Total assets

     50,142         38,152         33,210         32,520         23,423   

Short-term debt, including current maturities

     4,280         2,771         1,301         2,906         1,837   

Long-term debt, net of current maturities

     10,236         4,110         4,311         5,475         3,259   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt

     14,516         6,881         5,612         8,381         5,096   

Total equity

     22,343         22,002         19,259         16,438         13,864   

 

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Dividends

We have 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 our earnings, financial condition, capital requirements and other factors. Our ability to pay cash dividends may be restricted by instruments governing our debt obligations. Dividends are declared and paid in NIS. Dividends are converted into U.S. dollars and paid by the depositary of our American Depositary Shares (“ADSs”) for the benefit of owners of ADSs, 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 from 2012 and on are generally subject to withholding of Israeli income tax at a rate of up to 25%. Such tax rates apply unless a lower rate is provided in a treaty between Israel and the shareholder’s country of residence. In our 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. A 25% tax will be withheld on the dividend declared for the fourth quarter of 2011.

The following table sets forth the amounts of the dividends declared in respect of each period indicated prior to deductions for applicable Israeli withholding taxes (in cents per share).

 

     2011      2010      2009      2008      2007  
     In cents per share  

1st interim

     23.2         18.8         14.5         13.1         9.9   

2nd interim

     23.5         18.1         15.1         12.9         9.2   

3rd interim

     21.9         19.3         15.9         11.8         10.0   

4th interim

     26.8         21.8         18.7         14.7         12.4   

 

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RISK FACTORS

Our business faces significant risks. You should carefully consider all of the information set forth in this annual report and in our other filings with the SEC, including the following risk factors which we face and which are faced by our industry. Our business, financial condition and 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 and our other SEC filings. See “Forward-Looking Statements” on page 1.

Our success depends on our ability to develop and commercialize additional pharmaceutical products.

Our financial results depend upon our ability to commercialize additional generic and innovative pharmaceutical products. Commercialization requires that we successfully develop, test and manufacture both generic and innovative products. All of our products must receive regulatory approval and meet (and continue to comply with) regulatory and safety standards; if health or safety concerns arise with respect to a product, we may be forced to withdraw it from the market.

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 produce and market such products successfully and profitably. 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 new generic products also depends upon our success in challenging patent rights held by third parties or in developing non-infringing products. Due to the emergence and development of competing products over time, our overall profitability depends on, among other things, our ability to introduce new products in a timely manner, to continue to manufacture products cost-effectively and to manage the life cycle of our product portfolio.

Sales of our innovative products, especially Copaxone®, face increasing competition, including new orally-administered therapies and potential generic versions.

Any substantial decrease in the revenues derived from our innovative products would have an adverse effect on our results of operations. Several of our innovative products currently face, or will soon face, intense competition.

For example, Copaxone®, our leading innovative product, was responsible for a very significant contribution to our profits and cash flow from operations in 2011. To date, we have been successful in our efforts to establish Copaxone® as the 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 injectable products, such as Avonex®, Betaseron®, Rebif®, Extavia® and Tysabri®. In addition, competition from the rapidly developing market segment of oral treatments, such as Gilenya®, which was introduced in 2010 by Novartis, and Biogen’s BG-12, which is currently near commercialization, is expected to be especially intense in light of the substantial convenience afforded by oral products in comparison to injectables such as Copaxone®. Also, as discussed below, our patents on Copaxone® have been challenged, and we may face generic competition prior to 2014, when the U.S. Orange Book patents covering Copaxone® would otherwise expire.

 

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Our revenues and profits from generic pharmaceutical products typically decline as a result of competition, both from other pharmaceutical companies and as a result of increased governmental pricing pressure.

Our generic drugs face intense competition. Prices of generic drugs typically decline, often dramatically, especially as additional generic pharmaceutical companies (including low-cost generic producers based in China and India) receive approvals and enter the market for a given product and competition intensifies. Consequently, our ability to sustain our sales and profitability on any given product over time is affected by the number of new companies selling such product and the timing of their approvals.

In addition, intense pressure from government healthcare authorities, particularly in highly regulated European markets, to reduce their expenditures on prescription drugs has resulted in lower pharmaceutical pricing, causing decreases in revenues and profits.

Furthermore, brand pharmaceutical companies continue to defend their products vigorously. For example, brand companies often sell or license their own generic versions of their products, either directly or through other generic pharmaceutical companies (so-called “authorized generics”). No significant regulatory approvals are required for authorized generics, and brand companies do not face any other significant barriers to entry into such market. Brand companies may also seek to delay introductions of generic equivalents, by:

 

   

obtaining and enforcing new patents on drugs whose original patent protection is about to expire;

 

   

filing patent infringement suits that automatically delay the approval of generic versions by the U.S. Food and Drug Administration (“FDA”);

 

   

filing citizens’ petitions with the FDA contesting generic approvals on alleged health and safety grounds;

 

   

questioning the quality and bioequivalence of generic pharmaceuticals;

 

   

developing controlled-release or other slightly modified versions, which often reduce demand for the generic version of the existing product for which we are seeking approval;

 

   

making arrangements with managed care companies and insurers to reduce economic incentives to purchase generic versions;

 

   

changing product claims and product labeling; and

 

   

developing and marketing over-the-counter versions of brand products that are about to face generic competition.

These actions may increase the costs and risks of our efforts to introduce generic products and may delay or prevent such introduction altogether.

Our specialty pharmaceuticals business faces intense competition from companies that have greater resources and capabilities.

We face intense competition in our specialty pharmaceutical business. Many of our competitors have substantially greater experience in the development and marketing of branded, innovative and consumer-oriented products. They may be able to respond more quickly to new or emerging market preferences or to devote greater resources to the development and marketing of new products and/or technologies than we can. As a result, any products and/or innovations that we develop may become obsolete or noncompetitive before we can recover the expenses incurred in connection with their development. In addition, for these product categories we must demonstrate to physicians, patients and third-party payors the benefits of our products relative to competing products that are often more familiar or otherwise more well-established. If competitors introduce new products or new variations on their existing products, our marketed products, even those protected by patents, may be replaced in the marketplace or we may be required to lower our prices.

In addition, our increased focus on innovative and specialty pharmaceuticals requires much greater use of a direct sales force than does our core generic business. Our ability to realize significant revenues from direct marketing and sales activities depends on our ability to attract and retain qualified sales personnel. Competition

 

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for qualified sales personnel is intense. We may also need to enter into co-promotion, contract sales force or other such arrangements with third parties, for example, where our own direct sales force is not large enough or sufficiently well-aligned to achieve maximum penetration in the market. Any failure to attract or retain qualified sales personnel or to enter into third-party arrangements on favorable terms could prevent us from successfully maintaining current sales levels or commercializing new innovative and specialty products.

Research and development efforts invested in our innovative pipeline may not achieve expected results.

We invest increasingly significant resources to develop innovative pharmaceuticals (which, following the Cephalon acquisition, is now a much larger component of our business), both through our own efforts and through collaborations, in-licensing and acquisition of products from or with third parties. The development of innovative drugs involves processes and expertise different from those used in the development of generic drugs, which increases the risks of failure that we face. For example, the time from discovery to commercial launch of an innovative product can be 15 years or even longer, and involves multiple stages: not only intensive preclinical and clinical testing, but also highly complex, lengthy and expensive approval processes which can vary from country to country. The longer it takes to develop a product, the less time there will be for us to recover our development costs and generate profits.

During each stage, we may encounter obstacles that delay the development process and increase expenses, leading to significant risks that we will not achieve our goals and may be forced to abandon a potential product in which we have invested substantial amounts of time and money. These obstacles may include: preclinical failures; difficulty enrolling patients in clinical trials; delays in completing formulation and other work needed to support an application for approval; adverse reactions or other safety concerns arising during clinical testing; insufficient clinical trial data to support the safety or efficacy of the product candidate; and failure to obtain, or delays in obtaining, the required regulatory approvals for the product candidate or the facilities in which it is manufactured.

Because of the amounts required to be invested in augmenting our innovative pipeline, we are reliant on partnerships and joint ventures with third parties, and consequently face the risk that some of these third parties may fail to perform their obligations, or fail to reach the levels of success that we are relying on to meet our revenue and profit goals. There is a trend in the innovative pharmaceutical industry of seeking to “outsource” drug development by acquiring companies with promising drug candidates, and we face substantial competition from historically innovative companies for such acquisition targets. Accordingly, our investment in research and development of innovative products can involve significant costs with no assurances of future revenues or profits.

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 substantially 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.

We are currently engaged in lawsuits with respect to generic company challenges to the validity and/or enforceability of the patents covering Copaxone®, our leading innovative product, Azilect®, Amrix®, Fentora®, Provigil® and Nuvigil®. While we intend to defend the validity of these patents vigorously, and will seek to use all appropriate methods to prevent their infringement, such efforts are expensive and time consuming. Due to the nature of litigation, there can be no assurance that such efforts will be successful. The loss of patent protection or

 

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regulatory exclusivity on these or other innovative products could materially impact our business, results of operations, financial conditions or prospects.

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.

Decreasing opportunities to obtain U.S. market exclusivity for generic versions of significant products may adversely affect our revenues and profits.

Our ability to achieve continued growth and profitability through sales of generic pharmaceuticals is dependent on our success in challenging patents, developing non-infringing products or developing products with increased complexity to provide launch opportunities with U.S. market exclusivity or limited competition. The failure to continue to develop such opportunities could adversely affect our sales and profitability.

To the extent that we succeed in being the first to market a generic version of a significant product, and particularly if we are the only company authorized to sell during the 180-day period of exclusivity in the U.S. market, as provided under the Hatch-Waxman Act, our sales, profits and profitability can be substantially increased in the period following the introduction of such product and prior to a competitor’s introduction of an equivalent product. Even after the exclusivity period ends, there is often continuing benefit from being the first generic product in the market.

The number of significant new generic products for which Hatch-Waxman exclusivity is available, and the size of those product opportunities, vary significantly over time and are expected to decrease over the next several years in comparison to those available in the past. Patent challenges have become more difficult in recent years. Additionally, we increasingly share the 180-day exclusivity period with other generic competitors, which diminishes the commercial value of the exclusivity.

The 180-day market exclusivity period is triggered by commercial marketing of the generic product or, in certain cases, can be triggered by a final court decision that is no longer subject to appeal holding the applicable patents to be invalid, unenforceable or not infringed. However, the exclusivity period can be forfeited by our failure to launch a product following such a court decision. The Hatch-Waxman Act also contains other forfeiture provisions that may deprive the first “Paragraph IV” filer of exclusivity if certain conditions are met, some of which may be outside our control. Accordingly, we may face the risk that our exclusivity period is triggered or forfeited before we are able to commercialize a product and therefore may not be able to exploit a given exclusivity period for specific products.

We may not be able to find or successfully bid for suitable acquisition targets, or consummate and integrate future acquisitions.

A core part of our strategy has been, and remains, growth through acquisitions. For example, we acquired Cephalon, Inc. in October 2011, Taiyo in July 2011, the ratiopharm-Merckle Group in August 2010, Barr Pharmaceuticals, Inc. in December 2008 and IVAX Corporation in January 2006, among others. Our rationale for the Cephalon acquisition is, in part, predicated on our ability to realize certain revenue and cost synergies. Achieving these synergies is dependent upon a number of factors, some of which are beyond our control. These synergies may not be realized in the amount or time frame that we currently anticipate.

We continue to be engaged in various stages of evaluating or pursuing potential acquisitions and may in the future acquire other pharmaceutical businesses and seek to integrate them into our own operations. Our reliance

 

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on acquisitions as a means of growth involves risks that could adversely affect our future revenues and operating results. For example:

 

   

We may fail to identify acquisitions that would enable us to execute our business strategy.

 

   

We compete with others to acquire companies. We believe that this competition has intensified and may result in decreased availability of, or increased prices for, suitable acquisition candidates.

 

   

We may not be able to obtain necessary regulatory approvals, including those of competition authorities, and as a result, or for other reasons, we may fail to consummate an announced acquisition.

 

   

Potential acquisitions may divert management’s attention from our existing business operations, resulting in the loss of key customers and/or personnel and exposing us to unanticipated liabilities.

 

   

We may fail to integrate acquisitions successfully in accordance with our business strategy or achieve expected synergies.

 

   

We may not be able to retain experienced management and skilled employees from the businesses we acquire and, if we cannot retain such personnel, we may not be able to attract new skilled employees and experienced management to replace them.

 

   

We may purchase a company that has excessive known or unknown contingent liabilities, including, among others, patent infringement or product liability claims.

We significantly increased our leverage as a result of the acquisition of Cephalon.

We incurred approximately $6.5 billion of indebtedness in connection with the acquisition of Cephalon. As a result of this indebtedness and additional indebtedness we may incur, our principal and interest payment obligations have increased substantially and may increase further. The degree to which we are leveraged could affect our ability to obtain additional financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. In addition, due to the continuing effects of the worldwide financial crisis, capital markets have been more volatile in recent times. Such volatility may adversely affect our ability to obtain financing on favorable terms. Our ability to meet our debt service obligations will be dependent upon our future performance and access to financing, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control.

Manufacturing or quality control problems may damage our reputation for high quality production, demand costly remedial activities and negatively impact our financial results.

The pharmaceutical industry is subject to regulation by various governmental authorities. For instance, we must comply with requirements of the FDA, European Medicines Agency and other healthcare regulators with respect to the manufacture, labeling, sale, distribution, marketing, advertising, promotion and development of pharmaceutical products. Failure to comply with these requirements may lead to financial penalties, compliance expenditures, the recall or seizure of products, total or partial suspension of production and/or distribution, suspension of the applicable regulator’s review of our submissions, enforcement actions, injunctions and criminal prosecution. We must register our facilities, whether located in the United States or elsewhere, with the FDA as well as regulators outside the United States, and our products must be made in a manner consistent with current good manufacturing practices (“cGMP”) or similar standards in each territory in which we manufacture. In addition, the FDA and other agencies periodically inspect our manufacturing facilities. Following an inspection, an agency may issue a notice listing conditions that are believed to violate cGMP or other regulations, or a warning letter for violations of “regulatory significance” that may result in enforcement action if not promptly and adequately corrected.

Recently, there has been increasing regulatory scrutiny of pharmaceutical manufacturers, resulting in product recalls, plant shutdowns and other required remedial actions. Our primary oral solid dose facility in Jerusalem, as well as our U.S. injectable products facility and animal health facilities, have been the subject of

 

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significant regulatory actions, requiring substantial expenditures of resources to ensure compliance with more stringently applied production and quality control regulations. These regulatory actions also adversely affected our ability to supply various products worldwide and to obtain new product approvals at such facilities. If any regulatory body were to require one or more of our significant manufacturing facilities to cease or limit production, our business could be adversely affected. In addition, because regulatory approval to manufacture a drug is site-specific, the delay and cost of remedial actions, or obtaining approval to manufacture at a different facility also could have a material adverse effect on our business, financial position and results of operations.

We may be susceptible to product liability claims that are not covered by insurance.

Our business inherently exposes us to claims for injuries allegedly resulting from the use of our products. As we continue to expand our portfolio of available products (including products sold by companies we have acquired), we have experienced a significant increase in both the number of product liability claims asserted against us and the number of products attracting personal injury claims, and we expect that trend to continue. During 2010 and 2011, juries awarded compensatory and punitive damages of approximately $800 million against us and our distributors in cases involving our propofol product. Although we have settled some of these cases, in the event of additional significant judgments, our financial results, financial condition and access to sources of liquidity could be materially adversely affected.

Moreover, we sell, and will continue to sell, certain pharmaceutical products that are not covered by insurance. In addition, products for which we currently have coverage may be excluded from coverage in the future. Recent insurance loss experience, including pharmaceutical product liability exposures, has increased the cost of, and narrowed the coverage afforded by, insurance for pharmaceutical companies, including us. In order to contain insurance costs, in recent years we have adjusted our coverage profile to accept a greater degree of un-insured exposure. Accordingly, certain claims may be subject to self-insurance, exceed our policy limits or relate to damages that are not covered by our policies. 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. 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. In addition, where claims are made under insurance policies, insurers may reserve the right to deny coverage on various grounds.

Our agreements with brand pharmaceutical companies, which are important to our business, are facing increased government scrutiny in both the U.S. and Europe.

We are involved in numerous patent litigations in which we challenge the validity or enforceability of innovator companies’ listed patents and/or their applicability to our products, and therefore settling patent litigations has been and is likely to continue to be an important part of our business. Parties to such settlement agreements in the U.S., including us, are required by law to file them with the Federal Trade Commission (“FTC”) and the Antitrust Division of the Department of Justice (“DOJ”) for review. The FTC has publicly stated that, in its view, some of the brand-generic settlement agreements violate the antitrust laws and has brought actions against some brand and generic companies that have entered into such agreements. Accordingly, we may receive formal or informal requests from the FTC for information about a particular settlement agreement, and there is a risk that the FTC may commence an action against us alleging violation of the antitrust laws.

Similarly, the EU Commission has placed our European operations, as well as those of several brand and generic companies, under intense scrutiny in connection with its inquiry into possible anticompetitive conditions in the European pharmaceutical sector. Beginning in January 2008 and continuing through 2010, for example, the EU Commission has conducted high-profile, unannounced raids on our European offices and those of many of our brand and generic competitors. In its July 2009 report, the EU Commission found that between 2000 and 2007, generic medicines did not reach the market on average until seven months after expiration of the relevant

 

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patent, and it has asserted that the delays were due to settlement agreements with generic companies that delayed entry of generic competition. The EU Commission is currently reviewing over 200 such settlement agreements for evidence of anticompetitive practices, including several agreements to which we are a party. There is a risk that the increased scrutiny of the European pharmaceutical sector may lead to changes in the regulation of our business that would have an adverse impact on our results of operations in Europe.

We have sold and may in the future elect to sell generic products prior to the final resolution of outstanding patent litigation, and, as a result, we could be subject to liability for damages in the U.S., Europe and other markets where we do business.

Our ability to introduce new products depends in large part upon the success of our challenges to patent rights held by brand companies or our ability to develop non-infringing products. Based upon a variety of legal and commercial factors, we may elect to sell a generic product even though patent litigation is still pending, either before any court decision is rendered or while an appeal of a lower court decision is pending. The outcome of such patent litigation could, in certain cases, materially adversely affect our business. For example, we launched a generic version of Protonix® (pantoprazole), despite the fact that litigation with the company that sells the brand versions is still pending. Although the case remains subject to appeal, we received adverse decisions in the pantoprazole litigation in 2011.

If we sell products prior to a final court decision, whether in the United States, Europe or elsewhere, and such 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 liabilities for patent infringement, in the form of either payment for the innovator’s lost profits or a royalty on our sales of the infringing products. These damages may be significant, and could materially adversely affect our business. In the event of a finding of willful infringement, the damages may be up to three times the profits lost by the patent owner. 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. In addition, even if we do not suffer damages, we may incur significant legal and related expenses in the course of successfully defending against infringement claims.

Because we have substantial international operations, our sales and profits may be adversely affected by currency fluctuations and restrictions as well as credit risks.

In 2011, over 52% of our revenues came from sales outside the United States, a percentage that we expect to increase as we expand our non-U.S. operations. As a result, we are subject to significant foreign currency risks, including repatriation restrictions in certain countries. An increasing amount of our sales, particularly in Latin America, Central and Eastern European countries and Asia, is recorded in local currencies, which exposes us to the direct risk of devaluations, hyperinflation or exchange rate fluctuations. We may also be exposed to credit risks in some of these markets. The imposition of price controls or restrictions on the conversion of foreign currencies could also have a material adverse effect on our financial results.

In particular, although the majority of our net sales and operating costs is recorded in, or linked to, the U.S. dollar, our reporting currency, in 2011 we recorded sales and expenses in 34 other currencies. Approximately 57% of our operating costs in 2011 was incurred in currencies other than the U.S. dollar, particularly in euros, Israeli shekels, Hungarian forints, Canadian dollars, Japanese yen and the British pound. As a result, fluctuations in exchange rates between the currencies in which such costs are incurred and the U.S. dollar may have a material adverse effect on our results of operations, the value of balance sheet items denominated in foreign currencies and our financial condition.

We use derivative financial instruments to manage some of our net exposure to currency exchange rate fluctuations in the major foreign currencies in which we operate. We do not use derivative financial instruments or other “hedging” techniques to cover all of our potential exposure, and some elements of our financial

 

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statements, such as our equity position or operating profit, are not fully protected against foreign currency exposures. Therefore, we cannot assure you that we will be able to limit all of our exposure to exchange rate fluctuations that could affect our financial results.

Reforms in healthcare regulation and the uncertainty associated with pharmaceutical pricing, reimbursement and related matters could adversely affect the marketing, pricing and demand for our products.

The continuing increase in expenditures for healthcare has been the subject of considerable government attention almost everywhere we conduct business, particularly as public resources have been stretched by significant financial and economic crises in the United States and Western European countries. Both private health insurance funds and government health authorities are seeking ways to reduce or contain healthcare costs. In many countries and regions where we operate, including the United States, Western Europe, Israel, Russia, certain countries in Central and Eastern Europe and several countries in Latin America, pharmaceutical prices are subject to new government policies. 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 addition, “tender systems” for generic pharmaceuticals have been implemented (by both public and private entities) in a number of significant markets in which we operate, such as Germany and Russia, in an effort to lower prices. Under such tender systems, manufacturers submit bids that establish prices for generic pharmaceutical products. These measures impact marketing practices and reimbursement of drugs and may further increase pressure on competition and reimbursement margins. Certain other countries may consider the implementation of a tender system. Failing to win tenders, or the implementation of similar systems in other markets leading to further price declines, could have a material adverse affect on our business, financial position and results of operations.

Any failure to comply with the complex reporting and payment obligations under the Medicare and Medicaid programs may result in further litigation or sanctions, in addition to the lawsuits that we have previously announced.

The U.S. laws and regulations regarding Medicare and/or Medicaid reimbursement and rebates and other governmental programs are complex. Some of the applicable laws may impose liability even in the absence of specific intent to defraud. The subjective decisions and complex methodologies used in making calculations under these programs are subject to review and challenge, and it is possible that such reviews could result in material changes. A number of state attorneys general and others have filed lawsuits alleging that we and other pharmaceutical companies reported inflated average wholesale prices, leading to excessive payments by Medicare and/or Medicaid for prescription drugs. Such allegations could, if proven or settled, result in additional monetary penalties (beyond the lawsuits we have already settled) and possible exclusion from Medicare, Medicaid and other programs. In addition, we are notified from time to time of government investigations regarding drug reimbursement or pricing issues.

Government investigations into sales and marketing practices, particularly for our specialty pharmaceutical products, may result in substantial penalties.

We operate around the world in complex legal and regulatory environments, and any failure to comply with applicable laws, rules and regulations may result in civil and/or criminal legal proceedings. As those rules and regulations change or as interpretations of those rules and regulations evolve, our prior conduct or that of companies we have acquired may be called into question. In the United States, we are currently responding to federal investigations into our marketing practices with regard to several of our specialty pharmaceutical products, which could result in civil litigation brought on behalf of the federal government. Responding to such investigations is costly and involve a significant diversion of management’s attention. Such proceedings are unpredictable and may develop over lengthy periods of time. Consequently, we have in the past entered into

 

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settlement agreements with governmental authorities, including corporate integrity agreements, and may do so in the future. Future settlements may involve large cash penalties that could have a material adverse effect on our results of operations or cash flows.

Regulations to permit the sale of biotechnology-based products as biosimilar drugs, primarily in the United States, may be delayed, or may otherwise jeopardize our investment in such products.

We have made, and expect to continue to make, substantial investments in our ability to develop and produce biotechnology-based products, which require significantly greater early-stage financial commitments than “small-molecule” generic product development. Although some of these products may be sold as innovative products, one of our key strategic goals in making these investments is to position Teva at the forefront of the development of biosimilar generic versions of currently marketed biotechnology products. To date, in many markets, there does not yet exist a 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 we have made and will continue to make in our biotechnology capabilities. For example, in the healthcare reform legislation adopted in the United States, biosimilar products may not be approved for twelve years following approval of the branded biotechnology product. As a result, generic competition may be delayed significantly, adversely affecting our ability to develop a successful biosimilars business. The FDA is in the process of establishing regulations relating to biosimilars to implement the new healthcare legislation. These regulations, when ultimately adopted, could further complicate the process of bringing biosimilar products to market on a timely basis and could thus adversely affect our ability to develop a successful biosimilars business. While the FDA recently issued guidelines, their guidelines contained features that could significantly prolong the biosimilar development process and failed to address other important concerns.

We have significant operations in countries that may be adversely affected by political or economic instability, corruption, major hostilities or acts of terrorism.

