20-F 1 d450498d20f.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, 2012

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   New York Stock Exchange

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.

943,619,967 Ordinary Shares

696,251,654 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

 

¨ 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

     20   
  

Teva’s Markets

     28   
  

Operations and R&D

     37   
  

Research and Development

     37   
  

Operations

     44   
  

Environment

     46   
  

Organizational Structure

     47   
  

Properties and Facilities

     48   
  

Regulation

     51   

Item 4A:

   Unresolved Staff Comments      55   

Item 5:

   Operating and Financial Review and Prospects      56   
  

Introduction

     56   
  

Highlights

     56   
  

Results of Operations

     58   
  

Revenues

     59   
  

Other Income Statement Line Items

     69   
  

Supplemental Non-GAAP Income Data

     74   
  

Impact of Currency Fluctuations and Inflation

     78   
  

Critical Accounting Policies

     78   
  

Recently Issued Accounting Pronouncements

     84   
  

Liquidity and Capital Resources

     84   
  

Trend Information

     87   
  

Off-Balance Sheet Arrangements

     88   
  

Aggregated Contractual Obligations

     88   

Item 6:

   Directors, Senior Management and Employees      89   
  

Directors and Senior Management

     89   
  

Executive Officers

     89   
  

Directors

     89   
  

Compensation

     95   
  

Board Practices

     97   
  

Statutory Independent Directors/Financial Experts

     98   
  

Committees of the Board

     99   
  

Employees

     102   
  

Share Ownership

     102   

Item 7:

   Major Shareholders and Related Party Transactions      103   

 

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          Page  

Item 8:

   Financial Information      104   

Item 9:

   The Offer and Listing      105   
  

ADSs

     105   
  

Ordinary Shares

     105   

Item 10:

   Additional Information      107   
  

Memorandum and Articles of Association

     107   
  

Taxation

     112   
  

Documents on Display

     117   

Item 11:

   Quantitative and Qualitative Disclosures about Market Risk      118   
  

General

     118   
  

Exchange Rate Risk Management

     119   
  

Interest Rate Risk Management

     121   

Item 12D:

   Description of Teva American Depositary Shares      123   

Part II

     

Item 15:

   Controls and Procedures      129   

Item 16:

   [Reserved]      129   

Item 16A:

   Audit Committee Financial Experts      129   

Item 16B:

   Code of Ethics      129   

Item 16C:

   Principal Accountant Fees and Services      130   
  

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

     130   
  

Principal Accountant Fees and Services

     130   

Item 16D:

   Exemptions from the Listing Standards for Audit Committees      131   

Item 16E:

   Purchases of Equity Securities by the Issuer and Affiliated Purchasers      131   

Item 16F:

   Change in Registrant’s Certifying Accountant      131   

Item 16G:

   Corporate Governance      131   

Item 16H:

   Mine Safety Disclosure      131   

Part III

     

Item 17:

   Financial Statements      132   

Item 18:

   Financial Statements      132   
  

Consolidated Financial Statements

     132   
  

Financial Statement Schedule

     132   

Item 19:

   Exhibits      133   

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,” “USD” 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. References to “ROW” are to Rest of the World markets. References to “P&G” are to The Procter & Gamble Company and references to “PGT” are to PGT Healthcare, the joint venture we formed with P&G.

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: Identity of Directors, Senior Management and Advisors

Not applicable

 

ITEM 2: Offer Statistics and Expected Timetable

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 the New York Stock Exchange), 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, 2012 and selected balance sheet data at December 31, 2012 and 2011 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, 2009 and selected balance sheet data at December 31, 2010, 2009 and 2008 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 our consolidated 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 some subsidiaries and associated companies is their local currency.

 

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Operating Data

 

     For the year ended December 31,  
     2012     2011      2010     2009     2008  
     U.S. dollars in millions (except per share amounts)  

Net revenues

     20,317        18,312         16,121        13,899        11,085   

Cost of sales

     9,665        8,797         7,056        6,532        5,117   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     10,652        9,515         9,065        7,367        5,968   

Research and development expenses—net

     1,283        1,080         933        802        786   

Selling and marketing expenses

     3,879        3,478         2,968        2,676        1,842   

General and administrative expenses

     1,238        932         865        823        669   

Impairments, loss contingencies, restructuring and others—net

     1,974        901         410        638        124   

Purchase of research and development in process

     73        15         18        23        1,402   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     2,205        3,109         3,871        2,405        1,145   

Financial expenses—net

     386        153         225        202        345   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income before income taxes

     1,819        2,956         3,646        2,203        800   

Provision for income taxes

     (137     127         283        166        184   

Share in losses of associated companies—net

     46        61         24        33        1   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     1,910        2,768         3,339        2,004        615   

Net income (loss) attributable to non-controlling interests

     (53     9         8        4        6   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income attributable to Teva

     1,963        2,759         3,331        2,000        609   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Earnings per share attributable to Teva:

           

Basic ($)

     2.25        3.10         3.72        2.29        0.78   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Diluted ($)

     2.25        3.09         3.67        2.23        0.75   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Weighted average number of shares (in millions):

           

Basic

     872        890         896        872        780   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Diluted

     873        893         921        896        820   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance Sheet Data

 

     As at December 31,  
     2012      2011      2010      2009      2008  
     (U.S. dollars in millions)  

Financial assets (cash, cash equivalents and marketable securities)

     3,089         1,748         1,549         2,465         2,065   

Working capital (operating assets minus liabilities)

     3,589         3,937         3,835         3,592         3,944   

Total assets

     50,609         50,142         38,152         33,210         32,520   

Short-term debt, including current maturities

     3,006         4,280         2,771         1,301         2,906   

Long-term debt, net of current maturities

     11,712         10,236         4,110         4,311         5,475   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt

     14,718         14,516         6,881         5,612         8,381   

Total equity

     22,867         22,343         22,002         19,259         16,438   

 

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Dividends

We have paid dividends on a regular quarterly basis since 1986. Our dividend policy is regularly 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 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 15% tax will be withheld on the dividend declared for the fourth quarter of 2012.

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).

 

     2012      2011      2010      2009      2008  
     In cents per share  

1st interim

     26.3         23.2         18.8         14.5         13.1   

2nd interim

     25.0         23.5         18.1         15.1         12.9   

3rd interim

     25.7         21.9         19.3         15.9         11.8   

4th interim

     31.1         26.8         21.8         18.7         14.7   

 

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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 2012. 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.

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

 

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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 for qualified sales personnel is intense. We may also need to enter into co-promotion, contract sales force or

 

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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 must invest increasingly significant resources to develop innovative pharmaceuticals (including our strategic focus on developing new therapeutic entities), 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. Currently pending patent applications may not result in issued patents or be approved on a timely basis or at all. 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® 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. Our ability to enforce our patents also depends on the laws of individual countries and each country’s practices regarding the enforcement of intellectual property rights. The loss of patent protection or regulatory exclusivity on these or other innovative products could materially impact our business, results of operations, financial conditions or prospects.

 

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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 as well as joint ventures and licensing and other transactions. 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 acquisitions 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.

 

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We continue to be engaged in various stages of evaluating or pursuing potential acquisitions and other transactions and may in the future acquire other pharmaceutical businesses and seek to integrate them into our own operations. Our reliance on acquisitions and other transactions 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 and other transactions that would enable us to execute our business strategy.

 

   

We compete with others for acquisitions and other transactions. We believe that this competition has intensified and may result in decreased availability of, or increased prices for, suitable 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 recent acquisitions.

As a result of indebtedness we incurred in connection with acquisitions, 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.

In recent years, there has been increasing regulatory scrutiny of pharmaceutical manufacturers, resulting in product recalls, plant shutdowns and other required remedial actions. Several of our facilities have been the

 

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subject of 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 retention, exceed our policy limits or relate to damages that are not covered by our policy. 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 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 has since then opened proceedings with respect to a number

 

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of settlement agreements, including two agreements Teva entered into in 2005 and 2006, for evidence of anticompetitive practices. Although Teva vigorously argues that those agreements did not restrict competition, the EU Commission may rule against Teva, possibly imposing fines. It is also possible that the EU Commission would open investigations relating to subsequent agreements Teva has entered into. More generally, 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, and in 2012 we recorded a provision of $670 million related to this matter.

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 2012, 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 2012 we recorded sales and expenses in 34 other currencies. Approximately 57% of our operating costs in 2012 were 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 consolidated financial 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.

 

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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 governmental investigations regarding drug reimbursement or pricing issues.

Governmental 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 involves 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 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.

 

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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 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 has 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 and economic instability and corruption. There has been a substantial increase in law enforcement activity related to the U.S. Foreign Corrupt Practices Act (the “FCPA”) and similar anti-corruption laws in other jurisdictions. Our policies mandate compliance with these laws, but our internal controls may not always protect us from actions taken by our employees or third-party intermediaries that may violate the FCPA or other anti-corruption laws. Any violations by our employees or third-party intermediaries of anti-corruption laws during the performance of their obligations for us may have a material adverse effect on our reputation and our business, financial condition or results of operations.

As previously reported, beginning in 2012, Teva received subpoenas and informal document requests from the SEC and the Department of Justice to produce documents with respect to compliance with the FCPA in certain countries. Teva has identified issues that could potentially rise to the level of FCPA violations and has brought them to the attention of the SEC and the Department of Justice. These matters are in their early stages and no conclusions can be drawn at this time as to any likely outcomes.

Significant portions of our operations are conducted outside the markets in which our products are sold, and accordingly we often import a substantial number of products into such markets. We may, therefore, be denied access to our customers or suppliers or denied the ability to ship products from any of our sites as a result of a closing of the borders of the countries in which we sell our products, or in which our operations are located, due to economic, legislative, political and military conditions, including hostilities and acts of terror, in such countries.

Our executive offices and a substantial percentage of our manufacturing capabilities are located in Israel. Our Israeli operations are dependent upon materials imported from outside Israel. We also export significant amounts of products from Israel. Accordingly, our operations could be materially and adversely affected by acts of terrorism or if major hostilities 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.

 

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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, or to attract additional executive and managerial talent, could adversely affect our business.

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. In 2012 we transformed much of our senior management team including a new chief executive officer, chief scientific officer, head of global operations, head of Americas generics and head of our European operations, among others, who 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.

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 2012 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.

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 product manufactured in any such country in a timely fashion. Additionally, the

 

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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 continue to 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 acquired 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 $26.6 billion as a result of our acquisitions, and may increase further following future acquisitions. For example, in 2012, we recorded impairment charges of $1.1 billion. 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. For example, the Israeli Tax Authority has issued decrees for an additional $903 million in taxes with respect to the years 2005-2007. 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 consolidated financial statements.

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 consolidated 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 governmental 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.

 

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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 fully-integrated global pharmaceutical company. Our business includes three primary areas: generic, specialty and over-the-counter (“OTC”) medicines. As the world’s largest generic company with an established specialty medicines portfolio, Teva is strategically positioned to benefit from the current changes in the global healthcare environment.

Teva’s business strategy seeks to capitalize on the growing global need for medicines and evolving market, economic and legislative dynamics. These changes include aging populations, increased spending on pharmaceuticals in emerging market countries, economic pressures on governments and private payors to provide cost-effective healthcare solutions, global evolution in healthcare, legislative reforms, unmet patient needs, an increase in patient awareness and the growing importance of OTC medicines.

We believe that our strategy, dedicated employees, world-leading generic expertise and portfolio, global reach, integrated R&D capabilities, global infrastructure and scale position us at the forefront of a changing industry and will enable us to take advantage of opportunities created by these dynamics. These strengths are expressed across our business, as follows:

 

   

Teva is a leader in the global generic drug industry. We have held the leading position in the United States for almost a decade, and are also the leading generic drug company in Europe, where we have a balanced presence throughout the region. In addition, we have a major presence in Russia, are growing in Latin America, have begun to establish a major presence in Japan and recently entered the South Korean market.

 

   

We have a specialty pharmaceutical business with a growing late-stage pipeline, focused on the central nervous system (“CNS”) and respiratory therapeutic areas, with selective investments in oncology, women’s health and certain other areas.

 

   

We have an important and growing global OTC business, primarily through our joint venture with The Procter & Gamble Company (“P&G”), which combines our production capabilities and market reach with P&G’s marketing expertise and expansive global platform.

 

   

We are one of the world’s leading manufacturers of active pharmaceutical ingredients (“APIs”), with operations around the globe, and we produce APIs not only for our own use but also for many other pharmaceutical companies. Our growing API business and extensive access to important therapeutic molecules provides a basis for expansion into new product areas.

 

   

Our broad technological capabilities enable us to provide an unparalleled array of products. These capabilities include solid dose manufacturing, formulation expertise, complex APIs and injectable, inhalation and other delivery devices.

 

   

Our specialty medicines business provides a range of key products to patients in significant areas of medical need, and is complemented by our industry-leading support services organization, “Shared Solutions,” which helps patients with critical diseases secure reimbursement, ensures timely arrival and administration of medicines and assists with adherence. This program, which originated in the United States for patients with multiple sclerosis, is being introduced in other regions for patients with other diseases.

In 2012, approximately 51% of our revenues were generated from generic medicines, including APIs sold to third parties. Approximately 40% of our revenues were generated from specialty medicines, primarily Copaxone® for relapsing remitting multiple sclerosis, as well as Azilect® for Parkinson’s disease, Provigil® and Nuvigil® for sleep disorders, ProAir® HFA, Qvar® and other respiratory products, our women’s health products, Treanda® for certain hematological cancers, and others. Our remaining revenues were generated from our OTC business, primarily our joint venture with P&G, and our other activities, primarily our Hungarian and Israeli distribution services for third parties.

 

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In 2012, we generated approximately 51% of our revenues in the United States, approximately 28% in Europe (which for the purpose of this report includes all European Union (“EU”) member states, Norway and Switzerland) and approximately 21% in our ROW markets (primarily Japan, Canada, Latin America, Israel and Russia). 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.

Strategy

Following the appointment in mid-2012 of our new Chief Executive Officer, Dr. Jeremy M. Levin, and with the support of our Board of Directors, we undertook a thorough review of our business to improve current performance and best position Teva for the future. This review identified existing strengths, capabilities and opportunities throughout the organization and enabled a deeper understanding of the evolution of the pharmaceutical market and the resulting new opportunities. These findings were used to define a strategy that positions Teva to take advantage of opportunities throughout the global markets where we operate.

The core principle of our approach is a commitment to tailoring our specialty, generic and OTC medicines to the needs of individual markets and to providing relevant options for patients, physicians and customers. We recognize that fundamental changes are required to meet the changing demands of a global healthcare landscape. We will seek to meet the needs of all of our stakeholders by leveraging our geographic reach, focused specialty medicines portfolio, integrated R&D programs, world-class manufacturing and distribution capabilities and pricing flexibility to achieve a balanced and integrated approach to generic, specialty and OTC medicines.

Our strategy is designed to make Teva the most indispensable medicines company in the world, and consists of six major pillars:

 

   

Accelerating our growth platforms. In our generics business, we plan to focus on high-value medicines, medicines with higher barriers to entry and branded generics. In the United States, we will continue to extract maximum value from Paragraph IV patent challenge opportunities, and we intend to establish a leadership position in high-value generics by pursuing first-to-market opportunities and by developing complex generic products, as well as by enhancing the value of our portfolio by concentrating on high-margin, low competition markets. In Europe, we will focus on profitable growth, leveraging the synergies with our specialty and OTC medicines. In our ROW markets, we will make use of our global footprint, portfolio, branded generics and market knowledge to ensure sustainable and profitable growth. In all markets, we will work closely with our customers to strengthen and maintain high value, mutually beneficial relationships.

We will augment our commercial growth strategy in generics with our R&D capabilities in order to sustain our advantages in complex oral and inhalation delivery methods and grow our capabilities in other complex technologies, such as injectables, liposomal drug delivery, long-acting release and others.

 

   

Extending our global presence. In countries where we already have a strong presence, such as Russia and Japan, we plan to enhance and refine our portfolio to meet local needs, and seek to increase our presence in order to achieve market leadership. In other markets, we will grow our existing business to obtain a critical mass. We will also expand our early stage businesses in markets such as South Korea, China and India, and seek to enter new markets such as Brazil and certain South East Asia markets. In some cases we will implement these efforts through partnerships and in other cases, through direct investment in local markets. In our specialty business, we are continuing the global expansion of our

 

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existing products into new markets, leveraging on our proven success, technologies, patient understanding and capabilities originally developed in the United States market. For OTC medicines, we are planning to increase the presence of our joint venture with P&G in emerging markets, and to expand existing local brands into new geographies.

 

   

Executing strategic business development. Our approach to business development will be highly strategic, disciplined and focused on enhancing our core specialty franchises, primarily in the “CNS” and respiratory therapeutic areas, and making selective investments in new or growing geographies. We will balance investment in growth with return to investors and allocate our capital resources accordingly. In the near term, we plan to focus on executing a constellation of related small to mid-size transactions, alliances in key areas and licensing opportunities. In addition, we will continue to divest assets that are not part of our core strategy.

 

   

Protecting and expanding our core franchises. We will vigorously protect and expand our multiple sclerosis (“MS”) franchise and explore opportunities to expand into other neurodegenerative and CNS diseases. Our intent remains, as always, to provide patients with the best and safest treatments for their diseases. Building on our record of supporting and helping patients with chronic conditions, we will also enhance our presence in pain treatment with our current and new opioid-based assets and investigate other non-opioid alternatives. In the respiratory therapeutic area, we will improve the life cycle of our current products, develop existing molecules on our innovative Spiromax® platform, and investigate new technological platforms and disease areas. Finally, for biologic medicines, we will seek to create a differentiated program, based on novel biologics and bio-betters, and selectively invest in bio-similars. In addition, we will make selective investments in women’s health, oncology and other areas.

As part of our strategy to expand our specialty business, we plan to focus on new therapeutic entities (“NTEs”), which are known molecules that are formulated, delivered or used in a novel way to address specific patient needs. As a result of our strength in integrated generic and specialty R&D, our scalable production network and market access and knowledge, we believe this area represents a substantial opportunity for growth. We are also seeking to improve our existing medicines and make them more convenient and potentially more efficacious.