We are a global pharmaceutical company with worldwide operations. Although over 78% of our sales are in North America and Western Europe, 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. In addition, in many less-developed markets, we rely heavily on third-party distributors and other agents for the marketing and distribution of our products. Many of these third parties do not have internal compliance resources comparable to ours. Business activities in many of these markets have historically been more susceptible to corruption. If our efforts to screen third-party agents and detect cases of potential misconduct fail, we could be held responsible for the noncompliance of these third parties under applicable laws and regulations, including the U.S. Foreign Corrupt Practices Act, which may have a material adverse effect on our reputation and our business, financial condition or results of operations.

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

 

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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 were to occur in the Middle East or trade between Israel and its present trading partners were curtailed, including as a result of acts of terrorism in the U.S. or elsewhere.

The manufacture of our products is highly complex, and an interruption in our supply chain or problems with internal or third party information technology systems could adversely affect our results of operations.

Our products are either manufactured at our own facilities or obtained through supply agreements with third parties. Many of our products are the result of complex manufacturing processes, and some require highly specialized raw materials. For some of our key raw materials, we have only a single, external source of supply, and alternate sources of supply may not be readily available. For example, we purchase raw materials for most of our oral contraceptive products, which make up a substantial portion of our women’s health business, exclusively or primarily from the same external source. If our supply of certain raw materials or finished products is interrupted from time to time, or proves insufficient to meet demand, our results of operations could be adversely impacted.

We also rely on complex shipping arrangements throughout the various facilities of our supply chain spectrum. Customs clearance and shipping by land, air or sea routes rely on and may be affected by factors that are not in our full control or are hard to predict.

In addition, we rely on complex information technology systems, including Internet-based systems, to support our supply-chain processes as well as internal and external communications. The size and complexity of our systems make them potentially vulnerable to breakdown or interruption, whether due to computer viruses or other causes that may result in the loss of key information or the impairment of production and other supply chain processes. Such disruptions and breaches of security could adversely affect our business.

The failure to recruit or retain key personnel, including Cephalon employees, or to attract additional executive and managerial talent, could adversely affect our business, particularly during our integration of Cephalon.

Given the increasing size, complexity and global reach of our business and our multiple areas of focus, each of which would be a significant stand-alone company, we are especially reliant upon our ability to recruit and retain highly qualified management and other employees. We have recently experienced a number of departures of key senior executives, including the chief executive officer and the head of our European operations, and the degree of success of the transition to new management will have a significant effect upon our business results. In addition, the success of our research and development activities depends on our ability to attract and retain sufficient numbers of skilled scientific personnel. Any loss of service of key members of our organization, or any diminution in our ability to continue to attract high-quality employees, may delay or prevent the achievement of major business objectives.

In addition, the Cephalon acquisition involves the integration of two companies that have previously operated independently. The success of the combined company will depend in part upon the retention of key Cephalon employees, which may be difficult in light of the intense competition for qualified personnel in the pharmaceutical industry. The closing of the acquisition triggered the payout of employee equity awards (including those that were previously unvested) to Cephalon employees, eliminating the retention effect of such awards.

 

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Sales of our products may be adversely affected by the continuing consolidation of our customer base.

A significant proportion of our sales is made to relatively few U.S. retail drug chains, wholesalers, managed care purchasing organizations, mail order distributors and hospitals. These customers are continuing to undergo significant consolidation. Net sales to one such customer in 2011 accounted for 14% of our total consolidated sales. Such consolidation has provided and may continue to provide them with additional purchasing leverage, and consequently may 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 also be affected by fluctuations in the buying patterns of retail chains, major distributors and other trade buyers, whether resulting from seasonality, pricing, wholesaler buying decisions or other factors. In addition, since such a significant portion of our U.S. revenues is derived from relatively few customers, any financial difficulties experienced by a single customer, or any delay in receiving payments from a single customer, could have a material adverse effect on our business, financial condition and results of operations.

Because our facilities are located throughout the world, we are subject to varying patent laws that may adversely affect our ability to manufacture our products in the most efficient manner.

We are subject to legislation in all countries where we have manufacturing facilities relating to patents. Modifications of such legislation or court decisions regarding such legislation may adversely affect us and may impact our ability to export products manufactured in any such country in a timely fashion. Additionally, the existence of third-party patents in such countries, with the attendant risk of litigation, may cause us to move production to a different country (with potentially serious timing delays) or otherwise adversely affect our ability to export certain products from such countries. For example, legislation is currently pending in Israel that may affect the duration of patent term extension provisions.

The increasing amount of intangible assets and goodwill recorded on our balance sheet 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 and indefinite life intangible assets are subject to impairment review at least annually. Other long-lived assets are reviewed when there is an indication that an impairment may have occurred. The amount of goodwill and identifiable intangible assets on our consolidated balance sheet has increased significantly to $28.6 billion as a result of our acquisitions, and may increase further following future acquisitions as a result of changes in U.S. accounting rules regarding the treatment of in-process research and development. Impairment testing under U.S. GAAP may lead to further impairment charges in the future. In addition, we may from time to time sell assets that we determine are not critical to our strategy or execution. Future events or decisions may lead to asset impairments and/or related charges. Certain non-cash impairments may result from a change in our strategic goals, business direction or other factors relating to the overall business environment. Any significant impairment charges could have a material adverse effect on our results of operations.

Our tax liabilities could be larger than anticipated.

We are subject to tax in many jurisdictions, and significant judgment is required in determining our provision for income taxes. Likewise, we are subject to audit by tax authorities in many jurisdictions. In such audits, our interpretation of tax legislation might be challenged and tax authorities in various jurisdictions may disagree with, and subsequently challenge, the amount of profits taxed in such jurisdictions under our inter-company agreements. Although we believe our estimates are reasonable, the ultimate outcome of such audits and related litigation could be different from our provision for taxes and might have a material adverse effect on our financial statements.

 

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Termination or expiration of governmental programs or tax benefits could adversely affect our overall effective tax rate.

Our tax expenses and the resulting effective tax rate reflected in our financial statements are likely to increase over time as a result of changes in corporate income tax rates, other changes in the tax laws of the various countries in which we operate or changes in the mix of countries where we generate profit. We have benefited or currently benefit from a variety of Israeli and other government programs and tax benefits that generally carry conditions that we must meet in order to be eligible to obtain such benefits. If we fail to meet the conditions upon which certain favorable tax treatment is based, we would not be able to claim future tax benefits and could be required to refund tax benefits already received. Additionally, some of these programs and the related tax benefits are available to us for a limited number of years, and these benefits expire from time to time.

Any of the following could have a material effect on our overall effective tax rate:

 

   

some government programs may be discontinued,

 

   

we may be unable to meet the requirements for continuing to qualify for some programs,

 

   

these programs and tax benefits may be unavailable at their current levels,

 

   

upon expiration of a particular benefit, we may not be eligible to participate in a new program or qualify for a new tax benefit that would offset the loss of the expiring tax benefit, or

 

   

we may be required to refund previously recognized tax benefits if we are found to be in violation of the stipulated conditions.

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, storage, 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.

 

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ITEM 4: INFORMATION ON THE COMPANY

Introduction

Teva Pharmaceutical Industries Limited (“Teva”) is a global pharmaceutical company that combines the world’s leading generics business with a world-class specialty pharmaceuticals business, as well as a new joint venture focusing on over-the-counter (“OTC”) products. Our mission is to provide a broad range of affordable and effective medicines to patients around the world. We seek to capitalize on the dynamics of a growing generic market, including: aging populations, economic pressures on governments to provide less expensive healthcare options, legislative reform and the movement of decision-making power to payors, unmet needs in the market for pharmaceuticals and the growing importance of OTC medications. We believe that our broad product offerings, economies of scale, expansive geographic reach and globally integrated infrastructure position us to take advantage of these dynamics.

Our business comprises three primary areas—generic, branded and OTC products:

 

   

We are the leading generic drug company in the world and have held the leading position in the United States for almost a decade. We are also the leading generic drug company in Europe, where we have a balanced presence throughout the region. In addition, we have significantly increased our presence in our “rest of the world” markets. We are now the third leading generics company in Japan and have experienced significant growth in Russia and Latin America.

 

   

With our recent addition of Cephalon’s branded business, we have established a world-class specialty pharmaceutical business with an extensive late-stage pipeline.

 

   

We have significantly strengthened our OTC business through the creation of a joint venture with The Procter & Gamble Company (“P&G”), whose marketing expertise and expansive global platform provide a competitive advantage.

In 2011, approximately 56% of our revenues were generated from generic pharmaceuticals, including active pharmaceutical ingredients (“APIs”) sold to third parties, and approximately 35% from branded products, which include Copaxone® for multiple sclerosis, Azilect® for Parkinson’s disease, our respiratory and women’s health products and products from the Cephalon portfolio. With the acquisition of Cephalon in late 2011, our branded portfolio was expanded to include, most significantly, Provigil® for excessive sleepiness associated with narcolepsy, obstructive sleep apnea and shift work disorder, and Treanda® for chronic lymphocytic leukemia and indolent B-cell non-Hodgkin’s lymphoma that has progressed during or within six months of treatment with rituximab or a rituximab-containing regimen. Our remaining revenues were generated from our joint venture with P&G and our other activities such as our Hungarian and Israeli distribution services to third parties. We expect our revenues from branded products to increase as a result of the Cephalon acquisition.

In 2011, we generated approximately 48% of our revenues in the United States, approximately 31% in Europe (which for the purpose of this report includes all European Union (“EU”) member states, Norway and Switzerland) and approximately 21% in our rest of the world markets (primarily Canada, Latin America, Israel, Russia and other Eastern European countries that are not members of the EU). For a three year breakdown of our revenues by business line and by geography, see “Item 5: Operating and Financial Review and Prospects—Results of Operations.”

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. Our executive offices are located at 5 Basel Street, P.O. Box 3190, Petach Tikva 49131, Israel, and our telephone number is +972-3-926-7267. Our website is www.tevapharm.com.

 

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Strategy

Our strategy is designed to reinforce our balanced business model by diversifying our sources of revenue so that we are not dependent on any single market or product. While we expect generic pharmaceuticals to remain our main business, we continue to seek to increase the number of marketed products in our branded portfolio. We also continue to seek greater geographical diversity, with European and rest of the world markets comprising a greater portion of our revenues. Key elements of our strategy include:

 

   

Increasing Our Generic Market Share: Growing our market share, particularly in Europe and in key markets in Latin America, Central and Eastern Europe and Asia, which currently have low generic penetration rates, as well as in the United States, the world’s largest market for generic pharmaceuticals. We believe that such growth will result from (i) the growing demand for generic pharmaceuticals, (ii) new product opportunities, as brand products with 2011 sales of approximately $135 billion will lose patent protection by 2015, and (iii) our competitive advantages and existing leadership positions in many markets;

 

   

Investing in Our Generic Portfolio: Improving our generic R&D capabilities and production capacity, with a focus on capturing more high-value opportunities, in particular more complex products with greater barriers to entry, in key markets, as well as leveraging our broad product portfolio to enhance our market position globally;

 

   

Expanding Branded Pharmaceuticals: Building on our and Cephalon’s branded product pipeline and capabilities in combination with existing R&D, licensing and other business development opportunities. We now have over 40 products in various stages of clinical development, over half of which are in Phase III or beyond. Our focus is two-fold: strengthening existing therapeutic areas, such as our central nervous system, oncology, respiratory and women’s health products, while exploring opportunities to expand into other niche therapeutic areas;

 

   

Increasing Global OTC Opportunities: Expanding global sales of OTC products through our new joint venture with P&G. We are leveraging our broad geographic reach, experience in R&D, regulatory and manufacturing expertise and extensive portfolio of products with P&G’s strong brand-building, consumer-led innovation and go-to-market capabilities;

 

   

Investing in Biopharmaceuticals: Continuing to invest, either directly or in partnership with others, in the technologies, infrastructure and capabilities necessary to develop and produce affordable biopharmaceuticals, including biosimilars;

 

   

Expanding Vertical Integration: Expanding our already significant vertical integration to provide us with early access to high quality APIs and improve our profitability, in addition to further enhancing our API R&D capabilities;

 

   

Enhancing Customer Service: Rapidly responding to customers’ needs by broadening our product portfolio, executing more new product launches, optimizing our global supply chain, helping customers more efficiently manage their inventory and customizing shipping methods based on specific customer needs; and

 

   

Pursuing Potential Acquisitions: Continuing to evaluate potential acquisitions, collaborations and other business combinations that will complement or enhance our existing businesses, either through expanding our market share in attractive geographies or acquiring niche specialty products.

During the past year, among the important steps we took to advance our long-term goals were the acquisitions of Cephalon, Taiyo, Teva-Kowa, Théramex and Infarmasa and the formation of our OTC joint venture with P&G.

 

   

Cephalon: In October 2011, we acquired Cephalon, Inc., a global biopharmaceutical company with a strong marketed portfolio and pipeline of branded products, for $6.5 billion in cash. This acquisition diversified our branded portfolio and enhanced our late-stage innovative pipeline.

 

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Taiyo: In July 2011, we acquired Taiyo Pharmaceutical Industry Co. Ltd. for $1.1 billion in cash. Taiyo has developed one of the largest portfolios of generic products in Japan with over 550 marketed products, and its advanced production facilities enable it to produce a wide range of dosage forms on a large scale.

 

   

Teva-Kowa: In September 2011, we acquired from Kowa Company Ltd. the remaining 50% of our Japanese joint venture that we did not already own for $150 million in cash. This acquisition, together with Taiyo, has made Teva the third largest generic pharmaceuticals company in Japan.

 

   

PGT Consumer Healthcare: In November 2011, we formed a consumer health care joint venture with P&G, which combined the companies’ OTC pharmaceutical businesses in all markets outside North America. We own 49% of the joint venture, and P&G holds the remaining 51%.

 

   

Laboratoire Théramex: In January 2011, we acquired Laboratoire Théramex, whose product portfolio includes a wide variety of women’s health products sold in over 50 countries, primarily in Europe.

 

   

Infarmasa: In January 2011, we also acquired Corporación Infarmasa, a top ten pharmaceutical company in Peru with over 500 branded and unbranded generic drugs. Following the acquisition, we became one of the top two pharmaceutical companies in Peru.

Product Offerings

Generic Products

Generic pharmaceuticals are the chemical and therapeutic equivalents of originator pharmaceuticals and are typically sold at prices substantially below those of the originator’s product. Generics are required to meet similar governmental regulations as their brand-name equivalents offered or sold by the originator (such as those relating to manufacturing processes and FDA inspections) and must receive regulatory approval prior to their sale in any given country. In the United States, the world’s largest generic market, generic pharmaceuticals may be manufactured and marketed if relevant patents on their brand-name equivalents (and any additional government-mandated market exclusivity periods) have expired or have been challenged and invalidated or otherwise circumvented.

We manufacture and sell generic pharmaceutical products in a variety of dosage forms, including tablets, capsules, ointments, creams, liquids, injectables and inhalants. We offer a broad range of basic chemical entities, as well as specialized product families such as sterile products, hormones, narcotics, high-potency drugs and cytotoxic substances, in both parenteral and solid dosage forms.

Sales of generic pharmaceuticals have benefitted from increasing awareness and acceptance on the part of healthcare insurers and institutions, consumers, physicians and pharmacists globally. Factors contributing to this increased awareness are the passage of legislation permitting or encouraging generic 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. Further, more governments are issuing regulations designed to increase generic penetration, in countries as diverse as Japan and Brazil. We believe that these factors, together with an aging population and an increased focus on decreasing healthcare costs, as well as the large number of branded products losing patent protection over the coming years, should lead to continued expansion of the generic pharmaceuticals market.

The increasing acceptance of generic drugs globally has been mirrored by an increasing number of generic producers, and in recent years, by consolidation among generic producers. In addition, a number of innovative pharmaceutical producers have begun investing in producing and marketing generic drugs, either via internal growth or via acquisitions. The increased level of competition also impacts the pricing of generic products.

 

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In markets such as the United States, the United Kingdom, the Netherlands and Israel, generic pharmaceuticals are substituted by the pharmacist for their brand name equivalent. In these so called “pure generic” markets, physicians or patients have little control or say over the choice of generic manufacturer; generic drugs are not actively marketed or promoted to physicians and the relationship between the generic manufacturer and the pharmacy chains and distributors, health funds, and other health insurers is critical. In markets such as Poland, Austria and Hungary, as well as some Asian and Latin American countries, generics are sold under brand names, alongside the originator brand. In many of these “branded generic” markets, pharmacists dispense the specific pharmaceutical product prescribed by the physician, and substitution between originator brand, branded generic and/or generic manufacturers is often limited without the physician’s consent. In other markets, substitution is permitted but may be limited by market forces such as brand strength and reimbursement policies. In the branded generic markets, generic products are actively promoted and a sales force is necessary. Other markets, such as Germany, France, Italy and Spain, are hybrid markets with elements of both approaches.

Through coordinated global research and development activities, we constantly seek to expand our range of generic products, with an emphasis on high-value products, including those with high barriers to entry. Our generic product development strategy is two-fold: to be the first to introduce generic products to market and to achieve market introduction at the earliest possible date, which may involve attempting to invalidate or otherwise legally circumvent existing patents. We actively review pharmaceutical patents and seek opportunities to challenge those patents that we believe are either invalid or would not be infringed by a generic version. From time to time we enter into agreements settling patent litigation with brand companies. We believe that these agreements benefit both consumers, by accelerating the introduction and increasing the availability of our lower cost generic products, and us, by removing uncertainty regarding possible litigation risks. We will continue to evaluate any potential future settlements on a case-by-case basis.

When considering whether to develop a generic medicine, we take into account R&D recommendations, manufacturing capabilities, regulatory and IP restrictions and commercial factors. In furtherance of this strategy, we also seek to enter into alliances to acquire rights to products we do not have or to otherwise share development costs or litigation risks, or to resolve patent barriers to entry.

We have the largest generic R&D team in the industry, with capabilities in a wide range of dosage forms and therapeutic areas as well as in specialized product families, such as hormones, narcotics, high-potency drugs and cytotoxic substances. Due to our R&D capabilities, global presence, robust technology and vertical integration, we offer the largest product portfolio in the generic industry and are well-positioned to respond quickly and efficiently to new opportunities.

Our position in the generics market is supported by our API R&D and manufacturing activities, which provide significant vertical integration for our own products and which we also sell to third parties. APIs used in pharmaceutical products are also subject to regulatory oversight by national health authorities. We currently have a portfolio of over five hundred U.S. and European active API registrations. In selling our API products, we compete globally with other specialty chemical producers.

Branded Products

Our branded business is focused on delivering innovative solutions to patients and providers via pharmaceuticals, devices and services. Our global business reaches all key regions and markets. We focus on niche, specialty markets that allow us to have a deep understanding of the therapeutic area and patient and provider needs, while enhancing the efficiency of our commercial model. We offer branded products in several therapeutic classes, including central nervous system (“CNS”), respiratory, women’s health and oncology.

We seek to address unmet needs in niche areas through the acquisition of assets that we then develop and register for commercialization in global markets. These unmet needs are addressed through innovative new chemical entities (such as in CNS or oncology) or through the enhancement of delivery of existing chemical entities (respiratory or women’s health).

 

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Through our size and scale, we are able to realize efficiencies in how we market to large customers such as wholesalers, retailers and payors. We can focus on specialists in the areas we promote through sales and marketing, while benefiting from the scale of our business with large customers.

Our branded products face intense competition from both other branded and generic pharmaceuticals, each within their respective indication. We believe that our primary competitive advantages are the body of scientific evidence substantiating the safety and efficacy of our different products, as well as physicians’ experience with them.

Central Nervous System

Our expanding CNS portfolio includes two leading proprietary drugs, Copaxone® for the treatment of multiple sclerosis and Azilect® for the treatment of Parkinson’s disease, as well as several novel therapies for the treatment of pain and sleep disorders. We are dedicated to improving the lives of people with neurological disorders and seek to strengthen our innovative CNS pipeline.

Copaxone® (glatiramer acetate injection), our largest and first major branded product, is the leading multiple sclerosis therapy and is approved in more than 50 countries worldwide, including the United States, Russia, Canada, major Latin American markets, Australia, Israel, and all European countries. Copaxone® is indicated for the reduction of the frequency of relapses in relapsing-remitting multiple sclerosis (RRMS), including patients who have experienced a first clinical episode and have MRI features consistent with multiple sclerosis.

Multiple sclerosis is the most common cause of neurological disability in young adults and affects more than 2.5 million people worldwide. In the majority of patients, the disease is of the relapsing-remitting form, which is manifested by relapses followed by recovery or remission.

Copaxone®, the first non-interferon immunomodulator approved for the treatment of RRMS, has a unique mechanism of action that works with the immune system unlike many therapies that rely on general immune suppression or cell sequestration to exert their effect. By working with the immune system to help restore the immune system balance, Copaxone® provides both efficacy and safety for the long-term. Additionally, both clinical and preclinical research indicates that Copaxone® reduces brain volume loss and increases the production of factors that enhance neuronal repair. Copaxone® provides a sustainable treatment approach with strong long-term efficacy and safety as proven by more than one million patient years of treatment and 20 years of clinical experience.

We are approaching the end of a long-term collaborative agreement with Sanofi for the marketing of Copaxone® in Europe and other markets. In 2010, we assumed the distribution and marketing responsibilities for Copaxone® in the United Kingdom, the Czech Republic and Poland. On February 1, 2012, we assumed the marketing responsibilities for Copaxone® in all other European countries, and will also do so in Australia and New Zealand effective March 1, 2012. Sanofi is entitled to receive 6% of the in-market sales of Copaxone® in the applicable countries in Europe for a period of two years from when we assumed marketing responsibilities. Although we have recorded higher revenues as a result of these changes, we also become responsible for certain marketing and administrative expenses, which are no longer shared with Sanofi.

We have Orange Book-listed patents relating to Copaxone® with terms expiring in May 2014 as well as a non-Orange Book patent expiring in September 2015 in the United States. Additionally, we have patents expiring in May 2015 in most of the rest of the world. We also hold patents protecting various aspects of the process of preparing Copaxone® and methods of analyzing this product that expire between 2019 and 2024. Copaxone® is subject to various patent challenges in the United States. See note 12b to the consolidated financial statements.

Teva remains committed to the continued research and development of Copaxone®. In June 2011, we announced the completion of patient enrollment for the GALA trial—a Phase III trial designed to examine the

 

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efficacy, safety and tolerability of 40mg Copaxone® administered three times a week compared to placebo in patients with RRMS. This dose (glatiramer acetate, 40mg) is a higher strength than the currently marketed 20mg of Copaxone® injected daily. Results from the GALA trial are expected in mid 2012.

Additionally, we plan to continue to study a reduced-volume injection of Copaxone® designed to enhance the patient injection experience as it relates to injection pain and injection site reactions.

The principal therapies which closely compete with Copaxone® are the four first-line beta-interferon products: Avonex®, Betaseron®, Extavia® and Rebif®. We expect that in the next few years, the multiple sclerosis treatment landscape will change significantly, primarily as a result of new and emerging therapies. In September 2010, the first oral drug, Gilenya® (fingolimod), was approved by the FDA for the treatment of RRMS patients and included a risk evaluation and mitigation strategies (REMS) program to inform healthcare providers about serious safety risks, including bradyarrhythmia and atrioventricular block at treatment initiation, infections, macular edema, respiratory effects, hepatic effects, and fetal risk. Gilenya® has been authorized in the European Union since March 2011. In January 2012, the European Medicines Agency (“EMA”) initiated a formal review of Gilenya®, following cases of death and serious cardiovascular events in patients who had recently started treatment with the medicine.

Provigil® (modafinil), which was launched by Cephalon in 1999, is indicated for the treatment of excessive sleepiness associated with narcolepsy, obstructive sleep apnea (“OSA”) and shift work disorder (“SWD”). We expect that Provigil® will face competition in the United States beginning in April 2012, and, as a result, Provigil® revenues will materially decline. Outside the United States, Provigil® currently is approved, under various trade-names, in more than 30 countries, including France, the United Kingdom, Ireland, Italy and Germany, for the treatment of excessive daytime sleepiness associated with narcolepsy. In certain of these countries, we also have approval to market Provigil® to treat excessive sleepiness in patients with OSA and/or SWD.

Nuvigil® (armodafinil), the R-isomer of modafinil, is indicated for the treatment of excessive sleepiness associated with narcolepsy, OSA and SWD. It was launched by Cephalon in June 2009.

In January 2011, Cephalon announced positive results from a Phase IV clinical trial of Nuvigil®, in patients experiencing excessive sleepiness associated with SWD, specifically during the end of their night shifts (i.e., 4:00 a.m. to 8:00 a.m.), including the commute home. The study data showed statistically significant improvement in overall clinical condition related to late-shift sleepiness in patients receiving Nuvigil®, compared to the placebo group. This was the largest trial ever conducted in this patient population, with more than 380 patients randomized to treatment with Nuvigil® or placebo.

Following the positive results of a Phase II clinical trial of Nuvigil® as adjunctive therapy for treating major depressive disorder in adults with bipolar I disorder, Cephalon initiated three Phase III clinical trials, the first of which is expected to be completed in early 2012 and the remaining two trials in late 2012 or early 2013.

Several products, including methylphenidate products, compete with Provigil® and Nuvigil®.

Nuvigil® is protected by patents expiring in 2024, which are subject to various patent challenges in the United States.

Azilect® (rasagiline tablets) is indicated as initial monotherapy and as an adjunct to levodopa for the treatment of Parkinson’s disease, the second most common neurodegenerative disorder.

Azilect® is a second-generation, irreversible monoamine oxidase type B (MAO-B) inhibitor, indicated for treating the signs and symptoms of Parkinson’s disease in both early and moderate to advanced stages of the disease, with a favorable tolerability and safety profile. Although symptom-reducing therapies are available, many of them have efficacy, safety and tolerability concerns.

 

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Azilect® was launched in its first market, Israel, in March 2005, followed by a rolling launch in various European markets, and became available in the United States in 2006. Currently, Azilect® is approved for marketing in 45 countries.

Based on the results of the ADAGIO study, in December 2010, we filed a supplemental New Drug Application (sNDA) for Azilect® seeking an expanded label for the slowing of clinical progression of Parkinson’s disease. In January 2012, we received a complete response letter from the FDA relating to the application. We are reviewing the details of the letter and evaluating next steps.

We jointly market Azilect® with Lundbeck in certain key European countries. We exclusively market Azilect® in the United States and certain other markets, while Lundbeck exclusively markets Azilect® in the remaining European countries and certain other rest of the world markets.

Azilect® is protected in the United States by several patents that will expire between 2012 and 2027. We hold European patents covering Azilect® that will expire in 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® has data exclusivity protection in EU countries until 2015. Azilect® is subject to various patent challenges in the United States.

Azilect®’s competitors include both branded and generic versions of the newer non-ergot dopamine agonists class, including Mirapex® /Sifrol® (pramipexole), Requip® (ropinirole) and Neupro® (rotigotine), which are indicated for all stages of Parkinson’s disease, as well as Comtan®, a COMT inhibitor, indicated only for adjunct therapy in moderate to advanced stages of the disease.

Pain therapy. As a result of the Cephalon acquisition, our CNS portfolio now also includes Fentora® (fentanyl citrate buccal tablet) and Actiq® (oral transmucosal fentanyl citrate) for the treatment of breakthrough pain in opioid-tolerant adult patients with cancer, and Amrix® (cyclobenzaprine hydrochloride extended-release capsules) for relief of muscle spasm in acute, painful, musculoskeletal conditions.

Respiratory Products

We are committed to delivering a range of respiratory products for asthma, chronic obstructive pulmonary disease (COPD) and allergic rhinitis. Our portfolio includes innovative new chemical entities, as well as existing products that utilize specific proprietary delivery devices.

In recent years, we have continued to build upon our experience in the development, manufacture and marketing of inhaled respiratory drugs delivered by metered-dose and dry powder inhalers, primarily for bronchial asthma and COPD. In addition, we have invested in high quality manufacturing capability for press and breathe metered-dose inhalers, nasal sprays and nebulizers.

Below is a description of our main respiratory products:

ProAir (albuterol HFA) is an inhalation aerosol with a short-acting beta-agonist for the treatment of bronchial spasms linked to asthma or COPD and exercise-induced bronchospasm. Albuterol is the standard-of-care reliever therapy for these indications and one of the main components of most asthma and COPD treatments. The efficacy and safety profile of albuterol, which is used by millions of patients every day around the world, is well established. ProAir is marketed in the United States only and is the market leading reliever therapy.

Four major brands compete with ProAir in the U.S. market for the short acting beta agonist segment: Ventolin® (albuterol) by GlaxoSmithKline, Proventil® (albuterol) by Merck, Xopenex® (levalbuterol) by Sunovion and Maxair® (pirbuterol) by Graceway.

 

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Qvar® (beclomethasone diproprionate HFA) is an inhaled corticosteroid for long-term control of chronic bronchial asthma. Inhaled corticosteroids are the standard-of-care maintenance therapy for asthma. Qvar® is the fastest growing inhaled corticosteroid in the United States, capturing approximately 23% of the market. Teva directly markets Qvar® in the United States and major European markets. It is manufactured for us by 3M.

Four major global brands compete with Qvar® in the mono inhaled corticosteroid segment: Flixotide/Flovent® (fluticasone) by GlaxoSmithKline, Pulmicort® (budesonide) by AstraZeneca, Asmanex® (mometasone) by Merck and Alvesco® (ciclesonide) by Nycomed.

Oncology Products

Our oncology product line was enhanced by the addition of Treanda® through the Cephalon acquisition, as well as several late stage oncology development programs. Our development efforts are aimed at broadening our reach beyond the current hematology focus to include treatment of a variety of solid tumors and include novel new chemical entities as well as innovative biological approaches.

Treanda® (bendamustine hydrochloride) is approved in the United States for the treatment of patients with chronic lymphocytic leukemia (CLL) and patients with indolent B-cell non-Hodgkin’s lymphoma (NHL) that has progressed during or within six months of treatment with rituximab or a rituximab-containing regimen. We hold rights to Treanda® in the United States and certain other countries.

We are currently conducting a Phase III clinical trial of Treanda® in combination with Rituxan®, as a front-line treatment for NHL. In addition, results of an independent Phase III clinical study conducted by the German Study for Indolent Lymphomas Group (the “StiL Group”) in Giessen, Germany were announced in December 2009. The study for the first-line treatment of patients with advanced follicular, indolent, and mantle cell lymphomas indicated better tolerability and more than a 20-month improvement in median progression free survival when treated with Treanda® in combination with rituximab compared to cyclophosphamide, doxorubicin, vincristine, and prednisone in combination with rituximab. In December 2011, we submitted the StiL Group’s study results to the FDA as an sNDA for Treanda® for the treatment of front-line indolent B-cell NHL. Treanda® is protected by New Chemical Entity exclusivity until March 2013. Additionally, in December 2011, we submitted to the FDA a request for pediatric extension for Treanda®. If the pediatric extension is granted, the exclusivity for Treanda® will be extended until September 2013.

Treanda®’s competitors include other combination therapies such as R-CHOP (a combination of cyclophosphamide, vincristine, doxorubicin and prednisone in combination with rituximab) and CVP-R (a combination of cyclophosphamide, vincristine and prednisolone in combination with rituximab) for the treatment of NHL, as well as FCR (a combination of fludarabine, doxorubicin and rituximab) for the treatment of CLL.

Tevagrastim®/Ratiograstim® (filgrastim) are Granulocyte Colony Stimulating Factor (GCSF) based products that stimulate the production of white blood cells and are primarily used to reduce the risk of infections in oncology patients receiving chemotherapy. In September 2008, Tevagrastim® and Ratiograstim®, jointly developed by Teva and ratiopharm, became the first biosimilar GCSFs to be approved by the EMA. Clinical trials have demonstrated that Tevagrastim® and Ratiograstim® have an efficacy and safety profile equivalent to that of Amgen’s Neupogen®, the first GCSF product. Tevagrastim® and Ratiograstim® have been approved for the entire scope of Neupogen®’s therapeutic indications and are available in most European countries.

Eporatio® (erythropoietin) stimulates the production of red blood cells and is indicated for the treatment of renal anemia or chemotherapy-induced anemia. Clinical trials have demonstrated that Eporatio® has an efficacy and safety profile equivalent to that of Roche’s NeoRecormon®. Eporatio® is now approved in all 27 EU member states, Norway, Switzerland and Iceland.

 

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Women’s Health Products

Our Women’s Health product line focuses on several therapeutic areas, including oral contraceptives, intrauterine contraception, hormone therapy treatments for menopause/perimenopause, and therapies for use in infertility and urinary incontinence.

Below is a description of our main Women’s Health products in the United States:

Plan B® One-Step OTC/Rx (levonorgestrel) is an emergency oral contraceptive which consists of a single tablet dose of levonorgestrel for emergency contraception. Plan B® One-Step is intended to prevent pregnancy when taken within 72 hours after unprotected intercourse or contraceptive failure and is available over-the-counter for consumers 17 years of age and older and by prescription for women under 17.

ParaGard® T380 A (intrauterine copper contraceptive) is a non hormonal intrauterine contraceptive. ParaGard® provides women with a highly effective, long-term, reversible, non-hormonal contraceptive option. It is the only intrauterine contraceptive approved for up to 10 years of continuous use and is more than 99% effective at preventing pregnancy.

In January 2011, we completed the acquisition of Théramex Labratories, as part of our efforts to expand our women’s health business into key growth markets in Europe. Key products sold by Théramex include: Orocal®, a calcium supplement for the treatment of osteoporosis; Colpotrophine®, for vaginal atrophy; Lutenyl®, for menopause; Monazol®, for fungal dermatitis; Estreva®, for estrogen deficiencies; Antadys®, for dysmenorrhea; and Leeloo Gé®, an oral contraceptive. In addition, Théramex (in partnership with Merck & Co.) has developed Zoely®, a novel oral contraceptive combination of an estrogen identical to natural estrogen and a selective progestin. Zoely® was launched in France in December 2011 and in Belgium in January 2012. We hold the marketing rights for Zoely® in several European countries.

Consumer Healthcare Joint Venture

In November 2011, we formed PGT Healthcare, a consumer healthcare joint venture with P&G. The joint venture focuses on branded OTC medicines in categories such as cough/cold and allergy, digestive wellness, vitamins, minerals and supplements, analgesics and skin medications, and will operate in all markets outside North America. Its leading brands are Vicks®, Metamucil®, Pepto-Bismol® and ratiopharm®. The joint venture will also develop new brands for the North American market and certain global markets. We own 49% of the joint venture, and P&G holds the remaining 51%.

PGT Healthcare combines the companies’ OTC businesses outside of North America, and is expected to grow by capitalizing on:

 

   

P&G’s strong brand-building, consumer-led innovation and go-to-market capabilities;

 

   

our broad geographic reach, experience in R&D, regulatory and manufacturing expertise and extensive portfolio of products;

 

   

expanding the partners’ product and brand portfolios into more countries with large and fast-growing OTC markets;

 

   

expanding into new OTC categories (such as prescription products that have become OTC products); and

 

   

each company’s scale and operational efficiencies.

Other Revenues

We have other sources of revenues, such as sales of third party products for which we act as distributors, mostly in Israel and Hungary, and which are typically low margin activities. In 2011, our distribution activities to

 

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third parties comprised the majority of our Other Revenues. Also included are sales of animal health products, medical device products and other miscellaneous items.

Teva’s Markets

United States

In the United States, Teva is a leading pharmaceutical company, with a strong presence in both the generic and branded markets.

Generic Pharmaceuticals

We are the leading generic drug company in the United States We market over 400 generic products in more than 1,300 dosage strengths and packaging sizes, including oral, injectables and inhaled products. We believe that the breadth of our product offerings has been and will continue to be of strategic significance as the generics industry grows and as consolidation continues among purchasers, including large drugstore chains, wholesaling organizations, buying groups and managed care providers.

In 2011, we led the U.S. generic market in total prescriptions and new prescriptions, with total prescriptions amounting to approximately 524 million in 2011, representing 17.1% of total U.S. generic prescriptions. We expect that our U.S. market leadership will continue to be based on our ability to introduce new generic equivalents for brand-name products on a timely basis, emphasis on customer service, the breadth of our product line, our commitment to regulatory compliance and our cost-effective production.

We expect that our revenues in the United States will continue to be fueled by our strong U.S. generic pipeline, which, as of February 5, 2012, had 177 product registrations awaiting FDA approval (including some products through strategic partnerships), including 47 tentative approvals. Collectively, the branded versions of these products had U.S. sales in 2011 exceeding $114 billion. Of these applications, 120 were “Paragraph IV” applications challenging patents of branded products. We believe we are the first to file with respect to 74 of these products, the branded versions of which had U.S. sales of more than $52 billion in 2011. IMS reported brand sales are one of the many indicators of future potential value of a launch, but equally important are the mix and timing of competition, as well as cost effectiveness. However, potential advantages of being the first filer with respect to some of these products may be subject to forfeiture, shared exclusivity or competition from so-called “authorized generics,” which may ultimately affect the value derived.

Marketing and Sales. In 2011, our generics sales in the United States by channel were as follows:

 

     2011  

Drug store chains

     43

Drug wholesalers*

     38

Managed care organizations

     10

Generic distributors

     6

Governmental facilities and others

     3

 

* A major portion of the products sold to wholesalers ends up in drug store chains and therefore is not reflected in the data presented above.

Our sales organization consists of the Teva Generics group and the Teva Health Systems group. The Teva Generics sales force focuses calls primarily on purchasing agents for chain drug stores, drug wholesalers, mail order pharmacies and pharmacy buying groups. 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.

 

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In the United States, our wholesale selling efforts are supported by professional journal advertising and exhibitions at key medical and pharmaceutical conventions. From time to time, we also bid for U.S. government contracts.

Competitive Landscape. In the United States we are subject to intense competition in the generic drug market from other domestic and foreign generic drug manufacturers, brand-name pharmaceutical companies through lifecycle management initiatives, authorized generics, existing brand equivalents and manufacturers of therapeutically similar drugs. We believe that our primary competitive advantages are our ability to continually introduce new generic equivalents for brand-name drug products on a timely basis, quality and cost-effective production, our customer service and the breadth of our product line.

A significant proportion of our U.S. generic sales are 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 favors large suppliers that are capable of providing quality, a wide range of products and cost-efficient quantities.

Price competition from additional generic versions of the same product typically results 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. 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.

Branded Pharmaceuticals

With the acquisition of Cephalon, we have continued to expand our specialty branded portfoilio. Copaxone®, our multiple sclerosis treatment, has been the market leader since 2008 and has a U.S. market share of approximately 40%. Our respiratory products ProAir for the treatment of bronchial spasms, and Qvar® for long-term control of chronic bronchial asthma, maintained their leading positions within their respective indications. As a result of the Cephalon acquisition, our branded portfolio was expanded to include, most significantly, Provigil® and Nuvigil® for excessive sleepiness associated with narcolepsy, OSA and SWD, and Treanda® for chronic lymphocytic leukemia and indolent B-cell non-Hodgkin’s lymphoma that has progressed during or within six months of treatment with rituximab or a rituximab-containing regimen.

Our specialty marketing and sales organization concentrates on the therapeutic areas of CNS, respiratory, oncology and women’s health. Within each therapeutic area, our trained sales representatives seek to address the needs and preferences of patients as well as healthcare professionals. We are able to tailor our patient support, payor relations and medical affairs functions to the characteristics of each market, which differ according to the specific product.

Regulatory Highlights. All pharmaceutical manufacturers selling products in the U.S. are subject to extensive governmental regulation, principally by the FDA and the Drug Enforcement Administration (“DEA”).

 

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The Hatch-Waxman Act established the procedures for obtaining FDA approval for generic forms of brand-name drugs, and includes market exclusivity provisions that can delay the approval of ANDAs as well as a potential 180-day period of generic exclusivity for the first company to submit an ANDA with a Paragraph IV certification which challenges the validity or enforceability of an existing listed patent or asserts that the proposed product does not infringe an existing listed patent.

Europe

Europe is a diverse and dynamic market, encompassing the 27 countries in the EU plus Norway and Switzerland. Despite the diversity, the European markets share many characteristics that allow us to leverage our pan-European presence and enhance our strong footprint across the region by having a broad portfolio as well as strong management teams at the country level who can call on pan-European or global resources and capabilities to support their local needs.

We have a leading or significant presence in all European countries, which allows us to benefit from a balanced business model so we are not over-dependent on any single product or market that could be affected by pricing reforms or changes in public policy. No single market in Europe represents more than 25% of our total European revenues. In addition, the assumption of the marketing responsibility of Copaxone® from Sanofi and the acquisitions of Cephalon and Theramex further diversified our European portfolio.

Our strategy in Europe is to build on our broad-based leadership position, providing a wide range of generic and branded medicines that enable us to have a comprehensive solution for our customers’ needs.

The pharmaceutical market in each European country has distinct prescribing and dispensing habits, varying pricing and reimbursement mechanisms and different product ranges, although most markets are generally characterized by highly developed, government-funded healthcare and social planning, in which most healthcare is funded and often directly managed and provided by the public sector.

Some European countries, such as Germany, the United Kingdom, the Netherlands, Poland and the Czech Republic, are characterized by relatively high generic penetration of over 50% in volume. Other markets in Southern Europe have not attained such a high level of generic penetration but are moving in such direction. For example, measures introduced in several countries such as Spain and Portugal have increased generic penetration considerably. In certain European countries, there is a market for both branded generic products as well as products sold under their generic chemical names, while in others there is a market for branded generics only. Some countries, such as the U.K. and the Netherlands (so-called “pure generic” markets), permit substitution by pharmacists of the pharmaceutical product prescribed by the physician with its generic equivalent, while other countries, such as Poland, Austria and Hungary, permit pharmacists to dispense only the specific pharmaceutical product prescribed by doctors. In Germany, France, Italy, Spain and Portugal, as in certain Central and Eastern European countries, the market is a hybrid, with elements of both approaches. In markets such as Germany and the Netherlands, national health insurance funds play an increasingly important role in decision making. In these markets, the health insurance funds determine through tenders the products that are to be preferred for the patients that are insured at the specific fund.

Growth in the European healthcare market is driven by an aging population requiring significant healthcare services. The European financial crisis, which has strengthened the need of governments to implement public spending reductions, has resulted in growth for generic pharmaceuticals, since many European governments have begun taking action to encourage the use of generics. Pricing and reimbursement mechanisms in Europe are typically set by government regulation and are used to regulate or influence market behaviors, for example by encouraging the use of generics. In many markets, such as Spain, Germany, Italy and Finland, reimbursement for generic prescription pharmaceuticals is based on the price of a reference, or comparable, branded pharmaceutical. Other markets, such as France and Austria, require the price of a new generic product to be a certain percentage lower than the originator brand. In the United Kingdom, retail generic pricing is set by the market, but reimbursement is determined by regulations based on pharmacy purchase profit.

 

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We are active in all sales channels in the European healthcare market. The go to market model in each country depends on the local environment and the local market needs. In some markets our sales activities are more focused on general practitioners and specialist doctors. In other markets we work very closely with pharmacies or pharmacy chains, wholesalers or health insurance funds.

Generic Pharmaceuticals

We are the leading generic pharmaceutical company in Europe overall, and the generic market leader in 11 European countries, including the United Kingdom, Italy, Spain, the Netherlands, Portugal and Switzerland. We are one of the top three companies in a number of other countries, including France, Poland and the Czech Republic. In Germany, the completion of the integration of ratiopharm enhanced our position and by the end of 2011, we were number one in generics by volume and by value. The acquisition of Cephalon and its Swiss-based Mepha generics business further enhanced our market position in Europe by adding significant generic businesses in Switzerland and in Portugal. As a result of the acquisition, we are now the market leader for generic pharmaceuticals in Switzerland and we further enhanced our leadership position in Portugal.

As of December 31, 2011, Teva had received 1,241 generic approvals in Europe relating to 152 compounds in 331 formulations, including 10 European Medicines Agency (“EMA”) approvals valid in all EU member states. In addition, Teva had approximately 2,530 marketing authorization applications pending approval in 30 European countries, relating to 288 compounds in 546 formulations, including 11 applications pending with the EMA.

Our European pipeline includes generic versions of branded products with approximately $77 billion of total annual branded market sales in 2011.

Branded Pharmaceuticals

Our branded pharmaceuticals infrastructure in Europe was significantly enhanced in 2011 by the ongoing transfer of the marketing responsibility for Copaxone® from Sanofi to Teva, which was completed in the remaining European markets on February 1, 2012, and by the acquisition of Cephalon and Theramex.

As a result of the Cephalon acquisition, we added important branded products like Provigil® (modafinil), Effentora® (fentanyl buccal tablet), Spasfon® (Phloroglucinol), Myocet® (liposomal doxorubicin) and Actiq® (solid fentanyl) to our European portfolio. These products are sold in many markets across Europe, mainly France, the United Kingdom, Germany, Spain and Italy, either directly by us or through third party distributors.

Other Activities

Our other activities in Europe comprise mainly of the OTC joint venture with P&G, with Germany, Poland, Hungary and the Czech Republic being our main OTC markets, and our pharmaceutical distribution activities in Hungary.

Listed below are our largest European operations in terms of size:

In Germany, the largest European generic market, we were the second largest generic pharmaceutical company in terms of sales in 2011, with a product portfolio that includes 400 molecules. In addition, by the end of 2011, we achieved the number one position in the generic market both in volume and value.

With the transfer of the marketing responsibility of Copaxone® and the acquisition of Cephalon late last year, our branded business has been significantly strengthened in Germany. Our ratiopharm brand became the number one generics brand in Germany; and the well-established ratiopharm OTC business is a substantial contributor to our joint venture with P&G.

 

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In May 2011, we gained over 20% of the overall AOK tender volume for that year’s tender, representing a fivefold increase over our results in the AOK tender in 2009. AOK is the largest health insurance fund in Germany covering approximately one-third of the German population.

In 2011, we launched a number of generic products, such as Femara® (letrozole), ReQuip® (ropinirole ER), Diovan® (valsartan and valsartan/HCTZ) and Zyprexa® (olanzapine).

In France, we are the third largest generic pharmaceutical company in terms of sales, with a portfolio of approximately 230 molecules in approximately 620 dosage forms and packaging sizes. As a result of the acquisitions of Cephalon and Theramex, Teva became the fifth-largest branded pharmaceutical company in France in terms of prescriptions and eighth in terms of sales. Key branded products added through these acquisitions include Spasfon® (phloroglucinol), Modiodal® (modafinil), Vogalene® (metopimazine), and Vogalib® (metopimazine).

In 2011, we launched 143 new products or new dosage forms, including the generic versions of Inexium® (esomeprazole), Zyprexa® (olanzapine), Tareg® (valsartan) and Cotareg® (valsartan HCTZ).

In the United Kingdom, we are the leading generic pharmaceutical company in terms of prescriptions and sales, and we are the largest supplier by volume to the National Health Service. We have a portfolio of more than 300 molecules and maintain the largest sales force in the generic industry, focusing on independent retail pharmacies.

In 2011, we launched 30 new products or new dosage forms, including the generic versions of Nexium® (esomeprazole), Xenical® (orlistat), Serevent® (salmeterol), Zyprexa® (olanazapine) and Diovan® (valsartan).

In Italy, we are the leading generic pharmaceutical company in terms of sales, with a generic portfolio of 157 molecules in 323 dosage forms and packaging sizes.

In 2011, we launched 29 new molecules. Among others, we launched the generic versions of Arimidex® (anastrozole), Nexium® (esomeprazole), Levoxacin® (levofloxacin), Zyprexa® (olanzapine), Tareg® (valsartan), and Cotareg® (valsartan+HCTZ).

In Spain, we established our position as the leading generic company in terms of sales. During 2011, we also entered the women’s health market with the launch of our branded generic version of Yasmin®/ Yasminelle® (drospirenone and ethinyl estradiol), the largest-selling oral contraceptive product.

Our generic product portfolio has approximately 290 molecules in 750 dosage forms and packaging sizes.

During 2011, we launched 26 new products and 87 new dosage forms and packaging sizes, including generic versions of Yasmin® and Yasminelle® (drospirenone – ethynilestradiol), Zyprexa® (olanzapine), Diovan® and CoDiovan® (valsartan and valsartan—HCTZ), Axiago® (esomeprazole), Evista® (raloxifene) and Bonviva® (ibandronic acid).

Competitive Landscape. In Europe, we compete with other generic companies and brand drug companies that continue to sell or license branded pharmaceutical products after patent expirations. We also compete with other branded companies that are active in the same therapeutic areas as our branded products.

The generic market in Europe is very competitive, with the main competitive factors being price, fast entry to market, reputation, customer service and breadth of product line. In addition, as in the United States, the generic market also faces competition from brand pharmaceutical companies that try to prevent or delay approval of generic equivalents through several tactics.

 

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In Germany, there is a high rate of generic penetration with a relatively high number of competitors of varying sizes and capabilities. Tenders are an important feature of the German market, operated by approximately 200 statutory healthcare funds across Germany, and are a result of reforms initiated by the government that have also shifted the market from a physician-influenced branded model to a payor-influenced substitution model, representing a key opportunity for generics. Although tenders in Germany do not represent the majority of all pharmaceutical purchasing, they are a significant market influence and have contributed to pricing pressure in the German retail market.