 

   

Reducing our operating costs. We will also introduce initiatives designed to reduce our overall operating costs and complexity through a wide-scale cross-functional effort to create a more efficient organization. We are focusing particular attention on improving our procurement systems by leveraging our purchasing power and improving our production network, supply chain, and resource deployment processes.

 

   

Developing, retaining and recruiting world-class employees. We will build on and sustain our culture of execution, excellence, cultural diversity, cross-company collaboration and successful entrepreneurism to support the continued growth and development of Teva as a truly global pharmaceutical company.

Transaction Highlights

The transactions described below are some of the important steps we took during the past two years to advance our long-term goals:

 

   

Animal Health: In January 2013, we sold our U.S.-based animal health business, exiting the business.

 

   

South Korea Business Venture: In December 2012, we formed a business venture in South Korea with Handok Pharmaceutical Co., Ltd. (“Handok”). We will be responsible for manufacturing and supplying a wide range of generic and innovative medicines, and Handok will be responsible for sales and marketing, distribution, and regulatory affairs.

 

   

XEN402: In December 2012, we entered into a collaborative development and exclusive worldwide license agreement with Xenon Pharmaceuticals Inc. (“Xenon”) for its compound XEN402. XEN402 targets sodium channels found in sensory nerve endings that can increase in chronic painful conditions, and is currently in Phase II clinical development for a variety of pain-related disorders.

 

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Neurosearch A/S Assets: In October 2012, we acquired from Neurosearch A/S, a Danish company, the rights, assets and obligations relating to Huntexil® (pridopidine / ACR16), a drug candidate being developed for the symptomatic treatment of hand movement, balance and gait disturbances in patients with Huntington’s disease.

 

   

PGT Consumer Healthcare: In November 2011, we formed a consumer health care joint venture with P&G, combining our OTC pharmaceutical businesses in all markets outside North America. We 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 owns 51%. As of December 2012, the OTC products of Cephalon (Mepha) were included in the joint venture.

 

   

Cephalon: In October 2011, we acquired Cephalon, Inc. (“Cephalon”), a global biopharmaceutical company with a marketed portfolio and pipeline of specialty products. This acquisition helped to diversify our specialty portfolio and enhance our innovative pipeline.

 

   

CureTech: In September 2011, we exercised an option to invest $19 million in CureTech Ltd. (“CureTech”), a biotechnology company. We also agreed to make further investments in CureTech’s research and development activities. As a result of the option exercise, our ownership stake in CureTech increased from 33% to 75%. In January 2013, we announced the termination of our collaboration with CureTech.

 

   

Japanese Transactions: In July 2011, we acquired Taiyo Pharmaceutical Industry Co. Ltd. (“Taiyo”). Taiyo had developed a large portfolio of generic products in Japan, with over 550 marketed products, and had advanced production facilities. In September 2011, we acquired the remaining shares in Taisho Pharmaceutical Industries, Ltd. and the remaining 50% of our Japanese joint venture with Kowa Company Ltd. that we did not already own. Since April 2012, the majority of our Japan-based companies have operated under a single company known as Teva Seiyaku.

 

   

Corporación Infarmasa: In January 2011, we acquired Corporación Infarmasa, a company in Peru with over 500 branded and unbranded generic pharmaceuticals.

 

   

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

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 U.S. Food and Drug Administration (“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 increased awareness and acceptance on the part of healthcare insurers and institutions, consumers, physicians and pharmacists globally. Factors contributing to this

 

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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, in countries as diverse as France, Japan and Brazil, governments are issuing regulations designed to increase generic penetration. We believe that these factors, together with an aging population, an increase in global spending on pharmaceuticals, economic pressure on governments to provide less expensive healthcare solutions, legislative reforms and a shift of decision-making power to payors, should lead to continued expansion of the global generic pharmaceuticals market.

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 over the choice of generic manufacturer, and consequently generic drugs are not actively marketed or promoted to physicians. Instead, the relationship between the manufacturer and pharmacy chains and distributors, health funds, and other health insurers is critical. In contrast, in Russia, some Asian and Latin American countries as well as certain European markets, 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 some of these markets, branded 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 seek to establish leadership in high-value generics, both by pursuing first-to-market opportunities and by developing complex generic products. Our generic product development strategy is to continue to extract maximum value from Paragraph IV patent challenges opportunities in the United States and early launches globally, while establishing a leadership position in high-barrier, complex products. We intend to further enhance the value of our remaining portfolio by focusing on high-margin, low competition products.

When considering whether to develop a generic medicine, we take into account a number of factors including our overall strategy, regional and local patient and customer needs, R&D recommendations, manufacturing capabilities, regulatory considerations, commercial factors and intellectual property restrictions. We actively seek opportunities to challenge patents, if we believe they are either invalid or would not be infringed by a generic version. We may seek 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.

Our generic R&D organization, which has capabilities in a wide range of dosage forms and therapeutic areas as well as in specialized product families, has been integrated with our specialty R&D organization in order to maximize our ability to identify and act upon 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. APIs used in pharmaceutical products are subject to regulatory oversight by national health authorities. We produce approximately 300 APIs for our own use and for sale to third parties in many therapeutic areas, including respiratory, cardiovascular, anti-cholesterol, central nervous system, dermatological, hormones, anti-inflammatory, oncology, immunosuppressants and muscle relaxants. We utilize a variety of production technologies, including chemical synthesis, semi-synthetic fermentation, enzymatic synthesis, high potency manufacturing, plant extract technology and peptides synthesis. 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. In selling our API products, we compete globally with other specialty chemical producers.

 

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Specialty Products

Our specialty medicines business, which is focused on delivering innovative solutions to patients and providers via medicines, devices and services in all key regions and markets around the world, includes several core franchises, most significantly medicines for CNS disorders (with a strong emphasis on MS, neurodegenerative disorders, and pain) and respiratory medicines. We also have specialty products in oncology (including biologics), women’s health, and other areas. Our specialty business also includes our emerging NTE activity, which focuses on enhancing known molecules through new delivery methods, unique combinations or device innovations to address specific patient needs.

Our specialty medicines business faces intense competition from both branded and generic pharmaceutical companies. We believe that our primary competitive advantage is the body of scientific evidence substantiating the safety and efficacy of our various medicines, physician and patient experience with our medicines, and our medical and marketing capabilities tailored to product and market needs.

Central Nervous System

Our CNS portfolio includes Copaxone® for the treatment of multiple sclerosis, Azilect® for the treatment of the symptoms of Parkinson’s disease and Provigil® and Nuvigil® for the treatment of sleep disorders, as well as several novel therapies for the treatment of pain.

Copaxone® (glatiramer acetate injection), our largest specialty medicine, is the leading multiple sclerosis therapy worldwide and is approved and marketed in more than 50 countries, including the United States, all European countries, Russia, Canada, major Latin American markets, Australia and Israel. Copaxone® is indicated for the reduction of the frequency of relapses in relapsing-remitting multiple sclerosis (“RRMS”), including in 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 and slow progression of the disease that can affect the functioning of multiple systems. Our MS portfolio consists of Copaxone® as well as laquinimod, a Phase III compound currently under development.

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

At the beginning of 2012, we completed the phased assumption from Sanofi of marketing and distribution responsibilities for Copaxone® in all European countries, Australia and New Zealand. Sanofi is entitled to receive 6% of the in-market sales of Copaxone® in each applicable country in Europe for two years following our assumption of responsibilities in that country. Although we have recorded higher revenues as a result of these changes, we also became responsible for certain marketing and administrative expenses, which are no longer shared with Sanofi.

In the United States, 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. 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

 

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preparing Copaxone® and methods of analyzing this product, which expire between 2019 and 2024. Copaxone® is subject to various patent challenges in the United States and Europe.

In October 2012, we announced positive results of the GALA trial, a Phase III trial including 1,400 patients that was designed to examine the efficacy, safety and tolerability of glatiramer acetate 40 mg/ml injection administered three times a week compared to placebo in patients with RRMS. This dose is higher than the currently marketed Copaxone® 20 mg/ml product, which is injected daily. Based on the positive results of the study, including the favorable safety and tolerability profile demonstrated, we intend to file a supplemental NDA with the FDA in 2013. Teva remains committed to the continued research and development of Copaxone®. Future trials of Copaxone® will be conducted based on our evaluation of the potential of the medicine to address further unmet needs of patients and will take into account responses from the relevant regulatory bodies. In August 2012, Teva decided to discontinue the development of a reduced-volume glatiramer acetate formulation (20mg/0.5ml) and therefore terminated the GLOW clinical trial. The discontinuation was based on business considerations; no safety issues were identified with the administration of this formulation.

The principal therapies that compete with Copaxone® are the four first-line beta-interferon products: Avonex®, Betaseron®, Extavia® and Rebif®. Tysabri®, another MS therapy, is currently positioned as a second-or third-line agent; however, Biogen recently filed an application with the FDA and European Medicines Agency (“EMA”) for first-line use in John Cunningham-virus-negative patients, which represent approximately 45% of all RRMS patients. We expect that in the next few years, the MS treatment landscape will change significantly 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 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. In December 2012, we filed a “citizen’s petition” with the FDA requesting that an advisory committee of specialists be convened to weigh the benefits against the side effects of all new molecule MS products.

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”). Provigil® began to face generic competition in the United States in March 2012 and, as a result, sales decreased substantially. Outside the United States, Provigil® 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.

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 these trials had positive results reported in July 2012. As reported in January 2013, the second trial demonstrated a numerical improvement, but did not reach statistical significance in meeting its primary endpoint. We expect results from the third of these trials to become available during the third quarter of 2013. The results of this study must be statistically significant in order to support an NDA filing for this indication.

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

In early 2012, Teva reached an agreement with Mylan Pharmaceuticals, providing Mylan the ability to sell its generic version of Nuvigil® in the United States beginning in June 2016, or earlier under certain

 

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circumstances. Nuvigil® is protected by several patents, the latest of which expires in 2024, with a pediatric extension. Cephalon’s polymorph patent is currently the subject of patent litigation in the United States, and we are currently awaiting a trial decision with respect to several of the generic challengers. Teva is vigorously defending this patent.

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

Azilect® is a second-generation, irreversible monoamine oxidase type B (MAO-B) inhibitor. Although other symptom-reducing therapies are available, many of them have efficacy, safety and tolerability concerns.

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. We market Azilect® jointly with H. Lundbeck A/S 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 markets.

Azilect® is protected in the United States by several patents that will expire between 2013 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 and Canada, and a trial is scheduled to begin in May 2013 in the United States litigation.

Azilect®’s competitors include both specialty 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 Our CNS portfolio also includes Fentora® (fentanyl citrate buccal tablets) 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.

Oncology Products

Our oncology product line, led by Treanda® in the United States and by Tevagrastim®/Ratiograstim® outside the United States, was recently bolstered by the approvals of SynriboTM and tbo-filgrastim in the United States. Our oncology portfolio also includes several late-stage development programs. In addition to our current focus on hematology, we are developing treatments for solid tumors through new chemical entities or innovative biological approaches.

Treanda® (bendamustine hydrochloride for injection) 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.

In October 2012, we received a complete response letter (“CRL”) from the FDA addressing our supplemental new drug application (“sNDA”) for the use of Treanda® as a first-line treatment of patients with NHL in combination with rituximab. Although the BRIGHT study had met its endpoint of non–inferiority, the

 

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FDA requested additional data, specifically progression-free survival (“PFS”) data, which was not available from this trial. No further registration trials are planned in the United States.

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.

Treanda® is protected by new chemical entity exclusivity until September 2013 based on a pediatric extension received in 2012. We hold rights to Treanda® in the United States and certain other countries.

Tevagrastim® (filgrastim) (also marketed as Ratiograstim® or tbo-filgrastim) is a Granulocyte Colony Stimulating Factor (“G-CSF”)-based medicine that stimulates the production of white blood cells and is 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 G-CSF to be approved by the EMA. Tbo-filgrastim was approved in the United States on August 29, 2012, the first G-CSF to be approved in the United States in more than 10 years. We expect to launch tbo-filgrastim as early as November 2013, in accordance with the terms of a settlement agreement with Amgen. Clinical trials have demonstrated that our filgrastim products have an efficacy and safety profile equivalent to that of Amgen’s European version of Neupogen®, the first G-CSF product. Tevagrastim® and Ratiograstim® have been approved for the entire range of Neupogen®’s therapeutic indications and are available in most European countries. Tbo-filgrastim is indicated for the reduction in the duration of severe neutropenia in certain oncology patients.

Competitors to Tevagrastim®/Ratiograstim®/tbo-filgrastim include Neupogen®, and in Europe, also ZarzioTM and NivestimTM, which are also G-CSF products.

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.

Synribo™ (omacetaxine mepesuccinate for injection) was granted accelerated approval by the FDA on October 26, 2012, for the treatment of adult patients with chronic phase or accelerated phase chronic myeloid leukemia (“CML”) with resistance and/or intolerance to two or more tyrosine kinase inhibitors. It was launched in the United States in November 2012. We have granted marketing rights for Synribo™ to Hospira in Europe, the Middle East and certain African countries.

Synribo™ is protected by new chemical entity exclusivity until October 2017 and by orphan drug exclusivity until October 2019. It is also covered by patents in the United States expiring in 2019 and 2023. A term extension has been requested for the patent expiring in 2023.

SynriboTM provides a new treatment option in the CML treatment landscape and is administered subcutaneously. It is dosed twice daily for 14 consecutive days of a 28-day cycle at treatment induction, and twice daily for seven consecutive days of a 28-day cycle during maintenance once a response is achieved. SynriboTM acts independently of direct Bcr-Abl binding to reduce protein levels of both Bcr-Abl and Mcl-1, an inhibitor of apoptosis, in vitro.

The FDA recently approved three new treatments for CML including bosutinib and ponatinib.

Respiratory Products

Teva is committed to achieving a leading presence in the respiratory market by delivering a range of medicines for asthma, chronic obstructive pulmonary disease (“COPD”) and allergic rhinitis. Our portfolio is

 

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centered on optimizing respiratory therapies for patients through novel delivery systems and therapies that address unmet needs.

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, COPD and allergic rhinitis. 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 medicines:

ProAir® hydrofluoroalkane (“HFA”) inhalation aerosol with dose counter (albuterol sulfate) is indicated in patients four years of age and older for the treatment or prevention of bronchospasm with reversible obstructive airway disease and for the prevention of exercise-induced bronchospasm. In March 2012, the FDA approved the addition of a dose counter, an innovation designed to help patients, as well as their caregivers, keep track of the number of doses remaining in the inhaler. The efficacy and safety profile of albuterol, which is used by millions of patients every day around the world, is well established. ProAir® HFA, which is marketed in the United States only and is the leading reliever therapy, is protected by various patents expiring between 2014 and 2028. It is subject to patent challenges in the United States.

Three major brands compete with ProAir® HFA in the United States in the short-acting beta agonist market: Ventolin® HFA (albuterol) by GlaxoSmithKline, Proventil® HFA (albuterol) by Merck and Xopenex HFA® (levalbuterol) by Sunovion.

QVAR® (beclomethasone diproprionate HFA) is indicated as a maintenance treatment for asthma as a prophylactic therapy in patients five years of age or older. QVAR® is also indicated for asthma patients who require systemic corticosteroid administration, where adding QVAR® may reduce or eliminate the need for systemic corticosteroids. QVAR® is the fastest growing inhaled corticosteroid in the United States, capturing 26.9% of the market. We market QVAR®, which is manufactured by 3M, directly in the United States and major European markets. QVAR® is protected by various patents in the United States expiring in 2014 and 2015.

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

Qnasl® Nasal Aerosol (beclomethasone diproprionate HFA in a nasal actuator) is a synthetic corticosteroid medication indicated for the treatment of seasonal nasal and year-round nasal allergy symptoms in adults and adolescents 12 years of age and older. It is administered as a nonaqueous or “dry” spray delivered by HFA, an environmentally friendly propellant. This medicine was launched in 2012 in the United States, and is currently being studied in a Phase III trial for a pediatric indication. Qnasl® is protected by various patents in the United States expiring between 2014 and 2027.

Major competitors of Qnasl® are Veramyst® (fluticasone furoate) and Flonase® (fluticasone propionate) by GlaxoSmithKline, Rhinocort Aqua® (budesonide) by AstraZeneca, Nasonex® (mometasone) by Schering, and Omnaris® and Zetonna® (ciclesonide) by Dainippon Sumitomo.

Women’s Health Products

Currently, 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. We expect to broaden this focus over time.

Below is a description of our main women’s health products:

Plan B® One-Step OTC/Rx (levonorgestrel) is an emergency oral contraceptive that consists of a single tablet dose of levonorgestrel for emergency contraception. Plan B® One-Step is intended to prevent pregnancy

 

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when taken within 72 hours after unprotected intercourse or contraceptive failure and is available over-the-counter in the United States for women 17 years of age and older and by prescription for women under 17. Generic competition for this product already exists in the market.

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

Zoely® is a 28-day regimen combination contraceptive oral pill (consisting of 24 active pills and four placebo pills). Zoely® is the first and only monophasic contraception combining E2 physiological estrogen (17ß-estradiol) with NOMAC (nomegestrol acetate) progestin, which has a strong anti-gonadotropic activity, having minimal effect on metabolism and less impact on metabolic and haemostasis parameters than currently marketed products.

Zoely® is a joint development between Théramex and Merck & Co. We hold the marketing rights for Zoely® in several European countries. Zoely® is protected by patents in Europe with supplementary protection certificates extending to 2022.

Enjuvia® is an oral treatment of moderate to severe vasomotor symptoms associated with menopause. Enjuvia® is a plant-derived formulation of ten synthetic conjugated estrogens, including sodium D8,9-dehydroestrone sulfate, and is available in five dosage strengths. The Enjuvia® delivery system allows slow release of estrogens over several hours due to its Surelease® technology. We have Orange Book listed patents for Enjuvia® expiring in 2021.

We also market the following products in Europe: 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.

The oral contraceptives market is highly competitive and fragmented. The main competitors to our women’s health line are the Yasmin® and Yaz® franchise from Bayer, which was recently expanded to include the Yaz Flex® flexible dosage regimen oral contraceptive, which was launched in Australia in September 2012 and is expected to be launched in Europe later in 2013. There are numerous other brands and generic medications available, including generic versions made by Teva. In addition, there are other competing forms of contraceptives, such as intrauterine devices and vaginal hormonal contraceptive rings.

In the intrauterine device (“IUD”) market, Bayer’s Hormonal IUD Mirena® is the market leader. The follow-on product (called Jaydess® in Europe and Skyla® in the United States) recently received marketing authorizations for both markets. NuvaRing® from Merck is a vaginal hormonal contraceptive ring, and we expect the competitive landscape to continue to evolve towards non-oral deliveries.

Consumer Healthcare Joint Venture

PGT is our consumer healthcare joint venture with P&G. The joint venture includes the branded OTC medicines of the two companies in categories such as cough/cold and allergy, digestive wellness, vitamins, minerals and supplements, analgesics and skin medications, and operates in all markets outside North America. Its leading brands are Vicks®, Metamucil®, Pepto-Bismol®, and ratiopharm. The joint venture also develops new brands for the North American market and certain global markets. We own 49% and P&G holds 51%.

PGT’s strengths include P&G’s strong brand-building, consumer-led innovation and go-to-market capabilities; and our broad geographic reach, experience in R&D, regulatory and manufacturing expertise and extensive portfolio of products, and each company’s scale and operational efficiencies. It intends to introduce the partners’ product and brand portfolios into additional countries and to expand into new OTC categories (such as prescription products that have become OTC products).

 

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Other Revenues

We have other sources of revenues, primarily sales of third-party products for which we act as distributor, mostly in Israel and Hungary, as well as sales of medical devices and other miscellaneous items.

Teva’s Markets

United States

In the United States, Teva has 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 2012, we led the U.S. generic market in total prescriptions and new prescriptions, with total prescriptions amounting to approximately 530 million in 2012, representing 16.2% of total U.S. generic prescriptions. We intend to continue our U.S. market leadership based on our ability to introduce new generic equivalents for brand-name products on a timely basis, deep emphasis on customer service, the breadth of our product line, our commitment to quality and regulatory compliance and 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 January 22, 2013, had 147 product registrations awaiting FDA approval (including some products through strategic partnerships), including 38 tentative approvals. Collectively, the branded versions of these products had U.S. sales in 2012 exceeding $91 billion. Of these applications, 103 were “Paragraph IV” applications challenging patents of branded products. We believe we are the first to file with respect to 62 of these products, the branded versions of which had U.S. sales of more than $45 billion in 2012. 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 2012, our generics sales in the United States by channel were as follows:

 

     2012  

Drug store chains

     41

Drug wholesalers*

     36

Managed care organizations

     12

Generic distributors

     7

Governmental facilities and others

     4

 

* 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.

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

 

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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. We are committed to the success of our customers in this segment and focus closely on them as important business partners.

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.

Specialty Pharmaceuticals

We have continued to expand our specialty branded portfolio. 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® HFA for the treatment of bronchial spasms, and Qvar® for long-term control of chronic bronchial asthma, maintained their leading positions within their respective indications. Our branded portfolio includes 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.

Our U.S. business has built a specialized capability to help patients comply with their treatments, ensure timely delivery of medicines and assist in securing reimbursement. This capability, called “Shared Solutions,” is a critical part of our success in this market and has been recognized as industry-leading. It also reflects the growing understanding of the role of integrating patients and medicines through the capabilities now available in communications, internet and other modalities. We believe this capability is an important competitive advantage in the specialty medicines market.

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”).

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 that challenges the validity or enforceability of an existing listed patent or asserts that the proposed product does not infringe an existing listed patent.

 

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Europe

Europe, which we define as the 27 countries in the European Union plus Norway and Switzerland, is a diverse region that has a population of over 300 million people. In anticipation of the addition of Croatia to the European Union, we began including, as of January 1, 2013, the countries of the former Yugoslavia and Albania, which increases the number of European countries to 36. Despite their diversity, the European markets share many characteristics that allow us to leverage our pan-European presence and broad portfolio.

We have a leading or significant presence serving patients in all European countries. No single market in Europe represents more than 25% of our total European revenues, and as a result we are not dependent on any single market that could be affected by pricing reforms or changes in public policy.

Our strategy in Europe is to be flexible and focused on the needs of our customers and their patients. In generics, we focus on differentiation, in which we leverage our strengths (a comprehensive portfolio, partnership capabilities or competitive pricing) according to market conditions, seeking profitable business, rather than market share. In our specialty business, we seek to address unmet clinical needs in our chosen specialty franchises, especially in CNS and respiratory disorders. We leverage, where relevant, our understanding of patient needs and requirements, both in the United States and globally, to understand how best to improve and enhance our specialty medicines capability in Europe.

The pharmaceutical market in each European country has distinct prescribing and dispensing habits, varying pricing and reimbursement mechanisms and different product ranges. 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.

Generic Pharmaceuticals

The generic market in Europe is characterized by a very gradual transition from branded generics, where the physician plays a key decision-making role in choosing the supplier of a generic drug, towards a generic model where the key decision maker is the pharmacist. This transition is likely to take many years to complete. In the meantime, generic penetration in European countries varies widely, driven by government policy or reimbursement mechanisms, rather than by patient or healthcare professional preference.

Some European countries, such as Germany, the United Kingdom, the Netherlands, Poland and the Czech Republic, have relatively high levels of generic penetration of over 50% in volume. Other markets in Southern Europe have not yet attained such a high level of generic penetration but are moving in this direction. In 2012, government action in some markets with lower generic penetration rates created an immediate increase in generic market share, as a response to the need to reduce overall healthcare costs while preserving the quality of health outcomes. These measures were implemented in some Spanish regions and Italy as well as in France, where the introduction of the ‘Tiers Payant’ system to encourage generic dispensing resulted in an increase of generic penetration of some 20% in the second half of the year.

Despite the Eurozone financial crisis, Europe remains a fundamentally affluent region with a growing need for healthcare as its population ages and is unwilling to compromise on the quality of care. The financial crisis, which led to government spending reductions, also resulted in growth for generic pharmaceuticals in many countries since generics were used to help contain healthcare costs. Pricing and reimbursement mechanisms in Europe are typically set by government regulation and are used to regulate or influence market behavior, for example, by encouraging the use of generics. In many markets, such as Spain, Germany, Italy and Finland, reimbursement for generic prescription pharmaceuticals is usually based on the price of a reference (or comparable) branded pharmaceutical. Other markets, such as Italy 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 the leading generic pharmaceutical company in Europe overall, and the generic market leader in a number of European countries including the United Kingdom, Italy, Spain, the Netherlands, Portugal and Switzerland. We are one of the top three companies in many other countries, including Germany, France, Poland and Hungary. During 2012, Teva received 1,103 generic approvals in Europe relating to 231 compounds in 429 formulations, including six EMA approvals valid in all EU member states. In addition, Teva had approximately 2,131 marketing authorization applications pending approval in various European countries, relating to 244 compounds in 499 formulations, including three applications pending with the EMA.

We intend to continue 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.

Our European pipeline includes generic versions of branded products with approximately $4 billion of total annual branded market sales in 2012. In 2012, the European pharmaceutical market grew overall. The impact of the continuing pricing and reimbursement reforms has been to reduce some prices but to increase generic market penetration, and in many markets stock levels at wholesalers have been reduced, without detriment to customer service, as the implementation of reforms has helped to reduce market uncertainty. We have managed market conditions by taking a selective approach to competing for business, focusing on sustainable business and not business at any price.

In 2012, we declined to participate in certain hospital tenders because the procurement model reduced profitability in this market, and the market experienced product shortages in some instances due to manufacturers’ reducing their exposure to unsustainable contracts. We are now starting to see the start of an upward trend in prices as payors recognize the need to build stability and resilience into the supply of these medicines to patients.

Specialty Pharmaceuticals

Our assumption of marketing responsibility for Copaxone® from Sanofi was completed in the remaining European markets on February 1, 2012. We market a wide range of specialty medications in Europe including Copaxone®, Azilect®, Provigil®, Effentora® (fentanyl buccal tablet), Spasfon® (phloroglucinol), Myocet® (liposomal doxorubicin), Actiq® (solid fentanyl) and Zoely® (nomegestrol acetate/estradiol). These products are sold in many markets across Europe but notably in 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 PGT, our 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. In 2012, PGT successfully launched the Vicks® brand in Poland, Hungary and the Czech Republic.

Our largest European operations are described below:

Germany is the largest European pharmaceutical market. We have a product portfolio of approximately 480 molecules. In terms of generic market share, we continue to compete for leadership in the German retail market with our ratiopharm brand. In Germany, our most important specialty medicine is Copaxone®. In 2012, we maintained patient share and implemented a patient-centric model to safeguard supply for patients.

We continue to compete successfully for health insurance tenders, which are now a principal factor in the German retail generics market. In 2012, we focused strongly on a selective approach to this market, where we

 

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competed on the basis of winning sustainable and profitable business. This resulted in some reduction in value and market share in the tender market, but meant that profitability was maintained.

In 2012, we successfully launched a number of generic products, such as Atacand® (candesartan), Atacand Plus® (candesartan HCTZ), Seroquel® (quetiapine) and Seroquel Prolong® (quetiapine ER), Aricept® (donepezil) and Lipitor® (atorvastatin).

Our OTC business in Germany performed especially well, recording significant growth during the year against a background of an overall declining OTC market.

In France, we have a portfolio of over 300 molecules. Key specialty products marketed in France include Spasfon® (phloroglucinol), Modiodal® (modafinil), Vogalene® (metopimazine), and Vogalib® (metopimazine). Our activities in France are well balanced between specialty and generic medicines. In generics, we profited from the recent regulatory changes and strongly focused on a selective approach to generate sustainable business.

In 2012, we launched 52 new products or new dosage forms, including the generic versions of Lipitor® (atorvastatin), Nexium® (esomeprazole), Diovan® (valsartan), CoDiovan® (valsartan HCTZ) and JOSIR LP® (tamsulosine).

In the United Kingdom, we are the largest supplier by volume to the National Health Service. We have a portfolio of more than 300 molecules and supply one in six prescriptions dispensed, focusing on independent retail pharmacies.

In 2012, we launched 52 new products, including the generic versions of Seroquel® (quetiapine), Aricept® (donepezil), Agopton® (lansoprazole) and Detrol® (tolterodine).

In Italy, we have a generic portfolio of over 250 molecules. Our business in Italy continues to be the generic market leader, supplying about a fifth of the country’s generic medicines needs. The market experienced challenging conditions in 2012, but in the latter part of the year government measures designed to increase generic penetration had a significant positive effect on market growth in volume and value. In 2012, we launched 32 new products, including the generic versions of Lipitor® (atorvastatin), Seroquel® (quetiapine), Atacand® (candesartan), Epivir ® (lamivudine) and Actonel ® (risedronate sodium).

In addition to the generic launches, we enlarged our women’s healthcare franchise with the launch of our new oral contraceptive Zoely® (nomegestrol acetate/estradiol).

In Spain, our generic product portfolio has approximately 250 molecules. The Spanish market was characterized in 2012 by continuing pricing and reimbursement reforms, sometimes frequent and sudden. We used our differentiation strategy to meet our customers’ needs effectively.

During 2012, we launched 61 new products, including generic versions of Keppra® (levetiracetam), Aricept® (donepezil), Atacand® (candesartan) and Reminyl® (galantamine).

In addition to the generic launches, we enhanced our women’s health portfolio in Spain with the launch of our new oral contraceptive Zoely® (nomegestrol acetate / estradiol). We are now the second largest provider of oral contraception in Spain, despite having only entered this category one year ago.

Competitive Landscape

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

In Germany, there is a high rate of generic penetration with a relatively large number of competitors of varying sizes and capabilities. Tenders are an important feature of the German market, operated by

 

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approximately 200 statutory healthcare funds across Germany, and are a result of reforms initiated by the government that have 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 many competitors and strong pricing pressure. In 2012, the government introduced a new ‘Tiers Payant’ scheme designed to increase generic penetration, in which co-payment increases for the patient if a branded product prescription is chosen instead of an available generic version. This scheme immediately increased generic market penetration.

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

In Italy, there is a relatively low but growing rate of generic penetration with an increasing level of influence, and ability to substitute, by the pharmacist. The market consists of 20 semi-autonomous regional governments and is influenced by regional independent pharmacy groups. The pace of government reforms to encourage generic penetration has been slower than expected, but the government austerity program and its consequent encouragement of generic penetration is beginning to offset the reduction in growth in the overall Italian pharmaceutical market.

In Spain, the generic pharmaceutical market largely consists of domestic companies. Growth in this market stalled for part of 2012 due to the continuing economic situation, but overall government and regional reforms have, despite price decreases, encouraged the use of generic medicines.

Regulatory and legislative developments

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 2012, 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.

The European pharmaceutical industry is highly regulated and much of the legislative and regulatory framework is driven by the European Parliament and the European Commission. This has many benefits including the potential to harmonize standards across the complex European market, but it also has the potential to create difficulties affecting the whole of the European market.

The implementation of some elements of the European Falsified Medicines Directive, which are due to be enacted into national laws during 2013, could create disruption in the European medicines supply chain and affect the welfare of patients. The provisions of the Directive are intended to reduce the risk of counterfeit medicines entering the supply chain, but if interpreted strictly, it will become more difficult to import APIs for many important medicines into European Union countries in the second half of 2013. Teva believes that this represents a significant threat to the security of supply of medicines for the whole industry, affecting patients in many therapy areas across the whole of Europe. We continue to highlight the risks associated with the Directive at European and country level, and will continue to work to safeguard supplies of medicines to the patients who depend on them.

The implementation of new European pharmacovigilance legislation has changed our global pharmacovigilance obligations. These new requirements are intended to improve patient safety. However, they increased our administrative burden and therefore costs, and there are proposals from the European Commission to increase the fees that industry pays for the maintenance of the pharmacovigilance system. This proposal has so far been rejected by member states as well as industry, but discussions are ongoing that could lead to increased costs.

 

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The procurement model in parts of Europe for the supply of important secondary care products such as oncology injectable medicines creates a challenge for governments and the pharmaceutical industry. We do everything we can to supply medicines for life-threatening conditions, while at the same time the market creates few incentives for us to do so. Until the procurement model recognizes that stability and sustainability, and the need to allow manufacturers to earn a return on their investment, are important components in purchasing decisions, shortages will be almost impossible to avoid. In 2012, we declined to participate in certain tenders and ended our supply in others since the procurement model for this segment was not sustainable. If the situation remains unchanged, we may withdraw certain products from the market because they are commercially nonviable. We continue to work with governments and our customers on ensuring that the patient’s needs are protected, but we believe that governments can do more to insure security of supply by creating adequate incentives for manufacturers to maintain manufacturing capacity.

Rest of the World Markets

Our ROW markets include all countries other than the United States and those we include under Europe. Our key ROW markets are Japan, Russia, Latin America, Canada and Israel. The countries in this category range from highly regulated, pure generic 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. We consider Japan, Russia and the Latin American countries to be “emerging” generics markets that are characterized by rapid growth and relatively high sales of branded generics and OTC products, while Canada and Israel are “mature” generics markets that have higher generic penetration rates and therefore lower growth rates. We intend to expand our ROW market presence by growing our early stage businesses in markets such as South Korea. We further seek to enter new markets or enhance our existing presence in countries such as China, India, Brazil and South East Asia, either via partnership or by creating a direct presence.

Below are details of our operations in these markets:

Japan

We increased our presence in Japan through the acquisition of several generics companies beginning in 2009 and culminating in the 2011 acquisition of Taiyo, the third largest generics manufacturer in Japan, with a broad portfolio of products in solid, sterile and injectable technologies, and a presence in all major channels of the Japanese pharmaceutical market. In April 2012, we integrated our Japanese operations into a single entity, Teva Seiyaku (Teva Pharma Japan Inc.), which includes sales force, production and R&D capabilities.

Japan is the second largest pharmaceutical market in the world, with annual sales estimated at approximately $115 billion in 2012. Generic penetration is estimated at 26% of volume and 11% of value, based on National Health Insurance prices, and is expected to increase further following a number of key patent expirations and the further introduction of government initiatives expected over the next few years. The Japanese pharmaceutical market is in the process of transforming from a branded generics market, driven by physicians’ choice of brands, to a pharmacy substitution market with an increased proportion of generic prescriptions. In addition, pharmacy chains are slowly emerging, which we expect will result in additional generic penetration. At present, almost half of all generic drugs are sold in pharmacies, a quarter are dispensed by hospitals, and a fifth are sold by physicians.

Generic drugs are distributed by large wholesalers, which distribute both branded and generic products, and by hanshas, or 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 four leading generic pharmaceutical companies now capture approximately 50% of

 

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the market. The market is being further transformed by the entry of global companies (branded and generics) as well as local branded companies into the generics business.

Regulatory Highlights. The registration of existing or new generic drugs in Japan is subject to Pharmaceutical and Medical Device Agency approval and requires carrying out local bioequivalence studies, as well as upholding stringent quality, stability and stable supply requirements. Generic prices are regulated by the Ministry of Health, Labor and Welfare and set at 60%-70% of the equivalent branded drug prices (depending on the dosage form and number of competitors), with additional price reductions of approximately 8%-10% every two years.

The Japanese government provides fully comprehensive healthcare coverage, and more than 85% of healthcare expenses are paid by the government. In order to control 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. This led to a significant increase in generic penetration by volume (from 18% to 26% currently). The next reform, which is scheduled for April 2014, is likely to further increase generic penetration. In April 2010 and 2012, new financial incentive schemes were established, encouraging pharmacies to substitute generic drugs for branded ones, and doctors to write generic prescriptions.