In France, there is an increasingly competitive landscape with pricing pressure largely due to the existence of large pharmacist buying groups and to the French government’s efforts to control healthcare costs by imposing significant price decreases.

The United Kingdom is a ‘pure’ generic market with low barriers to entry and high generic penetration. In general, retail pricing of generics to the pharmacy is unregulated leading to strong price-led competition although pricing is heavily influenced by the ‘Category M’ scheme that creates a finite amount of reimbursement profit for pharmacies.

In Italy, there is a relatively low but fast-growing rate of generic penetration but with an increasing level of influence, and ability to substitute, by the pharmacist. The market is influenced by the twenty semi-autonomous regional governments and by the growth of regional independent pharmacy groups, which has resulted in increased competition among generic companies. Recent healthcare reforms prompted in part by the new government and its austerity programs are encouraging generic dispensing and offsetting the reduction in growth in the overall Italian pharmaceutical market.

In Spain, the generic pharmaceutical market is largely represented by local companies. We expect generic penetration to further increase in the Spanish market, as a 2011 Royal Law Decree mandates prescription by molecule rather than by brand.

Regulatory Highlights. In Europe, marketing authorizations for pharmaceutical products may be obtained through a centralized procedure involving the EMA, a mutual recognition procedure which requires submission of applications in other member states following approval by a so-called reference member state, or a decentralized procedure that entails simultaneous submission of applications to chosen member states.

During 2011, we continued to register products in the EU, using both the mutual recognition procedure and the decentralized procedure. We continue to use the centralized procedure to register our generic equivalent version of reference products that originally used this procedure.

Rest of the World Markets

Our Rest of the World markets include all countries other than the United States and those included under Europe. The markets making up the region are varied, ranging from highly regulated, pure generics markets such as Canada, to hybrid markets such as Japan and Brazil, to branded generics markets such as certain Commonwealth of Independent States markets and Latin American markets. The region includes several countries and areas that are characterized by rapid growth and relatively high sales of branded generic and OTC products (for example, Russia), and several that have lower growth rates, and more significant generic penetration rates, such as Canada.

Below are details of our operations in selected Rest of the World markets:

Japan. Teva is one of the top three generic pharmaceutical companies in Japan, having established its presence via several recent transactions:

 

   

in 2008, the formation of the Teva-Kowa joint venture;

 

   

in 2009, Teva-Kowa’s acquisition of a majority interest in Taisho Pharmaceutical Industries, a generics company with over 200 products;

 

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in October 2010, Teva-Kowa’s acquisition of the remainder of Taisho;

 

   

in July 2011, our acquisition of Taiyo, the third largest generics manufacturer in Japan, with a portfolio of over 550 products, and a strong market presence in all major channels of the Japanese pharmaceutical market; and

 

   

in September 2011, the acquisition of Kowa’s interest in the Teva-Kowa joint venture.

Japan is the second largest pharmaceutical market worldwide, estimated at approximately $105 billion in 2011. Generic penetration is estimated at 23% of volume and 7% of value, and is expected to increase further following a number of key patent expiries over the next few years and especially as a result of government actions. The Japanese pharmaceutical market is in process of transforming from a branded generics market, driven by physicians’ choice of brands, to a pharmacy substitution market. In addition, there is evidence of the slow emergence of pharmacy chains which we expect will enhance, to some extent, generic penetration. At present, almost half of generic drugs are sold in pharmacies, a quarter is dispensed by hospitals, and a fifth is sold by physicians.

Generic drugs are distributed by large wholesalers, which distribute both branded and generic products, and by “Hanshas,” small agents specializing in the sale of generics. Direct sales are extremely limited due to the highly fragmented nature of the market. Teva has established strategic partnerships with key national and regional wholesalers and the top Hanshas in order to ensure distribution of our products to all customer segments.

Competitive Landscape. The Japanese generic pharmaceutical market is relatively fragmented but is in the process of consolidating. The leading four generic pharmaceutical companies now capture approximately 50% of the market. The market is being further transformed by the entry of global branded companies into the generics business and new alliances between local generic companies and global generic players.

Regulatory Highlights. The registration of existing or new generic drugs in Japan is subject to Pharmaceutical and Medical Device Agency (PMDA) approval and requires carrying out bio-equivalence studies, as well as upholding stringent quality requirements. Generic prices are regulated by the PMDA and set at 70% of the equivalent branded drug prices, with additional price reductions of approximately 8-10% every two years.

The Japanese government provides universal healthcare coverage, and more than 85% of healthcare expenses are paid by the government. In order to reign in growing healthcare costs due to an aging population, in 2008 the Japanese regulator initiated a coordinated policy to promote the usage of generic drugs via a series of targeted incentive programs, with the goal of reaching 30% generic penetration by 2012. In April 2010, a new financial incentive scheme was established, encouraging pharmacies to substitute generic drugs for branded ones. This led to a significant increase in generic penetration by volume (from 18% to 23% currently). The next reform is expected in April 2012 and should further enhance generic penetration.

Canada. In Canada, we manufacture and market prescription pharmaceuticals and are now one of the two leading generic pharmaceutical companies in terms of prescriptions and sales. Our generic product portfolio includes 300 products in 1,256 dosage forms and packaging sizes. Our brand portfolio is primarily comprised of Copaxone® and Azilect®.

Our generic sales force in Canada markets generic products to retail chains, retail buying groups and independent pharmacies—reaching approximately 8,800 outlets. Canada continues to see consolidation of independent retail pharmacies and increased expansion of retail chains and buying groups: the top five retail chain customers in Canada represent approximately half the market (in terms of value). Our customer base continues to change as the number of independent community pharmacies decreases at the expense of chain drug and aligned store groups, which work closely with selected suppliers for specific products as well as increased

 

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government regulation on pricing. 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.

Competitive Landscape. In Canada, the competitive landscape continues to intensify with the increasing presence of multinational companies. The five major generic companies (including Teva), most of which are subsidiaries or divisions of global manufacturers, satisfy approximately 80% of the Canadian demand for generic pharmaceuticals. In addition, the major branded pharmaceutical companies have intensified their efforts to compete with the generic players, and are now offering incentives to patients and customers to offset generic cost savings. In addition, several of our customers have intensified their efforts to provide private label products, which may also compete with our products, though our strategy is to become key suppliers to these retail chains.

Regulatory Highlights. 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 (“TPD”) is the national authority that evaluates and monitors the safety, effectiveness and quality of drugs, medical devices and other therapeutic products. The TPD requires companies to make an abbreviated new drug submission in order to receive approval to manufacture and market generic pharmaceuticals.

The issuance of a market authorization or “Notice of Compliance” is subject to national regulations which provide both data exclusivity and patent protection to innovative pharmaceutical companies.

Russia. We are the second largest generic company and one of the top five pharmaceutical companies in Russia, offering a diverse portfolio of generic products, OTC pharmaceutical products, and branded products, including primarily Copaxone®. We have a portfolio of approximately 130 products sold to both retail and hospital channels.

Russia is primarily a branded generic, out-of-pocket, cash-pay market, although selected government-funded products included for reimbursement are procured using a tender process. The life-saving products that are included in the reimbursement list, including Copaxone®, are subject to tenders and price-setting by the government. The government seeks to encourage the use of generic products in order to reduce the cost of pharmaceuticals. Russian pharmaceutical law is currently under review, with a focus on increasing access and controlling pricing of products.

Competitive Landscape. The Russian market comprises large local manufacturers as well as international pharmaceutical companies, both generic and innovative. All competitors provide product education to physicians via medical representatives. As part of Russia’s 2020 pharmaceutical strategy, companies with a local manufacturing presence will receive favorable treatment. In 2011, Teva announced its commitment to build a manufacturing facility in Yaroslavi, Russia, which is expected to be operational by 2014.

Regulatory Highlights. The Russian government is implementing its 2020 pharmaceutical sector strategy which emphasizes localization of production and aims to harmonize the Russian pharmaceutical regulations with international principles and standards. Russia’s new pricing regulations, which took effect in 2010, impose price restrictions on pharmaceuticals listed on the new Essential Drug List (EDL). In accordance with this new legislation, as of January 1, 2010, EDL manufacturers must perform annual registrations of the maximum factory price calculated according to the methodology of the Ministry of Health. The law does not regulate prices for medicines that are not essential medicines. The new legislation also includes safety measures, to be implemented by January 1, 2014, with the goal of ensuring production of high-quality pharmaceuticals.

Commonwealth of Independent States (“CIS”). In the CIS countries, primarily Ukraine and Kazakhstan, our position in the market was significantly strengthened by the acquisition of ratiopharm. In both Ukraine and Kazakhstan, we are among the top ten pharmaceutical companies. The Ukraine pharmaceutical market is

 

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characterized by low government involvement, and is mostly driven by purchasing by the patients. However, the government plans to introduce a reimbursement system by 2015. In Kazakhstan, the local government purchases prescription drugs via tenders.

Israel. We are the leading provider of professional healthcare products and services in the Israeli market. In addition to generic, branded and OTC pharmaceutical products, we sell and distribute a wide range of healthcare products and services, including consumer healthcare products, hospital supplies, dialysis equipment and disposables, diagnostics and home care services. Our Israeli product portfolio also includes products sold under licensing arrangements. Our distribution company, Salomon Levin and Elstein Ltd., provides logistical support for the selling and distribution activities of Teva in Israel, which include distribution of products of third parties, including several multinational pharmaceutical companies.

The Israeli market is dominated by four government-mandated health funds which provide an extensive range of healthcare services, including pharmaceuticals, to all citizens. Prices for our products in Israel are significantly affected by pricing regulations and governmental policies, as well as the structure of the market.

Competitive Landscape. Our 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. The introduction of private labels into the retail market has increased competition in the OTC market, a trend that is expected to intensify.

Regulatory Highlights. The Israeli Ministry of Health requires pharmaceutical companies to conform to internationally recognized standards. Other legal requirements prohibit the manufacturing, importation and marketing of any medicinal product unless it is approved in accordance with these requirements.

In 2005, the Israeli parliament (Knesset) enacted new patent legislation that ensures that a 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. The Knesset also ratified legislation that provides for data exclusivity provisions, which may prevent the marketing of a generic product for a period of five and a half years from the first registration of the innovative drug product in any one of a number of specified Western countries. In February 2010, the Government of Israel signed an agreement with the United States Trade Representative that will result in new legislation modifying both the patent term extension provisions and the data exclusivity provisions, and extending the protection afforded to innovative products. In 2011 legislation was approved which prevents the marketing of a generic product for a period of six and a half years measured from the first registration of the innovative drug product in any one of a number of specified Western countries. The remaining legislation contemplated in the agreement with the United States Trade Representative is still pending.

Israeli pricing regulations use a reference pricing mechanism which takes into account pricing in several European countries, leading to relatively low prices in the market.

Latin America. We market a broad portfolio of products in Latin America, distributing our products in most Latin American countries. In most cases, these products are manufactured in our facilities in Mexico, Chile, Argentina and Peru. We have a strong presence in the major markets leveraging our local, regional and global supply chain for generics, branded generics, OTC, and branded products. During 2011, we continued to expand our presence in the largest markets by adding new therapeutic classes and strong performance in our existing product portfolio.

Brazil, Mexico, Venezuela, Colombia and Argentina are the largest pharmaceutical 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.

Total pharmaceutical retail sales in the region exceeded $59 billion in 2011 and, according to IMS forecasts, the Latin American pharmaceutical market is expected to grow at an average annual rate of approximately 13% through 2014.

 

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We intend to further expand our operations in Latin America, taking advantage of the expected increases in spending on healthcare (and on pharmaceuticals in particular), stronger regional economic performance and growing populations, leveraging our strong local presence, global product portfolio and manufacturing expertise.

Competitive Landscape. In Latin America, the pharmaceutical market is generally fragmented, with no single company enjoying market dominance in the region. Local generic companies predominate, especially in Brazil, Argentina and Chile. These local companies, as well as multinational brand companies, compete with our local operations in all of the markets. Our strengths in the region include our comprehensive range of products, which cover a wide range of therapeutic categories, strong sales forces and the opportunity to leverage our global product portfolio.

Regulatory Highlights. Historically in Latin America, local governments did not distinguish between innovative pharmaceuticals, OTC and generic drug products, and many pharmaceutical companies in the region engaged in the production of drugs still under patent in their countries of origin or off-patent drugs sold under a local brand name, in accordance with local laws that may not have required bioequivalence testing. In recent years, however, Latin America has seen increased enforcement of intellectual property and data protection rights. The market has also been characterized by an increased demand for high-quality pharmaceutical products as the major markets in the region have adopted more stringent regulations governing pharmaceutical product safety and quality. Nevertheless, pricing pressures for pharmaceutical products, which are subject to direct or indirect price controls in many countries in Latin America, are expected to continue to exert political and budgetary constraints that may foster the continued growth of generics but may have a negative impact on pricing. With respect to biosimilars or follow-on biologics, new regulatory pathways for approval have either been approved or are in development in the region.

Operations and R&D

Research and Development

We have research and development activities supporting all business activities—generic pharmaceuticals (including API) as well as innovative and biosimilar pharmaceuticals.

Our Global Generic R&D is in charge of developing products, covering all therapeutic areas, which are equivalent to innovative pharmaceutical products. Our emphasis is on developing high-value products, including those with high barriers to entry.

The activities of Global Generic R&D include product formulation, analytical method development, stability testing, management of bioequivalence and other clinical studies, registration and approval of numerous generic drugs for all of the markets where we operate.

Global Generic R&D has expanded its capabilities beyond tablets, capsules, liquids, ointments and creams to other dosage forms and 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 development centers located in the United States, Israel, India, Mexico, Europe, Latin America and Canada.

Our 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 our proprietary drugs. Our facilities include a large center in Israel (synthetic products and peptides), a large center in Hungary (fermentation and semi-synthetic products), a facility in India and additional sites in Italy, Croatia, Mexico and the Czech Republic (for development of high-potency API). Our substantial

 

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investment in API R&D generates a steady flow of API products, enabling the timely introduction of generic products to market. The API R&D division also seeks methods to continuously reduce API production costs, enabling us to improve our cost structure.

Our Global Branded R&D was significantly enhanced as a result of the Cephalon acquisition, and our integrated pipeline includes product candidates in a variety of therapeutic areas, such as CNS, oncology, respiratory and women’s health. We focus on novel drug candidates, branded products that utilize specific proprietary devices or technology, and biosimilars. We supplement our branded pipeline by in-licensing products mainly in clinical stages. We also hold investments in early stage companies that we believe have promising technologies or products.

We have identified biopharmaceuticals—in particular, biosimilars—as an important long-term growth opportunity. During the next decade, over 85% of current biopharmaceutical sales are expected to face competition from generic versions known as biosimilars, which are biological products that have the same structure and activity as an already marketed biological entity (the “reference product”), with a target site and/or mechanism of action, if known, as described in the innovator’s documentation for such reference product. In furtherance of our plans to take a leading role in the biosimilars field, we have established a dedicated research, development and manufacturing infrastructure. Our biopharmaceutical R&D facilities specialize in different technologies. Finished dosage biopharmaceutical manufacturing is carried out in our existing sterile manufacturing facilities. Our proprietary albumin fusion and glycopegylation technologies serve as technology platforms for the creation of long-acting products.

Our joint venture with Switzerland-based Lonza Group Ltd. provides us with access to the expertise and infrastructure of the world’s largest producer of biological API. Products in development by our joint venture with Lonza include rituximab, a biosimilar version to Mabthera™/Rituxan™.

Below is a table listing selected pipeline products in clinical development:

 

Project / Compound

  

Potential Indication

  

Clinical Phase

  

Formulation

CNS

        
Glatiramer acetate 0.5ml (Copaxone®)   

Relapsing-remitting multiple sclerosis

  

III

  

Subcutaneous

Glatiramer acetate 40mg (Copaxone®)   

Relapsing-remitting multiple sclerosis

  

III

  

Subcutaneous

Laquinimod    Relapsing-remitting multiple sclerosis    III    Oral
Tamper deterrent hydrocodone    Chronic pain    III    Oral
R-Modafinil (Nuvigil®)    Adjunctive therapy for treating bi-polar depression disorder in adults    III    Oral
RESPIRATORY         
Beclomethasone dipropionate HFA Nasal (Qnasl™)   

Allergic rhinitis

  

FDA submission

  

Nasal

ProAir™ HFA Dose Counter    Asthma/COPD    FDA submission    Inhalation
Albuterol Spiromax    Asthma/COPD    II completed    Inhalation
Reslizumab (Cinquil®)    Eosinophilic asthma    III    Subcutaneous
Budesonide Formoterol Spiromax    Asthma/COPD    II    Inhalation
Fluticasone Salmeterol Spiromax    Asthma/COPD    II    Inhalation

Fluticasone Salmeterol HFA

   Asthma/COPD    II    Inhalation

 

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Project / Compound

  

Potential Indication

  

Clinical Phase

  

Formulation

ONCOLOGY

        

Omacetaxine

   Chronic Myelogenous Leukemia (CML) patients who have failed two or more tyrosine kinase inhibitor (TKIs)    FDA submission    Subcutaneous
Balugrastim—albumin-fused G-CSF   

Neutropenia cancer

  

Phase III Complete

  

Subcutaneous

XM 22—glycoPEGylated G-CSF (Lonquex®)   

Neutropenia cancer

  

Submitted in EU and Russia

  

Subcutaneous

OGX-011/TV-1011    Metastatic castrate resistant prostate cancer    III    Intravenous
Bendamustine hydrochloride (Treanda®)   

Front line NHL

  

III

  

Oral

Obatoclax    Small cell lung cancer    Phase II completed    Subcutaneous
CARDIOVASCULAR         
Mesynchymal Precursor Cells (Revascor®)   

Congestive heart failure

  

III

(to begin Q2/2012)

  

Intracardiac Injection

WOMEN’S HEALTH         
Progesterone Vaginal Ring (Milprosa™)   

Luteal support for in vitro fertilization

  

FDA submission

  

Vaginal Ring

Oxybutynin Vaginal Ring    Overactive bladder    Phase III Complete    Vaginal Ring
XM17—Follitropin alfa   

Infertility, Female; Anovulation;

Reproductive techniques, assisted;

Hypogonadism

   Phase III Complete    Subcutaneous
Desogestrel and ethinyl estradiol (LeCette™)   

28-day oral contraceptive

  

III

  

Oral

Levonorgestrel desogestrel and ethinyl estradiol (Quartette™)   

91-day extend regimen oral contraceptive

  

III

  

Oral

OTHER         
NexoBrid®    Removal of burn-injured tissue    EMA submission   
Allogenic Stem Cells (StemEx®)    Cord blood transplant for leukemia and lymphoma    III   
DiaPep 277    Type I diabetes    III   
Mesynchymal Precursor Cells (Revascor®)   

Acute myocardial infarction

  

II

  

Intracardiac Injection

Laquinimod    Crohn’s disease    I/II Complete    Oral
Laquinimod    Lupus nephritis and lupus arthritis    I/II    Oral
CEP-37247 (anti-tumor necrosis factor)   

Sciatica (administered by the transforaminal epidural route)

  

II

  

Epidural Injection

 

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CNS

Laquinimod is a once-daily, orally administered immunomodulatory compound being developed for treatment of relapsing-remitting multiple sclerosis. We acquired the exclusive rights to develop, register, manufacture and commercialize laquinimod worldwide from Active Biotech. Under the agreement, we made an upfront payment to Active Biotech and will be required to make additional payments 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.

In April 2011, we announced the final results of the ALLEGRO Phase III study. The results demonstrated that relapsing-remitting multiple sclerosis patients treated with 0.6 mg daily oral laquinimod experienced a statistically significant reduction in annualized relapse rate compared to placebo. Additional clinical endpoints, including significant reduction in disability progression, as measured by EDSS, were also achieved. In August 2011, we announced the results of BRAVO, a second Phase III study. In this study, the primary endpoint of reduction in annualized relapse rates did not reach statistical significance. The observed safety and tolerability profile of laquinimod in both the ALLEGRO and the BRAVO trials was considered favorable. In October 2011, we held a meeting with the FDA to discuss the possibility of filing an NDA for laquinimod. Following the meeting, we believe it would be premature to file an NDA at this time. Further clinical studies of laquinimod as monotherapy and add-on therapy in patients with relapsing-remitting multiple sclerosis are currently under review.

Laquinimod is currently in Phase II development for Crohn’s disease and in Phase I/II studies for lupus nephritis and lupus arthritis. Results of each of these studies are expected in 2012.

Tamper Deterrent Hydrocodone is our formulation of hydrocodone utilizing our OraGuard™ technology, which provides deterrence against various tampering methods, including chewing, aqueous extraction for IV dosing and alcohol extraction. Results of our Phase III studies for the management of chronic pain are expected in 2012.

RESPIRATORY

We are focusing on developing products based on our proprietary delivery systems, including Easi- Breathe®, an advanced breath-activated inhaler, Spiromax®/Airmax®, a multi-dose dry powder inhaler, and Steri-Neb®, the advanced sterile formulations for nebulizers. This strategy is intended to result in “device consistency”, allowing physicians to choose which device best matches a patient’s needs both in terms of ease of use and effectiveness of delivery of the prescribed molecule for the therapeutic need.

QnaslTM (beclomethasone dipropionate) is a nasal aerosol corticosteroid in development for the treatment of perennial allergic rhinitis (PAR) and seasonal allergic rhinitis (SAR). Results of two Phase III studies, one for SAR and one for PAR, demonstrated significantly greater symptom relief compared to placebo. Based on these results, in May 2011, we submitted a New Drug Application (NDA) to the FDA.

Albuterol Spiromax is a dry-powder inhaler formulation of Albuterol in our novel Spiromax® device that is designed to be comparable to ProAir HFA. Results of two safety and efficacy studies indicated that the safety, efficacy, pharmacokinetic and pharmacodynamic profile of Albuterol Spiromax® was comparable to that of the marketed product, ProAir HFA MDI. The Phase III program is expected to begin in 2012.

Cinquil® (reslizumab) is an investigational humanized monoclonal antibody (mAb) against interleukin-5 (IL-5). IL-5 has been shown to play a crucial role in the maturation, growth and chemotaxis (movement) of eosinophils, inflammatory white blood cells implicated in a number of allergic diseases. We are investigating Cinquil® in Phase III studies as a possible treatment for eosinophilic asthma. Results of these studies are expected in early 2014.

 

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ProAir™ Dose Counter is an actuator with integrated dose counter which was developed for use with our ProAir™ HFA MDI aerosol device. In November 2011, we submitted an sNDA to the FDA.

Budesonide Formeterol Spiromax® is designed to be comparable to Symbicort® Turbuhaler®, delivered through Spiromax®—our novel inhalation-driven multi-dose dry powder inhaler technology. Results of our clinical studies are expected in 2012.

Fluticasone Salmeterol Spiromax® is designed to be comparable to Seretide® Diskus, delivered through Spiromax®—our novel inhalation-driven multi-dose dry powder inhaler technology. We expect to complete the clinical studies in 2012. In addition we are also developing a new formulation of this combination using our Spiromax® device with an enhanced lung delivery allowing us to use lower doses to achieve the same clinical outcomes as Advair® Diskus. Phase II trials are scheduled to begin in 2012.

Fluticasone Salmeterol HFA MDI is designed to be comparable to Advair®/Seretide® HFA, delivered in a well established press-and-breath device. We expect to complete the clinical studies in 2012.

ONCOLOGY

Omacetaxine is under development for the treatment of chronic myelogenous leukemia (CML) patients who have failed two or more tyrosine kinase inhibitors (TKIs). We have granted marketing rights for the product to Hospira in Europe, the Middle East and certain African countries. We expect to submit an NDA to the FDA by mid 2012.

Balugrastim is a long-acting G-CSF using the albumin-fusion technology initially developed by Human Genome Sciences to prolong plasma half-life. Balugrastim is designed to provide clinical efficacy and safety profiles which are fully comparable to Neulasta®. In July 2011, Teva entered into a settlement agreement with Amgen to resolve our litigation concerning certain of our G-CSF products in the United States. We agreed to an entry date of November 10, 2013 for our balugrastim and filgrastim products in the United States. In exchange, we consented to validity and enforceability of the patent in dispute and to infringement of our filgrastim product in the United States. We have maintained our ability to contest infringement of our balugrastim product. We expect to submit balugrastim for registration in the United States and in Europe in 2012.

Lonquex® (Lipegfilgrastim) is a long-acting G-CSF based on glycopegylation technology. Glycopegylation of G-CSF leads to a prolonged plasma half-life. Lonquex® was shown to provide clinical efficacy and safety profiles which are fully comparable to Neulasta®. Lonquex® was submitted for registration in EU and in Russia, and is expected to be submitted in the United States in 2012.