Russia

We market a diverse portfolio of generic products, OTC pharmaceutical products, and branded products (primarily Copaxone®) in Russia. We have a portfolio of approximately 130 products sold to both retail and hospital channels. Today we are one of the largest pharmaceutical companies in Russia.

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 includes large local manufacturers as well as international pharmaceutical companies, both generic and innovative. 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 Yaroslavl, Russia, which is expected to be operational by 2015.

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 an annual price review calculated according to the methodology of the Ministry of Health. The law does not regulate prices for non-essential medicines. The new legislation also includes safety measures, including obligatory GMP requirements, to be implemented by January 1, 2014, with the goal of ensuring production of high-quality pharmaceuticals.

Latin America

We market a broad portfolio of products in most Latin American countries. Our products are generally manufactured in our facilities in Mexico, Chile, Argentina and Peru. We have a strong presence in most major

 

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markets leveraging our local, regional and global supply chain for generics, branded generics, OTC, and specialty medicines. During 2012, 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, Chile 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 $74 billion in 2012 and, according to IMS forecasts, the Latin American pharmaceutical market is expected to grow at an average annual rate of approximately 15% through 2016. 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 leadership 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 medicines, 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.

Canada

In Canada, we manufacture and market prescription pharmaceuticals and continue to be one of the two leading generic pharmaceutical companies in terms of prescriptions and sales. Our generic product portfolio includes over 300 products in various dosage forms and packaging sizes. Our specialty 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 across Canada. We continue 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 non-aligned independent community pharmacies join pharmacy banner store groups or sell their operations to larger chain drug operators. These larger corporate accounts work closely with selected suppliers, listing products as part of a chain-wide formulary. We continue to experience increased government regulation on pricing, including a recent Canada-wide announcement indicating that the top six products in the market would be reduced in price to 18% of the referenced brand product on April 1, 2013.

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.

 

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Competitive Landscape. In Canada, the competitive landscape continues to intensify with the increasing presence of multinational companies. The five major generic companies (including Teva), are either subsidiaries of global manufacturers or privately held, Canadian owned firms. These top 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 have the potential to compete with our products; however, our strategy is to become a key supplier to these retail chains and add to value through our core supply chain competency.

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.

Israel

We are the leading provider of professional healthcare products and services in the Israeli market. In addition to generic and specialty pharmaceutical products, we sell and distribute a wide range of healthcare products and services, including OTC, vitamins, minerals and supplements, baby formula products and other consumer healthcare products (as part of PGT’s activities), 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 provides logistical support and distributes third-party products.

The Israeli generic pharmaceutical market is a full substitution market (by regulation) and 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. 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.

Competitive Landscape. Generic competition, which has increased in recent years, is expected to continue, with additional pressure on prices coming from the healthcare funds and other institutional buyers. The health funds are increasing their market share in the OTC market, holding over 25%, resulting in a decrease of the average selling price. 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. Significant regulatory changes and updates have been issued regarding GMP including a new set of importers’ responsibilities for the release of batches and the designation of a new function: QP (Qualified Person), following EU standards.

Operations and R&D

Research and Development

Our research and development activities span the full breadth of our business, including generic medicines (finished goods and API), specialty pharmaceuticals, new therapeutic entities (“NTEs”), which are known molecules that are formulated, delivered or used in a novel way to address unmet patient needs, and OTC

 

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medicines. All research and development activities, except for API, have been integrated into a single unit, Teva Global R&D.

A major area of focus is the development of new generic medicines. We develop products in all therapeutic areas that are equivalent to innovative pharmaceuticals. Our emphasis is on developing high-value products, such as those with complex technologies and formulations. Generic R&D activities, which are carried out in development centers located throughout the world, include product formulation, analytical method development, stability testing, management of bioequivalence and other clinical studies, and registration of generic drugs in all of the markets where we operate.

Over the past several years, our generic R&D capabilities have expanded 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, and more recently capability build-up in long-acting release injectables, transdermal patches, oral thin film, drug device combinations and nasal delivery systems for generic drugs. We have more than one thousand generic products in our pipeline (each product being equivalent to a molecule, dosage form and market combination).

In addition, Teva’s generic R&D supports PGT in developing OTC products, as well as in overseeing the work performed by contract developers of products selected by PGT.

Another major area of focus for Teva Global R&D is the development of novel specialty products in our key therapeutic areas of CNS and respiratory, with select projects in additional areas. These specialty R&D activities range from the discovery of new compounds, preclinical studies (including toxicology, pharmacokinetics, pharmacodynamics and pharmacology studies) to clinical pharmacology and the design, execution and analysis of clinical trials. We conduct these activities for both small molecules and biologics. Our specialty R&D activities also include process development.

Our specialty pipeline includes product candidates in several therapeutic areas, with a focus on CNS and respiratory products, and selective innovation in the areas of oncology, women’s health, and biologics. We focus our investments on novel drug candidates, specialty compounds that utilize specific proprietary devices or technology, biosimilars and bio-betters. We intend to continue to supplement our specialty pipeline, as necessary, by in-licensing or acquiring products including small molecules, biologics, biosimilars and bio betters, focused in critical therapeutic areas. This approach to investing, which will result in “constellations” of related opportunities, is designed to create a robust and sustainable pipeline. We also hold a small number of investments in certain early stage companies that we believe have promising technologies or products.

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

 

Project / Compound

 

Potential Indication

  Formulation   Clinical Phase
(month and year of
entering Phase III)

CNS

     

MULTIPLE SCLEROSIS

     
Glatiramer acetate 40mg (Copaxone®)  

Relapsing remitting multiple sclerosis

  Subcutaneous
  Phase III completed
Laquinimod   Relapsing remitting multiple sclerosis   Oral   US—III (Nov 2007)

EU—Pre-submission

Pridopidine (Huntexil®)   Motor disorders   Oral   II/III
XEN402   Painful disorders   Oral and
topical
  II
OTHER CNS      
Tamper deterrent hydrocodone   Chronic pain   Oral   III (Oct 2010)

 

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Armodafinil (Nuvigil®)   Adjunctive therapy for treating bi-polar depression disorder in adults   Oral   III (Feb 2009)
RESPIRATORY      
Beclomethasone dipropionate HFA Nasal (Qnasl®)   Pediatric allergic rhinitis   Nasal   III (Oct 2012)
Albuterol Spiromax®   Asthma/COPD   Inhalation   III (Oct 2012)
Reslizumab   Severe asthma with eosinophilia   Intravenous   III (Feb, 2011)
Budesonide Formoterol Spiromax®   Asthma/COPD   Inhalation   EU—pre-submission
Fluticasone Propionate Salmeterol Spiromax®   Asthma/COPD   Inhalation   II
Fluticasone Propionate Spiromax®   Asthma/COPD   Inhalation   II
Fluticasone Propionate Salmeterol HFA   Asthma/COPD   Inhalation   I (Bioequivalence)
ONCOLOGY      
Balugrastim—albumin fused G-CSF   Neutropenia cancer   Subcutaneous   US—submitted

XM 22—glycoPEGylated G-CSF (Lonquex®)

 

Neutropenia cancer

  Subcutaneous
  US, EU, Russia—
submitted
OGX-011/TV-1011   Metastatic castrate resistant prostate cancer   Intravenous   III (1st line: Dec
2010; 2nd line: Oct
2012)
OGX-011/TV-1011   Non-small cell lung cancer   Intravenous   III (Oct 2012)
WOMEN’S HEALTH      
Progesterone Vaginal Ring (Milprosa™)  

Luteal support for in vitro fertilization

  Vaginal ring
  US—submitted
Oxybutynin Vaginal Ring (DR-3001)   Overactive bladder   Vaginal ring   III (May 2008)
XM17—Follitropin alfa   Female infertility; anovulation; assisted reproductive techniques; hypogonadism   Subcutaneous   EU—submitted
Desogestrel and ethinyl estradiol (LeCette™)   28-day oral contraceptive   Oral   III (Aug 2010)

Levonorgestrel desogestrel and

ethinyl estradiol (Quartette™)

  91-day extended regimen oral contraceptive   Oral
  FDA submission
CARDIOVASCULAR      

Mesynchymal precursor cells (Revascor®)

 

Congestive heart failure

  Intracardiac
Injection
  II

Mesynchymal precursor cells (revascor®)

 

Acute myocardial infarction

  Intracardiac
Injection
  II

OTHER

     
Laquinimod   Crohn’s disease   Oral   II
Laquinimod   Lupus nephritis and Lupus arthritis   Oral   I/II

 

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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, up to a maximum 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 compared to placebo did not reach statistical significance. The observed safety and tolerability profile of laquinimod in both the ALLEGRO and the BRAVO trials was considered favorable. We are in the process of initiating a third Phase III study of laquinimod, CONCERTO, scheduled to begin in early 2013, with the primary endpoint of impact on disability progression.

In June 2012, we submitted a Marketing Authorization Application to EMA and in August 2012 we submitted a New Drug Submission to Health Canada. We are planning additional submissions during 2013.

Based on laquinimod’s novel mechanism of action, which has been manifested clinically in a statistically significant reduction of disability as measured by the Expanded Disability Status Scale and brain volume loss, as demonstrated in pooled data from the Phase III studies conducted to date, we are planning further clinical studies of laquinimod as add-on therapy in patients with relapsing-remitting multiple sclerosis and as monotherapy in patients with progressive forms of MS.

Laquinimod is currently in Phase II development for Crohn’s Disease (“CD”) and in Phase I/II studies for lupus nephritis and lupus arthritis. In October 2012, we announced the results of the Phase IIa study of laquinimod in moderate to severe CD. The findings demonstrated that treatment with orally administered laquinimod 0.5 mg/day resulted in an early and consistent effect on remission (48.3% vs. 15.9% of patients, respectively) and response rates (62.1% vs. 34.9% of patients, respectively) in patients with moderate-to-severe CD versus placebo. Further clinical studies in CD are under review. Results of the Phase I/II studies for lupus are expected in early 2013.

Laquinimod is protected by patents expiring in 2019 worldwide, with potential for extensions in various markets.

Tamper Deterrent Hydrocodone is our formulation of hydrocodone utilizing our OraGuard™ technology, which we believe provides deterrence against various tampering methods, including chewing, aqueous extraction for IV dosing and alcohol extraction. A Phase III study was completed in August 2011, but did not demonstrate a statistically significant difference between the hydrocodone and placebo treatment groups. A newly designed Phase III study will be initiated in early 2013.

Huntexil® (pridopidine) is an oral small molecule dopamine stabilizer being developed for the symptomatic treatment of motor disorders (including Huntington’s disease, or “HD”), which we licensed from Neurosearch A/S in late 2012. We intend to design and complete new clinical studies of pridopidine to assess its potential for symptomatic relief of HD. NeuroSearch A/S performed advanced-stage clinical studies of pridopidine in the United States, Europe and Canada in patients with HD, in which a significant treatment effect on Total Motor Score was demonstrated, but the primary endpoint of Modified Total Motor score was not met. Data from the

 

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clinical studies were presented to the FDA and EMA in the first half of 2011, but were found insufficient to file for marketing approval.

XEN402 is a small molecule intended to treat pain locally at its source through blocking of Nav1.7 and Nav1.8 sodium channels, which are found in sensory nerve endings that can increase in chronic painful conditions. XEN402 was licensed from Xenon Pharmaceuticals Inc. in December 2012. XEN402 has been studied in human subjects as both oral and topical forms. XEN402 is currently in Phase II clinical development for a variety of pain-related disorders. In an early study, oral XEN402 was shown to be effective at relieving the pain associated with the rare neuropathic pain condition, erythromelalgia. Topical XEN402 was studied in a Phase II trial to evaluate for effectiveness in alleviating the pain of post herpetic neuralgia. In this study the proportion of patients reporting clinically meaningful reductions in pain was significantly greater for topical XEN402 than for placebo.

Respiratory

A primary area of focus of our respiratory R&D is the development of products based on our proprietary delivery systems, including Easi-Breathe®, our advanced breath-actuated inhaler (“BAI”), Spiromax®/Airmax®, our novel inhalation-driven 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. In addition, we develop novel molecules for respiratory disease.

Albuterol Spiromax® is a dry-powder inhaler formulation of albuterol in our Spiromax® device that is designed to be an improvement to our ProAir® HFA. Results of two safety and efficacy studies have confirmed the safety, efficacy, pharmacokinetic and pharmacodynamic profile of albuterol Spiromax®. The Phase III program is ongoing.

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 reslizumab in Phase III studies as a possible treatment for severe asthma with eosinophilia. Results of these studies are expected in 2014.

Budesonide Formoterol Spiromax® is a combination utilizing our proprietary Spiromax® device. Results of our studies confirm that we have demonstrated bio-equivalence to the marketed product (Symbicort® Turbohaler®). We submitted a European marketing authorization application in January 2013.

Fluticasone Propionate Salmeterol Spiromax® is a new formulation of this combination using our Spiromax® device, with an enhanced lung delivery that is designed to allow lower doses to achieve the same clinical outcomes as Advair® Diskus. Phase II trials commenced in 2012.

Fluticasone Propionate Spiromax® is a new formulation of this combination using our Spiromax® device, with an enhanced lung delivery that is designed to allow lower doses to achieve the same clinical outcomes as Flovent® Diskus. Phase II trials commenced in 2012.

Fluticasone Propionate 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 clinical studies in 2014.

Oncology

Balugrastim is a long-acting G-CSF using albumin-fusion technology initially developed by Human Genome Sciences to prolong plasma half-life. Balugrastim is designed to provide clinical efficacy and safety

 

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profiles comparable to Neulasta®. In July 2011, we entered into a settlement agreement with Amgen to resolve 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 product in the United States. In exchange, we consented to validity and enforceability of the patent in dispute. We submitted balugrastim for registration in the United States in December 2012 and expect to file for submission in Europe in 2013. Balugrastim is protected by a patent in the United States until 2014, with the potential for patent term extension.

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 in clinical trials to provide clinical efficacy and safety profiles which are comparable to Neulasta®. Lonquex® was submitted for registration in Europe, the United States, and Russia. Lonquex® is protected by patents expiring in 2023 in the United States and in 2024 in Europe, with the potential for patent term extensions.

Custirsen/TV-1011 (OGX-011) is an antisense drug. In December 2009, Teva and OncoGenex entered into a global license and collaboration agreement to develop and commercialize custirsen/TV-1011/OGX-011. Custirsen was 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 November 2012, enrollment was completed in a large Phase III randomized trial of custirsen in combination with docetaxel and prednisone in the initial chemotherapy treatment of patients with castrate resistant prostate cancer. In addition, enrollment started in two new Phase III studies: a randomized trial of custirsen in combination with cabazitaxel and prednisone for the second-line treatment of patients with castrate-resistant prostate cancer, and a randomized trial of custirsen in combination with docetaxel for the second-line treatment of patients with non-small cell lung cancer.

Obatoclax is a Pan Bel-2 inhibitor with particular potency for the dominant protein Mel-1. Final data from the randomized Phase II trial of obatoclax evidenced a lower than expected treatment effect in lung cancer, as well as CNS activity. Based on these results, we decided not to pursue the Phase III trial in the non-small cell lung cancer indication and the product is currently being investigated in pre-clinical studies for other indications.

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 safety/efficacy study in women aged over 34 years prior to approval or as a post-marketing commitment. We plan to file a response to the FDA’s letter in 2013. Our patent applications for the product are pending.

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 side effects caused when taking treatments orally. 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. However, due to limitations surrounding a manufacturing site transfer, a contemporaneously-controlled bridging study to demonstrate the bioequivalence of the “to be marketed” product to the product used in the clinical studies, based on pharmacokinetic characteristics, could not be conducted, and an additional Phase III safety/efficacy study may be required.

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

 

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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™ has 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 by a seven-day regimen of EE alone. In 2012, we filed an NDA with the FDA. In clinical trials, Quartette™ demonstrated a safety profile similar to that of Seasonique® and other 28-day oral contraceptives. Our patent applications for the product are pending.

Cardiovascular

Revascor® (mesynchymal precursor cells) consists 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, Cephalon entered into a strategic alliance with Mesoblast Ltd. to develop and commercialize Mesoblast’s mesynchymal 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.

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.

In January 2011, interim results from the ongoing multi-center Phase II trial of Revascor® for patients with congestive heart failure were announced. Based on these Phase II results, and assuming timely finalization of the chemistry and manufacturing controls requirements, we are planning to initiate a Phase III study in 2013. This study will include an interim analysis, after an initial cohort of patients has completed six months of follow up.

New Therapeutic Entities (“NTEs”)

A new area of focus of Teva Global R&D is the development of new therapeutic entities. NTEs are known molecules that are formulated, delivered or used in a novel way to address unmet patient needs. Examples of NTEs include fixed-dose-combinations that improve adherence and therefore efficacy (for use in HIV, for example), drugs with prolonged half-lives to reduce frequency of administration, drugs with modified pharmacokinetic profiles to reduce side effects, drugs that are administered orally instead of by injection, drugs that are delivered in ways that address the needs of special patient populations (for example, children and the elderly), and drugs that are approved for new indications.

Many NTEs have achieved significant commercial successes (e.g., J&J’s Duregesic® fentanyl patch, Purdue’s Oxycontin®, and Lundbeck’s Namenda® for Alzheimer’s disease). However, without a systematic effort, the development of successful NTE products will continue to be sporadic.

Teva’s approach to the development of NTEs will be unprecedented in terms of scale, scope and dedication of resources. The successful development of NTEs requires access to a wide range of specialty and generic R&D capabilities: an understanding of medical needs, clinical and regulatory development, formulation know-how and special technologies, intellectual property and access to a large portfolio of generic molecules. The integration of our specialty and generic R&D groups into a single organizational unit—Teva Global R&D—creates a unique infrastructure that includes the entire range of capabilities required for the development of NTEs.

This unique organization is supported by a dedicated process for generating and screening ideas for NTEs. Drawing on a wide range of internal and external sources, we are generating more than 100 NTE ideas per year, of which we expect ten to be approved for development each year. To date, several NTEs have already been internally approved for development.

Because NTEs involve proven targets with known efficacy and safety profiles, we expect their development to involve reduced risks and costs, and shorter timelines compared to novel drugs. On the other hand, there are multiple avenues to exclusivity for NTEs, leveraging both regulatory and patent exclusivity to protect novel formulations, combinations and indications. Therefore, we believe that rewards from an NTE can be sustained over long periods.

 

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We believe that the combination of our unique organization, dedicated processes and the planned scale of our effort to generate NTEs, together with their favorable risk/ reward profiles, will create significant opportunities for Teva.

API R&D

Our API R&D division operates independently from Teva Global R&D, and 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 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.

Other Projects

During 2012, we also developed or participated in the development of the compounds listed below, which are no longer included in our pipeline.

StemEx® (allogeneic stem cell) was developed in a joint venture with Gamida Cell for the expansion of cord blood to be used in transplants. We have decided not to market the product, and the joint venture is seeking another partner for this program.

CEP-37247 is an anti-tumor necrosis factor domain-based antibody for the treatment of sciatica with a lower molecular weight than traditional antibodies. The compound is intended for the treatment of sub-acute sciatica (chronic radicular pain) in patients who have not responded to conventional therapy. CEP-37247 was evaluated in a randomized, double-blind, placebo-controlled, ascending-dose study to evaluate the safety and efficacy of the compound.

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. We have decided not to market the product and are cooperating with Andromeda to find a new partner for this program.

NexoBrid® was developed by MediWound for the enzymatic removal of burn-injured tissue. We terminated the joint development agreements in 2012.

Operations

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

 

   

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.

 

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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 52 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 2012, Teva produced approximately 73 billion tablets and capsules and over 720 million sterile units. Twenty-six of our plants are FDA approved, and thirty-one of our plants have EMA approval.

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, Hungary and the Czech Republic make up a significant percentage of our production capacity.

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 our consumer healthcare joint venture with P&G, we acquired two OTC-dedicated plants in the United States from P&G, which manufacture solid dosage forms, powders, liquids, semi-solids, nasal products and lozenges.

During 2012, we continued to expand our manufacturing capabilities, focusing on strategic growth areas. We started the construction of a new oral solid dosage facility in Russia and a new OTC manufacturing facility in India. We invested in expanding our manufacturing facility in Japan and in our global sterile manufacturing centers in Hungary and Croatia. In addition, our new state-of-the art logistics center in Shoham, Israel, began to operate during 2012, significantly increasing our technological and logistical capabilities. We constantly review these capabilities and our capacity utilization to ensure that they align with our ability to deliver the highest quality, best in class and most efficient products.

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.

 

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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, Weiler and Merckle, Germany

     1,787      Europe and other non-U.S. markets

Takayama, Japan

     1,648      Asia

Opava, Czech Republic

     1,050      North America, Europe and other markets

Debrecen, Hungary

     1,043      Europe and other non-U.S. markets

Kfar Saba, Israel

     1,021      North America, Europe and other markets

Zagreb, Croatia

     915      North America, Europe and other markets

Godollo, Hungary

     814      North America, Europe and other markets

Jerusalem, Israel

     717      North America and Europe

Toronto, Canada

     609      North America and Europe

Krakow, Poland

     596      North America, Europe and other markets

Forest, VA, U.S.

     579      North America

Maipu, Santiago, Chile

     548      Latin America

Haarlem, The Netherlands

     496      North America, Europe and other markets

Runcorn, U.K.

     480      North America, Europe and other markets

Sellersville, PA, U.S.

     472      North America

Cincinnati, OH, U.S.

     430      North America

Irvine, CA, U.S.

     403      North America

Waterford, Ireland

     360      North America, Europe and other markets

Raw Materials for Pharmaceutical Production

We source a major portion of our APIs from our own manufacturing facilities. Additional APIs 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.

We have expertise in a variety of production technologies, including chemical synthesis, semi-synthetic fermentation, enzymatic synthesis, high potent manufacturing, plant extract technology, and peptides synthesis, vitamin D derivatives synthesis and prostaglandins synthesis. 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, European agencies or other authorities as applicable. During 2012, all inspections of our API facilities worldwide found our manufacturing practices at all sites to be in compliance.

Environment

As part of our overall corporate responsibility, we are committed to environmental, health and safety matters in all aspects of our business. In 2012, we reorganized our environment, health and safety (“EHS”)

 

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division, which is now headed by a newly-appointed Global Environment Director. We further updated and enhanced our EHS policy on a variety of environmental issues, and have prepared a new set of standards that we intend to implement in 2013.

As a vertically integrated pharmaceutical company with worldwide operations, we believe that our adherence to applicable laws and regulations, together with proactive management which goes 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

As of December 31 2012, we are organized into four commercial units, by region: (1) the Americas, (2) Europe, (3) Eastern Europe, Middle East, Israel and Africa (“EMIA”) and Asia-Pacific (“APAC”), and (4) Japan and South Korea. These units coordinate all sales of generic, specialty and OTC medicines within their regions, as well as all other regional commercial activities.

In addition to these regional commercial units, our activities are conducted by two global divisions, Teva Global Operations (“TGO”) and Teva Global R&D, and by general corporate functions that include finance, legal, information system, business development and human resources. TGO’s responsibilities include manufacturing and commercialization of APIs, manufacturing of pharmaceuticals, procurement and our supply chain. Teva Global R&D is responsible for our overall research and development for generic medications, NTEs and specialty products. In 2012, we established a global women’s health organization. We expect continued refinements of this structure over the next year to align it more closely with our new strategy and expect, among other changes, to establish a global specialty pharmaceuticals unit to ensure the most effective and efficient operations worldwide.

 

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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 52 finished dosage pharmaceutical manufacturing sites in 25 countries, 21 API sites and 17 pharmaceutical R&D centers. The following sets forth, as of December 31, 2012, our principal operating subsidiaries in terms of sales to third parties:

 

Name of Subsidiary

   Country

Teva Canada Limited

   Canada

Pliva Hrvatska d.o.o.

   Croatia

Teva Czech Industries s.r.o.

   Czech Republic

Teva Santé S.A.S.

   France

Cephalon France S.A.S.

   France

Merckle GmbH

   Germany

Teva GmbH

   Germany

ratiopharm GmbH

   Germany

CT- Arzneimittel GmbH

   Germany

Teva Pharmaceutical Works Private Limited Company

   Hungary

Norton (Waterford) Limited

   Ireland

Teva Pharmaceutical Industries Ltd

   Israel

Teva Italia S.r.l.

   Italy

Teva Pharma Japan, Inc.

   Japan

Teva Pharmaceuticals Polska sp. z o.o

   Poland

Teva LLC

   Russia

Teva Pharma S.L.

   Spain

Teva Pharmaceuticals Europe B.V

   The Netherlands

Pharmachemie Holding B.V

   The Netherlands

Teva UK Limited

   United Kingdom

Ivax UK Limited

   United Kingdom

Teva Pharmaceuticals USA, Inc.

   United States

Teva API, Inc.

   United States

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, 2012:

 

Facility Location                            

   Square Feet
(in thousands)*
    

Main Function

Israel

     

Ramat Hovav

     1,355      API (chemical) manufacturing and R&D

Kfar Saba

     757      Pharmaceutical manufacturing, research laboratories, warehousing, and offices

Jerusalem (3 sites)

     516      Pharmaceutical manufacturing, research laboratories and offices

Shoham Logistics Center

     538      Distribution center

Netanya (3 sites)

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

Petach Tikva

     291      Corporate headquarters

Ashdod

     130      Manufacturing of hospital supplies

Assia—Petach Tikva

     118      R&D laboratories

 

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Facility Location                            

   Square Feet
(in thousands)*
    

Main Function

United States

     

North Wales area, PA (4 sites)

     808      Teva USA headquarters, warehousing and distribution center

Phoenix, AZ (2 sites)

     296      Manufacturing, packaging and offices

Forest, VA

     408      Manufacturing, packaging and offices

Irvine, CA (8 sites)

     342      Pharmaceutical manufacturing and R&D laboratories

Cincinnati, OH

     305      Pharmaceutical manufacturing, R&D laboratories and packaging

Miami, FL (3 sites)

     223      Manufacturing, R&D laboratories, warehousing and offices

Kutztown, PA

     211      Warehousing

Sellersville, PA

     206      Pharmaceutical manufacturing, packaging and R&D laboratories

Greensboro, SC

     500      Manufacturing, packaging and offices

Salt Lake City, UT

     194      Manufacturing, packaging and offices

Frazer, PA

     188      Offices

Pomona, NY

     181      Pharmaceutical manufacturing and R&D laboratories

Guayama, Puerto Rico

     170      API (chemical) manufacturing

West Chester, PA

     165      Laboratories

Mexico, MO (4 sites)

     144      API (chemical) manufacturing

Kansas City MO

     117      Offices

Canada

     

Toronto, Ontario

     335      Offices, pharmaceutical packaging, warehousing, distribution center and laboratories

Stouffville, Ontario

     155      Pharmaceutical manufacturing and R&D laboratories

Markham, Ontario

     122      Pharmaceutical manufacturing and warehousing

Europe

     

Debrecen, Hungary

     2,711      Pharmaceutical manufacturing, API (chemical) manufacturing, R&D laboratories and warehousing

Ulm, Germany

     1,675      Pharmaceutical manufacturing and offices

Opava, Czech Republic

     1,466      Pharmaceutical and API (chemical) manufacturing, warehousing and distribution center

Zagreb, Croatia (5 sites)

     869      Pharmaceutical manufacturing, packaging and warehousing, API (chemical) manufacturing and R&D laboratories

Savski Marof, Croatia

     581      API (chemical) manufacturing

Gödöllõ, Hungary

     183      Pharmaceutical manufacturing, hospital supplies manufacturing, R&D laboratories, distribution center, packaging and warehousing

Kutno, Poland

     290      Pharmaceutical manufacturing, warehousing and packaging

Krakow, Poland

     939      Pharmaceutical manufacturing and warehousing

Waterford, Ireland (2 sites)

     435      Pharmaceutical manufacturing, warehousing and packaging

 

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Facility Location                            

   Square Feet
(in thousands)*
    

Main Function

Weiler, Germany

     425      Pharmaceutical manufacturing and packaging

Haarlem, The Netherlands

     232      Laboratories

Glasshoughton, England

     247      Warehousing and distribution center

Zaragoza, Spain

     239      Pharmaceutical manufacturing, R&D laboratories

Eastbourne, England

     163      Warehousing and packaging

Runcorn, England (2 sites)

     241      Pharmaceutical manufacturing, warehousing, laboratories and offices

Santhia, Italy

     177      API (chemical) manufacturing, R&D laboratories and warehousing

Vilnius, Lithuania (2 sites)

     97      Pharmaceutical manufacturing and R&D laboratories

Tallinn, Estonia

     174      Offices

Sajababony, Hungary

     374      Mixed use

Dublin, Ireland (2 sites)

     188      Marketing, manufacturing

Asia

     

Takayama, Japan

     1,009      Pharmaceutical manufacturing

Gajraula (U.P.), India

     1,200      API (chemical) manufacturing

Goa, India

     285      Pharmaceutical manufacturing and R&D laboratories

Malanpur, India

     302      API (chemical) manufacturing

Hangzhou, China

     609      API (chemical) manufacturing

Kasukabe, Japan

     169      Pharmaceutical manufacturing

Koka, Japan

     151      Pharmaceutical manufacturing

Teda, China

     193      Marketing, manufacturing, warehousing and R&D laboratories, offices, API (chemical) manufacturing

Nagoya, Japan (2 sites)

     141      Offices

Latin America

     

Santiago, Chile

     240      Pharmaceutical manufacturing, warehousing and R&D laboratories

Lima, Peru (3 sites)

     221      Pharmaceutical manufacturing, warehousing and R&D laboratories

Munro, Argentina

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

Mexico City, Mexico

     240      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.

 

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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 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 a 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 30 months or a court decision finding the patent invalid, not infringed or unenforceable.

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

 

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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 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 appropriations. 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. 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. Implementation of the program began on October 1, 2012. In July 2012, Congress passed legislation that allowed the FDA to continue to collect user fees, payments to supplement the appropriations that the agency receives from Congress, for brand products and new user fee programs for generic and biosimilar products. As part of this legislation, Congress included a provision that extended the period of time that a generic applicant has to receive tentative approval. Applications that were filed by the effective date of the bill, October 2012, and had not already forfeited generic exclusivity are entitled to a 40-month period to receive FDA review before triggering a forfeiture. This provision sunsets over the five-year timeframe of the bill. However, for the applications to which this applies, the benefit is significant. Prospectively, the FDA will be collecting the newly created user fee for generic products, funding new resources and improving future review times.

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 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. As part of these efforts we filed a BLA for our GCSF product in 2009, which was approved by the FDA during 2012, and is expected, to be

 

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launched in November 2013. While regulations are still being developed relating to the Biologics Price Competition and Innovation Act of 2009 (“BPCI”), the FDA issued three substantial guidance documents in February 2012 that are intended to provide a roadmap for development of biosimilar products. These guidance documents address quality considerations, scientific considerations and questions and answers regarding commonly posed issues. These guidance documents 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. The guidance documents do not address the naming issue or intellectual property concerns, and provide very limited information on the development of interchangeable products.

Government Reimbursement Programs

In early 2010, the United States enacted the Patient Protection and Affordable Care Act of 2010 (the “PPACA”), a comprehensive plan to decrease health care costs and improve the quality of patient care. The PPACA seeks 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 PPACA 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 Medicare patients in excess of the prescription drug coverage limit and below the catastrophic coverage threshold. Under the PPACA, certain pharmaceutical companies are now obligated to fund 50% of the patient obligation in this gap, or “donut hole.” Additionally, commencing in 2011, an excise tax was levied against certain branded pharmaceutical products. The tax is specified by statute to be approximately $3 billion in 2012 through 2016, $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 based on an allocation of their governmental programs as a portion of total pharmaceutical government programs.

The Centers for Medicare and Medicaid Services (“CMS”) administer the Medicaid drug rebate program, in which pharmaceutical manufacturers pay quarterly rebates to each state Medicaid agency. Generally, for generic drugs marketed under ANDAs, manufacturers (including Teva) are required to rebate 13% of the average manufacturer price, and for products marketed under NDAs, manufacturers are required to rebate the greater of 23.1% 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, and other methodologies apply to new formulations of existing drugs.

In addition, the PPACA revised the methodologies for calculating the rebates, including the definition of “average manufacturer price.” CMS has proposed, but not yet promulgated, a regulation implementing aspects of the PPACA in the Medicaid drug rebate program.

Various state Medicaid programs have adopted supplemental drug rebate programs that provide states with additional manufacturer rebates for patient populations that are not included in the traditional Medicaid drug benefit coverage.

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

 

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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 2012, 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 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. The 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 October 2005 for products filed via the national pathway or November 2005 for products filed via the centralized procedure. 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 October or 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 purpose of 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 an 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 market exclusivity, may receive an additional two years of market exclusivity instead of an extension of the SPC if the requirements of the pediatric regulation are met.

 

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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 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 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 brand and generic drug products listed on the Patent Register maintained by Health Canada, which were listed prior to the filing of the generic submission. Generic pharmaceutical manufacturers can serve a notice of allegation upon the 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. Canadian provinces have been working separately and collectively to effect price reforms on a select number of high volume generic products. 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 emission 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 fully-integrated global pharmaceutical company. Our business includes three primary areas: generic, specialty and OTC medicines. As the world’s largest generic company with an established specialty medicines portfolio, we are strategically positioned to benefit from the current changes in the global healthcare environment.

Our business strategy seeks to capitalize on the growing global need for medicines and evolving market, economic and legislative dynamics. These changes include aging populations, increased spending on pharmaceuticals in emerging market countries, economic pressures on governments and private payors to provide cost-effective healthcare solutions, global evolution in healthcare, legislative reforms, unmet patient needs, an increase in patient awareness and the growing importance of OTC medicines.

We believe that our strategy, dedicated employees, world-leading generic expertise and portfolio, global reach, integrated R&D capabilities, global infrastructure and scale, position us at the forefront of a changing industry and will enable us to take advantage of opportunities created by these dynamics.

Highlights

Significant highlights of 2012 included:

 

   

Our revenues grew to $20.3 billion, an increase of approximately $2.0 billion, or 11%, over 2011. This growth was primarily the result of the inclusion of a full year of revenues from Cephalon and Taiyo, which were included in our consolidated financial statements commencing October and July 2011, respectively. In addition, global revenues from Copaxone® grew to nearly $4 billion.

 

   

Revenues increased in all geographies compared to 2011: by 19% in the United States, by 9% in our ROW region, and slightly in Europe.

 

   

Global generics revenues reached $10.4 billion, an increase of 2% over 2011. The increase was due to higher revenues in the United States and our ROW region, which were partially offset by lower revenues in Europe.

 

   

Our specialty medicines portfolio generated revenues of $8.2 billion, an increase of 26% compared to 2011. The increase was due to the inclusion of a full year of revenues from the Cephalon portfolio, as well as higher sales of Copaxone® and Azilect®. During the year we launched several new specialty products, including Synribo™ and Qnasl®.

 

   

Net R&D spending amounted to $1.4 billion, 64% of which was invested in our specialty portfolio.

 

   

G&A expenses amounted to $1.2 billion and net financial expenses amounted to $386 million, compared to $932 million and $153 million, respectively, in 2011.

 

   

Impairments, loss contingencies, restructuring and others amounted to $2.0 billion for the year, compared to $901 million for 2011.

 

   

Operating income amounted to $2.2 billion, a decrease of $904 million compared to 2011, primarily as a result of increases in loss contingencies and impairment charges.

 

   

Cash flow from operating activities amounted to $4.6 billion, an increase of $438 million compared to 2011.

 

   

Net income attributable to Teva in 2012 amounted to $2.0 billion, compared to $2.8 billion in 2011.