Custirsen/TV-1011 (OGX-011). In December 2009, Teva and OncoGenex entered into a global license and collaboration agreement to develop and commercialize custirsen/TV-1011/OGX-011. Custirsen is an antisense drug developed by Isis Pharmaceuticals Inc. and licensed to OncoGenex, and is designed to inhibit the production of clusterin, a protein associated with cancer treatment resistance. Custirsen was developed to increase the efficacy of chemotherapeutic drugs and may have broader market potential to treat various indications and disease stages.

In 2010, we initiated two Phase III studies in castrate resistant prostate cancer patients (“CRPC”). These two ongoing Phase III studies include a randomized, double-blind, placebo-controlled, Phase III study evaluating the pain palliation benefit of adding custirsen to a taxane for second-line chemotherapy in men with CRPC as well as a randomized study comparing standard first-line docetaxel/prednisone to docetaxel/prednisone in combination with custirsen in men with metastatic CRPC.

Obatoclax. Obatoclax is a Pan Bel-2 inhibitor with particular potency for the dominant protein Mel-1 currently being studied to treat patients with small cell lung cancer and myeloma. We expect to commence our Phase III study of Obatoclax for treatment of extensive-stage small cell lung cancer in combination with carboplatin and etoposide as first-line therapy in 2012.

 

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CARDIOVASCULAR

Revascor® (mesynchymal precursor cells) is comprised of human stem cells, the immature cells that give rise to different types of mature cells that make up the organs and tissues of the human body. In December 2010, we entered into a strategic alliance with Mesoblast Ltd. to develop and commercialize Mesoblast’s mesenchymal precursor cell therapeutics for hematopoietic stem cell transplantation in cancer patients, certain central nervous system disorders, as well as certain cardiovascular conditions, including congestive heart failure and acute myocardial infarction.

In January 2011, positive interim results from the ongoing multi center Phase II trial of Revascor® for patients with congestive heart failure were announced. Congestive heart failure remains a leading cause of hospital admissions, morbidity and mortality in the Western world. Heart failure affects as many as 20 million people worldwide. Based on the positive Phase II results and assuming timely finalization of the Chemistry, Manufacturing Controls requirements, we are planning to initiate a Phase III study during 2012.

WOMEN’S HEALTH

Progesterone vaginal ring (Milprosa™) is a silicone-based, flexible ring designed to be dosed weekly for luteal support for in vitro fertilization. Clinical studies indicated that Milprosa™ is not inferior to the approved progesterone gel and that the product was safe and well-tolerated, with a profile consistent with the known profile of progesterone. We filed an NDA with the FDA in 2010 and received a complete response letter in 2011 requiring a Phase IV study. We expect to respond to the FDA’s letter in 2012 and hope to receive FDA marketing approval and launch the product thereafter.

Oxybutynin vaginal ring (DR-3001) is a silicone-based, flexible ring designed to be dosed once a month to treat overactive bladder (OAB). This new and innovative delivery system for the intravaginal delivery of oxybutynin has been developed to minimize the presystemic first-pass metabolism that occurs with orally administered oxybutynin. Results of our Phase III trials for treatment of patients with OAB symptoms demonstrate statistically significant reductions for active treatment relative to placebo in total weekly incontinence episodes and average daily urinary frequency. The product was generally well-tolerated with a safety profile favorable to oral treatments and comparable to other non-oral treatments. We expect to file an NDA with the FDA in 2012 and thereafter a marketing authorization application with the EMA in 2013.

XM17 (follitropin alfa) is a biosimilar product to Gonal-f® for the treatment of female infertility. We expect to submit XM17 for registration in Europe in 2012.

LeCette™ is a 28-day oral contraceptive with 21-day regimen of desogestrel and ethinyl estradiol (“EE”) followed by a 7-day regimen of EE alone. We are currently conducting a Phase III study and, assuming positive results, expect to file an NDA with the FDA in 2013. In clinical trials, LeCette™ had demonstrated a safety profile similar to that of other 28-day oral contraceptives.

Quartette™ is a 91-day extended regimen oral contraceptive, with an 84-day phasic regimen of a constant levonorgestrel dose and an increasing EE dose, followed thereafter by a supplementation of hormone-free interval with EE alone. We have completed Phase III studies and expect to file an NDA with the FDA in 2012. In clinical trials, Quartette™ had demonstrated a safety profile similar to that of Seasonique® and other 28-day oral contraceptives.

OTHER

StemEx® (allogeneic stem cell) is currently being evaluated in a Phase III study for cord blood transplantation in leukemia and lymphoma patients. StemEx is a chelating agent that expands progenitor cells ex-vivo from a portion of a single cord for cord blood transplant of patients undergoing myoablative therapy for leukemia and lymphoma. We have a joint venture with Gamida Cell for the development of StemEx in hematological diseases. Marketing rights are retained by the joint venture.

 

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CEP-37247 is a new generation tumor necrosis factor (TNF) alpha blocker for the treatment of sciatica- a neuropathic inflammatory pain condition that occurs when the sciatic nerve is compressed, injured or irritated. CEP-37247 is based on a new type of therapeutic protein called a domain antibody. CEP-37247 is the first product incorporating domain antibodies (dAb) to be used in human trials. Domain antibodies exhibit the binding properties to a target characteristic of a full-sized antibody, but are considerably smaller. This smaller size has several possible advantages including improved manufacturing yield, lower immunogenicity and improved tissue penetration. Preliminary results of the Phase II study are expected in 2013.

DiaPep-277 is a 24 amino acid synthetic peptide believed to induce anti-inflammatory T-cells, block destruction of beta cells and preserve insulin secretion. We have a license agreement with Andromeda Biotech Ltd. with respect to Diapep 277, which is currently in Phase III—clinical development as a treatment for newly diagnosed Type I diabetes patients.

NexoBrid® is an innovative product developed by MediWound for the enzymatic removal of burn-injured tissue (eschar). NexoBrid® may present an alternative to surgery and lengthy non-surgical procedures. Another benefit of NexoBrid® is its selective activity, which removes only the eschar without harming viable tissue. This minimizes the need for additional skin grafting surgery and increases the potential for spontaneous healing of the burn wound. The Phase III study for the treatment of burns met the two primary endpoints of the study—reduction in the percentage of wound surgically excised and reduction in the percentage of wound autografted—with statistical significance. A marketing authorization application was submitted to the EMA in October 2010.

Operations

We believe that our global product infrastructure provides us with the following advantages:

 

   

global research and development facilities that enable us to have the broadest product line and the most extensive generic pipeline in the United States, as well as a leading global generic pipeline;

 

   

finished-dose manufacturing facilities approved by the FDA, EMA and other regulatory authorities and located in countries around the world, which offer a broad range of production technologies and the ability to concentrate production to achieve economies of scale;

 

   

API capabilities that offer a stable, high-quality supply of key active ingredients, as well as vertical integration efficiencies; and

 

   

high-volume, technologically advanced distribution facilities that allow us to deliver new products to our customers quickly and efficiently, providing a cost-effective, safe and reliable supply.

These capabilities provide us the means to respond on a global scale to a wide range of requirements (both therapeutic and commercial) of patients, customers and healthcare providers.

Pharmaceutical Production

We operate 53 finished dosage pharmaceutical plants in North America, Europe, Latin America, Asia and Israel. These plants manufacture solid dosage forms, sterile injectables, liquids, semi-solids, inhalers and medical devices. In 2011, Teva produced approximately 73 billion tablets and capsules and over 720 million sterile units.

Our two primary manufacturing technologies, solid dosage forms and injectables, 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 Israel, Germany and in Hungary make up a significant percentage of our production capacity.

Twenty six of our plants are FDA approved, and twenty eight of our plants have EMA approval.

 

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We strive to optimize our manufacturing network, in order to maintain our goal of supplying high quality, cost-competitive products on a timely basis to all of our customers globally. In addition, we also use several external contract manufacturers to achieve operational and cost benefits.

In connection with the recently-formed consumer healthcare joint venture with P&G, we acquired two OTC-dedicated plants in the United States from P&G, joining our existing manufacturing facilities throughout the world, which manufacture solid dosage forms, powders, liquids, semi-solids, nasal products and lozenges.

During 2011, we expanded our facilities in Opava, the Czech Republic, Debrecen, Hungary and Zagreb, Croatia, for manufacturing and packaging of solid dosage forms, and in Godollo, Hungary and Haarlem, Netherland, for sterile products manufacturing. In addition, our new state-of-the art logistics center in Shoham, Israel is expected to begin operating in 2012, significantly increasing our technological and logistical capabilities.

Our policy is to maintain multiple supply sources for our strategic products and APIs to the extent possible, so that we are not dependent on a single supply source. However, our ability to do so may be limited by regulatory or other requirements.

Our principal pharmaceutical manufacturing facilities in terms of size and number of employees are listed below:

 

Facility Location                            

   Total Number of
Site Employees
    

Principal Market(s) Served

Ulm and Weiler, Germany

     1,865       Europe and other non-U.S. markets

Japan

     1,355       Asia

Debrecen, Hungary

     1,144       Europe and other non-U.S. markets

Opava, Czech Republic

     1,040       North America, Europe and other markets

Kfar Saba, Israel

     973       North America, Europe and other markets

Zagreb, Croatia

     889       North America, Europe and other markets

Jerusalem, Israel

     721       North America and Europe

Godollo, Hungary

     681       North America, Europe and other markets

Forest , VA, U.S.

     661       North America

Toronto, Canada

     589       North America and Europe

Maipu, Santiago, Chile

     531       Latin America

Runcorn, U.K.

     463       North America, Europe and other markets

Cincinnati, OH, U.S.

     436       North America

Sellersville , PA, U.S.

     432       North America

Irvine , CA, U.S.

     420       North America

Waterford, Ireland

     351       North America, Europe and other markets

Raw Materials for Pharmaceutical Production

We source a major part of our APIs from our own API manufacturing facilities. Additional API materials are purchased from suppliers located in Europe, Asia and the United States. We have implemented a supplier audit program to ensure that our suppliers meet our high standards, and take a global approach to managing our commercial relations with these suppliers.

We have 21 API production facilities located in Israel, Hungary, Italy, the United States, the Czech Republic, India, Mexico, Puerto Rico, Monaco, China and Croatia. We produce approximately 300 APIs covering a wide range of products, including respiratory, cardiovascular, anti-cholesterol, central nervous system, dermatological, hormones, anti-inflammatory, oncology, immunosuppressants and muscle relaxants. Our API intellectual property portfolio includes over 800 granted patents and pending applications worldwide.

 

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We have expertise in a variety of production technologies, including chemical synthesis, semi-synthetic fermentation, enzymatic synthesis, high potent manufacturing, plant extract technology, synthetic peptides, vitamin D derivatives and prostaglandins. Our advanced technology and expertise in the field of solid state particle technology enable us to meet specifications for particle size distribution, bulk density, specific surface area, polymorphism, as well as other characteristics.

Our API facilities meet all applicable current Good Manufacturing Practices (cGMP) requirements under U.S., European, Japanese, and other applicable quality standards. Our API plants are regularly inspected by the FDA, the EMEA or other authorities as applicable. During 2011, all inspections of our API facilities worldwide found our manufacturing practices at all sites to be in compliance.

We also sell API to third parties, and are a leading global supplier of API to both generic and brand customers.

Environment

As part of our overall corporate responsibility, we are committed to environmental, health and safety matters in all aspects of our business. As a vertically integrated pharmaceutical company with worldwide operations, we believe that our adherence to applicable laws and regulations, together with proactive management beyond mere compliance, enhances our manufacturing competitive advantage, minimizes business and operational risks and helps us to avoid adverse environmental effects in the communities where we operate. We believe that we are in substantial compliance with all applicable environmental, health and safety requirements.

Organizational Structure

We are organized into four commercial units, by region: (1) Americas, (2) Europe, (3) Eastern Europe, Middle East, Israel and Africa (“EMIA”) and (4) Asia. These units coordinate all commercial activities within their region for the sale of generic products, branded products and other activities.

These regional commercial units are supported by two global divisions—Teva Generic Systems (“TGS”) and Global Branded Products (“GBP”)—and by a corporate headquarters function. TGS is responsible for our global operations, which include manufacturing of APIs and pharmaceuticals, our supply chain, and generic research and development. GBP is responsible for our global branded product research and development and for providing support to the regional commercial units for their branded product sales.

In addition, we have a “matrix” organizational structure in which the regional units share responsibility with TGS management for production activities within their regions.

Our worldwide operations are conducted through a network of global subsidiaries primarily located in North America, Europe, Latin America, Asia and Israel. We have direct operations in approximately 60 countries, as well as 56 finished dosage pharmaceutical manufacturing sites in 23 countries, 21 API sites and 17 pharmaceutical R&D centers. The following sets forth, as of December 31, 2011, our principal operating subsidiaries in terms of sales to third parties:

In North America—United States: Teva Pharmaceuticals USA, Inc, Teva API Inc. and Cephalon Inc.; Canada: Teva Canada Ltd. (formerly known as Novopharm Limited).

In Europe— Hungary: TEVA Pharmaceutical Works Private Limited Company; United Kingdom: Teva UK Limited; The Netherlands: Teva Pharmaceuticals Europe B.V., Pharmachemie Holding B.V., Teva API B.V.; France: Teva Santé SAS; Croatia: Pliva Hrvatska d.o.o.; Germany: CT Arzneimittel GMBH, ratiopharm GmbH; Poland: Teva Pharmaceuticals Polska sp. z o.o.; Italy: Teva Italia S.r.l.; Spain: Teva pharma S.L.; Monaco: Laboratoire Theramex S.A.M.; Czech Republic: Teva Czech Industries s.r.o.; Russia: Teva Limited Liability Company.

 

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In Latin America—Chile: Laboratorio Chile S.A.; Mexico: Lemery Desarrolloy Control, S.A.; Argentina: IVAX Argentina S.A.

In Israel—Teva Pharmaceutical Industries Ltd.

In Asia— Japan: Taiyo Pharmaceutical Industries Co. Ltd, Taisho Pharmaceutical Industries, Ltd.

In addition to the subsidiaries listed above, we have operations in various strategic and important locations, including China, India, Turkey and other emerging and smaller markets.

Properties and Facilities

Listed below are our principal facilities and properties in various regions of the world and their size in square feet as of December 31, 2011:

 

Facility Location                            

   Square Feet
(in thousands)
    

Main Function

Israel

     

Ramat Hovav

     1,219      API (chemical) manufacturing and R&D

Kfar Saba

     746      Pharmaceutical manufacturing, research laboratories, warehousing, and offices

Jerusalem (3 sites)

     564      Pharmaceutical manufacturing, research laboratories and offices

Shoham Logistics Center

     538      Distribution center

Netanya (2 sites)

     499      API (chemical) manufacturing, pharmaceutical warehousing, laboratories, distribution center and offices

Petach Tikva

     210      Corporate headquarters

Ashdod

     130      Manufacturing of hospital supplies

Assia—Petach Tikva

     118      R&D laboratories

United States

     

North Wales area, PA (4 sites)

     808      Teva USA headquarters, warehousing and distribution center

Phoenix, AZ

     500      Manufacturing, packaging and offices

St. Joseph, MO (8 sites)

     441      Offices, distribution, R&D and warehousing

Forest, VA

     408      Warehousing, manufacturing, packaging and distribution

Irvine, CA (8 sites)

     342      Pharmaceutical manufacturing, R&D laboratories and warehousing

Cincinnati, OH

     305      Pharmaceutical manufacturing, R&D laboratories, packaging and warehousing

Miami, FL (3 sites)

     223      Manufacturing, R&D, warehousing and offices

Kutztown, PA

     211      Warehousing

Sellersville, PA

     206      Pharmaceutical manufacturing, R&D laboratories

Greensboro, SC

     200      Manufacturing, packaging and offices

Salt Lake City, UT

     194      Warehousing and distribution

Frazer, PA

     188      Offices

Pomona, NY

     181      Pharmaceutical manufacturing, R&D laboratories and warehousing

 

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Facility Location                        

   Square Feet
(in thousands)
    

Main Function

Guayama, Puerto Rico      170      API (chemical) manufacturing
West Chester, PA      165      Laboratories
Mexico, MO      144      API (chemical) manufacturing
Kansas City MO      117      Offices and R&D laboratories
Eden Prairie, MN      116      Warehousing
Canada      
Toronto, Ontario      335      Offices, pharmaceutical packaging, warehousing, distribution and laboratories
Mirabel, Ontario      230      Manufacturing, warehousing and offices
Stouffville, Ontario      155      Pharmaceutical manufacturing and R&D laboratories
Markham, Ontario      122      Pharmaceutical manufacturing and warehousing
Europe      
Debrecen, Hungary      2,727      Pharmaceutical manufacturing, API (chemical) manufacturing, R&D laboratories and warehousing
Ulm, Germany      1,440      Phamaceutical manufacturing and offices
Opava, Czech Republic      1,322      Pharmaceutical and API (chemical) manufacturing, warehousing and distribution
Zagreb, Croatia (4 sites)      1,026      Pharmaceutical manufacturing, packaging and warehousing, API (chemical) manufacturing and R&D laboratories
Krakow, Poland      948      Pharmaceutical manufacturing and warehousing
Gödöllõ, Hungary      478      Pharmaceutical manufacturing, hospital supplies manufacturing, R&D laboratories, distribution, packaging and warehousing
Kutno, Poland      450      Pharmaceutical manufacturing, warehousing and packaging
Waterford, Ireland (2 sites)      435      Pharmaceutical manufacturing, warehousing and packaging
Weiler, Germany      430      Pharmaceutical manufacturing and packaging
Haarlem, The Netherlands      264      Pharmaceutical manufacturing, warehousing, packaging, offices and R&D laboratories
Glasshoughton, England      257      Warehousing and distribution center
Rho, Villanterio, Setimo Milanese, Italy      226      API (chemical) manufacturing and R&D laboratories
Bulciago, Italy      178      API (chemical) manufacturing
Zaragoza, Spain (2 sites)      155      Pharmaceutical manufacturing, R&D laboratories
Eastbourne, England      133      Warehousing and packaging
Runcorn, England      128      Pharmaceutical manufacturing, warehousing, laboratories and offices
Santhia, Italy      127      API (chemical) manufacturing, R&D laboratories and warehousing
Vilnius, Lithuania (2 sites)      95      Pharmaceutical manufacturing and R&D laboratories

 

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Facility Location                              

   Square Feet
(in thousands)
    

Main Function

Asia

     

Takayama, Japan

     1,184      Pharmaceutical manufacturing

Gajraula (U.P.), India

     827      API (chemical) manufacturing

Goa, India

     284      Pharmaceutical manufacturing and R&D laboratories

Malanpur, India

     275      API (chemical) manufacturing

Hangzhou, China

     245      API (chemical) manufacturing

Kasukabe, Japan

     193      Pharmaceutical manufacturing

Koka, Japan

     193      Pharmaceutical manufacturing

Latin America

     

Santiago, Chile

     240      Pharmaceutical manufacturing, warehousing and R&D laboratories

Lima, Peru (2 sites)

     189      Pharmaceutical manufacturing, warehousing and R&D laboratories

Munro, Argentina

     155      Pharmaceutical manufacturing, warehousing, R&D laboratories and packaging

Mexico City, Mexico

     110      Pharmaceutical manufacturing, warehousing and R&D laboratories

We lease certain of our facilities. In Israel, our principal executive offices and corporate headquarters in Petach Tikva are leased until December 2014. In North America, our principal leased properties are the facilities in North Wales, Pennsylvania, which have lease terms expiring between 2013 and 2016, and a warehouse in New Britain, Pennsylvania, of which the initial lease term expires in 2013. We own and lease various other facilities worldwide.

Regulation

United States

Food and Drug Administration and the Drug Enforcement Administration

All pharmaceutical manufacturers selling products in the United States are subject to extensive regulation by the United States 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 our products. Our facilities and products are periodically inspected by the FDA, which has extensive enforcement powers over the activities of pharmaceutical manufacturers. Noncompliance 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 NDAs and criminal prosecution by the Department of Justice. 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 to comply with applicable FDA policies and regulations could have a material adverse effect on our 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

 

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processes, packaging, labeling and quality control. FDA procedures generally 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 takes about three to five years.

The Drug Price Competition and Patent Term Restoration Act of 1984 (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 approval of ANDAs. One such provision allows a five-year data exclusivity period for NDAs involving new chemical entities and a three-year data exclusivity period for NDAs (including different dosage forms) containing new clinical trial 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.

Under 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 “Paragraph IV” certification. 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 Modernization Act”) of 2003 modified certain provisions of the Hatch-Waxman Act. Under the Medicare Modernization Act, the 180-day period of generic exclusivity rights may be forfeited under certain specified circumstances, including if the product is not marketed within 75 days of a final court decision. With the growing backlog of applications, and the resulting increase in the median time to approval of ANDAs, the number of forfeitures of exclusivity is likely to increase unless additional resources are provided within the FDA’s Office of Generic Drugs. To address these and other issues, members of industry and FDA met in 2011 to develop a generic drug user fee program in order to augment FDA’s congressional appropropriations. User fee funding is anticipated to be sufficient to eliminate the backlog by 2017 as well as provide enhanced review metrics over the five year period beginning with the program’s slated implementation on October 1, 2012. Additionally, generic drug user fees are intended to bring parity between the U.S. and foreign inspections by 2017 in order to ensure a consistent standard of quality for all drugs intended for the U.S. market. The proposed legislation must be approved by Congress.

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. An effect of this program has been to delay the launch of numerous generic products by an additional six months.

The passage of the Food and Drug Administration Amendments Act (FDAAA) in 2007 strengthened the FDA’s regulatory authority on post-marketing safety and granted them the authority to control drug marketing and labeling, to require post-approval studies, to establish active surveillance systems, and to make clinical trial operations and results more available to the public. Another provision provides for a six-month review clock for

 

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citizen petitions submitted to delay the approval of generic applications. A key provision also allows the FDA to require a risk evaluation and mitigation strategy for drugs associated with greater safety risks.

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 FDA’s current Good Manufacturing Practices (cGMP) standards or risk sanctions such as the suspension of manufacturing or the seizure of drug products and the FDA’s refusal to approve additional ANDAs.

Products manufactured outside the United States and marketed in the United States are subject to all of the above regulations, as well as to FDA and United States 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.

Our products also include biopharmaceutical products that are comparable to brand-name drugs. Of this portfolio, only one, Tev-Tropin®, is sold in the United States, while others are distributed outside of the United States. We plan to introduce additional products into the United States marketplace, and in 2009 filed a BLA for our GCSF product. While regulations are still being developed relating to the Biologics Price Competition and Innovation Act of 2009 (BPCI), the FDA did issue three substantial guidance documents in February 2012 that are intended to provide a roadmap for development of biosimilar products. Separate guidances address quality considerations and scientific considerations, with the third providing questions and answers regarding commonly posed issues. The guidances are comprehensive documents that provide significant information on developing a product through the 351(k) (biosimilar) pathway. They recommend a “stepwise approach” to development, including numerous meetings with FDA review staff during the development process. Most of the recommendations, however, are contingent on the FDA’s making subjective decisions during the development process on the scientific rigor employed to justify decisions. While there is a benefit to having a flexible development process, the lack of concrete recommendations will significantly prolong the development process of these products. In addition, the guidances did not address the naming issue or intellectual property concerns, and provided very limited information on the development of interchangeable products.

Government Reimbursement Programs

In early 2010, the United States government approved a comprehensive plan to decrease health care costs while improving the quality of patient care. These bills sought to reduce the federal deficit and the rate of growth in health care spending through, among other things, stronger prevention and wellness measures, increased access to primary care, changes in health care delivery systems and the creation of health insurance exchanges. In addition, the plan requires the pharmaceutical industry to share in the costs of reform, by increasing Medicaid rebates, narrowing sales definitions for average manufacturer price purposes and expanding Medicaid rebates to cover Medicaid managed care programs. Other components of healthcare reform include funding of pharmaceutical costs for patients in the “donut hole”. After a Medicare patient surpasses the prescription drug coverage limit, the patient is financially responsible for the entire cost of prescription drugs until the expense reaches the catastrophic coverage threshold. Under the new legislation, certain pharmaceutical companies are now obligated to fund 50% of the patient obligation in the “donut hole”. Additionally, commencing in 2011, an

 

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excise tax was levied against certain branded pharmaceutical products. The tax is specified by statute to be approximately $2.5 billion in 2011, $3 billion in 2012-16, $3.5 billion in 2017, $4.2 billion in 2018, and $2.8 billion each year thereafter. The tax is to be apportioned to qualifying pharmaceutical companies across the industry based on an allocation of their governmental programs as a portion of total pharmaceutical government programs.