 

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Exchange rate differences between 2012 and 2011 had a negative impact of approximately $572 million on revenues and a net positive impact on operating income.

 

   

During 2012, we refinanced $5 billion of debt, extending our average debt maturity to six years at December 31, 2012.

Acquisitions and Other Transactions

Sale of animal health unit

In January 2013, we sold our U.S.-based animal health business, exiting the business. We received approximately $50 million at closing and are entitled to receive up to a further $91 million in milestone payments.

South Korea venture

In December 2012, we formed a business venture in South Korea with Handok. We will be responsible for manufacturing and supplying a wide range of generic and innovative medicines, and Handok will be responsible for sales and marketing, distribution, and regulatory affairs. Under the agreement, there is a voting split of 60% and 40% and a profit split of 51% and 49% by Teva and Handok, respectively. This agreement had no effect on our 2012 financial results.

Xenon

In December 2012, we entered into a collaborative development and exclusive worldwide license agreement with Xenon for its compound XEN402. XEN402 targets sodium channels found in sensory nerve endings that can increase in chronic painful conditions, and is currently in Phase II clinical development for a variety of pain-related disorders. Under the agreement, we paid Xenon an upfront fee of $41 million. In addition, we may be required to pay development, regulatory and sales-based milestones of up to $335 million. Xenon is also entitled to royalties on sales and has an option to participate in commercialization in the United States.

Acquisition of Neurosearch A/S assets

In October 2012, we acquired from Neurosearch A/S, a Danish company, the rights, assets and obligations relating to Huntexil® (pridopidine/ACR16), a drug candidate being developed for the symptomatic treatment of hand movement, balance and gait disturbances in Huntington’s disease. Under the agreement, we paid NeuroSearch an upfront fee of $26 million. The achievement of regulatory and commercialization milestones may result in additional payments of up to approximately $10 million to NeuroSearch.

2011 Acquisitions and Other Transactions

Consumer Health Care Joint Venture with Procter & Gamble

In November 2011, we formed a consumer health care joint venture with P&G, combining our OTC pharmaceutical businesses in all markets outside North America. We 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 owns 51%. As of December 2012, the OTC products of Cephalon (Mepha) were included in the joint venture.

Cephalon

In October 2011, we acquired Cephalon for total consideration of $6.5 billion in cash. This acquisition diversified our specialty portfolio and enhanced our innovative pipeline.

CureTech

In September 2011, we exercised an option to invest $19 million in CureTech, a biotechnology company. We also agreed to make further investments in CureTech’s research and development activities. As a result of the

 

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option exercise, our ownership stake in CureTech increased from 33% to 75%. In January 2013, we announced the termination of our collaboration with CureTech.

Japanese Transactions

In September 2011, we acquired the remaining shares in Taisho and the remaining 50% of our Japanese joint venture with Kowa Company Ltd. that we did not already own. In July 2011, we acquired Taiyo for $1.1 billion in cash. Taiyo had developed a large portfolio of generic products in Japan, with over 550 marketed products, and had advanced production facilities. Since April 2012, the majority of our Japan-based companies have operated under a single company known as Teva Seiyaku.

Corporación Infarmasa

In January 2011, we acquired Corporación Infarmasa, a company in Peru with over 500 branded and unbranded generic pharmaceuticals.

Laboratoire Théramex

In January 2011, we acquired Laboratoire Théramex for €267 million paid at closing and certain limited performance-based milestone payments. Théramex’s product portfolio included a variety of women’s health products sold in over 50 countries, primarily in Europe.

2010 Acquisition

Ratiopharm

In August 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.

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
 
    2012     2011     2010     2012-2011     2011-2010  
    %     %     %     %     %  

Net revenues

    100.0       100.0       100.0       11       14  

Gross profit

    52.4       52.0       56.2       12       5  

Research and development expenses—net

    6.7       6.0       5.9       24       15  

Selling and marketing expenses

    19.1       19.0       18.4       12       17  

General and administrative expenses

    6.1       5.1       5.4       33       8  

Impairments, loss contingencies, restructuring and others—net

    9.7       4.9       2.5       119       120  

Operating income

    10.8       17.0       24.0       (29     (20

Financial expenses—net

    1.9       0.9       1.4       152       (32

Income before income taxes

    8.9       16.1       22.6       (38     (19

Provision for income taxes

    (0.7     0.7       1.8       (208     (55

Share in losses of associated companies—net

    0.2       0.3       0.1       (25     154  

Net income (loss) attributable to non-controlling interests

    (0.3     *        *        (689     13  

Net income attributable to Teva

    9.7       15.1       20.7       (29     (17

 

* Represents an amount of less than 0.05%.

 

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Revenues

General

Revenues in 2012 were $20.3 billion, an increase of 11% over 2011. The increase was primarily the result of the inclusion of a full year of revenues of Cephalon and Taiyo. Growth was also driven by higher generics revenues, mainly in the United States, and higher revenues of our specialty products, primarily Copaxone®. The increase was partially offset by lower generics revenues in Europe as well as exchange rate fluctuations.

Revenues by Geographic Area

The following table presents revenues by geographic area for the past three years:

 

     Year Ended December 31,      %  of
2012
    %  of
2011
    %  of
2010
 
     2012      2011      2010         
     U.S. $ in millions                     

United States:

               

Generic

   $ 4,381       $ 3,957       $ 5,789         21     22     36

Specialty

     5,857        4,804        3,600        29     26     22

Others

     200        39        5        1     §        §   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total United States

     10,438        8,800        9,394        51     48     58

Europe*:

               

Generic

     3,387        3,810        2,637        17     21     16

Specialty

     1,563        1,101        746        7     6     5

Others

     723        749        564        4     4     3
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Europe

     5,673        5,660        3,947        28     31     24

Rest of the World:

               

Generic

     2,617        2,429        1,481        13     13     9

Specialty

     730        588        509        4     3     3

Others

     859        835        790        4     5     6
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Rest of the World

     4,206        3,852        2,780        21     21     18
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Revenues

   $ 20,317       $ 18,312       $ 16,121         100     100     100
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

* All members of the European Union as well as Switzerland and Norway.
§ Less than 0.5%.

United States

Revenues in the United States in 2012 amounted to $10.4 billion, an increase of 19% compared to 2011. We significantly increased our presence in specialty medicines as a result of the acquisition of Cephalon, and maintained our leading position in the generics business. Total prescriptions for the year amounted to 564 million, representing 14.1% of total U.S. prescriptions, and new prescriptions amounted to 307 million. We expect that our U.S. market leadership position will continue to increase due to the enhancement of our specialty business, as a result of our ability to introduce new generic equivalents for brand-name products on a timely basis, our emphasis on customer service, the breadth of our product line, our commitment to regulatory compliance and quality and our cost-effective production. We will continue to seek to capitalize on Paragraph IV launches, and we intend to establish a leading position in high-value generics by pursuing first-to-market opportunities and by developing complex generic products, as well as by enhancing the value of our portfolio by concentrating on high-margin, low competition markets.

 

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Generic Medicines

Revenues from generic medicines in the United States during 2012 amounted to $4.4 billion up 11% compared to $4.0 billion in 2011. The increase resulted mainly from key 2012 launches of generic equivalents to products such as Lexapro® (escitalopram oxalate), Provigil® (modafinil), Actos® (pioglitazone), Actoplus met® (pioglitazone/metformin) and Tricor® (fenofibrate). This increase was also due to higher royalties related to sales of the generic equivalent of Lipitor® (atorvastatin) under our agreement with Ranbaxy, partially offset by declining sales of the generic equivalent of Zyprexa® (olanzapine), which was launched in 2011.

Among the most significant generic products we sold in the United States in 2012 were generic versions of Pulmicort® (budesonide inhalation), Adderall XR® (mixed amphetamine salts ER), Lexapro® (escitalopram oxalate), Provigil® (modafinil), Accutane® (isotretinoin, which we market as Claravis™), Adderall® (mixed amphetamine salts) and royalties under our agreement with Ranbaxy related to sales of the generic equivalent of Lipitor® (atorvastatin). Sales of certain of these products may decrease in 2013 due to competition and other factors.

Products. In 2012, we launched generic versions of the following 23 branded products in the United States (listed by date of launch):

 

Generic Name

  

Brand Name

   Launch
Date
     Total Annual Branded
Market at Time of
Generic Launch
$ millions (IMS)*
 

Olanzapine OD tablets

   Zyprexa® Zydis®      Feb-12       $ 368  

Progesterone soft gel capsules

   Prometrium®      Mar-12       $ 197  

Escitalopram oxalate tablets

   Lexapro®      Mar-12       $ 2,916  

Quetiapine tablets

   Seroquel®      Mar-12       $ 4,630  

Irbesartan tablets

   Avapro®      Mar-12       $ 464  

Irbesartan/HCTZ tablets

   Avalide®      Mar-12       $ 127  

Modafinil tablets***

   Provigil®      Mar-12       $ 1,143  

Clopidogrel tablets 75 mg

   Plavix®      May-12       $ 6,714  

Voriconazole tablets

   Vfend®      May-12       $ 174  

Fluoxetine/olanzapine capsules

   Symbyax®      Jun-12       $ 82  

Tolterodine tablets**

   Detrol®      Jun-12       $ 56  

Fluvastatin capsules

   Lescol®      Jul-12       $ 27  

Methylphenidate ER capsules 20, 30 & 40 mg

   Ritalin LA®      Jul-12       $ 84  

Methotrexate injection

   Methotrexate      Jul-12       $ 10  

Montelukast sodium chewable tablets

   Singulair®      Aug-12       $ 1,141  

Montelukast sodium tablets

   Singulair®      Aug-12       $ 3,598  

Oxaliplatin injection

   Eloxatin®      Aug-12       $ 1,544  

Metformin/pioglitazone tablets**

   Actoplus Met®      Aug-12       $ 413  

Pioglitazone tablets**

   Actoplus®      Aug-12       $ 2,736  

Methylphenidate ER capsules

   Metadate® CD      Sep-12       $ 144  

Quinine sulfate capsules

   Qualaquin®      Sep-12       $ 31  

Fenofibrate tablets 48 & 145 mg**

   Tricor®      Nov-12       $ 1,323  

Tiagabine HCl tablets***

   Gabitril®      Dec-12       $ 44  

 

* 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.
** Authorized generic of a third party’s branded drug.
*** Authorized generic of a Teva specialty product.

 

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We expect that our revenues in the United States will continue to benefit from our strong generic pipeline, which, as of January 22, 2013, had 147 product registrations awaiting FDA approval, including 38 tentative approvals. Collectively, the branded versions of these 147 products had U.S. sales in 2012 exceeding $91 billion. Of these applications, 103 were Paragraph IV applications challenging patents of branded products. We believe we are first to file with respect to 62 of these products, the branded versions of which had U.S. sales of more than $45 billion in 2012. 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 2012 we received, in addition to 28 final generic drug approvals, nine tentative approvals which remain tentative at December 31, 2012. 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 outstanding tentative approvals received are for generic equivalents of the following products:

 

Generic Name

  

Brand Name

   Total Branded Market
$ millions (IMS)*
 

Palonosetron injection

   Aloxi®    $ 480  

Duloxetine DR capsules

   Cymbalta®    $ 4,461  

Celecoxib capsules

   Celebrex®    $ 1,920  

Atomoxetine capsules

   Strattera®    $ 557  

Methylphenidate ER capsules 10 mg

   Ritalin LA®    $ 16  

Carbamazepine ER capsules

   Equetro®    $ 7  

Aripiprazole tablets

   Abilify®    $ 5,617  

Aripiprazole OD tablets

   Abilify Discmelt®    $ 15  

Candesartan/HCTZ tablets

   Atacand HCT®    $ 56  

 

* The figures given are for the twelve months ended September 30, 2012.

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 executed a remediation plan required by the FDA. In April 2011, we resumed limited manufacturing activity. We have been working closely with the FDA and are gradually releasing more products for distribution. On October 23, 2012, we received a letter from the FDA acknowledging that our corrective actions addressed the violations noted in the December 2009 warning letter. During 2012, we incurred uncapitalized production costs, consulting expenses and write-offs of inventory of approximately $88 million relating to this facility. As a result of a recent decision to explore our options regarding divestment of this facility, we have further impaired its property, plant and equipment by approximately $65 million. We decided to discontinue several products, and as a result impaired intangible assets by approximately $33 million. Although the impairments were recorded based on a fair value assessment, further impairments or losses could occur as additional information becomes available regarding the ultimate disposition of the facility.

 

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Specialty Medicines

Revenues from specialty medicines in the United States in 2012 amounted to $5.9 billion, an increase of 22% over 2011. The main factors affecting revenues of our specialty products in the United States include:

 

   

the inclusion of a full year of Cephalon’s specialty sales (as opposed to one quarter only in 2011), primarily of Provigil®, Nuvigil®, Treanda® and Fentora®; and

 

   

higher sales of Copaxone®, which increased by $122 million due to price increases. Copaxone® continued to account for a very significant contribution to our profits and cash flow from operations in 2012.

Other Revenues

Other revenues in the United States in 2012 amounted to $200 million compared to $39 million in 2011. These revenues were mainly generated from sales of OTC products to P&G pursuant to a manufacturing agreement.

Comparison of 2011 to 2010. In 2011, our revenues in the United States amounted to $8.8 billion compared to $9.4 billion in 2010. Generics revenues in 2011 amounted to $4.0 billion, and revenues of our specialty products amounted to $4.8 billion. This 6% decrease from 2010 to 2011 was attributable primarily to a decline in generics revenues due to declining sales of key products launched during 2010, which was partially offset by higher sales of Copaxone® and the inclusion of Cephalon revenues in the fourth quarter of 2011.

Europe

Revenues in Europe in 2012 amounted to $5.7 billion, flat compared to 2011. In local currency terms, revenues grew 8%, primarily due to the inclusion of a full year of Cephalon sales and completion of the transition of distribution and marketing responsibility for Copaxone® from Sanofi to Teva, partially offset by the effects of our renegotiations with some of the wholesalers in the region. During 2012, the main European currencies affecting our sales (the euro, British pound and Hungarian forint) weakened in value against the U.S. dollar (on an annual average compared to annual average basis).

As in previous years, European regulatory measures aimed at reducing healthcare and drug expenditures have led to slower growth in the generic medicines market, and have adversely affected our revenues in some markets while in other markets governmental action has led to increases in generic penetration. In France, Spain, Italy, Poland, Hungary and Portugal, governmental measures have reduced reimbursement rates. In several countries, particularly Spain, Italy, Portugal and Hungary, reductions in reimbursement rates have been combined with other reforms aimed at reducing drug expenditures, such as mandatory prescription by International Nonproprietary Name (“INN”) for select product groups. In addition, in certain countries, mainly Hungary and Italy, mandatory rebates were increased or introduced. We have adjusted our strategy to address these changes, shifting from a market share-driven approach to a model emphasizing profitable and sustainable growth.

We are monitoring closely, on an ongoing basis, activities in the countries which, based on our internal assessment, are experiencing significant economic stress, and are taking action to limit our exposure in these countries. Among the countries that are most affected by the crisis in Europe are Greece, Italy, Portugal, Spain and Hungary. We are taking measures to limit our risks in some of these countries by securitizing receivables without recourse and purchasing credit insurance. In addition, we are preparing contingency plans for various Eurozone crisis scenarios of different severity.

Generic Medicines

Revenues for generic medicines in Europe in 2012 amounted to $3.4 billion, a decrease of 11%. In local currency terms, sales decreased by 3%, primarily due to the unusually high revenues recorded in 2011 relating to

 

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the launch of a generic version of Lipitor® (atorvastatin), our more selective approach to competing for generics business and the impact of market factors in some countries. This decrease was partially offset by a number of successful product launches across Europe, increased business in certain countries and the inclusion of a full year’s sales of Cephalon’s generic subsidiary Mepha.

As of December 31, 2012, Teva had received 1,103 generic approvals in Europe relating to 231 compounds in 429 formulations, including six European Medicines Agency (“EMA”) approvals valid in all EU member states. In addition, Teva had approximately 2,131 marketing authorization applications pending approval in 30 European countries, relating to 244 compounds in 499 formulations, including three applications pending with the EMA. During 2012, 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.

Specialty Medicines

Revenues from specialty medicines in Europe in 2012 amounted to $1.6 billion, an increase of 42% compared to 2011. In local currency terms, sales increased by 53%, primarily driven by the inclusion of full year sales of Cephalon, the completion of the transition of the distribution and marketing rights for Copaxone® to us from Sanofi, and the launch of Zoely®.

Other Revenues

Other revenues in Europe in 2012 amounted to $723 million, compared to $749 million in 2011, a decrease of 3% due to a decrease in distribution revenues. In local currency terms, sales remained stable. Our OTC revenues increase was mainly due to higher sales of several European brands, as well as the launch of Vicks® in several countries.

Listed below are highlights for 2012 in our most significant European operations in terms of size:

 

   

Germany: Revenues in 2012 decreased by 8%. In local currency terms, revenues remained stable compared to 2011. Generic revenues decreased due to our new selective approach to participation in tenders, with a focus on sustainable and profitable opportunities. Our specialty products revenues increased due to the inclusion of Cephalon’s revenues for a full year and to the assumption of the distribution and marketing responsibility for Copaxone®, as well as the growth of Azilect®.

 

   

France: Revenues in 2012 increased by 16%. In local currency terms, revenues increased by 25% compared to 2011, primarily due to higher revenues of specialty products, largely due to the inclusion of Cephalon revenues and the assumption of the distribution and marketing responsibility for Copaxone®. This growth was partially offset by a slight decline in our generic business. In 2012, we maintained our leading position in the French generic pharmaceutical market.

 

   

United Kingdom: Revenues in 2012 decreased by 10% and by 9% in local currency terms, compared to 2011. This was mainly due to unusually high revenues recorded in 2011 relating to the launch of a generic version of Lipitor® (atorvastatin). In 2012, we maintained our market share, despite increased competition. In addition, the market was impacted by further price reductions for the more widely available generic products and by decreases in prices of generic pharmaceuticals generally in 2012. This was partially offset by new product launches.