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 13% (previously 11%) of the average manufacturer price; for products marketed under NDAs, manufacturers are required to rebate the greater of 23.1% (previously 15.1%) of the average manufacturer price or the difference between such 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. We have such a rebate agreement in effect with the United States federal government.

In addition, the Patient Protection and Affordable Care Act of 2010 mandated a newer regulation for Medicaid reimbursement, which became effective in part on October 1, 2010, which further modified the calculation of the “average manufacturer price.” The federal upper limit is now calculated as 175 percent of Center for Medicare and Medicaid Services calculated weighted average (based on units) of the monthly average manufacturer prices submitted by pharmaceutical companies with equivalent multiple source drugs.

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 our quarterly Medicaid drug rebate obligations.

European Union

The medicines regulatory framework of the EU requires that medicinal products, including generic versions of previously approved products and new strengths, dosage forms and formulations of previously approved products, must receive a marketing authorization before they can be placed on the market in the EU. Authorizations are granted after a favorable assessment of quality, safety and efficacy by the respective health authorities. In order to obtain authorization, 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 2011, we continued to register products in the EU, using both the mutual recognition procedure (submission of applications in other member states following approval by a so-called reference member state) and the decentralized procedure (simultaneous submission of applications to chosen member states). We continue to use the centralized procedure to register our generic equivalent version of reference products that originally used this procedure.

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 and regulatory requirements for comparability are followed. Guidelines have

 

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been 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.

In order to control expenditures on pharmaceuticals, most member states of the EU 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.

In addition to patent protection, exclusivity provisions in the EU may prevent companies from applying for marketing approval 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 EU. 2005 legislation, applicable to all members of the EU, changes and harmonizes the exclusivity period for new products where the application for marketing approval was submitted after November 2005. The period before marketing approval for a generic product can be pursued (known as data exclusivity) is eight years (from either six or ten years before) following approval of the reference product in the EU. Further, the generic product will be barred from market entry (marketing exclusivity) for a further two years, with the possibility of extending the market exclusivity by one additional year under certain circumstances for novel indications. Given that reference products submitted after November 2005 will take at least one year to be assessed and approved, the 2005 exclusivity provisions of ‘8+2+1’ years will affect only generic submissions for marketing approval lodged in late 2014 onwards.

The term of certain pharmaceutical patents may be extended in the EU by up to five years upon grant of Supplementary Patent Certificates (SPC). The justification for this extension is to increase effective patent life (i.e. the period between grant of a marketing authorization and patent expiry) to fifteen years. Previously, longer extensions had been available; for example, French and Italian patents granted before the current SPC legislation came into force were extended by up to eight and eighteen years, respectively.

Subject to the respective pediatric regulation, the holder of a SPC may obtain a further patent term extension of up to six months under certain conditions. This six month period cannot be claimed if the license holder claims a one-year extension of the period of marketing exclusivity based on the grounds that a new pediatric indication brings a significant clinical benefit in comparison with other existing therapies.

Orphan designated products, which receive, under certain conditions, a blanket period of ten years data exclusivity, may receive an additional two years of data exclusivity instead of an extension of the SPC if the requirements of the pediatric regulation are met.

The legislation also allows for research and development work during the patent term for the purpose of developing and submitting registration dossiers.

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.

The issuance of a market authorization or “Notice of Compliance” is subject to the Food and Drug Regulations, which provide, among other things, up to eight and one-half years of data exclusivity for innovative new drugs not previously approved for sale in Canada.

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 on the Patent Register maintained by Health Canada. Generic pharmaceutical manufacturers can serve a notice of allegation upon the

 

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brand company and, as is frequently the case, the brand company may commence litigation in response to the notice of allegation. In such cases, a Notice of Compliance will not be issued until the earlier of the expiration of a 24-month stay or resolution of the litigation in the generic company’s favor.

Every province in Canada offers a comprehensive public drug program for seniors and welfare recipients, and regulates the reimbursement price of drugs listed on their formularies for all patients. Most provinces in Canada have implemented price reforms aimed at reducing the reimbursement price of generic products. Generic reimbursement prices will decrease between 40-60% over a phased in period of approximately two years ending in 2013. Ontario and Quebec regulations (representing 60% of the Canadian market) also include certain limitations related to trade allowances paid to pharmacy customers and require generic companies to report the details of their transactions.

Miscellaneous Regulatory Matters

We are subject to various national, regional and local laws of general applicability, such as laws regulating working conditions. In addition, we are 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.

 

ITEM 4A: UNRESOLVED STAFF COMMENTS

None

 

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ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Introduction

We are a global pharmaceutical company that combines the world’s leading generics business with a world-class specialty pharmaceuticals business, as well as a new joint venture focusing on over-the-counter (“OTC”) products.

The pharmaceutical industry is affected by demographic and socioeconomic trends, such as aging populations and increased demand for pharmaceuticals, as well as broad economic trends, resulting in a corresponding increase in healthcare costs, governmental budget constraints and enhanced pressure on reimbursement pricing, and resource-constrained spending decisions of healthcare organizations, all of which lead to increased recognition of the importance of generics as providing access to affordable pharmaceuticals. We believe that our balanced business model, which includes generic, branded and OTC products, broad product offerings, economies of scale, expansive geographic reach and globally integrated infrastructure, positions us to take advantage of these trends.

Highlights

Significant highlights of 2011 included:

 

   

Intensive business development activities, including major acquisitions, such as Cephalon and Taiyo and new collaborations such as the OTC joint venture with Procter & Gamble. These activities significantly diversified our business, both geographically and by products, and had considerable impact on our revenues, gross profit and expenses for the year.

 

   

Our revenues grew to $18.3 billion, an increase of approximately $2.2 billion, or 14%, over 2010. Our revenue growth in 2011 was primarily driven by the inclusion of a full year of ratiopharm’s revenues, the consolidation of Cephalon’s revenues commencing in October 2011, and our Japanese acquisitions—including the consolidation of Taiyo commencing in July 2011. In addition, sales of Copaxone®, our leading product, grew significantly in 2011.

 

   

Our European and Rest of the World markets grew by 43% and 39%, respectively, compared to 2010. Revenues in the United States declined by $594 million, due to lower generic sales, partially offset by increased sales of our branded products, primarily Copaxone®.

 

   

Global generics revenues reached $10.2 billion, an increase of 3% over 2010. The increase was due to significantly higher revenues in Europe and our Rest of the World region, substantially offset by lower sales in the United States.

 

   

Our branded products portfolio generated revenues of $6.5 billion, an increase of 34% compared to 2010. The increase was due to the inclusion of the Cephalon products as well as record sales of Copaxone®, Qvar®, Azilect® and increased sales of ProAir™. Global in-market sales of Copaxone® reached a record $3.9 billion, an 18% increase over 2010.

 

   

Net R&D spending reached a record $1.1 billion, approximately 57% of which was invested in our branded portfolio.

 

   

G&A expenses amounted to $932 million. As a percentage of revenues, G&A expenses decreased to 5.1% in 2011 from 5.4% in 2010.

 

   

Operating income amounted to $3.1 billion, a decrease of $762 million compared to 2010.

 

   

Cash flow from operating activities amounted to $4.1 billion, similar to 2010.

 

   

Net income attributable to Teva in 2011 amounted to $2.8 billion, compared to $3.3 billion in 2010.

 

   

Exchange rate differences between 2011 and 2010 had a positive impact of approximately $367 million on revenues and $54 million on operating income.

 

   

In November, Teva raised $5 billion in the largest ever debt offering by an Israeli company.

 

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Acquisitions and Other Transactions

Consumer Health Care Joint Venture with Procter & Gamble

In November, 2011, we formed a consumer health care joint venture with The Procter & Gamble Company (“P&G”), combining our OTC pharmaceutical businesses in all markets outside North America. In addition, we will manufacture products to supply the joint venture’s markets as well as P&G’s existing North American OTC business. We own 49% of the joint venture, and P&G holds the remaining 51%. Since the joint venture became operative in late 2011, it did not have a significant effect on our results of operations for this year.

Cephalon

On October 14, 2011, we acquired Cephalon, Inc. (“Cephalon”) for total consideration of $6.5 billion in cash. Cephalon is a global biopharmaceutical company with a strong marketed portfolio and pipeline of branded products. The acquisition diversified our branded portfolio and enhanced our late-stage innovative pipeline. Cephalon’s results of operations were included in our consolidated financial statements commencing October 2011.

CureTech

On September 28, 2011, we exercised our option to invest $19 million in CureTech Ltd. (“CureTech”), a biotechnology company developing novel, broad-spectrum, immune modulating products for the treatment and control of cancer. As a result of the option exercise, our ownership in CureTech increased from 33% to 75%. We also hold an option to acquire full ownership of CureTech. In addition, we are obligated to make up to $50 million of equity investments in CureTech’s research and development activities.

Japanese Ventures

On September 26, 2011, we acquired 100% control of our former equity investment in Teva-Kowa, for a total purchase price of $150 million, thereby gaining all of the non-controlling interests in Taisho.

Taiyo

On July 14, 2011, we acquired 100% of the outstanding shares of Taiyo Pharmaceutical Industry Co. Ltd. (“Taiyo”) for $1.1 billion in cash. Taiyo has developed one of the largest portfolios of generic products in Japan with over 550 marketed products, and its advanced production facilities enable it to produce a wide range of dosage forms on a large scale. Taiyo’s results of operations were included in our consolidated financial statements commencing July 2011.

Corporación Infarmasa

On January 26, 2011, we acquired Corporación Infarmasa (“Infarmasa”), a top ten pharmaceutical company in Peru. Infarmasa’s product offerings significantly enhanced our portfolio in the market, especially in the area of antibiotics, where Infarmasa has the leading brand in Peru. Following the acquisition, we became one of the top two pharmaceutical companies in the country.

Laboratoire Théramex

On January 5, 2011, we acquired Laboratoire Théramex for €267 million paid at closing (approximately $355 million) and certain limited performance-based milestone payments. Théramex offers a wide variety of women’s health products, and expanded our women’s health business into important growth markets in Europe and the rest of the world.

 

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2010 Acquisition

Ratiopharm

On August 10, 2010, we acquired the Merckle ratiopharm Group (“ratiopharm”), a global pharmaceutical company with operations in more than 20 countries, for a total cash consideration of $5.2 billion. Ratiopharm’s results of operations were included in our consolidated financial statements commencing August 2010. Therefore, 2011 was the first full year in which the results of ratiopharm were included in our consolidated financial statements.

Results of Operations

The following table sets forth, for the periods indicated, certain financial data derived from our U.S. GAAP financial statements, presented as percentages of net revenues, and the percentage change for each item as compared to the previous year.

 

     Percentage of Net Revenues
Year Ended December 31,
     Percentage Change
Comparison
 
     2011      2010      2009      2011-2010     2010-2009  
     %      %      %      %     %  

Net revenues

     100.0        100.0        100.0        14       16  

Gross profit

     52.0        56.2        53.0        5       23  

Research and development expenses—net

     6.0        5.9        5.9        15       15  

Selling and marketing expenses

     19.0        18.4        19.3        17       11  

General and administrative expenses

     5.1        5.4        5.9        8       5  

Legal settlements, acquisition, restructuring and other expenses and impairment

     4.9        2.5        4.6        120       (36

Operating income

     17.0        24.0        17.3        (20     61  

Financial expenses—net

     0.9        1.4        1.5        (32     11  

Income before income taxes

     16.1        22.6        15.8        (19     66  

Provision for income taxes

     0.7        1.8        1.2        (55     70  

Share in losses of associated companies—net

     0.3        0.1        0.2        154       (27

Net income attributable to Teva

     15.1        20.7        14.4        (17     67  

Revenues by Geographic Area

 

     Year Ended December 31,      Percentage Change
Comparison
 
     2011      2010      2009      2011-2010     2010-2009  
     U.S. $ in millions      %     %  

United States:

             

Generic

     3,957        5,789        5,037        (32     15   

Branded

     4,804        3,600        3,096        33        16   

Others

     39        5        24        680        (79
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total United States

     8,800        9,394        8,157        (6     15   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Europe*:

             

Generic

     3,810        2,637        2,030        44        30   

Branded

     1,101        746        687        48        9   

Others

     749        564        554        33        2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Europe

     5,660        3,947        3,271        43        21   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Rest of World:

             

Generic

     2,429        1,481        1,397        64        6   

Branded

     588        509        419        16        21   

Others

     835        790        655        6        21   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Rest of World

     3,852        2,780        2,471        39        13   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Revenues

     18,312        16,121        13,899        14        16   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

* All members of the European Union as well as Switzerland and Norway.

 

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United States

In 2011, we continued to be a leading pharmaceutical company in the U.S. market, with revenues of $8.8 billion, a decrease of 6% compared to 2010. We have significantly increased our presence in the branded arena, due to the acquisition of Cephalon, and have maintained our leading position in the generics business. Total prescriptions amounted to 555 million, representing 14.1% of total U.S. prescriptions, and new prescriptions amounted to 304 million. We expect that our U.S. market leadership position will continue to increase due to the acquisition of Cephalon and the enhancement of our branded business, and as a result of our ability to introduce new generic equivalents for brand-name products on a timely basis, emphasis on customer service, the breadth of our product line, our commitment to regulatory compliance and our cost-effective production.

Generics

Revenues from generic products in the United States during 2011 amounted to approximately $4.0 billion, down 32% compared to approximately $5.8 billion in 2010. The decrease resulted from declining sales of key 2010 launches, such as Effexor XR® (venlafaxine HCl ER), Yaz® (drospirenone and ethinyl estradiol, which we market as Gianvi™), Cozaar® (losartan potassium), Hyzaar® (losartan potassium—hydrochlorothiazide) and Mirapex® (pramipexole dihydrochloride), as well as from supply constraints as a result of regulatory issues, primarily at our Irvine and Jerusalem facilities. This decline was partially offset by the launch of olanzapine, royalties related to sales of atorvastatin resulting from our agreement with Ranbaxy, and strong sales of budesonide.

Among the most significant generic products we sold in the U.S. in 2011 were generic versions of Pulmicort® (budesonide inhalation), Zyprexa® (olanzapine), Adderall XR® (mixed amphetamine salts ER), Effexor XR® (venlafaxine HCl ER), Accutane® (isotretinoin, which we market as Claravis™) and Yaz® (drospirenone and ethinyl estradiol, which we market as Gianvi™).

Products. In 2011, we launched 17 generic versions of the following branded products in the U.S. (listed by date of launch):

 

Generic Name

   Brand Name   Launch
Date
     Total Annual Branded
Market at Time of
Generic Launch

$ millions (IMS)*
 

Phentermine HCl capsules

   Phentermine     Jan-11         7.3  

Norethindrone acetate and ethinyl estradiol tablets

   Femhrt®     Feb-11         31.3  

Norethindrone and ethinyl estradiol chewable tablets

   Femcon® FE     Mar-11         34.4  

Disulfiram 250mg tablets

   Antabuse®     Apr-11         18.6  

Donepezil HCl tablets

   Aricept®     May-11         714.9  

Letrozole tablets

   Femara®     Jun-11         376.7  

Triamcinolone acetonide nasal spray

   Nasacort®AQ     Jun-11         181.8  

Levofloxacin tablets

   Levaquin®     Jun-11         830.5  

Gemcitabine HCl for injection

   Gemzar®     Jul-11         413.1  

Disulfiram 500mg tablets

   Antabuse®     Jul-11         2.7  

Amlodipine besylate & benazepril capsules

   Lotrel®     Jul-11         170.0  

Levonorgestrel / ethinyl estradiol and ethinyl estradiol tablets

   Seasonique®     Jul-11         111.9  

Levocetirizine dihydrochloride tablets

   Xyzal®     Sep-11         93.6  

Levetiracetam ER tablets

   Keprra XR®     Sep-11         151.3  

Olanzapine tablets

   Zyprexa®     Oct-11         3,343.1  

Levonorgestrel / ethinyl estradiol and ethinyl estradiol tablets

   LoSeasonique®     Dec-11         33.1  

Lamivudine / zidovudine tablets

   Combivir®     Dec-11         277.6  

 

* Branded annual market size as quoted by IMS is a commonly used measurement of the relative significance of a potential generic product. The figures given are for the twelve months ended in the calendar quarter closest to our launch. Generic equivalents of any given product are typically sold at prices substantially lower than the branded product price.

 

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We expect that our revenues in the U.S. will continue to benefit from our strong generic pipeline, which, as of February 9, 2012, had 175 product registrations awaiting FDA approval, including 45 tentative approvals. Collectively, the branded versions of these 175 products had U.S. sales in 2011 exceeding $115 billion. Of these applications, 118 were “Paragraph IV” applications challenging patents of branded products. We believe we are first to file with respect to 74 of these products, the branded versions of which had U.S. sales of more than $52 billion in 2011. IMS-reported brand sales are one of the many indicators of future potential value of a launch, but equally important are the mix and timing of competition, as well as cost effectiveness. However, potential advantages of being the first filer with respect to some of these products may be subject to forfeiture and or shared exclusivity.

The FDA requires companies to submit abbreviated new drug applications (ANDAs) for approval to manufacture and market generic forms of brand-name drugs. In most instances, FDA approval is granted upon the expiration of the underlying patents. However, companies may be rewarded with a 180-day period of marketing exclusivity, as provided by law, for being the first generic applicant to successfully challenge these patents. As part of our strategy, we actively review pharmaceutical patents and seek opportunities to challenge patents that we believe are either invalid or not infringed by our generic version. In addition to the commercial benefit of obtaining marketing exclusivity, we believe that our patent challenges ultimately improve healthcare by allowing consumers earlier access to more affordable, high-quality medications.

In 2011 we received, in addition to 21 final generic drug approvals, 14 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, a 30-month regulatory stay lapses or a 180-day exclusivity period awarded to another manufacturer either expires or is forfeited. The 14 tentative approvals received were for generic equivalents of the following products:

 

Generic Name

   Brand Name   Total Branded Market
$ millions (IMS)*
 

Olopatadine ophthalmic solution 0.2%

   Pataday®     261.4  

Lamivudine tablets

   Epivir®     97.8  

Ribarivin oral solution

   Rebetol®     0.3  

Rabeprazole DR tablets

   Aciphex®     902.0  

Zolmitriptan tablets

   Zomig®     139.8  

Pregabalin capsules

   Lyrica®     1,789.3  

Emtricitabine / tenofovir tablets

   Truvada®     1,974.4  

Risedronate tablets 150 mg

   Actonel®     271.3  

Levetiracetam ER tablets

   Keppra XR®     151.3  

Efavirenz / emtricitabine / tenofovir tablets

   Atripla®     2,572.4  

Solifenacin succinate tablets

   Vesicare®     655.4  

Atorvastatin tablets

   Liptor®     8,179.0  

Atazanavir capsules

   Reyataz®     949.4  

Tenofovir tablets

   Viread®     464.9  

 

* The figures given are for the year ended December 31, 2011.

On January 31, 2011, we received a warning letter from the FDA relating to our oral solid dose manufacturing facility in Jerusalem, citing cGMP deficiencies related to laboratory reporting and systems. We worked diligently to address the FDA’s observations and to resolve the FDA’s concerns. The deficiencies and

 

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remediation adversely affected our supply capabilities in 2011. Following a June 2011 follow-up inspection that concluded with no observations, we received a close-out letter from the FDA on September 9, 2011. The letter is formal notification that we have addressed the issues raised in the warning letter.

In December 2009, the FDA issued a warning letter relating to our Irvine, California injectable products manufacturing facility. We voluntarily ceased production at the facility during the second quarter of 2010, and are executing a remediation plan required by the FDA. In April 2011, we resumed limited manufacturing activity. We have been working closely with the FDA, and although we are gradually releasing more products for distribution, we currently expect to be able to resume full production in the second half of 2012. During 2011, we incurred uncapitalized production costs, consulting expenses and write-offs of inventory, of approximately $117 million relating to this facility. If we are unable to resume full production and sale of injectable products within the time frame currently expected, or if we further change our plans as to the scale of operations or products, we will incur additional expenses, and there may be further impairment of tangible and intangible assets. At December 31, 2011, we had approximately $49 million of intangible assets and approximately $214 million of fixed assets and inventory relating to products produced at the Irvine facility.

Branded Products

In 2011, our revenues from branded products in the United States amounted to $4.8 billion, an increase of 33% over 2010. The main factors affecting revenues of our branded products in the U.S. include:

 

   

the inclusion of Cephalon’s branded sales, primarily Provigil®, Nuvigil®, Treanda® and Fentora®;

 

   

record sales of Copaxone®, which increased by $507 million, primarily due to price increases and, to a lesser extent, volume growth. Copaxone® was responsible for a very significant contribution to our profits and cash flow from operations in 2011;

 

   

an increase of 31% in sales of Qvar® over 2010 due to volume growth and price increase;

 

   

a 10% increase in sales of ProAirTM over 2010 due to volume growth;

 

   

a 28% increase in sales of Azilect® over 2010 due to volume growth and price increase; and

 

   

a decline of 19% in sales of our women’s health products, primarily as a result of generic competition to our oral contraceptive product, Seasonique®, that commenced in the third quarter of 2011.

Other Revenues

In 2011, other revenues in the United States amounted to $39 million, compared to $5 million in 2010. These revenues were generated in the fourth quarter from sales of OTC products to P&G at cost pursuant to a manufacturing agreement.

On July 31, 2009, we entered into a consent decree with the FDA with respect to the operations of Teva Animal Health. The consent decree mandated that all Teva Animal Health products be recalled and all finished goods inventory be destroyed. In October 2010, Teva Animal Health resumed selling certain third party manufactured products, and on February 3, 2012, Teva Animal Health received authorization to resume manufacturing and distribution activities related to our non-sterile liquid products. We continue to pursue remediation of the Teva Animal Health manufacturing site. During the fourth quarter of 2011, the site’s fixed assets and related intangibles were impaired as a result of the extensive time and expenses related to the remediation, resulting in an $85 million charge. At December 31, 2011, we had remaining approximately $15 million of intangible assets and approximately $39 million of fixed assets and inventory relating to animal health products.

Comparison of 2010 to 2009. In 2010, our revenues in the United States amounted to $9.4 billion, a 15% increase over 2009. Generics revenues in 2010 amounted to $5.8 billion, and branded revenues amounted to $3.6 billion. The increase was attributable primarily to the following:

 

   

the launch of our generic version of Effexor XR® (venlafaxine HCl ER) pursuant to a settlement agreement with Wyeth Pharmaceuticals;

 

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launches of our generic versions of Yaz® (drospirenone and ethinyl estradiol, which we market as Gianvi™), Cozaar® (losartan potassium), Hyzaar® (losartan potassium—hydrochlorothiazide) and Mirapex® (pramipexole dihydrochloride), which was launched in the first quarter of 2010 pursuant to an agreement with Boehringer Ingelheim;

 

   

sales of products launched before 2010 that had higher revenues in 2010, primarily the generic versions of Pulmicort® (budesonide inhalation), which was re-launched in December 2009 pursuant to a settlement agreement with AstraZeneca, and Accutane® (isotretinoin, which we market as Claravis™);

 

   

continued growth in sales of Copaxone®, in-market sales of which increased by $371 million in 2010 over 2009. We benefited from record in-market sales of Copaxone® in the U.S. due to price increases and, to a lesser extent, volume growth;

 

   

41% growth in sales of Qvar®, our inhaled corticosteroid; and

 

   

increased in-market sales of Azilect®, which grew by 34% over 2009.

These factors were partially offset by a 13% decrease from 2009 in sales of ProAirTM due to strong competition in the short-acting beta agonist market and decreased demand related to a less severe flu season in 2010.

Europe

Sales in Europe in 2011 amounted to $5.7 billion, an increase of 43% compared to 2010. In local currency terms, sales grew by 37%, primarily due to the inclusion of a full year of ratiopharm’s sales, the acquisitions of Theramex and Cephalon and the transition of marketing responsibility for Copaxone® from Sanofi to Teva in many European markets. During 2011, the main European currencies affecting our sales (the euro, British pound and Hungarian forint) strengthened in value against the U.S. dollar (on an annual average compared to annual average basis).

Generic Products

Revenues for generic products in Europe reached $3.8 billion, an increase of 44%, primarily due to the inclusion of a full year of ratiopharm’s sales and the acquisition of Cephalon (including Mepha, its Swiss generics subsidiary), as well as an increase in API sales. In 2011, we enhanced our position as the leading generic pharmaceutical company in Europe, and, with the inclusion of Mepha, improved our market position significantly in certain key European countries such as Switzerland. During 2011, we had 441 product launches across Europe.

As of December 31, 2011, Teva had received 1,241 generic approvals in Europe relating to 152 compounds in 331 formulations, including 10 European Medicines Agency (“EMA”) approvals valid in all EU member states. In addition, Teva had approximately 2,530 marketing authorization applications pending approval in 30 European countries, relating to 288 compounds in 546 formulations, including 11 applications pending with the EMA. During 2011, we continued to register products in the EU, using both the mutual recognition procedure (submission of applications in other member states following approval by a so-called reference member state) and the decentralized procedure (simultaneous submission of applications to chosen member states). We continue to use the centralized procedure to register our generic equivalent version of reference products that originally used this procedure.