 

   

Italy: Revenues in 2012 decreased by 19%. In local currency terms, revenues decreased by 12%, primarily due to a decline in our generics revenues. The Italian generic pharmaceutical market grew by approximately 10% in 2012, despite market uncertainty in advance of anticipated reforms. We made

 

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adjustments to our relationships with wholesalers (including the termination of some relationships) during the year. Although we remain the leading generic pharmaceutical company in Italy, the result of these adjustments was a decrease in revenues. The inclusion of Cephalon and the assumption of the distribution and marketing responsibility for Copaxone® partially offset the decrease in revenues from generic medicines. Zoely®, our new oral contraceptive, was successfully launched in Italy in March 2012.

 

   

Spain: Revenues in 2012 decreased by 1%. In local currency terms, revenues increased by 7%, primarily due to the effect of governmental measures aimed at reducing healthcare spending, which resulted in significant increased usage of generic pharmaceuticals (although a slight decrease in value). An amendment to Spanish legislation was implemented in May 2012, allowing dispensing of only the lowest priced products within certain product groups. We increased our market share and maintained our leading position in the Spanish generic market. We also benefited from the inclusion of Cephalon and the assumption of the distribution and marketing responsibility for Copaxone®.

Comparison of 2011 to 2010. Total sales in Europe in 2011 amounted to approximately $5.7 billion, an increase of 43% compared to 2010. The main contributors to this increase were the inclusion of a full year of ratiopharm’s revenues, the acquisitions of Theramex and Cephalon and the transition of distribution and marketing responsibility for Copaxone® from Sanofi to Teva in many European markets. During 2011, the main European currencies affecting our revenues (the euro, British pound and Hungarian forint) strengthened in value against the U.S dollar (on an annual average compared to annual average basis).

Rest of the World (“ROW”) Markets

These markets include all countries other than the United States and the countries we include under “Europe,” and range from pure generic markets, such as Canada and Israel, to markets where generic medicines are marketed and sold under brand names, as in several Asian and Latin American countries. Revenues of branded generic medicines 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.

We consider Japan, Russia and the Latin American countries to be “emerging” generics markets characterized by rapid growth and relatively high revenues of branded generics and OTC products, while Canada and Israel are “mature” generics markets that have higher generic penetration rates and therefore lower growth rates.

Revenues in ROW markets in 2012 amounted to $4.2 billion, an increase of 9% compared to 2011. In local currency terms, revenues grew 13%. Total revenues in our emerging generics markets in 2012 amounted to $2.9 billion (including $626 million of revenues from all other ROW markets), an increase of 19% from $2.5 billion in 2011. Revenues in our mature generics markets amounted to $1.3 billion for the year, a decrease of 9% compared to 2011.

Revenues of generic medicines in 2012 amounted to $2.6 billion, which represents 62% of the total revenues in the region; revenues of specialty products in 2012 amounted to $730 million, or 17% of total revenues in the region; and other revenues, in 2012 were $859 million, or 21% of total revenues in the region.

In Russia our revenues in 2012 grew by 14% (21% in local currency terms), as compared to 2011. The growth was mainly attributable to unusually high revenues of Copaxone®, due to the fact that Russian government tenders for Copaxone® in 2012 also included supplies for a significant portion of 2013. We expect that changes in the Russian government tender system in 2013 will result in significant variations from year to year in our future Copaxone® revenues. Growth was also driven by higher revenues from specialty medicines and OTC products, supported by the launch of Vicks® in July 2012. We maintained our leading position in the Russian generic pharmaceutical market and increased our market share.

 

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In Japan, our revenues in 2012 grew by 49% (50% in local currency terms) compared to 2011. Our results in Japan mainly reflect the inclusion of a full year of revenues of Taiyo and our other Japanese ventures. The Japanese generics market as a whole has been growing as a result of the healthcare reforms instituted by the government in April 2012, which included additional incentives to prescribe generics as well as price reductions for generic products.

In Latin America, our revenues in 2012 grew by 9% (13% in local currency terms) compared to 2011. The increase was primarily driven by higher revenues of generic medicines, the performance of our OTC products and growth in revenues of Copaxone® and other specialty medicines. We achieved growth in most markets and continued to maintain our market share across the region. In the near term, revenues are expected to be negatively affected by drug price legislation, as well as by exchange rate fluctuations in certain Latin American markets.

Generic glatiramer acetate was approved recently in Argentina, and is expected to be launched in the first quarter of 2013. In addition, we understand that a local manufacturer was allowed to bid on generic glatiramer acetate in a government tender in Mexico and was awarded part of the tender. Although the local company’s product has been approved, we are pursuing legal action.

In Canada, where we are one of the two leading generic pharmaceutical companies, our revenues in 2012 decreased by 16% primarily due to price reforms and lower generics revenues, partially offset by sales from new generic product launches. As of December 31, 2012, we had 69 product registrations awaiting approval by the Therapeutic Products Directorate of Health Canada. Collectively, the branded versions of these products had Canadian sales in 2012 of approximately $3 billion.

Comparison of 2011 to 2010. Our revenues in ROW markets amounted to $3.9 billion in 2011, an increase of 39% as compared to 2010. Total revenues in our emerging generics markets for 2011 amounted to $2.5 billion, which includes $572 million of revenues from all other ROW markets. Revenues from our mature generics markets amounted to $1.4 billion for 2011.

Revenues by Product Line

The following table presents revenues by product line for the past three years:

 

     Year Ended December 31,                        Percentage
Change
 
     2012      2011      2010      % of
2012
    % of
2011
    % of
2010
    2012-
2011
    2011-
2010
 
     U.S. $ in millions                                 

Generic Medicines

   $ 10,385       $ 10,196       $ 9,907         51     56     61     2     3

API

     796        747        641        4     4     4     7     17

Specialty Medicines

     8,150        6,493        4,855        40     35     30     26     34

CNS

     5,464        4,412        3,202        27     24     20     24     38

Copaxone®

     3,996        3,570        2,958        20     19     18     12     21

Provigil®

     417        350        —          2     2     —          19     —     

Nuvigil®

     347        86        —          2     §        —          303     —     

Azilect®

     330        290        244        2     2     2     14     19

Oncology

     860        268        74        4     1     §        221     262

Treanda®

     608        131        —          3     1     0     364     —     

Respiratory

     856        878        747        4     5     5     (3 %)      18

ProAir®

     406        436        396        2     2     2     (7 %)      10

Qvar®

     297        305        250        1     2     2     (3 %)      22

Women’s Health

     448        438        374        2     2     2     2     17

Other Specialty

     522        497        458        3     3     3     5     9

All Others

     1,782        1,623        1,359        9     9     9     10     19

OTC

     936        765        496        5     4     3     22     54

Other Revenues

     846        858        863        4     5     5     (1 %)      (1 %) 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 20,317       $ 18,312       $ 16,121         100     100     100     11     14
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

§ Less than 0.5%.

 

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Generic Medicines

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

Sales of generic medicines grew by $189 million, or 2%, in 2012 over 2011. Our largest market for generics is the United States, with revenues of approximately $4.4 billion, up 11% from 2011, which represents approximately 42% of total generics revenues in 2012. The increase in sales of generics in the United States resulted from new launches in 2012.

Revenues from generic medicines in Europe in 2012 amounted to $3.4 billion, a decrease of 11% over 2011. The decrease was primarily due to the inclusion of unusually high revenues recorded in 2011 relating to the launch of a generic version of Lipitor® (atorvastatin) in the U.K. and our more selective approach to competing for sustainable and profitable generics business as well as changes in currency exchange rates. The decrease was partially offset by successful new product launches across Europe, by increased business in certain countries and by the inclusion of a full year of sales of Cephalon’s generic subsidiary Mepha. In local currency terms, sales declined by 3%.

Active Pharmaceutical Ingredients (“API”)

API sales to third parties in 2012 amounted to $796 million, an increase of 7% over 2011. The increase was mainly due to growth in the United States and Europe, and was largely attributable to increased demand from existing customers as well as several new product launches.

Comparison of 2011 to 2010. Sales to third parties in 2011 amounted to $747 million, an increase of 17% compared to 2010. The increase in sales in 2011 occurred mainly due to growth in our principal geographical markets.

Specialty Medicines

Our revenues from specialty medicines amounted to approximately $8.2 billion in 2012, an increase of 26% over 2011.

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

Central Nervous System

Our CNS specialty product line includes Copaxone® and Azilect® as well as Provigil® and Nuvigil® for the treatment of sleep disorders and Fentora® for the treatment of pain. In 2012, our CNS sales reached approximately $5.5 billion, an increase of 24% over 2011, primarily due to the inclusion of a full year of revenues of Cephalon products and an increase in Copaxone® and Azilect® revenues.

Comparison of 2011 to 2010. In 2011, sales of our CNS products amounted to $4.4 billion, compared to $3.2 billion in 2010.

Copaxone®. In 2012, Copaxone® (glatiramer acetate injection) continued to be the leading multiple sclerosis therapy in the United States and globally. Our sales of Copaxone® in 2012 grew by 12% compared to 2011, reaching $4.0 billion. In local currency terms, Copaxone® sales grew by 14%.

Until February 2012, global in-market sales included sales of Copaxone® by both Sanofi and us. In February 2012, we completed the assumption from Sanofi of the marketing and distribution rights of Copaxone®. Therefore, commencing with the second quarter of 2012, all global sales were made by us. Global in-market sales for 2012 amounted to $4.0 billion, an increase of 3% over the in-market sales of the comparable period.

 

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Revenues from Copaxone® in the United States in 2012 increased by 4% to $2.9 billion due to price increases, which were partially offset by a decrease in volume due mainly to adjustments related to the renegotiation of our distribution service agreements in the first quarter of the year. U.S. market share in terms of new and total prescriptions was 39.9% and 40.8% respectively, according to December 2012 IMS data.

U.S. revenues amounted to 72% of global in-market sales of Copaxone® in 2012, similar to 2011.

Our non-U.S. Copaxone® revenues in 2012 amounted to $1.1 billion, an increase of 39% compared to 2011, and an increase of 49% in local currency terms. The increase was driven primarily by our assumption of distribution and marketing responsibility for Copaxone® from Sanofi in Europe, which was completed in February 2012, and by volume growth, particularly in Russia due to unusually high tender sales. 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 distribution and marketing responsibilities. This termination of our arrangements with Sanofi has resulted in increases both in our net revenues and in our selling and marketing expenses.

Non-U.S. in-market sales remained stable compared to 2011. In local currency terms, non-U.S. in-market sales increased 8% compared to 2011. The increase in local currency terms in non-U.S. in-market sales was driven by unit growth primarily in Russia, due to the timing of tenders, in Spain and in Italy.

Generic glatiramer acetate was approved recently in Argentina, and is expected to be launched in the first quarter of 2013.

In a government tender in Mexico, a local manufacturer was allowed to bid on generic glatiramer acetate and was awarded part of the tender. Although the local company’s product has been approved, we are pursuing legal action. We do not expect this to materially affect our sales of Copaxone®.

Comparison of 2011 to 2010. In 2011, in-market global sales of Copaxone® were approximately $3.9 billion, an increase of 18% over 2010. U.S. revenues in 2011 accounted for 72% of global in-market sales of Copaxone®. The growth of in-market sales of Copaxone® in the United States in 2011 reflected the impact of a price increase of 14.9% in January 2011 as well as unit growth.

Provigil®. Our 2012 sales of Provigil® amounted to $417 million. Provigil® began to face generic competition in the United States in March 2012 and, as a result, sales decreased substantially.

Nuvigil®. Our 2012 global Nuvigil® sales amounted to $347 million.

Azilect®. Our once-daily treatment for Parkinson’s disease, Azilect® (rasagiline tablets), continued to grow during the year. We market Azilect® jointly 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.

Global in-market sales, which represent sales by Teva and Lundbeck to third parties, reached $420 million in 2012 compared to $393 million in 2011, an increase of 7%. Our sales of Azilect® amounted to $330 million, an increase of 14% compared to 2011. The increase in sales reflects both price increases and volume growth in the United States, as well as volume growth in Europe (mainly in Germany, France and Spain), partially offset by exchange rate effects.

Comparison of 2011 to 2010. In 2011, in-market global sales of Azilect® were approximately $393 million, an increase of 24% over 2010.

 

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Oncology Products

Our specialty oncology product line includes certain legacy Cephalon products as well as our biosimilar products indicated mainly for the treatment of side effects of oncology treatments. Sales of these products amounted to $860 million in 2012 as compared to $268 million in 2011. The increase resulted primarily from the inclusion of a full year of Cephalon’s cancer treatments, the largest of which is Treanda®. The sales of biosimilar products, marketed mainly in Europe, continued to grow in 2012. In November 2012, we launched Synribo™, in the United States.

Sales of Treanda® amounted to $608 million in 2012.

In August 2012, Treanda® was approved in Canada. Lundbeck, who hold the rights to market Treanda® in Canada, launched the product in September 2012.

Comparison of 2011 to 2010. In 2011, sales amounted to $268 million, an increase of 262% from $74 million in 2010.

Respiratory Products

Our respiratory product line includes only specialty respiratory products, mainly ProAir® and Qvar®. During 2012 we launched a new respiratory product, Qnasl® for the treatment of nasal allergy symptoms. Sales of generic products indicated for the treatment of respiratory disease are reported as part of our generic medicines sales.

Revenues from our specialty respiratory products in 2012 amounted to $856 million, a decrease of 3% from 2011. The decrease was primarily due to lower revenues in the United States, mainly due to adjustments related to the renegotiation of our distribution service agreements (DSA) and to additional Medicaid rebates. The decrease was partially offset by sales growth in Russia.

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® revenues amounted to $406 million, a decrease of 7% compared to 2011, mainly due to the impact of the DSA re-negotiations and to additional Medicaid rebates. ProAir® maintained its leadership in the SABA market, with a market share of 51.9% in terms of total number of prescriptions during the fourth quarter of 2012, an increase of 1.2 points compared to the fourth quarter of 2011.

Qvar® (beclomethasone diproprionate HFA) is an inhaled corticosteroid for long-term control of chronic bronchial asthma. Qvar® global sales amounted to $297 million, a decrease of 3% from the prior year due to decreased sales in several markets in Europe. Qvar® maintained its second-place position in the inhaled corticosteroids category in the United States, with a market share of 26.9% in terms of total number of prescriptions during the fourth quarter of 2012, an increase of 3.3 points compared to the fourth quarter of 2011.

Comparison of 2011 to 2010. In 2011, sales of our respiratory products amounted to approximately $878 million, compared to $747 million in 2010.

Women’s Health Products

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

Revenues from our global women’s health products in 2012 amounted to $448 million, an increase of 2% from $438 million in 2011. The growth was primarily attributable to increases in sales of women’s health products in Europe and Latin America.

 

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Revenues in the United States declined, mainly as a result of generic competition to our oral contraceptive product, Seasonique®, starting in the third quarter of 2011. This decline was partially offset by growth in sales of our contraceptive products Paragard® and Plan B One-Step®.

Comparison of 2011 to 2010. In 2011, sales of our women’s health products amounted to $438 million, an increase of 17% from $374 million in 2010.

All Others

OTC

Our revenues from OTC products in 2012 amounted to $936 million compared to $765 million in 2011. Our revenues related to PGT amounted to $747 million, an increase of 2%, compared to $734 million in the previous year. In local currency terms, revenues grew by 7%. The increase was mainly due to growth in sales in Latin America and Europe. During the year, the Vicks® product line was launched in Hungary, Poland, Russia and the Czech Republic.

PGT’s in-market sales in 2012 amounted to $1.3 billion. This amount represents sales of the combined OTC portfolios of Teva and P&G outside North America. Sales grew in Europe, Asia and Latin America, mainly due to increased sales forces and price increases.

Revenues from the sales of OTC products in the United States to P&G, which commenced in the fourth quarter of 2011 pursuant to a manufacturing agreement, amounted to $189 million in 2012, as compared to $31 million in 2011.

Comparison of 2011 to 2010. In 2011, our OTC revenues amounted to $765 million, an increase of 54% over 2010, primarily due to the contributions of the ratiopharm business.

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.

Our other revenues amounted to $846 million in 2012, a slight decline from 2011. 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 noted above, we sold our animal health unit in January 2013.

Comparison of 2011 to 2010. In 2011, our other revenues amounted to $858 million, a slight decrease over 2010.

Other Income Statement Line Items

Gross Profit

Gross profit amounted to $10.7 billion in 2012, an increase of 12%, or $1.2 billion, compared to 2011.

The higher gross profit was mainly a result of an increase in revenues, particularly of specialty medicines and generic medicines in the United States and in Japan, and of decreased inventory step-up charges and decreased costs related to regulatory actions taken in various facilities. These factors were partially offset by higher charges related to the amortization of purchased intangible assets, which increased from $668 million in 2011 to $1,228 million in 2012, and the negative effect of changes in currency exchange rates.

Gross profit margin was 52.4% in 2012, up from 52.0% in 2011. The increase in gross margin primarily reflects higher contributions from Treanda®, Nuvigil®, Provigil® and Copaxone® (which increased gross margin

 

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by approximately 3.5 points). In addition, reduced inventory step-up charges and costs related to regulatory actions taken in various manufacturing facilities increased gross margin by approximately 1.9 points. These factors were partially offset by the effects of charges related to the amortization of purchased intangible assets (which decreased gross margin by approximately 2.4 points) and a reduction in gross margin from sales of other medicines (which decreased gross margin by approximately 2.4 points).

Comparison of 2011 to 2010. Gross profit increased in 2011 to $9.5 billion from $9.1 billion in 2010, an increase of 5%. Gross profit margins were 52.0% in 2011 and 56.2% in 2010.

Research and Development (R&D) Expenses

Net R&D expenses, including the purchase of in-process R&D, amounted to $1.4 billion in 2012, an increase of 24% compared to 2011, primarily as a result of the acquisition of Cephalon. As a percentage of revenues, R&D spending was 6.7% in 2012, compared to 6.0% in 2011.