Branded Products

Sales of branded products in Europe amounted to $1.1 billion, an increase of 48% compared to 2010. The change was driven by the inclusion of Theramex and Cephalon and increased sales of Copaxone®, but was also due to the transition of the marketing rights for Copaxone® to us from Sanofi in several European countries such as Germany, Portugal, Sweden, Austria and Norway, as well as growth in markets where Teva already had exclusive marketing rights. On February 1, 2012, we assumed marketing responsibility from Sanofi for Copaxone® in all remaining European countries.

 

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Our 2011 acquisitions of Cephalon and Theramex substantially enhanced our branded product offerings. With the acquisition of Cephalon, well-recognized brands such as Provigil®, Effentora®, Spasfon®, Myocet® and Actiq® have been added to our branded portfolio and are sold, either directly by us or through third party distributors, in many European markets, mainly France, the United Kingdom, Germany, Spain and Italy. With the acquisition of Theramex, in January 2011, we established a European women’s health platform. In 2011, we received a marketing approval for Zoely®, a new oral contraceptive developed by Théramex and Merck and Co. The approval of Zoely® marks an important step in our strategy to enhance our women’s health product line. Zoely® was launched in France in December 2011 and in Belgium in January 2012. We hold the marketing rights for Zoely® in several European countries.

Other Revenues

Other revenues amounted to $749 million, compared to $564 million in 2010, an increase of 33%, due to the inclusion of a full year of ratiopharm’s sales in 2011, which brought a strong OTC presence to Teva in various markets such as Germany, Austria and Finland, as well as an increase in our Hungarian third party distribution activities.

Listed below are highlights for 2011 in our most significant European operations in terms of size:

 

   

Germany: Sales in Germany increased in 2011 primarily due to the inclusion of a full year of ratiopharm’s sales, and to a lesser extent, the transfer of the marketing responsibility for Copaxone® to Teva in mid October 2011. Our generic sales in Germany had a slight increase in terms of volume and value in 2011. By the end of 2011, we achieved the number one position in the generic market both in volume and value.

 

   

France: Sales in France increased in 2011 primarily due to the inclusion of a full year of ratiopharm’s sales as well as the integration of Theramex, which strengthened our position as the third-largest generic pharmaceutical company in France in terms of sales. With the inclusion of Cephalon and Theramex, we have a balanced business in France.

 

   

United Kingdom: We are the largest generic pharmaceutical company in the U.K. in terms of sales. In 2011 we further increased our market share, despite a large number of competitors. Our revenues in 2011 increased, primarily due to new product launches, including the generic version of Lipitor® (atorvastatin), which were partially offset by price reductions for more widely available generic products, so called “Category M” products, and the decrease in value of generic pharmaceuticals generally in 2011.

 

   

Italy: Sales in Italy increased in 2011 primarily due to the inclusion of a full year of ratiopharm’s sales, which strengthened our position as the leading generic pharmaceutical company in Italy. With the acquisitions of Cephalon and Theramex, we added strong branded products to our portfolio. The market for generic pharmaceuticals continued to show growth of more than 10% in 2011 (based on IMS data as of November 2011).

 

   

Spain: Sales in Spain grew in 2011 primarily due to the inclusion of a full year of ratiopharm’s sales. The market for generic pharmaceuticals showed enhanced growth of well above 10% (based on IMS data as of November 2011). In 2011, the Spanish market was further influenced by healthcare saving measures and reforms that mandate INN (chemical molecule name) prescription and reductions in reimbursement prices.

Comparison of 2010 to 2009. Total sales in Europe in 2010 amounted to approximately $3.9 billion, an increase of 21% compared to 2009. The main contributors to this increase were the inclusion of ratiopharm sales, commencing in August 2010, mainly in Germany, France, Spain and Italy, higher sales of generic pharmaceuticals and higher sales of APIs as well as increased sales of Copaxone® and Azilect®.

 

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Rest of the World (“ROW”) Markets

These markets include all countries other than the United States and the countries we include as “Europe”. ROW markets range from pure generic markets, such as Canada and Israel, to markets in which generic products are marketed and sold under brand names, such as several Asian and Latin American markets. Sales of branded generic products usually generate higher gross margins but also involve considerably higher marketing expenditures than do non-branded generics. These markets also vary widely in size, growth rates, availability of biosimilar approval pathways and the importance and acceptance of OTC products.

Our revenues in ROW markets reached an aggregate of $3.9 billion in 2011, an increase of 39% as compared to 2010. In local currency terms, revenues grew by 34%. Sales of generic products amounted to $2.4 billion, which represent 63% of the total revenues in the region; sales of branded products amounted to $588 million, or 15% of total revenues in the region; and other revenues were $835 million, or 22% of total sales in the region.

Approximately 23% of our ROW revenues were generated in Canada and other markets, 21% in Latin America, 20% in Russia and other Eastern European markets, 19% in Japan and other Asian markets, and 16% in Israel. In Latin America, revenues grew by 11% both in dollar terms and in local currency terms, as compared to 2010. The increase was primarily driven by strong generic and OTC performance, as well as by increased sales of Copaxone® and our other branded products. The acquisition of Infarmasa in February 2011 strengthened our OTC and generic portfolio in Peru. The increase was partially offset by a reduction in revenues as a result of the divestment of our pharmacy chain in Peru in February 2011. We achieved growth in all markets. We slightly increased our market share of Copaxone® and continued to maintain our market share for all other markets across the region.

In Canada, where we are one of the two leading generic pharmaceutical companies, revenues in 2011 increased by 33%, primarily due to the inclusion of a full year of ratiopharm’s sales and new product launches. As of December 31, 2011, we had 61 product registrations awaiting approval by the Therapeutic Products Directorate of Health Canada. Collectively, the branded versions of these products had Canadian sales in 2011 of approximately $3.6 billion.

Our revenues in Russia and other Eastern European markets in 2011 grew by 29% in dollar terms and by 26% in local currency terms, as compared to 2010. The growth was mainly attributable to strong sales of OTC products and generic products, enhanced by the inclusion of a full year of ratiopharm’s sales, which had a significant effect on revenues in Russia, Ukraine and Kazakhstan. Sales of Copaxone® in Russia in 2011 declined compared to 2010, due to a delay in the annual governmental tender. In that tender, which was held in the beginning of 2012, Teva was awarded a significantly higher volume. In 2011, our market shares in most major countries in Eastern Europe increased or remained at the same level compared to 2010. In Russia, we are now the second largest generic pharmaceutical company by value. In Ukraine we are a top-five generics company, and we are the largest generics company in Kazakhstan.

The generic pharmaceutical markets in South Eastern Europe, primarily Croatia and the other former Yugoslav states, declined due to stagnant economies and pricing and competitive pressures. Teva’s sales in these markets were impacted by general market conditions and new competitive entrants.

Sales in Israel in 2011 increased by 10% in dollar terms and by 7% in local currency terms, as compared to 2010, primarily driven by distribution revenues and sales of medical products.

Our sales in Asia in 2011 grew substantially compared to 2010, primarily due to our Japanese acquisitions. On January 25, 2012, we announced our plans to consolidate our Taiyo and Teva-Kowa activities to form a new “Teva Seiyaku” company at the beginning of April 2012.

 

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Comparison of 2010 to 2009. Revenues in our ROW markets during 2010 amounted to approximately $2.8 billion, an increase of 13% compared to 2009. In 2010, approximately 26% of such revenues were generated in Latin America, 25% in Canada and all other markets, 22% in Russia and other Eastern European markets, 20% in Israel, and 7% in Asia.

Revenues by Product Line

 

     Year Ended December 31                           Percentage
Change
Comparison
 
     2011      2010      2009      % of
2011
     % of
2010
     % of
2009
     2011-
2010
    2010-
2009
 
     U.S. $ in millions                           %     %  

Generics

     10,196        9,907        8,464        56         61         61         3        17   

API

     747        641        565        4         4         4         17        13   

Branded Products

     6,493        4,855        4,202        35         30         30         34        16   

CNS

     4,412        3,202        2,665        24         20         19         38        20   

Copaxone®

     3,570        2,958        2,486        19         18         18         21        19   

Provigil®

     350        —           —           2                                  

Azilect®

     290        244        179        2         2         1         19        36   

Nuvigil®

     86        —           —           *                                  

Respiratory

     878        747        775        5         5         6         18        (4

ProAir™

     436        396        455        2         2         3         10        (13

Qvar®

     305        250        202        2         2         1         22        24   

Women’s Health

     438        374        357        2         2         3         17        5   

Oncology

     268        74        50        1         *         *         262        48   

Treanda®

     131        —           —           1                                  

Other Branded

     497        458        355        3         3         3         9        29   

All Others

     1,623        1,359        1,233        9         8         9         19        10   

OTC

     765        496        457        4         3         3         54        9   

Other Revenues

     858        863        776        5         5         6         (1     11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

     18,312        16,121        13,899        100         100         100         14        16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

* Less than 0.5%

Generics

Our generic products category includes sales of our generic products as well as API sales to third parties.

Sales of generic products grew by $289 million, or 3%, in 2011 over 2010. Our largest market for generics is the United States, with revenues of approximately $4.0 billion, down 32% from 2010 and representing approximately 39% of total generics revenues in 2011. The decrease resulted from declining sales of key 2010 launches, as well as from supply constraints as a result of regulatory issues, primarily at our Irvine and Jerusalem facilities.

Revenues from generic products in Europe in 2011 amounted to $3.8 billion, an increase of 44% over 2010. The increase was primarily due to the inclusion of a full year of ratiopharm, as well as the acquisition of Cephalon’s generics business, which is largely based in Europe. In local currency terms, sales grew by 37%.

In our ROW markets, generics sales amounted to approximately $2.4 billion, an increase of 64% over 2010. The increase was mainly due to the acquisition of Taiyo in Japan and the further consolidation of our activities in the country, the acquisition of the ratiopharm business in Canada, and growth in Latin America and Eastern Europe. In local currency terms, sales grew by 59%.

In 2010, revenues from generic products in the United States were approximately $5.8 billion, an increase of 15% over 2009. Revenues from generic products in Europe amounted to approximately $2.6 billion, an increase of 30% over 2009. Generic product revenues in the ROW markets in 2010 were approximately $1.5 billion, an increase of 6% over 2009.

 

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Active Pharmaceutical Ingredients (API)

API sales to third parties in 2011 amounted to $747 million, an increase of 17% over 2010. This growth occurred in all of our principal geographical markets and was largely attributable to increased demand from existing customers, as well as to several new product launches. The growth also resulted from strong sales in certain markets in Asia and Central and Eastern Europe.

Comparison of 2010 to 2009. Sales to third parties in 2010 amounted to $641 million, an increase of 13% compared to 2009. The increase in sales in 2010 occurred mainly due to growth in our principal geographical markets.

Branded Products

Teva’s revenues from branded products amounted to approximately $6.5 billion in 2011, an increase of 34% over 2010.

In 2011, we revised our classification of certain products and grouped our branded products into five categories: Central Nervous System, Respiratory, Women’s Health, Oncology and Other.

Central Nervous System

Our central nervous system (“CNS”) product line includes Copaxone® and Azilect® as well as certain additions to our portfolio following the Cephalon acquisition, in particular Provigil® and Nuvigil® for the treatment of wakefulness, Amrix®, Actiq® and Fentora® for the treatment of pain, and Gabitril® for the treatment of epilepsy. In 2011, our CNS sales reached approximately $4.4 billion, an increase of 38% over 2010, primarily due to higher sales of Copaxone®, the addition of the Cephalon acquired products in the fourth quarter and an increase in Azilect® sales.

Copaxone®. In 2011, Copaxone® (glatiramer acetate injection) continued to be the leading multiple sclerosis therapy in the U.S. and globally. Global in-market sales, which represent sales of Copaxone® to third parties, grew by 18% over 2010, reaching $3.9 billion. Our sales of Copaxone® amounted to approximately $3.6 billion. Price increases and positive currency effects accounted for nearly two thirds of the increase, and unit growth accounted for the remainder. Copaxone® was responsible for a very significant contribution to our profits and cash flow from operations in 2011.

 

In 2011, sales of Copaxone® in the United States increased 22% to $2.8 billion, and non-U.S. in-market sales increased by 8% to $1.1 billion compared to 2010. Growth in U.S. sales of Copaxone® was driven by a price increase in January 2011 of 14.9% as well as by unit growth. The increase in non-U.S. sales, primarily in Italy, Spain, France, the United Kingdom, Brazil and Mexico, was driven by unit growth as well as positive currency effects, which were partially offset by governmental cost-containment measures. U.S. sales accounted for 72% of global Copaxone® sales in 2011, compared with 69% in 2010.

On February 1, 2012, we completed the assumption of marketing responsibility for Copaxone® from Sanofi in Europe, and on March 1, 2012 we will assume marketing responsibility in Australia and New Zealand. Sanofi is entitled to receive 6% of the in-market sales of Copaxone® in the applicable European countries for a period of two years from our assumption of the marketing responsibilities. As a result, beginning March 1, 2012, Sanofi will also no longer share any of our Copaxone® selling and marketing expenses. This termination of our marketing arrangements with Sanofi will eventually result in increases in our net sales of Copaxone®.

Copaxone® has been approved for marketing in the United States, Canada, Israel, all European Union countries, and several other markets. U.S. market shares in terms of new and total prescriptions were 37.0% and 40.2%, respectively, according to December 2011 IMS data.

Comparison of 2010 to 2009. In 2010, in-market global sales of Copaxone® were approximately $3.3 billion, an increase of 17% over 2009. U.S. sales in 2010 accounted for 69% of global sales of Copaxone®. The growth of in-market sales of Copaxone® in the U.S. in 2010 also reflected the impact of two price increases of 9.9% each.

 

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Provigil®. Following the acquisition of Cephalon, our Provigil® sales amounted to $350 million in the fourth quarter of 2011. We expect that Provigil® will face competition in the United States beginning in April 2012, and that Provigil® sales will materially decline as a result.

Azilect®. Our once-daily treatment for Parkinson’s disease, Azilect® (rasagiline tablets), continued to establish itself in the United States and Europe. We jointly market Azilect® with Lundbeck in certain key European countries. We exclusively market Azilect® in the United States and certain other markets, while Lundbeck exclusively markets Azilect® in the remaining European countries and certain other international markets. Azilect® has been approved for marketing in the United States, Europe as well as in selected ROW markets.

Global in-market sales, which represent sales to third parties, in 2011 reached $393 million compared to $318 million in 2010, an increase of 24%. Our sales of Azilect® amounted to $290 million, an increase of 19% compared to 2010. The increase in sales is attributable primarily to volume growth worldwide and to a lesser extent due to price increases in the United States. Outside the United States, sales of Azilect® increased mainly in Germany, France, Spain and Turkey.

Nuvigil®. Following the acquisition of Cephalon, our global Nuvigil® sales amounted to $86 million in the fourth quarter of 2011.

Comparison of 2010 to 2009. In 2010, sales of our CNS products amounted to approximately $3.2 billion, compared to $2.7 billion in 2009.

Respiratory Products

We include only branded products in our respiratory product line, the main products of which are ProAirTM and Qvar®. Sales from generic products indicated for the treatment of respiratory disease are reported as part of our generic drug sales.

Revenues from our respiratory branded products increased by 18% in 2011 to $878 million, primarily due to an increase of 16% in the United States. In addition, revenues in Europe increased by 20% (reflected in all major markets, including Germany, the United Kingdom, France and Italy).

ProAir™ (albuterol HFA), which we sell only in the United States, is a short-acting beta-agonist (SABA) for the treatment of bronchial spasms linked to asthma or COPD and exercise-induced bronchospasm. ProAir™ sales reached $436 million, an increase of 10% compared to 2010. ProAir™ maintained its leadership in the SABA market, with an average market share of 50.7% in terms of total number of prescriptions during the fourth quarter of 2011 as compared to 47.6% in the fourth quarter of 2010.

Qvar® (beclomethasone diproprionate HFA) is an inhaled corticosteroid for long-term control of chronic bronchial asthma, Qvar® global sales reached $305 million, an increase of 22% from the prior year. Qvar® maintained its second-place position in the inhaled corticosteroids category in the United States with an average market share of 23.6% in terms of total number of prescriptions during the fourth quarter of 2011, compared to 20.6% in the fourth quarter of 2010. Sales of Qvar® increased in the principal markets in Europe as well, most notably in Germany and France.

Comparison of 2010 to 2009. In 2010, sales of our respiratory products amounted to approximately $747 million, compared to $775 million in 2009.

Oncology Products

Our branded oncology product line includes certain Cephalon products as well as our biosimilar products indicated mainly for the treatment of side effects of oncology treatments. Sales of these products reached $268 million in 2011 as compared to $74 million in 2010. The increase resulted primarily from the inclusion of Cephalon’s cancer treatments as of the fourth quarter of 2011.

Sales of Treanda®, our largest selling oncology product, reached $131 million in the fourth quarter of 2011. During 2011, sales of biosimilar oncology pharmaceuticals reached $102 million, as compared with $74 million in 2010, mainly driven by the inclusion of ratiopharm’s sales and the continued growth of our biosimilar granulocyte colony stimulating factor (GCSF) in Europe.

 

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In 2009, sales of biosimilar oncology pharmaceuticals reached $50 million.

Women’s Health Products

Our women’s health product line includes our branded women’s health products, but does not include revenues from generic women’s health products which are reported as part of our generic drug sales.

Our global women’s health branded products had revenues of $438 million, an increase of 17% from $374 million in 2010, primarily driven by the inclusion of the Theramex women’s health products in Europe and in the ROW markets, commencing January 2011.

U.S. sales declined by 19% over 2010, mainly as a result of generic competition to our oral contraceptive product, Seasonique® starting in the third quarter of 2011.

Comparison of 2010 to 2009. In 2010, sales reached $374 million, an increase of 5% from $357 million in 2009.

All Others

OTC

PGT Healthcare, which commenced operations on November 1, 2011, combines the OTC portfolios of Teva and P&G outside of North America. The combined portfolio represents PGT Healthcare’s in-market sales. Teva owns a 49% interest in PGT Healthcare, with P&G owning the remaining 51%.

PGT Healthcare’s in-market sales (i.e., the joint venture’s sales to third parties), for the two months ended December 31, 2011 amounted to $237 million. Teva’s sales relating to the joint venture amounted to $165 million, including $31 million of sales at cost to P&G pursuant to supply arrangements for P&G’s North American OTC business.

Our OTC sales for the full year 2011, which include Teva’s sales relating to our joint venture with P&G, were $765 million, a 54% increase over 2010, due primarily to the full year inclusion of ratiopharm’s sales.

Comparison of 2010 to 2009. In 2010, our OTC sales were $496 million, an increase of 9% over 2009.

Other Revenues

Other revenues include sales of third party products for which we act as distributors (mostly in Israel and Hungary), animal health products and medical products, as well as miscellaneous items.

In 2011, we recorded sales of $858 million in this category, a slight decline from the sales recorded in 2010. The decline was due to the divestment of our pharmacy chain in Peru in February 2011, which was almost completely offset by the growth in our distribution services in Israel and Hungary as well as the sale of medical products in Israel.

Comparison of 2010 to 2009. In 2010, we recorded sales of $863 million, an increase of 11% over 2009.

Other Income Statement Line Items

Gross Profit

In 2011, gross profit amounted to $9.5 billion, an increase of 5%, or $450 million compared to 2010. The higher gross profit was mainly a result of our higher overall revenues, which was partially offset by higher inventory step-up charges, related to the Cephalon, Taiyo, Theramex and Infarmasa acquisitions, higher charges related to the amortization of purchased intangible assets, primarily of ratiopharm (which commenced in the first quarter of 2011) and of Cephalon (which commenced in part in the fourth quarter of 2011), as well as higher costs related to regulatory actions taken in various facilities.

 

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Gross profit margins were 52.0% in 2011, compared with 56.2% in 2010. The decrease in gross margin primarily reflects the product mix in the U.S., which included a fewer number of high-margin generic products, as well as the factors described above. These factors were partially offset by an increase in sales of our higher margin innovative and branded products, mainly Copaxone®, Azilect®, ProAir™ and Qvar® as well as the newly acquired Cephalon products, mainly Provigil®, Treanda® and Nuvigil®.

Comparison of 2010 to 2009. Gross profit increased in 2010 to $9.1 billion from $7.4 billion in 2009, an increase of 23%. Gross profit margins were 56.2% in 2010, compared to 53.0% in 2009.

Research and Development (R&D) Expenses

Net R&D spending for 2011 grew by 15% over 2010 and reached $1.1 billion. As a percentage of revenues, R&D spending reached 6.0% in 2011, as compared to 5.9% to 2010.

In 2011, we increased R&D spending in our branded R&D activities, including research and development of biosimilar, women’s health and other innovative products as clinical activities progressed and Cephalon’s R&D activities were integrated in the fourth quarter of 2011. Following Cephalon’s integration, the share of our branded R&D (CNS, respiratory, women’s health and oncology products) increased to approximately 57% of our 2011 R&D expenditures, while the balance was for generic R&D.

During 2011, we were reimbursed $31 million for related R&D efforts incurred as part of the Teva-Lonza joint venture. This reimbursement has been recorded as a reduction in research and development expenses. Our share in the joint venture’s expenses in 2011 was approximately $36 million and is reflected in the income statement under “share in losses of associated companies—net.”

Comparison of 2010 to 2009. Research and development expenses increased in 2010 to $951 million from $825 million in 2009, an increase of 15%. Slightly more than half of our 2010 R&D expenditures was for generic R&D, and the balance was for our innovative, respiratory, women’s health and biosimilar products.

Selling and Marketing (S&M)

S&M expenses in 2011 amounted to $3.5 billion, an increase of 17% over 2010. As a percentage of revenues, S&M expenses were 19.0% in 2011 compared to 18.4% in 2010. The increase in dollar terms was primarily due to the consolidation of ratiopharm (commencing August 2010), Theramex (commencing January 2011), Infarmasa (commencing February 2011), Taiyo (commencing July 2011) and Cephalon (commencing October 2011) as well as changes in currency exchange rates. The increase was partially offset by the termination of our obligation to pay Sanofi 25% of the in-market sales of Copaxone® in U.S. and Canada through March 31, 2010, as described below, as well as the sale of our Peruvian pharmacy chain in February 2011 and lower royalty payments made on generic products in the U.S. (mainly on generic versions of Mirapex®, Yaz®, Effexor XR® and Yasmin®, partially offset by higher payments on generic versions of Zyprexa® and Pulmicort®).

Comparison of 2010 to 2009. S&M expenses in 2010 amounted to $3.0 billion, an increase of 11% over 2009. As a percentage of revenues, S&M expenses decreased from 19.3% in 2009 to 18.4% in 2010.

Copaxone® was originally co-promoted with Sanofi in Germany, France, Spain, the Netherlands and Belgium, and was marketed solely by Sanofi in certain other European markets, Australia and New Zealand. Effective as of February 1, 2012, we assumed all marketing responsibility for Copaxone® in Europe, and on March 1, 2012 we will assume marketing responsibility in Australia and New Zealand. Sanofi is entitled to receive, on a country-by-country basis, 6% of the in-market sales of Copaxone® in certain European countries until 2014. Although we expect to record higher revenues as a result of this change, we will also become responsible for certain marketing and administrative expenses, which will no longer be shared with Sanofi.

 

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General and Administrative Expenses (G&A)

G&A expenses in 2011 amounted to $932 million compared with $865 million in 2010, an increase of 8%. As a percentage of revenues, G&A expenses decreased to 5.1% for 2011 from 5.4% for 2010. The increase in G&A expenses in dollar terms resulted primarily from the inclusion of ratiopharm for a full year in 2011 as compared to five months in 2010, as well as the inclusion of Cephalon, Taiyo and the joint venture with P&G for parts of the year, and exchange rate differences, and was partially offset by gains recognized from the sale of our Peruvian pharmacy chain and the acquisition of additional holdings in CureTech and in our Japanese venture. The latter transactions gave us control of these entities, triggering a gain of $135 million.

Comparison of 2010 to 2009. G&A expenses in 2010 amounted to $865 million, an increase of 5% over 2009, and as a percentage of revenues, G&A expenses decreased to 5.4% for 2010 from 5.9% for 2009.

Legal Settlements, Acquisition, Restructuring and Other Expenses and Impairment

Legal settlements, acquisition, restructuring and other expenses and impairment resulted in expenses of $901 million in 2011 as compared to $410 million in 2010. Legal settlement expenses were primarily related to intellectual property and product liability litigation.

During 2011, we reached the following settlements:

 

   

A settlement with Pfizer Inc. of patent litigation related to generic versions of Pfizer’s Neurontin® (gabapentin) capsules and tablets sold by Teva and its subsidiary IVAX Pharmaceuticals. The settlement between the parties provides for a full release of Teva and its subsidiaries and a one-time payment to Pfizer. The financial terms of the settlement are confidential.

 

   

A settlement agreement with Novartis regarding patent litigation related to amlodipine/benazepril (Lotrel®). The settlement provides for a full release for past sales and a royalty-free license for future sales of all strengths. The financial terms of the settlement are confidential.

 

   

A settlement with the plaintiffs in the majority of the propofol product liability cases where hepatitis C infection was alleged. Teva has established a provision covering both the settlement and the estimated cost of the remainder of these cases.

Our 2011 results include restructuring expenses of $192 million, which include severance costs of $154 million, primarily in connection with the Cephalon acquisition. These expenses relate mainly to integration of new businesses. Our cost reduction initiatives, which were undertaken to meet the challenges of our business environment and future opportunities, include the closure of certain manufacturing and R&D facilities and related streamlining of staff functions and work force.

Acquisition expenses in 2011 of $37 million were primarily related to the Cephalon acquisition.

Impairment of long-lived assets of $201 million for the year ended December 31, 2011 related primarily to our animal health business in the United States and a divestiture in connection with the Cephalon acquisition. Impairment of long-lived assets of $124 million in 2010 consisted primarily of impairments of intangible assets and fixed assets as a result of the decisions to restructure the Irvine injectable products facility.

Operating Income

Operating income was $3.1 billion in 2011, down from $3.9 billion in 2010. As a percentage of revenues, operating margin was 17.0% compared to 24.0% in 2010. The decline in operating income was mainly a result of the increase in operating expenses (selling and marketing, general and administrative and research and development) as a result of the ratiopharm, Cephalon, Taiyo and Theramex acquisitions, an increase in legal settlements, higher charges related to the amortization of ratiopharm’s intangible assets, which commenced in the

 

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first quarter of 2011, and of Cephalon’s intangible assets, which commenced in part in the fourth quarter of 2011, as well as higher impairment charges mainly related to our animal health business in the U.S and a divestiture in connection with the Cephalon acquisition. The decrease in operating income was partially offset by higher net revenue and gross profit as previously discussed as well as lower royalty payments (recorded within selling and marketing expenses).

Comparison of 2010 to 2009. Operating income in 2010 amounted to $3.9 billion, an increase of 61% over 2009, and as a percentage of revenues, operating income increased to 24.0% for 2010 from 17.3% for 2009.

Financial Expenses

In 2011, financial expenses amounted to $153 million, compared to $225 million in 2010. The decrease resulted primarily from gains resulting from the termination during 2011 of interest rate swap agreements relating to the 6.15% senior notes due 2036 and hedging costs in connection with the ratiopharm acquisition that were recorded in 2010, partially offset by interest expenses on the Taiyo and Cephalon financing. In 2011, interest expenses were higher as a result of an increase in debt. We expect interest expenses to remain relatively high for much of 2012.

Comparison of 2010 to 2009. In 2010, financial expenses amounted to $225 million, compared to $202 million in 2009. The $23 million increase was primarily attributable to hedging costs in connection with the ratiopharm acquisition, partially offset by lower interest expenses and gains from the sale of marketable securities and auction rate securities.

Tax Rate

The provision for taxes amounted to $127 million or 4% of our pre-tax income of $3.0 billion in 2011. In 2010, the provision for taxes amounted to $283 million, or 8% of pre-tax income of $3.6 billion. In 2009, the provision for taxes amounted to $166 million, or 8% of pre-tax income of $2.2 billion. The effective tax rate for 2011 is the result of the geographic mix and type of products sold during the year, and a variety of factors, including different effective tax rates applicable to non-Israeli subsidiaries that have tax rates above Teva’s average tax rates (including the impact of legal settlements, restructuring and impairment charges on such subsidiaries). We expect that the tax rate in future years will be higher, as a result of the product mix projected for these years.

The statutory Israeli corporate tax rate was 24% in 2011, compared to 25% in 2010 and 26% in 2009. This rate has increased in 2012 to 25%. However, this increase is expected to have a relatively small impact on our provision for taxes, as our effective consolidated tax rates have historically been considerably lower, because a major portion of our income is derived from “approved enterprises” in Israel (as more fully described in “Item 10: Additional Information—Israeli Taxation” below). In addition, in certain locations outside of Israel we have been enjoying lower tax rates.

Most of our 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 Information—Israeli Taxation.” Concurrently, we enjoy investment-related and R&D-related tax incentives in many of our facilities around the world.

In the future, the effective tax rate is expected to fluctuate as a result of various factors, including changes in the products and geographical distribution of our income, the effect of any mergers and acquisitions, the effects of statutes of limitations and legal settlements which may affect provisions for uncertain tax positions.

 

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Net Income and Share Count

Net income attributable to Teva in 2011 was $2.8 billion compared to $3.3 billion in 2010. This decrease was mainly due to factors previously discussed, including the increase in operating expenses (selling and marketing, general and administrative and research and development) as a result of ratiopharm, Cephalon, Taiyo and Theramex acquisitions, an increase in legal settlements, higher charges related to the amortization of ratiopharm’s intangible assets, which commenced in the first quarter of 2011, as well as Cephalon’s intangible assets, which commenced partially in the fourth quarter of 2011 as well as higher impairment charges mainly related to our animal health plant in the U.S. and a divestiture in connection with the Cephalon acquisition. These factors were partially offset by an increase in overall sales and gross profit and a decrease in the provision for taxes, as well as a decrease in financial expenses.

Comparison of 2010 to 2009. Net income attributable to Teva amounted to $3.3 billion in 2010, as compared with $2.0 billion in 2009.

Diluted earnings per share reached $3.09 in 2011, a decrease of 16% compared to diluted earnings per share of $3.67 in 2010. In 2009, diluted earnings per share amounted to $2.23. Net income attributable to Teva, used for computing diluted earnings per share, is calculated after adding back interest expenses on convertible senior debentures and issuance costs (net of tax benefits) of $44 million in 2010 and $1 million in 2009.

During 2011, we repurchased approximately 19.6 million shares at a weighted average price of $45.8 per share, for an aggregate purchase price of $899 million. These purchases completed the $1 billion repurchase plan authorized in December 2010, in which we purchased a total of 21.6 million shares at a weighted average price of $46.3 per share.

On December 21, 2011, the Board of Directors authorized the repurchase of up to an aggregate of $3 billion in ordinary shares or ADSs. The repurchase program has no time limit and is expected to be completed over a three-year period.

The share count used for the fully diluted calculation for 2011, 2010 and 2009 was 893 million, 921 million and 896 million shares, respectively.

At December 31, 2011, and 2010, the share count for calculating Teva’s market capitalization was approximately 883 million and 898 million shares, respectively.

Supplemental Non-GAAP Income Data

The tables below present supplemental non-GAAP data, in U.S. dollar terms, as a percentage of sales and the change by item as a percentage of the amount for the comparable period, which we believe facilitates an understanding of the factors affecting our business. In these tables, we exclude the following amounts:

 

     Year Ended December 31,  
     2011     2010     2009  
     U.S. dollars in millions  

Amortization of purchased intangible assets

     706       527       485  

Expense in connection with legal settlements and reserves

     471       2       434  

Inventory step-up charges

     352       107       302  

Impairment of long-lived assets

     201       124       110  

Restructuring and other expenses

     192       260       90  

Costs related to regulatory actions taken in facilities

     170       —          —     

Acquisition expenses

     37       24       4  

Purchase of research and development in process

     15       18       23  

Financial (gain) expenses related to hedging of the acquisition and other

     —          71       (8

Net of corresponding tax benefit

     (465     (330     (411

The data so presented—after these exclusions—are the results used by management and our board of directors to evaluate our operational performance, to compare against work plans and budgets, and ultimately to

 

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evaluate the performance of management. For example, each year we prepare detailed work plans for the next three succeeding fiscal years. These work plans are used to manage the business and are the plans against which management’s performance is measured. All such plans are prepared on a basis comparable to the presentation below, in that none of the plans take into account those elements that are factored out in our non-GAAP presentations. In addition, at quarterly meetings of the Board at which management provides financial updates to the Board, 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 non-GAAP 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 is performance targets tied to the work plan, and thus tied to the same non-GAAP presentation as is set forth below.

In arriving at our non-GAAP presentation, we have 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 our management, are items that, either as a result of their nature or size, could, were they not singled out, potentially cause investors to extrapolate future performance from an improper base. While not all inclusive, examples of these items include: legal settlements and reserves, purchase accounting expense adjustments related to acquisitions, including adjustments for write-offs of R&D in-process, amortization of intangible assets and inventory “step-ups” following acquisitions; restructuring expenses related to efforts to rationalize and integrate operations on a global basis; financial hedging expenses in connection with the ratiopharm acquisition; material tax and other awards or settlements—both in terms of amounts paid or amounts received; impairment charges related to intangible and other assets such as intellectual property, product rights or goodwill; the income tax effects of the foregoing types of items when they occur; and costs related to regulatory actions taken at our facilities (such as uncapitalized production costs, consulting expenses or write-offs of inventory related to remediation). Included in restructuring expenses are severance, shut down costs, contract termination costs and other costs that we believe are sufficiently large that their exclusion is important to understanding trends in our financial results.

These data are non-GAAP financial measures and should not be considered replacements for GAAP results. We provide such non-GAAP data 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 our performance. The limitations of using these non-GAAP financial measures as performance measures are that they provide a view of our 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 our 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.

 

     Year Ended December 31,      Percentage of Net Revenues
Year Ended December 31,
     Percentage Change
Comparison
 
         2011              2010              2009          2011      2010      2009      2011-2010     2010-2009  
     U.S. dollars and shares in millions
(except per share amounts)
     %      %      %      %     %  

Net revenues

     18,312        16,121        13,899        100.0        100.0        100.0        14       16  

Gross profit

     10,705        9,669        8,119        58.5        60.0        58.4        11       19  

Operating income

     5,253        4,933        3,853        28.7        30.6        27.7        6       28  

Income before income taxes

     5,100        4,779        3,643        27.9        29.6        26.2        7       31  

Provision for income taxes

     592        613        577        3.2        3.8        4.2        (3     6  

Net income attributable to Teva

     4,438        4,134        3,029        24.2        25.6        21.8        7       36  

Diluted earnings per share

     4.97        4.54        3.37                 9       35  

Weighted average number of shares—diluted

     893        921        912                

 

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For 2009 the difference between the reported and the non-GAAP diluted weighted average number of shares represents potential dilution of convertible senior debentures, which had an anti-dilutive effect on the reported earnings per share while being dilutive on the non-GAAP basis.

Reconciliation between reported Net Income attributable to Teva and Earnings per share as reported under US GAAP to Non-GAAP Net Income attributable to Teva and Earnings per share

 

     Year ended
December 31, 2011
 
     U.S. dollars in millions
(except per share amounts)
 
     GAAP     Reconciliation     Various
Non-GAAP
measures
    Effect of
reconciliation
item on
non-GAAP
diluted EPS
 

Net revenues

     18,312       —          18,312       —     

Cost of sales

     8,797       (1,190     7,607       (1.33
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     9,515       1,190       10,705       1.33  

Research and development expenses—net

     1,095       (15     1,080       (0.02

Selling and marketing expenses

     3,478       (38     3,440       (0.04

General and administrative expenses

     932       —          932       —     

Legal settlements, acquisition, restructuring and other expenses and impairment

     901       (901     —         (1.01
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     3,109       2,144       5,253       2.40  

Financial expenses—net

     153       —          153       —     

Provision for income taxes

     127       465       592       0.52  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Teva

     2,759       1,679       4,438       1.88  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to Teva:

        

Basic

     3.10       1.88       4.98    

Diluted

     3.09       1.88       4.97    

Weighted average number of shares (in millions):

        

Basic

     890       —          890    

Diluted

     893       —          893    

Add back for diluted earnings per share calculation

     *          *     

Effective tax rate

     4     8     12  

 

* Less than $0.5 million.

 

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     Year ended
December 31, 2010
 
     U.S. dollars in millions
(except per share amounts)
 
     GAAP     Reconciliation     Various
Non-GAAP
measures
    Effect of
reconciliation
item on non-

GAAP
diluted EPS
 

Net revenues

     16,121       —          16,121       —     

Cost of sales

     7,056       (604     6,452       (0.66
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     9,065       604       9,669       0.66  

Research and development expenses—net

     951       (18     933       (0.02

Selling and marketing expenses

     2,968       (30     2,938       (0.03

General and administrative expenses

     865       —          865       —     

Legal settlements, acquisition, restructuring and other expenses and impairment

     410       (410     —         (0.45
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     3,871       1,062       4,933       1.16  

Financial expenses—net

     225       (71     154       (0.08

Provision for income taxes

     283       330       613       0.37  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Teva

     3,331       803       4,134       0.87  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to Teva:

        

Basic

     3.72       0.89       4.61    

Diluted

     3.67       0.87       4.54    

Weighted average number of shares (in millions):

        

Basic

     896       —          896    

Diluted

     921       —          921    

Add back for diluted earnings per share calculation

     44       —          44    

Effective tax rate

     8     5     13  

 

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     Year ended
December 31, 2009
 
     U.S. dollars in millions
(except per share amounts)
 
     GAAP     Reconciliation     Various
non-GAAP
measures
    Effect of
reconciliation
item on non-

GAAP
diluted EPS
 

Net revenues

     13,899       —          13,899       —     

Cost of sales

     6,532       (752     5,780       (0.82
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     7,367       752       8,119       0.82  

Research and development expenses—net

     825       (23     802       (0.03

Selling and marketing expenses

     2,676       (35     2,641       (0.04

General and administrative expenses

     823       —          823       —     

Legal settlements, acquisition, restructuring and other expenses and impairment

     638       (638     —         (0.70
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     2,405       1,448       3,853       1.59  

Financial expenses—net

     202       8       210       0.01  

Provision for income taxes

     166       411       577       0.44  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Teva

     2,000       1,029       3,029       1.14  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to Teva:

        

Basic

     2.29       1.18       3.47    

Diluted

     2.23       1.14       3.37    

Weighted average number of shares (in millions):

        

Basic

     872       —          872    

Diluted

     896       16       912    

Add back for diluted earnings per share calculation

     1       43       44    

Effective tax rate

     8     8     16  

For 2009, the difference between the add back for diluted earnings per share calculations represents potential dilution of convertible senior debentures, which had an anti-dilutive effect on the reported earnings per share while being dilutive on a non-GAAP basis.

Non-GAAP Effective Tax Rate

The provision for non-GAAP taxes for 2011 amounted to $592 million on pre-tax non-GAAP income of $5.1 billion. The provision for taxes in the comparable period of 2010 was $613 million on pre-tax income of $4.8 billion, and in 2009, was $577 million on pre-tax income of $3.6 billion. The non-GAAP tax rate for 2011 was 12% as compared to 13% in 2010 and 16% in 2009. The lower annual non-GAAP effective tax rate for 2011 as compared to 2010, was primarily the result of differences in the mix of products (both type and location of production) sold in these years. In general, we benefit more from tax incentives on products for which we also produce the API.

Trend Information

The following factors are expected to have an effect on our 2012 results:

 

   

an increase in Copaxone® sales due to the completion of the takeback of marketing responsibility from Sanofi;

 

   

competition for Provigil® in the United States beginning in April 2012, resulting in a material decrease in sales of this product;

 

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a substantial increase in the amortization of intangible assets held by Cephalon and Taiyo, a disproportionate amount of which will occur in the first quarter;

 

   

the impact of currency fluctuations on revenues and net income, as well as on various balance sheet line items;

 

   

share repurchases pursuant to the $3 billion share repurchase program authorized by the Board of Directors in December 2011; and

 

   

repayment of $1 billion and refinancing of $2.6 billion of short-term debt.

Future acquisitions could affect the above numbers.

Impact of Currency Fluctuations and Inflation

Because our 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 we operate (primarily the euro, Israeli shekel, Russian ruble, Canadian dollar, British pound, Japanese yen and Hungarian forint) affect our results. During 2011, the main currencies relevant to our operations increased in value against the U.S. dollar: the euro by 5%, Israeli shekel by 4%, Russian ruble by 3% , Canadian dollar by 4%, British pound by 4%, Japanese yen by 10% and Hungarian forint 3% (on an annual average compared to annual average basis).

As a result, exchange rate movements during 2011 in comparison with 2010 positively impacted overall revenues by approximately $367 million. We also recorded higher expenses due to these currency fluctuations, and as a result our operating income increased by approximately $54 million.

Exchange rates also had a significant impact on our balance sheet, as approximately 75% of our net assets, including both non-monetary and monetary assets that were translated from the functional currencies into U.S. dollar, were in non U.S. dollar currencies. When compared with the end of 2010, certain changes in currency rates had a negative impact of $0.8 billion on our equity, mainly due to the decrease in value against the U.S. dollar of: the euro by 3%, the Hungarian forint by 16%, the Polish zloty by 16%, the Czech koruna by 4% and the Chilean peso by 11%. All comparisons are on the basis of end of year rates.

Critical Accounting Policies

The preparation of our 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 our business activities, certain accounting policies that are more important to the portrayal of our financial condition and results of operations and that require management’s subjective judgments are described below. We base our judgments on our experience and on various assumptions that we believe to be reasonable under the circumstances. Please refer to Note 1 to our consolidated financial statements included in this annual report for a summary of all of our significant accounting policies.

Revenue Recognition and Sales Reserves and Allowances (“SR&A”)

Revenue is recognized from product sales, including sales to distributors when persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collectability is reasonably assured. This generally occurs when products are shipped and title, risk and rewards for the products are transferred to the customer.

 

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Revenues from product sales, are recorded net of provisions for estimated chargebacks, rebates, returns, cash discounts and other deductions, such as shelf stock adjustments, which can be reasonably estimated. When sales provisions are not considered reasonably estimable by Teva, the revenue is deferred to a future period when more information is available to evaluate the impact. These provisions primarily relate to sales of pharmaceutical products in the U.S.

Provisions for chargebacks, rebates including Medicaid and other governmental program discounts, rebates and other promotional items, such as shelf stock adjustments, are included in “sales reserves and allowances” under “current liabilities”. These provisions are recognized concurrently with the sales of products. Provisions for doubtful debts and prompt payment discounts are netted against “Accounts receivable”.

We adjust these provisions in the event that it appears that the actual amounts may differ from the estimated provisions. The following briefly describes the nature of each deduction and how provisions are estimated in our financial statements.

Rebates and Other Sales Reserves and Allowances

Rebates and Other Sales Reserves and Allowances includes rebates for customer programs and government, shelf stock adjustments and other promotional programs. Rebates represent the majority of the reserve.

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 manufacturer’s price for the products dispensed. Many states have also implemented supplemental rebate programs that obligate manufacturers to pay rebates in excess of those required under federal law. We estimate these rebates based on historical trends of rebates paid as well as on changes in wholesaler inventory levels and increases or decreases in sales. Included in the 2011 and 2010 provisions are estimates for the impact of changes to Medicaid rebates and associated programs related to U.S healthcare reform.

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. We regularly monitor the competitive factors that influence the pricing of our products and customer inventory levels and adjust these estimates where appropriate.

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.

Chargebacks. We have arrangements with various third parties, such as managed care organizations and drug store chains, establishing prices for certain of our products. While these arrangements are made

 

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between us 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 our concurrence, which establishes the pricing for certain products which the wholesalers provide. Under either arrangement, we will issue a credit (referred to as a “chargeback”) to the wholesaler for the difference between the invoice price to the wholesaler and the customer’s contract price.

Provisions for chargebacks are the largest single component of our SR&A process, involving estimates of contract prices across in excess of 1,300 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. We regularly monitor the provision for chargebacks and make adjustments when we believe that actual chargebacks may differ from estimated provisions. In addition, we consider current and expected price competition when evaluating the provision for chargebacks.

Returns. Returns primarily relate to customer returns for expired products which the customer has the right to return up to one year following the expiration date. Such returned products are destroyed, and credits and/or refunds are issued to the customer for the value of the returns. We record a reserve for estimated sales returns in accordance with the “Revenue Recognition When Right of Return Exists” FASB pronouncement. 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 2011 and 2010 were estimated at approximately 24 months from the date of sale. Additionally, we consider 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.

Sales reserves and allowances (SR&A) for third-party sales of pharmaceutical products to U.S. customers at December 31, 2011 and 2010 were as set forth in the below table. Such sales reserves and allowances to U.S. customers comprised over 76% of our total sales reserves and allowances as of December 31, 2011, with the balance primarily in Germany, Canada, and the U.K.

 

     Sales Reserves and Allowances  
     Reserves
included in
Accounts
Receivable,
net
    Chargebacks     Returns     Rebates &
Other Sales
Reserves and
Allowances
    Total  
     (U.S. dollars in millions)  

Balance at December 31, 2009

   $ 123       1,031     $ 412     $ 1,273     $ 2,839  

Provisions related to sales made in current year period

     305       3,098       194       2,848       6,445  

Provisions related to sales made in prior periods

     —          —          (41     (62     (103

Credits and payments

     (335     (3,335     (194     (2,584     (6,448
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

   $ 93     $ 794     $ 371     $ 1,475     $ 2,733  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquisition of Cephalon

     5       46       80       97       228  

Provisions related to sales made in current year period

     291       2,843       248       3,112       6,494  

Provisions related to sales made in prior periods

     (1     1       (36     29       (7

Credits and payments

     (288     (2,619     (212     (2,814     (5,933
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

   $ 100     $ 1,065     $ 451     $ 1,899     $ 3,515  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Reserves at December 31, 2011 increased by approximately $782 million from December 31, 2010. The most significant variances were an increase in rebates and other sales reserves of approximately $327 million, an increase of $228 million related to the acquisition of Cephalon, and an increase to chargebacks of $225 million. Chargebacks have increased due to overall mix of products sold. The increase in rebates and other sales reserves is primarily related to the impact of pricing actions during the year, higher rebates to customers, as well as, additional Medicaid and other governmental rebates related to U.S. healthcare reform.

Actual inventory on hand with our customers may be higher or lower due to differences between actual and projected demand. We monitor inventory levels to minimize risk of excess quantities. As is customary in the industry, we may provide additional incentives to wholesalers for the purchase of certain inventory items or in relation to wholesale trade shows.

Expenses in Connection with Collaboration Agreements

Expenses incurred in relation to third party cooperation arrangements are recorded and generally included in cost of sales where the third party is a supplier of product or related product components. In other cases, payments are generally considered marketing costs and are included in selling and marketing expenses. When payments or royalties are received, they are included in revenue.

Income Taxes

The provision for income tax is calculated based on our assumptions as to our entitlement to various benefits under the applicable tax laws in the jurisdictions in which we operate. The entitlement to such benefits depends upon our compliance with the terms and conditions set out in these laws.

Accounting for uncertainty in income taxes 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. In the determination of the appropriate valuation allowances we have considered the most recent projections of future business results and prudent tax planning alternatives that may allow us to realize the deferred tax assets. 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 our intention to hold these investments, rather than realize them.

Income derived from our tax exempt Approved Enterprises in Israel triggers tax payments only upon declaration of dividend from such income, except for income of an Approved Enterprise under the Strategic Investment Track, which is exempt upon distribution as well. In 2011, we distributed dividends in the amount of $370 million out of our previously exempt income and paid the corporate tax due on such distributions. In future years we expect to have sufficient income from non-exempt and strategic Approved Enterprise sources to fund our dividend distributions. Accordingly, we intend to permanently reinvest the amounts of tax exempt income (other than income from the strategic Approved Enterprise) and do not intend to declare further dividend distributions from such income. Therefore, no deferred taxes have been provided in respect of such tax exempt income. In general, we do not expect our non-Israeli subsidiaries to distribute taxable dividends in the foreseeable future, as their earnings are needed to fund their growth while we expect to have sufficient resources in the Israeli companies to fund our cash needs in Israel.

 

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Contingencies

We are from time to time subject to claims arising in the ordinary course of our business, including patent, product liability and other litigation. In determining whether liabilities should be recorded for pending litigation claims, we assess the allegations made and the likelihood that we will be able to defend against the claim successfully. Teva records provisions to the extent that it concludes that a contingent liability is probable and the amount thereof is estimable. Because litigation outcomes and contingencies are unpredictable, and because excessive verdicts can occur, these assessments involve complex judgments about future events and can rely heavily on estimates and assumptions.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined as follows: raw and packaging materials and purchased products—mainly on a “moving average” basis; finished products and products in process; raw material and packaging component—mainly on a “moving average” basis; capitalized pro