In 2012, we increased our specialty R&D spending, primarily as a result of the acquisition of Cephalon. Our specialty R&D activities focus primarily on product candidates in the CNS and respiratory therapeutic areas, with selective investments in oncology, women’s health and biologics. Specialty R&D activities represented approximately 64% of our total R&D expenditures in 2012, while the balance was for generic R&D activities.

A portion of our R&D activities is conducted through joint ventures. Our share in the R&D expenses of these joint ventures is reflected in the income statement under “share in losses of associated companies—net.”

Comparison of 2011 to 2010. R&D expenses increased in 2011 to $1.1 billion from $1.0 billion in 2010, an increase of 15%. Approximately 57% of our 2011 R&D expenditures was for specialty R&D activities, and the balance was for our generic R&D activities.

Selling and Marketing (S&M)

S&M expenses in 2012 amounted to $3.9 billion, an increase of 12% over 2011. As a percentage of revenues, S&M expenses were 19.1% in 2012 compared to 19.0% in 2011.

The increase in dollar terms was primarily due to the consolidation of Taiyo (commencing July 2011) and Cephalon (commencing October 2011) as well as the assumption of distribution and marketing responsibility for Copaxone® in Europe. The increase was partially offset by currency fluctuations as well as lower royalty payments made on generic medicines in the United States (mainly on generic versions of Effexor XR®, Zyprexa®, Pulmicort® and Yaz®, partially offset by higher payments primarily on the generic version of Provigil®).

The slight increase as a percentage of revenues resulted from an increase in the proportion of specialty medicines sold, which have higher than average selling and marketing expenses, largely offset by reduced selling and marketing expenses for our generic medicines and a reduction in royalty payments made on certain generic medicines in the United States.

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 completed the assumption of marketing and distribution responsibility for Copaxone® in Europe from Sanofi. As of March 1, 2012, CSL Limited has assumed the marketing and distribution 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 the applicable European countries until 2014. Although we record higher revenues as a result of this change, we have also become responsible for certain marketing and administrative expenses, which are no longer shared with Sanofi.

 

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Comparison of 2011 to 2010. S&M expenses in 2011 amounted to $3.5 billion, an increase of 17% over 2010. As a percentage of revenues, S&M expenses increased from 18.4% in 2010 to 19.0% in 2011.

General and Administrative Expenses (G&A)

G&A expenses in 2012 amounted to $1.2 billion compared with $0.9 billion in 2011, an increase of 33%. As a percentage of revenues, G&A expenses increased to 6.1% for 2012 from 5.1% for 2011.

The dollar increase in G&A expenses resulted primarily from gains recorded in 2011, which reduced our expenses in that period, as well as higher expenses in 2012 due to the inclusion of Cephalon and Taiyo and transactions related to our joint venture with P&G for a full year in 2012, as compared to parts of the year in 2011. The gains recorded in 2011 were mainly due to our acquisition of additional holdings in CureTech and in our Japanese venture, which allowed us to gain control of these entities, triggering a gain of $135 million, relating to our prior holdings in these companies, as well as the sale of our Peruvian pharmacy chain. The increase in expenses in 2012 was partially offset by exchange rate differences and lower patent litigation and product liability costs.

Comparison of 2011 to 2010. G&A expenses in 2011 amounted to $0.9 billion, an increase of 8% over 2010, and as a percentage of revenues, G&A expenses decreased to 5.1% for 2011 from 5.4% for 2010.

Impairments, Loss Contingencies, Restructuring and Others

Expenses for impairments, loss contingencies, restructuring and others amounted to $2.0 billion, as compared to $901 million in 2011.

Impairments of long-lived assets in 2012 were $1.1 billion, related primarily to:

 

  1. Identifiable intangible assets of $858 million comprised of:

 

  a.

In-process R&D write-downs amounted to $625 million, including $268 million relating to obatoclax for the treatment of small cell lung cancer and $96 million relating to CEP-37247 anti-tumor necrosis factor for the treatment of sciatica. Armodafinil (Nuvigil®) for the treatment of bi-polar disorder was also impaired in the amount of $79 million to reflect a settlement agreement with Mylan. We further impaired CureTech’s in-process R&D by $127 million.

 

  b.

Impairment of existing product rights of $233 million, which included mainly Enjuvia®, a women’s health marketed product, for a total of $62 million, Gabatril® for $43 million, and Ivax’s verapamil for $20 million.

 

  2. Property, plant and equipment of $190 million, which included various impairments to manufacturing and research and development facilities.

 

  3. Non-current investments of $23 million.

For 2011, impairment of long-lived assets amounted to $201 million related mainly to the divestiture of a Cephalon fentanyl product and the assets of our recently sold animal health unit.

Loss contingencies and legal settlements for 2012 are composed mainly of a provision for a loss contingency of $670 million relating to pending patent litigation concerning our generic pantoprazole. In 2011, legal expenses and loss contingencies amounted to $471 million and were primarily due to the Pfizer settlement, the Novartis settlement and the propofol product liability cases.

Restructuring and other expenses were $221 million and $192 million for 2012 and 2011, respectively, comprised mainly of severance costs of $154 million and $187 million, respectively. These expenses for 2012 include costs related to the ongoing restructuring of Cephalon France and Théramex.

 

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Contingent consideration benefit was recorded as a result of impairing long lived assets during 2012, which decreased associated milestone payment liabilities previously recorded in connection with the Cephalon acquisition.

Acquisition expenses of $7 million and $37 million in 2012 and 2011, respectively, were primarily related to the Cephalon acquisition.

As part of our new long term strategy, we plan to introduce initiatives designed to reduce our overall operating costs and complexity through a wide-scale cross-functional effort to create a more efficient organization. We are focusing our attention, in particular, on improving our procurement systems by leveraging our purchasing power and improving our production network, supply chain, and resources deployment processes. Consequently, we expect to incur significant restructuring and impairment expenses associated with the plan over the next few years.

Operating Income

Operating income was $2.2 billion in 2012, as compared to $3.1 billion in 2011. As a percentage of revenues, operating margin was 10.8% in 2012 compared to 17.0% in 2011.

The decrease in operating income was due to factors previously discussed, primarily higher impairments of long-lived assets, higher S&M expenses, higher G&A expenses, higher R&D expenses, increased provisions for loss contingency and expenses in connection with legal settlements and reserves as well as higher restructuring and other expenses. This decrease was partially offset by higher revenues, higher gross profit and income from contingent consideration as well as lower acquisition expenses. Foreign exchange rate fluctuations had a net positive effect compared to 2011.

The decrease of 6.2 points in operating income as a percentage of revenues was mainly due to the higher impairments of long-lived assets (4.2 points), higher general and administrative margin (1.0 points), increased provisions for loss contingency and legal settlements and reserves (0.9 points), higher R&D margin (0.7 points) and higher selling and marketing margin (0.1 points), partially offset by higher gross margin (0.4 points) and income from contingent consideration (0.2 points) as well as lower acquisition expenses (0.2 points).

Comparison of 2011 to 2010. Operating income in 2011 amounted to $3.1 billion, a decrease of 20% over 2010, and as a percentage of revenues, operating income decreased to 17.0% for 2011 from 24.0% for 2010.

Financial Expenses

Financial expenses amounted to $386 million in 2012, compared to $153 million in 2011. The increase resulted from the inclusion of Cephalon-related financing expenses for a full year and higher interest expenses due to the longer duration of our debt following refinancings in 2012 (including the redemption of our 1.7% Senior Notes due 2014), partially offset by gains resulting from the termination during 2011 of the interest rate swap agreements relating to our 6.15% senior notes due 2036.

Comparison of 2011 to 2010. 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-related financings. In 2011 interest expenses were higher as a result of an increase in debt.

Tax Rate

In 2012, we booked a negative provision for tax in the amount of $137 million, primarily as a result of the significant impairments and higher amortization expenses of intangible assets. Such impairments and

 

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amortization expenses were in jurisdictions with a higher tax rate than our average group tax rate, resulting in such provision. In 2011, the provision for taxes amounted to $127 million, or 4% of pre-tax income of $3.0 billion. In 2010, the provision for taxes amounted to $283 million, or 8% of pre-tax income of $3.6 billion. The effective tax rate 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 impairment, restructuring and legal settlement charges on such subsidiaries). In addition, the release of reserves for uncertain tax positions and tax benefits as a result of mergers between recently acquired companies and our subsidiaries further reduced the effective tax rate for 2012.

The statutory Israeli corporate tax rate was 25% in 2012. However, our effective consolidated tax rates have historically been, and are in 2012, considerably lower than the statutory rate because of tax incentives we benefit from in Israel and other countries. 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 tax rates 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.” We also benefit from other 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 product mix and geographical distribution of our income, the effect of any mergers and acquisitions, and the effects of statutes of limitations and legal settlements which may affect provisions for uncertain tax positions. We expect that the tax rate in future years will be significantly higher than this year’s, as a result of the product mix projected for these years.

Net Income and Share Count

Net income attributable to Teva in 2012 was $2.0 billion compared to $2.8 billion in 2011. This decrease was due to the factors previously discussed, primarily our lower operating income and higher financial expenses, partially offset by lower provision for taxes.

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

Diluted earnings per share reached $2.25 in 2012, a decrease of 27% compared to diluted earnings per share of $3.09 in 2011.

During 2012, we repurchased approximately 28.1 million shares at a weighted average price of $41.64 per share, for an aggregate purchase price of $1.2 billion. These purchases were made pursuant to the $3 billion repurchase plan announced in December 2011. This repurchase program has no time limit and is expected to be completed over a three-year period.

During 2011, we repurchased approximately 19.6 million shares at a weighted average price of $45.84 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.

The share count used for the fully diluted calculation for 2012, 2011 and 2010 was 873 million, 893 million and 921 million shares, respectively.

At December 31, 2012, and 2011, the share count for calculating Teva’s market capitalization was approximately 857 million and 883 million shares, respectively.

 

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Supplemental Non-GAAP Income Data

The tables on the following pages present supplemental non-GAAP data, in U.S. dollar terms, as a percentage of revenues 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,  
      2012         2011         2010    
    U.S. dollars in millions  

Amortization of purchased intangible assets

    1,272       706       527  

Impairment of long-lived assets

    1,071       201       124  

Provision for loss contingency

    670       30       —    

Restructuring and other expenses

    221       192       260  

Costs related to regulatory actions taken in facilities

    128       170       —    

Purchase of research and development in process

    73       15       18  

Inventory step-up

    63       352       107  

Expense in connection with legal settlements and reserves

    45       441       2  

Changes in contingent consideration related to business combination

    (40     —         —    

Acquisition expenses

    7       37       24  

Financial expenses related to early repayment of senior notes and other

    32       —         71  

Net of corresponding tax effect

    (798     (465     (330

Minority interest changes related to impairments of co-owned assets

    (36     —         —    

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 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 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; changes in the fair value of contingent consideration; restructuring expenses related to efforts to rationalize and integrate operations; certain financial hedging expenses; 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.

 

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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.

The following table presents the GAAP measures, the corresponding non-GAAP amounts and related non-GAAP adjustments for the applicable periods:

 

          Year ended
December 31, 2012
 
          U.S. dollars and shares in millions
(except per share amounts)
 
          GAAP      Non-GAAP
Adjustments
    Non-GAAP      % of Net
Revenues
 
   Gross profit1      10,652        1,419       12,071        59
   Operating income1,2      2,205        3,510       5,715        28
   Net income attributable to Teva1,2,3      1,963        2,708       4,671        23
   Earnings per share attributable to Teva—diluted4      2.25        3.10       5.35     

(1)

   Amortization of purchased intangible assets         1,228       
   Costs related to regulatory actions taken in facilities         128       
   Inventory step-up         63       
        

 

 

      
   Gross profit adjustments         1,419       

(2)

   Impairment of long-lived assets         1,071       
   Provision for loss contingency         670       
   Restructuring, acquisition and other expenses         261       
   Expense in connection with legal settlements and reserves         45       
   Amortization of purchased intangible assets         44       
        

 

 

      
           2,091        
        

 

 

      
   Operating income adjustments         3,510       
        

 

 

      

(3)

   Tax effect and other items         (802     
        

 

 

      
   Net income adjustments         2,708       
        

 

 

      

(4)

   The weighted average number of shares was 873 million for the year ended December 31, 2012. Non-GAAP earnings per share can be reconciled with GAAP earnings per share by dividing each of the amounts included in footnotes 1-3 above by the applicable weighted average share number.           

 

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          Year ended
December 31, 2011
 
          U.S. dollars and shares in millions
(except per share amounts)
 
          GAAP      Non-GAAP
Adjustments
    Non-GAAP      % of Net
Revenues
 
   Gross profit1      9,515        1,190       10,705        58
   Operating income1,2      3,109        2,144       5,253        29
   Net income attributable to Teva1,2,3      2,759        1,679       4,438        24
   Earnings per share attributable to Teva—diluted4      3.09        1.88       4.97     

(1)

   Amortization of purchased intangible assets         668       
   Costs related to regulatory actions taken in facilities         170       
   Inventory step-up         352       
        

 

 

      
   Gross profit adjustments         1,190       

(2)

   Impairment of long-lived assets         201       
   Provision for loss contingency         30       
   Restructuring, acquisition and other expenses         244       
   Expense in connection with legal settlements and reserves         441       
   Amortization of purchased intangible assets         38       
        

 

 

      
           954        
        

 

 

      
   Operating income adjustments         2,144       
        

 

 

      

(3)

   Tax effect and other items         (465     
        

 

 

      
   Net income adjustments         1,679       
        

 

 

      

(4)

   The weighted average number of shares was 893 million for the year ended December 31, 2011. Non-GAAP earnings per share can be reconciled with GAAP earnings per share by dividing each of the amounts included in footnotes 1-3 above by the applicable weighted average share number.           

 

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          Year ended
December 31, 2010
 
          U.S. dollars and shares in millions
(except per share amounts)
 
          GAAP      Non-GAAP
Adjustments
    Non-GAAP      % of Net
Revenues
 
   Gross profit1      9,065        604       9,669        60
   Operating income1,2      3,871        1,062       4,933        31
   Net income attributable to Teva1,2,3      3,331        803       4,134        26
   Earnings per share attributable to Teva—diluted4      3.67        0.87       4.54     

(1)

   Amortization of purchased intangible assets         497       
   Inventory step-up         107       
        

 

 

      
   Gross profit adjustments         604       

(2)

   Provision for loss contingency         —         
   Impairment of long-lived assets         124       
   Restructuring, acquisition and other expenses         302       
   Amortization of purchased intangible assets         30       
   Expense in connection with legal settlements and reserves         2       
        

 

 

      
           458        
        

 

 

      
   Operating income adjustments         1,062       
        

 

 

      

(3)

   Tax effect and other items         (259     
        

 

 

      
   Net income adjustments         803       
        

 

 

      

(4)

   The weighted average number of shares was 921 million for the year ended December 31, 2010. Non-GAAP earnings per share can be reconciled with GAAP earnings per share by dividing each of the amounts included in footnotes 1-3 above by the applicable weighted average share number.           

For 2010, 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 2012 amounted to $661 million on pre-tax non-GAAP income of $5.4 billion. The provision for taxes in the comparable period of 2011 was $592 million on pre-tax income of $5.1 billion, and in 2010, was $613 million on pre-tax income of $4.8 billion. The non-GAAP tax rate for 2012 and 2011 was 12% as compared to 13% in 2010. The annual non-GAAP effective tax rate for 2012 was primarily the result of the mix of products (both type and location of production) sold during the year. In general, we benefit more from tax incentives on products for which we also produce the API. In addition, the release of reserves for uncertain tax positions and tax benefits as a result of mergers between recently acquired companies and our subsidiaries further reduced the effective tax rate for 2012.

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, and the effects of statutes of limitations and legal settlements which may affect provisions for uncertain tax positions. We expect that the tax rate in future years will be significantly higher than this year, as a result of the product mix projected for these years.

 

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Trend Information

The following factors are expected to have an effect on our 2013 results:

 

   

a small decrease in sales of Copaxone® as a result of changes in the competitive landscape;

 

   

continuation of the generic competition for Provigil® in the United States, which began in April 2012, resulting in a material decrease in sales of this product when compared to 2012 sales;

 

   

increases in operating expenses, due to higher levels of sales and marketing activities for our specialty pharmaceuticals;

 

   

continued, substantial amortization of intangible assets throughout the year;

 

   

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

 

   

substantial restructuring and impairment expenses relating to improvements in our production network, supply chain and resource deployment processes.

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 2012, the following main currencies relevant to our operations decreased in value against the U.S. dollar (each on an annual average compared to annual average basis): the euro by 8%, Israeli shekel by 7%, Russian ruble by 5%, Canadian dollar by 1%, British pound by 1% and Hungarian forint by 11%, while the Japanese yen was unchanged.

As a result, exchange rate movements during 2012 in comparison with 2011 negatively impacted overall revenues by approximately $572 million. We recorded lower expenses due to these currency fluctuations, and as a result our operating income increased.

Exchange rates also had a significant impact on our balance sheet, as approximately 65% 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 2011, certain changes in currency rates had a positive impact of $0.6 billion on our equity, mainly due to the increase in value against the U.S. dollar of: the euro by 2%, the Hungarian forint by 10%, the Polish zloty by 10%, the Czech koruna by 4%, the Chilean peso by 8% and the British pound by 4%. 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 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 United States.

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 consolidated 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 2012 and 2011 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 2012 and 2011 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, 2012 and 2011 were as set forth in the below table. Such sales reserves and allowances to U.S. customers comprised over 80% of our total sales reserves and allowances as of December 31, 2012, with the balance primarily in Canada, Germany and France.

 

     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, 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  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provisions related to sales made in current year period

     338       3,144       226       3,926       7,634  

Provisions related to sales made in prior periods

     —         32       (60     (11     (39

Credits and payments

     (342     (3,006     (185